##### Table of Contents



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,
1999

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

Securities registered pursuant to
Section 12(b) of the Act:

Common stock, $.01 par value


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

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 29, 2000 as
reported on the American Stock Exchange, was approximately
$77 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 29, 2000, the Registrant had
11,829,116 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 17, 2000 are incorporated by reference into
Part III.



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TABLE OF CONTENTS



|                                                                                |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|TABLE OF CONTENTS                                                              
|PART I                                                                         
|PART II                                                                        
|PART III                                                                       
|SIGNATURES                                                                     
|FORM 10-K                                                                      
|SUMMARY OF SELECTED FINANCIAL INFORMATION                                      
|Report of Independent Accountants                                              
|CONSOLIDATED BALANCE SHEETS                                                    
|CONSOLIDATED SCHEDULE OF INVESTMENTS                                           
|CONSOLIDATED SCHEDULE OF INVESTMENTS                                           
|CONSOLIDATED STATEMENTS OF INCOME                                              
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY                                
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                     
|Report of Independent Accountants on Consolidating Financial Statements        
|CONSOLIDATING BALANCE SHEET                                                    
|CONSOLIDATING STATEMENT OF INCOME                                              
|CONSOLIDATING STATEMENT OF SHAREHOLDERS EQUITY                                
|CONSOLIDATING STATEMENTS OF CASH FLOWS                                         
|INDEX TO FINANCIAL STATEMENTS                                                  
|Report of Independent Accountants                                              
|PMC CAPITAL, L.P. 1998-1 STATEMENT OF ASSETS, LIABILITIES AND PARTNERS CAPITAL
|STATEMENTS OF INCOME                                                           
|STATEMENTS OF PARTNERS CAPITAL                                                
|STATEMENT OF CASH FLOWS                                                        
|NOTES TO FINANCIAL STATEMENTS                                                  
|INDEX TO FINANCIAL STATEMENTS                                                  
|Report of Independent Accountants                                              
|STATEMENT OF ASSETS, LIABILITIES AND PARTNERS CAPITAL                         
|STATEMENT OF INCOME                                                            
|STATEMENTS OF PARTNERS CAPITAL                                                
|NOTES TO FINANCIAL STATEMENTS                                                  
|EXHIBITS                                                                       



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PMC Capital, Inc.

Form 10-K


For the Year Ended December 31, 1999




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TABLE OF CONTENTS


|                     |    |    |     |                                                                                        |  |  |    | 
|-------------------- | -- | -- | --- | -------------------------------------------------------------------------------------- |  |  | -- | 
|ITEM                 |    |    |     | PAGE                                                                                  
|                     |    |    |     |                                                                                       
|                    
|                    
|                    
|                    
|PART I              
|                    
|                     | 1  | .  |     | Business                                                                               |  |  | 1  | 
|                     | 2  | .  |     | Properties                                                                             |  |  | 15 | 
|                     | 3  | .  |     | Legal Proceedings                                                                      |  |  | 15 | 
|                     | 4  | .  |     | Submission of Matters to a Vote of Security Holders                                    |  |  | 15 | 
|                    
|                    
|                    
|                    
|PART II             
|                    
|                     | 5  | .  |     | Market for the Registrants Common Stock and Related
	Shareholder Matters              |  |  | 16 | 
|                     | 6  | .  |     | Selected Consolidated Financial Data                                                   |  |  | 17 | 
|                     | 7  | .  |     | Managements Discussion and Analysis of Financial Condition
	and Results of Operations |  |  | 18 | 
|                     | 7  | A. |     | Quantitative and Qualitative Disclosures about Market Risk                             |  |  | 30 | 
|                     | 8  | .  |     | Consolidated Financial Statements and Supplementary Data                               |  |  | 30 | 
|                     | 9  | .  |     | Changes in and Disagreements with Accountants on Accounting and
	Financial Disclosure  |  |  | 30 | 
|                    
|                    
|                    
|                    
|PART III            
|                    
|                     | 10 | .  |     | Directors and Executive Officers of the Registrant                                     |  |  | 31 | 
|                     | 11 | .  |     | Executive Compensation                                                                 |  |  | 31 | 
|                     | 12 | .  |     | Security Ownership of Certain Beneficial Owners and Management                         |  |  | 31 | 
|                     | 13 | .  |     | Certain Relationships and Related Transactions                                         |  |  | 31 | 
|                    
|                    
|                    
|                    
|PART IV             
|                    
|                     | 14 | .  |     | Exhibits, Financial Statements, Schedules and Reports on
	Form 8-K                     |  |  | 32 | 
|Signatures           |    |    | 33  |                                                                                       
|Financial Statements |    |    | F-1 |                                                                                       
|Exhibits             |    |    | E-1 |                                                                                       

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PART I

Item 1.    BUSINESS

GENERAL

Overview

PMC Capital, Inc., a Florida corporation, is
a diversified closed-end management investment company that has
elected to operate as a business development company
(BDC) under the Investment Company Act of 1940, as
amended (the 1940 Act). The common stock of PMC
Capital, Inc. (the Common Stock) is traded on
the American Stock Exchange under the symbol PMC. PMC
 Capital, Inc. has elected to be taxed as a regulated
investment company and thus distributes substantially all its
taxable income as dividends to its shareholders, thereby
incurring no Federal income tax liability on such income.

PMC Capital, Inc. (PMC Capital or
 PMC, and together with its subsidiaries, the
Company, we or our) is a
national lender to small businesses either directly or through
its three principal subsidiaries. These lending subsidiaries are
First Western SBLC, Inc. (First Western), PMC
Investment Corporation (PMCIC) and Western Financial
Capital Corporation (Western Financial). First
Western, PMCIC and Western Financial are registered under the
1940 Act as diversified closed-end management investment
companies. Our investment objective is to achieve current income
that is available to pay out to shareholders in the form of
quarterly dividends. We have a fundamental policy with respect to
 loan concentration that requires us to be greater than
25% concentrated in the lodging industry. We also have
originated loans for convenience stores and gas stations, medical
 professionals, restaurants, service providers, retail stores,
commercial real estate and others. During the years ended
December 31, 1999 and 1998, we funded $84.3 million and
 $66.4 million in loans, respectively, and at
December 31, 1999, our investment portfolio consisted of
$106.2 million representing 299 loans in
40 states.

We operate under several licenses from the Small
Business Administration (the SBA). Our wholly-owned
subsidiary, First Western, is licensed as a small business
lending company (SBLC) that originates loans through
the SBAs 7(a) Guaranteed Loan Program. PMCIC is a
licensed specialized small business investment company
(SSBIC) under the Small Business Investment Act of
1958, as amended (SBIA). PMCIC uses long-term funds
provided by the SBA, together with its own capital, to provide
long-term collateralized loans to eligible small businesses owned
 by disadvantaged persons, as defined under the
regulations of the SBA. Western Financial is a licensed small
business investment company (SBIC) under the SBIA
that provides loans to borrowers whether or not they qualify as
disadvantaged.

We primarily originate loans to individuals and
small business concerns in the limited service sector of the
lodging industry. We also target the convenience store and gas
station, medical, food service, service, retail and commercial
real estate industries. We are a national lender that primarily
lends to businesses in the southwest and southeast regions of the
 United States. A majority of our loans in the lodging industry
are secured by limited service hospitality properties and are
generally to owner-operated facilities operating under national
franchises. We believe that franchise operations offer attractive
 lending opportunities because such businesses generally employ
proven business concepts, have national reservation systems, have
 consistent product quality, are screened and monitored by
franchisors and generally have a higher rate of success when
compared to other independently operated businesses.

Advisory Services

In addition to our lending operations, we earn
revenue through our investment advisor subsidiary, PMC
Advisers, Ltd. (PMC Advisers), which evaluates
and services loans and other investment alternatives pursuant to
a fee arrangement with PMC Commercial Trust (PMC
Commercial). PMC Commercial, our affiliate, is a real
estate investment trust. The executive officers of PMC Capital
are also the executive officers of PMC Commercial. PMC Advisers
provides these investment advisory services to PMC Commercial
pursuant to investment management agreements (the
Investment Management Agreements) entered into
between PMC Capital, PMC Advisers and PMC Commercial. As the
investment advisor for PMC Commercial, PMC Advisers has earned
$2.3

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million, $2.6 million and $1.6 million
in advisory fees during the years ended December 31, 1999,
1998 and 1997, respectively.

PMC Commercial provides loans to persons or
entities whose borrowing needs and/or strength and stability
exceed the limitations set for our SBA approved loan programs. As
 a result, we generally pursue different prospective borrowers
than PMC Commercial. In order to further mitigate the potential
for conflicts of interest, PMC Commercial, PMC Capital and PMC
Advisers have entered into a loan origination agreement (the
Loan Origination Agreement). Pursuant to the Loan
Origination Agreement, loans that are greater than
$1.1 million that meet PMC Commercials underwriting
criteria are first presented to PMC Commercial for funding. If
PMC Commercial does not have available funds, we may originate
those lending opportunities as long as they meet our lending
criteria. The fee of PMC Advisers is primarily based on the value
 of PMC Commercials assets. As a result, any increases in
the dollar amount of PMC Commercials assets will benefit
PMC Advisers, and PMC Advisers will have a potential conflict in
determining whether to advise PMC Commercial to acquire assets or
 write down the value of any assets. In order to mitigate the
risk to PMC Commercial from increasing its asset base through
leveraged transactions, the Investment Management Agreements
provide PMC Advisers with a reduced fee for any loans originated
through additional borrowings.

SBA 7(a) Lending Program

Under the SBA 7(a) program, we primarily
originate senior secured, variable-rate loans that are partially
guaranteed by the SBA through our subsidiary, First Western. Our
SBA 7(a) loans are primarily provided to small businesses
for the purpose of acquiring real estate. We also lend money to
business start-ups for purposes of leasehold improvements, or
purchasing machinery and equipment, among other things. The loans
 are secured by a mortgage or other liens on the assets of the
borrower. In all cases, the owners of the business must
personally guarantee the repayment of the loan.

Our SBA 7(a) loans will typically range in
size from $100,000 to $1.4 million. Over 99% of our SBA
7(a) portfolio had variable interest rates as of
December 31, 1999. Pricing on our SBA 7(a) loans is
generally a spread over the prime rate ranging from 1.00% to
2.75%, which is adjusted on a quarterly basis. These loans are
fully amortizing and payable in equal monthly installments of
principal and interest, primarily due on the first day of the
month following the month in which the loan is fully funded.

The number and dollar volume of loans originated
by First Western under the SBA 7(a) program decreased during
 1998 and the early part of 1999. The factors that contributed to
 this decrease included:



| |    |                                                                                                                                                                                                                                                  
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | An increase in guarantee fees due to the SBA by
	the borrower under the SBA 7(a)  program.                                                                                                                                                       
| | 2. | Increased competition to originate SBA
	7(a) program loans from other SBA 7(a)  program
	lenders.                                                                                                                                                
| | 3. | An increase in competition from alternative loan
	products. These other products often provide prospective
	borrowers that we target with fixed interest rates at less than
	the floating interest rates available through the SBA
	7(a) program.

Accordingly, as SBA 7(a) program funding
decreased, the premiums earned on the sales of the government
guaranteed portions of these loans were significantly reduced
from prior years. In addition, due to the high rate of
prepayments experienced in our most concentrated industry, the
limited service hospitality industry, purchasers of the
guaranteed portion of our SBA 7(a) loans significantly
decreased the premium which they paid for these types of assets.

Commencing in early 1999, we refocused our
marketing effort to emphasize loan originations under the SBA
7(a) program. As a result of this increased
marketing effort for SBA 7(a) lending, revenues generated
from the sales of the guaranteed portion of the SBA 7(a)
program loans increased during the latter half of 1999. We
believe, based on presently outstanding commitments to fund
loans, that this positive trend will continue.

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Commercial Mortgage Loans

We originate mortgage loans to small businesses
primarily secured by commercial real estate. We believe that we
successfully compete in the commercial real estate finance market
 due to our understanding of the borrowers business and the
flexible loan terms that we offer. We use an intrinsic
value approach to assess new commercial mortgage loans,
which requires an analysis of the replacement cost of the
collateral and an analysis of local market conditions. We also
consider the underlying cash flow of the real estate tenant or
owner-occupant as well as the more traditional real estate loan
underwriting criteria.

We generally price new fixed rate commercial
mortgage loans based on a fixed spread ranging from 3.5% to 4.3%
over the ten-year U.S. Treasury rates. During 1998 and 1999,
 commercial lending competition increased. The result was that
the spreads charged by commercial real estate lenders in the
marketplace narrowed. Accordingly, our net spread over treasury
rates declined. At December 31, 1999, 70% of our portfolio
of commercial mortgage loans carried a fixed interest rate, and
30% carried a floating interest rate based on the prime rate. Our
 fixed interest rate loans primarily require level payments of
principal and interest calculated to amortize the principal on a
ten to 25-year basis. Sometimes the loans with less than a
25 year maturity have a balloon payment at maturity. Our
variable interest rate loans require payments of principal and
interest, reset on a quarterly basis, to fully amortize the loan
over its life.

Our primary competition comes from banks,
financial institutions and other lending companies. Additionally,
 there are lending programs that have been established by
national franchisers in the lodging industry. Some of these
competitors have greater financial and larger managerial
resources than we have. Competition has increased as the
financial strength of the banking and thrift industries improved.
 In managements opinion, there continues to be an
increasing amount of competitive lending activity at advance
rates and interest rates which are considerably more aggressive
than those that we offer. In order to maintain a quality
portfolio, we will continue to adhere to our historical
underwriting criteria, and as a result, some loan origination
opportunities will not be funded by us. We believe that we
compete effectively with the other lending companies on the basis
 of our reputation as a lender, the timely credit analysis and
decision-making processes, and the renewal options available to
borrowers.

The following table contains data for our loan
portfolio, broken down by subsidiary:

|                                |                                        |                                      |   |           |   |               |   |      |   |      |   |      |   |      |   |      |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |      |  
|------------------------------- | -------------------------------------- | ------------------------------------ | - | --------- | - | ------------- | - | ---- | - | ---- | - | ---- | - | ---- | - | ---- | - |  | - | ---- | - |  | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|                                |                                        |                                      |   |           |   |               |   |      |   |      |   |      |   |     
|                                |                                        |                                      |   | Western   |   |               |   |     
|                                |                                        | PMCIC                                |   | Financial |   | First Western |   | PMC 
|                                |                                        |                                      |   |           |   |               |   |     
|                                |                                        | 1999                                 |   | 1998      |   | 1999          |   | 1998 |   | 1999 |   | 1998 |   | 1999 |   | 1998
|                                |                                        |                                      |   |           |   |               |   |      |   |      |   |      |   |      |   |     
|                                |                                        | (In millions, except interest rates)
|                               
|                               
|                               
|                               
|As of December 31:              |                                        |                                      |   |           |   |               |   |      |   |      |   |      |   |      |   |      |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |     
|                                | Retained principal outstanding         |                                      | $ | 37.2      |   |               | $ | 43.2 |   |      | $ | 11.2 |   |      | $ | 21.2 |   |  | $ | 16.9 |   |  | $ | 8.9  |   |  | $ | 41.0 |   |  | $ | 43.4 |  
|                                |                                        |                                      |   |           |   |               |   |      |   |      |   |      |   |      |   |      |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |     
|                               
|                                | Weighted average interest rate         |                                      |   | 10.4      | % |               |   | 10.5 | % |      |   | 10.6 | % |      |   | 10.4 | % |  |   | 10.4 | % |  |   | 10.4 | % |  |   | 9.5  | % |  |   | 9.3  | %
|                                |                                        |                                      |   |           |   |               |   |      |   |      |   |      |   |      |   |      |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |     
|                               
|                                | Dollars past due greater than 60  days |                                      | $ | 0.1       |   |               | $ | 0.7  |   |      | $ | 0.4  |   |      | $ | 0.1  |   |  | $ | 0.3  |   |  | $ | 0.3  |   |  | $ | -    |   |  | $ | 0.5  |  
|                                |                                        |                                      |   |           |   |               |   |      |   |      |   |      |   |      |   |      |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |     
|                               
|For the year ended December 31: |                                        |                                      |   |           |   |               |   |      |   |      |   |      |   |      |   |      |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |     
|                               
|                                | Loan originations                      |                                      | $ | 15.4      |   |               | $ | 14.1 |   |      | $ | 7.7  |   |      | $ | 12.0 |   |  | $ | 27.6 |   |  | $ | 10.6 |   |  | $ | 33.6 |   |  | $ | 29.7 |  
|                                |                                        |                                      |   |           |   |               |   |      |   |      |   |      |   |      |   |      |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |     
|                               
|                                | Loan losses                            |                                      | $ | -         |   |               | $ | 0.4  |   |      | $ | 0.1  |   |      | $ | -    |   |  | $ | 0.1  |   |  | $ | -    |   |  | $ | -    |   |  | $ | -    |  
|                                |                                        |                                      |   |           |   |               |   |      |   |      |   |      |   |      |   |      |   |  |   |      |   |  |   |      |   |  |   |      |   |  |   |     

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Non-Investment Company Act Subsidiaries

PMC Capital is either directly or indirectly the
sole shareholder or partner of several non-investment company
subsidiaries. These are: PMC Advisers, Ltd. and its
subsidiary (collectively, PMC Advisers); PMC Funding
Corp. and its subsidiary (PMC Funding); and several
special purpose entities (the Limited Partnerships as
 defined below) established to facilitate loan securitizations.
Our consolidated financial statements include the accounts of PMC
 and its wholly-owned regulated investment company subsidiaries.
The accounts of PMC Advisers, PMC Funding, and the Limited
Partnerships which are accounted for by the equity method of
accounting in conformity with the requirements of Federal
securities laws.

For a description of the operations of PMC
Advisers, see Advisory Services. For a description of
 the operations of the Limited Partnerships, see
Securitization and Structured Financing Programs. PMC
 Funding is a Florida corporation that holds certain equity
assets on our behalf. PMC Capital is the sole shareholder of PMC
Funding. Operations from PMC Funding consist of income generated
from the construction and sale of property and the operation of
properties acquired as part of liquidating some of our loans.

Securitization and Structured Financing
Programs

We have sold portions of our loan portfolio into
special purpose entities to generate cash proceeds. These
proceeds have been used to fund additional loans. These types of
loan sales are commonly referred to as securitizations or
structured loan sales and are either sold to purchasers (for a
securitization) or notes payable are issued (for a structured
financing) in the asset backed securities market. Further, gains
on these sales generated by our securitizations or structured
loan sales represent a material portion of our revenues in the
period in which these transactions occur. The gains on structured
 loan sales cause timing differences between our net income in
accordance with generally accepted accounting principles
(GAAP) and our investment company taxable income. See
 Managements Discussion and Analysis of Financial
Condition and Results of Operations - Dividends.

Any delay in the sale of our loans beyond a
quarter-end or year-end would delay the gain on sale in the given
 quarter or year and will have a negative impact on reported
earnings for such quarter or year in which the delay occurred.
Since we rely on securitizations or structured loan sales as a
source of operating capital to fund new loan originations, any
adverse changes in our ability to complete these types of
transactions including any negative impact on the asset-backed
securities market for the type of product we generate, could have
 a detrimental effect on our ability to originate and sell loans.

Problems in the asset backed securities market
could affect our ability to complete a securitization on a timely
 basis or may cause us to sell the loans on unfavorable terms.
The unfavorable terms could consist of any of the following:



| |   |                                                                   
| | - | ------------------------------------------------------------------
| |  | increased interest rates,                                         
|
| |  | more cash reserve requirements, or                                
|
| |  | a requirement that we hold larger subordinated
	portions of loans.

Each of the items described above would have a
negative impact on our net income. While market conditions have
subsequently improved, during the latter half of 1998 the
liquidity of the asset-backed securities market was significantly
 impacted by several factors. Several publications identified the
 global financial crisis in overseas currencies coupled with the
potential for a recession in the United States as a cause for
investors in the type of asset-backed securities that we place to
 widen the spreads they require in order to purchase
asset-backed securities. During November 1998, we completed a
sale of loans under these less than ideal market conditions, and
the interest rate that we paid for the notes of the special
purpose entity was negatively impacted by those market
conditions. As a result, we recognized less profit on our loan
sale in November 1998 than would have been attainable in previous
 periods.

We retain a portion of the default and prepayment
risk associated with the loan portfolio that we sell in the
asset-backed securities market. The gain is calculated based on
the present value of estimated future excess cash

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flows that we anticipate will be received from the
 sold loans which is calculated based on managements
assumptions concerning, among other things, anticipated defaults
and loan losses and anticipated prepayment speeds. Accordingly,
the gain recognized on these loan sales is a non-cash item. This
part of the gain, called an interest-only strip receivable, is
identified as an asset on our balance sheet. The value of the
interest-only strip receivable can be affected by any of the
following:



| |   |                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Any losses or prepayments on our sold loans will
	have a negative effect on our future cash flows.                                                                                                                                                                                                                                       
| |  | Actual defaults and prepayments may vary from our
	assumptions, possibly to a material degree.                                                                                                                                                                                                                                           
| |  | Faster than anticipated prepayments of principal
	or loan losses will decrease the fair value attributed to the
	interest-only strip receivable.                                                                                                                                                                                         
| |  | Slower than anticipated prepayments of principal
	or loan losses will increase the fair value attributed to the
	interest-only strip receivable.                                                                                                                                                                                         
| |  | The effect on our yield due to principal
	prepayments on the sold loans occurring at a rate that is faster
	(or slower) than the rate anticipated 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, defaults and recoveries, if any, on defaulted
underlying securitized loans. In addition, we are required to
deposit substantial amounts of the cash flows generated by our
interests in our securitizations (restricted cash)
into spread accounts which are pledged to the security holders.

We regularly measure our default, prepayment and
other assumptions against the actual performance of securitized
receivables and the guaranteed portion of loans sold. If we were
to determine, as a result of such regular review or otherwise,
that we underestimated (or overestimated) defaults and/or
prepayments, or that any other material assumptions were
inaccurate, we would adjust the carrying value of our
interest-only strip receivable by making a charge (credit) to
income and adjusting the carrying value of the interest-only
strip receivable on our balance sheet.

During 1999, as a result of prepayment speeds
exceeding our expectations, we recorded a net realized and
unrealized loss of $0.5 million on our interest-only strip
receivables. During 1998, the prepayment speeds exceeding our
expectations was more than offset by better than anticipated loss
 rates on the portfolios. As a result, during the year ended
December 31, 1998 we recorded a net unrealized gain and
corresponding reduction in the valuation allowance of
$0.1 million on the interest-only strip receivables. During
1999, as a result of the significant amount of loans which
prepaid, the present value of the cash flows expected to be
received on First Western loans sold in the secondary market,
using a risk-free rate of return, is less than the amortized cost
 of the related interest-only strip receivable. Valuation losses
of $1.3 million have previously been reflected in our income
 statement as unrealized losses. During the period when the
present value of the cash flows is less than the amortized cost,
we recognize the valuation as realized with a corresponding
reduction in the unrealized valuation loss. The net unrealized
gain on the interest-only strip receivables was $0.6 million
 at December 31, 1999 and the net unrealized loss was
$0.2 million at December 31, 1998. Although we believe
that we have made reasonable assumptions as to the future cash
flows of the various pools of loans that have been sold in
securitization or structured finance transactions, actual rates
of default or prepayment may differ from those assumed and other
assumptions may be required to be revised based upon future
events. We are required to enter into agreements (the
Credit Enhancement Agreements) that govern the assets
 and the flow of funds in and out of the related Limited
Partnership or trust formed as part of the securitization or
structured loan sale. Generally, the Credit Enhancement
Agreements contain specified limits on the delinquency, default
and loss rates on the receivables included in each trust or
limited partnership. If, at any measurement date, the
delinquency, default or loss rate with respect to any trust or
Limited Partnership were to exceed the specified limits,
provisions of the Credit Enhancement Agreement would
automatically increase the level of credit enhancement
requirements for that trust or Limited Partnership. During the
period in which the specified delinquency, default or loss rate
was exceeded, excess cash flow, if any, would be used to fund the
 increased credit enhancement levels instead of being distributed
 to us, which would reduce our cash flow. We have never had a
reduction of cash flow as a result of any of the provisions of
our securitizations or structured financings.

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In connection with our structured loan sales we
have formed the Limited Partnerships as special purpose entities
to hold the loans sold and issue notes payable secured by the
loans. The Limited Partnerships consist of:



| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | PMC Capital Limited Partnership (the 1996
	Partnership) and its related general partner and trust;
|
| |  | PMC Capital, L.P. 1998-1 (the 1998
	Partnership) and its related general partner; and             
|
| |  | PMC Capital, L.P. 1999-1 (the 1999
	Partnership) and its related general partner.                 

The terms of the notes payable issued by the
Limited Partnerships provide that the owners of these special
purpose entities are not liable for any payments on the notes.
Accordingly, if the special purpose entities fail to pay the
principal or interest due on the notes, the sole recourse of the
holders of the notes is against the assets of the special purpose
 entities. We have no obligation to pay the notes, nor do the
holders of the notes have any recourse against our assets. PMC
Capital is either directly or indirectly the sole owner of the
special purpose entities and is the servicer for all loans held
by the special purpose entities. Data relating to our completed
securitizations is as follows:

|                                   |                        |                       |         |              |         |         |        |         |         |         |      
|---------------------------------- | ---------------------- | --------------------- | ------- | ------------ | ------- | ------- | ------ | ------- | ------- | ------- | -----
|                                   |                        |                       |         |             
|                                   |                        | FW(1)                 |         | PMC(2)      
|                                   |                        |                       |         |             
|                                   |                        | 1994                  |         | 1997         |         | 1996    |        | 1998    |         | 1999   
|                                   |                        |                       |         |              |         |         |        |         |         |        
|                                   |                        | (Dollars in millions)
|                                  
|                                  
|                                  
|                                  
|Dollar amount of loans sold        |                        | $26.4                 |         | $22.8        |         | $45.7   |        | $43.1   |         | $60.3  
|                                  
|                                  
|                                  
|                                  
|Portfolio as of December  31, 1999 |                        | $ 3.9                 |         | $10.7        |         | $14.2   |        | $39.5   |         | $57.5  
|                                  
|                                  
|                                  
|                                  
|Weighted average interest rate:    |                        |                       |         |              |         |         |        |         |         |        
|                                  
|                                  
|                                  
|                                  
|                                   | - At time of sale      |                       | P+2.66% |              | P+2.48% |         | 11.52% |         | P+1.26% |         | 9.59%
|                                  
|                                  
|                                  
|                                  
|                                   | - At December 31, 1999 |                       | P+2.68% |              | P+2.37% |         | 11.23% |         | P+1.20% |         | 9.59%
|                                  
|                                  
|                                  
|                                  
|Cost of funds on the               |                        |                       |         |              |         |         |        |         |         |        
|                                   | notes/certificates     |                       | P-1.25% |              | P-1.90% |         | 6.72%  |         | P-1.00% |         | 6.60%
|                                  
|                                  
|                                  
|                                  
|Subordinated interest              |                        |                       |         |              |         |         |        |         |         |        
|                                   | retained(%)(3)         |                       | 6.0%    |              | 7.0%    |         | 12.0%  |         | 10.5%   |         | 8.0% 
|                                  
|                                  
|                                  
|                                  
|Rating agency                      |                        | Moodys               |         | Moodys      |         | Moodys |        | Moodys |         | Moodys
|                                  
|                                  
|                                  
|                                  
|Rating of certificates/notes       |                        | Aaa                 |         | Aaa/A(3) |         | Aa    |        | Aaa   |         | Aaa  
|                                  
|                                  
|                                  
|                                  
|Cash reserve requirement(%)        |                        | 5.0%                  |         | 8.0%         |         | 5.0%    |        | 8.0%    |         | 6.0%   



|    |                                                                                                  
|--- | -------------------------------------------------------------------------------------------------
|(1) | First Western securitization transactions during
	the year indicated.                            
|(2) | PMC Capital, Western Financial and PMCIC
	structured loan sales during the year indicated.       
|(3) | The transaction had both the primary and
	subordinated portion of the transaction rated and sold.

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REGULATORY OVERVIEW

Business Development Company

In 1994, PMC Capital elected to become a business
development company (BDC) rather than a registered
investment company under the 1940 Act. BDCs must register their
shares under the Securities Exchange Act of 1934, as amended (the
 Exchange Act), and are subject to the Exchange
Acts periodic reporting requirements rather than the 1940
Acts reporting requirements. Companies having securities
registered under the Exchange Act, such as PMC Capital, must file
 quarterly rather than semi-annual financial reports. BDCs have
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. A
business development company is a unique kind of investment
company that focuses on investing in or lending to small private
companies and making managerial assistance available to them. A
BDC may use capital provided by public shareholders and from
other sources to invest in long-term, private investments in
growing small businesses. A BDC provides shareholders the ability
 to retain the liquidity of a publicly traded stock, while
sharing in the benefits, if any, of investing in privately owned
companies. As a BDC, we may not acquire any asset other than
Qualifying Assets unless, at the time we make the
acquisition, our Qualifying Assets represent at least 70% of the
value of our total assets (the 70% test). The
principal categories of Qualifying Assets relevant to our
business are:



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

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

| |     |                                                                                                                                                                                                       
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Securities received in exchange for or distributed
	 with respect to securities described in (1) above or
	pursuant to the exercise of options, warrants, or rights relating
	 to such securities; and
| | (3) | Cash, cash items, government securities, or high
	quality debt securities (within the meaning of the 1940 Act),
	maturing in one year or less from the time of investment.                            

To include certain securities described above as
Qualifying Assets for the purpose of the 70% test, a BDC must
make available to the issuer of those securities significant
managerial assistance such as providing significant guidance and
counsel concerning the management, operations, or business
objectives and policies of a portfolio company, or making loans
to a portfolio company. We will provide managerial assistance on
a continuing basis to any portfolio company that requests it,
whether or not difficulties are perceived. As a BDC, we are
entitled to issue senior securities in the form of stock or
senior securities representing indebtedness, as long as each
class of senior security has an asset coverage of at least 200%
immediately after each such issuance. This limitation is not
applicable to borrowings by our SBIC or SBLC subsidiaries, and
therefore any borrowings by these subsidiaries are not included
in this asset coverage test. See Risk Factors. We may
 not change the nature of our business so as to cease to be, or
withdraw our election as, a BDC unless authorized by vote of a
majority of the outstanding voting securities, as
defined in the 1940 Act. Since we made our BDC election, we have
not made any substantial change in the nature of our business.

Regulated Investment Company (RIC)

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



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

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| |     |                               
| | --- | ------------------------------
| | (2) | Diversify our holdings so that



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



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

Fundamental and Other Policies of PMC and Its
Subsidiaries

As part of being a BDC, we are required to
establish a core set of fundamental policies. 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 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 more
 than 50% of PMC Capitals outstanding voting securities, or
 more of PMC Capitals voting securities present at a
meeting of security holders at which a quorum is present. Our
Board of Directors may change other investment policies of PMC
Capital at any time.



|   |                                                                                                                                                                                                                                                                                                                                                                                          
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1) | The Company will not purchase or sell commodities
	or commodity contracts.                                                                                                                                                                                                                                                                                                               
|  
|2) | The Company will not engage in short sales,
	purchase securities on margin or trade in contracts commonly
	called puts or calls or in combinations thereof, except that it
	may acquire warrants, options or other rights to subscribe to or
	sell securities in furtherance of its investment objectives.                                                                               
|  
|3) | The Company will not underwrite securities of
	other issuers, except that it may acquire portfolio securities
	under circumstances where, if sold, the Company might be deemed
	an underwriter for purposes of the Securities Act of 1933. The
	Company may purchase restricted securities as to
	which there are substantial restrictions on resale under the
	Securities Act of 1933.
|  
|4) | The Company will not purchase any securities of a
	company if any of the directors or officers of the Company owns
	more than 0.5% of such company and such persons owning more than
	0.5% together own 5% or more of the shares of such company.                                                                                                                                        
|  
|5) | The Company may issue senior securities in the
	form of debentures, reverse repurchase agreements and preferred
	stock and may borrow monies from banks and other lenders, all on
	an unsecured basis. The 1940 Act limits the Company to the
	issuance of one class of senior debt securities and one class of
	senior equity securities (as such terms are defined in the 1940
	Act).  
|  
|6) | The Company will not invest more than 25% of its
	total assets in any one industry except in the lodging industry
	which may constitute 100% of the Companys portfolio. The
	Company will invest at least 25% of its total assets in the
	lodging industry.                                                                                                                             

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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|7) | The Company may invest in real estate development
	companies, may make real estate acquisition loans and real estate
	 improvement loans and may further make other loans secured by
	real estate.                                                                                                                                                                                                                                                                                           
|  
|8) | The Company may make loans and purchase debt
	securities in furtherance of its investment objectives. The
	Company will not make loans to its officers, directors or other
	affiliated persons.                                                                                                                                                                                                                                                                                              
|  
|9) | PMCIC will perform the functions and conduct the
	activities contemplated under the SBIA, and will provide
	assistance solely to small business concerns which will
	contribute to a well-balanced national economy by facilitating
	ownership of such concerns by persons whose participation in the
	free enterprise system is hampered because of social or economic
	disadvantages. These fundamental policies of PMCIC may not be
	changed without the prior written consent of the SBA.

As stated above, we have a fundamental policy
regarding investment in the lodging industry. At
December 31, 1999 and 1998, loans to businesses in the
lodging industry comprised 55% and 61% of our total assets,
respectively. There can be no assurance that we will continue to
experience the positive results we have historically achieved
from lending to the lodging industry or that market conditions
will enable us to maintain or increase our level of loan
concentration in this industry. Any economic factors that
negatively impact this industry could have a material adverse
effect on our business. Additionally, at December 31, 1999,
loans to businesses located in Texas and Georgia comprised
approximately 27% and 13% of our outstanding loan portfolio,
respectively. A decline in economic conditions in any of these
states may adversely affect us.

Overview of SBA Regulations

The lending operations of First Western, PMCIC and
 Western Financial are regulated by the SBA, which establishes,
among other things, maximum interest rates that borrowers may be
charged (which currently for PMCIC and Western Financial may not
exceed the greater of 19% per annum or 11% above our cost of
 funds from the SBA) and minimum and maximum maturities for our
loans (which generally range from four to 25 years).
Borrowers must satisfy certain criteria established by the SBA to
 qualify for loans originated by us under SBA sponsored programs,
 including limitations on the net worth and net income of
potential borrowers or alternative criteria that focus upon the
number of employees of the borrower and its gross revenues. In
addition, the SBA generally limits the aggregate amount of
guaranties that can be provided to any single borrower and
restricts the use to which the loan proceeds can be employed by
the borrower. As part of the legislation approved 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. As part of this
legislation, the availability of 3% subsidized debentures
and the right of the SBA to purchase preferred stock of an SSBIC
were repealed. This legislative change has no effect on
previously issued debentures or preferred stock of SSBICs
including PMCIC.

10



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##### Table of Contents



SBIC Regulations

SBICs are authorized to stimulate the flow of
private equity capital to eligible small businesses. Under
present SBA regulations, eligible small businesses include
businesses that have a net worth not exceeding $18 million
and have average annual fully taxed net income not exceeding
$6 million for the most recent two fiscal years. In
addition, an SBIC must devote 20% of its investment activity
 to smaller concerns as defined by the SBA. A smaller
 concern is one that has a net worth not exceeding
$6 million and has average annual fully taxed net income not
 exceeding $2 million for the most recent two fiscal years.
SBA regulations also provide alternative size standard criteria
to determine eligibility, which depend on the industry in which
the business is engaged and are based on such factors as the
number of employees and gross sales. According to SBA
regulations, SBICs may make long-term loans to small businesses,
invest in the equity securities of such businesses, and provide
them with consulting and advisory services. Both Western
Financial and PMCIC provide long-term loans to qualifying small
businesses. Western Financial and PMCIC are periodically examined
 and audited by the SBA staff to determine its compliance with
SBIC regulations. Western Financial and PMCIC have the
opportunity to sell to the SBA subordinated debentures with a
maturity of up to ten years, up to an additional aggregate
principal amount of $16 million based on PMCICs and
Western Financials regulatory capital. This limit generally
 applies to all financial assistance provided by the SBA to any
licensee and its associates, as that term is defined
in SBA regulations. Historically, an SBIC was also eligible to
sell preferred stock to the SBA. Western Financial and PMCIC have
 outstanding $35.6 million of subordinated debentures and
PMCIC has $7.0 million of preferred stock investments from
the SBA at December 31, 1999. Interest rates on the SBA
debentures currently outstanding have a weighted average interest
 rate of 6.7%. At December 31, 1999, we had an outstanding
commitment from the SBA to purchase up to $12.5 million in
additional SBIC debentures. We anticipate that we will seek this
additional financing during 2000.

SBLC Regulations

First Western is licensed to operate as an SBLC
and is periodically examined and audited by the SBA staff for
purposes of determining compliance with SBA regulations,
including its participation in the SBA Preferred Lenders Program.
 See SBA 7(a) Lending.

The SBA guarantees 75% of qualified loans over
$100,000. While the eligibility requirements of the SBA 7(a)
 program vary by the industry of the borrower and other factors,
the general eligibility requirements are that: (i) gross
sales of the borrower cannot exceed $5.0 million,
(ii) liquid assets or real estate equity of the borrower and
 affiliates cannot exceed specified limits, and (iii) the
maximum aggregate SBA loan guarantees to a borrower cannot exceed
 $750,000. Maximum maturities for SBA 7(a) loans are
25 years for real estate and 15 years for the purchase
of machinery and equipment.

RISK FACTORS

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 identified in this
Form 10-K. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic,
competitive and market conditions and future business decisions,
all of which are difficult or impossible to predict accurately
and many of which are beyond our control. Although we believe
that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could be inaccurate and,
therefore, there can be no assurance that the forward-looking
statements included in this Form 10-K will prove to be
accurate. In light of the significant uncertainties inherent in
the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by us
 or any other person that our objectives and plans will be
achieved.

11



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##### Table of Contents



Fluctuations In Quarterly Results

Our quarterly operating results will fluctuate
based on a number of factors. These include, among others, the
completion of a securitization or structured finance transaction
in a particular calendar quarter, the interest rates on the
securities issued in connection with its securitization or
structured finance transactions, the volume of our loans
originated, the timing of prepayment of loans, changes in and the
 timing of the recognition of realized and unrealized gains or
losses on investments, the degree to which we encounter
competition in our markets and general economic conditions. As a
result of these factors, results for any period should not be
relied upon as being indicative of future operating performance.

Impact of Inflation

In an inflationary environment, we can experience
problems selling loans in a securitization or structured loan
sale at a reasonable cost of funds and capital. A majority of
loans in our presently outstanding portfolio have a fixed
interest rate. Additionally, we may use our short-term credit
facility that has a variable interest rate cost of funds and
availability to $15 million for the origination of fixed
interest rate loans. We anticipate that our working capital needs
 will call for the completion of a securitization or structured
finance transaction sometime during the middle of the year ending
 December 31, 2000. If either U.S. Treasury rates were
to increase sharply (over 1%) from present levels
(approximately 6.5% for the 10-year U.S. Treasury) or
spreads for asset backed securities similar to the type issued by
 us were to increase sharply (over 1%) from our estimate of
present levels, we may not be able to complete a loan sale
because of the reduction between the yield on our fixed interest
rate loans and the interest needed to be paid to the purchasers.
As a result, to the extent we have borrowed funds on our
short-term credit facility to originate fixed interest rate
loans, our cash flow and net spread will be reduced if short-term
 interest rates were to rise from present levels. At
December 31, 1999 we did not have any balance borrowed on
our short-term credit facility.

Leverage

We have borrowed funds and issued shares of
preferred stock, and intend to borrow additional funds through
advances on our revolving credit facility and through the
issuance of notes payable or SBA debentures, if available. As a
result, we are leveraged. The SBA and private lenders have fixed
dollar claims on our assets superior to the claims of the holders
 of our common stock. Leverage magnifies the effect that rising
or falling interest rates have on our earnings. Any increase in
the interest rate earned by us on investments in excess of the
interest rate or dividend payable on the funds obtained from
either borrowings or the issuance of preferred stock would cause
our net income and earnings per share to increase more than it
would without leverage, while any decrease in the interest rate
earned by us on investments would cause net income and earnings
per share to decline by a greater amount than it would without
leverage. Leverage is thus generally considered a speculative
investment technique. In order for us to repay indebtedness or
meet our obligations in respect of any outstanding preferred
stock on a timely basis, we may be required to dispose of assets
at a time which we 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 our results of operations.

12



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##### Table of Contents



Interest Rate and Prepayment Risk

As a result of the general downward trend in
interest rates from 1997 through February 1999, we experienced an
 increase in the number and the dollar amount of prepaid loans.
First Westerns loans (all variable interest rate) do not
have prepayment penalties in accordance with SBA policy. On
prepayments of fixed-rate loans, we received the immediate
benefit of the prepayment charge; however, the proceeds from the
prepayments were invested initially in temporary investments and
have been re-loaned or committed to be re-loaned at lower rates.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations. The impact of the
lower lending rates was partially offset by the reduced cost of
our borrowings. Our net income is affected by the spread between
the rate at which we borrow funds and the rate at which we loan
these funds. PMC Capital, Western Financial and PMCIC have
primarily originated fixed interest rate loans and the borrowed
funds of these companies are typically long-term and at fixed
interest rates. First Western originates variable interest rate
loans and has utilized both advances from PMC Capital and the
securitization and sale of its portfolio (transactions were
completed in 1994 and 1997) to obtain funds necessary to
originate loans. If the yield on loans originated by us with
funds obtained from borrowings or the issuance of preferred stock
 fails to cover the cost of such funds, our cash flow will be
reduced. During periods of changing interest rates, interest rate
 mismatches on our retained loans could negatively impact our net
 income, dividend yield and the market price of our common stock.
 Generally, the fixed-rate loans that we originate have
prepayment penalties. If interest rates decline, we may
experience significant prepayments. Such prepayments, as well as
scheduled repayments, are likely to be re-loaned or invested at
lower rates. As a result, these factors may impair our ability to
 maintain dividend distributions at existing levels.

Risks of Lending To Small Businesses

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

Portfolio Valuation

There is typically no public market or established
 trading market for the loans we originate. The illiquidity of
most of our portfolio of loans may adversely affect our ability
to dispose of such loans and securities at times when it may be
advantageous for us to liquidate such investments. As a result,
the valuation of the loans in our portfolio is subject to the
estimate of our Board of Directors. Unlike traditional lenders,
we do not establish general reserves for anticipated loan losses,
 but we adjust quarterly the valuation of our portfolio to
reflect the estimate of our Board of Directors as to the current
realizable value of the loan portfolio including specific
reserves on problem loans. In the absence of a readily
ascertainable market value, the estimated value of our portfolio
of loans may differ significantly from the values that would be
placed on the portfolio if a ready market for the loans existed.
Any changes in estimated values are recorded in our statement of
operations as Net unrealized gains (losses) on
investments.

13



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Loss of Pass-Through Tax Treatment

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

Ongoing Need For Additional Capital Since
Earnings are Required to be Paid as Dividends

We will continue to need working capital to fund
loans. Historically, we have sold loans, borrowed from financial
institutions and have issued equity securities. A reduction in
the availability of funds from financial institutions, the equity
 market or the asset backed securities market could have a
material adverse effect on us. We must distribute at least
90% of our net operating income to our shareholders to
maintain our RIC status under the Code. As a result, such
earnings are not available to fund loan originations. We expect
to be able to borrow from financial institutions and sell loans
in the asset backed securities market. As a result of our current
 market price, we do not anticipate selling additional equity
securities during the year ended December 31, 2000. If we
fail to obtain funds from such sources or from other sources to
fund our loans, it could have a material adverse effect on our
financial condition and our results of operations. In addition,
as a BDC, we are generally required to maintain a ratio of at
least 200% of total assets to total borrowings, which
restricts our ability to borrow in certain circumstances.

Highly Regulated Environment

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

EMPLOYEES

At December 31, 1999, we employed 55
individuals including marketing professionals, investment
professionals, operations professionals and administrative staff.
 Our loan processing is centralized in our Dallas, Texas office.
In addition, we have loan production offices in Atlanta, Georgia
and Phoenix, Arizona. Our management believes the relationship
with our employees is good.

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##### Table of Contents



QUARTERLY RESULTS

The following table shows the earnings per share
on a quarterly basis for the last ten years.


|     |  |      |      |      |  |      |      |      |  |      |      |      |  |      |      |      |  |      |      |      |  |   |      |  |  |   |      |  |  |   |      |  |  |   |      |  |  |   |      | 
|---- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | - | ---- |  |  | - | ---- |  |  | - | ---- |  |  | - | ---- |  |  | - | ---- | 
|     |  | 1999 |      | 1998 |  | 1997 |      | 1996 |  | 1995 |      | 1994 |  | 1993 |      | 1992 |  | 1991 |      | 1990
|Qtr  |  |      |      |      |  |      |      |      |  |      |      |      |  |      |      |      |  |      |      |     
|1st  |  | $    | 0.23 |      |  | $    | 0.28 |      |  | $    | 0.29 |      |  | $    | 0.27 |      |  | $    | 0.23 |      |  | $ | 0.19 |  |  | $ | 0.18 |  |  | $ | 0.18 |  |  | $ | 0.15 |  |  | $ | 0.13 | 
|2nd* |  |      | 0.42 |      |  |      | 0.28 |      |  |      | 0.31 |      |  |      | 0.30 |      |  |      | 0.25 |      |  |   | 0.23 |  |  |   | 0.23 |  |  |   | 0.23 |  |  |   | 0.15 |  |  |   | 0.12 | 
|3rd  |  |      | 0.24 |      |  |      | 0.29 |      |  |      | 0.30 |      |  |      | 0.30 |      |  |      | 0.27 |      |  |   | 0.26 |  |  |   | 0.25 |  |  |   | 0.19 |  |  |   | 0.18 |  |  |   | 0.13 | 
|4th* |  |      | 0.22 |      |  |      | 0.31 |      |  |      | 0.45 |      |  |      | 0.31 |      |  |      | 0.28 |      |  |   | 0.44 |  |  |   | 0.21 |  |  |   | 0.19 |  |  |   | 0.16 |  |  |   | 0.14 | 
|     |  |      |      |      |  |      |      |      |  |      |      |      |  |      |      |      |  |      |      |      |  |   |      |  |  |   |      |  |  |   |      |  |  |   |      |  |  |   |      | 
|     |  | $    | 1.11 |      |  | $    | 1.16 |      |  | $    | 1.35 |      |  | $    | 1.18 |      |  | $    | 1.03 |      |  | $ | 1.12 |  |  | $ | 0.87 |  |  | $ | 0.79 |  |  | $ | 0.64 |  |  | $ | 0.52 | 
|     |  |      |      |      |  |      |      |      |  |      |      |      |  |      |      |      |  |      |      |      |  |   |      |  |  |   |      |  |  |   |      |  |  |   |      |  |  |   |      | 

*  Includes $0.22 in the second quarter of
 1999, $0.08 in the fourth quarter of 1998, $0.21 in the fourth
quarter of 1997 and $0.24 in the fourth quarter of 1994 relating
to structured sales of portions of the loan portfolio.

Item 2.  PROPERTIES

Our headquarters are located at 18111 Preston
 Road, Suite 600, Dallas, Texas 75252. We lease
approximately 13,000 square feet in an office building
pursuant to a five year lease which commenced in December 1998.
In addition, at December 31, 1999, we also leased office
space in Phoenix, Arizona and Atlanta, Georgia. The aggregate
annual lease payments for the year ended December 31, 1999
were approximately $300,000.

Item 3.  LEGAL PROCEEDINGS

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

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

No matters were submitted to a vote of
shareholders during the last quarter of the year ended
December 31, 1999.

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##### Table of Contents






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 us for each such period.

|                   |  |      |       |     |  |           |       |           |  |   |       |  |  |   |       | 
|------------------ |  | ---- | ----- | --- |  | --------- | ----- | --------- |  | - | ----- |  |  | - | ----- | 
|                   |  |      |       |     |  | Regular   |       | Special  
|                   |  |      |       |     |  | Dividends |       | Dividends
|                   |  |      |       |     |  | Per       |       | Per      
|Quarter Ended      |  | High |       | Low |  | Share     |       | Share    
|                   |  |      |       |     |  |           |       |          
|December 31, 1999  |  | $    | 8.75  |     |  | $         | 7.88  |           |  | $ | 0.250 |  |  | $ | 0.015 | 
|September 30, 1999 |  | $    | 9.00  |     |  | $         | 8.06  |           |  | $ | 0.250 |  |  |   | -     | 
|June 30, 1999      |  | $    | 8.75  |     |  | $         | 7.75  |           |  | $ | 0.250 |  |  |   | -     | 
|March 31, 1999     |  | $    | 10.13 |     |  | $         | 8.31  |           |  | $ | 0.250 |  |  |   | -     | 
|                  
|December 31, 1998  |  | $    | 11.00 |     |  | $         | 8.00  |           |  | $ | 0.250 |  |  |   | -     | 
|September 30, 1998 |  | $    | 13.75 |     |  | $         | 9.00  |           |  | $ | 0.325 |  |  |   | -     | 
|June 30, 1998      |  | $    | 14.38 |     |  | $         | 13.56 |           |  | $ | 0.325 |  |  |   | -     | 
|March 31, 1998     |  | $    | 15.00 |     |  | $         | 13.75 |           |  | $ | 0.325 |  |  |   | -     | 
|                  
|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 |  |  |   | -     | 

On February 29, 2000, there were
approximately 1,400 shareholders of record of Common Stock
and the last reported sales price of the Common Stock was
$8.13 per share.

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##### Table of Contents



Item 6.  SELECTED CONSOLIDATED
FINANCIAL DATA

The following is a summary of our Selected
Consolidated Financial Data as of and for the five years in the
period ended December 31, 1999. The following data should be
 read in conjunction with our consolidated financial statements
and the notes thereto and Managements Discussion and
Analysis of the Financial Condition and Results of
Operations appearing elsewhere in this Form 10-K. The
selected consolidated financial data presented below has been
derived from our consolidated financial statements, audited by
PricewaterhouseCoopers LLP, independent accountants, whose
report with respect thereto is included elsewhere in this
Form 10-K.

|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |         |  
|----------------- | ---------------------------------------------------------------------------- | -------------------------------------------- | - | ------- | - | ---- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                  |                                                                              |                                             
|                  |                                                                              | Years Ended December 31,                    
|                  |                                                                              |                                             
|                  |                                                                              | 1999                                         |   | 1998    |   | 1997 |   | 1996    |   | 1995
|                  |                                                                              |                                              |   |         |   |      |   |         |   |     
|                  |                                                                              | (In thousands, except per share information)
|                 
|                 
|                 
|                 
|Operating:        |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                  | Operating income                                                             |                                              | $ | 22,627  |   |      | $ | 24,314  |   |      | $ | 24,406  |   |  | $ | 23,821  |   |  | $ | 21,262  |  
|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                  | Operating expenses                                                           |                                              | $ | (11,140 | ) |      | $ | (11,091 | ) |      | $ | (10,602 | ) |  | $ | (10,454 | ) |  | $ | (9,541  | )
|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                  | Realized and unrealized gain (loss) on investments                           |                                              | $ | 1,933   |   |      | $ | 726     |   |      | $ | 1,818   |   |  | $ | (147    | ) |  | $ | (359    | )
|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                  | Net operating income and realized and unrealized gain (loss) on
	investments |                                              | $ | 13,420  |   |      | $ | 13,949  |   |      | $ | 15,622  |   |  | $ | 13,220  |   |  | $ | 11,362  |  
|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                  | Dividends declared, common                                                   |                                              | $ | 12,007  |   |      | $ | 14,473  |   |      | $ | 14,543  |   |  | $ | 12,853  |   |  | $ | 11,600  |  
|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                  | Basic and diluted earnings per common share                                  |                                              | $ | 1.11    |   |      | $ | 1.16    |   |      | $ | 1.35    |   |  | $ | 1.18    |   |  | $ | 1.03    |  
|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                  | Dividends per common share                                                   |                                              | $ | 1.02    |   |      | $ | 1.23    |   |      | $ | 1.27    |   |  | $ | 1.16    |   |  | $ | 1.08    |  
|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                  | Weighted average common shares outstanding                                   |                                              |   | 11,829  |   |      |   | 11,800  |   |      |   | 11,411  |   |  |   | 11,002  |   |  |   | 10,768  |  
|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                  | Loans funded                                                                 |                                              | $ | 84,264  |   |      | $ | 66,450  |   |      | $ | 86,361  |   |  | $ | 70,154  |   |  | $ | 77,567  |  
|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|At end of period: |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                  | Loans receivable, net                                                        |                                              | $ | 106,325 |   |      | $ | 116,711 |   |      | $ | 127,240 |   |  | $ | 93,354  |   |  | $ | 110,499 |  
|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                  | Total assets                                                                 |                                              | $ | 165,191 |   |      | $ | 163,349 |   |      | $ | 165,839 |   |  | $ | 163,431 |   |  | $ | 159,002 |  
|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                  | SBA debentures payable                                                       |                                              | $ | 35,640  |   |      | $ | 39,790  |   |      | $ | 41,290  |   |  | $ | 44,570  |   |  | $ | 43,540  |  
|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                  | Notes payable                                                                |                                              | $ | 38,333  |   |      | $ | 35,000  |   |      | $ | 35,000  |   |  | $ | 35,000  |   |  | $ | 35,001  |  
|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                  | Preferred stock of consolidated subsidiary                                   |                                              | $ | 7,000   |   |      | $ | 7,000   |   |      | $ | 7,000   |   |  | $ | 7,000   |   |  | $ | 7,000   |  
|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                  | Common shareholders equity                                                  |                                              | $ | 73,314  |   |      | $ | 72,151  |   |      | $ | 70,166  |   |  | $ | 62,903  |   |  | $ | 59,088  |  
|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                  | Number of common shares outstanding                                          |                                              |   | 11,829  |   |      |   | 11,829  |   |      |   | 11,631  |   |  |   | 11,162  |   |  |   | 10,871  |  
|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|Ratios:           |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                  | Return on average assets(1)                                                  |                                              |   | 8.2     | % |      |   | 8.5     | % |      |   | 9.7     | % |  |   | 8.3     | % |  |   | 8.0     | %
|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        
|                  | Return on common shareholders equity(2)                                     |                                              |   | 18.1    | % |      |   | 19.2    | % |      |   | 23.3    | % |  |   | 21.3    | % |  |   | 19.2    | %
|                  |                                                                              |                                              |   |         |   |      |   |         |   |      |   |         |   |  |   |         |   |  |   |        



---



|    |                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on the average value of assets which is the
	our total assets on the the first day of the year and on the last
	 day of each quarter of the year, divided by five.
|(2) | Based on the total shareholders equity on
	the the first day of the year and on the last day of each quarter
	 of the year, divided by five.                           

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##### Table of Contents



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

Results of Operations

General

Our operations include originating, servicing and
selling commercial loans. We sell the government guaranteed
portion of our loans originated under the SBA 7(a) program
and sell commercial mortgage loans through securitizations and
structured financings. Historically, we have retained servicing
rights and residual interests in all loans sold. Servicing rights
 are the right to collect payments on behalf of the loan
purchaser, monitor the loan for any defaults and to address any
problems in collecting the required principal and interest
payments. We retain a residual interest on sold loans by owning a
 percentage of the related loan and by establishing cash reserves
 to cover future losses relating to the sold loans. In addition,
we operate as an investment manager to evaluate properties and
loans and to service loans and lease contracts pursuant to fee
arrangements with PMC Commercial.

Our revenue sources include the following:



| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | Interest earned on commercial loans originated and
	 retained including the effect of commitment fees collected at
	the inception of the loan.
| |  | Fee income from the management of PMC Commercial.                                                                                             
| |  | An equity interest in the income of our
	non-investment company subsidiaries.                                                                 
| |  | Premiums recognized from the sale of the
	government guaranteed portion of SBA  7(a) program loans
	into the secondary market.                
| |  | Interest earned on temporary (short-term)
	investments.                                                                                       
| |  | Gains relating to securitizations and structured
	loan sales.                                                                                 
| |  | Other fees, including: late fees, prepayment fees,
	 construction monitoring and site visit fees.                                             

Our earnings depend primarily on the level of
interest and related portfolio income and net realized and
unrealized earnings on our investment portfolio after deducting
interest paid on borrowed capital and operating expenses.
Interest income results from the stated interest rate earned on a
 loan, the collection and amortization of loan origination points
 and original issue discount. Our ability to generate interest
income is dependent on economic, regulatory and competitive
factors that influence interest rates and loan originations, and
our ability to secure financing for our investment activities.
For a more detailed description of the risk factors affecting our
 financial condition and results of operations, see Risk Factors
in Item 1 of this Form 10-K.

Our retained loan portfolio at value was
$106.3 million and $116.7 million at December 31,
1999 and 1998, respectively. During the years ended
December 31, 1999 and 1998, we originated investments in
loans totaling $84.3 million and $66.4 million and
received repayments and sold loans totaling $90.2 million
and $75.5 million, respectively. Primarily as a result of
the structured loan sale in June 1999, the total loan portfolio
decreased by 9% from December 31, 1998 to December 31,
1999. Our serviced loan portfolio increased by $19.6 million
 (7%) to $305.6 million at December 31, 1999 from
$286.0 million at December 31, 1998.

As a result of several factors, the number and
dollar volume of loans originated under the SBA 7(a) program
 decreased during 1998 and the first quarter of 1999. The factors
 that contributed to this decrease included an increase in
guarantee fees due to the SBA by the borrower under the
SBA 7(a) program, an increase in competition to originate
SBA 7(a) program loans from other SBA 7(a) program
lenders, and an increase in competition from alternative loan
products. These other products often provide prospective
borrowers with fixed interest rates at less than the floating
interest rates available through the SBA 7(a) program. In
addition, due to the high rate of prepayments experienced in the
limited service hospitality industry, purchasers of the
guaranteed portion of our SBA 7(a) loans have significantly
decreased the premium paid for these assets. Accordingly,
SBA 7(a) program funding had decreased and the premiums
earned on the sales of the government guaranteed portions of
these loans were significantly reduced from prior period levels.
Commencing in early 1999, we refocused our marketing effort to
emphasize loan originations under the SBA 7(a) program. As a
 result of this increased

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##### Table of Contents



marketing effort for SBA 7(a) lending,
revenues generated from the sales of the guaranteed portion of
the SBA 7(a) program loans has increased during the second
half of 1999 and we believe that this positive trend will
continue based on commitments to fund loans which are presently
outstanding. During the year ended December 31, 1999 funding
 of SBA 7(a) program loans were $27.6 million, an
increase of 160% from the $10.6 million funded during the
year ended December 31, 1998. For the years ended
December 31, 1999, 1998 and 1997, revenues generated by
government guaranteed loan sales were $1.3 million,
$0.8 million and $1.8 million, respectively.

As a result of the low interest rate environment
during 1998 and the beginning of 1999, we experienced an
increased rate in the prepayment of our retained loans. During
the years ended December 31, 1999 and 1998, we received
$15.4 million and $24.7 million, respectively, in
collections of principal on retained loans including prepayments.
 For the years ended December 31, 1999, 1998 and 1997,
principal collections including prepayments (as an annualized
percentage of our total retained loan portfolio), were 15%, 19%
and 11%, respectively. Prepayments generally increase during
times of declining interest rates. When fixed interest rate loans
 are paid off prior to their maturity, we receive the immediate
benefit of prepayment charges. Prepayment charges result in
one-time increases in our other investment income. However, the
proceeds from the prepayments were invested initially in
temporary investments and have been re-loaned or committed to be
re-loaned at lower interest rates. These lower interest rates
have had an adverse effect on our results of operations and
depending upon the rate of future prepayments may have an impact
on our ability to maintain shareholder distributions at current
levels. The impact of the lower lending rates was partially
offset by reduced cost of borrowings. First Westerns loans
(all variable-rate) have no prepayment fees in accordance with
SBA policy. While prepayments continued at accelerated levels
through the second quarter of 1999, as a result of recent changes
 in the credit markets, the pace of prepayment activity decreased
 during the last six months of 1999 and we believe that as a
result of the current interest rate environment the prepayment
activity on fixed interest rate loans may continue at these lower
 levels during the year ending December 31, 2000.

Substantially all of the First Western loans are
variable-rate which reset quarterly based on a spread above the
prime rate of interest as stated in The Wall Street Journal on the first day of the applicable period (the Prime
Rate). The spread over the Prime Rate charged by First
Western ranges from 0.5% to 2.75%.

The Prime Rates for variable-rate loans are as
follows:

|                  |  |      |      |      |  |      |      |   |  |  |      |  
|----------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                  |  | 1999 |      | 1998 |  | 1997
|                  |  |      |      |      |  |     
|First Quarter     |  |      | 7.75 | %    |  |      | 8.50 | % |  |  | 8.25 | %
|Second Quarter    |  |      | 7.75 | %    |  |      | 8.50 | % |  |  | 8.50 | %
|Third Quarter     |  |      | 8.00 | %    |  |      | 8.50 | % |  |  | 8.50 | %
|Fourth Quarter(1) |  |      | 8.25 | %    |  |      | 8.25 | % |  |  | 8.50 | %

(1)  Effective January 1, 2000, the
Prime Rate is 8.5%.

We receive other investment income from various
sources including prepayment fees, late fees, construction
monitoring fees and site visit fees. The amount of other
investment income earned will vary based on volume of loans
funded, the timing and amount of financings, volume of loans
which prepay, the mix of loans (construction versus
non-construction), the rate and type of loans originated (whether
 fixed or variable) as well as the general level of interest
rates.

Expenses primarily consist of interest expense,
salaries and related benefits and overhead. General and
administrative expenditures consist primarily of insurance,
advertising and promotional expense, telephone services,
corporate printing costs, commissions and general office
expenses. In addition, we have other administrative costs which
consist of profit sharing plan, rent, legal and accounting, SBA
fees and directors and shareholders expense. Our operations are
centralized in Dallas, Texas where our headquarters are located.
We presently have additional business development offices located
 in Atlanta, Georgia and Phoenix, Arizona.

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##### Table of Contents



Certain Accounting Considerations

We have transferred assets to special purpose
entities in connection with securitizations and structured
financings in order to obtain working capital to originate new
loans. The transfer of assets that qualifies for sale treatment
under SFAS No. 125 (Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of
Liabilities) 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.
 We typically receive cash and retain the right to receive
contractual servicing fees and the right to receive future
interest income on loans transferred that exceed the
contractually specified servicing fee, typically on the
guaranteed portion of an SBA 7(a) program loan, in exchange for a
 portion of the loan. The difference between (i) the
carrying value of the portion of loans sold and (ii) the sum
 of (a) cash received, (b) servicing rights, and
(c) the interest-only strip receivable retained, constitutes
 the gain on sale.

In accordance with SFAS No. 125, we establish
 a servicing asset to the extent we receive contractual
compensation for servicing loans which is in excess of adequate
compensation to service these loans. Servicing the sold portion
of government guaranteed loans requires First Western to retain a
 minimum servicing spread of 1%. This spread is in excess of
adequate compensation to service these loans. Accordingly, we
have recorded a servicing asset relating to the servicing of the
sold portion of First Westerns loans. 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.

As of the date a securitization or structured
financing 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 us 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, we measure 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 included
in the accompanying consolidated statements of income as an
unrealized gain (loss) on investments. During the year ended
December 31, 1999, we recorded a net realized and unrealized
 loss of $0.5 million. During the years ended
December 31, 1998 and 1997, we recorded a net unrealized
gain of $0.1 million and a net unrealized loss of
$0.3 million, respectively, related to the interest-only
strip receivables. At December 31, 1999, the interest-only
strip receivable on our balance sheet included unrealized
appreciation of $0.6 million. At December 31, 1998, the
 interest-only strip receivable on our balance sheet was net of
an unrealized loss of $0.2 million.

In addition, on a quarterly basis, 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 as of the balance sheet date. If during any
evaluation 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. During 1999, as a result of the significant
 amount of loans which prepaid, the present value of the cash
flows expected to be received on First Western loans sold in the
secondary market, using a risk-free rate of return, is less than
the amortized cost of the related interest-only strip receivable.
 Accordingly, valuation losses of $1.3 million, which have
previously been reflected on our income statement as unrealized
losses, were realized.

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,
default rates and future loan losses. There can be no assurance
of the accuracy of these estimates. If the prepayment speeds
occur at a faster rate than anticipated or future loan losses
occur quicker than expected or in amounts greater than expected,
the amortization of the servicing asset will be accelerated and
the value of the interest-only strip receivable will decline. If
prepayments occur slower than

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anticipated or future loan losses are less than
expected, cash flows would exceed estimated amounts and total
income in future periods would be enhanced.

Year Ended December 31, 1999 Compared to
the Year Ended December 31, 1998

Net income decreased by $0.5 million (4%)
from $13.9 million during the year ended December 31,
1998 to $13.4 million during the year ended
December 31, 1999. As described in more detail below, net
operating income for the year ended December 31, 1999 is
down $1.7 million (13%) compared to 1998 mainly due to a
reduction in interest income of $1.9 million (11%) offset by
 an increase in premium income of $0.3 million. For the year
 ended December 31, 1999, our net realized and unrealized
gain on investments was up $1.2 million (166%) primarily as
a result of an increased gain on sale of assets of
$1.6 million (173%) offset by increased unrealized and
realized losses on investments of $0.4 million (200%). Basic
 and diluted earnings per share decreased by $0.05 (4%) from
$1.16 per share during the year ended December 31, 1998
 to $1.11 per share during the year ended December 31,
1999. The weighted average common shares outstanding were
11.8 million during each of the years ended
December 31, 1999 and 1998.

Interest income:
Interest income decreased by
$1.9 million (11%) from $17.2 million for the year
ended December 31, 1998 to $15.3 million for the year
ended December 31, 1999. Interest income includes the
interest earned on loans, the interest earned on short-term
(temporary) investments, up-front fees collected
including the accretion of up-front fees and the interest earned
on the interest-only strip receivables. This overall decrease was
 primarily attributable to a decline in interest rates on new
loan originations and the structured sale of $40 million in
loans in November 1998 and $60 million in loans during
June 1999.

Interest income on loans decreased by
$3.4 million, or 20%, from $16.6 million during the
year ended December 31, 1998 to $13.2 million during
the year ended December 31, 1999. The decrease in interest
income on loans was primarily a result of the decrease in the
weighted average outstanding principal amount of loans which
decreased as a result of the structured loan sales in November
1998 and June 1999. The average retained loan portfolio decreased
 by 23% to $103.1 million during the year ended
December 31, 1999 from $134.4 million during the year
ended December 31, 1998. The decrease in interest income was
 also caused by a continuation of lower interest rates charged on
 new loan originations and the prepayment of our higher interest
rate loans. As general lending competition has increased the rate
 that we were able to charge decreased while prepayments
increased. Hospitality lending has become more competitive from
local and regional banks and through loan programs of major
investment banks (commonly known as conduit
programs). The proceeds from the prepayments were invested
initially in temporary investments and, to the extent we
originated fixed interest rate loans, have been re-loaned at
these competitive, lower interest rates. The weighted average
interest rate on our retained loan portfolio remained constant at
 10.0% as of December 31, 1999 and 1998.

Interest on other investments for the year ended
December 31, 1999 was $2.1 million, which was
$1.3 million greater than the $0.8 million in interest
income on other investments earned during the year ended
December 31, 1998. This increase was primarily due to
(i) the greater daily balances in short-term investments and
 cash and cash equivalents as a result of the structured loan
sales in November 1998 and June 1999 and (ii) the interest
income earned on our interest-only strip receivables related to
the structured loan sales in November 1998 and June 1999. The
average outstanding temporary investments fluctuate based on the
size and timing of receipt of capital resources and the volume of
 loan originations and prepayment activities.

Premium income:
Premium income increased by
$0.3 million (38%) from $0.8 million for the year ended
 December 31, 1998 to $1.1 million for the year ended
December 31, 1999. This increase was primarily attributable
to an increase in loans funded under our SBA 7(a) program
and sold into the secondary market during 1999 when compared to
1998. Early in 1999, we refocused our marketing effort on
SBA 7(a) lending. As a result, funding and loan sales of
SBA 7(a) loans increased during 1999. We expect that these
marketing efforts will allow us to maintain a higher level of
SBA 7(a) lending during 2000. The proceeds from the sale of
the government guaranteed portion of loans (under the
SBA 7(a) program) increased by $9.2 million (92%) from
$10.0 million during the year ended December 31, 1998
to $19.2 million during the year ended December 31,
1999. Offsetting a portion of the increase in premium income is
the diminished premiums paid by purchasers of government
guaranteed loans.

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Other investment income, net:
Other investment income remained constant
at $0.8 million for each of the years ended
December 31, 1999 and 1998.

Other income, net:
Other income, net, decreased by
$0.6 million (21%) from $2.9 million during the year
ended December 31, 1998 to $2.3 million during the year
 ended December 31, 1999. Other income during the year ended
 December 31, 1998 included $0.6 million in fee income
earned by PMC Advisers related to the completion of a structured
sale of loans by PMC Commercial and fees related to the
acquisition by PMC Commercial (during June 1998) of properties.
Since there was no comparable recognition of income in 1999 other
 than $0.1 million in fees related to the acquisition of
properties by PMC Commercial, other income was significantly
lower. In addition, during the third quarter of 1998, we
recognized income related to a loan which paid-off in full that
had been acquired at a discount.

Equity in income of unconsolidated
subsidiaries:As a BDC, we do
 not consolidate the operations of our non-investment company
subsidiaries. Instead we are required to recognize the income of
our non-investment company subsidiaries under the equity
method of accounting. Earnings of our unconsolidated
subsidiaries, primarily the Limited Partnerships established by
us in connection with the structured sales of our loans, are
reflected as a single line item (Equity in income of
unconsolidated subsidiaries) on our consolidated statements of
operations.

The differential between the interest and other
loan related income received by the Limited Partnerships on the
loans transferred to it by PMC Capital and the interest paid by
the Limited Partnerships on the notes issued by the Limited
Partnerships in connection with the structured sales (see
Note 7 to the accompanying consolidated financial
statements), less the net cash flow relating to the interest-only
 strip receivable on PMCs balance sheet and any loan
losses, contributes to the revenues of PMC Capital through its
equity ownership in the Limited Partnerships.

Equity in income of unconsolidated subsidiaries
increased by $0.5 million (19%), from $2.6 million
during the year ended December 31, 1998 to $3.1 million
 during the year ended December 31, 1999.

We recognized $1.1 million in net income
related to the retained interests in the loans transferred to the
 1998 Partnership and the 1999 Partnership during the year ended
December 31, 1999 compared to $0.2 million during the
year ended December 31, 1998. The 1998 Partnership was
formed late in 1998 and, therefore, only minimal operations
occurred during 1998.

The net income of PMC Advisers was
$0.6 million during the year ended December 31, 1999
compared to $0.2 million during the year ended
December 31, 1998. The increase was primarily related to
fees generated by the property management agreement entered into
in June 1998 with PMC Commercial.

In addition, PMC Funding had a gain of
$0.2 million during the year ended December 31, 1999 as
 compared to a $0.1 million loss during the year ended
December 31, 1998. The primary reason for this change was
the recognition of a gain on the sale of an asset during the
first quarter of 1999.

These increases noted above were partially offset
by a decrease in profits from the 1996 Partnership. The 1996
Partnership had net income of $1.3 million and
$2.4 million during the years ended December 31, 1999
and 1998, respectively. The decrease is primarily due to the
continued reduction in outstanding principal balance of loans
owned by the 1996 Partnership and the recognition of significant
prepayment fees of $0.6 million in 1998 by the 1996
Partnership compared to $0.1 million during 1999.

The loans held by each of the Limited Partnerships
 will continue to be reduced through principal repayments,
resulting in a decline in our profits from these unconsolidated
subsidiaries in future periods.

Operating expenses, not including interest:Operating expenses, not
including interest, increased by $0.2 million (4%) from
$5.6 million during the year ended December 31, 1998 to
 $5.8 million during the year ended December 31, 1999.
Operating expenses are comprised of salaries and related
benefits, general and administrative, profit sharing plan, rent,
legal and accounting, SBA fees and directors and shareholders
expense. The largest operating expense is salaries and related
benefits which consist of salaries for our officers and employees
 who

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provide all of the management, advisory, and
portfolio functions, including marketing, servicing, accounting
and portfolio analysis. It is anticipated that operating expenses
 will remain at or near present levels during the year ending
December 31, 2000.

Interest expense:
Interest expense decreased by
$0.2 million (4%) from $5.5 million during the year
ended December 31, 1998 to $5.3 million during the year
 ended December 31, 1999. Interest expense results primarily
 from interest on (i) our $38.3 million of unsecured
notes with a weighted average interest rate of 7.4% and weighted
average remaining maturity of 3.2 years as of
December 31, 1999, and (ii) $35.6 million of
debentures due to the SBA as a result of borrowings made by the
our subsidiaries, with a weighted average interest rate of
approximately 6.7% and weighted average remaining maturity of
3.4 years as of December 31, 1999. The reduction in
interest expense was due to the repayment of SBA debentures
during 1998 and 1999. During September and December 1999, we
repaid at maturity $3.2 million and $1.0 million in SBA
 debentures. We also repaid approximately $1.5 million in
SBA debentures at maturity during February 1998. Partially
offsetting the decrease in interest expense was an additional
$3.3 million in senior debt we borrowed in July 1999.

Realized and unrealized gain (loss) on
investments:Realized and
unrealized gain (loss) on investments changed from a gain of
$0.7 million during the year ended December 31, 1998 to
 a gain of $1.9 million during the year ended
December 31, 1999. The primary reason for this increase in
net gain was the difference in the gain recognized on the
structured loan sale during the year ended December 31, 1999
 as compared to the gain recognized on the structured loan sale
during the year ended December 31, 1998.

We recorded a gain of $0.9 million at the
time we completed the structured sale of $40 million in
loans during November 1998. Due to market conditions at the time
of the sale, the net difference between our sold assets and the
coupon paid by the purchasers of the assets was approximately 2%.
 The structured loan sale in 1999 was for $60 million and
market conditions had improved resulting in a spread of
approximately 3%. The result was the recognition of
$2.6 million at the time of sale, which is $1.7 million
 greater than the gain recognized from the 1998 structured
loan sale.

Offsetting a portion of the gain from sale of
assets was the change in recorded realized and unrealized gains
(losses) relating to our interest-only strip receivables.
During the year ended December 31, 1998, we recognized net
gains of $0.1 million compared to net losses of
$0.5 million during the year ended December 31, 1999.
The primary reason for the net losses in 1999 was increased
prepayment speeds primarily during the second and fourth quarters
 of the year.

We also recognized $0.3 million of loan
valuation losses and loans written-off during the year ended
December 31, 1998 compared to $0.1 million during the
year ended December 31, 1999. Loan losses were minimal
during each of the years ended December 31, 1999
and 1998.

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Year Ended December 31, 1998 Compared to
the Year Ended December 31, 1997

Net income decreased by $1.6 million from
$15.6 million during the year ended December 31, 1997
to $14.0 million during the year ended December 31,
1998. The weighted average common shares outstanding increased by
 approximately 4% from 11.4 million during the year ended
December 31, 1997 to 11.8 million during the year ended
 December 31, 1998 as a result of shares issued pursuant to
the dividend reinvestment and cash purchase plan. The most
significant reason for the decline in net income was the reduced
amount of income recognized on securitization or the structured
sales of loan portfolio when comparing the years ended
December 31, 1998 and 1997. The income for the year ended
December 31, 1998 includes the effect as more fully
described below of the following:



| |     |                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) | reduced interest income earned as a result of the
	securitization and sale by First Western of $22.8 million of
	 loans in December 1997 and a general decline in the interest
	rate on outstanding loans,

| |      |                        
| | ---- | -----------------------
| | (ii) | reduced premium income,

| |       |                                      
| | ----- | -------------------------------------
| | (iii) | increased investment management fees,

(iv)  the gain resulting from the structured
sale of loans in 1998, and


| |     |                               
| | --- | ------------------------------
| | (v) | changes in valuation reserves.

Interest income:
Interest income increased by
$0.1 million, from $17.1 million for the year ended
December 31, 1997 to $17.2 million for the year ended
December 31, 1998. The overall increase was primarily
attributable to the increase in interest income on loans being
slightly greater than the decrease in interest earned on our
temporary investments.

Interest income on loans increased by
$0.6 million, or 4%, from $15.8 million during the year
 ended December 31, 1997 to $16.4 million during the
year ended December 31, 1998. The increase in interest
income was primarily a result of the increase in outstanding
principal on loans. The average retained loan portfolio increased
 by 18% to $134.4 million during the year ended
December 31, 1998 from $113.8 million during the year
ended December 31, 1997. This increase was partially offset
by a continuation of lower interest rates charged on new loan
originations and the prepayment of the higher interest rate
loans. As competition has increased and conduit loan programs
increased acceptability of hospitality lending, the rate we were
able to charge decreased while prepayments were increasing. The
proceeds from the prepayments were invested initially in
temporary investments and have been re-loaned at lower interest
rates. As a result, the weighted average interest rates on
outstanding retained loans decreased to 10.0% at
December 31, 1998 from 10.5 % at December 31, 1997.

Interest on short-term investments for the year
ended December 31, 1997 was greater than for 1998 due to the
 fact that the average temporary investments outstanding during
the year ended December 31, 1998 were $13.8 million, a
52% decrease from $28.9 million during the year ended
December 31, 1997. The average outstanding temporary
investments fluctuate based on the size and timing of receipt of
capital resources and the volume of loan originations and
prepayment activities. Accordingly, interest on temporary
investments decreased by $0.6 million, or 43%, from
$1.4 million during the year ended December 31, 1997 to
 $0.8 million during the year ended December 31, 1998.

Premium income:
Premium income decreased by
$1.0 million (56%) from $1.8 million for the year ended
 December 31, 1997 to $0.8 million for the year ended
December 31, 1998. This decrease was primarily attributable
to an $11.6 million (54%) decrease in the government
guaranteed portion of loans held for sale or sold (under the SBA
7(a) program) from $21.6 million during the year ended
December 31, 1997 to $10.0 million during the year
ended December 31, 1998. As a result of several factors, the
 number and dollar volume of loans originated by First Western
under the SBA 7(a) program decreased in 1998. The factors that
contributed to this decrease included an increase in guarantee
fees due to the SBA by the borrower under the SBA 7(a) program,
increased competition for SBA 7(a) program loans, and an increase
 in competition from alternative loan products. These other
products often provide prospective borrowers with fixed interest
rates at less than the floating interest rates available through
the SBA 7(a) program. Accordingly, premiums earned were
significantly reduced during 1998.

Other investment income, net:
Other investment income, net, increased by
$0.3 million (60%) from $0.5 million for the year ended
 December 31, 1997 to $0.8 million for the year ended
December 31, 1998. This increase

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was primarily attributable to an increase in
prepayment fees received and recognition of discount related to
fixed-rate loans which were prepaid in full and forfeited
commitment fees during the year ended December 31, 1998 as
compared to the year ended December 31, 1997.

Equity in income (loss) of unconsolidated
subsidiaries:Equity in
income (loss) of unconsolidated subsidiaries remained the same at
 $2.6 million during the years ended December 31, 1998
and 1997.

The 1996 Partnership had net income of
$2.4 million and $2.6 million during the years ended
December 31, 1998 and 1997, respectively. The decrease is
primarily due to the continued reduction in outstanding principal
 balance of loans held by the 1996 Partnership. Accordingly, the
interest earned on the 1996 Partnership assets is decreasing
resulting in less net profits. The loans held by the 1996
Partnership will continue to be reduced resulting in a decline in
 our profits in future periods of operations. The 1996
Partnership profits include all yield generated from the loans
transferred by PMC Capital less the cost of the 1996 Notes issued
 by the 1996 Partnership. During the year ended December 31,
 1998 and 1997, the net income from the 1996 Partnership included
 $0.6 million and $0.2 million, respectively, in
prepayment fees received on loans paid-off prior to their
contractual maturity.

Also included in equity in income of
unconsolidated subsidiaries is the net income of PMC Advisers of
$0.2 million and the 1998 Partnership of $0.2 million,
during the year ended December 31, 1998 and the operations
of PMC Funding which had losses of $0.1 million and $48,000
during the years ended December 31, 1998 and 1997,
respectively.

Other income, net:
Other income, net, increased by
$0.5 million (21%) from $2.4 million during the year
ended December 31, 1997 to $2.9 million during the year
 ended December 31, 1998. Other income increased during the
year ended December 31, 1998 primarily due to increased
investment management fees generated by PMC Advisers related to
the completion of a structured financing by PMC Commercial
($0.2 million) and fees related to the acquisition by PMC
Commercial of hotel properties ($0.5 million).

Operating expenses:
Operating expenses, not including interest,
 increased by $0.6 million (12%) from $5.0 million
during the year ended December 31, 1997 to $5.6 million
 during the year ended December 31, 1998. This increase was
primarily a result of an increase in salaries and related
benefits of $0.6 million (18%) from $3.4 million during
 the year ended December 31, 1997, to $4.0 million
during the year ended December 31, 1998. Salaries and
related benefits were 16% and 14%, respectively, of total income
during the years ended December 31, 1998 and 1997.

Interest expense:
Interest expense was $5.5 million
during each of the years ended December 31, 1998 and 1997.
Interest expense results primarily from interest payments made on
 (i) our $35 million of unsecured notes with a weighted
 average interest rate of 7.3% and weighted average remaining
maturity of 2.8 years as of December 31, 1998, and (ii)
 $39.8 million of debentures due to the SBA as a result of
borrowings made by our SBIC subsidiaries, with a weighted average
 interest rate of approximately 6.6% and weighted average
remaining maturity of 4.3 years as of December 31,
1998. The decrease was primarily attributable to the repayment at
 maturity of approximately $2.5 million in SBA debentures
during February 1997 and $1.5 million in February 1998.

Realized and unrealized gain (loss) on
investments:Realized and
unrealized gain (loss) on investments decreased by
$1.1 million (61%) from a gain of $1.8 million during
the year ended December 31, 1997 to a gain of
$0.7 million during the year ended December 31, 1998.
The primary reason for the decrease in gain was the reduction in
the gain recognized on the structured loan sales completed in
1998 and 1997. We recognized a $2.4 million gain from the
securitization and sale of First Western loans in 1997 and a
$0.9 million gain from the structured sale of loans during
1998. The gain in 1997 was greater since (i) in the 1997
sale, the notes were sold at par and the underlying loans were
previously reflected at a discount of approximately
$1.6 million (in accordance with Emerging Issues Task Force
88-11) while the loans sold in the 1998 structured loan sale were
 sold at par and the underlying loans receivable were previously
reflected at par, and (ii) the 1997 sale was at a greater
spread between the weighted average interest rate of the loans
receivable and the coupon due to the security holders as compared
 to the 1998 structured loan sale.

During the years ended December 31, 1998 and
1997, we recorded unrealized gains of $0.1 million and
losses of $0.3 million, respectively, relating to the
interest-only strip.

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Additionally, net unrealized and realized losses
on retained loans receivable were $0.3 million and
$0.2 million during the years ended December 31, 1998
and 1997, respectively. Loan losses were minimal during each of
the years ended December 31, 1998 and 1997.

Cash Flow Analysis

The primary source of our funds is net income. The
 source of funds from net income is adjusted primarily by the
gain recognized from the sale of assets, the equity in the income
 of unconsolidated subsidiaries, the change in other assets and
liabilities, and First Westerns lending activities.

We generated cash flow of $7.9 million and
$12.1 million from operating activities during the years
ended December 31, 1999 and 1998, respectively. The decrease
 in cash flow is related to the items described below. Included
in cash flows from operating activities is the portion of the
lending activity of First Western relating to the sale of the
government guaranteed portion of the SBA 7(a) program loans
originated into the secondary market (Government Guaranteed
 Lending). During the years ended December 31, 1999
and 1998, we had a net use of cash of $0.2 million and a net
 source of cash of $2.6 million respectively, from
Government Guaranteed Lending activities representing a decrease
in source of funds of $2.7 million. The net operating income
 and unrealized gain (loss) on investments adjusted for the
principal non-cash items (which are the change in unrealized
depreciation on investments and loans written-off, depreciation
and amortization and the gain (loss) on sale of assets) was
$12.5 million for the year ended December 31, 1999,
compared to $14.6 million during the year ended
December 31, 1998, which represents a $2.1 million
(14%) decrease. The primary reasons for this decrease was the
fees generated during June 1998 of $0.6 million by PMC
Advisers and a reduction in interest income of approximately
$1.9 million due to the structured sale of loans in November
 1998 and June 1999. In addition, during the years ended
December 31, 1999 and 1998, we had a net source of cash of
$0.6 million and a net use of cash of $1.4 million,
respectively, from the change in operating assets and
liabilities.

We used cash flow of $45.6 million and
$37.1 million from investing activities during the years
ended December 31, 1999 and 1998, respectively. This
$8.5 million increase in investing activities relates
primarily to a net increase in loans funded less principal
collected of $15.1 million offset by a $2.3 million
reduction from purchasing the B certificate of our
1998 structured sale during 1998, a $2.7 million increase in
 proceeds from partnership distributions and a $2.5 million
reduction in advances to unconsolidated affiliates.

We generated cash flow of $42.2 million and
$26.3 million from financing activities during the years
ended December 31, 1999 and 1998, respectively. The primary
reason for the change in source of funds by $15.9 million
was the receipt of approximately $55 million in proceeds
from the 1999 Partnership related to the structured sale of loans
 in 1999 compared to approximately $41 million in proceeds
received from the structured sale of loans in 1998. Dividends
paid on common stock during the year ended December 31, 1999
 were $11.8 million as compared to $14.8 million during
 the year ended December 31, 1998, a decrease of
$3.0 million (20%). We also had a decrease in funds received
 from the issuance of common stock of $2.1 million due to
the curtailment of the cash portion of our dividend reinvestment
plan during 1998 and the utilization of the market purchase
option for plan purchases subsequent to April 1998. Under the
market purchase option, we do not receive any of the proceeds
from plan participants. In addition, we repaid $4.2 million
and $1.5 million in SBA debenture debentures during the
years ended December 31, 1999 and 1998, respectively, and we
 issued $3.3 million, net, in senior notes during July 1999.

Liquidity and Capital Resources

Sources and uses of funds:

As a RIC, pursuant to the Code we are required to
pay out substantially all of our net investment company taxable
income to our common shareholders (see Dividends
below). Consequently, we must procure funds from sources other
than earnings in order to meet our capital requirements. In
addition, as a BDC, we are generally required to maintain a ratio
 of at least 200% of total assets to total borrowings, which may
restrict our ability to borrow in certain circumstances.

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Our primary use of funds is to originate loans. We
 also expend funds for payment of (i) dividends to
shareholders, (ii) principal due on borrowings,
(iii) interest and related financing costs,
(iv) general and administrative expenses, (v) capital
expenditures, and (vi) advances on loan liquidations.

Historically, our primary source of capital and
liquidity has been:

| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | debentures issued through programs of the SBA,                                  
| |  | private and public issuances of common stock,                                   
| |  | the issuance of senior unsecured medium-term
	notes,                            
| |  | the structured sale or securitization of a portion
	 of our loan portfolio,  and
| |  | the utilization of our short-term, unsecured
	revolving credit facility.        

Our primary source of capital has most recently
been through the structured sale of loans. During 1998, we
completed a structured sale of variable-rate loans primarily
originated as part of a variable-rate lending program that was
not part of the SBA 7(a) loan program. During 1999, we
completed a structured sale of a pool of fixed-rate loans.
Prospectively, in order to generate growth in the size of our
investment portfolio and meet our outstanding loan commitments,
we need to obtain additional funds from:

| |   |                                                             
| | - | ------------------------------------------------------------
| |  | securitization and sale of a portion of the loan
	portfolio,
| |  | borrowings under our credit facility,                       
| |  | medium-term debt offerings, and/or                          
| |  | equity offerings.                                           

We have $6.7 million in senior notes which
mature in July 2000 and $11.6 million in SBA debentures
which mature during the year ending December 31, 2000. We
anticipate that the $6.7 million in senior notes will be
rolled over into new senior notes at their maturity. We also
expect the SBA debentures to be rolled over at their maturity
through the SBAs outstanding commitment to provide
debentures to our SBIC subsidiaries.

Since year end, we have increased our outstanding
commitments to fund loans to over $60 million. Since some
commitments expire without the proposed loan closing, the total
commitment amounts do not necessarily represent future cash
requirements. We have $15 million available under our
revolving credit facility. Additional sources of capital include
principal collections on our existing loan portfolio and proceeds
 from the sale of 7(a) loans in the secondary market. We are
 also developing a loan pool of approximately $40 million to
 $50 million for a securitization transaction which is
anticipated to be completed prior to September 30, 2000. To
the extent commitments pertain to PMCIC or Western Financial, we
should be able to issue SBA debentures to fund those
commitments. There can be no assurances that we will be able to
complete the above transactions at acceptable advance rates
and/or interest rates. If not, we may have to refer commitments
to PMC Commercial, issue debt at decreased loan-to-value ratios
or increased interest rates and/or sell assets to meet our
committed obligations when and if they come due. Management
believes that these financing sources will enable us to generate
funds sufficient to meet both our short-term and long-term
capital needs.

Recent Transactions and Activity:

During July 1999, $6.7 million in senior
unsecured notes were refinanced at maturity and $3.3 million
 in additional funds were received. The new $10.0 million in
 notes mature in July 2005 with an interest rate of 7.44%. In
addition, we repaid $4.2 million in SBA debentures at
maturity during 1999. The SBA has issued a commitment to Western
Financial and PMCIC to provide guaranties on $12.5 million
in future debentures. It is anticipated that this commitment will
 be utilized for the roll-over of debentures during
the year ending December 31, 2000.

On June 3, 1999, the 1999 Partnership,
completed a structured sale of a pool of fixed-rate loans through
 a private placement (the 1999 Private Placement) of
approximately $55.6 million of its 1999 Loan-Backed Fixed
Rate Notes (the 1999 Notes). The 1999 Notes were
issued at par and have a stated maturity of July 2024. The 1999
Notes were issued with an interest rate of 6.60% and were
originally collateralized by approximately $60 million of
loans sold by PMC Capital to the 1999 Partnership. The 1999 Notes
 were rated Aaa by Moodys Investors Service.
The terms of the 1999 Notes provide that the partners of the 1999
 Partnership are not liable for any payments on the 1999 Notes.
Accordingly, if the 1999 Partnership fails to pay the 1999 Notes,
 the sole recourse of the holders of the 1999 Notes is against
the assets of the 1999 Partnership. Accordingly, we have no
obligation to

27



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##### Table of Contents



pay the 1999 Notes, nor do the holders of the 1999
 Notes have any recourse against our assets. The net proceeds
from the issuance of the 1999 Notes (approximately
$55.6 million prior to payment of issuance costs of
approximately $0.5 million and the funding of approximately
$1.8 million for a reserve fund held by the trustee as
collateral) were distributed to PMC Capital. PMC Capital Corp.
1999-1 was formed in June 1999 to act as the general partner of
the 1999 Partnership and owns a 0.1% general partnership interest
 in the 1999 Partnership. PMC Capital owns a 99.9% limited
partnership interest in the 1999 Partnership. PMC Capital is the
servicer for all loans held by the 1999 Partnership.

Commitments:

Loan commitments outstanding at December 31,
1999 to various prospective small business companies, including
the unfunded portion of projects in the construction phase,
amounted to approximately $49.2 million. Of these
commitments, $11.5 million were for loans partially
guaranteed by the SBA of which approximately $10.8 million
would be sold (when fully funded) into the secondary market. Such
 commitments are made in the ordinary course of our 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.

Revolving credit facility:

PMC Capital has a $15 million revolving
credit facility which expires in March 2002. At December 31,
 1999, we had no borrowings outstanding under our revolving
credit facility, and had availability of $15 million.
Advances pursuant to the credit facility bear interest at our
option at either the lenders prime rate less 50 basis
points or LIBOR plus 175 basis points. The credit facility
requires we meet certain covenants, the most restrictive of which
 provides that the ratio of net charge-offs to net loans
receivable may not exceed 2%, and the ratio of assets to senior
debt (as defined in the credit facility) will not fall below 135%
 with respect to PMC Capital and 150% including our consolidated
subsidiaries. At December 31, 1999 we were in compliance
with all covenants of this facility.

Investment Company Act requirements:

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

Dividends:

PMC Capital has historically paid 100% of its
investment company taxable income and not paid any return of
capital. There are certain timing differences between book and
tax income, most notably the recognition of commitment fees
received and the recognition of income relating to the 1998 and
1999 structured sale of loans. A portion of dividends paid during
 1998 pertained to earnings in 1997 including the effect of the
gain from the sale of certain loans originated by First Western
completed in December 1997 (these amounts being referred to as
the Carry-Forward Amounts). As a result of these
timing differences and the Carry-Forward Amounts, the payment and
 amount of dividends does not necessarily coincide with our
earnings. We utilized a substantial portion of our Carry-Forward
Amounts during 1998 to pay dividends. We anticipate (based on
past operations and current business trends) that the dividend
will be $0.25 per share, per quarter, through the end of the
 year 2000. Each of the quarterly dividends paid during 1999
 were $0.25 per share with an additional extra dividend of
$0.015 per share declared in December 1999 and paid in
January 2000. Our Board of Directors may amend this stabilized
dividend policy as warranted by actual and/ or anticipated
earnings.

Year 2000 Compliance Update

Current:The
Year 2000 issue concerns the potential impact of historic
computer software code that only utilized two digits to represent
 the calendar year (e.g. 99 for
1999). Software so developed, and not corrected,
could potentially have produced inaccurate or unpredictable
results commencing January 1, 2000, when current and

28



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##### Table of Contents



future dates present a lower two digit year number
 than dates in the prior century. The Year 2000 issue still
potentially exists as certain dates are passed in the future.
Similar to most financial services providers, we are subject to
the potential impact of the Year 2000 issue due to the
nature of financial information. Potential impacts on us may
arise from software, computer hardware, and other equipment both
within our direct control and outside of our control, yet with
which we electronically or operationally interface. Regulators
have focused upon Year 2000 exposures, issuing guidance
concerning the responsibilities of senior management and
directors. Year 2000 testing and certification has been
addressed as a key safety and soundness issue in conjunction with
 these regulatory concerns. To date, we have not had any material
 Year 2000 problems and we do not anticipate any problems.
We are currently in the process of changing our servicing and
financial software. These software changes are not related to any
 Year 2000 concerns.

History:During
 1998, we formed an internal review team to address, identify and
 resolve any Year 2000 issues that encompasses any of our
operating and administrative areas. In addition, executive
management monitored the status of our Year 2000 remediation
 plans, where necessary, as they relate to internally used
software, computer hardware and use of computer applications in
our servicing processes. In addition, we are engaged in assessing
 any future Year 2000 issue with our significant suppliers.

We only used internal resources to test our
software for Year 2000 modifications. During 1999 we have
substantially completed our Year 2000 assessment and
re-mediation. In addition we completed formal communications with
 our significant suppliers prior to the end of 1999 and
determined that we did not appear to be vulnerable to those third
 parties failure to re-mediate their own Year 2000
issues. The total project cost was not considered to be material.
 The majority of the project cost was attributable to employee
time necessary to test the present system and to meet future
industry requirements and has accordingly been expensed.
Management believes that we devoted the necessary resources to
identify and resolve significant Year 2000 issues in a
timely manner.

29



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##### Table of Contents



Item 7A.  QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to market risk associated with
	changes in interest rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | Our balance sheet consists of two items subject to
	 interest rate risk. First, a majority of our investment
	portfolio consists of fixed interest rate loans. Given that the
	loans are priced at a fixed rate of interest, changes in interest
	 rates should not have a direct impact on interest income.
	Changes in market interest rates are considered by the board of
	directors in its determination of fair value of our loans. To
	date, changes in market interest rates have not had a significant
	 affect on the board of directors determination. However,
	future interest rate changes could have an impact. Significant
	reductions in interest rates, however, can prompt increased
	prepayments of our loans, resulting in possible decreases in
	long-term revenues due to the relending of the prepayment
	proceeds at lower interest rates (See Item 1. Risk
	Factors  Interest Rate and Prepayment Risk).
	Second, our liabilities include debt payable to the SBA and our
	senior unsecured debt. The SBA debentures and the senior
	unsecured debt are payable at fixed rates of interest, so changes
	 in interest rates do not affect our interest expense (See
	Risk Factors  Leverage and  Interest
	Rate and Prepayment Risk).

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

30



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##### Table of Contents






PART III

Item 10.  DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT

Incorporated herein by reference to our definitive
 proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the year end covered by
this Form 10-K with respect to the Annual Meeting of
Shareholders to be held on May 17, 2000.

Item 11.  EXECUTIVE COMPENSATION

Incorporated herein by reference to our definitive
 proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the year end covered by
this Form 10-K with respect to the Annual Meeting of
Shareholders to be held on May 17, 2000.

Item 12.  SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated herein by reference to our definitive
 proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the year end covered by
this Form 10-K with respect to the Annual Meeting of
Shareholders to be held on May 17, 2000.

Item 13.  CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS

Incorporated herein by reference to our definitive
 proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the year end covered by
this Form 10-K with respect to the Annual Meeting of
Shareholders to be held on May 17, 2000.

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##### Table of Contents



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

32



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##### Table of Contents






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 29, 2000

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

|                                                   |  |                                                                                           |  |      |                | 
|-------------------------------------------------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -------------- | 
|Name                                               |  | Title                                                                                     |  | Date
|                                                  
|/s/ DR. FREDRIC M. ROSEMOREDR. FREDRIC M. ROSEMORE |  | Chairman of the Board and Treasurer                                                       |  |      | March 29, 2000 | 
|                                                  
|/s/ LANCE B. ROSEMORELANCE B. ROSEMORE             |  | President, Chief Executive Officer, Secretary and Director
	(Principal Executive Officer) |  |      | March 29, 2000 | 
|                                                  
|/s/ BARRY N. BERLINBARRY N. BERLIN                 |  | Chief Financial Officer (Principal Financial and Accounting
	Officer)                     |  |      | March 29, 2000 | 
|                                                  
|/s/ DR. MARTHA GREENBERGDR. MARTHA GREENBERG       |  | Director                                                                                  |  |      | March 29, 2000 | 
|                                                  
|/s/ DR. IRVIN BORISHDR. IRVIN BORISH               |  | Director                                                                                  |  |      | March 29, 2000 | 
|                                                  
|/s/ THOMAS HAMILLTHOMAS HAMILL                     |  | Director                                                                                  |  |      | March 29, 2000 | 
|                                                  
|/s/ BARRY A. IMBERBARRY A. IMBER                   |  | Director                                                                                  |  |      | March 29, 2000 | 
|                                                  
|/s/ BARRY A. CHAFITZBARRY A. CHAFITZ               |  | Director                                                                                  |  |      | March 29, 2000 | 

33



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES




FORM 10-K


INDEX TO FINANCIAL STATEMENTS


|                                                |                                           |                                                                                                       |      |     |      | 
|----------------------------------------------- | ----------------------------------------- | ----------------------------------------------------------------------------------------------------- | ---- | --- | ---- | 
|                                               
|                                               
|                                               
|                                               
|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, 1999 and 1998                                          |      |     | F-6  | 
|                                               
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Consolidated Schedule of Investments as of December 31, 1999                                          |      |     | F-7  | 
|                                               
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Consolidated Statements of Income for the Years Ended
	December 31, 1999, 1998 and 1997               |      |     | F-9  | 
|                                               
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Consolidated Statements of Shareholders Equity for the
	Years Ended December 31, 1999, 1998 and 1997 |      |     | F-10 | 
|                                               
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Consolidated Statements of Cash Flows for the Years Ended
	December 31, 1999, 1998 and 1997           |      |     | F-11 | 
|                                               
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Notes to Consolidated Financial Statements                                                            |      |     | F-12 | 
|                                               
|                                               
|                                               
|                                               
|                                               
|                                                | Consolidating Financial Statements:       |                                                                                                       |      |     |     
|                                               
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Report of Independent Accountants on Consolidating Financial
	Statements                              |      |     | F-31 | 
|                                               
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Consolidating Balance Sheet as of December 31, 1999                                                   |      |     | F-32 | 
|                                               
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Consolidating Statement of Income for the Year Ended
	December 31, 1999                               |      |     | F-33 | 
|                                               
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Consolidating Statement of Shareholders Equity for the Year
	 Ended December 31, 1999                |      |     | F-34 | 
|                                               
|                                               
|                                               
|                                               
|                                               
|                                                |                                           | Consolidating Statement of Cash Flows for the Year Ended
	December 31, 1999                           |      |     | F-35 | 
|                                               
|                                               
|                                               
|                                               
|                                               
|PMC CAPITAL, L.P. 1998-1 - Financial Statements |                                           |                                                                                                       | F-36 |    
|                                               
|                                               
|                                               
|                                               
|                                               
|PMC CAPITAL, L.P. 1999-1 - Financial Statements |                                           |                                                                                                       | F-45 |    

F-1



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES




SUMMARY OF SELECTED FINANCIAL INFORMATION


|                  |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |         |        | 
|----------------- | ----------------------------------------------------- | ------------------------------------------------ | - | ------- | ------ | ---- | - | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ |  | - | ------- | ------ | 
|                  |                                                       |                                                 
|                  |                                                       | Years Ended December 31,                        
|                  |                                                       |                                                 
|                  |                                                       | 1999                                             |   | 1998    |        | 1997 |   | 1996    |        | 1995
|                  |                                                       |                                                  |   |         |        |      |   |         |        |     
|                  |                                                       | (In thousands, except per share data and ratios)
|                 
|                 
|                 
|                 
|Operating:        |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                 
|                  | Operating income                                      |                                                  | $ | 22,627  |        |      | $ | 24,314  |        |      | $ | 24,406  |        |  | $ | 23,821  |        |  | $ | 21,262  |       
|                 
|                  | Operating expenses                                    |                                                  |   | (11,140 | )      |      |   | (11,091 | )      |      |   | (10,602 | )      |  |   | (10,454 | )      |  |   | (9,541  | )     
|                 
|                  | Realized and unrealized gain (loss) on investments    |                                                  |   | 1,933   |        |      |   | 726     |        |      |   | 1,818   |        |  |   | (147    | )      |  |   | (359    | )     
|                  |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                 
|                  | Net operating income and realized and unrealized gain |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |         |       
|                  |                                                       | (loss) on investments                            |   | $       | 13,420 |      |   | $       | 13,949 |      |   | $       | 15,622 |  |   | $       | 13,220 |  |   | $       | 11,362 | 
|                  |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Dividends declared, common                            |                                                  | $ | 12,007  |        |      | $ | 14,473  |        |      | $ | 14,543  |        |  | $ | 12,853  |        |  | $ | 11,600  |       
|                  |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Earnings per common share                             |                                                  | $ | 1.11    |        |      | $ | 1.16    |        |      | $ | 1.35    |        |  | $ | 1.18    |        |  | $ | 1.03    |       
|                  |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Dividends per common share                            |                                                  | $ | 1.02    |        |      | $ | 1.23    |        |      | $ | 1.27    |        |  | $ | 1.16    |        |  | $ | 1.08    |       
|                  |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Weighted average common shares outstanding            |                                                  |   | 11,829  |        |      |   | 11,800  |        |      |   | 11,411  |        |  |   | 11,002  |        |  |   | 10,768  |       
|                  |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Loans funded                                          |                                                  | $ | 84,264  |        |      | $ | 66,450  |        |      | $ | 86,361  |        |  | $ | 70,154  |        |  | $ | 77,567  |       
|                  |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                 
|At end of period: |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                 
|                  | Loans receivable, net                                 |                                                  | $ | 106,325 |        |      | $ | 116,711 |        |      | $ | 127,240 |        |  | $ | 93,354  |        |  | $ | 110,499 |       
|                  |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Total assets                                          |                                                  | $ | 165,191 |        |      | $ | 163,349 |        |      | $ | 165,839 |        |  | $ | 164,964 |        |  | $ | 159,002 |       
|                  |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | SBA debentures payable                                |                                                  | $ | 35,640  |        |      | $ | 39,790  |        |      | $ | 41,290  |        |  | $ | 44,570  |        |  | $ | 43,540  |       
|                  |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Notes payable                                         |                                                  | $ | 38,333  |        |      | $ | 35,000  |        |      | $ | 35,000  |        |  | $ | 35,000  |        |  | $ | 35,001  |       
|                  |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Preferred stock of consolidated subsidiary            |                                                  | $ | 7,000   |        |      | $ | 7,000   |        |      | $ | 7,000   |        |  | $ | 7,000   |        |  | $ | 7,000   |       
|                  |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Common shareholders equity                           |                                                  | $ | 73,314  |        |      | $ | 72,151  |        |      | $ | 70,166  |        |  | $ | 62,903  |        |  | $ | 59,088  |       
|                  |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Number of common shares outstanding                   |                                                  |   | 11,829  |        |      |   | 11,829  |        |      |   | 11,631  |        |  |   | 11,162  |        |  |   | 10,871  |       
|                  |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|Ratios:           |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                 
|                  | Return on average assets(1)                           |                                                  |   | 8.2     | %      |      |   | 8.5     | %      |      |   | 9.7     | %      |  |   | 8.3     | %      |  |   | 8.0     | %     
|                  |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        
|                  | Return on average common shareholders equity(2)      |                                                  |   | 18.1    | %      |      |   | 19.2    | %      |      |   | 23.3    | %      |  |   | 21.3    | %      |  |   | 19.2    | %     
|                  |                                                       |                                                  |   |         |        |      |   |         |        |      |   |         |        |  |   |         |        |  |   |        



|    |                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on the average value of assets which is the
	our total assets on the the first day of the year and on the last
	 day of each quarter of the year, divided by five.
|(2) | Based on the total shareholders equity on
	the the first day of the year and on the last day of each quarter
	 of the year, divided by five.                           

F-2



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES

QUARTERLY STATISTICS


(Unaudited)


(In thousands, except per share data)


|                                                     |  |                              |        |         |  |         |       |         |  |       |       |  |  |   |        |   |  |   |        | 
|---------------------------------------------------- |  | ---------------------------- | ------ | ------- |  | ------- | ----- | ------- |  | ----- | ----- |  |  | - | ------ | - |  | - | ------ | 
|                                                     |  |                             
|                                                     |  | YEAR ENDED DECEMBER 31, 1999
|                                                     |  |                             
|                                                     |  | First                        |        | Second  |  | Third   |       | Fourth  |  |      
|                                                     |  | Quarter                      |        | Quarter |  | Quarter |       | Quarter |  | Total
|                                                     |  |                              |        |         |  |         |       |         |  |      
|                                                    
|Operating income                                     |  | $                            | 5,604  |         |  | $       | 5,497 |         |  | $     | 5,677 |  |  | $ | 5,849  |   |  | $ | 22,627 | 
|                                                    
|Net operating income                                 |  | $                            | 2,903  |         |  | $       | 2,775 |         |  | $     | 2,758 |  |  | $ | 3,051  |   |  | $ | 11,487 | 
|                                                    
|Net gain (loss) on investments                       |  | $                            | (158   | )       |  | $       | 2,240 |         |  | $     | 192   |  |  | $ | (341   | ) |  | $ | 1,933  | 
|                                                    
|Net increase in net assets resulting from operations |  | $                            | 2,745  |         |  | $       | 5,015 |         |  | $     | 2,950 |  |  | $ | 2,710  |   |  | $ | 13,420 | 
|                                                    
|                                                    
|PER SHARE                                           
|                                                    
|Operating income                                     |  | $                            | 0.474  |         |  | $       | 0.465 |         |  | $     | 0.480 |  |  | $ | 0.494  |   |  | $ | 1.913  | 
|                                                    
|Net operating income                                 |  | $                            | 0.245  |         |  | $       | 0.235 |         |  | $     | 0.233 |  |  | $ | 0.258  |   |  | $ | 0.971  | 
|                                                    
|Net gain (loss) on investments                       |  | $                            | (0.013 | )       |  | $       | 0.189 |         |  | $     | 0.016 |  |  | $ | (0.029 | ) |  | $ | 0.163  | 
|                                                    
|Net increase in net assets resulting from operations |  | $                            | 0.232  |         |  | $       | 0.424 |         |  | $     | 0.249 |  |  | $ | 0.229  |   |  | $ | 1.134  | 

|                                                     |  |                              |       |         |  |         |        |         |  |       |       |  |  |   |       |  |  |   |        | 
|---------------------------------------------------- |  | ---------------------------- | ----- | ------- |  | ------- | ------ | ------- |  | ----- | ----- |  |  | - | ----- |  |  | - | ------ | 
|                                                     |  |                             
|                                                     |  | YEAR ENDED DECEMBER 31, 1998
|                                                     |  |                             
|                                                     |  | First                        |       | Second  |  | Third   |        | Fourth  |  |      
|                                                     |  | Quarter                      |       | Quarter |  | Quarter |        | Quarter |  | Total
|                                                     |  |                              |       |         |  |         |        |         |  |      
|Operating income                                     |  | $                            | 5,790 |         |  | $       | 6,441  |         |  | $     | 6,049 |  |  | $ | 6,034 |  |  | $ | 24,314 | 
|                                                    
|Net operating income                                 |  | $                            | 3,068 |         |  | $       | 3,788  |         |  | $     | 3,369 |  |  | $ | 2,998 |  |  | $ | 13,223 | 
|                                                    
|Net gain (loss) on investments                       |  | $                            | 224   |         |  | $       | (457   | )       |  | $     | 90    |  |  | $ | 869   |  |  | $ | 726    | 
|                                                    
|Net increase in net assets resulting from operations |  | $                            | 3,292 |         |  | $       | 3,331  |         |  | $     | 3,459 |  |  | $ | 3,867 |  |  | $ | 13,949 | 
|                                                    
|                                                    
|PER SHARE                                           
|                                                    
|                                                    
|Operating income                                     |  | $                            | 0.494 |         |  | $       | 0.545  |         |  | $     | 0.511 |  |  | $ | 0.510 |  |  | $ | 2.060  | 
|                                                    
|Net operating income                                 |  | $                            | 0.262 |         |  | $       | 0.321  |         |  | $     | 0.285 |  |  | $ | 0.253 |  |  | $ | 1.121  | 
|                                                    
|Net gain (loss) on investments                       |  | $                            | 0.019 |         |  | $       | (0.039 | )       |  | $     | 0.008 |  |  | $ | 0.073 |  |  | $ | 0.061  | 
|                                                    
|Net increase in net assets resulting from operations |  | $                            | 0.281 |         |  | $       | 0.282  |         |  | $     | 0.293 |  |  | $ | 0.326 |  |  | $ | 1.182  | 

F-3



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##### Table of Contents






Report of Independent Accountants

To the Shareholders and Board of Directors

PMC Capital, Inc.:


In our opinion, the accompanying consolidated
balance sheets as of December 31, 1999 and 1998, including
the schedule of investments as of December 31, 1999 and the
related consolidated statements of income, shareholders
equity and cash flows for each of the three years in the period
ended December 31, 1999 and the financial highlights for
each of the five years in the period ended December 31, 1999
 present fairly, in all material respects, the financial position
 of PMC Capital, Inc. and its subsidiaries at
December 31, 1999 and 1998 and the results of their
operations and their cash flows and the financial highlights for
the periods indicated, in conformity with accounting principles
generally accepted in the United States. These financial
statements and financial highlights (hereafter referred to as
financial statements) are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which
 require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits, which included confirmation of securities owned as of
December 31, 1999 and 1998, provide a reasonable basis for
the opinion expressed above.



| |                           
| | --------------------------
| | PricewaterhouseCoopers LLP

February 25, 2000, except for Notes 5
and 6,

as to which the date is March 22,
 2000


Dallas, Texas


F-4



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##### Table of Contents













Our financial highlights included below should be
read in conjunction with the consolidated financial statements
and the notes thereto appearing elsewhere in this Form 10-K.
 The financial highlights below provide information about our
financial history. It uses our 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.

|                                    |                                                                                                             |                                                              |                                                  |                                  |      |      |      |        |      |      |      |        |       |      |      |        |       |      |      |        |       |      |      | 
|----------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------------ | -------------------------------- | ---- | ---- | ---- | ------ | ---- | ---- | ---- | ------ | ----- | ---- | ---- | ------ | ----- | ---- | ---- | ------ | ----- | ---- | ---- | 
|                                    |                                                                                                             |                                                             
|                                    |                                                                                                             | Years Ended December 31,                                    
|                                    |                                                                                                             |                                                             
|                                    |                                                                                                             | 1999                                                         |                                                  | 1998                             |      | 1997 |      | 1996   |      | 1995
|                                    |                                                                                                             |                                                              |                                                  |                                  |      |      |      |        |      |     
|Per share operating performance(1): |                                                                                                             |                                                              |                                                  |                                  |      |      |      |        |      |      |      |        |       |      |      |        |       |      |      |       
|                                   
|                                   
|                                   
|                                   
|                                   
|                                    | Net asset value, beginning of period                                                                        |                                                              | $                                                | 6.10                             |      |      | $    | 6.03   |      |      | $    | 5.64   |       |      | $    | 5.44   |       |      | $    | 5.37   |      
|                                    |                                                                                                             |                                                              |                                                  |                                  |      |      |      |        |      |      |      |        |       |      |      |        |       |      |      |       
|                                    |                                                                                                             | Net operating income                                         |                                                  |                                  | 0.98 |      |      |        | 1.12 |      |      |        | 1.21  |      |      |        | 1.21  |      |      |        | 1.09  |     
|                                   
|                                   
|                                   
|                                   
|                                    |                                                                                                             | Net gains or losses on securities realized and unrealized(2) |                                                  |                                  | 0.16 |      |      |        | 0.20 |      |      |        | 0.47  |      |      |        | 0.17  |      |      |        | 0.08  |     
|                                    |                                                                                                             |                                                              |                                                  |                                  |      |      |      |        |      |      |      |        |       |      |      |        |       |      |      |       
|                                    |                                                                                                             |                                                              |                                                  | Total from investment operations |      |      | 1.14 |        |      |      | 1.32 |        |       |      | 1.68 |        |       |      | 1.38 |        |       |      | 1.17 | 
|                                    |                                                                                                             |                                                              |                                                  |                                  |      |      |      |        |      |      |      |        |       |      |      |        |       |      |      |       
|                                    |                                                                                                             | Less distributions:                                          |                                                  |                                  |      |      |      |        |      |      |      |        |       |      |      |        |       |      |      |        |       |     
|                                   
|                                   
|                                   
|                                   
|                                    |                                                                                                             |                                                              | Preferred shareholder of consolidated subsidiary |                                  |      | 0.02 |      |        |      | 0.02 |      |        |       | 0.02 |      |        |       | 0.02 |      |        |       | 0.02 |     
|                                   
|                                   
|                                   
|                                   
|                                    |                                                                                                             |                                                              | Common shareholders                              |                                  |      | 1.02 |      |        |      | 1.23 |      |        |       | 1.27 |      |        |       | 1.16 |      |        |       | 1.08 |     
|                                    |                                                                                                             |                                                              |                                                  |                                  |      |      |      |        |      |      |      |        |       |      |      |        |       |      |      |       
|                                    |                                                                                                             |                                                              |                                                  | Total distributions              |      |      | 1.04 |        |      |      | 1.25 |        |       |      | 1.29 |        |       |      | 1.18 |        |       |      | 1.10 | 
|                                    |                                                                                                             |                                                              |                                                  |                                  |      |      |      |        |      |      |      |        |       |      |      |        |       |      |      |       
|                                    |                                                                                                             | Net asset value, end of period                               |                                                  | $                                | 6.20 |      |      | $      | 6.10 |      |      | $      | 6.03  |      |      | $      | 5.64  |      |      | $      | 5.44  |     
|                                    |                                                                                                             |                                                              |                                                  |                                  |      |      |      |        |      |      |      |        |       |      |      |        |       |      |      |       
|                                    |                                                                                                             | Per share market value, end of period                        |                                                  | $                                | 8.25 |      |      | $      | 8.56 |      |      | $      | 14.56 |      |      | $      | 14.00 |      |      | $      | 12.63 |     
|                                    |                                                                                                             |                                                              |                                                  |                                  |      |      |      |        |      |      |      |        |       |      |      |        |       |      |      |       
|                                    |                                                                                                             | Total investment return                                      |                                                  |                                  | 9    | %    |      |        | (33  | %)   |      |        | 13    | %    |      |        | 20    | %    |      |        | 2     | %   
|                                    |                                                                                                             |                                                              |                                                  |                                  |      |      |      |        |      |      |      |        |       |      |      |        |       |      |      |       
|Ratios and supplemental data:       |                                                                                                             |                                                              |                                                  |                                  |      |      |      |        |      |      |      |        |       |      |      |        |       |      |      |       
|                                   
|                                   
|                                   
|                                   
|                                    | Net assets, end of period (in thousands)                                                                    |                                                              | $                                                | 73,314                           |      |      | $    | 72,151 |      |      | $    | 70,166 |       |      | $    | 62,903 |       |      | $    | 59,088 |      
|                                    |                                                                                                             |                                                              |                                                  |                                  |      |      |      |        |      |      |      |        |       |      |      |        |       |      |      |       
|                                    | Ratio of expenses to average net assets                                                                     |                                                              |                                                  | 15                               | %    |      |      | 16     | %    |      |      | 16     | %     |      |      | 17     | %     |      |      | 16     | %    
|                                    |                                                                                                             |                                                              |                                                  |                                  |      |      |      |        |      |      |      |        |       |      |      |        |       |      |      |       
|                                    | Ratio of operating income to average net assets                                                             |                                                              |                                                  | 16                               | %    |      |      | 19     | %    |      |      | 21     | %     |      |      | 22     | %     |      |      | 20     | %    
|                                    |                                                                                                             |                                                              |                                                  |                                  |      |      |      |        |      |      |      |        |       |      |      |        |       |      |      |       
|                                    | Ratio of net operating income and realized and unrealized gain
	(loss) on investments to average net assets |                                                              |                                                  | 18                               | %    |      |      | 20     | %    |      |      | 24     | %     |      |      | 22     | %     |      |      | 20     | %    
|                                    |                                                                                                             |                                                              |                                                  |                                  |      |      |      |        |      |      |      |        |       |      |      |        |       |      |      |       
|                                    | Portfolio turnover(3)                                                                                       |                                                              |                                                  | 87                               | %    |      |      | 58     | %    |      |      | 20     | %     |      |      | 16     | %     |      |      | 30     | %    
|                                    |                                                                                                             |                                                              |                                                  |                                  |      |      |      |        |      |      |      |        |       |      |      |        |       |      |      |       

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



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS


(In thousands, except share and per share data)


|                                           |                                                                |                                                                 |         |         |     |   |         |         |     | 
|------------------------------------------ | -------------------------------------------------------------- | --------------------------------------------------------------- | ------- | ------- | --- | - | ------- | ------- | --- | 
|                                           |                                                                |                                                                
|                                           |                                                                | December 31,                                                   
|                                           |                                                                |                                                                
|                                           |                                                                | 1999                                                            |         | 1998   
|                                           |                                                                |                                                                 |         |        
|                                          
|                                          
|                                          
|                                          
|ASSETS                                     |                                                                |                                                                 |         |         |     |   |         |        
|                                          
|                                          
|                                          
|                                          
|                                          
|Investments at value:                      |                                                                |                                                                 |         |         |     |   |         |        
|                                           | Loans receivable, net                                          |                                                                 | $       | 106,325 |     |   | $       | 116,711 |    
|                                           | Cash equivalents                                               |                                                                 |         | 22,980  |     |   |         | 18,489  |    
|                                           | Investment in unconsolidated subsidiaries                      |                                                                 |         | 20,038  |     |   |         | 12,930  |    
|                                           | Interest-only strip receivables                                |                                                                 |         | 5,820   |     |   |         | 4,168   |    
|                                           | Restricted investments                                         |                                                                 |         | 2,502   |     |   |         | 2,525   |    
|                                           | Mortgage-backed security of affiliate                          |                                                                 |         | 2,007   |     |   |         | 2,168   |    
|                                           | Real property owned                                            |                                                                 |         | 65      |     |   |         | 109     |    
|                                           |                                                                |                                                                 |         |         |     |   |         |        
|Total investments at value                 |                                                                |                                                                 | 159,737 |         |     |   | 157,100 |        
|                                           |                                                                |                                                                 |         |         |     |   |         |        
|Other assets:                              |                                                                |                                                                 |         |         |     |   |         |        
|                                           | Receivable for loans sold                                      |                                                                 |         | 113     |     |   |         | 156     |    
|                                           | Due from unconsolidated subsidiaries                           |                                                                 |         | 2,277   |     |   |         | 2,579   |    
|                                           | Servicing asset                                                |                                                                 |         | 1,179   |     |   |         | 1,330   |    
|                                           | Deferred charges, deposits and other assets                    |                                                                 |         | 932     |     |   |         | 1,140   |    
|                                           | Accrued interest receivable                                    |                                                                 |         | 534     |     |   |         | 581     |    
|                                           | Cash                                                           |                                                                 |         | 213     |     |   |         | 235     |    
|                                           | Property and equipment, net                                    |                                                                 |         | 206     |     |   |         | 228     |    
|                                           |                                                                |                                                                 |         |         |     |   |         |        
|Total other assets                         |                                                                |                                                                 | 5,454   |         |     |   | 6,249   |        
|                                           |                                                                |                                                                 |         |         |     |   |         |        
|Total assets                               |                                                                | $                                                               | 165,191 |         |     | $ | 163,349 |        
|                                           |                                                                |                                                                 |         |         |     |   |         |        
|                                          
|                                          
|                                          
|                                          
|LIABILITIES AND SHAREHOLDERS EQUITY       |                                                                |                                                                 |         |         |     |   |         |        
|                                          
|                                          
|                                          
|                                          
|                                          
|Liabilities:                               |                                                                |                                                                 |         |         |     |   |         |        
|                                           | SBA debentures payable                                         |                                                                 | $       | 35,640  |     |   | $       | 39,790  |    
|                                           | Notes payable                                                  |                                                                 |         | 38,333  |     |   |         | 35,000  |    
|                                           | Accounts payable                                               |                                                                 |         | 1,940   |     |   |         | 1,728   |    
|                                           | Dividends payable                                              |                                                                 |         | 3,198   |     |   |         | 3,020   |    
|                                           | Borrower advances                                              |                                                                 |         | 2,415   |     |   |         | 1,598   |    
|                                           | Accrued interest payable                                       |                                                                 |         | 1,249   |     |   |         | 1,264   |    
|                                           | Due to unconsolidated subsidiaries                             |                                                                 |         | 628     |     |   |         | 1       |    
|                                           | Deferred fee revenue                                           |                                                                 |         | 370     |     |   |         | 666     |    
|                                           | Other liabilities                                              |                                                                 |         | 1,104   |     |   |         | 1,131   |    
|                                           |                                                                |                                                                 |         |         |     |   |         |        
|Total liabilities                          |                                                                |                                                                 | 84,877  |         |     |   | 84,198  |        
|                                           |                                                                |                                                                 |         |         |     |   |         |        
|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, |                                                                 |         |         |     |   |         |         |    
|                                           |                                                                | 11,829,116 shares issued and outstanding at December 
	31, 1999 |         |         |     |   |         |         |     | 
|                                           |                                                                | and 1998                                                        |         |         | 118 |   |         |         | 118 | 
|                                           | Additional paid-in capital                                     |                                                                 |         | 71,312  |     |   |         | 71,312  |    
|                                           | Undistributed net operating income                             |                                                                 |         | 1,484   |     |   |         | 1,495   |    
|                                           | Net unrealized appreciation (depreciation) on investments      |                                                                 |         | 400     |     |   |         | (774    | )  
|                                           |                                                                |                                                                 |         |         |     |   |         |        
|                                           |                                                                |                                                                 | 73,314  |         |     |   | 72,151  |        
|                                           |                                                                |                                                                 |         |         |     |   |         |        
|Total liabilities and shareholders equity |                                                                | $                                                               | 165,191 |         |     | $ | 163,349 |        
|                                           |                                                                |                                                                 |         |         |     |   |         |        
|Net asset value per common share           |                                                                | $                                                               | 6.20    |         |     | $ | 6.10    |        
|                                           |                                                                |                                                                 |         |         |     |   |         |        

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

F-6



---



##### Table of Contents



PMC CAPITAL INC. AND SUBSIDIARIES




CONSOLIDATED SCHEDULE OF INVESTMENTS


DECEMBER 31, 1999


(Dollars in thousands, except footnotes)


|                                     |                                                       |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |       |      |  
|------------------------------------ | ----------------------------------------------------- | -------------------------- |  | ------------------ | -- | ------ | - | ------- | ------ | - |  | ----- | ---- | ---- | - | ------- | ------ |  |  | ----- | ---- | - |  | --- | -- |  | - | ------- | ------ |  |  | ----- | ---- | -
|                                     |                                                       |                            |  |                   
|                                     |                                                       | Retained Loans             |  | Serviced Loans (2)
|                                     |                                                       |                            |  |                   
|                                     |                                                       | Number                     |  |                    |    | Number |   |        
|                                     |                                                       | of                         |  |                    |    | of     |   |        
|Category/ Issuer(1)                  |                                                       | Loans                      |  | Value              |    | %      |   | Cost    |        | % |  | Loans |      | Cost |   | %      
|                                     |                                                       |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |        
|Loans to small business concerns(3): |                                                       |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |      
|                                    
|                                    
|                                    
|                                    
|                                     | First Western SBLC, Inc. and Subsidiaries             |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |       |     
|                                     | (Small business lending company loans)                |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |       |     
|                                     |                                                       | Hotels and motels          |  |                    | 59 |        |   | $       | 9,997  |   |  |       | 9.4  | %    |   | $       | 10,275 |  |  |       | 9.6  | % |  |     | 91 |  |   | $       | 64,569 |  |  |       | 21.1 | %
|                                     |                                                       | Restaurants                |  |                    | 23 |        |   |         | 1,909  |   |  |       | 1.8  | %    |   |         | 1,981  |  |  |       | 1.9  | % |  |     | 47 |  |   |         | 9,839  |  |  |       | 3.2  | %
|                                     |                                                       | Retail, other              |  |                    | 27 |        |   |         | 1,666  |   |  |       | 1.6  | %    |   |         | 1,736  |  |  |       | 1.6  | % |  |     | 48 |  |   |         | 8,047  |  |  |       | 2.6  | %
|                                     |                                                       | Gasoline/ service stations |  |                    | 10 |        |   |         | 1,139  |   |  |       | 1.1  | %    |   |         | 1,169  |  |  |       | 1.1  | % |  |     | 14 |  |   |         | 5,286  |  |  |       | 1.7  | %
|                                     |                                                       | Services                   |  |                    | 29 |        |   |         | 884    |   |  |       | 0.8  | %    |   |         | 941    |  |  |       | 0.9  | % |  |     | 62 |  |   |         | 9,252  |  |  |       | 3.0  | %
|                                     |                                                       | Car washes                 |  |                    | 2  |        |   |         | 838    |   |  |       | 0.8  | %    |   |         | 847    |  |  |       | 0.8  | % |  |     | 2  |  |   |         | 1,586  |  |  |       | 0.5  | %
|                                     |                                                       | Food and grocery stores    |  |                    | 3  |        |   |         | 147    |   |  |       | 0.1  | %    |   |         | 155    |  |  |       | 0.1  | % |  |     | 4  |  |   |         | 1,195  |  |  |       | 0.4  | %
|                                     |                                                       | Laundromats                |  |                    | 6  |        |   |         | 137    |   |  |       | 0.1  | %    |   |         | 164    |  |  |       | 0.2  | % |  |     | 10 |  |   |         | 1,427  |  |  |       | 0.5  | %
|                                     |                                                       | Wholesale                  |  |                    | 4  |        |   |         | 123    |   |  |       | 0.1  | %    |   |         | 129    |  |  |       | 0.1  | % |  |     | 9  |  |   |         | 1,385  |  |  |       | 0.5  | %
|                                     |                                                       | Manufacturing              |  |                    | 6  |        |   |         | 46     |   |  |       | 0.0  | %    |   |         | 49     |  |  |       | 0.0  | % |  |     | 9  |  |   |         | 1,568  |  |  |       | 0.5  | %
|                                     |                                                       | Health care                |  |                    | 6  |        |   |         | 19     |   |  |       | 0.0  | %    |   |         | 24     |  |  |       | 0.0  | % |  |     | 8  |  |   |         | 543    |  |  |       | 0.2  | %
|                                     |                                                       |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |      
|                                     | Total                                                 |                            |  | 175                |    |        |   | 16,905  |        |   |  | 15.8  | %    |      |   | 17,470  |        |  |  | 16.3  | %    |   |  | 304 |    |  |   | 104,697 |        |  |  | 34.2  | %   
|                                     |                                                       |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |      
|                                     | Western Financial Capital Corporation                 |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |       |     
|                                     | (Small business investment company loans)             |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |       |     
|                                     |                                                       | Hotels and motels          |  |                    | 17 |        |   |         | 10,488 |   |  |       | 9.9  | %    |   |         | 10,497 |  |  |       | 9.8  | % |  |     | 33 |  |   |         | 24,241 |  |  |       | 7.9  | %
|                                     |                                                       | Other notes receivable     |  |                    | 4  |        |   |         | 276    |   |  |       | 0.3  | %    |   |         | 306    |  |  |       | 0.3  | % |  |     | 6  |  |   |         | 703    |  |  |       | 0.2  | %
|                                     |                                                       | Health care                |  |                    | 8  |        |   |         | 241    |   |  |       | 0.2  | %    |   |         | 261    |  |  |       | 0.2  | % |  |     | 10 |  |   |         | 735    |  |  |       | 0.2  | %
|                                     |                                                       | Services                   |  |                    | 2  |        |   |         | 178    |   |  |       | 0.2  | %    |   |         | 182    |  |  |       | 0.2  | % |  |     | 11 |  |   |         | 3,404  |  |  |       | 1.1  | %
|                                     |                                                       | Retail, other              |  |                    | 1  |        |   |         | 44     |   |  |       | 0.0  | %    |   |         | 44     |  |  |       | 0.0  | % |  |     | 3  |  |   |         | 2,286  |  |  |       | 0.7  | %
|                                     |                                                       | Gasoline/ service stations |  |                    | -  |        |   |         | -      |   |  |       | 0.0  | %    |   |         | -      |  |  |       | 0.0  | % |  |     | 4  |  |   |         | 1,527  |  |  |       | 0.5  | %
|                                     |                                                       | Restaurants                |  |                    | -  |        |   |         | -      |   |  |       | 0.0  | %    |   |         | -      |  |  |       | 0.0  | % |  |     | 1  |  |   |         | 1,087  |  |  |       | 0.4  | %
|                                     |                                                       | Manufacturing              |  |                    | -  |        |   |         | -      |   |  |       | 0.0  | %    |   |         | -      |  |  |       | 0.0  | % |  |     | 1  |  |   |         | 371    |  |  |       | 0.1  | %
|                                     |                                                       |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |      
|                                     | Total                                                 |                            |  | 32                 |    |        |   | 11,227  |        |   |  | 10.6  | %    |      |   | 11,290  |        |  |  | 10.5  | %    |   |  | 69  |    |  |   | 34,354  |        |  |  | 11.1  | %   
|                                     |                                                       |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |      
|                                     | PMC Investment Corporation                            |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |       |     
|                                     | (Specialized small business investment company loans) |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |       |     
|                                     |                                                       | Hotels and motels          |  |                    | 43 |        |   |         | 36,890 |   |  |       | 34.8 | %    |   |         | 37,021 |  |  |       | 34.6 | % |  |     | 86 |  |   |         | 71,582 |  |  |       | 23.5 | %
|                                     |                                                       | Health care                |  |                    | 4  |        |   |         | 174    |   |  |       | 0.2  | %    |   |         | 225    |  |  |       | 0.2  | % |  |     | 4  |  |   |         | 225    |  |  |       | 0.1  | %
|                                     |                                                       | Services                   |  |                    | 1  |        |   |         | 65     |   |  |       | 0.1  | %    |   |         | 65     |  |  |       | 0.1  | % |  |     | 2  |  |   |         | 392    |  |  |       | 0.1  | %
|                                     |                                                       | Retail, other              |  |                    | 1  |        |   |         | 26     |   |  |       | 0.0  | %    |   |         | 26     |  |  |       | 0.0  | % |  |     | 1  |  |   |         | 26     |  |  |       | 0.0  | %
|                                     |                                                       | Other notes receivable     |  |                    | 1  |        |   |         | 3      |   |  |       | 0.0  | %    |   |         | 3      |  |  |       | 0.0  | % |  |     | 1  |  |   |         | 3      |  |  |       | 0.0  | %
|                                     |                                                       | Gasoline/ service stations |  |                    | -  |        |   |         | -      |   |  |       | 0.0  | %    |   |         | -      |  |  |       | 0.0  | % |  |     | 5  |  |   |         | 2,721  |  |  |       | 0.9  | %
|                                     |                                                       |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |      
|                                     | Total                                                 |                            |  | 50                 |    |        |   | 37,158  |        |   |  | 35.1  | %    |      |   | 37,340  |        |  |  | 34.9  | %    |   |  | 99  |    |  |   | 74,949  |        |  |  | 24.6  | %   
|                                     |                                                       |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |      
|                                     | PMC Capital, Inc.                                     |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |       |     
|                                     | (Commercial loans)                                    |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |       |     
|                                     |                                                       | Hotels and motels          |  |                    | 31 |        |   |         | 33,847 |   |  |       | 31.9 | %    |   |         | 33,861 |  |  |       | 31.7 | % |  |     | 76 |  |   |         | 82,126 |  |  |       | 27.0 | %
|                                     |                                                       | Apartment complex          |  |                    | 4  |        |   |         | 3,102  |   |  |       | 2.9  | %    |   |         | 3,104  |  |  |       | 2.9  | % |  |     | 4  |  |   |         | 3,104  |  |  |       | 1.0  | %
|                                     |                                                       | Services                   |  |                    | 1  |        |   |         | 2,348  |   |  |       | 2.2  | %    |   |         | 2,348  |  |  |       | 2.2  | % |  |     | 4  |  |   |         | 3,614  |  |  |       | 1.2  | %
|                                     |                                                       | Gasoline/ service stations |  |                    | 3  |        |   |         | 900    |   |  |       | 0.8  | %    |   |         | 900    |  |  |       | 0.8  | % |  |     | 3  |  |   |         | 900    |  |  |       | 0.3  | %
|                                     |                                                       | Restaurants                |  |                    | 2  |        |   |         | 574    |   |  |       | 0.5  | %    |   |         | 574    |  |  |       | 0.5  | % |  |     | 2  |  |   |         | 574    |  |  |       | 0.2  | %
|                                     |                                                       | Commercial real estate     |  |                    | 1  |        |   |         | 264    |   |  |       | 0.2  | %    |   |         | 266    |  |  |       | 0.2  | % |  |     | 1  |  |   |         | 266    |  |  |       | 0.1  | %
|                                     |                                                       | Manufacturing              |  |                    | -  |        |   |         | -      |   |  |       | 0.0  | %    |   |         | -      |  |  |       | 0.0  | % |  |     | 1  |  |   |         | 1,038  |  |  |       | 0.3  | %
|                                     |                                                       |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |      
|                                     |                                                       | Total                      |  |                    | 42 |        |   |         | 41,035 |   |  |       | 38.5 | %    |   |         | 41,053 |  |  |       | 38.3 | % |  |     | 91 |  |   |         | 91,622 |  |  |       | 30.1 | %
|                                     |                                                       |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |      
|                                     | Total loans receivable(4)                             |                            |  | 299                |    |        | $ | 106,325 |        |   |  | 100.0 | %    |      | $ | 107,153 |        |  |  | 100.0 | %    |   |  | 563 |    |  | $ | 305,622 |        |  |  | 100.0 | %   
|                                     |                                                       |                            |  |                    |    |        |   |         |        |   |  |       |      |      |   |         |        |  |  |       |      |   |  |     |    |  |   |         |        |  |  |      

(Continued on next page)

F-7



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##### Table of Contents



PMC CAPITAL INC. AND SUBSIDIARIES




CONSOLIDATED SCHEDULE OF INVESTMENTS


DECEMBER 31, 1999


(Continued - dollars in thousands,
except footnotes)


|                                           |                                                               |       |         |        |  |      |       |      |   |   |         |        |  |  |       |      |  
|------------------------------------------ | ------------------------------------------------------------- | ----- | ------- | ------ |  | ---- | ----- | ---- | - | - | ------- | ------ |  |  | ----- | ---- | -
|Category/Issuer(1)                         |                                                               | Value |         | %      |  | Cost |       | %   
|                                           |                                                               |       |         |        |  |      |       |     
|Total loans receivable (from prior page)   |                                                               | $     | 106,325 |        |  |      | 66.5  | %    |   | $ | 107,153 |        |  |  | 67.0  | %   
|                                           |                                                               |       |         |        |  |      |       |      |   |   |         |        |  |  |       |     
|Money market and fund deposit accounts(5): |                                                               |       |         |        |  |      |       |      |   |   |         |        |  |  |       |     
|                                           | Bank One money market saving accounts                         |       |         | 18,964 |  |      |       | 11.9 | % |   |         | 18,964 |  |  |       | 11.8 | %
|                                           | Dreyfus, Cash Management Plus money market fund               |       |         | 3,016  |  |      |       | 1.9  | % |   |         | 3,016  |  |  |       | 1.9  | %
|                                           | SunTrust, overnight repo account                              |       |         | 414    |  |      |       | 0.2  | % |   |         | 414    |  |  |       | 0.3  | %
|                                           | Texas Capital Bank, money market savings accounts             |       |         | 401    |  |      |       | 0.2  | % |   |         | 401    |  |  |       | 0.2  | %
|                                           | Goldman Sachs, Prime Obligation money market fund             |       |         | 104    |  |      |       | 0.1  | % |   |         | 104    |  |  |       | 0.1  | %
|                                           | Goldman Sachs, money market fund                              |       |         | 81     |  |      |       | 0.1  | % |   |         | 81     |  |  |       | 0.1  | %
|                                           |                                                               |       |         |        |  |      |       |      |   |   |         |        |  |  |       |     
|                                           | Total money market and fund deposit accounts                  |       |         | 22,980 |  |      |       | 14.4 | % |   |         | 22,980 |  |  |       | 14.4 | %
|                                           |                                                               |       |         |        |  |      |       |      |   |   |         |        |  |  |       |     
|Investment in unconsolidated subsidiaries: |                                                               |       |         |        |  |      |       |      |   |   |         |        |  |  |       |     
|                                           | Investment in PMC Capital L.P. 1999-1 and affiliate           |       |         | 7,949  |  |      |       | 5.0  | % |   |         | 7,949  |  |  |       | 4.9  | %
|                                           | Investment in PMC Limited Partnership and affiliates          |       |         | 6,525  |  |      |       | 4.1  | % |   |         | 6,525  |  |  |       | 4.1  | %
|                                           | Investment in PMC Capital L.P. 1998-1 and affiliate           |       |         | 5,402  |  |      |       | 3.4  | % |   |         | 5,402  |  |  |       | 3.4  | %
|                                           | Investment in PMC Funding Corp. and subsidiary                |       |         | 137    |  |      |       | 0.1  | % |   |         | 137    |  |  |       | 0.1  | %
|                                           | Investment in PMC Advisers, Ltd. and subsidiary               |       |         | 25     |  |      |       | 0.0  | % |   |         | 25     |  |  |       | 0.0  | %
|                                           |                                                               |       |         |        |  |      |       |      |   |   |         |        |  |  |       |     
|                                           | Total investment in unconsolidated subsidiaries               |       |         | 20,038 |  |      |       | 12.6 | % |   |         | 20,038 |  |  |       | 12.5 | %
|                                           |                                                               |       |         |        |  |      |       |      |   |   |         |        |  |  |       |     
|Other investments:                         |                                                               |       |         |        |  |      |       |      |   |   |         |        |  |  |       |     
|                                           | Interest-only strip receivables                               |       |         | 5,820  |  |      |       | 3.6  | % |   |         | 5,230  |  |  |       | 3.3  | %
|                                           | Investment in Class B certificate of PMC Capital L.P.
	1998-1 |       |         | 2,007  |  |      |       | 1.3  | % |   |         | 2,007  |  |  |       | 1.2  | %
|                                           | Bank One Trust Company, restricted investments                |       |         | 1,437  |  |      |       | 0.9  | % |   |         | 1,437  |  |  |       | 0.9  | %
|                                           | SunBank Miami, restricted investments                         |       |         | 1,065  |  |      |       | 0.7  | % |   |         | 1,065  |  |  |       | 0.7  | %
|                                           | Real property owned                                           |       |         | 65     |  |      |       | 0.0  | % |   |         | 65     |  |  |       | 0.0  | %
|                                           |                                                               |       |         |        |  |      |       |      |   |   |         |        |  |  |       |     
|                                           | Total other investments                                       |       |         | 10,394 |  |      |       | 6.5  | % |   |         | 9,804  |  |  |       | 6.1  | %
|                                           |                                                               |       |         |        |  |      |       |      |   |   |         |        |  |  |       |     
|Total investments(6)                       |                                                               | $     | 159,737 |        |  |      | 100.0 | %    |   | $ | 159,975 |        |  |  | 100.0 | %   
|                                           |                                                               |       |         |        |  |      |       |      |   |   |         |        |  |  |       |     



|    |                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 ($72.7  million), the loans contributed
	 to the Partnerships ($111.2 million) and the unguaranteed
	portion of First Western loans sold and serviced
	($14.5 million). The balance does not include approximately
	$116.9 million of loan portfolio serviced on behalf of PMC
	Commercial Trust.
|(3) | Interest rates on loans receivable range from 8.0%
	 to 14.5%.                                                                                                                                                                                                                                                                                                          
|(4) | Balances are at face value of loans, less
	discounts aggregating $480,000, unamortized fee revenue of
	$158,000 and reserves of $190,000.                                                                                                                                                                                                                               
|(5) | Interest or dividend rates on money market and
	fund deposit accounts range from 4% to 5%.                                                                                                                                                                                                                                                                              
|(6) | The aggregate cost of investments for Federal
	income tax purposes is approximately $158 million.                                                                                                                                                                                                                                                                       

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

F-8



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF INCOME


(In thousands, except per share data)


|                                                         |                       |                                                                  |        |        |        |      |        |        |        |   |        |        |        |  
|-------------------------------------------------------- | --------------------- | ---------------------------------------------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                                                         |                       |                                                                 
|                                                         |                       | Years Ended December 31,                                        
|                                                         |                       |                                                                 
|                                                         |                       | 1999                                                             |        | 1998   |        | 1997
|                                                         |                       |                                                                  |        |        |        |     
|Investment income:                                       |                       |                                                                  |        |        |        |      |        |        |        |   |        |       
|                                                         |                       | Interest                                                         |        | $      | 15,279 |      |        | $      | 17,214 |   |        | $      | 17,136 |  
|                                                         |                       | Premium income                                                   |        |        | 1,090  |      |        |        | 776    |   |        |        | 1,776  |  
|                                                         |                       | Other investment income, net                                     |        |        | 843    |      |        |        | 807    |   |        |        | 504    |  
|                                                         |                       |                                                                  |        |        |        |      |        |        |        |   |        |       
|Total investment income                                  |                       |                                                                  | 17,212 |        |        |      | 18,797 |        |        |   | 19,416 |       
|Other income, net                                        |                       |                                                                  | 2,320  |        |        |      | 2,893  |        |        |   | 2,430  |       
|Equity in income of unconsolidated subsidiaries, net     |                       |                                                                  | 3,095  |        |        |      | 2,624  |        |        |   | 2,560  |       
|                                                         |                       |                                                                  |        |        |        |      |        |        |        |   |        |       
|Total income                                             |                       |                                                                  | 22,627 |        |        |      | 24,314 |        |        |   | 24,406 |       
|                                                         |                       |                                                                  |        |        |        |      |        |        |        |   |        |       
|Expenses:                                                |                       |                                                                  |        |        |        |      |        |        |        |   |        |       
|                                                         |                       | Interest                                                         |        |        | 5,313  |      |        |        | 5,467  |   |        |        | 5,548  |  
|                                                         |                       | Salaries and related benefits                                    |        |        | 4,049  |      |        |        | 3,965  |   |        |        | 3,435  |  
|                                                         |                       | General and administrative                                       |        |        | 860    |      |        |        | 821    |   |        |        | 797    |  
|                                                         |                       | Rent                                                             |        |        | 286    |      |        |        | 244    |   |        |        | 229    |  
|                                                         |                       | Profit sharing plan                                              |        |        | 243    |      |        |        | 243    |   |        |        | 243    |  
|                                                         |                       | Legal and accounting                                             |        |        | 235    |      |        |        | 182    |   |        |        | 192    |  
|                                                         |                       | Small Business Administration fees                               |        |        | 86     |      |        |        | 106    |   |        |        | 108    |  
|                                                         |                       | Directors and shareholders expense                               |        |        | 68     |      |        |        | 63     |   |        |        | 50     |  
|                                                         |                       |                                                                  |        |        |        |      |        |        |        |   |        |       
|Total expenses                                           |                       |                                                                  | 11,140 |        |        |      | 11,091 |        |        |   | 10,602 |       
|                                                         |                       |                                                                  |        |        |        |      |        |        |        |   |        |       
|Net operating income                                     |                       |                                                                  | 11,487 |        |        |      | 13,223 |        |        |   | 13,804 |       
|                                                         |                       |                                                                  |        |        |        |      |        |        |        |   |        |       
|Realized and unrealized gain (loss) on investments:      |                       |                                                                  |        |        |        |      |        |        |        |   |        |       
|                                                         |                       | Investments written-off                                          |        |        | (1,805 | )    |        |        | (219   | ) |        |        | (183   | )
|                                                         |                       | Sale of assets                                                   |        |        | 2,564  |      |        |        | 925    |   |        |        | 2,360  |  
|                                                         |                       | Change in unrealized appreciation (depreciation) on
	investments |        |        | 1,174  |      |        |        | 20     |   |        |        | (359   | )
|                                                         |                       |                                                                  |        |        |        |      |        |        |        |   |        |       
|Total realized and unrealized gain (loss) on investments |                       |                                                                  | 1,933  |        |        |      | 726    |        |        |   | 1,818  |       
|                                                         |                       |                                                                  |        |        |        |      |        |        |        |   |        |       
|Net operating income and realized and unrealized gain    |                       |                                                                  |        |        |        |      |        |        |        |   |        |       
|                                                         | (loss) on investments |                                                                  | $      | 13,420 |        |      | $      | 13,949 |        |   | $      | 15,622 |       
|                                                         |                       |                                                                  |        |        |        |      |        |        |        |   |        |       
|Preferred dividends                                      |                       | $                                                                | 250    |        |        | $    | 250    |        |        | $ | 250    |       
|                                                         |                       |                                                                  |        |        |        |      |        |        |        |   |        |       
|Basic weighted average common shares outstanding         |                       |                                                                  | 11,829 |        |        |      | 11,800 |        |        |   | 11,411 |       
|                                                         |                       |                                                                  |        |        |        |      |        |        |        |   |        |       
|Diluted weighted average common shares outstanding       |                       |                                                                  | 11,831 |        |        |      | 11,800 |        |        |   | 11,411 |       
|                                                         |                       |                                                                  |        |        |        |      |        |        |        |   |        |       
|Basic and diluted earnings per common share              |                       | $                                                                | 1.11   |        |        | $    | 1.16   |        |        | $ | 1.35   |       
|                                                         |                       |                                                                  |        |        |        |      |        |        |        |   |        |       

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

F-9



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY


FOR THE YEARS ENDED DECEMBER 31, 1999,
1998 AND 1997


(In thousands, except share and per share data)


|                                                                                                    |                                 |        |     |            |  |               |        |              |  |       |        |         |   |   |       |   |  |   |        |         |  
|--------------------------------------------------------------------------------------------------- | ------------------------------- | ------ | --- | ---------- |  | ------------- | ------ | ------------ |  | ----- | ------ | ------- | - | - | ----- | - |  | - | ------ | ------- | -
|                                                                                                    |                                 |        |     |            |  |               |        | Net          |  |      
|                                                                                                    |                                 |        |     |            |  | Undistributed |        | Unrealized   |  |      
|                                                                                                    |                                 |        |     | Additional |  | Net           |        | Depreciation |  |      
|                                                                                                    |                                 | Common |     | Paid-in    |  | Operating     |        | on           |  |      
|                                                                                                    |                                 | Stock  |     | Capital    |  | Income        |        | Investments  |  | Total
|                                                                                                    |                                 |        |     |            |  |               |        |              |  |      
|Balance, January 1, 1997                                                                            |                                 | $      | 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 ($1.27 per common share) |        |     | -          |  |               |        | -            |  |       |        | (14,543 | ) |   |       | - |  |   |        | (14,543 | )
|                                                                                                    |                                 |        |     |            |  |               |        |              |  |       |        |         |   |   |       |   |  |   |        |        
|                                                                                                   
|Balance, December 31, 1997                                                                          |                                 |        | 116 |            |  |               | 68,555 |              |  |       | 2,289  |         |   |   | (794  | ) |  |   | 70,166 |        
|                                                                                                   
|Issuances of common stock pursuant to dividend reinvestment and
	cash purchase plan, 198,329 shares |                                 |        | 2   |            |  |               | 2,757  |              |  |       | -      |         |   |   | -     |   |  |   | 2,759  |        
|                                                                                                   
|Net income                                                                                          |                                 |        | -   |            |  |               | -      |              |  |       | 13,929 |         |   |   | 20    |   |  |   | 13,949 |        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Dividends:                                                                                          |                                 |        |     |            |  |               |        |              |  |       |        |         |   |   |       |   |  |   |        |        
|                                                                                                   
|                                                                                                    | Preferred                       |        |     | -          |  |               |        | -            |  |       |        | (250    | ) |   |       | - |  |   |        | (250    | )
|                                                                                                   
|                                                                                                    | Common ($1.23 per common share) |        |     | -          |  |               |        | -            |  |       |        | (14,473 | ) |   |       | - |  |   |        | (14,473 | )
|                                                                                                    |                                 |        |     |            |  |               |        |              |  |       |        |         |   |   |       |   |  |   |        |        
|                                                                                                   
|Balance, December 31, 1998                                                                          |                                 |        | 118 |            |  |               | 71,312 |              |  |       | 1,495  |         |   |   | (774  | ) |  |   | 72,151 |        
|                                                                                                   
|Net income                                                                                          |                                 |        | -   |            |  |               | -      |              |  |       | 12,246 |         |   |   | 1,174 |   |  |   | 13,420 |        
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Dividends:                                                                                          |                                 |        |     |            |  |               |        |              |  |       |        |         |   |   |       |   |  |   |        |        
|                                                                                                   
|                                                                                                    | Preferred                       |        |     | -          |  |               |        | -            |  |       |        | (250    | ) |   |       | - |  |   |        | (250    | )
|                                                                                                   
|                                                                                                    | Common ($1.02 per common share) |        |     | -          |  |               |        | -            |  |       |        | (12,007 | ) |   |       | - |  |   |        | (12,007 | )
|                                                                                                    |                                 |        |     |            |  |               |        |              |  |       |        |         |   |   |       |   |  |   |        |        
|                                                                                                   
|Balance, December 31, 1999                                                                          |                                 | $      | 118 |            |  | $             | 71,312 |              |  | $     | 1,484  |         |   | $ | 400   |   |  | $ | 73,314 |        
|                                                                                                    |                                 |        |     |            |  |               |        |              |  |       |        |         |   |   |       |   |  |   |        |        

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

F-10



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR THE YEARS ENDED DECEMBER 31, 1999,
1998 AND 1997


(In thousands)


|                                                     |                                                                                                                                                      |                                                                               |                             |         |         |      |         |         |        |        |         |         |         |        |  
|---------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | --------------------------- | ------- | ------- | ---- | ------- | ------- | ------ | ------ | ------- | ------- | ------- | ------ | -
|                                                     |                                                                                                                                                      |                                                                              
|                                                     |                                                                                                                                                      | Years Ended December 31,                                                     
|                                                     |                                                                                                                                                      |                                                                              
|                                                     |                                                                                                                                                      | 1999                                                                          |                             | 1998    |         | 1997
|                                                     |                                                                                                                                                      |                                                                               |                             |         |         |     
|Cash flows from operating activities:                |                                                                                                                                                      |                                                                               |                             |         |         |      |         |         |        |        |         |        
|                                                     | Net operating income and realized and unrealized gain (loss) on
	investments                                                                         |                                                                               | $                           | 13,420  |         |      | $       | 13,949  |        |        | $       | 15,622  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | 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                                                   |                             |         | (19,308 | )    |         |         | (7,407 | )      |         |         | (20,622 | )     
|                                                     |                                                                                                                                                      | Proceeds from sale of guaranteed loans                                        |                             |         | 19,152  |      |         |         | 9,978  |        |         |         | 21,638  |       
|                                                     |                                                                                                                                                      | Change in unrealized depreciation on investments and investments
	written-off |                             |         | 631     |      |         |         | 199    |        |         |         | 543     |       
|                                                     |                                                                                                                                                      | Unrealized premium income, net                                                |                             |         | (664    | )    |         |         | (7     | )      |         |         | 215     |       
|                                                     |                                                                                                                                                      | Depreciation and amortization                                                 |                             |         | 981     |      |         |         | 1,340  |        |         |         | 1,032   |       
|                                                     |                                                                                                                                                      | Accretion of loan discount and deferred fees                                  |                             |         | (1,462  | )    |         |         | (1,163 | )      |         |         | (1,623  | )     
|                                                     |                                                                                                                                                      | Deferred fees collected                                                       |                             |         | 163     |      |         |         | 91     |        |         |         | 766     |       
|                                                     |                                                                                                                                                      | Gain on sale of assets, net                                                   |                             |         | (2,564  | )    |         |         | (928   | )      |         |         | (2,360  | )     
|                                                     |                                                                                                                                                      | Equity in income of unconsolidated subsidiaries, net                          |                             |         | (3,095  | )    |         |         | (2,624 | )      |         |         | (2,560  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                      | Net change in operating assets and liabilities:                               |                             |         |         |      |         |         |        |        |         |         |         |       
|                                                     |                                                                                                                                                      |                                                                               | Accrued interest receivable |         |         | (125 | )       |         |        | 29     |         |         |         | (231   | )
|                                                     |                                                                                                                                                      |                                                                               | Other assets                |         |         | 99   |         |         |        | 338    |         |         |         | (527   | )
|                                                     |                                                                                                                                                      |                                                                               | Accrued interest payable    |         |         | (15  | )       |         |        | (52    | )       |         |         | (127   | )
|                                                     |                                                                                                                                                      |                                                                               | Borrower advances           |         |         | 817  |         |         |        | (81    | )       |         |         | (116   | )
|                                                     |                                                                                                                                                      |                                                                               | Other liabilities           |         |         | (143 | )       |         |        | (1,610 | )       |         |         | (1,069 | )
|                                                     |                                                                                                                                                      |                                                                               |                             |         |         |      |         |         |        |        |         |        
|Net cash provided by operating activities            |                                                                                                                                                      |                                                                               | 7,887                       |         |         |      | 12,052  |         |        |        | 10,581  |        
|                                                     |                                                                                                                                                      |                                                                               |                             |         |         |      |         |         |        |        |         |        
|Cash flows from investing activities:                |                                                                                                                                                      |                                                                               |                             |         |         |      |         |         |        |        |         |        
|                                                     | Loans funded                                                                                                                                         |                                                                               |                             | (64,956 | )       |      |         | (59,043 | )      |        |         | (65,739 | )      
|                                                     | Principal collected and other adjustments                                                                                                            |                                                                               |                             | 15,431  |         |      |         | 24,661  |        |        |         | 10,069  |        
|                                                     | Proceeds from interest-only strip receivables                                                                                                        |                                                                               |                             | 583     |         |      |         | 792     |        |        |         | 648     |        
|                                                     | Purchase of furniture and fixtures and other assets                                                                                                  |                                                                               |                             | (39     | )       |      |         | (146    | )      |        |         | (139    | )      
|                                                     | Proceeds from (purchase of) mortgage-backed security of affiliate                                                                                    |                                                                               |                             | 161     |         |      |         | (2,168  | )      |        |         | -       |        
|                                                     | Proceeds from sale of assets                                                                                                                         |                                                                               |                             | 71      |         |      |         | 301     |        |        |         | 22,986  |        
|                                                     | Proceeds from partnership distributions                                                                                                              |                                                                               |                             | 5,672   |         |      |         | 3,012   |        |        |         | 3,347   |        
|                                                     | Release of (investment in) restricted cash                                                                                                           |                                                                               |                             | 23      |         |      |         | 273     |        |        |         | (1,569  | )      
|                                                     | Investment in unconsolidated subsidiaries                                                                                                            |                                                                               |                             | (3,524  | )       |      |         | (3,253  | )      |        |         | -       |        
|                                                     | Advances from (to) unconsolidated affiliates, net                                                                                                    |                                                                               |                             | 929     |         |      |         | (1,555  | )      |        |         | (1,004  | )      
|                                                     |                                                                                                                                                      |                                                                               |                             |         |         |      |         |         |        |        |         |        
|Net cash used in investing activities                |                                                                                                                                                      |                                                                               | (45,649                     | )       |         |      | (37,126 | )       |        |        | (31,401 | )      
|                                                     |                                                                                                                                                      |                                                                               |                             |         |         |      |         |         |        |        |         |        
|Cash flows from financing activities:                |                                                                                                                                                      |                                                                               |                             |         |         |      |         |         |        |        |         |        
|                                                     | Proceeds from issuance of senior notes                                                                                                               |                                                                               |                             | 10,000  |         |      |         | -       |        |        |         | -       |        
|                                                     | Proceeds from issuance of common stock                                                                                                               |                                                                               |                             | -       |         |      |         | 2,061   |        |        |         | 5,475   |        
|                                                     | Proceeds from unconsolidated subsidiary                                                                                                              |                                                                               |                             | 55,649  |         |      |         | 40,876  |        |        |         | -       |        
|                                                     | Payment of dividends on common stock                                                                                                                 |                                                                               |                             | (11,829 | )       |      |         | (14,771 | )      |        |         | (13,197 | )      
|                                                     | Payment of dividends on preferred stock                                                                                                              |                                                                               |                             | (250    | )       |      |         | (250    | )      |        |         | (250    | )      
|                                                     | Payment of senior notes                                                                                                                              |                                                                               |                             | (6,667  | )       |      |         | -       |        |        |         | -       |        
|                                                     | Payment of SBA debentures                                                                                                                            |                                                                               |                             | (4,150  | )       |      |         | (1,500  | )      |        |         | (3,280  | )      
|                                                     | Payment of issuance costs on notes and debentures                                                                                                    |                                                                               |                             | (523    | )       |      |         | (119    | )      |        |         | (443    | )      
|                                                     |                                                                                                                                                      |                                                                               |                             |         |         |      |         |         |        |        |         |        
|Net cash provided by (used in) financing activities  |                                                                                                                                                      |                                                                               | 42,230                      |         |         |      | 26,297  |         |        |        | (11,695 | )      
|                                                     |                                                                                                                                                      |                                                                               |                             |         |         |      |         |         |        |        |         |        
|Net increase (decrease) in cash and cash equivalents |                                                                                                                                                      |                                                                               | 4,468                       |         |         |      | 1,223   |         |        |        | (32,515 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents, beginning of year         |                                                                                                                                                      |                                                                               | 18,725                      |         |         |      | 17,502  |         |        |        | 50,017  |        
|                                                     |                                                                                                                                                      |                                                                               |                             |         |         |      |         |         |        |        |         |        
|Cash and cash equivalents, end of year               |                                                                                                                                                      | $                                                                             | 23,193                      |         |         | $    | 18,725  |         |        | $      | 17,502  |        
|                                                     |                                                                                                                                                      |                                                                               |                             |         |         |      |         |         |        |        |         |        
|Supplemental disclosure:                             |                                                                                                                                                      |                                                                               |                             |         |         |      |         |         |        |        |         |        
|                                                     | Interest paid                                                                                                                                        |                                                                               | $                           | 5,328   |         |      | $       | 5,474   |        |        | $       | 5,631   |        
|                                                     |                                                                                                                                                      |                                                                               |                             |         |         |      |         |         |        |        |         |        
|                                                     | Dividends reinvested                                                                                                                                 |                                                                               | $                           | -       |         |      | $       | 700     |        |        | $       | 963     |        
|                                                     |                                                                                                                                                      |                                                                               |                             |         |         |      |         |         |        |        |         |        
|                                                     | Reclassification from loans receivable to real property owned                                                                                        |                                                                               | $                           | 377     |         |      | $       | 109     |        |        | $       | 203     |        
|                                                     |                                                                                                                                                      |                                                                               |                             |         |         |      |         |         |        |        |         |        
|                                                     | Loans and interest receivable transferred to unconsolidated
	subsidiary, net                                                                         |                                                                               | $                           | 4,832   |         |      | $       | 5,471   |        |        | $       | -       |        
|                                                     |                                                                                                                                                      |                                                                               |                             |         |         |      |         |         |        |        |         |        

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

F-11



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1.  Summary of Significant
Accounting Policies:

Business

PMC Capital, Inc. (PMC Capital
and, together with its subsidiaries, we or
our) is a diversified closed-end management
investment company that operates as a business development
company (BDC) under the Investment Company Act of
1940, as amended (the 1940 Act). Our common
stock (the Common Stock) is traded on the American
Stock Exchange under the symbol PMC. We have elected
to be taxed as a regulated investment company under the Internal
Revenue Code and distribute substantially all our taxable income
as dividends to our shareholders, thereby incurring no Federal
income tax liability on such income.


We are primarily engaged in the business of
originating loans to small businesses either directly or through
our three principal subsidiaries: First Western SBLC, Inc.
(First Western), PMC Investment Corporation
(PMCIC) and Western Financial Capital Corporation
(Western Financial). We primarily originate loans to
individuals and small business concerns in the lodging industry.
We also target the medical, food service, service, retail and
commercial real estate industries. We are a national lender that
primarily lends to businesses in the Southwest and Southeast
regions of the United States. In addition to our lending
operations, we earn revenue as an investment advisor who
evaluates and services loans and other investment alternatives
pursuant to a fee arrangement with PMC Commercial Trust
(PMC Commercial). PMC Commercial is a real estate
investment trust and our affiliate as a result of common
management.

First Western, PMCIC and Western Financial are
registered under the 1940 Act as diversified closed-end
management investment companies. In addition, PMC Capital is
either directly or indirectly the sole shareholder or partner of
several non-investment company act subsidiaries. These are: PMC
Advisers, Ltd. and its subsidiary (PMC
Advisers); PMC Funding Corp. and its subsidiary (PMC
Funding); PMC Capital Limited Partnership (the 1996
Partnership) and its related general partner and trust; PMC
 Capital, L.P. 1998-1 (the 1998 Partnership),
and its related general partner and PMC Capital, L.P. 1999-1
 (the 1999 Partnership and together with the 1996
Partnership and the 1998 Partnership, the Limited
Partnerships) and its related general partner.

Principles of Consolidation

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


The accounts of our wholly-owned non-investment
company act subsidiaries, PMC Advisers, PMC Funding and the
Limited Partnerships 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 SBA 7(a)
program (the SBA 7(a) program). PMCIC is a
licensed specialized small business investment company
(SSBIC) under the Small Business Investment Act of
1958, as amended (SBIA). PMCIC uses long-term funds
provided by the SBA, together with its own capital, to provide
long-term collateralized loans to eligible small businesses owned
 by disadvantaged persons, as defined under the
regulations of the SBA. The interest rates on loans originated by
 PMCIC are either fixed or variable based on the prime lending
rate (Prime Rate). As an SSBIC, PMCIC 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 being reduced through an SBA subsidy
by 3% during the first five years). The SBA subsidy is no longer
provided on new issuances under the SSBIC program.


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 Western Financial are either fixed or variable
based on the Prime Rate. As an SBIC, Western

F-12



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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 acts as the investment advisor for
PMC Commercial.


PMC Funding holds assets on our behalf. PMC
Capital is the sole shareholder of PMC Funding.

The 1996 Partnership was formed as a Delaware
limited partnership in November 1996 to act as our special
purpose affiliate and to acquire loans from us 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.

The 1998 Partnership was formed as a Delaware
limited partnership in November 1998 to act as our special
purpose affiliate and to acquire loans from us and to issue
variable-rate debt through a private placement. PMC Capital Corp.
 1998-1 is a Delaware corporation formed in November 1998 to be
the general partner of the 1998 Partnership.

The 1999 Partnership was formed as a Delaware
limited partnership in May 1999 to act as our special
purpose affiliate and to acquire fixed-rate loans from us and to
issue fixed-rate debt through a private placement. PMC Capital
Corp. 1999-1 is a Delaware corporation formed in May 1999 to be
the general partner of the 1999 Partnership.

Use of Estimates in the Preparation of
Financial Statements

The preparation of financial statements in
conformity with generally accepted accounting principles requires
 us to make estimates and assumptions that affect 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 valued at our Board of
Directors estimate of amounts that could be realized in the
 normal course of business. The Board of Directors anticipates
that we hold our loans to maturity and has estimated the fair
value of loans receivable to approximate the remaining
unamortized principal 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 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.

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 of the loans. This difference
is the Retained Loan Discount. At the time of sale, premium
income is 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.

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PMC CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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.

Deferred fees consist of non-refundable fees less
direct loan origination costs. For loans originated prior to
January 1, 1998, these fees are being recognized over the
expected life of the related loan. For loans originated
subsequent to December 31, 1997, these fees are being
recognized currently. This change did not materially impact our
financial statements.

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

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

Interest-only Strip Receivable and Servicing
Asset:We follow Statement of
Financial Accounting Standards (SFAS) No. 125,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, which 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. We typically receive cash and
retain the right to receive contractual servicing fees (the
servicing asset) 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.

In accordance with SFAS No. 125, we establish
 a servicing asset to the extent we receive contractual
compensation for servicing loans which is in excess of adequate
compensation to service the loans. Servicing the sold portion of
government guaranteed loans requires First Western to retain a
minimum servicing spread of 1%. This spread is in excess of what
we consider adequate compensation to service the loans.
Accordingly, we have recorded a servicing asset relating to the
servicing of the sold portion of First Westerns loans. 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 our estimate of the anticipated
discounted future cash flows retained by us 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. We update the anticipated future
cash flows on a quarterly basis and determine 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. During 1999, as a result of the significant amount
of loans which prepaid, the present value of the cash flows
expected to be received on First Western loans sold in the
secondary market, using a risk-free rate of return, is less than
the amortized cost of the related interest-only strip

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PMC CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


receivable. Accordingly, valuation losses of
$1.3 million which have previously been reflected in our
income statement as unrealized losses were realized.

In addition, on a quarterly basis, we measure 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.
As of December 31, 1999 and 1998, there was an unrealized
appreciation (depreciation) of $590,000 and ($180,000),
respectively, related to the interest-only strip receivable.
During the years ended December 31, 1999 and 1998, we
recorded a net realized and unrealized loss of $500,000 and a net
 unrealized gain of $120,000, respectively, relating 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 our 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.

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

Mortgage-Backed Security of Affiliate:The mortgage-backed security represents the
ownership of the Class B notes of the 1998 Partnership and
is valued at amortized cost, which approximates fair value.

Real Property Owned:Real property owned is valued at our Board of Directors
estimate of fair value, based upon appraisals and other factors.

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.


Property and Equipment

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


Valuation of Debt

Our debt is valued at the remaining unamortized
balance of the debt.


Net Unrealized Appreciation (Depreciation) on
Investments

Included in net unrealized appreciation
(depreciation) on investments on the accompanying
consolidated balance sheets are valuation allowances for loans
receivable and the interest-only strip receivables.


Interest Income

Interest income includes income on loans and the
yield on the interest-only strip receivables. Interest income on
loans is accrued as earned and the accrual of interest is
generally suspended when the related loan becomes 60 days
past due (a Non-accrual Loan). Interest income on a
Non-accrual Loan is recognized on a 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 our
future retained servicing rights.


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PMC CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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. The
sale price includes the value attributable to any excess
servicing spread retained by us plus any cash received.

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 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 expected credit losses) and the carrying
value of the assets (including the Retained Loan Discount, if
any).

Federal Income Taxes

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


Any dividends we declared 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 the
shareholders received it on December 31 of the year
declared.

Distributions to Shareholders

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


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 80% 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.
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. At December 31, 1999,
included in loans receivable are approximately $2.8 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
$87.2 million and $105.8 million at December 31,
1999 and 1998, respectively.

PMCIC and Western Financial originate loans that
are payable in monthly installments of principal and interest
based upon five to 20 year amortization periods, with the
balance due at maturity. These loans are

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PMC CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


collateralized with first liens on real and/ or
personal property and are generally guaranteed by the principals
of the borrower.

PMC Capital 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 SBA 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, (iv) contain
 prepayment fees, and (iv) are generally guaranteed by the
principals of the borrower.

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

|               |  |                    |     |      |  |  |     |  
|-------------- |  | ------------------ | --- | ---- |  |  | --- | -
|               |  |                   
|               |  | Percentage of Loan
|               |  | Portfolio         
|               |  | December 31,      
|               |  |                   
|State          |  | 1999               |     | 1998
|               |  |                    |     |     
|Texas          |  |                    | 27  | %    |  |  | 35  | %
|Georgia        |  |                    | 13  | %    |  |  | 4   | %
|Arizona        |  |                    | 8   | %    |  |  | 2   | %
|North Carolina |  |                    | 6   | %    |  |  | 4   | %
|Florida        |  |                    | 4   | %    |  |  | 6   | %
|California     |  |                    | 3   | %    |  |  | 8   | %
|Other          |  |                    | 39  | %    |  |  | 41  | %
|               |  |                    |     |      |  |  |     |  
|               |  |                    | 100 | %    |  |  | 100 | %
|               |  |                    |     |      |  |  |     |  

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

|                             |  |                          |          |      |  |   |          |  
|---------------------------- |  | ------------------------ | -------- | ---- |  | - | -------- | -
|                             |  |                         
|                             |  | Years Ended December 31,
|                             |  |                         
|                             |  | 1999                     |          | 1998
|                             |  |                          |          |     
|Balance, beginning of period |  | $                        | 594,000  |      |  | $ | 494,000  |  
|                            
|                            
|                            
|                            
|Provision for losses         |  |                          | 131,000  |      |  |   | 319,000  |  
|                            
|                            
|                            
|                            
|Loans written-off            |  |                          | (535,000 | )    |  |   | (219,000 | )
|                             |  |                          |          |      |  |   |          |  
|Balance, end of period       |  | $                        | 190,000  |      |  | $ | 594,000  |  
|                             |  |                          |          |      |  |   |          |  

Loans receivable with an aggregate retained
balance of $0.8 million and $1.6 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, 1999 and 1998, respectively.

At December 31, 1999 and 1998, the recorded
investment in loans identified as impaired in accordance with
SFAS No. 114 totaled $0.5 million and
$1.8 million, respectively. Of this total, at
December 31, 1999 and 1998, approximately $0.3 million
and $0.6 million, 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 $0.2 million and $1.3 million of these
loans at December 31, 1999 and 1998, have a corresponding
valuation allowance of $0.2 million and $0.6 million,
respectively. At December 31, 1999 and at December 31,
1998, we had recognized $6,000 in valuation allowances on
identified problem loans of $29,000 and $44,000, respectively,
which were not deemed impaired. We 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 $50,000 and $0.2 million,
respectively, would have been recognized during the years ended
December 31, 1999 and 1998.

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PMC CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In addition to the SBA Guaranteed Sales, First
Western sells through separate transactions, the unguaranteed
portion of some 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 some 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 PMCIC and Western Financial to PMC Capital) of
loans to the 1996 Partnership without recourse. At
December 31, 1999, the aggregate remaining principal balance
 of those loans was $14.2 million.

During November 1998, PMC Capital contributed
approximately $43.1 million (aggregate principal balance
due, including $22.3 million in loans transferred from PMCIC
 and Western Financial to PMC Capital) of loans to the 1998
Partnership without recourse. At December 31, 1999, the
aggregate remaining principal balance of those loans was
$39.4 million.

During the year ended December 31, 1999, PMC
Capital contributed approximately $60.3 million (aggregate
principal balance due, including $29.9 million in loans
transferred from PMCIC and Western Financial to PMC Capital) of
loans to the 1999 Partnership without recourse. At
December 31, 1999, the aggregate remaining principal balance
 of those loans was $57.5 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 Capital 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 premium, First Western retains the
minimum Servicing Spread of 1% required by SBA regulations
(SBA Minimum Servicing). When receiving the maximum
premium, PMC Capital 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.

Our 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 our balance sheet as the
Servicing Asset and the interest-only strip receivable.

The activity in the servicing asset is summarized
as follows:

|                                     |  |                          |           |      |  |      |           |   |  |   |           |  
|------------------------------------ |  | ------------------------ | --------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                                     |  |                         
|                                     |  | Years Ended December 31,
|                                     |  |                         
|                                     |  | 1999                     |           | 1998 |  | 1997
|                                     |  |                          |           |      |  |     
|Aggregate balance, beginning of year |  | $                        | 1,330,000 |      |  | $    | 1,607,000 |   |  | $ | 1,753,000 |  
|Aggregate additions                  |  |                          | 275,000   |      |  |      | 222,000   |   |  |   | 328,000   |  
|Amortization                         |  |                          | (426,000  | )    |  |      | (499,000  | ) |  |   | (474,000  | )
|                                     |  |                          |           |      |  |      |           |   |  |   |           |  
|Aggregate balance, end of year       |  | $                        | 1,179,000 |      |  | $    | 1,330,000 |   |  | $ | 1,607,000 |  
|                                     |  |                          |           |      |  |      |           |   |  |   |           |  

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PMC CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 4.  Property and Equipment:

Property and equipment consisted of the following:

|                               |  |                    |          |      |  |   |          |  
|------------------------------ |  | ------------------ | -------- | ---- |  | - | -------- | -
|                               |  |                   
|                               |  | As of December 31,
|                               |  |                   
|                               |  | 1999               |          | 1998
|                               |  |                    |          |     
|Furniture and equipment        |  | $                  | 574,000  |      |  | $ | 536,000  |  
|Automobiles                    |  |                    | 13,000   |      |  |   | 13,000   |  
|                               |  |                    |          |      |  |   |          |  
|                               |  |                    | 587,000  |      |  |   | 549,000  |  
|Less: accumulated depreciation |  |                    | (381,000 | )    |  |   | (321,000 | )
|                               |  |                    |          |      |  |   |          |  
|                               |  | $                  | 206,000  |      |  | $ | 228,000  |  
|                               |  |                    |          |      |  |   |          |  

Depreciation and amortization expense for the
years ended December 31, 1999, 1998 and 1997 was
approximately $0.1 million, $0.2 million and
$0.1 million, respectively. Included in amortization is
approximately $0.1 million during the year ended
December 31, 1998 to write-off of leasehold improvements
relating to the previously occupied leased office space which was
 terminated on January 1, 1999.

Note 5.  Notes Payable:

At December 31, 1999 and 1998 outstanding
uncollateralized notes were as follows:

|                                                               |  |                    |            |      |  |   |            | 
|-------------------------------------------------------------- |  | ------------------ | ---------- | ---- |  | - | ---------- | 
|                                                               |  |                   
|                                                               |  | As of December 31,
|                                                               |  |                   
|                                                               |  | 1999               |            | 1998
|                                                               |  |                    |            |     
|Note payable, 7.20% interest rate, matures July 19, 2001(1)    |  | $                  | 13,333,000 |      |  | $ | 20,000,000 | 
|Note payable, 6.97% interest rate, matures December 15, 2002   |  |                    | 5,000,000  |      |  |   | 5,000,000  | 
|Note payable, 8.60% interest rate, matures April 19, 2003      |  |                    | 5,000,000  |      |  |   | 5,000,000  | 
|Note payable, 7.49% (2) interest rate, matures
	April 19, 2004 |  |                    | 5,000,000  |      |  |   | 5,000,000  | 
|Note payable, 7.44% interest, matures July 19, 2005            |  |                    | 10,000,000 |      |  |   | -          | 
|                                                               |  |                    |            |      |  |   |            | 
|                                                               |  | $                  | 38,333,000 |      |  | $ | 35,000,000 | 
|                                                               |  |                    |            |      |  |   |            | 



|    |                                                                           
|--- | --------------------------------------------------------------------------
|(1) | Payable in equal annual installments on
	July 19, 2000 and 2001.          
|(2) | Reset quarterly at 1.3% over the three month LIBOR
	 at the time of reset.

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PMC CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Principal payments required on the notes at
December 31, 1999, are as follows:

|             |      |  |  |        |  |   |            | 
|------------ | ---- |  |  | ------ |  | - | ---------- | 
|Year Ending  |      |  |  |       
|December 31, |      |  |  | Amount
|             |      |  |  |       
|             | 2000 |  |  |        |  | $ | 6,666,000  | 
|             | 2001 |  |  |        |  |   | 6,667,000  | 
|             | 2002 |  |  |        |  |   | 5,000,000  | 
|             | 2003 |  |  |        |  |   | 5,000,000  | 
|             | 2004 |  |  |        |  |   | 5,000,000  | 
|             | 2005 |  |  |        |  |   | 10,000,000 | 
|             |      |  |  |        |  |   |            | 
|             |      |  |  |        |  | $ | 38,333,000 | 
|             |      |  |  |        |  |   |            | 

The notes require us 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 our
loan valuation reserve for any 12 month period must not
exceed 3% of net loans receivable and (iii) our consolidated
 earnings plus interest expense must exceed 150% of interest
expense. At December 31, 1999, we were in compliance with
all of the covenants of these notes.

We have a $15 million uncollateralized
revolving credit facility, amended on March 22, 2000, which
expires March 2002. Advances pursuant to the credit facility bear
 interest at our option of the banks prime rate less
50 basis points or the London Interbank Offering Rate
(LIBOR) plus 175 basis points. The credit facility
requires that we meet certain covenants, the most restrictive of
which requires that the ratio of net charge-offs to net loans
receivable not exceed 2%, and the ratio of assets to senior debt
(as defined in the note agreement) will not fall below 135% for
PMC Capital and 150% including our consolidated subsidiaries, as
amended. At December 31, 1999 and 1998 we had no outstanding
 amounts borrowed on this credit facility, and we were in
compliance with all covenants of this facility.

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, 1999, the maturities, interest rates and
principal payments on the SBA debentures were as follows:

|                  |                    |  |  |               |  |        |           |   |  |   |            | 
|----------------- | ------------------ |  |  | ------------- |  | ------ | --------- | - |  | - | ---------- | 
|Maturity Date (1) |                    |  |  | Interest Rate |  | Amount
|                  |                    |  |  |               |  |       
|                  | January 2, 2000(2) |  |  |               |  |        | 7.875     | % |  | $ | 3,000,000  | 
|                  | March 1, 2000(2)   |  |  |               |  |        | 9.350     | % |  |   | 1,000,000  | 
|                  | June 1, 2000       |  |  |               |  |        | (3) 9.300 | % |  |   | 300,000    | 
|                  | 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  |  |  |               |  |        | 8.200     | % |  |   | 3,000,000  | 
|                  | September 1, 2004  |  |  |               |  |        | 8.200     | % |  |   | 3,000,000  | 
|                  | March 1, 2005      |  |  |               |  |        | (5) 4.840 | % |  |   | 3,000,000  | 
|                  | June 1, 2005       |  |  |               |  |        | (6) 3.690 | % |  |   | 5,000,000  | 
|                  | September 1, 2005  |  |  |               |  |        | (7) 3.875 | % |  |   | 7,000,000  | 
|                  | September 1, 2006  |  |  |               |  |        | 7.590     | % |  |   | 2,490,000  | 
|                  |                    |  |  |               |  |        |           |   |  |   |            | 
|                  |                    |  |  |               |  |        |           |   |  | $ | 35,640,000 | 
|                  |                    |  |  |               |  |        |           |   |  |   |            | 



|    |                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | During the year ended December 31, 1999 and
	1998, we paid off $4,150,000 and $1,500,000, respectively, in
	debentures payable at their maturity. Total debentures
	outstanding at December 31, 1998 were $39,790,000.
|   
|(2) | Paid in full at maturity.                                                                                                                                                                                             

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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|    |                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------
|(3) | During April 1995, we assumed $2,260,000 in SBA
	debentures from a non-affiliated SBIC in exchange for loans
	receivable and cash.
|   
|(4) | During May 1996, we assumed $1,030,000 in SBA
	debentures from a non-affiliated SBIC in exchange for loans
	receivable and cash.  
|   
|(5) | The interest rate will increase to 7.840% in March
	 2000 until maturity.                                                         
|   
|(6) | The interest rate will increase to 6.690% in June
	2000 until maturity.                                                           
|   
|(7) | The interest rate will increase to 6.875% in
	September 2000 until maturity.                                                      

Note 7.  Commitments and
Contingencies:

Operating Leases

During 1991, we entered into an agreement to lease
 our corporate office space for a 15 year period from a
corporation, a majority of whose principals are our officers and
directors. Leasehold improvements of $150,000 were paid to the
corporation for costs incurred during the build-out of the leased
 premises. During September 1998, we exercised the option to
terminate the lease effective January 1, 1999.


In September 1998, we entered into a five year
lease for office space commencing December, 1998. We may at our
option, renew the term of the lease for two additional five year
periods. At December 31, 1999, we had additional agreements
to lease office space in Phoenix, Arizona; and Atlanta, Georgia.
Rental expense amounted to approximately $286,000, $244,000 and
$229,000 during the years ended December 31, 1999, 1998 and
1997, respectively.

Future minimum lease payments at December 31,
 1999 are as follows:

|             |      |  |  |        |  |   |           | 
|------------ | ---- |  |  | ------ |  | - | --------- | 
|Year Ending  |      |  |  |       
|December 31, |      |  |  | Amount
|             |      |  |  |       
|             | 2000 |  |  |        |  | $ | 284,000   | 
|             | 2001 |  |  |        |  |   | 284,000   | 
|             | 2002 |  |  |        |  |   | 284,000   | 
|             | 2003 |  |  |        |  |   | 284,000   | 
|             | 2004 |  |  |        |  |   | 24,000    | 
|             |      |  |  |        |  |   |           | 
|             |      |  |  |        |  | $ | 1,160,000 | 
|             |      |  |  |        |  |   |           | 

Loan Commitments

Loan commitments outstanding at December 31,
1999, to various prospective small business companies, including
the unfunded portion of projects in the construction phase,
amounted to approximately $49.2 million. Of these
commitments, $11.5 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 our 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.


Since year end, we have increased our outstanding
commitments to fund loans to over $60 million. We have
$15 million available under our revolving credit facility.
Additional sources of capital include principal collections on
our existing loan portfolio and proceeds from the sale of 7(a)
loans in the secondary market. We are also developing a loan pool
 of approximately $40 million to $50 million for a
securitization transaction which is anticipated to be completed
prior to September 30, 2000. To the extent

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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


commitments pertain to PMCIC or Western Financial,
 we should be able to issue SBA debentures to fund those
commitments. There can be no assurances that we will be able to
complete the above transactions at acceptable advance rates
and/or interest rates. If not, we may have to refer commitments
to PMC Commercial, issue debt at decreased loan-to-value ratios
or increased interest rates and/or sell assets to meet our
committed obligations when and if they come due.

Employment Agreements

We have employment contracts with certain of our
officers and/or employees for terms expiring June 2001. Annual
remuneration during the term of the contracts does not exceed
$315,000 for any one individual. Future minimum payments under
these contracts are as follows:

|             |  |        |               |  
|------------ |  | ------ | ------------- | -
|Year Ending  |  |       
|December 31, |  | Amount
|             |  |       
|             |  |        | (In thousands | )
|            
|2000         |  | $      | 1,185         |  
|2001         |  |        | 1,185         |  
|2002         |  |        | 592           |  
|             |  |        |               |  
|             |  | $      | 2,962         |  
|             |  |        |               |  

During the years ended December 31, 1999,
1998 and 1997 compensation to officers was approximately
$1.7 million, $1.5 million and $1.6 million,
respectively.

Litigation

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


Note 8.  Credit and Interest Rate
Risk:

In connection with First Westerns
securitization and sale of the unguaranteed portions of
SBA loans and the structured sale by PMC Capital, we are
subject to credit risk. When we complete these types of
transactions, the investors protection from losses is
provided by: (i) the subordination of our right to receive
payment on loans receivable (aggregating approximately
$0.2 million at December 31, 1999), (ii) the
subordination of the interest-only strip receivable related to
our right to receive the Excess Servicing Spread on those loans
sold (valued at $5.8 million at December 31, 1999,
included in interest-only strip receivable on the accompanying
balance sheet), (iii) the subordination of the Class B
certificate held by PMC Capital (valued at approximately
$2.0 million at December 31, 1999), (iv) the
investment in the 1998 Partnership and 1999 Partnership (valued
at $13.3 million at December 31, 1999) and
(v) cash deposits held in restricted interest bearing bank
accounts of $2.5 million at December 31, 1999.

Impairment of the interest-only strip receivable
is measured based on its fair value. In measuring impairment at
December 31, 1999 and 1998, the servicing portfolio was
evaluated based upon the predominant risk characteristics which
we have determined to be prepayment and payment default risks. We
 evaluated the serviced portfolio for (i) the interest-only
strip receivable related to SBA Guaranteed Sales, (ii) the
securitized sale of the unguaranteed portion of SBA loans in 1994
 and 1997 (the SBA Unguaranteed Sales) and
(iii) the structured sale of loans in 1998 and 1999. Based
upon current prepayment assumptions, estimates of default rates
and a discount factor considering the current interest rate
environment, we have recorded a net realized and unrealized loss
of $0.5 million during the year ended December 31, 1999
 and a net unrealized gain of $0.1 million during the year
ended December 31, 1998. At December 31, 1999 and 1998,
 the net unrealized appreciation (depreciation) related to
the interest-only strip receivables was $0.6 million and
($0.2 million), respectively.

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PMC CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In connection with our investment in the Limited
Partnerships, all payments of principal and interest on the loans
 contributed to the Limited Partnerships are to be deposited with
 the respective trustee and are used to pay the respective
noteholders the required monthly principal and interest then due
on the notes pursuant to the respective Trust Indenture (as
defined below) prior to releasing any excess funds to the Limited
 Partnerships free and clear of the respective Trust Indenture.
The Limited Partnerships obligations to the respective
noteholders are also collateralized by: (i) the differential
 between the outstanding principal balance remaining due on the
underlying loans held by the Limited Partnerships and the balance
 due the respective 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 Limited Partnerships to the extent they
 are restricted as described below.

Pursuant to the terms of the respective trust
indenture that we have entered into with the noteholders and the
Limited Partnerships (the Trust Indenture) under
certain circumstances, the excess cash, after payment of the
required principal and interest to the respective partnership
noteholders (the Excess Cash), must be retained in
the Reserve Account until the covenants are in compliance. Of the
 assets of the Limited Partnerships at December 31, 1999,
approximately $93,000 was Excess Cash which was distributed to us
 in January 2000.

We have established a fundamental policy that
requires investment of at least 25% of our total assets in the
lodging industry, and allows investment of up to 100% of our
total assets in this industry. At December 31, 1999 and
1998, loans to businesses in the lodging industry comprised 55%
and 61% of our total assets, respectively, and 86% and 85% of our
 loans receivable, net, respectively. Any economic factors that
negatively impact the lodging industry could have a material
adverse effect on our business. Additionally, at
December 31, 1999, loans to businesses located in Texas and
Georgia comprised approximately 27% and 13%, respectively, of our
 outstanding loan portfolio. A decline in economic conditions in
Texas or Georgia may have an adverse affect on us.

Our net income is affected by the spread between
the rate at which we borrow funds and the rate at which we loan
these funds. A significant portion of the portfolios of
PMC Capital, Western Financial and PMCIC have typically been
 long-term and at fixed rates of interest and the borrowed funds
of these companies are typically long-term and at fixed rates of
interest. PMCIC, Western Financial and PMC have also originated
variable-rate loans which were part of the structured
securitization and sale that was completed in November 1998 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 the loans we originated with funds
obtained from borrowings or the issuance of preferred stock fails
 to cover the cost of such funds, our cash flow will be reduced.
During periods of changing interest rates, interest rate
mismatches could negatively impact our net income, dividend yield
 and the market price of our Common Stock. Most of the fixed-rate
 loans that we have originated have prepayment penalties. If
interest rates decline, we may experience significant
prepayments. Such prepayments, as well as scheduled repayments,
are likely to be re-loaned or invested at lower rates, which may
have an adverse effect on our ability to maintain dividend
distributions at existing levels.

Note 9.  Cumulative Preferred Stock
of Consolidated Subsidiary:

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

PMCIC is entitled to redeem, in whole or in part,
the 3% Preferred Stock by paying 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, 1999, 1998 and 1997.

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PMC CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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 were recognized on the 4% Preferred
Stock during each of the years ended December 31, 1999, 1998
 and 1997, 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:

We have 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 optional cash portion of the plan was
suspended during April, 1998. In addition, since April 1998 we
have been using the open market to purchase shares with the
proceeds from the dividend reinvestment portion of the plan.
Accordingly, when we use the open market to purchase the shares
we do not issue new shares or receive the proceeds. As a result
we had no share issuances during the year ended December 31,
 1999. During the years ended December 31, 1998 and 1997, we
 issued 198,329 and 468,706, shares of common stock pursuant to
the Plan for proceeds (through cash and the reinvestment of
dividends) of approximately $2.8 million and
$6.4 million, respectively.

Note 11.  Borrower Advances:

We finance several projects during the
construction phase. At December 31, 1999 we were in the
process of funding approximately $27.3 million in
construction projects, of which $14.7 million has not been
funded. As part of the monitoring process to verify that the
borrowers cash equity is utilized for its intended purpose,
 we receive deposits from the borrowers and release the funds
upon presentation of appropriate supporting documentation. We had
 approximately $2.4 million and $1.6 million in funds
held on behalf of borrowers at December 31, 1999 and 1998,
respectively, which is included as a liability on the
accompanying consolidated balance sheets.

Note 12.  Realized and Unrealized
Gain (Loss) on Investments:

During the years ended December 31, 1999,
1998 and 1997 we recognized gains of $2.6 million,
$0.9 million and $2.4 million, respectively, from the
sale of loans through structured financings or securitizations.

In determining the gain on sale and fair value of
the interest-only strip receivable and servicing asset related to
 our securitization and sale transactions, we utilize certain
assumptions which include:

|                   |  |                             |  |                            
|------------------ |  | --------------------------- |  | ---------------------------
|                   |  | SBA 7(a)                    |  | Non-SBA 7(a)               
|                   |  | Transactions                |  | Transactions               
|                   |  |                             |  |                            
|Prepayment rate(a) |  | Minimum 22% CPR             |  | Minimum 8% CPR             
|                  
|                  
|                  
|                  
|                  
|Loss rate(b)       |  | Approximately 0.5% per anum |  | Approximately 0.5% per anum
|                  
|                  
|                  
|                  
|                  
|Discount rate(c)   |  | 14.4%                       |  | 14.4%                      

(a) The prepayment rate is based on current
performance of the respective loan pools, adjusted for
anticipated principal payments considering the current loan pools
 and similar loans.

(b) Credit exposure exists to the extent of
possible default on the underlying collateral requiring payment
from anticipated future residual interests. We believe that a
0.5% loss rate covers this inherent risk.

(c)  The rate is as of December 31, 1999
 and is based upon our estimate of comparable rates of discount
which would be used by potential purchasers of similar assets.

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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Activity in our investments written-off and change
 in unrealized appreciation (depreciation) on investments is
 as follows:

|                                                                |  |                              |            |            |  |       |          |   |  |   |            |  
|--------------------------------------------------------------- |  | ---------------------------- | ---------- | ---------- |  | ----- | -------- | - |  | - | ---------- | -
|                                                                |  |                             
|                                                                |  | Year Ended December 31, 1999
|                                                                |  |                             
|                                                                |  | Interest-Only                |            |           
|                                                                |  | Strip                        |            | Loans      |  |      
|                                                                |  | Receivables                  |            | Receivable |  | Total
|                                                                |  |                              |            |            |  |      
|Investments written-off                                         |  | $                            | (1,270,000 | )          |  | $     | (535,000 | ) |  | $ | (1,805,000 | )
|                                                               
|Change in unrealized appreciation (depreciation) on investments |  |                              | 770,000    |            |  |       | 404,000  |   |  |   | 1,174,000  |  
|                                                                |  |                              |            |            |  |       |          |   |  |   |            |  
|Total realized and unrealized gain (loss) on investments        |  | $                            | (500,000   | )          |  | $     | (131,000 | ) |  | $ | (631,000   | )
|                                                                |  |                              |            |            |  |       |          |   |  |   |            |  

|                                                                |  |                              |         |            |  |       |          |   |  |   |          |  
|--------------------------------------------------------------- |  | ---------------------------- | ------- | ---------- |  | ----- | -------- | - |  | - | -------- | -
|                                                                |  |                             
|                                                                |  | Year Ended December 31, 1998
|                                                                |  |                             
|                                                                |  | Interest-Only                |         |           
|                                                                |  | Strip                        |         | Loans      |  |      
|                                                                |  | Receivables                  |         | Receivable |  | Total
|                                                                |  |                              |         |            |  |      
|Investments written-off                                         |  | $                            | -       |            |  | $     | (219,000 | ) |  | $ | (219,000 | )
|                                                               
|Change in unrealized appreciation (depreciation) on investments |  |                              | 120,000 |            |  |       | (100,000 | ) |  |   | 20,000   |  
|                                                                |  |                              |         |            |  |       |          |   |  |   |          |  
|Total realized and unrealized gain (loss) on investments        |  | $                            | 120,000 |            |  | $     | (319,000 | ) |  | $ | (199,000 | )
|                                                                |  |                              |         |            |  |       |          |   |  |   |          |  

|                                                                |  |                              |          |            |  |       |          |   |  |   |          |  
|--------------------------------------------------------------- |  | ---------------------------- | -------- | ---------- |  | ----- | -------- | - |  | - | -------- | -
|                                                                |  |                             
|                                                                |  | Year Ended December 31, 1997
|                                                                |  |                             
|                                                                |  | Interest-Only                |          |           
|                                                                |  | Strip                        |          | Loans      |  |      
|                                                                |  | Receivables                  |          | Receivable |  | Total
|                                                                |  |                              |          |            |  |      
|Investments written-off                                         |  | $                            | -        |            |  | $     | (183,000 | ) |  | $ | (183,000 | )
|                                                               
|Change in unrealized appreciation (depreciation) on investments |  |                              | (300,000 | )          |  |       | (59,000  | ) |  |   | (359,000 | )
|                                                                |  |                              |          |            |  |       |          |   |  |   |          |  
|Total realized and unrealized gain (loss) on investments        |  | $                            | (300,000 | )          |  | $     | (242,000 | ) |  | $ | (542,000 | )
|                                                                |  |                              |          |            |  |       |          |   |  |   |          |  

Note 13.  Earnings Per Common Share
Computations:

The computations of basic earnings per common
share are based on the weighted average number of our shares
outstanding. The weighted average number of shares used in the
computations of basic earnings per common share was 11,829,000,
11,800,000 and 11,411,000 for the years ended December 31,
1999, 1998 and 1997, respectively. For the purposes of
determining the diluted earnings per share, the weighted average
shares outstanding were 11,831,000 and was increased by the
effect of stock options during the year ended December 31,
1999. There was no change in the weighted average shares
outstanding for the effect of stock

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PMC CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


options during the year ended December 31,
1998 since the stock options were anti-dilutive. Prior to 1998,
we did not have a stock option plan. 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 PMCIC. Preferred stock dividend requirements were
 approximately $250,000 during each of the years ended
December 31, 1999, 1998 and 1997.

Note 13.  Profit Sharing Plan:

We have a profit sharing plan available to our
full-time employees after one year of employment. Vesting
increases ratably to 100% after the sixth year of employment.
Pursuant to our profit sharing plan, $243,000 has been expensed
during each of the years ended December 31, 1999, 1998 and
1997, respectively. Contributions to the profit sharing plan are
at the discretion of our Board of Directors.

Note 14.  Related Party Transactions:

Pursuant to SBA rules and regulations,
distributions from our wholly-owned regulated investment company
subsidiaries are limited. As of December 31, 1999 and 1998,
the amounts of dividends available for distribution were
approximately $2.0 million and $1.9 million,
respectively. See the accompanying consolidating financial
statements.

Pursuant to the investment management agreements
entered into between PMC Commercial and PMC Advisers, fees of
between 0.40% and 1.67%, annually, are charged by PMC Advisers
based upon the average principal outstanding of PMC
Commercials loans. In addition, the investment management
agreement was amended to include compensation to PMC Advisers for
 its assistance in the issuance of PMC Commercials debt and
 equity securities. During 1998, a second investment management
agreement was entered into which provides a fee to be paid to PMC
 Advisers for providing services relating to the supervision of
leases entered into by PMC Commercial and charged a fee relating
to the acquisition by PMC Commercial of limited service
hospitality properties. Fees for the three years in the period
ended December 31, 1999 were as follows:

|                                   |  |                          |       |      |  |      |       |  |  |   |       | 
|---------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                   |  |                         
|                                   |  | Years Ended December 31,
|                                   |  |                         
|Type of Fee                        |  | 1999                     |       | 1998 |  | 1997
|                                   |  |                          |       |      |  |     
|                                   |  | (In thousands)          
|Loan servicing and origination fee |  | $                        | 1,726 |      |  | $    | 1,789 |  |  | $ | 1,662 | 
|Lease supervision                  |  |                          | 482   |      |  |      | 218   |  |  |   | -     | 
|Structured financing               |  |                          | -     |      |  |      | 167   |  |  |   | -     | 
|Property acquisition               |  |                          | 81    |      |  |      | 466   |  |  |   | -     | 
|                                   |  |                          |       |      |  |      |       |  |  |   |       | 
|                                   |  | $                        | 2,289 |      |  | $    | 2,640 |  |  | $ | 1,662 | 
|                                   |  |                          |       |      |  |      |       |  |  |   |       | 

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PMC CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 15.  Investment in
Unconsolidated Entities:

As described in Note 1, the consolidated
financial statements include the accounts of PMC Capital and its
wholly owned regulated investment company subsidiaries. The
accounts of PMC Advisers, PMC Funding Corp., the 1996 Partnership
 and the 1998 Partnership (the Unconsolidated
Entities) are accounted for by the equity method of
accounting in conformity with Federal securities law.

PMC Advisers.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,
1999, 1998 and 1997, was $1,747,000, $2,470,000 and $1,603,000,
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.

PMC Funding Corp.PMC Funding Corporation is a corporation that holds assets
 on our behalf. PMC Funding Corp. owns a 99% limited partnership
interest in Asset Investments Series A, L.L.C. The
accounts of Asset Investments Series A, L.L.C., have
been consolidated with PMC Funding Corp.

PMC Capital Limited Partnership.
On November 13, 1996, the 1996
Partnership (a newly formed special purpose affiliate of PMC
Capital) completed a private placement of approximately
$40.7 million of its Loan-Backed Fixed Rate Notes,
Series 1996-A (the 1996 Notes). The
1996 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 1996
Partnership. In connection with this private placement, the 1996
Notes were given a rating of Aa2 by Moodys
Investors Service.

PMC Capital L.P. 1998-1.
On November 24, 1998, the 1998
Partnership (a special purpose affiliate of PMC Capital)
completed a private placement of approximately $39.6 million
 of its Loan-Backed Variable Rate Notes, Series 1998-1 (the
1998 Notes). The 1998 Notes, issued at par, which
have a stated maturity in 2021 and bear interest at the prime
rate as published in the Wall Street Journal (adjusted quarterly)
 less 1%, are collateralized by loans contributed by PMC Capital
to the 1998 Partnership. In connection with this private
placement, the Notes were given a rating of Aaa by
Moodys Investors Service.

PMC Capital L.P. 1999-1.
On June 3, 1999, the 1999 Partnership
(a newly formed special purpose affiliate of PMC Capital)
completed a private placement of approximately $55.6 million
 of its Loan-Backed Fixed Rate Notes, Series 1999-1 (the
1999 Notes).The 1999 Notes, issued at par, which have
 a stated maturity in 2024, bear interest at 6.6% and are
collateralized by loans contributed by PMC Capital to the 1999
Partnership. In connection with this private placement, the Notes
 were given a rating of Aaa by Moodys Investors
 Service.

The terms of the 1996 Notes, 1998 Notes and 1999
Notes provide that the partners of the respective Limited
Partnerships are not liable for any payment on the respective
notes. Accordingly, the Limited Partnerships have the exclusive
obligation for the repayment of the respective notes, and the
holders of the respective notes have no recourse to PMC Capital
or its other subsidiaries or their assets in the event of
nonpayment of the underlying loans. The net proceeds from the
issuance of the respective notes have been distributed to PMC
Capital. The net effect of the contributed loans less the
distributed funds comprises the limited partners capital on the
condensed combining balance sheet. PMC Capital either directly or
 indirectly owns 100% of the Limited Partnerships.

F-27



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The following are condensed combined financial
statements of the Unconsolidated Entities as of December 31,
 1999 and 1998 and for the three years in the period ended
December 31, 1999:

CONDENSED COMBINED BALANCE SHEETS

(In thousands)


|                             |                                                |              |         |         |         |   |        |        |        | 
|---------------------------- | ---------------------------------------------- | ------------ | ------- | ------- | ------- | - | ------ | ------ | ------ | 
|                             |                                                |             
|                             |                                                | December 31,
|                             |                                                |             
|                             |                                                | 1999         |         | 1998   
|                             |                                                |              |         |        
|                            
|                            
|                            
|                            
|Assets                      
|                            
|                            
|                            
|                            
|Investments at value:        |                                                |              |         |         |         |   |        |       
|                             | Loans receivable, net                          |              | $       | 111,184 |         |   | $      | 61,768 |       
|                             | Cash equivalents                               |              |         | 33      |         |   |        | 64     |       
|                             | Restricted investments and real property owned |              |         | 9,443   |         |   |        | 9,096  |       
|                             |                                                |              |         |         |         |   |        |       
|                             |                                                |              | 120,660 |         |         |   | 70,928 |       
|                             | Other assets                                   |              |         | 856     |         |   |        | 1,673  |       
|                             |                                                |              |         |         |         |   |        |       
|                             |                                                | Total assets |         | $       | 121,516 |   |        | $      | 72,601 | 
|                             |                                                |              |         |         |         |   |        |       
|                            
|Liabilities and Equity      
|                            
|                            
|                            
|                            
|Liabilities:                 |                                                |              |         |         |         |   |        |       
|                             | Notes payable                                  |              | $       | 99,767  |         |   | $      | 57,053 |       
|                             | Other liabilities                              |              |         | 1,711   |         |   |        | 2,618  |       
|                             |                                                |              |         |         |         |   |        |       
|                             |                                                |              | 101,478 |         |         |   | 59,671 |       
|                             |                                                |              |         |         |         |   |        |       
|                            
|Equity:                      |                                                |              |         |         |         |   |        |       
|                             | Common Stock and additional paid-in capital    |              |         | 501     |         |   |        | 501    |       
|                             | Partners Capital                              |              |         | 20,128  |         |   |        | 12,765 |       
|                             | Accumulated deficit                            |              |         | (591    | )       |   |        | (336   | )     
|                             |                                                |              |         |         |         |   |        |       
|                             |                                                |              | 20,038  |         |         |   | 12,930 |       
|                             |                                                |              |         |         |         |   |        |       
|Total liabilities and equity |                                                | $            | 121,516 |         |         | $ | 72,601 |       
|                             |                                                |              |         |         |         |   |        |       

CONDENSED COMBINED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 1999,
1998 AND 1997


(In thousands)


|           |                                                                                                                                                      |                     |       |        |       |      |       |       |       |   |       |       |       | 
|---------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | ----- | ------ | ----- | ---- | ----- | ----- | ----- | - | ----- | ----- | ----- | 
|           |                                                                                                                                                      |                    
|           |                                                                                                                                                      | For the Years Ended
|           |                                                                                                                                                      | December 31,       
|           |                                                                                                                                                      |                    
|           |                                                                                                                                                      | 1999                |       | 1998   |       | 1997
|           |                                                                                                                                                      |                     |       |        |       |     
|Income:    |                                                                                                                                                      |                     |       |        |       |      |       |       |       |   |       |      
|           | Investment income                                                                                                                                    |                     | $     | 9,619  |       |      | $     | 4,536 |       |   | $     | 5,021 |      
|           | Other income, net                                                                                                                                    |                     |       | 2,539  |       |      |       | 1,677 |       |   |       | 1,716 |      
|           |                                                                                                                                                      |                     |       |        |       |      |       |       |       |   |       |      
|           | Total income                                                                                                                                         |                     |       | 12,158 |       |      |       | 6,213 |       |   |       | 6,737 |      
|           |                                                                                                                                                      |                     |       |        |       |      |       |       |       |   |       |      
|Expenses:  |                                                                                                                                                      |                     |       |        |       |      |       |       |       |   |       |      
|           | Interest                                                                                                                                             |                     |       | 5,545  |       |      |       | 1,833 |       |   |       | 2,287 |      
|           | General and administrative expenses                                                                                                                  |                     |       | 2,178  |       |      |       | 1,756 |       |   |       | 1,890 |      
|           | Provision for loan losses                                                                                                                            |                     |       | 123    |       |      |       | -     |       |   |       | -     |      
|           |                                                                                                                                                      |                     |       |        |       |      |       |       |       |   |       |      
|           |                                                                                                                                                      | Total expense       |       |        | 7,846 |      |       |       | 3,589 |   |       |       | 4,177 | 
|           |                                                                                                                                                      |                     |       |        |       |      |       |       |       |   |       |      
|Net income |                                                                                                                                                      |                     | 4,312 |        |       |      | 2,624 |       |       |   | 2,560 |      
|           | Less: elimination of the net cash flow and unrealized gain (loss)
	 on investments relating to the interest-only strip receivable,
	in consolidation |                     |       | (1,217 | )     |      |       | -     |       |   |       | -     |      
|           |                                                                                                                                                      |                     |       |        |       |      |       |       |       |   |       |      
|           |                                                                                                                                                      | $                   | 3,095 |        |       | $    | 2,624 |       |       | $ | 2,560 |      
|           |                                                                                                                                                      |                     |       |        |       |      |       |       |       |   |       |      

F-28



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 16.  Stock Based Compensation
Plan

During the years ended December 31, 1999,
1998 and 1997 we 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) that we sponsored. We apply
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 us would have changed the methods we apply in
recognizing the cost of the Plan. Adoption of the cost
recognition provisions of SFAS No. 123 is optional and we
decided not to elect these provisions of SFAS No. 123.
However, pro-forma disclosures as if we adopted the cost
recognition provisions of SFAS No. 123 are required by SFAS
No. 123 and are presented below.

Under the Plan, we are 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

We granted stock options during the years ended
December 31, 1999, 1998 and 1997 to certain employees and
directors. The stock options granted all have contractual terms
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 years ended December 31, 1999, 1998 and 1997 was from
$8.06 to $14.31. The options granted vest 100% on the first
anniversary of the date of grant.

|                                                               |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |        |  |  |   |       | 
|-------------------------------------------------------------- |  | ---------- | ------- | -------- |  | ---------- | ----- | -------- |  | ---------- | ------- | -------- |  | - | ----- |  |  | - | ------ |  |  | - | ----- | 
|                                                               |  |            |         |          |  |           
|                                                               |  | 1999       |         | 1998     |  | 1997      
|                                                               |  |            |         |          |  |           
|                                                               |  | Number of  |         | Weighted |  | Number of  |       | Weighted |  | Number of  |         | Weighted
|                                                               |  | Shares     |         | Average  |  | Shares     |       | Average  |  | Shares     |         | Average 
|                                                               |  | Underlying |         | Exercise |  | Underlying |       | Exercise |  | Underlying |         | Exercise
|                                                               |  | Options    |         | Prices   |  | Options    |       | Prices   |  | Options    |         | Prices  
|                                                               |  |            |         |          |  |            |       |          |  |            |         |         
|Outstanding at January 1                                       |  |            | 134,855 |          |  | $          | 14.18 |          |  |            | 86,755  |          |  | $ | 14.21 |  |  |   | -      |  |  |   | n/a   | 
|Granted                                                        |  |            | 65,000  |          |  | $          | 8.04  |          |  |            | 56,000  |          |  | $ | 14.07 |  |  |   | 86,755 |  |  | $ | 14.21 | 
|Exercised                                                      |  |            | -       |          |  |            | -     |          |  |            | -       |          |  |   | -     |  |  |   | -      |  |  |   | n/a   | 
|Forfeited                                                      |  |            | 800     |          |  | $          | 11.06 |          |  |            | 7,900   |          |  | $ | 14.13 |  |  |   | -      |  |  |   | n/a   | 
|Expired                                                        |  |            | 3,000   |          |  | $          | 14.13 |          |  |            | -       |          |  |   | -     |  |  |   | -      |  |  |   | n/a   | 
|                                                               |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |        |  |  |   |       | 
|Outstanding at December 31                                     |  |            | 196,055 |          |  | $          | 12.15 |          |  |            | 134,855 |          |  | $ | 14.18 |  |  |   | 86,755 |  |  | $ | 14.21 | 
|                                                               |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |        |  |  |   |       | 
|Exercisable at December 31                                     |  |            | 131,455 |          |  | $          | 14.16 |          |  |            | 86,455  |          |  | $ | 14.21 |  |  |   | -      |  |  |   | n/a   | 
|                                                               |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |        |  |  |   |       | 
|Weighted-average fair value of options granted during the year |  | $          | 0.35    |          |  |            |       |          |  | $          | 0.78    |          |  |   |       |  |  | $ | 0.54   |  |  |   |       | 
|                                                               |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |        |  |  |   |       | 

F-29



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The weighted-average remaining term of the options
 outstanding as of December 31, 1999 is 3.81 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 during the
years ended December 31, 1999, 1998 and 1997:

|                        |  |      |       |      |  |      |       |   |  |  |       |  
|----------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|Assumption              |  | 1999 |       | 1998 |  | 1997
|                        |  |      |       |      |  |     
|Expected Term (years)   |  |      | 3.0   |      |  |      | 3.0   |   |  |  | 3.0   |  
|Risk-Free Interest Rate |  |      | 5.81  | %    |  |      | 5.55  | % |  |  | 6.17  | %
|Expected Dividend Yield |  |      | 12.43 | %    |  |      | 8.80  | % |  |  | 8.77  | %
|Expected Volatility     |  |      | 18.36 | %    |  |      | 15.63 | % |  |  | 11.41 | %

Pro-Forma Net Income and Earnings Per Common
 Share

Had the compensation cost for our stock-based
compensation plans been determined consistent with SFAS
No. 123, our net income and earnings per common share for
the years ended December 31, 1999, 1998 and 1997 would
approximate the pro forma amounts below (in thousands, except per
 share data):

|                                            |  |                   |        |                   |  |                   |        |       |  |          |        |       |  |   |        |  |  |   |        |  |  |   |        | 
|------------------------------------------- |  | ----------------- | ------ | ----------------- |  | ----------------- | ------ | ----- |  | -------- | ------ | ----- |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                            |  |                   |        |                   |  |                  
|                                            |  | December 31, 1999 |        | December 31, 1998 |  | December 31, 1997
|                                            |  |                   |        |                   |  |                  
|                                            |  | As                |        | Pro               |  | As                |        | Pro   |  | As       |        | Pro  
|                                            |  | Reported          |        | Forma             |  | Reported          |        | Forma |  | Reported |        | Forma
|                                            |  |                   |        |                   |  |                   |        |       |  |          |        |      
|SFAS No. 123 Charge                         |  | $                 | -      |                   |  | $                 | 28     |       |  | $        | -      |       |  | $ | 44     |  |  | $ | -      |  |  | $ | 25     | 
|APB 25 Charge                               |  | $                 | -      |                   |  | $                 | -      |       |  | $        | -      |       |  | $ | -      |  |  | $ | -      |  |  | $ | -      | 
|Net Income                                  |  | $                 | 13,420 |                   |  | $                 | 13,392 |       |  | $        | 13,949 |       |  | $ | 13,905 |  |  | $ | 15,622 |  |  | $ | 15,597 | 
|Basic and Diluted Earnings Per Common Share |  | $                 | 1.11   |                   |  | $                 | 1.11   |       |  | $        | 1.16   |       |  | $ | 1.16   |  |  | $ | 1.35   |  |  | $ | 1.35   | 

The following table summarizes information about
stock options outstanding at December 31, 1999:

|                     |  |                     |         |                     |  |           |       |              |  |          |      |  |  |  |         |  |  |   |       | 
|-------------------- |  | ------------------- | ------- | ------------------- |  | --------- | ----- | ------------ |  | -------- | ---- |  |  |  | ------- |  |  | - | ----- | 
|                     |  |                     |         |                    
|                     |  | Options Outstanding |         | Options Exercisable
|                     |  |                     |         |                    
|                     |  | Number              |         |                     |  | Weighted  |       | Number       |  |         
|                     |  | Outstanding         |         | Weighted            |  | Average   |       | Exercisable  |  | Weighted
|                     |  | at                  |         | Average             |  | Remaining |       | at           |  | Average 
|Range of             |  | December 31,        |         | Exercise            |  | Contract  |       | December 31, |  | Exercise
|Exercise prices      |  | 1999                |         | Price               |  | Life      |       | 1999         |  | Price   
|                     |  |                     |         |                     |  |           |       |              |  |         
|$7.8125 to $8.0625   |  |                     | 64,600  |                     |  | $         | 8.05  |              |  | $        | 4.45 |  |  |  | -       |  |  |   | n/a   | 
|$14.0625 to $14.3125 |  |                     | 131,455 |                     |  | $         | 14.16 |              |  | $        | 2.81 |  |  |  | 131,455 |  |  | $ | 14.16 | 
|                     |  |                     |         |                     |  |           |       |              |  |          |      |  |  |  |         |  |  |   |       | 
|$7.8125 to $14.3125  |  |                     | 196,055 |                     |  | $         | 12.16 |              |  | $        | 3.35 |  |  |  | 131,455 |  |  | $ | 14.16 | 
|                     |  |                     |         |                     |  |           |       |              |  |          |      |  |  |  |         |  |  |   |       | 

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

F-30



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##### Table of Contents






Report of Independent Accountants

on Consolidating Financial Statements


To the Shareholders and Board of Directors

PMC Capital, Inc.:


The report on our audit of the consolidated
financial statements of PMC Capital, Inc. and its subsidiaries as
 of December 31, 1999 and for the year then ended appears on
 page F-4 of this Form 10-K. That audit was conducted
for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The consolidating balance
sheet and related consolidating statements of income, cash flows
and shareholders equity is presented for purposes of
additional analysis and is not a required part of the
consolidated financial statements. Such 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 to the consolidated financial
statements taken as a whole.



| |                           
| | --------------------------
| | PricewaterhouseCoopers LLP

February 25, 2000

Dallas, Texas


F-31



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES




CONSOLIDATING BALANCE SHEET


DECEMBER 31, 1999


|                                                 |                                                           |              |         |             |  |              |         |         |   |   |         |         |  
|------------------------------------------------ | --------------------------------------------------------- | ------------ | ------- | ----------- |  | ------------ | ------- | ------- | - | - | ------- | ------- | -
|                                                 |                                                           |              |         |             |  | CONSOLIDATED
|                                                 |                                                           |              |         |             |  | BEFORE      
|                                                 |                                                           | CONSOLIDATED |         | ELIMINATION |  | ELIMINATION 
|                                                 |                                                           |              |         |             |  |             
|                                                
|                                                
|                                                
|                                                
|ASSETS                                          
|                                                
|                                                
|                                                
|                                                
|                                                
|Investments at value, see accompanying schedule: |                                                           |              |         |             |  |              |         |         |   |   |         |        
|                                                 | Loans receivable, net                                     |              | $       | 106,325     |  |              | $       | -       |   |   | $       | 106,325 |  
|                                                 | Cash equivalents                                          |              |         | 22,980      |  |              |         | -       |   |   |         | 22,980  |  
|                                                 | Investment in subsidiaries                                |              |         | 20,038      |  |              |         | (23,411 | ) |   |         | 43,449  |  
|                                                 | Interest only strip receivable                            |              |         | 5,820       |  |              |         | -       |   |   |         | 5,820   |  
|                                                 | Restricted investments                                    |              |         | 2,502       |  |              |         | -       |   |   |         | 2,502   |  
|                                                 | Mortgage-backed security of affiliate                     |              |         | 2,007       |  |              |         | -       |   |   |         | 2,007   |  
|                                                 | Real property owned                                       |              |         | 65          |  |              |         | -       |   |   |         | 65      |  
|                                                 |                                                           |              |         |             |  |              |         |         |   |   |         |        
|Total investments                                |                                                           |              | 159,737 |             |  |              | (23,411 | )       |   |   | 183,148 |        
|                                                 |                                                           |              |         |             |  |              |         |         |   |   |         |        
|Other assets:                                    |                                                           |              |         |             |  |              |         |         |   |   |         |        
|                                                 | Receivable for loans sold                                 |              |         | 113         |  |              |         | -       |   |   |         | 113     |  
|                                                 | Due from unconsolidated subsidiaries                      |              |         | 2,277       |  |              |         | (21,185 | ) |   |         | 23,462  |  
|                                                 | Servicing asset                                           |              |         | 1,179       |  |              |         | -       |   |   |         | 1,179   |  
|                                                 | Deferred charges, deposits and other assets               |              |         | 932         |  |              |         | -       |   |   |         | 932     |  
|                                                 | Accrued interest receivable                               |              |         | 534         |  |              |         | -       |   |   |         | 534     |  
|                                                 | Cash                                                      |              |         | 213         |  |              |         | -       |   |   |         | 213     |  
|                                                 | Property and equipment, net                               |              |         | 206         |  |              |         | -       |   |   |         | 206     |  
|                                                 |                                                           |              |         |             |  |              |         |         |   |   |         |        
|Total other assets                               |                                                           |              | 5,454   |             |  |              | (21,185 | )       |   |   | 26,639  |        
|                                                 |                                                           |              |         |             |  |              |         |         |   |   |         |        
|Total assets                                     |                                                           | $            | 165,191 |             |  | $            | (44,596 | )       |   | $ | 209,787 |        
|                                                 |                                                           |              |         |             |  |              |         |         |   |   |         |        
|                                                
|LIABILITIES AND SHAREHOLDERS EQUITY            
|                                                
|                                                
|                                                
|                                                
|                                                
|Liabilities:                                     |                                                           |              |         |             |  |              |         |         |   |   |         |        
|                                                 | SBA debentures payable                                    |              | $       | 35,640      |  |              | $       | -       |   |   | $       | 35,640  |  
|                                                 | Notes payable                                             |              |         | 38,333      |  |              |         | -       |   |   |         | 38,333  |  
|                                                 | Accounts payable                                          |              |         | 1,940       |  |              |         | -       |   |   |         | 1,940   |  
|                                                 | Dividends payable                                         |              |         | 3,198       |  |              |         | -       |   |   |         | 3,198   |  
|                                                 | Borrower advances                                         |              |         | 2,415       |  |              |         | -       |   |   |         | 2,415   |  
|                                                 | Accrued interest payable                                  |              |         | 1,249       |  |              |         | -       |   |   |         | 1,249   |  
|                                                 | Due to unconsolidated subsidiaries                        |              |         | 628         |  |              |         | (21,185 | ) |   |         | 21,813  |  
|                                                 | Deferred fee revenue                                      |              |         | 370         |  |              |         | -       |   |   |         | 370     |  
|                                                 | Other liabilities                                         |              |         | 1,104       |  |              |         | -       |   |   |         | 1,104   |  
|                                                 |                                                           |              |         |             |  |              |         |         |   |   |         |        
|Total liabilities                                |                                                           |              | 84,877  |             |  |              | (21,185 | )       |   |   | 106,062 |        
|                                                 |                                                           |              |         |             |  |              |         |         |   |   |         |        
|Cumulative preferred stock of subsidiary         |                                                           |              | 7,000   |             |  |              | 3,000   |         |   |   | 4,000   |        
|                                                 |                                                           |              |         |             |  |              |         |         |   |   |         |        
|Shareholders Equity:                            |                                                           |              |         |             |  |              |         |         |   |   |         |        
|                                                 | Cumulative preferred stock of
	subsidiary, 3%             |              |         | -           |  |              |         | (3,000  | ) |   |         | 3,000   |  
|                                                 | Common stock                                              |              |         | 118         |  |              |         | (22     | ) |   |         | 140     |  
|                                                 | Additional paid-in capital                                |              |         | 71,312      |  |              |         | (22,373 | ) |   |         | 93,685  |  
|                                                 | Undistributed net operating income                        |              |         | 1,484       |  |              |         | (2,016  | ) |   |         | 3,500   |  
|                                                 | Net unrealized appreciation (depreciation) on investments |              |         | 400         |  |              |         | -       |   |   |         | 400     |  
|                                                 |                                                           |              |         |             |  |              |         |         |   |   |         |        
|                                                 |                                                           |              | 73,314  |             |  |              | (27,411 | )       |   |   | 100,725 |        
|                                                 | Less treasury stock                                       |              |         | -           |  |              |         | 1,000   |   |   |         | (1,000  | )
|                                                 |                                                           |              |         |             |  |              |         |         |   |   |         |        
|Total shareholders equity                       |                                                           |              | 73,314  |             |  |              | (26,411 | )       |   |   | 99,725  |        
|                                                 |                                                           |              |         |             |  |              |         |         |   |   |         |        
|Total liabilities and shareholders equity       |                                                           | $            | 165,191 |             |  | $            | (44,596 | )       |   | $ | 209,787 |        
|                                                 |                                                           |              |         |             |  |              |         |         |   |   |         |        
|Net asset value per common share                 |                                                           | $            | 6.20    |             |  |              |         |         |   |   |         |        
|                                                 |                                                           |              |         |             |  |              |         |         |   |   |         |        

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                 |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |        |  
|------------------------------------------------ | --------------------------------------------------------- | ------------ | ------- | ------------- |  | ----------- | ------ | ----------- | - | - | ------ | ------ | - | - | ------ | ------ | -
|                                                 |                                                           |              |         | FIRST         |  | WESTERN     |        |            
|                                                 |                                                           |              |         | WESTERN SBLC, |  | FINANCIAL   |        | PMC        
|                                                 |                                                           | PMC CAPITAL, |         | INC. AND      |  | CAPITAL     |        | INVESTMENT 
|                                                 |                                                           | INC.         |         | SUBSIDIARIES  |  | CORPORATION |        | CORPORATION
|                                                 |                                                           |              |         |               |  |             |        |            
|                                                
|                                                
|                                                
|                                                
|ASSETS                                           |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       
|                                                
|                                                
|                                                
|                                                
|Investments at value, see accompanying schedule: |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       
|                                                 | Loans receivable, net                                     |              | $       | 41,035        |  |             | $      | 16,905      |   |   | $      | 11,227 |   |   | $      | 37,158 |  
|                                                 | Cash equivalents                                          |              |         | 3,677         |  |             |        | 2,285       |   |   |        | 10,112 |   |   |        | 6,906  |  
|                                                 | Investment in subsidiaries                                |              |         | 43,449        |  |             |        | -           |   |   |        | -      |   |   |        | -      |  
|                                                 | Interest only strip receivable                            |              |         | 3,839         |  |             |        | 1,981       |   |   |        | -      |   |   |        | -      |  
|                                                 | Restricted investments                                    |              |         | -             |  |             |        | 2,502       |   |   |        | -      |   |   |        | -      |  
|                                                 | Mortgage-backed security of affiliate                     |              |         | 2,007         |  |             |        | -           |   |   |        | -      |   |   |        | -      |  
|                                                 | Real property owned                                       |              |         | -             |  |             |        | 27          |   |   |        | -      |   |   |        | 38     |  
|                                                 |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       
|Total investments                                |                                                           |              | 94,007  |               |  |             | 23,700 |             |   |   | 21,339 |        |   |   | 44,102 |       
|                                                 |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       
|Other assets:                                    |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       
|                                                 | Receivable for loans sold                                 |              |         | 7             |  |             |        | 106         |   |   |        | -      |   |   |        | -      |  
|                                                 | Due from unconsolidated subsidiaries                      |              |         | 23,416        |  |             |        | 11          |   |   |        | 9      |   |   |        | 26     |  
|                                                 | Servicing asset                                           |              |         | -             |  |             |        | 1,179       |   |   |        | -      |   |   |        | -      |  
|                                                 | Deferred charges, deposits and other assets               |              |         | 234           |  |             |        | 242         |   |   |        | 155    |   |   |        | 301    |  
|                                                 | Accrued interest receivable                               |              |         | 212           |  |             |        | 74          |   |   |        | 69     |   |   |        | 179    |  
|                                                 | Cash                                                      |              |         | 86            |  |             |        | 80          |   |   |        | 13     |   |   |        | 34     |  
|                                                 | Property and equipment, net                               |              |         | 206           |  |             |        | -           |   |   |        | -      |   |   |        | -      |  
|                                                 |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       
|Total other assets                               |                                                           |              | 24,161  |               |  |             | 1,692  |             |   |   | 246    |        |   |   | 540    |       
|                                                 |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       
|Total assets                                     |                                                           | $            | 118,168 |               |  | $           | 25,392 |             |   | $ | 21,585 |        |   | $ | 44,642 |       
|                                                 |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       
|                                                
|                                                
|                                                
|                                                
|LIABILITIES AND SHAREHOLDERS EQUITY             |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       
|                                                
|                                                
|                                                
|                                                
|Liabilities:                                     |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       
|                                                 | SBA debentures payable                                    |              | $       | -             |  |             | $      | -           |   |   | $      | 12,640 |   |   | $      | 23,000 |  
|                                                 | Notes payable                                             |              |         | 38,333        |  |             |        | -           |   |   |        | -      |   |   |        | -      |  
|                                                 | Accounts payable                                          |              |         | 104           |  |             |        | 1,819       |   |   |        | 16     |   |   |        | 1      |  
|                                                 | Dividends payable                                         |              |         | 3,135         |  |             |        | -           |   |   |        | -      |   |   |        | 63     |  
|                                                 | Borrower advances                                         |              |         | 1,019         |  |             |        | 680         |   |   |        | 107    |   |   |        | 609    |  
|                                                 | Accrued interest payable                                  |              |         | 496           |  |             |        | 20          |   |   |        | 342    |   |   |        | 391    |  
|                                                 | Due to unconsolidated subsidiaries                        |              |         | 628           |  |             |        | 20,335      |   |   |        | 200    |   |   |        | 650    |  
|                                                 | Deferred fee revenue                                      |              |         | 228           |  |             |        | 7           |   |   |        | 54     |   |   |        | 81     |  
|                                                 | Other liabilities                                         |              |         | 911           |  |             |        | 143         |   |   |        | 22     |   |   |        | 28     |  
|                                                 |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       
|Total liabilities                                |                                                           |              | 44,854  |               |  |             | 23,004 |             |   |   | 13,381 |        |   |   | 24,823 |       
|                                                 |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       
|Cumulative preferred stock of subsidiary         |                                                           |              | -       |               |  |             | -      |             |   |   | -      |        |   |   | 4,000  |       
|                                                 |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       
|Shareholders Equity:                            |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       
|                                                 | Cumulative preferred stock of
	subsidiary, 3%             |              |         | -             |  |             |        | -           |   |   |        | -      |   |   |        | 3,000  |  
|                                                 | Common stock                                              |              |         | 118           |  |             |        | -           |   |   |        | 21     |   |   |        | 1      |  
|                                                 | Additional paid-in capital                                |              |         | 71,312        |  |             |        | 2,000       |   |   |        | 7,934  |   |   |        | 12,439 |  
|                                                 | Undistributed net operating income                        |              |         | 1,674         |  |             |        | 1,125       |   |   |        | 269    |   |   |        | 432    |  
|                                                 | Net unrealized appreciation (depreciation) on investments |              |         | 210           |  |             |        | 263         |   |   |        | (20    | ) |   |        | (53    | )
|                                                 |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       
|                                                 |                                                           |              | 73,314  |               |  |             | 3,388  |             |   |   | 8,204  |        |   |   | 15,819 |       
|                                                 | Less treasury stock                                       |              |         | -             |  |             |        | (1,000      | ) |   |        | -      |   |   |        | -      |  
|                                                 |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       
|Total shareholders equity                       |                                                           |              | 73,314  |               |  |             | 2,388  |             |   |   | 8,204  |        |   |   | 15,819 |       
|                                                 |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       
|Total liabilities and shareholders equity       |                                                           | $            | 118,168 |               |  | $           | 25,392 |             |   | $ | 21,585 |        |   | $ | 44,642 |       
|                                                 |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       
|Net asset value per common share                 |                                                           |              |         |               |  |             |        |             |   |   |        |        |   |   |        |       

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

F-32



---



##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES




CONSOLIDATING STATEMENT OF INCOME


FOR THE YEAR ENDED DECEMBER 31, 1999


|                                                                             |                                                                  |              |        |             |   |              |        |   |  |   |        |        |  
|---------------------------------------------------------------------------- | ---------------------------------------------------------------- | ------------ | ------ | ----------- | - | ------------ | ------ | - |  | - | ------ | ------ | -
|                                                                             |                                                                  |              |        |             |   | CONSOLIDATED
|                                                                             |                                                                  |              |        |             |   | BEFORE      
|                                                                             |                                                                  | CONSOLIDATED |        | ELIMINATION |   | ELIMINATION 
|                                                                             |                                                                  |              |        |             |   |             
|Investment income:                                                           |                                                                  |              |        |             |   |              |        |   |  |   |        |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Interest                                                         |              | $      | 15,279      |   |              | $      | - |  |   | $      | 15,279 |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Premium income                                                   |              |        | 1,090       |   |              |        | - |  |   |        | 1,090  |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Other investment income, net                                     |              |        | 843         |   |              |        | - |  |   |        | 843    |  
|                                                                             |                                                                  |              |        |             |   |              |        |   |  |   |        |       
|Total investment income                                                      |                                                                  |              | 17,212 |             |   |              | -      |   |  |   | 17,212 |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Other income, net                                                            |                                                                  |              | 2,320  |             |   |              | -      |   |  |   | 2,320  |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Equity in income (loss) of subsidiaries                                      |                                                                  |              | 3,095  |             |   |              | (7,870 | ) |  |   | 10,965 |       
|                                                                             |                                                                  |              |        |             |   |              |        |   |  |   |        |       
|Total income                                                                 |                                                                  |              | 22,627 |             |   |              | (7,870 | ) |  |   | 30,497 |       
|                                                                             |                                                                  |              |        |             |   |              |        |   |  |   |        |       
|Expense:                                                                     |                                                                  |              |        |             |   |              |        |   |  |   |        |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Interest                                                         |              |        | 5,313       |   |              |        | - |  |   |        | 5,313  |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Salaries and related benefits                                    |              |        | 4,049       |   |              |        | - |  |   |        | 4,049  |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | General and administrative                                       |              |        | 860         |   |              |        | - |  |   |        | 860    |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Rent                                                             |              |        | 286         |   |              |        | - |  |   |        | 286    |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Profit sharing plan                                              |              |        | 243         |   |              |        | - |  |   |        | 243    |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Legal and Accounting                                             |              |        | 235         |   |              |        | - |  |   |        | 235    |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Small Business Administration fees                               |              |        | 86          |   |              |        | - |  |   |        | 86     |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Directors and shareholders expense                               |              |        | 68          |   |              |        | - |  |   |        | 68     |  
|                                                                             |                                                                  |              |        |             |   |              |        |   |  |   |        |       
|Total expense                                                                |                                                                  |              | 11,140 |             |   |              | -      |   |  |   | 11,140 |       
|                                                                             |                                                                  |              |        |             |   |              |        |   |  |   |        |       
|Net operating income                                                         |                                                                  |              | 11,487 |             |   |              | (7,870 | ) |  |   | 19,357 |       
|                                                                             |                                                                  |              |        |             |   |              |        |   |  |   |        |       
|Realized and unrealized gain (loss) on investments:                          |                                                                  |              |        |             |   |              |        |   |  |   |        |       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Investments written-off                                          |              |        | (1,805      | ) |              |        | - |  |   |        | (1,805 | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Sales                                                            |              |        | 2,564       |   |              |        | - |  |   |        | 2,564  |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Change in unrealized appreciation (depreciation) on
	investments |              |        | 1,174       |   |              |        | - |  |   |        | 1,174  |  
|                                                                             |                                                                  |              |        |             |   |              |        |   |  |   |        |       
|                                                                             |                                                                  |              | 1,933  |             |   |              | -      |   |  |   | 1,933  |       
|                                                                             |                                                                  |              |        |             |   |              |        |   |  |   |        |       
|Net operating income and realized and unrealized gain (loss) on
	investments |                                                                  | $            | 13,420 |             |   | $            | (7,870 | ) |  | $ | 21,290 |       
|                                                                             |                                                                  |              |        |             |   |              |        |   |  |   |        |       
|Preferred dividend                                                           |                                                                  | $            | 250    |             |   | $            | (250   | ) |  | $ | 500    |       
|                                                                             |                                                                  |              |        |             |   |              |        |   |  |   |        |       
|Basic and diluted earnings per share                                         |                                                                  | $            | 1.11   |             |   |              |        |   |  |   |        |       
|                                                                             |                                                                  |              |        |             |   |              |        |   |  |   |        |       

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                             |                                                                  |          |        |               |  |             |       |             |   |   |       |       |   |   |       |       |  
|---------------------------------------------------------------------------- | ---------------------------------------------------------------- | -------- | ------ | ------------- |  | ----------- | ----- | ----------- | - | - | ----- | ----- | - | - | ----- | ----- | -
|                                                                             |                                                                  |          |        | FIRST         |  | WESTERN     |       |            
|                                                                             |                                                                  | PMC      |        | WESTERN SBLC, |  | FINANCIAL   |       | PMC        
|                                                                             |                                                                  | CAPITAL, |        | INC. AND      |  | CAPITAL     |       | INVESTMENT 
|                                                                             |                                                                  | INC.     |        | SUBSIDIARY    |  | CORPORATION |       | CORPORATION
|                                                                             |                                                                  |          |        |               |  |             |       |            
|Investment income:                                                           |                                                                  |          |        |               |  |             |       |             |   |   |       |       |   |   |       |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Interest                                                         |          | $      | 5,408         |  |             | $     | 2,545       |   |   | $     | 2,233 |   |   | $     | 5,093 |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Premium income                                                   |          |        | 426           |  |             |       | 664         |   |   |       | -     |   |   |       | -     |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Other investment income, net                                     |          |        | 279           |  |             |       | 82          |   |   |       | 150   |   |   |       | 332   |  
|                                                                             |                                                                  |          |        |               |  |             |       |             |   |   |       |       |   |   |       |      
|Total investment income                                                      |                                                                  |          | 6,113  |               |  |             | 3,291 |             |   |   | 2,383 |       |   |   | 5,425 |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Other income, net                                                            |                                                                  |          | 1,938  |               |  |             | 241   |             |   |   | 60    |       |   |   | 81    |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Equity in income (loss) of subsidiaries                                      |                                                                  |          | 10,965 |               |  |             | -     |             |   |   | -     |       |   |   | -     |      
|                                                                             |                                                                  |          |        |               |  |             |       |             |   |   |       |       |   |   |       |      
|Total income                                                                 |                                                                  |          | 19,016 |               |  |             | 3,532 |             |   |   | 2,443 |       |   |   | 5,506 |      
|                                                                             |                                                                  |          |        |               |  |             |       |             |   |   |       |       |   |   |       |      
|Expense:                                                                     |                                                                  |          |        |               |  |             |       |             |   |   |       |       |   |   |       |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Interest                                                         |          |        | 2,734         |  |             |       | 7           |   |   |       | 1,307 |   |   |       | 1,265 |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Salaries and related benefits                                    |          |        | 4,049         |  |             |       | -           |   |   |       | -     |   |   |       | -     |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | General and administrative                                       |          |        | 758           |  |             |       | 41          |   |   |       | 36    |   |   |       | 25    |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Rent                                                             |          |        | 286           |  |             |       | -           |   |   |       | -     |   |   |       | -     |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Profit sharing plan                                              |          |        | 243           |  |             |       | -           |   |   |       | -     |   |   |       | -     |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Legal and Accounting                                             |          |        | 234           |  |             |       | -           |   |   |       | 1     |   |   |       | -     |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Small Business Administration fees                               |          |        | -             |  |             |       | 1           |   |   |       | 31    |   |   |       | 54    |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Directors and shareholders expense                               |          |        | 66            |  |             |       | 2           |   |   |       | -     |   |   |       | -     |  
|                                                                             |                                                                  |          |        |               |  |             |       |             |   |   |       |       |   |   |       |      
|Total expense                                                                |                                                                  |          | 8,370  |               |  |             | 51    |             |   |   | 1,375 |       |   |   | 1,344 |      
|                                                                             |                                                                  |          |        |               |  |             |       |             |   |   |       |       |   |   |       |      
|Net operating income                                                         |                                                                  |          | 10,646 |               |  |             | 3,481 |             |   |   | 1,068 |       |   |   | 4,162 |      
|                                                                             |                                                                  |          |        |               |  |             |       |             |   |   |       |       |   |   |       |      
|Realized and unrealized gain (loss) on investments:                          |                                                                  |          |        |               |  |             |       |             |   |   |       |       |   |   |       |      
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Investments written-off                                          |          |        | -             |  |             |       | (1,299      | ) |   |       | (71   | ) |   |       | (435  | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Sales                                                            |          |        | 2,564         |  |             |       | -           |   |   |       | -     |   |   |       | -     |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Change in unrealized appreciation (depreciation) on
	investments |          |        | 210           |  |             |       | 519         |   |   |       | (2    | ) |   |       | 447   |  
|                                                                             |                                                                  |          |        |               |  |             |       |             |   |   |       |       |   |   |       |      
|                                                                             |                                                                  |          | 2,774  |               |  |             | (780  | )           |   |   | (73   | )     |   |   | 12    |      
|                                                                             |                                                                  |          |        |               |  |             |       |             |   |   |       |       |   |   |       |      
|Net operating income and realized and unrealized gain (loss) on
	investments |                                                                  | $        | 13,420 |               |  | $           | 2,701 |             |   | $ | 995   |       |   | $ | 4,174 |      
|                                                                             |                                                                  |          |        |               |  |             |       |             |   |   |       |       |   |   |       |      
|Preferred dividend                                                           |                                                                  | $        | 250    |               |  | $           | -     |             |   | $ | -     |       |   | $ | 250   |      
|                                                                             |                                                                  |          |        |               |  |             |       |             |   |   |       |       |   |   |       |      
|Basic and diluted earnings per share                                         |                                                                  |          |        |               |  |             |       |             |   |   |       |       |   |   |       |      

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

F-33



---



##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES




CONSOLIDATING STATEMENT OF SHAREHOLDERS
EQUITY


DECEMBER 31, 1999


(In thousands)


|                                          |                                               |           |        |        |   |            |     |               |   |   |         |         |   |   |        |         |  
|----------------------------------------- | --------------------------------------------- | --------- | ------ | ------ | - | ---------- | --- | ------------- | - | - | ------- | ------- | - | - | ------ | ------- | -
|                                          |                                               |           |        |        |   | Additional |     | Undistributed
|                                          |                                               | Preferred |        | Common |   | Paid-in    |     | Net Operating
|                                          |                                               | Stock, 3% |        | Stock  |   | Capital    |     | Income       
|                                          |                                               |           |        |        |   |            |     |              
|PMC CAPITAL, INC.                         |                                               |           |        |        |   |            |     |               |   |   |         |         |   |   |        |        
|                                         
|                                          | Balances, January 1, 1999                     |           | $      | -      |   |            | $   | 118           |   |   | $       | 71,312  |   |   | $      | 721     |  
|                                         
|                                          | Net income                                    |           |        | -      |   |            |     | -             |   |   |         | -       |   |   |        | 13,210  |  
|                                          | Preferred dividend of consolidated subsidiary |           |        | -      |   |            |     | -             |   |   |         | -       |   |   |        | (250    | )
|                                          | Dividends on common stock                     |           |        | -      |   |            |     | -             |   |   |         | -       |   |   |        | (12,007 | )
|                                          |                                               |           |        |        |   |            |     |               |   |   |         |         |   |   |        |        
|                                          | Balances, December 31, 1999                   |           | $      | -      |   |            | $   | 118           |   |   | $       | 71,312  |   |   | $      | 1,674   |  
|                                          |                                               |           |        |        |   |            |     |               |   |   |         |         |   |   |        |        
|FIRST WESTERN SBLC, INC. AND SUBSIDIARIES |                                               |           |        |        |   |            |     |               |   |   |         |         |   |   |        |        
|                                         
|                                          | Balances, January 1, 1999                     |           | $      | -      |   |            | $   | -             |   |   | $       | 2,000   |   |   | $      | 1,043   |  
|                                         
|                                          | Net income                                    |           |        | -      |   |            |     | -             |   |   |         | -       |   |   |        | 2,182   |  
|                                          | Dividends to parent company                   |           |        | -      |   |            |     | -             |   |   |         | -       |   |   |        | (2,100  | )
|                                          |                                               |           |        |        |   |            |     |               |   |   |         |         |   |   |        |        
|                                          | Balances, December 31, 1999                   |           | $      | -      |   |            | $   | -             |   |   | $       | 2,000   |   |   | $      | 1,125   |  
|                                          |                                               |           |        |        |   |            |     |               |   |   |         |         |   |   |        |        
|WESTERN FINANCIAL CAPITAL CORPORATION     |                                               |           |        |        |   |            |     |               |   |   |         |         |   |   |        |        
|                                         
|                                          | Balances, January 1, 1999                     |           | $      | -      |   |            | $   | 21            |   |   | $       | 7,934   |   |   | $      | 697     |  
|                                         
|                                          | Net income                                    |           |        | -      |   |            |     | -             |   |   |         | -       |   |   |        | 997     |  
|                                          | Dividends to parent company                   |           |        | -      |   |            |     | -             |   |   |         | -       |   |   |        | (1,425  | )
|                                          |                                               |           |        |        |   |            |     |               |   |   |         |         |   |   |        |        
|                                          | Balances, December 31, 1999                   |           | $      | -      |   |            | $   | 21            |   |   | $       | 7,934   |   |   | $      | 269     |  
|                                          |                                               |           |        |        |   |            |     |               |   |   |         |         |   |   |        |        
|PMC INVESTMENT CORPORATION                |                                               |           |        |        |   |            |     |               |   |   |         |         |   |   |        |        
|                                         
|                                          | Balances, January 1, 1999                     |           | $      | 3,000  |   |            | $   | 1             |   |   | $       | 12,439  |   |   | $      | 930     |  
|                                         
|                                          | Net income                                    |           |        | -      |   |            |     | -             |   |   |         | -       |   |   |        | 3,727   |  
|                                          | Dividends to parent company                   |           |        | -      |   |            |     | -             |   |   |         | -       |   |   |        | (3,975  | )
|                                          | Dividends, preferred                          |           |        | -      |   |            |     | -             |   |   |         | -       |   |   |        | (250    | )
|                                          |                                               |           |        |        |   |            |     |               |   |   |         |         |   |   |        |        
|                                          | Balances, December 31, 1999                   |           | $      | 3,000  |   |            | $   | 1             |   |   | $       | 12,439  |   |   | $      | 432     |  
|                                          |                                               |           |        |        |   |            |     |               |   |   |         |         |   |   |        |        
|ELIMINATION ADJUSTMENTS                   |                                               |           |        |        |   |            |     |               |   |   |         |         |   |   |        |        
|                                          | Equity in income of subsidiaries              |           |        | -      |   |            |     | -             |   |   |         | -       |   |   |        | (7,870  | )
|                                          | Dividends to parent                           |           |        | -      |   |            |     | -             |   |   |         | -       |   |   |        | 7,500   |  
|                                          | Preferred dividend of consolidated subsidiary |           |        | -      |   |            |     | -             |   |   |         | -       |   |   |        | 250     |  
|                                          | Stock of subsidiaries                         |           |        | (3,000 | ) |            |     | (22           | ) |   |         | (22,373 | ) |   |        | -       |  
|                                          | Undistributed earnings of subsidiaries        |           |        | -      |   |            |     | -             |   |   |         | -       |   |   |        | (1,896  | )
|                                          |                                               |           |        |        |   |            |     |               |   |   |         |         |   |   |        |        
|                                          |                                               |           | (3,000 | )      |   |            | (22 | )             |   |   | (22,373 | )       |   |   | (2,016 | )      
|                                          |                                               |           |        |        |   |            |     |               |   |   |         |         |   |   |        |        
|CONSOLIDATED                              |                                               | $         | -      |        |   | $          | 118 |               |   | $ | 71,312  |         |   | $ | 1,484  |        
|                                          |                                               |           |        |        |   |            |     |               |   |   |         |         |   |   |        |        

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                          |                                               |                |     |          |   |               |       |        |   |   |         |         |  
|----------------------------------------- | --------------------------------------------- | -------------- | --- | -------- | - | ------------- | ----- | ------ | - | - | ------- | ------- | -
|                                          |                                               | Net            |     |          |   |              
|                                          |                                               | Unrealized     |     |          |   |              
|                                          |                                               | Appreciation   |     |          |   | Total        
|                                          |                                               | (Depreciation) |     | Treasury |   | Shareholders
|                                          |                                               | on Investments |     | Stock    |   | Equity       
|                                          |                                               |                |     |          |   |              
|PMC CAPITAL, INC.                         |                                               |                |     |          |   |               |       |        |   |   |         |        
|                                          | Balances, January 1, 1999                     |                | $   | -        |   |               | $     | -      |   |   | $       | 72,151  |  
|                                          | Net income                                    |                |     | 210      |   |               |       | -      |   |   |         | 13,420  |  
|                                          | Preferred dividend of consolidated subsidiary |                |     | -        |   |               |       | -      |   |   |         | (250    | )
|                                          | Dividends on common stock                     |                |     | -        |   |               |       | -      |   |   |         | (12,007 | )
|                                          |                                               |                |     |          |   |               |       |        |   |   |         |        
|                                          | Balances, December 31, 1999                   |                | $   | 210      |   |               | $     | -      |   |   | $       | 73,314  |  
|                                          |                                               |                |     |          |   |               |       |        |   |   |         |        
|FIRST WESTERN SBLC, INC. AND SUBSIDIARIES |                                               |                |     |          |   |               |       |        |   |   |         |        
|                                          | Balances, January 1, 1999                     |                | $   | (256     | ) |               | $     | (1,000 | ) |   | $       | 1,787   |  
|                                          | Net income                                    |                |     | 519      |   |               |       | -      |   |   |         | 2,701   |  
|                                          | Dividends to parent company                   |                |     | -        |   |               |       | -      |   |   |         | (2,100  | )
|                                          |                                               |                |     |          |   |               |       |        |   |   |         |        
|                                          | Balances, December 31, 1999                   |                | $   | 263      |   |               | $     | (1,000 | ) |   | $       | 2,388   |  
|                                          |                                               |                |     |          |   |               |       |        |   |   |         |        
|WESTERN FINANCIAL CAPITAL CORPORATION     |                                               |                |     |          |   |               |       |        |   |   |         |        
|                                          | Balances, January 1, 1999                     |                | $   | (18      | ) |               | $     | -      |   |   | $       | 8,634   |  
|                                          | Net income                                    |                |     | (2       | ) |               |       | -      |   |   |         | 995     |  
|                                          | Dividends to parent company                   |                |     | -        |   |               |       | -      |   |   |         | (1,425  | )
|                                          |                                               |                |     |          |   |               |       |        |   |   |         |        
|                                          | Balances, December 31, 1999                   |                | $   | (20      | ) |               | $     | -      |   |   | $       | 8,204   |  
|                                          |                                               |                |     |          |   |               |       |        |   |   |         |        
|PMC INVESTMENT CORPORATION                |                                               |                |     |          |   |               |       |        |   |   |         |        
|                                          | Balances, January 1, 1999                     |                | $   | (500     | ) |               | $     | -      |   |   | $       | 15,870  |  
|                                          | Net income                                    |                |     | 447      |   |               |       | -      |   |   |         | 4,174   |  
|                                          | Dividends to parent company                   |                |     | -        |   |               |       | -      |   |   |         | (3,975  | )
|                                          | Dividends, preferred                          |                |     | -        |   |               |       | -      |   |   |         | (250    | )
|                                          |                                               |                |     |          |   |               |       |        |   |   |         |        
|                                          | Balances, December 31, 1999                   |                | $   | (53      | ) |               | $     | -      |   |   | $       | 15,819  |  
|                                          |                                               |                |     |          |   |               |       |        |   |   |         |        
|ELIMINATION ADJUSTMENTS                   |                                               |                |     |          |   |               |       |        |   |   |         |        
|                                          | Equity in income of subsidiaries              |                |     | -        |   |               |       | -      |   |   |         | (7,870  | )
|                                          | Dividends to parent                           |                |     | -        |   |               |       | -      |   |   |         | 7,500   |  
|                                          | Preferred dividend of consolidated subsidiary |                |     | -        |   |               |       | -      |   |   |         | 250     |  
|                                          | Stock of subsidiaries                         |                |     | -        |   |               |       | 1,000  |   |   |         | (24,395 | )
|                                          | Undistributed earnings of subsidiaries        |                |     | -        |   |               |       | -      |   |   |         | (1,896  | )
|                                          |                                               |                |     |          |   |               |       |        |   |   |         |        
|                                          |                                               |                | -   |          |   |               | 1,000 |        |   |   | (26,411 | )      
|                                          |                                               |                |     |          |   |               |       |        |   |   |         |        
|CONSOLIDATED                              |                                               | $              | 400 |          |   | $             | -     |        |   | $ | 73,314  |        
|                                          |                                               |                |     |          |   |               |       |        |   |   |         |        

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

F-34



---



##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES




CONSOLIDATING STATEMENTS OF CASH FLOWS


FOR THE YEAR ENDED DECEMBER 31, 1999


(In thousands)


|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |              |      |          |       |      |         |         |         |      |         |         |         |     |  
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | --------------------------- | ----------- | ------- | ------------ | ---- | -------- | ----- | ---- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | --- | -
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         | CONSOLIDATED |      |         
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         | BEFORE       |      | PMC     
|                                                     |                                                                                                                                                                |                                                                               |                             | ELIMINATION |         | ELIMINATION  |      | CAPITAL,
|                                                     |                                                                                                                                                                | CONSOLIDATED                                                                  |                             | ENTRIES     |         | ENTRIES      |      | INC.    
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |              |      |         
|Cash flows from operating activities:                |                                                                                                                                                                |                                                                               |                             |             |         |              |      |          |       |      |         |         |         |      |         |        
|                                                     | Net operating income and realized and unrealized gain (loss) on
	investments                                                                                   |                                                                               | $                           | 13,420      |         |              | $    | (7,870   | )     |      | $       | 21,290  |         |      | $       | 13,420  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net operating income and realized and
	unrealized gain (loss) on investments to net cash provided by
	(used in) operating activities: |                                                                               |                             |             |         |              |      |          |       |      |         |         |         |      |         |         |        
|                                                     |                                                                                                                                                                | Loans funded, held for sale                                                   |                             |             | (19,308 | )            |      |          | -     |      |         |         | (19,308 | )    |         |         | -       |    
|                                                     |                                                                                                                                                                | Proceeds from sale of guaranteed loans                                        |                             |             | 19,152  |              |      |          | -     |      |         |         | 19,152  |      |         |         | -       |    
|                                                     |                                                                                                                                                                | Change in unrealized depreciation on investments and investments
	written-off |                             |             | 631     |              |      |          | -     |      |         |         | 631     |      |         |         | (210    | )  
|                                                     |                                                                                                                                                                | Unrealized premium income, net                                                |                             |             | (664    | )            |      |          | -     |      |         |         | (664    | )    |         |         | -       |    
|                                                     |                                                                                                                                                                | Depreciation and amortization                                                 |                             |             | 981     |              |      |          | -     |      |         |         | 981     |      |         |         | 106     |    
|                                                     |                                                                                                                                                                | Accretion of loan discount and deferred fees                                  |                             |             | (1,462  | )            |      |          | -     |      |         |         | (1,462  | )    |         |         | (491    | )  
|                                                     |                                                                                                                                                                | Deferred fees collected                                                       |                             |             | 163     |              |      |          | -     |      |         |         | 163     |      |         |         | 60      |    
|                                                     |                                                                                                                                                                | (Gain) loss on sale of assets                                                 |                             |             | (2,564  | )            |      |          | -     |      |         |         | (2,564  | )    |         |         | (2,564  | )  
|                                                     |                                                                                                                                                                | Equity in income of subsidiary                                                |                             |             | (3,095  | )            |      |          | 7,870 |      |         |         | (10,965 | )    |         |         | (10,965 | )  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                                | Net change in operating assets and liabilities:                               |                             |             |         |              |      |          |       |      |         |         |         |      |         |         |         |    
|                                                     |                                                                                                                                                                |                                                                               | Accrued interest receivable |             |         | (125         | )    |          |       | (169 | )       |         |         | 44   |         |         |         | (12 | )
|                                                     |                                                                                                                                                                |                                                                               | Other assets                |             |         | 99           |      |          |       | -    |         |         |         | 99   |         |         |         | (4  | )
|                                                     |                                                                                                                                                                |                                                                               | Accrued interest payable    |             |         | (15          | )    |          |       | -    |         |         |         | (15  | )       |         |         | 66  |  
|                                                     |                                                                                                                                                                |                                                                               | Borrower advances           |             |         | 817          |      |          |       | -    |         |         |         | 817  |         |         |         | 663 |  
|                                                     |                                                                                                                                                                |                                                                               | Other liabilities           |             |         | (143         | )    |          |       | -    |         |         |         | (143 | )       |         |         | (59 | )
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |              |      |          |       |      |         |         |         |      |         |        
|Net cash provided by (used in) operating activities  |                                                                                                                                                                |                                                                               | 7,887                       |             |         |              | (169 | )        |       |      | 8,056   |         |         |      | 10      |        
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |              |      |          |       |      |         |         |         |      |         |        
|Cash flows from investing activities:                |                                                                                                                                                                |                                                                               |                             |             |         |              |      |          |       |      |         |         |         |      |         |        
|                                                     | Loans funded                                                                                                                                                   |                                                                               |                             | (64,956     | )       |              |      | -        |       |      |         | (64,956 | )       |      |         | (33,563 | )      
|                                                     | Principal collected and other adjustments                                                                                                                      |                                                                               |                             | 15,431      |         |              |      | -        |       |      |         | 15,431  |         |      |         | 5,555   |        
|                                                     | Proceeds from sale of loans to affiliates                                                                                                                      |                                                                               |                             | -           |         |              |      | 169      |       |      |         | (169    | )       |      |         | (30,091 | )      
|                                                     | Proceeds from sale of assets                                                                                                                                   |                                                                               |                             | 71          |         |              |      | -        |       |      |         | 71      |         |      |         | -       |        
|                                                     | Proceeds from interest-only strip receivable                                                                                                                   |                                                                               |                             | 583         |         |              |      | -        |       |      |         | 583     |         |      |         | -       |        
|                                                     | Purchase of furniture and fixtures and other assets                                                                                                            |                                                                               |                             | (39         | )       |              |      | -        |       |      |         | (39     | )       |      |         | (39     | )      
|                                                     | Proceeds from mortgage-backed security of affiliate                                                                                                            |                                                                               |                             | 161         |         |              |      | -        |       |      |         | 161     |         |      |         | 161     |        
|                                                     | Proceeds from partnership distributions                                                                                                                        |                                                                               |                             | 5,672       |         |              |      | -        |       |      |         | 5,672   |         |      |         | 5,672   |        
|                                                     | Investment in unconsolidated subsidiary                                                                                                                        |                                                                               |                             | (3,524      | )       |              |      | -        |       |      |         | (3,524  | )       |      |         | (3,524  | )      
|                                                     | Release of (investment in) restricted cash                                                                                                                     |                                                                               |                             | 23          |         |              |      | -        |       |      |         | 23      |         |      |         | -       |        
|                                                     | Advances to (from) affiliates and subsidiaries                                                                                                                 |                                                                               |                             | 929         |         |              |      | -        |       |      |         | 929     |         |      |         | (5,097  | )      
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |              |      |          |       |      |         |         |         |      |         |        
|Net cash provided by (used in) investing activities  |                                                                                                                                                                |                                                                               | (45,649                     | )           |         |              | 169  |          |       |      | (45,818 | )       |         |      | (60,926 | )      
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |              |      |          |       |      |         |         |         |      |         |        
|Cash flows from financing activities:                |                                                                                                                                                                |                                                                               |                             |             |         |              |      |          |       |      |         |         |         |      |         |        
|                                                     | Proceeds from issuance of senior notes                                                                                                                         |                                                                               |                             | 10,000      |         |              |      | -        |       |      |         | 10,000  |         |      |         | 10,000  |        
|                                                     | Proceeds from unconsolidated subsidiary                                                                                                                        |                                                                               |                             | 55,649      |         |              |      | -        |       |      |         | 55,649  |         |      |         | 55,649  |        
|                                                     | Payment of dividends to parent                                                                                                                                 |                                                                               |                             | -           |         |              |      | (250     | )     |      |         | 250     |         |      |         | 7,750   |        
|                                                     | Payment of dividends on common stock                                                                                                                           |                                                                               |                             | (11,829     | )       |              |      | 250      |       |      |         | (12,079 | )       |      |         | (12,079 | )      
|                                                     | Payment of dividends on preferred stock                                                                                                                        |                                                                               |                             | (250        | )       |              |      | -        |       |      |         | (250    | )       |      |         | -       |        
|                                                     | Payment of senior notes                                                                                                                                        |                                                                               |                             | (6,667      | )       |              |      | -        |       |      |         | (6,667  | )       |      |         | (6,667  | )      
|                                                     | Payment of SBA debentures                                                                                                                                      |                                                                               |                             | (4,150      | )       |              |      | -        |       |      |         | (4,150  | )       |      |         | -       |        
|                                                     | Payment of debt issuance costs                                                                                                                                 |                                                                               |                             | (523        | )       |              |      | -        |       |      |         | (523    | )       |      |         | (513    | )      
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |              |      |          |       |      |         |         |         |      |         |        
|Net cash provided by (used in) financing activities  |                                                                                                                                                                |                                                                               | 42,230                      |             |         |              | -    |          |       |      | 42,230  |         |         |      | 54,140  |        
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |              |      |          |       |      |         |         |         |      |         |        
|Net increase (decrease) in cash and cash equivalents |                                                                                                                                                                |                                                                               | 4,468                       |             |         |              | -    |          |       |      | 4,468   |         |         |      | (6,776  | )      
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents, beginning of year         |                                                                                                                                                                |                                                                               | 18,725                      |             |         |              | -    |          |       |      | 18,725  |         |         |      | 10,539  |        
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |              |      |          |       |      |         |         |         |      |         |        
|Cash and cash equivalents, end of year               |                                                                                                                                                                | $                                                                             | 23,193                      |             |         | $            | -    |          |       | $    | 23,193  |         |         | $    | 3,763   |        
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |              |      |          |       |      |         |         |         |      |         |        
|Supplemental disclosure:                             |                                                                                                                                                                |                                                                               |                             |             |         |              |      |          |       |      |         |         |         |      |         |        
|                                                     | Interest paid                                                                                                                                                  |                                                                               | $                           | 5,328       |         |              | $    | -        |       |      | $       | 5,328   |         |      | $       | 2,668   |        
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |              |      |          |       |      |         |         |         |      |         |        
|                                                     | Reclassification from loans receivable to real property owned of
	affiliate                                                                                    |                                                                               | $                           | 377         |         |              | $    | -        |       |      | $       | 377     |         |      | $       | -       |        
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |              |      |          |       |      |         |         |         |      |         |        
|                                                     | Loans and interest receivable transferred to unconsolidated
	subsidiary, net                                                                                   |                                                                               | $                           | 4,832       |         |              | $    | -        |       |      | $       | 4,832   |         |      | $       | 4,832   |        
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |              |      |          |       |      |         |         |         |      |         |        

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |             |        |        |      |      |        |         |      |     |  
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | --------------------------- | ----------- | ------- | ----------- | ------ | ------ | ---- | ---- | ------ | ------- | ---- | --- | -
|                                                     |                                                                                                                                                                | FIRST                                                                         |                             | WESTERN     |         |            
|                                                     |                                                                                                                                                                | WESTERN SBLC,                                                                 |                             | FINANCIAL   |         | PMC        
|                                                     |                                                                                                                                                                | INC. AND                                                                      |                             | CAPITAL     |         | INVESTMENT 
|                                                     |                                                                                                                                                                | SUBSIDIARY                                                                    |                             | CORPORATION |         | CORPORATION
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |            
|Cash flows from operating activities:                |                                                                                                                                                                |                                                                               |                             |             |         |             |        |        |      |      |        |        
|                                                     | Net operating income and realized and unrealized gain (loss) on
	investments                                                                                   |                                                                               | $                           | 2,701       |         |             | $      | 995    |      |      | $      | 4,174   |     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net operating income and realized and
	unrealized gain (loss) on investments to net cash provided by
	(used in) operating activities: |                                                                               |                             |             |         |             |        |        |      |      |        |         |     
|                                                     |                                                                                                                                                                | Loans funded, held for sale                                                   |                             |             | (19,308 | )           |        |        | -    |      |        |         | -    |    
|                                                     |                                                                                                                                                                | Proceeds from sale of guaranteed loans                                        |                             |             | 19,152  |             |        |        | -    |      |        |         | -    |    
|                                                     |                                                                                                                                                                | Change in unrealized depreciation on investments and investments
	written-off |                             |             | 780     |             |        |        | 73   |      |        |         | (12  | )  
|                                                     |                                                                                                                                                                | Unrealized premium income, net                                                |                             |             | (664    | )           |        |        | -    |      |        |         | -    |    
|                                                     |                                                                                                                                                                | Depreciation and amortization                                                 |                             |             | 797     |             |        |        | 24   |      |        |         | 54   |    
|                                                     |                                                                                                                                                                | Accretion of loan discount and deferred fees                                  |                             |             | (457    | )           |        |        | (154 | )    |        |         | (360 | )  
|                                                     |                                                                                                                                                                | Deferred fees collected                                                       |                             |             | 24      |             |        |        | 16   |      |        |         | 63   |    
|                                                     |                                                                                                                                                                | (Gain) loss on sale of assets                                                 |                             |             | -       |             |        |        | -    |      |        |         | -    |    
|                                                     |                                                                                                                                                                | Equity in income of subsidiary                                                |                             |             | -       |             |        |        | -    |      |        |         | -    |    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                                                                                | Net change in operating assets and liabilities:                               |                             |             |         |             |        |        |      |      |        |         |      |    
|                                                     |                                                                                                                                                                |                                                                               | Accrued interest receivable |             |         | (49         | )      |        |      | 33   |        |         |      | 72  |  
|                                                     |                                                                                                                                                                |                                                                               | Other assets                |             |         | 86          |        |        |      | 1    |        |         |      | 16  |  
|                                                     |                                                                                                                                                                |                                                                               | Accrued interest payable    |             |         | -           |        |        |      | (75  | )      |         |      | (6  | )
|                                                     |                                                                                                                                                                |                                                                               | Borrower advances           |             |         | 291         |        |        |      | (251 | )      |         |      | 114 |  
|                                                     |                                                                                                                                                                |                                                                               | Other liabilities           |             |         | 39          |        |        |      | (69  | )      |         |      | (54 | )
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |             |        |        |      |      |        |        
|Net cash provided by (used in) operating activities  |                                                                                                                                                                |                                                                               | 3,392                       |             |         |             | 593    |        |      |      | 4,061  |        
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |             |        |        |      |      |        |        
|Cash flows from investing activities:                |                                                                                                                                                                |                                                                               |                             |             |         |             |        |        |      |      |        |        
|                                                     | Loans funded                                                                                                                                                   |                                                                               |                             | (8,275      | )       |             |        | (7,665 | )    |      |        | (15,453 | )   
|                                                     | Principal collected and other adjustments                                                                                                                      |                                                                               |                             | 246         |         |             |        | 3,179  |      |      |        | 6,451   |     
|                                                     | Proceeds from sale of loans to affiliates                                                                                                                      |                                                                               |                             | -           |         |             |        | 14,568 |      |      |        | 15,354  |     
|                                                     | Proceeds from sale of assets                                                                                                                                   |                                                                               |                             | 9           |         |             |        | 55     |      |      |        | 7       |     
|                                                     | Proceeds from interest-only strip receivable                                                                                                                   |                                                                               |                             | 583         |         |             |        | -      |      |      |        | -       |     
|                                                     | Purchase of furniture and fixtures and other assets                                                                                                            |                                                                               |                             | -           |         |             |        | -      |      |      |        | -       |     
|                                                     | Proceeds from mortgage-backed security of affiliate                                                                                                            |                                                                               |                             | -           |         |             |        | -      |      |      |        | -       |     
|                                                     | Proceeds from partnership distributions                                                                                                                        |                                                                               |                             | -           |         |             |        | -      |      |      |        | -       |     
|                                                     | Investment in unconsolidated subsidiary                                                                                                                        |                                                                               |                             | -           |         |             |        | -      |      |      |        | -       |     
|                                                     | Release of (investment in) restricted cash                                                                                                                     |                                                                               |                             | (191        | )       |             |        | -      |      |      |        | 214     |     
|                                                     | Advances to (from) affiliates and subsidiaries                                                                                                                 |                                                                               |                             | 6,543       |         |             |        | 71     |      |      |        | (588    | )   
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |             |        |        |      |      |        |        
|Net cash provided by (used in) investing activities  |                                                                                                                                                                |                                                                               | (1,085                      | )           |         |             | 10,208 |        |      |      | 5,985  |        
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |             |        |        |      |      |        |        
|Cash flows from financing activities:                |                                                                                                                                                                |                                                                               |                             |             |         |             |        |        |      |      |        |        
|                                                     | Proceeds from issuance of senior notes                                                                                                                         |                                                                               |                             | -           |         |             |        | -      |      |      |        | -       |     
|                                                     | Proceeds from unconsolidated subsidiary                                                                                                                        |                                                                               |                             | -           |         |             |        | -      |      |      |        | -       |     
|                                                     | Payment of dividends to parent                                                                                                                                 |                                                                               |                             | (2,100      | )       |             |        | (1,425 | )    |      |        | (3,975  | )   
|                                                     | Payment of dividends on common stock                                                                                                                           |                                                                               |                             | -           |         |             |        | -      |      |      |        | -       |     
|                                                     | Payment of dividends on preferred stock                                                                                                                        |                                                                               |                             | -           |         |             |        | -      |      |      |        | (250    | )   
|                                                     | Payment of senior notes                                                                                                                                        |                                                                               |                             | -           |         |             |        | -      |      |      |        | -       |     
|                                                     | Payment of SBA debentures                                                                                                                                      |                                                                               |                             | -           |         |             |        | (3,150 | )    |      |        | (1,000  | )   
|                                                     | Payment of debt issuance costs                                                                                                                                 |                                                                               |                             | -           |         |             |        | (10    | )    |      |        | -       |     
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |             |        |        |      |      |        |        
|Net cash provided by (used in) financing activities  |                                                                                                                                                                |                                                                               | (2,100                      | )           |         |             | (4,585 | )      |      |      | (5,225 | )      
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |             |        |        |      |      |        |        
|Net increase (decrease) in cash and cash equivalents |                                                                                                                                                                |                                                                               | 207                         |             |         |             | 6,216  |        |      |      | 4,821  |        
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents, beginning of year         |                                                                                                                                                                |                                                                               | 2,158                       |             |         |             | 3,909  |        |      |      | 2,119  |        
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |             |        |        |      |      |        |        
|Cash and cash equivalents, end of year               |                                                                                                                                                                | $                                                                             | 2,365                       |             |         | $           | 10,125 |        |      | $    | 6,940  |        
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |             |        |        |      |      |        |        
|Supplemental disclosure:                             |                                                                                                                                                                |                                                                               |                             |             |         |             |        |        |      |      |        |        
|                                                     | Interest paid                                                                                                                                                  |                                                                               | $                           | 7           |         |             | $      | 1,382  |      |      | $      | 1,271   |     
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |             |        |        |      |      |        |        
|                                                     | Reclassification from loans receivable to real property owned of
	affiliate                                                                                    |                                                                               | $                           | 27          |         |             | $      | 45     |      |      | $      | 305     |     
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |             |        |        |      |      |        |        
|                                                     | Loans and interest receivable transferred to unconsolidated
	subsidiary, net                                                                                   |                                                                               | $                           | -           |         |             | $      | -      |      |      | $      | -       |     
|                                                     |                                                                                                                                                                |                                                                               |                             |             |         |             |        |        |      |      |        |        

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

F-35



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##### Table of Contents



PMC CAPITAL, L.P. 1998-1




INDEX TO FINANCIAL STATEMENTS


|                                  |                                                                                                                                                 |  |      |      | 
|--------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                 
|                                 
|                                 
|                                 
|Report of Independent Accountants |                                                                                                                                                 |  | F-37 |     
|                                 
|                                 
|                                 
|                                 
|                                 
|Financial Statements:             |                                                                                                                                                 |  |      |     
|                                 
|                                 
|                                 
|                                 
|                                 
|                                  | Statement of Assets, Liabilities and Partners Capital as of
	 December 31, 1999 and 1998                                                       |  |      | F-38 | 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                  | Statements of Income for the Year Ended December 31, 1999
	and for the period from October 23, 1998 (Inception)
	to December 31, 1998           |  |      | F-39 | 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                  | Statements of Partners Capital for the Year Ended
	December 31, 1999 and for the period from October 23,
	1998 (Inception)to December 31, 1998 |  |      | F-40 | 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                  | Statements of Cash Flows for the Year Ended December  31,
	1999 and for the period from October 23, 1998 (Inception)to December 31, 1998        |  |      | F-41 | 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                  | Notes to Financial Statements                                                                                                                   |  |      | F-42 | 

F-36



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##### Table of Contents






Report of Independent Accountants

To the General Partner

PMC Capital, L.P. 1998-1:


In our opinion, the accompanying statement of
assets, liabilities and partners capital and the related
statements of income, partners capital and cash flows
present fairly, in all material respects, the financial position
of PMC Capital, L.P. 1998-1 at December 31, 1999 and
1998 and the results of its operations and cash flows for the
year ended December 31, 1999 and for the period from
October 23, 1998 (inception) to December 31, 1998, in
conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility
of the Companys management; our responsibility is to
express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance
 with auditing standards generally accepted in the United States
which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating
 the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed
above.



| |                           
| | --------------------------
| | PricewaterhouseCoopers LLP

February 25, 2000

Dallas, Texas


F-37



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##### Table of Contents






PMC CAPITAL, L.P. 1998-1

STATEMENT OF ASSETS, LIABILITIES AND
PARTNERS CAPITAL


(In thousands)


|                                        |                             |              |        |        |  |   |        |        | 
|--------------------------------------- | --------------------------- | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                                        |                             |             
|                                        |                             | December 31,
|                                        |                             |             
|                                        |                             | 1999         |        | 1998  
|                                        |                             |              |        |       
|ASSETS                                  |                             |              |        |        |  |   |        |       
|                                       
|                                       
|                                       
|                                       
|                                       
|Investments:                            |                             |              |        |        |  |   |        |       
|                                       
|                                       
|                                       
|                                       
|                                        | Loans receivable, net       |              | $      | 39,375 |  |   | $      | 41,255 | 
|                                       
|                                       
|                                       
|                                       
|                                        | Restricted investments      |              |        | 4,390  |  |   |        | 5,898  | 
|                                        |                             |              |        |        |  |   |        |       
|Total investments                       |                             |              | 43,765 |        |  |   | 47,153 |       
|                                        |                             |              |        |        |  |   |        |       
|Other assets:                           |                             |              |        |        |  |   |        |       
|                                       
|                                       
|                                       
|                                       
|                                        | Accrued interest receivable |              |        | 193    |  |   |        | 168    | 
|                                        |                             |              |        |        |  |   |        |       
|Total other assets                      |                             |              | 193    |        |  |   | 168    |       
|                                        |                             |              |        |        |  |   |        |       
|Total assets                            |                             | $            | 43,958 |        |  | $ | 47,321 |       
|                                        |                             |              |        |        |  |   |        |       
|                                       
|LIABILITIES AND PARTNERS CAPITAL       |                             |              |        |        |  |   |        |       
|                                       
|                                       
|                                       
|                                       
|                                       
|Liabilities:                            |                             |              |        |        |  |   |        |       
|                                       
|                                       
|                                       
|                                       
|                                        | Notes payable               |              | $      | 37,939 |  |   | $      | 40,983 | 
|                                       
|                                       
|                                       
|                                       
|                                        | Accrued interest payable    |              |        | 229    |  |   |        | 239    | 
|                                       
|                                       
|                                       
|                                       
|                                        | Due to limited partner      |              |        | 511    |  |   |        | 450    | 
|                                        |                             |              |        |        |  |   |        |       
|Total liabilities                       |                             |              | 38,679 |        |  |   | 41,672 |       
|                                        |                             |              |        |        |  |   |        |       
|Partners capital:                      |                             |              |        |        |  |   |        |       
|                                       
|                                       
|                                       
|                                       
|                                        | General partners interest  |              |        | -      |  |   |        | -      | 
|                                       
|                                       
|                                       
|                                       
|                                        | Limited partners interest  |              |        | 5,279  |  |   |        | 5,649  | 
|                                        |                             |              |        |        |  |   |        |       
|                                        |                             |              | 5,279  |        |  |   | 5,649  |       
|                                        |                             |              |        |        |  |   |        |       
|Total liabilities and partners capital |                             | $            | 43,958 |        |  | $ | 47,321 |       
|                                        |                             |              |        |        |  |   |        |       

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

F-38



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##### Table of Contents



PMC CAPITAL, L.P. 1998-1




STATEMENTS OF INCOME


(In thousands)


|                        |                              |              |       |                  |  |   |     |     | 
|----------------------- | ---------------------------- | ------------ | ----- | ---------------- |  | - | --- | --- | 
|                        |                              |              |       | October 23,     
|                        |                              | Year Ended   |       | 1998 (Inception)
|                        |                              | December 31, |       | to December 31, 
|                        |                              | 1999         |       | 1998            
|                        |                              |              |       |                 
|Investment income:      |                              |              |       |                  |  |   |     |    
|                        | Interest                     |              | $     | 3,902            |  |   | $   | 421 | 
|                        | Other investment income, net |              |       | 60               |  |   |     | 53  | 
|                        |                              |              |       |                  |  |   |     |    
|Total investment income |                              |              | 3,962 |                  |  |   | 474 |    
|                        |                              |              |       |                  |  |   |     |    
|Expense:                |                              |              |       |                  |  |   |     |    
|                        | Interest                     |              |       | 2,683            |  |   |     | 296 | 
|                        | Provision for loan losses    |              |       | 123              |  |   |     | -   | 
|                        | General and administrative   |              |       | 137              |  |   |     | -   | 
|                        |                              |              |       |                  |  |   |     |    
|Total expense           |                              |              | 2,943 |                  |  |   | 296 |    
|                        |                              |              |       |                  |  |   |     |    
|Net income              |                              | $            | 1,019 |                  |  | $ | 178 |    
|                        |                              |              |       |                  |  |   |     |    

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

F-39



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##### Table of Contents



PMC CAPITAL, L.P. 1998-1




STATEMENTS OF PARTNERS CAPITAL


PERIOD FROM OCTOBER 23, 1998
(INCEPTION) TO DECEMBER 31, 1999


(In thousands)


|                                                                      |  |           |         |           |  |       |    |   |  |   |         |  
|--------------------------------------------------------------------- |  | --------- | ------- | --------- |  | ----- | -- | - |  | - | ------- | -
|                                                                      |  | Limited   |         | General   |  |      
|                                                                      |  | Partners |         | Partners |  |      
|                                                                      |  | Interest  |         | Interest  |  | Total
|                                                                      |  |           |         |           |  |      
|Balance, October 23, 1998 (inception)                                 |  | $         | -       |           |  | $     | -  |   |  | $ | -       |  
|                                                                     
|Limited Partners contribution of loans receivable and other
	 assets |  |           | 46,347  |           |  |       | -  |   |  |   | 46,347  |  
|                                                                     
|Net income                                                            |  |           | 178     |           |  |       | -  |   |  |   | 178     |  
|                                                                     
|Partnership distributions                                             |  |           | (40,876 | )         |  |       | -  |   |  |   | (40,876 | )
|                                                                      |  |           |         |           |  |       |    |   |  |   |         |  
|                                                                     
|Balance, December 31, 1998                                            |  |           | 5,649   |           |  |       | -  |   |  |   | 5,649   |  
|                                                                     
|Net income                                                            |  |           | 1,018   |           |  |       | 1  |   |  |   | 1,019   |  
|                                                                     
|Partnership distributions                                             |  |           | (1,388  | )         |  |       | (1 | ) |  |   | (1,389  | )
|                                                                      |  |           |         |           |  |       |    |   |  |   |         |  
|                                                                     
|Balance, December 31, 1999                                            |  | $         | 5,279   |           |  | $     | -  |   |  | $ | 5,279   |  
|                                                                      |  |           |         |           |  |       |    |   |  |   |         |  

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

F-40



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##### Table of Contents



PMC CAPITAL, L.P. 1998-1




STATEMENT OF CASH FLOWS


(In thousands)


|                                                     |                                                                                    |                                                 |                             |                  |     |     |        |         |   |      |  
|---------------------------------------------------- | ---------------------------------------------------------------------------------- | ----------------------------------------------- | --------------------------- | ---------------- | --- | --- | ------ | ------- | - | ---- | -
|                                                     |                                                                                    |                                                 |                             | October 23,     
|                                                     |                                                                                    | Year Ended                                      |                             | 1998 (Inception)
|                                                     |                                                                                    | December 31,                                    |                             | to December 31, 
|                                                     |                                                                                    | 1999                                            |                             | 1998            
|                                                     |                                                                                    |                                                 |                             |                 
|Cash flows from operating activities:                |                                                                                    |                                                 |                             |                  |     |     |        |        
|                                                     | Net income                                                                         |                                                 | $                           | 1,019            |     |     | $      | 178     |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net income to net cash provided by
	operating activities: |                                                 |                             |                  |     |     |        |         |  
|                                                     |                                                                                    | Provision for loan losses                       |                             |                  | 123 |     |        |         | - |     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                    | Net change in operating assets and liabilities: |                             |                  |     |     |        |         |   |     
|                                                     |                                                                                    |                                                 | Accrued interest receivable |                  |     | (25 | )      |         |   | (168 | )
|                                                     |                                                                                    |                                                 | Accrued interest payable    |                  |     | (10 | )      |         |   | 239  |  
|                                                     |                                                                                    |                                                 |                             |                  |     |     |        |        
|Net cash provided by operating activities            |                                                                                    |                                                 | 1,107                       |                  |     |     | 249    |        
|                                                     |                                                                                    |                                                 |                             |                  |     |     |        |        
|Cash flows from investing activities:                |                                                                                    |                                                 |                             |                  |     |     |        |        
|                                                     | Principal collected                                                                |                                                 |                             | 1,757            |     |     |        | 1,889   |  
|                                                     | Release of (investment in) restricted cash                                         |                                                 |                             | 1,508            |     |     |        | (5,898  | )
|                                                     |                                                                                    |                                                 |                             |                  |     |     |        |        
|Net cash provided by (used in) investing activities  |                                                                                    |                                                 | 3,265                       |                  |     |     | (4,009 | )      
|                                                     |                                                                                    |                                                 |                             |                  |     |     |        |        
|Cash flows from financing activities:                |                                                                                    |                                                 |                             |                  |     |     |        |        
|                                                     | Proceeds from issuance of notes payable                                            |                                                 |                             | -                |     |     |        | 41,861  |  
|                                                     | Payment on notes payable                                                           |                                                 |                             | (3,044           | )   |     |        | (878    | )
|                                                     | Partner distributions                                                              |                                                 |                             | (1,389           | )   |     |        | (40,876 | )
|                                                     | Partner contributions                                                              |                                                 |                             | -                |     |     |        | 3,203   |  
|                                                     | Advances from affiliates, net                                                      |                                                 |                             | 61               |     |     |        | 450     |  
|                                                     |                                                                                    |                                                 |                             |                  |     |     |        |        
|Net cash provided by (used in) financing activities  |                                                                                    |                                                 | (4,372                      | )                |     |     | 3,760  |        
|                                                     |                                                                                    |                                                 |                             |                  |     |     |        |        
|Net increase (decrease) in cash and cash equivalents |                                                                                    |                                                 | -                           |                  |     |     | -      |        
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents, beginning of period       |                                                                                    |                                                 | -                           |                  |     |     | -      |        
|                                                     |                                                                                    |                                                 |                             |                  |     |     |        |        
|Cash and cash equivalents, end of year               |                                                                                    | $                                               | -                           |                  |     | $   | -      |        
|                                                     |                                                                                    |                                                 |                             |                  |     |     |        |        
|Supplemental disclosure:                             |                                                                                    |                                                 |                             |                  |     |     |        |        
|                                                     | Loans contributed from limited partner                                             |                                                 | $                           | -                |     |     | $      | 43,144  |  
|                                                     |                                                                                    |                                                 |                             |                  |     |     |        |        
|                                                     | Interest paid                                                                      |                                                 | $                           | 2,693            |     |     | $      | 57      |  
|                                                     |                                                                                    |                                                 |                             |                  |     |     |        |        

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

F-41



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##### Table of Contents



PMC CAPITAL, L.P. 1998-1




NOTES TO FINANCIAL STATEMENTS


Note 1.  Summary of Significant
Accounting Policies:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Business:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | PMC Capital, L.P. 1998-1 (the
	Partnership) was formed as a Delaware limited
	partnership in October 1998 to act as a special purpose affiliate
	 of PMC Capital, Inc. (PMC Capital), the
	99.9% limited partner. PMC Capital Corp. 1998-1 is a
	Delaware corporation formed in October 1998 to be the General
	Partner (0.1% ownership) of the Partnership and is
	wholly-owned by PMC Capital. The Partnership was established to
	acquire loans from PMC Capital and to issue variable-rate debt
	through a private placement. PMC Capital is either directly or
	indirectly the sole 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.                                                                                                                                                               
|
| | Loans Receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Loans receivable are carried at amortized cost
	which is the loan principal balance, 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.                                                                                                  
|
| | 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.                                                                                                                                                                                                                                                                                                                                                                         
|
| | Statement of Cash Flows                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | We consider 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 24, 1998, PMC Capital either
	contributed or sold the aggregate amount of $43.1 million of
	 loans (the Partnership Loans) to the Partnership
	without recourse to PMC Capital.                                                                                                                                                                                                                                                                                                                                                                                       
|
| | At December 31, 1999 there was one investment
	 in a loan identified as impaired. The loan has a principal
	balance outstanding at December 31, 1999 of $371,000 and a
	valuation reserve of $123,000. Had this impaired loan performed
	in accordance with its original terms, interest income of
	approximately $37,000 would have been recognized during the year
	ended December 31, 1999. This loan was greater than
	60 days past due and we are in the process of liquidation at
	 December 31, 1999. At December 31, 1998 there were no
	investments identified as impaired.
|
| | There were no other 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, 1999.                                                                                                                                                                                                                                                                                                                                                                  

F-42



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##### Table of Contents



PMC CAPITAL, L.P. 1998-1


NOTES TO FINANCIAL STATEMENTS




| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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:

|        |  |                |     |      |  |  |     |  
|------- |  | -------------- | --- | ---- |  |  | --- | -
|        |  |               
|        |  | Percentage of 
|        |  | Loan Portfolio
|        |  | December 31,  
|        |  |               
|State   |  | 1999           |     | 1998
|        |  |                |     |     
|Texas   |  |                | 25  | %    |  |  | 23  | %
|Arizona |  |                | 10  | %    |  |  | 9   | %
|Georgia |  |                | 7   | %    |  |  | 7   | %
|Other   |  |                | 58  | %    |  |  | 61  | %
|        |  |                |     |      |  |  |     |  
|        |  |                | 100 | %    |  |  | 100 | %
|        |  |                |     |      |  |  |     |  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | No other state had a concentration greater than
	10%. A decline in economic conditions in any of these states may
	adversely affect the Partnership. At December 31, 1999 and
	1998 loans to businesses in the lodging industry comprised 75%
	and 73% of loans receivable, respectively, and 67% and 64% of
	total assets, respectively. Any economic factors that negatively
	impact the lodging industry could have a material adverse effect
	on the business of the Partnership.

Note 3.  Notes Payable:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On November 24, 1998, the Partnership
	completed a private placement of approximately $39.6 million
	 of its Loan-Backed Adjustable Rate Class-A Notes, (the
	Class-A Notes) and $2.2 million of its
	Loan-Backed Adjustable Rate Class-B Notes (the Class-B
	Notes, and together with the Class-A Notes, the
	Notes). The Class-A Notes and the Class-B Notes,
	issued at par, which have a stated maturity in 2021 and bear
	interest at the prime rate less 1.0% and 0.9%, (7.25% and 7.35%
	at December 31, 1999, respectively) are collateralized by
	the loans contributed by PMC Capital to the Partnership. In
	connection with this private placement, the Class-A Notes and the
	 Class-B Notes were given a rating of Aaa and
	A1, respectively, by Moodys Investors Service.
	The Class-B Notes were purchased by PMC Capital, Inc., the
	limited partner of the Partnership. 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 Partnership Loans. All
	principal collected on the Partnership 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. As of December 31, 1999 and 1998, the
	balances outstanding on the Notes were $37.9 million and
	$41.0 million, respectively. Since the obligation to pay
	principal on the Notes is based upon the principal payments
	received on the loans, there is not annual contractual obligation
	 to repay the Notes.

Note 4.  Partners Capital:



| |                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The net proceeds from the issuance of the Notes
	(approximately $39.8 million prior to the payment of
	issuance costs of approximately $500,000 and the funding of a
	$2.6 million reserve fund held by the trustee as collateral)
	 were distributed to PMC Capital.

F-43



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##### Table of Contents



PMC CAPITAL, L.P. 1998-1


NOTES TO FINANCIAL STATEMENTS


Note 5.  Fair Values of Financial
Instruments:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Partnerships financial investments
	consist of loans receivable, restricted investments and notes
	payable. The estimates of fair value as required by Statement of
	Financial Accounting Standards (SFAS) No. 107 do
	 not differ from the value as determined by the General Partner
	primarily as a result of the loans receivable and notes payable
	having variable rates of interest. The carrying value of the
	restricted investments approximate fair value due to the nature
	of the assets.

Note 6.  Related Party Transactions:



| |                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 1999 and 1998, the
	Partnership had a balance due to the Limited Partner of $511,000
	and $450,000, respectively. This balance is non-interest bearing
	and due on demand.

F-44



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##### Table of Contents



PMC CAPITAL, L.P. 1999-1




INDEX TO FINANCIAL STATEMENTS


|                                  |                                                                                                    |  |       |       | 
|--------------------------------- | -------------------------------------------------------------------------------------------------- |  | ----- | ----- | 
|                                 
|                                 
|                                 
|                                 
|Report of Independent Accountants |                                                                                                    |  | F- 46 |      
|                                 
|                                 
|                                 
|                                 
|                                 
|Financial Statements:             |                                                                                                    |  |       |      
|                                 
|                                 
|                                 
|                                 
|                                 
|                                  | Statement of Assets, Liabilities and Partners Capital as of
	 December 31, 1999                   |  |       | F- 47 | 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                  | Statement of Income for the period from May 27, 1999 (Inception)to December 31, 1999               |  |       | F- 48 | 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                  | Statement of Partners Capital for the period from May 
	 27, 1999 (Inception)to December 31, 1999 |  |       | F- 49 | 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                  | Statement of Cash Flows for the period from May 27, 1999 (Inception)to December 31, 1999           |  |       | F- 50 | 
|                                 
|                                 
|                                 
|                                 
|                                 
|                                  | Notes to Financial Statements                                                                      |  |       | F- 51 | 

F-45



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##### Table of Contents






Report of Independent Accountants

To the General Partner

PMC Capital, L.P. 1999-1:


In our opinion, the accompanying statements of
assets, liabilities and partners capital and the related
statements of income, partners capital and cash flows
present fairly, in all material respects, the financial position
of PMC Capital, L.P. 1999-1 at December 31, 1999 and
the results of its operations and cash flows for the period from
May 27, 1999 (inception) to December 31, 1999, in
conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility
of the Companys management; our responsibility is to
express an opinion on these financial statements based on our
audit. We conducted our audit of these statements in accordance
with auditing standards generally accepted in the United States
which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating
 the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed
above.



| |                           
| | --------------------------
| | PricewaterhouseCoopers LLP

February 25, 2000

Dallas, Texas


F-46



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##### Table of Contents



PMC CAPITAL, L.P. 1999-1




STATEMENT OF ASSETS, LIABILITIES AND
PARTNERS CAPITAL


(In thousands)


|                                        |                             |              |        |        |  
|--------------------------------------- | --------------------------- | ------------ | ------ | ------ | -
|                                        |                             | December 31,
|                                        |                             | 1999        
|                                        |                             |             
|ASSETS                                  |                             |              |        |       
|                                       
|                                       
|                                       
|                                       
|                                       
|Investments:                            |                             |              |        |       
|                                        | Loans receivable, net       |              | $      | 57,528 |  
|                                        | Restricted investments      |              |        | 4,349  |  
|                                        |                             |              |        |       
|Total investments                       |                             |              | 61,877 |       
|                                        |                             |              |        |       
|Other assets:                           |                             |              |        |       
|                                        | Accrued interest receivable |              |        | 300    |  
|                                        |                             |              |        |       
|Total other assets                      |                             |              | 300    |       
|                                        |                             |              |        |       
|Total assets                            |                             | $            | 62,177 |       
|                                        |                             |              |        |       
|                                       
|LIABILITIES AND PARTNERS CAPITAL       |                             |              |        |       
|                                       
|                                       
|                                       
|                                       
|                                       
|Liabilities:                            |                             |              |        |       
|                                        | Notes payable               |              | $      | 53,167 |  
|                                        | Accrued interest payable    |              |        | 292    |  
|                                        | Due to limited partner      |              |        | 769    |  
|                                        |                             |              |        |       
|Total liabilities                       |                             |              | 54,228 |       
|                                        |                             |              |        |       
|Partners capital:                      |                             |              |        |       
|                                        | General partners interest  |              |        | (1     | )
|                                        | Limited partners interest  |              |        | 7,950  |  
|                                        |                             |              |        |       
|                                        |                             |              | 7,949  |       
|                                        |                             |              |        |       
|Total liabilities and partners capital |                             | $            | 62,177 |       
|                                        |                             |              |        |       

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

F-47



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##### Table of Contents



PMC CAPITAL, L.P. 1999-1




STATEMENT OF INCOME


(In thousands)


|                        |                              |                  |       |       | 
|----------------------- | ---------------------------- | ---------------- | ----- | ----- | 
|                        |                              | May 27,         
|                        |                              | 1999 (Inception)
|                        |                              | to December 31, 
|                        |                              | 1999            
|                        |                              |                 
|Investment income:      |                              |                  |       |      
|                        | Interest                     |                  | $     | 3,364 | 
|                        | Other investment income, net |                  |       | 114   | 
|                        |                              |                  |       |      
|Total investment income |                              |                  | 3,478 |      
|                        |                              |                  |       |      
|Expenses:               |                              |                  |       |      
|                        | Interest                     |                  |       | 2,084 | 
|                        | General and administrative   |                  |       | 111   | 
|                        |                              |                  |       |      
|Total expenses          |                              |                  | 2,195 |      
|                        |                              |                  |       |      
|Net income              |                              | $                | 1,283 |      
|                        |                              |                  |       |      

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

F-48



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##### Table of Contents



PMC CAPITAL, L.P. 1999-1




STATEMENTS OF PARTNERS CAPITAL


PERIOD FROM MAY 27, 1999 (INCEPTION) TO
DECEMBER 31, 1999


(In thousands)


|                                                                      |  |           |         |           |  |       |    |   |  |   |         |  
|--------------------------------------------------------------------- |  | --------- | ------- | --------- |  | ----- | -- | - |  | - | ------- | -
|                                                                      |  | Limited   |         | General   |  |      
|                                                                      |  | Partners |         | Partners |  |      
|                                                                      |  | Interest  |         | Interest  |  | Total
|                                                                      |  |           |         |           |  |      
|Balance, May 27, 1999 (inception)                                     |  | $         | -       |           |  | $     | -  |   |  | $ | -       |  
|                                                                     
|Limited Partners contribution of loans receivable and other
	 assets |  |           | 63,982  |           |  |       | -  |   |  |   | 63,982  |  
|                                                                     
|Net income                                                            |  |           | 1,282   |           |  |       | 1  |   |  |   | 1,283   |  
|                                                                     
|Partnership distributions                                             |  |           | (57,314 | )         |  |       | (2 | ) |  |   | (57,316 | )
|                                                                      |  |           |         |           |  |       |    |   |  |   |         |  
|                                                                     
|Balance, December 31, 1999                                            |  | $         | 7,950   |           |  | $     | (1 | ) |  | $ | 7,949   |  
|                                                                      |  |           |         |           |  |       |    |   |  |   |         |  

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

F-49



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##### Table of Contents



PMC CAPITAL, L.P. 1999-1

STATEMENT OF CASH FLOWS


(In thousands)


|                                                     |                                                                                    |                                                 |                             |         |   |      |  
|---------------------------------------------------- | ---------------------------------------------------------------------------------- | ----------------------------------------------- | --------------------------- | ------- | - | ---- | -
|                                                     |                                                                                    | May 27,                                        
|                                                     |                                                                                    | 1999 (Inception)                               
|                                                     |                                                                                    | to December 31,                                
|                                                     |                                                                                    | 1999                                           
|                                                     |                                                                                    |                                                
|Cash flows from operating activities:                |                                                                                    |                                                 |                             |        
|                                                     | Net income                                                                         |                                                 | $                           | 1,283   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net income to net cash provided by
	operating activities: |                                                 |                             |         |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                    | Net change in operating assets and liabilities: |                             |         |   |     
|                                                     |                                                                                    |                                                 | Accrued interest receivable |         |   | (300 | )
|                                                     |                                                                                    |                                                 | Accrued interest payable    |         |   | 292  |  
|                                                     |                                                                                    |                                                 |                             |        
|Net cash provided by operating activities            |                                                                                    |                                                 | 1,275                       |        
|                                                     |                                                                                    |                                                 |                             |        
|Cash flows from investing activities:                |                                                                                    |                                                 |                             |        
|                                                     | Principal collected and other adjustments                                          |                                                 |                             | 2,940   |  
|                                                     | Investment in restricted cash, net                                                 |                                                 |                             | (4,349  | )
|                                                     |                                                                                    |                                                 |                             |        
|Net cash used in investing activities                |                                                                                    |                                                 | (1,409                      | )      
|                                                     |                                                                                    |                                                 |                             |        
|Cash flows from financing activities:                |                                                                                    |                                                 |                             |        
|                                                     | Proceeds from issuance of notes payable                                            |                                                 |                             | 55,649  |  
|                                                     | Payment on notes payable                                                           |                                                 |                             | (2,482  | )
|                                                     | Partner distributions                                                              |                                                 |                             | (57,316 | )
|                                                     | Partner contributions                                                              |                                                 |                             | 3,514   |  
|                                                     | Advances from limited partner, net                                                 |                                                 |                             | 769     |  
|                                                     |                                                                                    |                                                 |                             |        
|Net cash provided by financing activities            |                                                                                    |                                                 | 134                         |        
|                                                     |                                                                                    |                                                 |                             |        
|Net increase (decrease) in cash and cash equivalents |                                                                                    |                                                 | -                           |        
|Cash and cash equivalents, beginning of period       |                                                                                    |                                                 | -                           |        
|                                                     |                                                                                    |                                                 |                             |        
|Cash and cash equivalents, end of year               |                                                                                    | $                                               | -                           |        
|                                                     |                                                                                    |                                                 |                             |        
|Supplemental disclosure:                             |                                                                                    |                                                 |                             |        
|                                                     | Loans contributed from limited partner                                             |                                                 | $                           | 60,468  |  
|                                                     |                                                                                    |                                                 |                             |        
|                                                     | Interest paid                                                                      |                                                 | $                           | 1,792   |  
|                                                     |                                                                                    |                                                 |                             |        

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

F-50



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##### Table of Contents



PMC CAPITAL, L.P. 1999-1




NOTES TO FINANCIAL STATEMENTS


Note 1.  Summary of Significant
Accounting Policies:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Business:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | PMC Capital, L.P. 1999-1 (the
	Partnership) was formed as a Delaware limited
	partnership in May 1999 to act as a special purpose affiliate of
	PMC Capital, Inc. (PMC Capital), the 99.9%
	limited partner. PMC Capital Corp. 1999-1 is a Delaware
	corporation formed in May 1999 to be the General Partner (0.1%
	ownership) of the Partnership. The Partnership was established to
	 acquire loans from PMC Capital and to issue variable-rate debt
	through a private placement. PMC Capital is either directly or
	indirectly the sole 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.                                                                                                                   
|
| | Loans Receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Loans receivable are carried at amortized cost
	which is the loan principal balance, 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.                                                        
|
| | 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.                                                                                                                                                                                                                                                                                                                             
|
| | 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 June 3, 1999, PMC Capital either
	contributed or sold the aggregate amount of $60.3 million of
	 loans (the Partnership Loans) to the Partnership
	without recourse to PMC Capital.                          
|
| | At December 31, 1999 there were no recorded
	investments in loans identified as impaired                                                                                                                          
|
| | There were no other 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, 1999.

F-51



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##### Table of Contents



PMC CAPITAL, L.P. 1999-1


NOTES TO FINANCIAL STATEMENTS




| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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:

|           |  |                   |     |  
|---------- |  | ----------------- | --- | -
|           |  | Percentage of    
|           |  | Loan Portfolio at
|           |  | December 31,     
|State      |  | 1999             
|           |  |                  
|Texas      |  |                   | 36  | %
|California |  |                   | 10  | %
|Virginia   |  |                   | 7   | %
|Other      |  |                   | 47  | %
|           |  |                   |     |  
|           |  |                   | 100 | %
|           |  |                   |     |  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | No other state had a concentration greater than
	10%. A decline in economic conditions in Texas or California may
	adversely affect the Partnership. At December 31, 1999 loans
	 to businesses in the lodging industry comprised 91% of loans
	receivable and 84% of total assets. Any economic factors that
	negatively impact the lodging industry could have a material
	adverse effect on the business of the Partnership.

Note 3.  Notes Payable:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On May 27, 1999, the Partnership completed a
	private placement of approximately $55.6 million of its
	Loan-Backed Fixed Rate Notes, (the Notes). The Notes,
	 issued at par, which have a stated maturity in 2024 and bear
	interest at 6.6%, 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 Aaa, 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 Partnership Loans. All
	principal collected on the Partnership 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. As of December 31, 1999, the balance
	outstanding on the Notes were $53.2 million. Since the
	obligation to pay principal on the Notes is based upon the
	principal payments received on the loans, there is no annual
	contractual obligation to repay the Notes.

Note 4.  Partners Capital:



| |                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The net proceeds from the issuance of the Notes
	(approximately $55.6 million prior to the payment of
	issuance costs of approximately $500,000 and the funding of a
	$1.8 million reserve fund held by the trustee as collateral)
	 were distributed to PMC Capital.

Note 5.  Fair Values of Financial
Instruments:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The estimates of fair value as required by
	Statement of Financial Accounting Standards (SFAS)
	No. 107 do not differ from the value of the financial assets
	 and liabilities determined by the General Partner primarily as a
	 result of the recent completion of the asset purchase at fair
	value and the portfolio assets having variable rates of interest.
	 Considerable judgment 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.

F-52



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##### Table of Contents



PMC CAPITAL, L.P. 1999-1


NOTES TO FINANCIAL STATEMENTS




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

|             |                        |          |   |        |  |  |   |        | 
|------------ | ---------------------- | -------- | - | ------ |  |  | - | ------ | 
|             |                        |         
|             |                        | 1999    
|             |                        |         
|             |                        | Carrying |   | Fair  
|             |                        | Amount   |   | Value 
|             |                        |          |   |       
|Assets:      |                        |          |   |        |  |  |   |       
|            
|            
|            
|            
|             | Loans receivable, net  |          | $ | 57,528 |  |  | $ | 56,936 | 
|            
|            
|            
|            
|             | Restricted investments |          |   | 4,349  |  |  |   | 4,349  | 
|            
|            
|            
|            
|Liabilities: |                        |          |   |        |  |  |   |       
|            
|            
|            
|            
|             | Notes payable          |          |   | 53,167 |  |  |   | 50,804 | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Loans receivable, net:
	The estimated fair value for all 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.
|
| | 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 6.  Related Party Transactions:



| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 1999, the Partnership had a
	balance due to the Limited Partner of $769,000. This balance is
	non-interest bearing and due on demand.

F-53



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##### Table of Contents






EXHIBITS

|        |         |             |  |                                                                                                                                                                                                                                               |  |  |  | 
|------- | ------- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |         | Description |  | Page                                                                                                                                                                                                                                         
|        |         |             |  |                                                                                                                                                                                                                                              
|        | 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), 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).                                                                                          |  |  |  | 
|       
|        | ****4.2 |             |  | Debenture dated September 24, 1996 for $2,490,000 loan with
	SBA.                                                                                                                                                                             |  |  |  | 
|       
|        | 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).                                                              |  |  |  | 
|       
|        | 4.11    |             |  | 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).                                                           |  |  |  | 
|       
|        | **4.13  |             |  | 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.                                                                                                                                                        |  |  |  | 

E-1



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##### Table of Contents



| |          |  |  |                                                                                                      |  |  |  | 
| | -------- |  |  | ---------------------------------------------------------------------------------------------------- |  |  |  | 
| | **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.                                    |  |  |  | 
|
| | ***4.25  |  |  | 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. |  |  |  | 
|
| | ***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.                 |  |  |  | 
|
| | *4.32    |  |  | Senior Note dated July 19, 1999 for $10,000,000 with
	Equitable Life Insurance Company of Iowa.      |  |  |  | 
|
| | *10.1    |  |  | Employment contract between the Registrant and Lance B.
	Rosemore dated July 1, 1999.                |  |  |  | 
|
| | *10.2    |  |  | Employment contract between the Registrant and Andrew S.
	Rosemore dated July 1, 1999.               |  |  |  | 
|
| | *10.4    |  |  | Employment contract between the Registrant and Jan F. Salit
	dated July 1, 1999.                     |  |  |  | 

E-2



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##### Table of Contents



| |             |  |  |                                                                                                                                                                                                                                                                                     |  |  |  | 
| | ----------- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
| | *10.5       |  |  | Employment contract between the Registrant and Barry N.
	Berlin dated July 1, 1999.                                                                                                                                                                                                 |  |  |  | 
|
| | *10.6       |  |  | Employment contract between the Registrant and Mary J.
	Brownmiller dated July 1, 1999.                                                                                                                                                                                             |  |  |  | 
|
| | 10.7        |  |  | First Amended and Restated Revolving Credit Note dated as of
	March 15, 1998-(incorporated by reference from
	Registrants Form 10-Q for the quarterly period ended
	March 31, 1998)                                                                                                |  |  |  | 
|
| | ****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 Stock Option Plan.                                                                                                                                                                                                                              |  |  |  | 
|
| | *****10.10  |  |  | PMC Capital, Inc. 1997 Employee Stock Option Plan.                                                                                                                                                                                                                                  |  |  |  | 
|
| | *10.11      |  |  | Employment contract between the Registrant and Cheryl T.
	Murray dated July 1, 1999.                                                                                                                                                                                                |  |  |  | 
|
| | ******10.12 |  |  | Servicing Agreement by and among Harris Trust savings Bank,as
	Trustee and Supervisory Servicer, PMC Capital L.P. 1998-1,
	as Issuer, and PMC Capital, Inc., as Servicer.                                                                                                           |  |  |  | 
|
| | 10.13       |  |  | Second Amendment to Loan Agreement and Amendment to Loan
	Documents and Renewal and Extension of loan dated as of
	March 15, 1998-(incorporated by reference from
	Registrants Form 10-Q for the quarterly period ended
	March 31, 1998)                                           |  |  |  | 
|
| | 10.14       |  |  | Servicing Agreement by and among Harris Trust Savings Bank, as
	Trustee and Supervisory Servicer, PMC Capital L.P. 1999-1,
	as Issuer, and PMC Capital, Inc., as Servicer.-(incorporated
	 by reference from Registrants Form  10-Q for the
	quarterly period ended June 30, 1999) |  |  |  | 
|
| | *21         |  |  | Subsidiaries of Registrant                                                                                                                                                                                                                                                          |  |  |  | 



---



|       |                                                                                                                                
|------ | -------------------------------------------------------------------------------------------------------------------------------
|*      | 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
|      
|*****  | Previously filed with the Commission as an exhibit
	 to the Registrants Form 10-K for the fiscal year ended
	December 31, 1997
|      
|****** | Previously filed with the Commission as an exhibit
	 to the Registrants Form 10-K for the fiscal year ended
	December 31, 1998

E-3