##### Table of Contents



SECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2001



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

For the Transition Period From _____________ to _____________ .

Commission File Number: 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 o

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

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 March
20, 2002 as reported on the American Stock Exchange, was approximately $73
million. Common Stock held by each officer and director and by each person
who owns 10% or more of the outstanding Common Stock has been excluded
because such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.

As of March 20, 2002, the Registrant had 11,853,516 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrants Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the year covered by this Form
10-K with respect to the Annual Meeting of Shareholders to be held on May
15, 2002 are incorporated by reference into Part III.





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TABLE OF CONTENTS



|                                                  |                                                                                                                   |                                   |  |  |  |  |  | 
|------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | --------------------------------- |  |  |  |  |  | 
|PART I                                           
|                                                  | Item 1. BUSINESS                                                                                                 
|                                                  | Item 2. PROPERTIES                                                                                               
|                                                  | Item 3. LEGAL PROCEEDINGS                                                                                        
|                                                  | Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                      
|PART II                                          
|                                                  | Item 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERS                                 
|                                                  | Item 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                                     
|                                                  | Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                    
|                                                  | Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                              
|                                                  | Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                 
|                                                  | Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING                      AND FINANCIAL DISCLOSURE
|PART III                                         
|                                                  | Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                      
|                                                  | Item 11. EXECUTIVE COMPENSATION                                                                                  
|                                                  | Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                          
|                                                  | Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                          
|                                                  | Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                                         
|SIGNATURES                                       
|                                                  |                                                                                                                   | Consolidated Financial Statements
|EX-4.36 Senior Note Agreement                    
|EX-10.1 Employment Contract - Lance B. Rosemore  
|EX-10.2 Employment Contract - Andrew S. Rosemore 
|EX-10.4 Employment Contract - Jan F. Salit       
|EX-10.5 Employment Contract - Barry N. Berlin    
|EX-10.6 Employment Contract - Mary J. Brownmiller
|EX-10.10 Employment Contract - Cheryl T. Murray  
|EX-10.18 Third Amendment to Credit Agreement     
|EX-10.19 Fourth Amendment to Credit Agreement    
|EX-10.20 Fifth Amendment to Credit Agreement     
|EX-10.21 Sixth Amendment to Credit Agreement     
|EX-10.22 Investment Management Agreement         
|EX-21.1 Subsidiaries of Registrant               



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##### Table of Contents



PMC CAPITAL, INC.

Form 10-K
For the Year Ended December 31, 2001



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TABLE OF CONTENTS

|                                                                                             |  |  |      |  | 
|-------------------------------------------------------------------------------------------- |  |  | ---- |  | 
|PART I                                                                                       |  |  |      | 
|ITEM                                                                                         |  |  | PAGE | 
|                                                                                             |  |  |      | 
|1.     Business                                                                              |  |  | 2    | 
|2.     Properties                                                                            |  |  | 18   | 
|3.     Legal Proceedings                                                                     |  |  | 18   | 
|4.     Submission of Matters to a Vote of Security Holders                                   |  |  | 18   | 
|                                                                                             |  |  |      | 
|PART II                                                                                      |  |  |      | 
|                                                                                             |  |  |      | 
|5.     Market for the Registrants Common Stock and Related Shareholder
Matters              |  |  | 19   | 
|6.     Selected Consolidated Financial Data                                                  |  |  | 20   | 
|7.     Managements Discussion and Analysis of Financial Condition and
Results of Operations |  |  | 21   | 
|7A.  Quantitative and Qualitative Disclosures about Market Risk                              |  |  | 38   | 
|8.     Consolidated Financial Statements and Supplementary Data                              |  |  | 39   | 
|9.     Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure  |  |  | 39   | 
|                                                                                             |  |  |      | 
|PART III                                                                                     |  |  |      | 
|                                                                                             |  |  |      | 
|10.    Directors and Executive Officers of the Registrant                                    |  |  | 40   | 
|11.    Executive Compensation                                                                |  |  | 40   | 
|12.    Security Ownership of Certain Beneficial Owners and Management                        |  |  | 40   | 
|13.    Certain Relationships and Related Transactions                                        |  |  | 40   | 
|                                                                                             |  |  |      | 
|PART IV                                                                                      |  |  |      | 
|                                                                                             |  |  |      | 
|14.    Exhibits, Financial Statements, Schedules and Reports on Form 8-K                     |  |  | 41   | 
|Signatures                                                                                   |  |  | 42   | 
|Consolidated 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 under the Internal Revenue Code and thus distributes substantially
all of its taxable income as dividends to its shareholders, thereby
incurring no Federal income tax liability on such income.

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

Lending Activities

We primarily originate loans to individuals and small business concerns
in the limited service sector of the lodging industry. We have a
fundamental policy with respect to loan concentration that requires us to
have at least 25% of our total assets invested in the lodging industry, and
at December 31, 2001 our concentration was 56%. We also emphasize lending
to the convenience store and gas station, medical, restaurant, 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. Our loans in the lodging industry are generally
collateralized by limited service hospitality properties and are generally
made to owner-operated facilities operating under national franchises. We
believe that franchise operations offer attractive lending opportunities
because such businesses generally employ proven business concepts, have
national reservation systems, have consistent product quality, are screened
and monitored by franchisors and generally have a higher rate of success
when compared to other independently operated businesses.

We originate mortgage loans to small businesses primarily
collateralized by commercial real estate. We believe that we successfully
compete in the commercial real estate finance market due to our
understanding of the borrowers businesses and the flexible loan terms that
we offer. Our approach in assessing new commercial mortgage loans 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
tenant or owner-occupant as well as more traditional real estate loan
underwriting criteria.

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We generally price new fixed-rate commercial mortgage loans based on a
fixed spread ranging from 3.75% to 4.5% over the ten-year U.S. Treasury
rate. At December 31, 2001, 64% of our loans receivable carried a fixed
interest rate and 36% carried a floating interest rate based on the prime
rate or LIBOR. Our fixed interest rate loans receivable primarily require
level payments of principal and interest calculated to amortize the
principal on a ten to 25-year basis. Certain loans receivable with less
than a 25-year maturity have a balloon payment at maturity. Our variable
interest rate loans receivable primarily require payments of principal and
interest, reset on a quarterly basis, to fully amortize the loan over its
life (typically ten to 20 years.)

The following table sets forth the amount of our loans originated and
repaid during the years indicated:

|                                            |  |                          |         |      |  |      |         |      |  |                |         |   |  |   |         |   |  |   |         |  
|------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | ---- |  | -------------- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                            |  | Years Ended December 31,
|                                            |  |                         
|                                            |  | 2001                     |         | 2000 |  | 1999 |         | 1998 |  | 1997          
|                                            |  |                          |         |      |  |      |         |      |  |               
|                                            |  |                          |         |      |  |      |         |      |  | (In thousands) |         |   |  |   |         |   |  |  
|Loans receivable, net -
beginning of period |  | $                        | 100,353 |      |  | $    | 106,325 |      |  | $              | 116,711 |   |  | $ | 127,240 |   |  | $ | 93,354  |  
|Loans originated                            |  |                          | 65,977  |      |  |      | 44,158  |      |  |                | 84,264  |   |  |   | 66,450  |   |  |   | 86,361  |  
|Loan repayments(1)                          |  |                          | (10,063 | )    |  |      | (11,233 | )    |  |                | (15,431 | ) |  |   | (23,538 | ) |  |   | (8,285  | )
|Structured loan sales(2)                    |  |                          | (49,194 | )    |  |      | (28,046 | )    |  |                | (60,481 | ) |  |   | (43,144 | ) |  |   | (22,810 | )
|Loans sold(3)                               |  |                          | (7,778  | )    |  |      | (9,584  | )    |  |                | (19,152 | ) |  |   | (9,978  | ) |  |   | (21,638 | )
|Loans purchased(4)                          |  |                          | 8,634   |      |  |      |        |      |  |                |        |   |  |   |        |   |  |   |        |  
|Other adjustments(5)                        |  |                          | (537    | )    |  |      | (1,267  | )    |  |                | 414     |   |  |   | (319    | ) |  |   | 258     |  
|                                            |  |                          |         |      |  |      |         |      |  |                |         |   |  |   |         |   |  |   |         |  
|Loans receivable, net -
end of period       |  | $                        | 107,392 |      |  | $    | 100,353 |      |  | $              | 106,325 |   |  | $ | 116,711 |   |  | $ | 127,240 |  
|                                            |  |                          |         |      |  |      |         |      |  |                |         |   |  |   |         |   |  |   |         |  



---

|(1) |  | Includes loans receivable which were repaid prior to their contractual
maturity.                                                                                          
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | We sold loans receivable as part of structured loan transactions.                                                                                                         
|   
|(3) |  | First Western sells the guaranteed portion of its loans receivable
through private placements to either dealers in government guaranteed
loans or institutional investors.
|   
|(4) |  | Represents the purchase of loans though our exercise of optional
redemption provisions from affiliated special purpose entities.                                          
|   
|(5) |  | Includes the change in provision for loan losses and loans written-off.                                                                                                   

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

|               |       |   |                          |        |      |   |        |        |      |   |                |        |  |   |        |        |  |   |        |        | 
|-------------- | ----- | - | ------------------------ | ------ | ---- | - | ------ | ------ | ---- | - | -------------- | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|               |       |   | Years Ended December 31,
|               |       |   |                         
|               |       |   | 2001                     |        | 2000 |   | 1999   |        | 1998 |   | 1997          
|               |       |   |                          |        |      |   |        |        |      |   |               
|               |       |   |                          |        |      |   |        |        |      |   | (In thousands) |        |  |   |        |        |  |   |       
|First Quarter  |       | $ | 15,628                   |        |      | $ | 13,190 |        |      | $ | 17,231         |        |  | $ | 10,937 |        |  | $ | 20,504 |       
|Second Quarter |       |   | 32,850                   |        |      |   | 10,943 |        |      |   | 16,534         |        |  |   | 11,739 |        |  |   | 21,776 |       
|Third Quarter  |       |   | 9,903                    |        |      |   | 10,453 |        |      |   | 27,687         |        |  |   | 16,887 |        |  |   | 20,970 |       
|Fourth Quarter |       |   | 7,596                    |        |      |   | 9,572  |        |      |   | 22,812         |        |  |   | 26,887 |        |  |   | 23,111 |       
|               |       |   |                          |        |      |   |        |        |      |   |                |        |  |   |        |        |  |   |        |       
|               | Total |   | $                        | 65,977 |      |   | $      | 44,158 |      |   | $              | 84,264 |  |   | $      | 66,450 |  |   | $      | 86,361 | 
|               |       |   |                          |        |      |   |        |        |      |   |                |        |  |   |        |        |  |   |        |       

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

|                                |                                |                                         |       |              |     |          |       |        |     |       |       |                        |     |       |       |         |     |   |       |        |     |            |       |         |     |  
|------------------------------- | ------------------------------ | --------------------------------------- | ----- | ------------ | --- | -------- | ----- | ------ | --- | ----- | ----- | ---------------------- | --- | ----- | ----- | ------- | --- | - | ----- | ------ | --- | ---------- | ----- | ------- | --- | -
|                                |                                |                                         |       | December 31,
|                                |                                |                                         |       |             
|                                |                                |                                         |       | 2001         |     | 2000    
|                                |                                |                                         |       |              |     |         
|                                |                                |                                         |       |              |     |          |       |        |     |       |       | Commercial             |     |       |       |         |     |   |       |        |     | Commercial
|                                |                                |                                         |       | Total        |     | SBA 7(a) |       | Loans  |     | Total |       | SBA 7(a)               |     | Loans
|                                |                                |                                         |       |              |     |          |       |        |     |       |       |                        |     |      
|                                |                                |                                         |       |              |     |          |       |        |     |       |       | (Dollars in thousands) |     |       |       |         |     |   |       |       
|Principal balance:              |                                |                                         |       |              |     |          |       |        |     |       |       |                        |     |       |       |         |     |   |       |        |     |            |       |        
|                                | Loans receivable(1)            |                                         | $     | 108,357      |     |          | $     | 17,510 |     |       | $     | 90,847                 |     |       | $     | 101,571 |     |   | $     | 17,223 |     |            | $     | 84,348  |    
|                                | Sold loans of SPEs             |                                         |       | 158,002      |     |          |       | 4,907  |     |       |       | 153,095                |     |       |       | 140,246 |     |   |       | 9,860  |     |            |       | 130,386 |    
|                                | Sold SBA 7(a)
guaranteed loans |                                         |       | 55,409       |     |          |       | 55,409 |     |       |       |                       |     |       |       | 65,933  |     |   |       | 65,933 |     |            |       |        |    
|                                |                                |                                         |       |              |     |          |       |        |     |       |       |                        |     |       |       |         |     |   |       |        |     |            |       |        
|                                | Serviced Loan Portfolio        |                                         | $     | 321,768      |     |          | $     | 77,826 |     |       | $     | 243,942                |     |       | $     | 307,750 |     |   | $     | 93,016 |     |            | $     | 214,734 |    
|                                |                                |                                         |       |              |     |          |       |        |     |       |       |                        |     |       |       |         |     |   |       |        |     |            |       |        
|Weighted average interest rate: |                                |                                         |       |              |     |          |       |        |     |       |       |                        |     |       |       |         |     |   |       |        |     |            |       |        
|                                | Loans receivable               |                                         |       | 9.0          | %   |          |       | 7.9    | %   |       |       | 9.2                    | %   |       |       | 10.4    | %   |   |       | 11.1   | %   |            |       | 10.2    | %  
|                                | Sold loans of SPEs             |                                         |       | 9.1          | %   |          |       | 8.4    | %   |       |       | 9.1                    | %   |       |       | 10.2    | %   |   |       | 12.0   | %   |            |       | 10.0    | %  
|                                | Sold SBA 7(a)
guaranteed loans |                                         |       | 8.0          | %   |          |       | 8.0    | %   |       |       |                       |     |       |       | 11.5    | %   |   |       | 11.5   | %   |            |       |        |    
|                                | Serviced Loan Portfolio        |                                         |       | 8.9          | %   |          |       | 8.1    | %   |       |       | 9.2                    | %   |       |       | 10.5    | %   |   |       | 11.5   | %   |            |       | 10.7    | %  
|                               
|Impaired loans(2):              |                                |                                         |       |              |     |          |       |        |     |       |       |                        |     |       |       |         |     |   |       |        |     |            |       |        
|                                | Loans receivable               |                                         | $     | 6,152        |     |          | $     | 1,308  |     |       | $     | 4,844                  |     |       | $     | 3,046   |     |   | $     | 1,482  |     |            | $     | 1,564   |    
|                                | Sold loans of SPEs             |                                         |       | 1,799        |     |          |       | 125    |     |       |       | 1,674                  |     |       |       | 1,824   |     |   |       | 144    |     |            |       | 1,680   |    
|                                |                                |                                         |       |              |     |          |       |        |     |       |       |                        |     |       |       |         |     |   |       |        |     |            |       |        
|                                |                                | $                                       | 7,951 |              |     | $        | 1,433 |        |     | $     | 6,518 |                        |     | $     | 4,870 |         |     | $ | 1,626 |        |     | $          | 3,244 |        
|                                |                                |                                         |       |              |     |          |       |        |     |       |       |                        |     |       |       |         |     |   |       |        |     |            |       |        
|Percentage impaired loans:      |                                |                                         |       |              |     |          |       |        |     |       |       |                        |     |       |       |         |     |   |       |        |     |            |       |        
|                                |                                | Loans receivable                        |       |              | 5.7 | %        |       |        | 7.5 | %     |       |                        | 5.3 | %     |       |         | 3.0 | % |       |        | 8.6 | %          |       |         | 1.9 | %
|                                |                                | Sold loans of SPEs                      |       |              | 1.1 | %        |       |        | 2.5 | %     |       |                        | 1.1 | %     |       |         | 1.3 | % |       |        | 1.5 | %          |       |         | 1.3 | %
|                                |                                | Loans receivable and sold
loans of SPEs |       |              | 3.0 | %        |       |        | 6.4 | %     |       |                        | 2.7 | %     |       |         | 2.0 | % |       |        | 6.0 | %          |       |         | 1.5 | %

|                  |  |                          |        |      |  |   |       |  |  |                |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|----------------- |  | ------------------------ | ------ | ---- |  | - | ----- |  |  | -------------- | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                  |  | Years Ended December 31,
|                  |  |                         
|                  |  | 2001                     |        | 2000
|                  |  |                          |        |     
|                  |  |                          |        |      |  |   |       |  |  | (In thousands) |        |  |  |   |        |  |  |  
|Loan originations |  | $                        | 65,977 |      |  | $ | 8,011 |  |  | $              | 57,966 |  |  | $ | 44,158 |  |  | $ | 12,294 |  |  | $ | 31,864 | 
|                  |  |                          |        |      |  |   |       |  |  |                |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|Loan losses(3)    |  | $                        | 809    |      |  | $ | 463   |  |  | $              | 346    |  |  | $ | 486    |  |  | $ | 350    |  |  | $ | 136    | 
|                  |  |                          |        |      |  |   |       |  |  |                |        |  |  |   |        |  |  |   |        |  |  |   |        | 



---

|(1) |  | Balances are at cost of loans, plus discounts aggregating $522,000 and
$559,000 and reserves of $443,000 and
$659,000 at December 31, 2001 and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes those loans receivable which are either past due greater
than 60 days or the collection of the balance of principal and interest
is considered impaired and a loan loss reserve has been established.
The balance does not include the principal balance of loans which have
been identified as potential problems for which it is expected that a
full recovery of the principal balance will be received through either
collection efforts or liquidation of collateral (Special Mention
Loans). Our Special Mention Loans were $1.5 million (1.4%) of our loans
receivable and $6.5 million (4.1%) of our sold loans as of December 31,
2001. Since the sold SBA 7(a) guaranteed loans are secured by a
government guarantee, we do not have exposure to loss. Accordingly,
impaired loan statistics for our SBA 7(a) guaranteed loans have not been
presented.
|   
|(3) |  | Represents loans written-off and the change in unrealized appreciation
(depreciation) of loans receivable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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Non-Investment Company Act Subsidiaries

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

Structured Loan Transactions

General

Structured loan sale transactions are currently our primary method of
obtaining funds for new loan originations.

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

We account for structured loan sale transactions as sales of our loans
receivable; as a result, neither the loans receivable contributed to the SPE
nor the notes payable issued by the SPE are included in our consolidated
financial statements. When a structured loan sale transaction is completed;
(1) our ownership interests in the SPEs are accounted for as retained
interests in transferred assets (the Retained Interests) and are recorded
at the present value of our estimated future cash flows to be received from
the SPE and (2) the difference between (i) the carrying value of the loans
receivable sold and (ii) the sum of (a) cash received and (b) the initial
value of our Retained Interests constitutes the gain or loss on sale. Gains
or losses on these sales may represent a material portion of our net
operating income and realized and unrealized gain (loss) on investments
(hereinafter called net income) in the period in which the transactions
occur. These gains or losses also cause timing differences between our net
income determined in accordance with generally accepted accounting
principles and our investment company taxable income. See Risk Factors  Fluctuations in Quarterly Results and Managements Discussion and Analysis
of Financial Condition and Results of Operations  Liquidity and Capital
Resources  Dividends.

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

Problems in the asset-backed securities market that could affect our
ability to complete a structured loan transaction on a timely basis or may
cause us to sell our loans receivable on unfavorable terms include the
following:



| |  |  | Increased interest rates;                                                   
| | - |  | ----------------------------------------------------------------------------
|
| |  |  | Increased cash reserve requirements; or                                     
|
| |  |  | A requirement that we hold larger subordinated portions of loans receivable.

Each of the items described above would have a negative impact on our
net income. In addition, certain economic conditions may cause investors in
the type of asset-backed securities that we place to widen the spreads
they require in order to purchase asset-backed securities. See Risk
Factors  Market for Structured Loan Transactions.

5



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Cash Flows of the SPEs

Our Retained Interests consist of required overcollateralization, cash
reserves and an interest-only strip receivable (the IO Receivable). The
value of our Retained Interests is determined based on the present value of
estimated future cash flows that we will receive from the SPEs. The
estimated future cash flows are calculated based on managements assumptions
concerning, among other things, loan losses, prepayment speeds and discount
rates. On a quarterly basis, we measure the fair value of, and record
income relating to, the Retained Interests based upon the future anticipated
cash flows discounted based on our estimate of market interest rates for
investments of this type. Any appreciation (depreciation) of our Retained
Interests is included in the accompanying statement of income as either
realized or unrealized gain (loss) on investments.

We retain a portion of the default and prepayment risk associated with
our Retained Interests. Actual defaults and prepayments may vary from our
assumptions, possibly to a material degree, and slower (faster) than
anticipated prepayments of principal or lower (higher) than anticipated loan
losses will increase (decrease) the fair value of our Retained Interests and
the related cash flows.

We regularly measure our loan loss, prepayment and other assumptions
against the actual performance of the loans receivable sold. Although we
believe that we have made reasonable assumptions as to the future cash
flows, actual rates of loss or prepayments may vary from those assumed and
other assumptions may be revised based upon anticipated future events.

At the time a structured loan sale transaction is completed, we enter
into agreements (the Credit Enhancement Agreements) that govern the assets
and the flow of funds in and out of the SPE formed as part of the structured
loan sale transaction. Generally, the Credit Enhancement Agreements contain
specified limits on the delinquency, default and loss rates on loans
receivable included in each SPE. If, at any measurement date, the
delinquency, default or loss rate with respect to any SPE were to exceed the
specified limits, provisions of the Credit Enhancement Agreements would
automatically increase the level of credit enhancement requirements for that
SPE. During the period in which the specified delinquency, default or loss
rate was exceeded, excess cash flow from the SPE, if any, would be used to
fund the increased credit enhancement levels instead of being distributed to
us, which would delay our distributions or could reduce our cash flow. To
date, we have not had a reduction of cash flow as a result of an increased
credit enhancement requirement associated with our structured loan
transactions.

In connection with our structured loan sale transactions, limited
partnerships and joint ventures have been formed as SPEs to hold the loans
receivable sold and issue certificates or notes payable collateralized by
the loans receivable. As of December 31, 2001, our SPEs consisted of:



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

PMC Capital owns 100% of First Western 1997, the 1998 Partnership and
the 1999 Partnership. In addition, PMC Capital owns approximately 33.3% of
the 2000 Joint Venture and 59.5% of the 2001 Joint Venture as of December
31, 2001 with the balance owned by PMC Commercial Trust (PMC Commercial),
a company affiliated with us through common management. Moodys Investors
Service, Inc. has rated all of the transactions as detailed below.

6



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##### Table of Contents



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

|                                            |                      |            |                         |        |             |       |                        |        |            |       |            |        |   |  |      |        |   |  |      |        |  
|------------------------------------------- | -------------------- | ---------- | ----------------------- | ------ | ----------- | ----- | ---------------------- | ------ | ---------- | ----- | ---------- | ------ | - |  | ---- | ------ | - |  | ---- | ------ | -
|                                            |                      |            | As of December 31, 2001
|                                            |                      |            |                        
|                                            |                      |            | First Western           |        | 1998        |       | 1999                   |        | 2000 Joint |       | 2001 Joint
|                                            |                      |            | 1997(1)                 |        | Partnership |       | Partnership            |        | Venture    |       | Venture   
|                                            |                      |            |                         |        |             |       |                        |        |            |       |           
|                                            |                      |            |                         |        |             |       | (Dollars in thousands) |        |            |       |           
|Principal amount of loans sold:             |                      |            |                         |        |             |       |                        |        |            |       |            |        |   |  |      |        |   |  |      |       
|                                            | At time of sale      |            | $                       | 22,810 |             |       | $                      | 43,144 |            |       | $          | 60,468 |   |  | $    | 28,039 |   |  | $    | 49,257 |  
|                                            | At December 31, 2001 |            | $                       | 4,907  |             |       | $                      | 29,926 |            |       | $          | 47,909 |   |  | $    | 26,612 |   |  | $    | 48,648 |  
|Weighted average interest rate(2):          |                      |            |                         |        |             |       |                        |        |            |       |            |        |   |  |      |        |   |  |      |       
|                                            | At time of sale      |            |                         | P+2.48 | %           |       |                        | P+1.26 | %          |       |            | 9.59   | % |  |      | 9.54   | % |  |      | 9.78   | %
|                                            | At December 31, 2001 |            |                         | P+2.50 | %           |       |                        | P+1.20 | %          |       |            | 9.50   | % |  |      | 9.32   | % |  |      | 9.78   | %
|Interest rate on the notes/certificates (2) |                      |            | P-1.90                  | %      |             |       | P-1.00                 | %      |            |       | 6.60       | %      |   |  | 7.28 | %      |   |  | 6.36 | %     
|Subordinated interest owned (%)(3)          |                      |            |                        |        |             |       | 5.0                    | %      |            |       |           |        |   |  |     |        |   |  |     |       
|Required overcollateralization (%)(4)       |                      |            |                        |        |             |       | 5.5                    | %      |            |       | 8.0        | %      |   |  | 11.0 | %      |   |  | 8.0  | %     
|Rating of certificates/notes                |                      | "Aaa"/ "A" |                         | "Aaa"  |             | "Aaa" |                        | "Aaa"  |            | "Aaa"
|Cash reserve requirement(%)                 |                      |            | 8.0                     | %      |             |       | 8.0                    | %      |            |       | 6.0        | %      |   |  | 6.0  | %      |   |  | 6.0  | %     



---

|(1) |  | The transaction had both the primary and a subordinated portion of the
transaction rated and sold.                                                                                         
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Variable interest rates are denoted by the spread over (under) the
prime rate (P). The rate for our OC Piece of First Western 1997 is
P-1.55%.                                           
|   
|(3) |  | The subordinated interest owned represents our mortgage-backed
security of affiliate owned by PMC Capital.                                                                                 
|   
|(4) |  | The required overcollateralization percentage represents the
portion of our sold loans receivable retained by the SPEs whose value
is included in retained interests in transferred assets.

PMC Capital Limited Partnership (the 1996 Partnership) completed a
private placement of approximately $40.7 million of its Loan-Backed Fixed
Rate Notes, Series 1996-A (the 1996 L.P. Notes) in November 1996. During
the year ended December 31, 1996, we contributed approximately $45.7 million
in loans receivable to the 1996 Partnership. On November 1, 2001, we
acquired, through exercise of our option, the remaining $6.4 million in
loans receivable through payment of the remaining balance on the 1996 L.P.
Notes of $710,000. We did not recognize any gain or loss as a result of the
acquisition of the loans receivable.

First Western completed a securitization in 1994 and sold approximately
$26.4 million of its loans receivable. On November 16, 2001, we acquired,
through exercise of our option, the remaining $2.4 million in loans
receivable for approximately $2.4 million. We realized a gain of
approximately $77,000 (which had previously been recognized as an unrealized
gain) as a result of the acquisition of the loans receivable.

Structured Loan Sale Transaction Completed During 2001

On June 27, 2001, we completed a structured loan sale transaction of a
pool of fixed-rate loans receivable. PMC Capital and PMC Commercial
contributed loans receivable of $49.2 million and $32.7 million,
respectively, to an SPE (the 2001 Joint Venture). The 2001 Joint Venture
issued, through a private placement, approximately $75.4 million of its 2001
Loan-Backed Fixed Rate Notes (the 2001 L.P. Notes) of which approximately
$45.3 million (the 2001 PMC L.P. Notes) was allocated to us based on our
ownership percentage in the 2001 Joint Venture. The 2001 L.P. Notes, issued
at par, which have a stated maturity in 2021 and bear interest at 6.36%, are
collateralized by the loans receivable contributed by us and PMC Commercial
to the 2001 Joint Venture. We accounted for this transaction as a sale and
recorded a gain of $2,732,000 during 2001 and recorded our Retained
Interests at an initial amount of $9,186,000.

The net proceeds from the issuance of the 2001 PMC L.P. Notes
(approximately $44.5 million) were distributed to us. These proceeds are
net of our issuance costs and prior to funding the required reserve balance.
At inception of the 2001 Joint Venture, we owned a 60.1% limited
partnership interest in the 2001 Joint Venture. Our ownership in the 2001
Joint Venture is based on our share of the capital of the 2001 Joint

7



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Venture. Our share of the cash flows from the 2001 Joint Venture is based
upon the remaining principal on the underlying loans receivable contributed
by us to the 2001 Joint Venture divided by all loans receivable held by the
2001 Joint Venture. At December 31, 2001, we owned a 59.5% limited
partnership interest in the 2001 Joint Venture and our share of the cash
flows was 62.2%.

Structured Loan Sale Transaction Completed During 2000

On December 18, 2000, we completed a structured loan sale transaction
of a pool of fixed-rate loans receivable. PMC Capital and PMC Commercial
contributed loans receivable of $28.1 million and $55.7 million,
respectively, to an SPE (the 2000 Joint Venture). The 2000 Joint Venture
issued, through a private placement, approximately $74.5 million of its 2000
Loan-Backed Fixed Rate Notes (the 2000 L.P. Notes) of which approximately
$24.9 million (the 2000 PMC L.P. Notes) was allocated to us based on our
ownership percentage in the 2000 Joint Venture. The 2000 L.P. Notes, issued
at par, which have a stated maturity in 2024 and bear interest at 7.28%, are
collateralized by the loans receivable contributed by us and PMC Commercial
to the 2000 Joint Venture. We accounted for this transaction as a sale and
recorded a gain of $564,000 during 2000 and recorded our Retained Interests
at an initial amount of $5,573,000.

The net proceeds from the issuance of the 2000 PMC L.P. Notes
(approximately $24.7 million) were distributed to us. These proceeds are
net of our issuance costs and prior to funding the required reserve balance.
At inception of the 2000 Joint Venture, we owned a 33.5% limited
partnership interest in the 2000 Joint Venture. Our ownership in the 2000
Joint Venture is based on our share of the capital of the 2000 Joint
Venture. Our share of the cash flows from the 2000 Joint Venture is based
upon the remaining principal on the underlying loans receivable contributed
by us to the 2000 Joint Venture divided by all loans receivable held by the
2001 Joint Venture. At December 31, 2001, we owned a 33.3% limited
partnership interest in the 2000 Joint Venture and our share of the cash
flows was 33.4%.

Joint Structured Loan Sale Transactions

The terms of the 2001 L.P. Notes and the 2000 L.P. Notes provide that
the partners of the 2001 Joint Venture and the 2000 Joint Venture,
respectively, are not liable for any payments on the 2001 L.P. Notes or the
2000 L.P. Notes. Accordingly, if the 2001 Joint Venture or the 2000 Joint
Venture, respectively, fails to pay the 2001 L.P. Notes or the 2000 L.P.
Notes, the sole recourse of the holders of the 2001 L.P. Notes and the 2000
L.P. Notes is against the assets of the 2001 Joint Venture and 2000 Joint
Venture, respectively. Accordingly, we have no obligation to pay the 2001
L.P. Notes or the 2000 L.P. Notes, nor do the holders of the 2001 L.P. Notes
or the 2000 L.P. Notes have any recourse against our assets.

PMC Capital and PMC Commercial have entered into an indemnification
agreement regarding the performance of their respective loans receivable
sold to the 2001 Joint Venture and the 2000 Joint Venture. To the extent
that poor performance by either companys sold loans receivable (the
Underperforming Company) is pervasive enough to cause the other company
(the Performing Company) to not receive cash flow that it otherwise would
have received, then the Underperforming Company must make the Performing
Company whole. If the cash flow reduction is considered to be temporary,
then interest will be paid as compensation to the Performing Company. If
the reduction of cash flows is deemed permanent, the balance of reduction to
cash flows must be paid to the Performing Company by the Underperforming
Company. If the performance of our sold loans receivable significantly
deteriorated, it could be necessary for us to perform under this
indemnification agreement. At December 31, 2001, our maximum exposure under
this indemnification agreement was approximately $17.8 million which
represents the net present value of the Retained Interests reflected on PMC
Commercials consolidated balance sheet. Based on our present cash flow
assumptions, including stress test analysis of increasing the anticipated
losses on each of the loan pools, it does not appear that the loans
receivable sold by us will cause any permanent cash flow reductions to PMC
Commercial nor does it appear that the loans receivable sold by PMC
Commercial will cause any permanent cash flow reduction to us.

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Advisory Services

In addition to our lending operations, we earn income through PMC
Advisers which evaluates and services loans receivable and other investments
pursuant to fee arrangements with PMC Commercial (the Investment Management
Agreements). PMC Commercial, our affiliate, is a real estate investment
trust. As the investment advisor for PMC Commercial, PMC Advisers has
earned $2.3 million, $2.2 million and $2.3 million in advisory fees during
the years ended December 31, 2001, 2000 and 1999, respectively.

PMC Commercial provides loans to persons or entities whose borrowing
needs and/or strength and stability exceed the limitations set by the SBA
for our SBA approved loan programs. As a result, we generally pursue
different prospective borrowers than PMC Commercial. In order to further
mitigate the potential for conflicts of interest, PMC Capital, PMC
Commercial and PMC Advisers have entered into a loan origination agreement
(the Loan Origination Agreement). Pursuant to the Loan Origination
Agreement, loans that are greater than $1.1 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
fees of PMC Advisers (pursuant to the Investment Management Agreements) are
primarily based on the value of PMC Commercials assets. As a result, any
increases in the dollar amount of PMC Commercials assets will benefit PMC
Advisers, and PMC Advisers may have a potential conflict in determining
whether to advise PMC Commercial to acquire assets or write-down the value
of any assets. In order to mitigate the risk to PMC Commercial from
increasing its asset base through leveraged transactions, the Investment
Management Agreements provide PMC Advisers with a reduced fee for any loans
originated with capital obtained through borrowings.

REGULATORY OVERVIEW

Business Development Company (BDC)

PMC Capital is a BDC. 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 BDC 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.                          

9



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



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

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

10



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

SBA Regulations

The lending operations of First Western, PMCIC and Western Financial
are regulated by the SBA, which establishes, among other things, maximum
interest rates that borrowers may be charged (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 receivable (which generally range from seven 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.

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

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provide long-term loans to qualifying small businesses. Western
Financial and PMCIC have the opportunity to sell to the SBA up to an
additional aggregate principal amount of $20 million of SBA debentures,
based on PMCICs and Western Financials regulatory capital. Western
Financial and PMCIC had outstanding $31.3 million of SBA debentures and
PMCIC had $7.0 million of preferred stock investments from the SBA at
December 31, 2001. Interest rates on the SBA debentures currently
outstanding have a weighted average interest rate of 7.6%. At December 31,
2001, we had an outstanding commitment from the SBA to purchase up to $5.2
million ($4.2 million expiring September 2003 and $1.0 million expiring
September 2004) in additional SBA debentures.

First Western is licensed to operate as an SBLC. The SBA guarantees
75% of qualified loans over $150,000 with such individual guarantees not
exceeding $1,000,000. 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
presently exceed $6,000,000, (ii) liquid assets or real estate equity of the
borrower and affiliates cannot exceed specified limits, and (iii) the
maximum aggregate SBA loan guarantees to a borrower cannot exceed
$1,000,000. Maximum maturities for SBA 7(a) loans are 25 years for real
estate and 15 years for the purchase of machinery and equipment. In order
to operate as an SBLC, a licensee is required to maintain a minimum net
worth (as defined by SBA regulations) of $1,000,000.

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.

Volatility in Valuation of our Retained Interests in Transferred Assets

The value of our Retained Interests is determined based on managements
assumptions concerning, among other things, anticipated defaults and loan
losses, discount rates and prepayment speeds. We retain a portion of the
default and prepayment risk associated with our Retained Interests. Actual
defaults and prepayments may vary from our assumptions, possibly to a
material degree, and slower (faster) than anticipated prepayments of
principal or lower (higher) than anticipated loan losses will increase
(decrease) the fair value of our Retained Interests and the related
estimated cash flows. The discount rates that we utilize are determined for
each of the assets comprising the Retained Interests based upon our estimate
of the inherent risk associated with each asset.

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

Concentration of Investments

As previously stated, we have a fundamental policy regarding investment
in the lodging industry. At December 31, 2001 and 2000, loans receivable to
businesses in the lodging industry comprised 56% and 53% of our total
assets, respectively. In addition, significant portions of the assets
underlying our Retained Interests are

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also loans receivable to the lodging industry. 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 financial
condition and results of operations.

At December 31, 2001, loans receivable to businesses located in Texas,
Georgia and North Carolina comprised approximately 24%, 12% and 11% of our
outstanding loans receivable, respectively. No other state had a
concentration of 10% or greater of our loans receivable at December 31,
2001. A decline in economic conditions in any of these states could have a
material adverse effect on our financial condition and results of
operations.

Market for Structured Loan Transactions

We will continue to need capital to fund loans. Our ability to
continue to grow depends, to a large extent, on our ability to complete
structured loan sale transactions. In certain economic markets the
availability of funds may be diminished or the spread charged for funds
may increase causing us to delay a structured loan sale transaction. A
reduction in the availability of this source of funds could have a material
adverse effect on our financial condition and results of operations since
working capital may not be available to fund loan originations.

We may experience problems selling fixed-rate loans receivable in a
structured loan sale transaction at a cost of funds acceptable to us. It is
anticipated that our working capital needs for 2002 will require us to
complete a structured loan sale transaction with PMC Commercial during the
first half of 2002. At present, since our fixed-rate loans receivable have
a weighted average interest rate of 9.8% at December 31, 2001, general
increases in interest rates will reduce our spread when we complete a
structured loan transaction. If (i) five-year U.S. Treasury rates were to
increase to levels above 6%, or (ii) spreads over Treasury for asset-backed
securities similar to the type issued by us were to increase sharply (over
150 basis points) from our estimate of present levels, or (iii) a
combination thereof, we may not be able to complete a fixed-rate structured
loan sale transaction with an acceptable structure because of the reduction
between the yield on our fixed-rate loans receivable and the interest needed
to be paid to the purchasers.

Interest Rate and Prepayment Risk

Prepayments generally increase during times of declining interest
rates. When loans receivable are repaid prior to their maturity, we often
receive prepayment charges. Prepayment charges result in one-time increases
in our income. The proceeds from the prepayments we receive are invested
initially in temporary investments and have generally been re-loaned or
committed to be re-loaned at lower interest rates than the prepaid loans
receivable. The lower interest rates we receive on these new loans
receivable have had an adverse effect on our results of operations and
depending upon the rate of future prepayments may further impact our results
of operations. The impact of the lower lending rates on our net operating
income may be partially offset by the reduced cost of our variable-rate
borrowings.

First Western sells the guaranteed portion of most of its originated
loans through private placements. These sales are included in our Retained
Interests and are especially sensitive to prepayments. Our retained
interest in these loan sales consists only of an IO Receivable. Therefore,
to the extent the prepayments of these loans exceed our estimates, there is
a significant impact on the value of the associated Retained Interests.

Prepayments affect our spread on the pool of loans sold in our
structured loan sale transactions. Prepayments of loans receivable with
higher interest rates negatively impact the value of our Retained Interests
to a greater extent than prepayment of loans receivable with lower interest
rates.

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 sale of

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its loans receivable 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 loans receivable could negatively impact our
net operating income, dividend yield and the market price of our common
stock. Generally, the fixed-rate loans that we originate have prepayment
fees. As 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.

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 discretionary guidance line 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 when we would not otherwise do so and at
prices which may be below the net book value of such assets. Dispositions
of assets could have a material adverse effect on our financial condition
and results of operations.

Economy and Competition

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

Several factors may impact the ability of our borrowers to meet their
contractual payment obligations. During economic downturns, there may be
reductions in business travel and consumers generally take fewer vacations.
Another factor which affects the limited service sector of the hospitality
industry is a significant change in gasoline prices. When gas prices
sharply increase over a short period of time, occupancy rates may decrease
as a result of less automobile travel. These factors may cause a reduction
in revenue per available room (RevPar). If RevPar for our limited service
sector of the hospitality industry were to experience significant sustained
reductions, the ability of our borrowers to meet their obligations could be
impaired and loan losses could increase.

Risks of Lending to Small Businesses

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

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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.

Loan Portfolio Valuation

The valuation of our loans receivable is subject to the estimate of our
Board of Directors. There is typically no public market or established
trading market for the loans we originate. The illiquid nature of our loans
receivable may adversely affect our ability to dispose of such loans
receivable at times when it may be advantageous for us to liquidate such
investments. We adjust the valuation of our portfolio on a quarterly basis
to reflect the estimate of our Board of Directors as to the current
realizable value of our loans receivable. In the absence of a readily
ascertainable market value, the estimated value of our loans receivable may
differ significantly from the values that would be placed if a ready market
for the loans existed.

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

We will continue to need working capital to fund loans. Historically,
we have sold loans receivable, borrowed from financial institutions and
issued equity securities. A reduction in the availability of funds from
financial institutions, the equity market or the asset-backed securities
market could have a material adverse effect on us. We must distribute at
least 90% of our investment company taxable income to our shareholders to
maintain our RIC status under the Internal Revenue Code of 1986, as amended
(the Code). As a result, such earnings are not available to fund loan
originations. We expect to be able to borrow from financial institutions and
sell loans receivable in the asset-backed securities market. As a result of
our current market price, we do not anticipate selling additional equity
securities during the year ending December 31, 2002. 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.

Fluctuations in Quarterly Results

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

     The completion of a structured loan sale transaction in a particular period;

     Interest rates on the securities issued in connection with our structured loan transactions;

     Interest rate changes;

     The volume of loans we originate and the timing of prepayment of our loans receivable;

     Changes in and the timing of the recognition of gains or losses on investments;

     The degree to which we encounter competition in our markets; and

     General economic conditions.

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

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

Impact of Inflation

We may use our short-term credit facility that has a variable interest
rate cost of funds and availability of

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$15 million (our revolving credit facility of $10 million and our
discretionary guidance line of $5 million) for the origination of fixed-rate
loans. 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, 2001 we did not have any balance
outstanding on our short-term credit facility.

Loss of Pass-Through Tax Treatment

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

Highly Regulated Environment

We are regulated by 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 are also subject to
change. Any change in the laws or regulations governing our business could
have a material impact on our financial condition or our results of
operations.

EMPLOYEES

At December 31, 2001, we employed 49 individuals including marketing
professionals, investment professionals, operations professionals and
administrative staff. Our loan processing is centralized in our Dallas,
Texas office. In addition, we have loan production offices in Georgia,
Missouri and Arizona. Our management believes the relationship with our
employees is good.

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QUARTERLY RESULTS

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

|     |  |       |      |       |  |         |      |       |  |        |      |     |  |   |      |  |  |   |      |    
|---- |  | ----- | ---- | ----- |  | ------- | ---- | ----- |  | ------ | ---- | --- |  | - | ---- |  |  | - | ---- | ---
|     |  |       |      |       |  | Quarter
|     |  |       |      |       |  |        
|     |  | Total |      | First |  | Second  |      | Third |  | Fourth
|     |  |       |      |       |  |         |      |       |  |       
|1992 |  | $     | 0.79 |       |  | $       | 0.18 |       |  | $      | 0.23 |     |  | $ | 0.19 |  |  | $ | 0.19 |    
|1993 |  | $     | 0.87 |       |  | $       | 0.18 |       |  | $      | 0.23 |     |  | $ | 0.25 |  |  | $ | 0.21 |    
|1994 |  | $     | 1.12 |       |  | $       | 0.19 |       |  | $      | 0.23 |     |  | $ | 0.26 |  |  | $ | 0.44 | (1)
|1995 |  | $     | 1.03 |       |  | $       | 0.23 |       |  | $      | 0.25 |     |  | $ | 0.27 |  |  | $ | 0.28 |    
|1996 |  | $     | 1.18 |       |  | $       | 0.27 |       |  | $      | 0.30 |     |  | $ | 0.30 |  |  | $ | 0.31 |    
|1997 |  | $     | 1.35 |       |  | $       | 0.29 |       |  | $      | 0.31 |     |  | $ | 0.30 |  |  | $ | 0.45 | (2)
|1998 |  | $     | 1.16 |       |  | $       | 0.28 |       |  | $      | 0.28 |     |  | $ | 0.29 |  |  | $ | 0.31 | (3)
|1999 |  | $     | 1.11 |       |  | $       | 0.23 |       |  | $      | 0.42 | (4) |  | $ | 0.24 |  |  | $ | 0.22 |    
|2000 |  | $     | 0.93 |       |  | $       | 0.22 |       |  | $      | 0.22 |     |  | $ | 0.20 |  |  | $ | 0.29 | (5)
|2001 |  | $     | 0.87 |       |  | $       | 0.20 |       |  | $      | 0.38 | (6) |  | $ | 0.15 |  |  | $ | 0.14 |    



---

|(1) |  | Includes approximately $0.24 relating to the sale of a portion of our loan portfolio
|--- |  | ------------------------------------------------------------------------------------
|   
|(2) |  | Includes approximately $0.21 relating to the sale of a portion of our loan portfolio
|   
|(3) |  | Includes approximately $0.08 relating to the sale of a portion of our loan portfolio
|   
|(4) |  | Includes approximately $0.22 relating to the sale of a portion of our loan portfolio
|   
|(5) |  | Includes approximately $0.05 relating to the sale of a portion of our loan portfolio
|   
|(6) |  | Includes approximately $0.23 relating to the sale of a portion of our loan portfolio

CUSTOMERS

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

AVAILABLE INFORMATION

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

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Item 2. PROPERTIES

Our headquarters are located at 18111 Preston Road, Suite 600, Dallas,
Texas 75252. We lease approximately 13,000 square feet in an office
building pursuant to a five-year lease which commenced in December 1998. In
addition, at December 31, 2001, we leased office space in Missouri, Arizona
and Georgia. The aggregate annual lease payments for the year ended
December 31, 2001 were approximately $321,000.




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, 2001.

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PART II




Item 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERS

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

|                   |  |      |       |     |  |       |      |       |  |           |       |           |  |   |       | 
|------------------ |  | ---- | ----- | --- |  | ----- | ---- | ----- |  | --------- | ----- | --------- |  | - | ----- | 
|                   |  |      |       |     |  |       |      |       |  | Regular   |       | Special  
|                   |  |      |       |     |  |       |      |       |  | Dividends |       | Dividends
|                   |  |      |       |     |  |       |      |       |  | Per       |       | Per      
|Quarter Ended      |  | High |       | Low |  | Share |      | Share
|                   |  |      |       |     |  |       |      |      
|December 31, 2001  |  | $    | 8.03  |     |  | $     | 6.79 |       |  | $         | 0.200 |           |  |   |      | 
|September 30, 2001 |  | $    | 8.18  |     |  | $     | 7.75 |       |  | $         | 0.200 |           |  |   |      | 
|June 30, 2001      |  | $    | 8.50  |     |  | $     | 6.75 |       |  | $         | 0.200 |           |  |   |      | 
|March 31, 2001     |  | $    | 9.50  |     |  | $     | 8.00 |       |  | $         | 0.250 |           |  |   |      | 
|                   |  |      |       |     |  |       |      |       |  |           |       |           |  |   |       | 
|December 31, 2000  |  | $    | 9.81  |     |  | $     | 7.75 |       |  | $         | 0.250 |           |  |   |      | 
|September 30, 2000 |  | $    | 10.38 |     |  | $     | 9.13 |       |  | $         | 0.250 |           |  |   |      | 
|June 30, 2000      |  | $    | 10.13 |     |  | $     | 7.75 |       |  | $         | 0.250 |           |  |   |      | 
|March 31, 2000     |  | $    | 8.31  |     |  | $     | 7.75 |       |  | $         | 0.250 |           |  |   |      | 
|                   |  |      |       |     |  |       |      |       |  |           |       |           |  |   |       | 
|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 |           |  |   |      | 

On March 20, 2002, there were approximately 850 shareholders of record
of our Common Stock and the last reported sales price of our Common Stock
was $7.05 per share.

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Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following is a summary of our Selected Consolidated Financial Data
as of and for the five years in the period ended December 31, 2001. 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.

|                  |                                                                             |  |                          |         |      |  |                                                      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|----------------- | --------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---------------------------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                  |                                                                             |  | Years Ended December 31,
|                  |                                                                             |  |                         
|                  |                                                                             |  | 2001                     |         | 2000 |  | 1999                                                 |         | 1998 |  | 1997
|                  |                                                                             |  |                          |         |      |  |                                                      |         |      |  |     
|                  |                                                                             |  |                          |         |      |  | (Dollars in thousands, except per share information) |         |      |  |     
|Operating Data:   |                                                                             |  |                          |         |      |  |                                                      |         |      |  |      |         |   |  |   |         |   |  |   |        
|                  | Total income                                                                |  | $                        | 20,752  |      |  | $                                                    | 21,584  |      |  | $    | 22,627  |   |  | $ | 24,314  |   |  | $ | 24,406  |  
|                  | Total expenses                                                              |  | $                        | (11,408 | )    |  | $                                                    | (11,280 | )    |  | $    | (11,140 | ) |  | $ | (11,091 | ) |  | $ | (10,602 | )
|                  | Realized and unrealized gain (loss)
on investments                          |  | $                        | 1,223   |      |  | $                                                    | 949     |      |  | $    | 1,933   |   |  | $ | 726     |   |  | $ | 1,818   |  
|                  | Net operating income and realized
and unrealized gain (loss) on
investments |  | $                        | 10,567  |      |  | $                                                    | 11,253  |      |  | $    | 13,420  |   |  | $ | 13,949  |   |  | $ | 15,622  |  
|                  | Dividends declared, common                                                  |  | $                        | 10,076  |      |  | $                                                    | 11,846  |      |  | $    | 12,007  |   |  | $ | 14,473  |   |  | $ | 14,543  |  
|                  | Basic and diluted earnings per
common share                                 |  | $                        | 0.87    |      |  | $                                                    | 0.93    |      |  | $    | 1.11    |   |  | $ | 1.16    |   |  | $ | 1.35    |  
|                  | Dividends per common share                                                  |  | $                        | 0.85    |      |  | $                                                    | 1.00    |      |  | $    | 1.02    |   |  | $ | 1.23    |   |  | $ | 1.27    |  
|                  | Basic weighted average common
shares outstanding                            |  |                          | 11,854  |      |  |                                                      | 11,841  |      |  |      | 11,829  |   |  |   | 11,800  |   |  |   | 11,411  |  
|                  | Loans funded                                                                |  | $                        | 65,977  |      |  | $                                                    | 44,158  |      |  | $    | 84,264  |   |  | $ | 66,450  |   |  | $ | 86,361  |  
|                  |                                                                             |  |                          |         |      |  |                                                      |         |      |  |      |         |   |  |   |         |   |  |   |        
|At end of period: |                                                                             |  |                          |         |      |  |                                                      |         |      |  |      |         |   |  |   |         |   |  |   |        
|                  | Loans receivable, net                                                       |  | $                        | 107,392 |      |  | $                                                    | 100,353 |      |  | $    | 106,325 |   |  | $ | 116,711 |   |  | $ | 127,240 |  
|                  | Retained interests in transferred assets                                    |  | $                        | 33,537  |      |  | $                                                    | 32,341  |      |  | $    | 28,423  |   |  | $ | 20,151  |   |  | $ | 14,853  |  
|                  | Total assets                                                                |  | $                        | 162,698 |      |  | $                                                    | 161,478 |      |  | $    | 165,191 |   |  | $ | 163,349 |   |  | $ | 165,839 |  
|                  | Notes and debentures payable                                                |  | $                        | 76,310  |      |  | $                                                    | 72,977  |      |  | $    | 73,973  |   |  | $ | 74,790  |   |  | $ | 76,290  |  
|                  | Preferred stock of consolidated
subsidiary                                  |  | $                        | 7,000   |      |  | $                                                    | 7,000   |      |  | $    | 7,000   |   |  | $ | 7,000   |   |  | $ | 7,000   |  
|                  | Common shareholders equity                                                 |  | $                        | 72,908  |      |  | $                                                    | 72,667  |      |  | $    | 73,314  |   |  | $ | 72,151  |   |  | $ | 70,166  |  
|                  | Number of common shares
outstanding                                         |  |                          | 11,854  |      |  |                                                      | 11,854  |      |  |      | 11,829  |   |  |   | 11,829  |   |  |   | 11,631  |  
|                  |                                                                             |  |                          |         |      |  |                                                      |         |      |  |      |         |   |  |   |         |   |  |   |        
|Ratios:           |                                                                             |  |                          |         |      |  |                                                      |         |      |  |      |         |   |  |   |         |   |  |   |        
|                  | Return on average assets(1)                                                 |  |                          | 6.5     | %    |  |                                                      | 6.9     | %    |  |      | 8.2     | % |  |   | 8.5     | % |  |   | 9.7     | %
|                  | Return on average common
shareholders equity(2)                            |  |                          | 14.1    | %    |  |                                                      | 15.1    | %    |  |      | 18.1    | % |  |   | 19.2    | % |  |   | 23.3    | %



---

|(1) |  | Based on the average value of 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 shareholders equity on the first day of the year
and on the last day of each quarter of the year, divided by five.           

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

Our investment income and realized gains include the following:



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

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

Expenses primarily consist of interest expense, salaries and related
benefits and overhead. General and administrative expenditures consist
primarily of insurance, advertising and promotional expense, telephone
services, corporate printing costs 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 Missouri, Georgia and Arizona.

Lending Operations

The value of our loans receivable was $107.4 million and $100.4 million
at December 31, 2001 and 2000, respectively. During 2001 and 2000, we
originated investments in loans totaling $66.0 million and $44.2 million and
received repayments and contributed and sold loans receivable totaling $67.0
million and $48.9 million, respectively. Our Serviced Loan Portfolio
increased by $14.1 million (4.6%) to $321.8 million at December 31, 2001
from $307.7 million at December 31, 2000.

During 2001, 2000 and 1999, we received $10.1 million, $11.2 million
and $15.4 million, respectively, in collections of principal on loans
receivable including prepayments. For the years ended December 31, 2001,

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2000 and 1999, principal collections (including prepayments), as an
annualized percentage of our loans receivable, were 9%, 11% and 15%,
respectively. While the annual percentage decreased during 2001, we
experienced increased prepayment activity during December 2001 and January
2002. The prepayment activity increased as a result of the current interest
rate environment (the prime rate and interest rates on treasury notes
decreased substantially during 2001) and we believe that we may continue to
see increased prepayment activity during the remainder of 2002. Many of our
prepayment charges are based upon a yield maintenance premium which provides
for greater fees as interest rates decrease. First Westerns loans
receivable (all variable interest rate) did not have prepayment penalties
for loans originated prior to January 2001 in accordance with SBA policy.
The SBA changed its policy on prepayment fees to allow the SBA to collect a
5% fee for loans prepaid in the first year, 3% in the second year and 1% in
the third year. This change in SBA policy may lessen the amount of
prepayments received during the first three years after the origination of
an SBA guaranteed loan. When loans receivable are paid-off prior to their
maturity, we receive prepayment charges. Prepayment charges result in
one-time increases in our income. The proceeds from the prepayments we
receive are invested initially in temporary investments and are generally
re-loaned or committed to be re-loaned at lower interest rates than the
prepaid loans receivable. These lower interest rates have had an adverse
effect on our results of operations and depending upon the rate of future
prepayments may further impact our results of operations.

At December 31, 2001, approximately $38.5 million of our loans
receivable had a variable interest rate (reset on a quarterly basis) based
upon either the prime rate or LIBOR. The spread that we charge over the
prime rate generally ranges from 1.0% to 2.5%. The spread that we charge
over LIBOR generally ranges from 3.75% to 4.25%. The prime rate and LIBOR
used in determining interest rates for the first quarter of 2002 were 4.75%
and 1.86%, respectively. To the extent the prime rate or LIBOR changes, we
will see changes in interest income on our variable-rate loans receivable.

Loan Portfolio Performance

Our policy with respect to loans receivable which are in arrears as to
interest payments for a period in excess of 60 days or loans on which we
have established loan loss reserves is generally to discontinue the accrual
of interest income and reverse previously recorded interest income which is
deemed uncollectible. We will deliver a default notice and begin
foreclosure and liquidation proceedings when we determine that pursuit of
these remedies is the most appropriate course of action. On an ongoing
basis, we monitor our loans receivable and evaluate the adequacy of our
allowance for loan losses. In our analysis, we review various factors,
including the value of the collateral securing the loan and the borrowers
payment history. Based upon our analysis, a loan loss reserve is
established as considered necessary.

Historically, we have not had a significant amount of impaired loans
nor have we had a significant amount of charged-off loans. While our
impaired loans as of December 31, 2001 as a percentage of our loans
receivable and sold loans of our SPEs are 5.7% and 1.1%, respectively, we
have experienced a trend of increasing impaired loans. Our impaired loans
as of December 31, 2000 as a percentage of our loans receivable and loans
receivable and sold loans of our SPEs were 3.0% and 1.3%, respectively.
This trend of increasing impaired loans as a percentage of our loans
receivable commenced during early 2001 and has continued throughout the year
and into 2002. Impaired loans at December 31, 2001 include two limited
service hospitality properties we acquired through foreclosure during
January and February 2002. The aggregate value of these properties, as
reduced for costs of selling, was estimated to be $2.1 million. As of
December 31, 2001 the underlying loans receivable were written down by
$631,000. In addition, these balances do not include the principal balance
of loans which have been identified as potential problems for which it is
expected that a full recovery of the principal balance will be received
through either collection efforts or liquidation of collateral (Special
Mention Loans). Our Special Mention Loans were $1.5 million (1.4%) of our
loans receivable and $6.5 million (4.1%) of our sold loans as of December
31, 2001.

As a result of the increased impaired loans, our loan losses increased
to $809,000 during the year ended December 31, 2001 from $486,000 during the
year ended December 31, 2000. Our loan losses during 2001 include $460,000
related to the two limited service hospitality properties we acquired
through foreclosure during January and February 2002. No additional losses
were recognized at the time we foreclosed upon the assets.

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Current Economic Factors

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

During 2001 there were reductions in business and discretionary travel
causing a moderation in demand for hotel rooms and there has been a slowdown
in construction of hospitality properties. In addition, the tragic events
of September 11, 2001 have led to uncertainty in the nations economy.
During the weeks immediately following the tragedy, hotels experienced
significant short-term declines in occupancy compared to the prior year.
Another factor which affects the limited service sector of the hospitality
industry is a significant rise in gasoline prices in a short period of time.
As seen in the past, when gas prices sharply increase, occupancy rates
decrease.

Considering the current economy, it is difficult for us to determine
the current and long-term performance of the lodging industry, the potential
impact on our borrowers and lending operations or the potential impact on
our results of operations, financial condition or cash flows.

As a result of either an increase in competition, a lack of funding
sources or a lack of identifying loans which meet our underwriting criteria,
we could have a reduced volume of loan originations. The resulting decrease
in loan origination volume would effect our operations. To the extent that
principal payments on outstanding loans exceeded our loan originations,
interest income would be reduced.

Critical Accounting Considerations and Significant Accounting Policies

Our discussion and analysis of our financial condition and our results
of operations is based upon our consolidated financial statements, which
have been prepared in accordance with generally accepted accounting
principles. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, income and expenses, and related disclosure of contingent
assets and liabilities.

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

Principles of Consolidation

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

Fair Value Accounting

All of our investments are valued at our Board of Directors estimate
of fair value with the resulting unrealized gains and losses being recorded
through earnings.

Valuation of Loans Receivable

The valuation of our loans receivable is subject to the estimate of our
Board of Directors. There is typically no public market or established
trading market for the loans we originate. The illiquid nature of our loans

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receivable may adversely affect our ability to dispose of such loans at
times when it may be advantageous for us to liquidate such investments. We
adjust the valuation of our loans receivable on a quarterly basis to reflect
the estimate of our Board of Directors as to the current realizable value of
the loans. In the absence of a readily ascertainable market value, the
estimated value of our loans receivable may differ significantly from the
values that would be placed on the loans receivable if a ready market
existed.

Loan loss reserves are established based on a determination, through an
evaluation of the recoverability of individual loans, by our Board of
Directors when significant doubt exists as to the ultimate realization of a
loan. On an ongoing basis, we monitor our loans receivable and evaluate the
adequacy of our provision for loan losses. The Board of Directors has
estimated the fair value of loans receivable to approximate the remaining
unamortized principal of the loan, unless there is doubt as to the
realization of a loan receivable. A valuation reserve is established for a
loan based on the creditors payment history, collateral value, guarantor
support and other factors. The determination of whether significant doubt
exists and whether a loan loss provision is necessary for each loan requires
judgment and considers the facts and circumstances existing at the
evaluation date. Changes to the facts and circumstances of the borrower,
the lodging industry and the economy may require the establishment of
significant additional loan loss reserves. If a determination is made that
significant doubt exists as to the ultimate collection of a loan, the effect
to operating results may be material.

Retained Interests

We have transferred assets to SPEs in connection with our structured
loan transactions. Our Retained Interests consist of required
overcollateralization, cash reserves and the IO Receivable. The fair value
of our Retained Interests is determined based on the present value of
estimated future cash flows from the SPEs. When a structured loan sale
transaction is completed, the difference between (i) the carrying value of
the loans receivable sold and (ii) the sum of (a) cash received and (b) the
present value of the estimated future cash flows from the Retained Interests
recorded constitutes the gain or loss on sale.

The estimated future cash flows are calculated based on managements
assumptions concerning, among other things, loan losses, prepayment speeds
and discount rates. We regularly measure our loan loss, prepayment and
other assumptions against the actual performance of the loans receivable
sold. If the prepayment speeds occur at a faster rate than anticipated or
future loan losses occur quicker than expected or in amounts greater than
expected, the value of the Retained Interests will decline and total income
in future periods would be reduced. If prepayments occur slower than
anticipated or future loan losses are less than expected, cash flows would
exceed estimated amounts, the value of our Retained Interest would increase
and total income in future periods would be enhanced. Actual prepayments
and loan losses may vary significantly from our assumptions. Although we
believe that we have made reasonable assumptions as to the future cash flows
of the structured loan sale transactions, actual rates of loss or
prepayments may vary significantly from those assumed and other assumptions
may be revised based upon anticipated future events. The discount rate is
managements estimate of a market rate based on interest rate levels
considering the risks inherent in the transaction.

The income from our Retained Interests is comprised of the yield earned
on our Retained Interests. The yield earned is determined based on our
estimates of future cash flows. We update our cash flow assumptions on a
quarterly basis and any changes to cash flow assumptions will affect the
yield on our Retained Interests. For the years ended December 31, 2001 and
2000, the yield on our weighted average Retained Interests was 14.9% and
14.2%, respectively.

On a quarterly basis, we measure the fair value of, and record income
relating to, the Retained Interests based upon the future anticipated cash
flows discounted to reflect the current market interest rates for
investments of this type. Any appreciation (depreciation) of the Retained
Interests is included in the accompanying consolidated statement of income
as either investments written-off, net (realized gains and losses) or an
unrealized gain (loss) on investments.

Since we account for structured loan sale transactions as sales of our
loans receivable, neither the loans receivable contributed to the SPE nor
the notes payable issued by the SPE are included in our consolidated
financial statements. As a result, our consolidated balance sheets at
December 31, 2001 and 2000 do not

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include $171.6 million and $141.1 million in assets, respectively, and
$147.4 million and $117.7 million in liabilities, respectively, related to
our structured loan sale transactions recorded by the SPEs. Our Retained
Interests related to these structured loan sale transactions were $30.6
million and $28.3 million at December 31, 2001 and 2000, respectively.

The following is a sensitivity analysis of our Retained Interests to
highlight the volatility that results when prepayments, loan losses and
discount rates are different than our assumptions. The following summarizes
the results of the sensitivity analysis as of December 31, 2001:

|                                                   |  |                 |            |                 |  |   |           | 
|-------------------------------------------------- |  | --------------- | ---------- | --------------- |  | - | --------- | 
|Changed Assumption                                 |  | Pro-Forma Value |            | Asset Reduction
|                                                   |  |                 |            |                
|Losses increase by 50 basis points per annum (1)   |  | $               | 31,116,000 |                 |  | $ | 2,421,000 | 
|Losses increase by 100 basis points per annum (1)  |  | $               | 28,775,000 |                 |  | $ | 4,762,000 | 
|Rate of prepayment increases by 5% per annum (2)   |  | $               | 32,259,000 |                 |  | $ | 1,278,000 | 
|Rate of prepayments increases by 10% per annum (2) |  | $               | 31,288,000 |                 |  | $ | 2,249,000 | 
|Discount rates increase by 100 basis points        |  | $               | 32,300,000 |                 |  | $ | 1,237,000 | 
|Discount rates increase by 200 basis points        |  | $               | 31,144,000 |                 |  | $ | 2,393,000 | 



---

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

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

Impact of Recently Issued Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board approved SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS No. 144). SFAS No. 144 requires that long-lived assets to be
disposed of other than by sale be considered held and used until their
disposition. SFAS No. 144 also requires that long-lived assets to be
disposed of by sale be accounted for under the requirements of SFAS No. 121
which requires that such assets be measured at the lower of carrying amounts
or fair value less costs to sell and to cease depreciation (amortization).
SFAS No. 144 describes a probability-weighted cash flow estimation approach
to deal with situations in which alternative courses of action to recover
the carrying amount of a long-lived asset under consideration or a range is
estimated for the amount of possible future cash flows. As a result,
discontinued operations are no longer measured on a net realizable basis,
and future operating losses are no longer recognized before they occur.
SFAS No. 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. We will adopt SFAS No. 144 on January 1, 2002 and do not expect that
the adoption will have a material impact on our results of operations or
financial position.

Related Party Transactions

Our executive officers are also the executive officers of PMC
Commercial. PMC Advisers provides investment advisory services to PMC
Commercial pursuant to the Investment Management Agreements. As the
investment advisor for PMC Commercial, PMC Advisers has earned $2.3 million,
$2.2 million and $2.3 million in advisory fees during the years ended
December 31, 2001, 2000 and 1999, respectively.

PMC Commercial and PMC Advisers have entered into a 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

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available funds, we may originate those lending opportunities as long as
they meet our lending criteria.

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. Commencing July 1, 2000, the highest rate charged
was reduced from 1.67% to 1.55%. In addition, the investment management
agreement includes compensation to PMC Advisers for its assistance in the
issuance of PMC Commercials debt and equity securities and the acquisition
by PMC Commercial of limited service hospitality properties. The investment
management agreements also provide for an annual fee of 0.70% of the
original cost of the hospitality properties to be paid to PMC Advisers
relating to leases entered into by PMC Commercial. The investment
management agreements were amended on July 1, 2001 to provide for a fee of
$10,000 upon the sale of each limited service hospitality property and an
annual loan origination fee equal to five basis points of loans funded for
the first $20 million in loans and 2.5 basis points thereafter.

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

Net income decreased by $686,000 (6%), to $10,567,000 during the year
ended December 31, 2001 from $11,253,000 during the year ended December 31,
2000. The most significant reason for the decrease in net income was a
$960,000 reduction in net operating income partially offset by a $274,000
increase in realized and unrealized gains on investments. Significant
components of these changes are discussed below.

Interest income: Interest income decreased by $1,972,000 (15%), to
$11,568,000 for the year ended December 31, 2001 from $13,540,000 for the
year ended December 31, 2000. The decrease is primarily due to a 10%
decrease in our weighted average loans receivable outstanding, a decrease in
variable interest rates and a 140 basis point reduction in our weighted
average interest rate.

Interest income is comprised of the following:

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

As a result of the sale of approximately $49.2 million and $28.0
million of our loans receivable in structured loan sale transactions
completed in June 2001 and December 2000, respectively, our weighted average
loans receivable outstanding decreased $11.5 million (10%) to $106.3 million
during 2001 from $117.8 million during 2000. In addition, the prime rate
decreased by 350 basis points during 2001 causing our weighted average
interest rate to decline to 9.0% at December 31, 2001 from 10.4% at December
31, 2000. Approximately 36% and 30% of our loans receivable had variable
rates of interest as of December 31, 2001 and 2000, respectively.

Income from retained interests in transferred assets:Income from our
Retained Interests increased by $1,320,000 (33%), to $5,340,000 for the year
ended December 31, 2001 from $4,020,000 for the year ended December 31,
2000. The income from our Retained Interests is comprised of the yield
accreted on our Retained Interests. The increase in income from our
Retained Interests was the result of an increase in our weighted average
Retained Interests outstanding primarily due to the structured loan sale
transactions completed in June 2001 and December 2000.

Premium income:Premium income decreased by $72,000 (13%), to $501,000
for the year ended December 31, 2001 from $573,000 for the year ended
December 31, 2000. The decrease was primarily a result of a decrease in the
proceeds from the sale of the government guaranteed portion of loans
receivable (under the SBA 7(a) program) to $7.8 million in 2001 from $9.6
million during 2000.

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Other investment income, net:Other investment income, net, decreased
by $29,000 (4%), to $794,000 for the year ended December 31, 2001 from
$823,000 for the year ended December 31, 2000. This decrease was primarily
attributable to a reduction in forfeited commitment fees in 2001 compared to
2000.

Other income, net:Other income, net, increased by $19,000 (1%), to
$2,167,000 during the year ended December 31, 2001 from $2,148,000 during
the year ended December 31, 2000 due primarily to an increase in income from
advisory services provided to PMC Commercial.

Equity in income (loss) 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, not including the SPEs
established by us in connection with the structured sales of our loans
receivable, are reflected as a single line item (Equity in income (loss) of
unconsolidated subsidiaries) on our consolidated statements of income.

Equity in income (loss) of unconsolidated subsidiaries decreased by
$98,000 (20%), to $382,000 during the year ended December 31, 2001 from
$480,000 during the year ended December 31, 2000.

The decrease was a result of the following:



| |  |  | The net income of PMC Advisers was $456,000 during the
year ended December 31, 2001 compared to $495,000 during the year
ended December 31, 2000. The decrease was primarily attributable
to decreased management fees from PMC Commercial in 2001 due to
the sale of five hotel properties by PMC Commercial during the
year ended December 31, 2001. As a result of the property sales,
our future income from PMC Advisers should be reduced.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | PMC Funding had a loss of $74,000 during the year ended
December 31, 2001 compared to a $15,000 loss during the year
ended December 31, 2000.                                                                                                                                                                                                                                                                                                   

Operating expenses, not including interest expense:Operating
expenses, excluding interest, increased by $109,000 (2%), to $6,006,000
during the year ended December 31, 2001 from $5,897,000 during the year
ended December 31, 2000. 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
primary reason for the increase was general and administrative expenses
which increased $61,000 (8%), to $811,000 during the year ended December 31,
2001 from $750,000 during the year ended December 31, 2000. The increase
was mainly due to increased insurance expense, advertising and bank fees.

Interest expense:Interest expense increased by $19,000 (-%), to
$5,402,000 during the year ended December 31, 2001 from $5,383,000 during
the year ended December 31, 2000. Interest expense remained relatively
flat, since the effect of our weighted average debt outstanding increasing
to $75.3 million in 2001 compared to $70.8 million in 2000, was offset by a
decline in our weighted average cost of funds to 7.2% for 2001 compared to
7.6% in 2000. Interest expense results primarily from interest on (i) our
notes payable ($45.0 million and $41.7 million outstanding as of December
31, 2001 and 2000, respectively) with a weighted average interest rate of
5.4% and weighted average remaining maturity of 2.9 years as of December 31,
2001, (ii) debentures due the SBA (as of both December 31, 2001 and 2000 the
outstanding balances were $31.3 million), with a weighted average interest
rate of approximately 7.6% and weighted average remaining maturity of 4.6
years as of December 31, 2001, and (iii) balances outstanding on our
revolving credit facility.

Realized and unrealized gain (loss) on investments:Realized and
unrealized gain (loss) on investments increased $274,000 to a gain of
$1,223,000 during the year ended December 31, 2001 compared to a gain of
$949,000 during the year ended December 31, 2000.

The increase in net realized and unrealized gain (loss) on investments
was due to an increase in the amount of gain recognized on our structured
loan sale transactions. During the year ended December 31, 2001 we
recognized a gain of approximately $2,732,000 relating to the sale of $49.2
million of loans receivable during June 2001 compared to a gain of $564,000
recognized from the structured loan sale of $28.0 million of loans
receivable during December 2000. The increase was due to an increase in the
principal sold of approximately

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$21.2 million and the increased net interest spread. The net interest
spread is the difference between the weighted average interest rate on the
sold loans receivable compared to the coupon rate on the debt issued by the
SPE. We generated a net interest spread of 3.42% related to our 2001
structured loan sale compared to a net interest spread of 2.26% related to
our 2000 structured loan sale. This increase was substantially offset by
increases in realized and unrealized losses on investments as described
below.

During the year ended December 31, 2001, we recognized net realized and
unrealized losses (excluding the gains relating to our structured loan sale
transactions) of $1,509,000 compared to net realized and unrealized gains of
$385,000 during the year ended December 31, 2000. The $1,509,000 net
realized and unrealized loss is attributable to a $700,000 net realized and
unrealized loss on Retained Interests and a $809,000 net realized and
unrealized loss on loans receivable.

During the year ended December 31, 2001, the net realized and
unrealized losses on our Retained Interests of $700,000 consisted of
realized losses of $1,303,000 and unrealized gains of $603,000. The primary
reason for the net realized and unrealized losses during 2001 was a
reduction in expected future cash flows resulting from higher than
anticipated prepayment activity and lower than anticipated income on our
reserve funds. During the year ended December 31, 2000 we recognized
$871,000 in valuation gains relating to our Retained Interests. The primary
reason for these net realized and unrealized gains during 2000 was the lower
than anticipated rate of prepayment activity and less than anticipated loan
losses.

We also recognized $809,000 of net loan losses during the year ended
December 31, 2001 compared to $486,000 in net loan losses during the year
ended December 31, 2000. The increase was primarily a result of valuation
reserves established on impaired loans identified during the third and
fourth quarter of 2001 including $460,000 related to two limited service
hospitality properties we acquired through foreclosure in January and
February 2002. Loan losses (including the change in unrealized appreciation
(depreciation) on loans) were 0.76% and 0.41% of our weighted average
outstanding loans receivable during the years ended December 31, 2001 and
2000, respectively.

Year Ended December 31, 2000 Compared to the Year Ended December 31,
1999

Net income decreased by $2,167,000 (16%), to $11,253,000 during the
year ended December 31, 2000 from $13,420,000 during the year ended December
31, 1999. The most significant reason for this decrease in net income was
the reduction in the amount of gain recognized on our structured loan sale
transactions of $2,000,000. During the year ended December 31, 2000 we
recognized $564,000 relating to the structured loan sale of $28.0 million of
loans receivable during December 2000 compared to a gain of $2,564,000
recognized from the structured loan sale of $60.5 million of loans
receivable during June 1999.

Interest income:Interest income decreased by $655,000 (5%), to
$13,540,000 for the year ended December 31, 2000 from $14,195,000 for the
year ended December 31, 1999. Interest income includes the interest earned
on loans receivable, the interest earned on short-term (temporary)
investments and the up-front fees collected. This overall decrease was
primarily attributable to a decrease in income from up-front fees
recognized. The decline in up-front fees is directly related to the reduced
loan origination volume when comparing the year ended December 31, 2000 to
the year ended December 31, 1999.

Interest income and commitment fees received on loans receivable
increased by $138,000 (1%), to $13,060,000 during the year ended December
31, 2000 from $12,922,000 during the year ended December 31, 1999. Interest
income and commitment fees received on loans receivable was comparable
during the year ended December 31, 2000 and 1999, however, the components
changed as described below. Interest income on our loans receivable
increased by approximately $1,391,000 (12%), to $12,628,000 during the year
ended December 31, 2000 from $11,237,000 during the year ended December 31,
1999 as a result of (i) an increase in the weighted average loans receivable
outstanding of $14.7 million (14%) to $117.8 million during the year ended
December 31, 2000 from $103.1 million during the year ended December 31,
1999 and (ii) an increase in the weighted average interest rate primarily
related to an increase in the prime rate causing interest income to be
increased on our variable interest rate loans receivable. Offsetting the
effects of the increased loans receivable and interest rates was a reduction
in the recognition of commitment fee income. During the year ended December
31, 2000 we recognized approximately $432,000 of up-front fees compared to
$1,685,000 in up-front

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fees during the year ended December 31, 1999. The decrease of $1,253,000 in
commitment fees is attributable to fewer loan originations during the year
ended December 31, 2000 (a reduction of approximately $40.1 million)
compared to the year ended December 31, 1999.

Interest on other investments (which consists of interest on temporary
investments) for the year ended December 31, 2000 was $480,000 which was
$793,000 (62%) less than the $1,273,000 in interest income on other
investments earned during the year ended December 31, 1999. The decrease
relates to a decrease in temporary investments outstanding. From June 1999
through December 1999 we had a significant portion of the proceeds from our
structured loan sale transaction invested in temporary investments until we
originated new loans. As a result, the weighted average temporary
investments decreased by $16.3 million (53%) to $14.7 million during the
year ended December 31, 2000 from $31.0 million during the year ended
December 31, 1999.

Income from retained interests in transferred assets:Income from
retained interests in transferred assets increased by $553,000 (16%), to
$4,020,000 for the year ended December 31, 2000 from $3,467,000 for the year
ended December 31, 1999. The income from our Retained Interests is
comprised of the yield accreted on our Retained Interests. The increase in
our income from our Retained Interests was the result of an increase in our
weighted average Retained Interests outstanding primarily due to our
structured loan sale transaction completed in June 1999. We owned this
investment for a full year during the year ended December 31, 2000 compared
to a half a year during the year ended December 31, 1999.

Premium income:Premium income decreased by $517,000 (47%), to
$573,000 for the year ended December 31, 2000 from $1,090,000 for the year
ended December 31, 1999. The decrease was primarily a result of reduced
loan sales to the secondary market. Our sale of the government guaranteed
portion of loans receivable (under the SBA 7(a) program) decreased to $9.6
million during the year ended December 31, 2000 from $19.2 million during
the year ended December 31, 1999. The number and dollar volume of loans
originated, and as a consequence sold, by First Western under the SBA 7(a)
program decreased during the year ended December 31, 2000. The decrease in
volume primarily relates to 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 2000, we continued to face increased
competition to originate SBA 7(a) program loans from other SBA 7(a) program
lenders as well as lenders providing alternative loan products.

Other investment income, net:Other investment income, net, decreased
by $20,000 (2%), to $823,000 for the year ended December 31, 2000 from
$843,000 for the year ended December 31, 1999. Other investment income
includes fee income related to our loans and was comparable during the years
ended December 31, 2000 and 1999.

Other income, net:Other income, net, decreased by $172,000 (7%), to
$2,148,000 during the year ended December 31, 2000 from $2,320,000 during
the year ended December 31, 1999. Other income, which primarily consists of
income relating to the advisory services provided to PMC Commercial, was
reduced during the year ended December 31, 2000 as a result of the reduced
fee structure and loans receivable managed for PMC Commercial. During the
year ended December 31, 1999 and during the six months ended June 30, 2000,
we charged fees between 0.40% and 1.67% annually, based upon the average
principal outstanding of loans under management pursuant to the IMAs.
Effective July 1, 2000, the highest fee chargeable by PMC Advisers under the
IMAs was reduced from 1.67% to 1.55%. The reduction in management fee
income was lessened by $100,000 due to the fee earned on the placement of
PMC Commercials loans receivable into the 2000 Joint Venture.

Equity in income (loss) 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, not including the SPEs
established by us in connection with the structured sales of our loans
receivable, are reflected as a single line item (Equity in income (loss) of
unconsolidated subsidiaries) in our consolidated statements of income.

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Equity in income (loss) of unconsolidated subsidiaries decreased by
$232,000 (33%), to $480,000 during the year ended December 31, 2000 from
$712,000 during the year ended December 31, 1999.

The decrease was a result of the following:



| |  |  | The net income of PMC Advisers was $495,000 during the
year ended December 31, 2000 compared to $561,000 during the year
ended December 31, 1999. The decrease was primarily a result of
$81,000 in fees earned by PMC Advisers related to the acquisition
by PMC Commercial of four properties during the year ended
December 31, 1999. There was no comparable transaction during
the year ended December 31, 2000.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | PMC Funding had a loss of $15,000 during the year ended
December 31, 2000 as compared to a $151,000 gain during the year
ended December 31, 1999. The primary reason for the change was
the recognition of a gain on the sale of an asset during the
first quarter of 1999. There was no comparable transaction
during the year ended December 31, 2000.                                                             

Operating expenses, not including interest expense:Operating
expenses, not including interest, increased by $70,000 (1%), to $5,897,000
during the year ended December 31, 2000 from $5,827,000 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 provide all of our management,
advisory and loan functions, including marketing, servicing and accounting
analysis. We had an increase in salaries and related benefits of $133,000
(3%), to $4,182,000 during the year ended December 31, 2000 from $4,049,000
during the year ended December 31, 1999. The increase in salaries and
related benefits was primarily attributable to an increase in our marketing
staff attributable to new loan production offices.

Interest expense:Interest expense increased by $70,000 (1%), to
$5,383,000 during the year ended December 31, 2000 from $5,313,000 during
the year ended December 31, 1999. Interest expense results primarily from
interest on (i) the Companys $41.7 million of unsecured notes payable with
a weighted average interest rate of 7.7% and weighted average remaining
maturity of 3.0 years as of December 31, 2000, (ii) $31.3 million of SBA
debentures, with a weighted average interest rate of approximately 7.6%
(including SBA annual fees on debentures issued during 2000) and weighted
average remaining maturity of 5.6 years as of December 31, 2000, and (iii)
balances outstanding on our revolving credit facility. While we have
borrowed on this facility during the year ended December 31, 2000, we did
not have any borrowings outstanding at December 31, 2000.

Activity relating to our outstanding debt was as follows:



| |  |  | During July 1999, we issued an additional $3.3 million in senior debt;                                                                                          
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During the year ended December 31, 1999 we repaid at maturity $4.1 million in SBA debentures;                                                                   
|
| |  |  | During the year ended December 31, 2000 we repaid at maturity $11.6 million of SBA debentures;                                                                  
|
| |  |  | During July 2000, we issued an additional $3.3 million in senior debt;                                                                                          
|
| |  |  | During the third quarter of 2000, we issued $7.3 million of SBA debentures; and                                                                                 
|
| |  |  | The subsidized rate on $12 million of SBIC debentures expired during the year ended December 31, 2000 and the interest
rate on these debentures increased by 3%.

Realized and unrealized gain (loss) on investments:Realized and
unrealized gain (loss) on investments decreased to a gain of $949,000 during
the year ended December 31, 2000 from a gain of $1,933,000 during the year
ended December 31, 1999.

The most significant reason for this decrease in net realized and
unrealized gain (loss) on investments was the reduction in the amount of
gain recognized on our structured loan sale transactions. During the year
ended December 31, 2000 we recognized a gain of approximately $564,000
relating to the sale of $28.0 million of loans receivable during December
2000 compared to a gain of $2,564,000 recognized from the sale of $60.5
million of loans receivable during June 1999. The reduction of $2,000,000
was due to a decrease in the

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principal amount sold of approximately $32.5 million and the reduced net
interest spread. The net interest spread is the difference between the
weighted average interest rate on the sold loans receivable compared to the
coupon rate on the debt issued by the SPE. We generated a net interest
spread of 2.26% related to our 2000 structured loan sale transaction
compared to a net interest spread of 2.99% related to our 1999 structured
loan sale.

During the year ended December 31, 2000, we recognized net realized and
unrealized gains of $385,000 compared to net realized and unrealized losses
(excluding the gain relating to our structured loan sale transaction) of
$631,000 during the year ended December 31, 1999. During the year ended
December 31, 2000 we recognized $871,000 in valuation gains relating to our
Retained Interests. The primary reason for the net gains during the year
ended December 31, 2000 was the continued lower than previously anticipated
rate of prepayment activity and less than anticipated loss activity related
to the structured loan sale of fixed interest rate loans receivable
completed in June 1999. With respect to the loans receivable sold in June
1999, we did not have any loans receivable that prepaid during the year
ended December 31, 2000 and we did not have any loans receivable that were
charged-off or that required a loan loss provision to be established.
During the year ended December 31, 1999, we recognized $500,000 in valuation
losses relating to Retained Interests. The primary reason for the valuation
losses during the year ended December 31, 1999 was increased prepayment of
principal on the underlying pool of variable-rate loans originated by First
Western.

We also recognized $486,000 of net realized and unrealized loan
valuation losses during the year ended December 31, 2000 compared to
$131,000 in net realized and unrealized loan valuation losses during the
year ended December 31, 1999. The increase was primarily a result of
valuation reserves established on impaired loans identified during the third
and fourth quarter of 2000. Loan losses (including the change in unrealized
appreciation (depreciation) on loans) were 0.41% and 0.13% of our weighted
average outstanding loans receivable during the years ended December 31,
2000 and 1999, respectively.

Cash Flow Analysis

We generated cash flow from operating activities of $9,959,000 and
$8,636,000 during 2001 and 2000, respectively. The increase in cash flows
from operating activities of $1,323,000 (15%) primarily relates to (i)
increased funds available from our SBA 7(a) loan activity of $1,192,000 and
(ii) a $696,000 reduction in use of funds from the change in our operating
assets and liabilities. These increases were partially offset by a
reduction in net income of $686,000.

We used cash of $51,476,000 and $21,377,000 from investing activities
during 2001 and 2000, respectively. This $30,099,000 increase in cash used
in investing activities relates primarily to a net increase in loans funded
less principal collected of $25,987,000 and the purchase of loans receivable
of $2,272,000 from the exercise of our option relating to our securitization
completed in 1994.

We generated cash of $36,926,000 from financing activities during 2001
compared to $11,457,000 from financing activities during 2000. This
$25,469,000 increase in cash flows from financing activities relates
primarily to $44,511,000 net proceeds from the debt issued by the 2001 Joint
Venture compared to $24,713,000 in net proceeds from the 2000 Joint Venture.

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Funds

Overview

Historically, dividends paid to our shareholders have exceeded our cash
flows provided by operating activities. In 2002, we anticipate that our
cash flows from operating activities will be used to pay 2002 dividend
distributions. As a result, all of our cash flows from operating activities
are not available to fund our loan originations or debt service. During
2001 our investment in loans ($62.6 million) and debt repayments ($6.7
million) were primarily funded by:
31Table of Contents



| |  |  | Principal collections on our loans receivable of $10.1 million;         
| | - |  | ------------------------------------------------------------------------
|
| |  |  | Net proceeds from our structured loan sale transaction of $44.5 million;
|
| |  |  | Issuance of notes payable of $10.0 million; and,                        
|
| |  |  | Use of cash on hand.                                                    

During 2002, we anticipate loan originations will range from $36
million to $48 million, which we expect to be funded primarily through (i) a
structured loan sale transaction(s), (ii) issuance of notes payable or SBA
debentures and (iii) advances under our revolving credit facility.

We have $5.0 million in notes payable with an interest rate of 6.97%
that mature in December 2002. We anticipate that these notes payable will
be rolled-over into new notes payable with an extended maturity. We also
have a $510,000 SBA debenture that matures in December 2002 and anticipate
that we will utilize a portion of our commitment from the SBA to refinance
the SBA debenture. See Debt below.

At December 31, 2001, we had approximately $17.3 million of cash and
cash equivalents, availability of $10 million under our revolving credit
facility, $5 million under our discretionary guidance line facility and
approximately $19.5 million of total loan commitments and approvals
outstanding. Commitments have fixed expiration dates and require payment of
a fee. Since some commitments expire without the proposed loan closing, the
total committed amounts do not necessarily represent future cash
requirements.

To the extent we fully utilize our cash and cash equivalents on hand
and our $10 million revolving credit facility and $5 million discretionary
guidance line, we anticipate that we would complete another structured loan
sale transaction or issue SBA debentures to fund our commitments. We
achieve more timely access to the market, a more efficient cost of funds and
lower retained interest in loans receivable sold when we complete a
structured loan sale transaction through a joint venture transaction with
PMC Commercial.

We are currently in the process of marketing a co-securitization
transaction with PMC Commercial and expect net proceeds of approximately $36
million to be received in the second quarter of 2002. 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 advance rates
or increased interests rates and/or sell assets to meet our committed
obligations when and if they come due.

Sources of Funds

General

We expect that the sources of funds described below should be adequate
to meet our existing obligations and generate funds sufficient to meet both
our short-term and long-term capital needs. However, there can be no
assurance that we will be able to raise funds through these financing
sources.

To generate growth in the size of our investment portfolio and meet our
outstanding loan commitments, we will need to obtain additional funds from
our primary sources of capital and liquidity as follows:



| |  |  | The structured loan sale or structured loan financing of a portion of our loans receivable;
| | - |  | -------------------------------------------------------------------------------------------
|
| |  |  | Issuance of SBA debentures;                                                                
|
| |  |  | Private and public issuances of common stock;                                              
|
| |  |  | The issuance of senior unsecured medium-term notes; and                                    
|
| |  |  | Borrowings under our short-term, unsecured revolving credit facility and/or guidance line. 

As a BDC, we are generally required to maintain a ratio of at least
200% of total assets to total borrowings, which may restrict our ability to
borrow in certain circumstances. We expect to be able to borrow from
financial institutions and sell loans receivable in the asset-backed
securities market. As a result of the current market price for our common
stock, we do not anticipate selling additional equity securities during the
year ending December 31, 2002.

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

We believe that as a result of the current interest rate environment
(the prime rate and the interest rates on treasury notes decreased
substantially during 2001) we may continue to see increased levels of
prepayment activity during 2002. The majority of our prepayment fees are
based on a yield maintenance premium which provides for greater fees as
interest rates decrease.

Structured Loan Sale Transactions

Since 1996, our primary source of funds has been structured loan sale
transactions. We generated net proceeds of $44.5 million and $24.7 million
from the completion of structured loan sale transactions during 2001 and
2000, respectively. It is anticipated that our primary source of working
capital during 2002 will be structured loan sale transaction(s). In certain
economic markets the availability of funds may be diminished or the spread
charged for funds may increase causing us to delay a structured loan
transaction. A reduction in the availability of this source of funds could
have a material adverse effect on our financial condition and results of
operations since working capital may not be available to fund loan
originations.

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

The timing of, and ability to complete, our structured loan
transactions is dependent on several factors. First is the availability of
capital under our revolving credit facilities. To the extent our
commitments to fund loans fully utilize our availability under our revolving
credit facilities, we will attempt to complete a structured loan sale
transaction. Second is the expected interest rate environment. Since most
of our loans receivable have fixed rates of interest, in order to reduce a
possible interest rate mismatch (in which the cost of the source of funds
could increase due to a rise in interest rates), it is preferable to
complete a structured loan transaction as close in time as possible to the
origination of the loans sold. Since we can combine our loans with loans of
PMC Commercial, we can reduce this risk by selling loans receivable more
frequently as the combined loan pools attain sufficient size. Third is the
economic environment. In certain economic markets the availability of funds
might be diminished or the spread charged for funds may increase causing
us to delay a structured loan sale transaction.

We may experience problems selling fixed-rate loans receivable in a
structured loan sale transaction at a cost of funds acceptable to us. It is
anticipated that our working capital needs for 2002 will require us to
complete a structured loan sale transaction with PMC Commercial during the
first half of 2002. At present, since our fixed-rate loans receivable have
a weighted average interest rate of 9.8% at December 31, 2001, general
increases in interest rates will reduce our spread when we complete a
structured loan transaction. If (i) five-year U.S. Treasury rates were to
increase to levels above 6%, or (ii) spreads over Treasury for asset-backed
securities similar to the type issued by us were to increase sharply (over
150 basis points) from our estimate of present levels, or (iii) a
combination thereof, we may not be able to complete a fixed-rate structured
loan sale transaction with an acceptable structure because of the reduction
between the yield on our fixed-rate loans receivable and the interest needed
to be paid to the purchasers.

Problems in the asset-backed securities market could affect our ability
to complete a structured loan transaction on a timely basis or may cause us
to sell the loans on unfavorable terms including:



| |  |  | Increased interest rates;                                                   
| | - |  | ----------------------------------------------------------------------------
|
| |  |  | Increased cash reserve requirements; or                                     
|
| |  |  | A requirement that we hold larger subordinated portions of loans receivable.

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Each of the items described above would have a negative impact on our
net income. In addition, there are other occurrences that could impair our
ability, or alter our decision, to complete a structured loan transaction.

These events include, but are not limited to, the following:



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

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

We are presently in the process of marketing a structured loan sale
transaction of approximately $43 million of our loans receivable for
estimated net proceeds of approximately $36 million. Based on our
discussions with the rating agencies, our investment bankers and with
potential investors, we believe that a market for our loans exists and the
interest rate spreads and all-in costs of this structured loan transaction
are similar to our previously issued transactions. Completion of this
structured loan sale transaction is expected in the second quarter of 2002.
These transactions are very sensitive to changes in market conditions.
While we have been successful in completing our past structured loan
transactions in a timely manner, due to the risky nature of these
transactions and the many factors which could cause us to delay or postpone
a transaction, there can be no assurance of a successful outcome.

Since we account for structured loan sale transactions as sales of our
loans receivable neither the loans receivable contributed to the SPE nor the
notes payable issued by the SPE are included in our consolidated financial
statements. As a result, our consolidated balance sheets at December 31,
2001 and 2000 do not include $171.6 million and $141.1 million in assets,
respectively, and $147.4 million and $117.7 million in liabilities,
respectively, related to our structured loan sale transactions recorded by
the SPEs. Our Retained Interests related to these structured loan sale
transactions was $30.6 million and $28.3 million at December 31, 2001 and
2000, respectively.

Debt

At December 31, 2001, we did not have any borrowings outstanding under
our $10 million revolving credit facility or our $5 million discretionary
guidance line, thus providing credit availability of $15 million. Advances
pursuant to the credit facility bear interest at our option at either the
lenders prime rate less 50 basis points or LIBOR plus 175 basis points.
The credit facility requires that we meet certain covenants, the most
restrictive of which provides that the ratio of net charge-offs to net loans
receivable may not exceed 2%, and the ratio of assets to debt may not fall
below 110% for PMC Capital and 135% including our consolidated subsidiaries.
At December 31, 2001 we were in compliance with all covenants of this
facility.

We had $6.7 million in notes payable which were repaid in July 2001 at
maturity and $6.7 million in notes payable that were repaid in July 2000 at
maturity. Both the $6.7 million in notes payable due July 2000 and July
2001 were rolled over into new notes payable at which time we borrowed an
additional $3.3 million. The $10 million in notes payable from 2000 and $10
million from 2001, mature in July 2004 and July 2006, respectively, and bear
interest at LIBOR plus 1.4% and LIBOR plus 1.3%, respectively, reset on a
quarterly basis. We repaid $11.6 million in SBA debentures at their
maturity during the year ended December 31, 2000

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and issued $7.3 million in SBA debentures with a coupon rate of 8.452%
(including the mandatory SBA 1% annual fee). At December 31, 2001, we had
an outstanding commitment from the SBA, expiring December 31, 2002, to
purchase up to $5.2 million ($4.2 million expiring September 2003 and $1.0
million expiring September 2004) in additional SBA debentures.

Uses of Funds

General

Our primary use of funds is to originate loans to small businesses in
the limited service hospitality industry. We also use funds primarily for
payment of:



| |  |  | Dividends to shareholders;                             
| | - |  | -------------------------------------------------------
|
| |  |  | Principal payments on borrowings;                      
|
| |  |  | Interest and related financing costs; and,             
|
| |  |  | Salaries and other general and administrative expenses.

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

Loan Originations

As a result of uncertain economic trends and overbuilding in certain
regional markets, during 1999 and early 2000 there was a slowdown in the
number of new hospitality properties that were built or sold. During 2001,
we experienced an increase in loan origination opportunities due primarily
to competition lessening from banks and other lenders and due to a reduction
in interest rates during 2001 causing more refinancing opportunities. Loan
originations during 2001 were $66.0 million.

While we experienced a high volume of origination activity in 2001, our
fourth quarter volume was not as high as the prior years fourth quarter
volume and our commitments to originate new loans decreased. As of December
31, 2001, our commitments of approximately $19.5 million were significantly
less than commitments of $32.2 million at December 31, 2000. In addition,
the volume of new business was slightly lower in January and February 2002
compared to January and February 2001. While this activity is not
necessarily indicative of volume over the remainder of 2002, it does show a
downward trend in volume of loan originations. We anticipate that quarterly
loan volumes (which averaged approximately $16.5 million per quarter in
2001) will range from $6 million to $12 million per quarter in 2002 and
annual loan origination volume will range from $36 million to $48 million.

35



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Summarized Contractual
Obligations, Commitments and Contingencies

The following summarizes our contractual obligations at December 31,
2001:

|                                   |  |                        |        |        |  |           |       |        |  |                |        |         |  |   |        |  |  |   |        | 
|---------------------------------- |  | ---------------------- | ------ | ------ |  | --------- | ----- | ------ |  | -------------- | ------ | ------- |  | - | ------ |  |  | - | ------ | 
|                                   |  | Payments Due by Period
|                                   |  |                       
|Contractual                        |  |                        |        |        |  | Less than |       | 1 to 3 |  | 4 to 5         |        | After 5
|Obligations                        |  | Total                  |        | 1 year |  | years     |       | years  |  | years         
|                                   |  |                        |        |        |  |           |       |        |  |               
|                                   |  |                        |        |        |  |           |       |        |  | (In thousands) |        |         |  |   |        |  |  |  
|Long-term debt(1)                  |  | $                      | 76,310 |        |  | $         | 5,510 |        |  | $              | 26,000 |         |  | $ | 37,490 |  |  | $ | 7,310  | 
|Preferred stock(2)                 |  |                        | 4,000  |        |  |           |      |        |  |                |       |         |  |   |       |  |  |   | 4,000  | 
|Operating leases(3)                |  |                        | 592    |        |  |           | 284   |        |  |                | 308    |         |  |   |       |  |  |   |       | 
|Employment agreements(4)           |  |                        | 2,962  |        |  |           | 1,185 |        |  |                | 1,777  |         |  |   |       |  |  |   |       | 
|                                   |  |                        |        |        |  |           |       |        |  |                |        |         |  |   |        |  |  |   |        | 
|Total contractual cash
obligations |  | $                      | 83,864 |        |  | $         | 6,979 |        |  | $              | 28,085 |         |  | $ | 37,490 |  |  | $ | 11,310 | 
|                                   |  |                        |        |        |  |           |       |        |  |                |        |         |  |   |        |  |  |   |        | 



---

|(1) |  | In addition, we have a $10 million revolving credit facility and a $5
million guidance line facility. No
amounts are outstanding under either of these facilities as of
December 31, 2001.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The 4% preferred stock of our subsidiary was issued in 1994
($2.0 million) and 1995 ($2.0 million) and must be redeemed at par
no later than 15 years from the date of issuance.          
|   
|(3) |  | Represents our future minimum lease payments under our leases for
office space.                                                                                                           
|   
|(4) |  | We have employment agreements with certain of our officers.                                                                                                                               

Our commitments at December 31, 2001 are summarized as follows:

|                     |                   |           |                                            |        |           |       |                |        |        |       |        |   |  |   |   |   |  |   |   |   | 
|-------------------- | ----------------- | --------- | ------------------------------------------ | ------ | --------- | ----- | -------------- | ------ | ------ | ----- | ------ | - |  | - | - | - |  | - | - | - | 
|                     |                   |           | Amount of Commitment Expiration Per Period
|                     |                   |           |                                           
|                     |                   |           | Total Amounts                              |        | Less than |       | 1 to 3         |        | 4 to 5 |       | Over 5
|Other Commitments    |                   | Committed |                                            | 1 year |           | years |                | years  |        | years
|                     |                   |           |                                            |        |           |       |                |        |        |      
|                     |                   |           |                                            |        |           |       | (In thousands) |        |        |       |        |   |  |   |  
|Indemnification(1)   |                   | $         |                                           |        |           | $     |               |        |        | $     |       |   |  | $ |  |   |  | $ |  |  
|Environmental(2)     |                   |           |                                           |        |           |       |               |        |        |       |       |   |  |   |  |   |  |   |  |  
|Other commitments(3) |                   |           | 19,451                                     |        |           |       | 19,451         |        |        |       |       |   |  |   |  |   |  |   |  |  
|                     |                   |           |                                            |        |           |       |                |        |        |       |        |   |  |   |   |   |  |   |   |  
|                     | Total commitments |           | $                                          | 19,451 |           |       | $              | 19,451 |        |       | $      |  |  |   | $ |  |  |   | $ |  | 
|                     |                   |           |                                            |        |           |       |                |        |        |       |        |   |  |   |   |   |  |   |   |  



---

|(1) |  | Represents our cross indemnification with PMC Commercial related to
the 2001 Joint Venture and the
2000 Joint Venture with a maximum exposure at December 31, 2001 of
$17.8 million as discussed in
detail below.                                                                                                                                                                                                                                                                                    
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Represents a liability of $0.3 million reflected on the
balance sheet of PMC Funding, our non-consolidated, non-investment
company act subsidiary. The liability represents the estimated
remaining costs to remediate an environmental obligation relating to
an asset acquired through liquidation and subsequently sold during
1999 by PMC Funding. We cannot currently estimate when or if the
obligation may be required to be paid. There can be no assurance of
the accuracy of this estimate.
|   
|(3) |  | Represents our loan commitments and approvals outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                                           

In a structured loan sale transaction, we contribute loans receivable
to an SPE in exchange for an ownership interest in that entity. The SPE
issues notes payable (usually through a private placement) to third parties
and then distributes a portion of the note payable proceeds to us. The
notes payable are collateralized solely by the assets of the SPE which means
that should the SPE fail to make payments on the notes, the noteholders have
no recourse to us. We have no obligation to pay the notes, nor do the
holders of the notes have any recourse against our assets. Accordingly,
neither the assets contributed to the SPEs nor the notes payable issued by
the SPE are included in our consolidated financial statements.

PMC Capital and PMC Commercial have entered into an indemnification
agreement regarding the performance of their respective loans receivable
sold to the 2001 Joint Venture and the 2000 Joint Venture. To the extent
that poor performance by either companys sold loans receivable (the
Underperforming Company) is pervasive enough to cause the other company
(the Performing Company) to not receive cash flow that it

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otherwise would have received, then the Underperforming Company must make
the Performing Company whole. If the cash flow reduction is considered to
be temporary, then interest will be paid as compensation to the Performing
Company. If the reduction of cash flows is deemed permanent, the balance of
reduction to cash flows must be paid to the Performing Company by the
Underperforming Company. At December 31, 2001, our maximum exposure under
this indemnification agreement was approximately $17.8 million which
represents the net present value of the Retained Interests reflected on PMC
Commercials consolidated balance sheet. Based on our present cash flow
assumptions, including stress test analysis of increasing the anticipated
losses on each of the loan pools, it does not appear that the loans
receivable sold by us will cause any permanent cash flow reductions to PMC
Commercial nor will the loans receivable sold by PMC Commercial cause any
permanent cash flow reduction to us. If the performance of our sold loans
receivable significantly deteriorated, it could be necessary for us to
perform under this indemnification agreement.

At the time a structured loan sale transaction is completed, we enter
into Credit Enhancement Agreements that govern the assets and the flow of
funds in and out of the SPE formed as part of the structured loan sale
transaction. Generally, the Credit Enhancement Agreements contain specified
limits on the delinquency, default and loss rates on loans receivable
included in each SPE. If, at any measurement date, the delinquency, default
or loss rate with respect to any SPE were to exceed the specified limits,
provisions of the Credit Enhancement Agreements would automatically increase
the level of credit enhancement requirements for that SPE. During the
period in which the specified delinquency, default or loss rate was
exceeded, excess cash flow from the SPE, if any, would be used to fund the
increased credit enhancement levels instead of being distributed to us,
which would delay our distribution or could reduce our cash flow. To date,
we have not had a reduction of cash flow as a result of an increased credit
enhancement requirement associated with our structured loan transactions.

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 dividends equal to at least 100% of
its investment company taxable income. There are certain timing differences
between book and tax income, most notably the recognition of income relating
to our structured loan transactions. As a result of these timing
differences and the anticipation of cash flows from the SPEs, the payment
and amount of dividends does not necessarily coincide with our earnings and
we may have a distribution of dividends in excess of our net income. In
addition, our dividends paid since we became an investment company exceeded
our earnings and profits for tax purposes. We did not recognize any return
of capital for dividend reporting purposes during the year ended December
31, 2001. During 2000, we recognized a 22.6% return of capital for dividend
reporting purposes. The computation of return of capital provides for
several timing differences, most notably relating to the recognition of gain
treatment on structured loan transactions.

During April, July and September 2001, we paid quarterly dividends of
$0.25, $0.20 and $0.20 per share of Common Stock in dividends to common
shareholders. During December 2001, we declared a $0.20 per share dividend
to common shareholders of record on December 31, 2001, which was paid during
January 2002. Our Board of Directors may amend our dividend policy as
warranted by actual and/or anticipated earnings.

On March 18, 2002, our Board of Directors declared a dividend of $0.16
per common share for the first quarter of 2002. The Board of Directors
reduced the quarterly dividend after consideration of the impact of lower
short-term interest rates and diminished interest rate spreads.

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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Since our balance sheet consists of items subject to interest rate
risk, we are subject to market risk associated with changes in interest
rates as described below.

A majority of our loans receivable (approximately 64%) consists of
fixed interest rate loans receivable and, as a result, changes in interest
rates do not have an immediate impact on interest income with regard to
these loans receivable. Our interest rate risk on our fixed-rate loans
receivable is primarily related to loan prepayments and pay-offs. The
average maturity of our loans receivable is less than their average
contractual terms because of prepayments. The average life of mortgage
loans tends to increase when the current mortgage loan rates are
substantially higher than rates on existing mortgage loans and, conversely,
decrease when the current mortgage loan rates are substantially lower than
rates on existing mortgage loans (due to refinancings of fixed-rate loans).
See Item 1, Business-Risk Factors-Interest Rate and Prepayment Risk.

As of December 31, 2001, we had $38.5 million of variable-rate loans
receivable and $25.0 million of variable-rate debt. On the $13.5 million
differential between our variable-rate loans receivable outstanding and our
variable-rate debt we have interest rate risk. To the extent variable rates
continue to decrease we would have a net decrease in interest income. Due
to decreases in the prime rate and LIBOR during the fourth quarter of 2001,
the interest rate on our variable-rate loans receivable and the current cost
of funds on our variable-rate debt have decreased by 125 basis points
effective as of January 1, 2002. Assuming there was no change to our
outstanding debt or loans, annualized interest income and expense would
decrease from current levels by $481,000 and $313,000, respectively. In
addition, the majority of our variable-rate loans are based on the prime
rate while our variable-rate debt is based on LIBOR. To the extent that the
differential between the prime rate and LIBOR were to change and the prime
rate did not change while LIBOR increased, we would have a negative impact
on net income. An increase in the spread between the prime rate and LIBOR
of 100 basis points would reduce net income by $250,000.

The sensitivity of our variable-rate loans receivable and debt to
changes in interest rates is regularly monitored and analyzed by measuring
the characteristics of our assets and liabilities. We assess interest rate
risk in terms of the potential effect on interest income net of interest
expense, the value of net assets and the value at risk in an effort to
ensure that we are insulated from any significant adverse effects from
changes in interest rates. Based on our analysis of the sensitivity of
interest income net of interest expense, if the balance sheet were to remain
constant and no actions were taken to alter the existing interest rate
sensitivity, a hypothetical immediate 100 basis point change in interest
rates would have reduced net income by approximately $135,000 or 1% over a
one-year period.

Changes in market interest rates are considered by the Board of
Directors in its determination of fair value of our loans receivable. To
date, changes in market interest rates have not had a significant effect 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 receivable, resulting in
possible decreases in long-term revenues due to the re-lending of the
prepayment proceeds at lower interest rates.

We have an investment in Retained Interests which is valued by our
Board of Directors based on various factors including estimates of
appropriate market discount rates. As there is no quoted market value for
our Retained Interests, changes to the general interest rate environment may
not affect our discount rates. Significant changes in the discount rates
used by the Board of Directors in determining the fair value of the Retained
Interests will have an impact on the recorded value and future earnings.
Assuming all other factors (prepayments, losses, etc.) remain unchanged, if
the discount rates used by the Board of Directors were to increase by 100
basis points or 200 basis points from current rates, the value of our
Retained Interests and our net income would decrease by $1.2 million and
$2.4 million, respectively.

Although management believes that the above described measures are
indicative of our sensitivity to interest rate changes, it does not adjust
for potential changes in credit quality, size and composition of our balance
sheet and other business developments that could affect our net income.
Accordingly, no assurances can be given that actual results would not differ
materially from the potential outcome simulated by these estimates.

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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.

39



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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 15, 2002.




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 15, 2002.




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 15, 2002.




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 15, 2002.

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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.                        

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SIGNATURES

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

|                     |  |  |                              | 
|-------------------- |  |  | ---------------------------- | 
|                     |  |  | PMC Capital, Inc.            | 
|                    
|                    
|                     |  |  | By: /s/ LANCE B. ROSEMORE    | 
|                     |  |  |                              | 
|                     |  |  | Lance B. Rosemore, President | 
|Dated March 28, 2002 |  |  |                              | 

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 28, 2002
|                                                  
|/s/ LANCE B. ROSEMORELance B. Rosemore             |  | President, Chief Executive
Officer, Secretary and Director
(Principal Executive Officer) |  | March 28, 2002
|                                                  
|/s/ BARRY N. BERLINBarry N. Berlin                 |  | Chief Financial Officer
(Principal Financial and
Accounting Officer)                     |  | March 28, 2002
|                                                  
|/s/ DR. MARTHA GREENBERGDr. Martha Greenberg       |  | Director                                                                                 |  | March 28, 2002
|                                                  
|/s/ DR. IRVIN BORISHDr. Irvin Borish               |  | Director                                                                                 |  | March 28, 2002
|                                                  
|/s/ THOMAS HAMILLThomas Hamill                     |  | Director                                                                                 |  | March 28, 2002
|                                                  
|/s/ BARRY A. IMBERBarry A. Imber                   |  | Director                                                                                 |  | March 28, 2002
|                                                  
|Theodore J. Samuel                                 |  | Director                                                                                 |  |               

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

|                                          |                                                                                                      |  |     |      | 
|----------------------------------------- | ---------------------------------------------------------------------------------------------------- |  | --- | ---- | 
|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, 2001 and 2000                                         |  |     | F-6  | 
|                                          | Consolidated Schedule of Investments as of December 31, 2001                                         |  |     | F-7  | 
|                                          | Consolidated Statements of Income for the Years Ended December 31, 2001, 2000 and 1999               |  |     | F-9  | 
|                                          | Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2001, 2000 and 1999 |  |     | F-10 | 
|                                          | Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999           |  |     | 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, 2001                                                  |  |     | F-32 | 
|                                          | Consolidating Statement of Income for the Year Ended December 31, 2001                               |  |     | F-33 | 
|                                          | Consolidating Statement of Shareholders Equity for the Year Ended December 31, 2001                 |  |     | F-34 | 
|                                          | Consolidating Statement of Cash Flows for the Year Ended December 31, 2001                           |  |     | F-35 | 

F-1



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##### Table of Contents






PMC CAPITAL, INC. AND SUBSIDIARIES
SUMMARY OF SELECTED FINANCIAL INFORMATION

|                  |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|----------------- | --------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                  |                                                                             |  | Years Ended December 31,                     
|                  |                                                                             |  |                                              
|                  |                                                                             |  | 2001                                          |         | 2000 |  | 1999 |         | 1998 |  | 1997
|                  |                                                                             |  |                                               |         |      |  |      |         |      |  |     
|                  |                                                                             |  | (Dollars in
thousands, except per share data)
|Operating Data:   |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        
|                  | Total income                                                                |  | $                                             | 20,752  |      |  | $    | 21,584  |      |  | $    | 22,627  |   |  | $ | 24,314  |   |  | $ | 24,406  |  
|                  | Total expenses                                                              |  |                                               | (11,408 | )    |  |      | (11,280 | )    |  |      | (11,140 | ) |  |   | (11,091 | ) |  |   | (10,602 | )
|                  | Realized and unrealized gain (loss)
on investments                          |  |                                               | 1,223   |      |  |      | 949     |      |  |      | 1,933   |   |  |   | 726     |   |  |   | 1,818   |  
|                  |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|                  | Net operating income and realized
and unrealized gain (loss) on
investments |  | $                                             | 10,567  |      |  | $    | 11,253  |      |  | $    | 13,420  |   |  | $ | 13,949  |   |  | $ | 15,622  |  
|                  |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|                  | Dividends declared, common                                                  |  | $                                             | 10,076  |      |  | $    | 11,846  |      |  | $    | 12,007  |   |  | $ | 14,473  |   |  | $ | 14,543  |  
|                  |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|                  | Basic and diluted earnings per
common share                                 |  | $                                             | 0.87    |      |  | $    | 0.93    |      |  | $    | 1.11    |   |  | $ | 1.16    |   |  | $ | 1.35    |  
|                  |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|                  | Dividends per common share                                                  |  | $                                             | 0.85    |      |  | $    | 1.00    |      |  | $    | 1.02    |   |  | $ | 1.23    |   |  | $ | 1.27    |  
|                  |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|                  | Basic weighted average common
shares outstanding                            |  |                                               | 11,854  |      |  |      | 11,841  |      |  |      | 11,829  |   |  |   | 11,800  |   |  |   | 11,411  |  
|                  |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|                  | Loans funded                                                                |  | $                                             | 65,977  |      |  | $    | 44,158  |      |  | $    | 84,264  |   |  | $ | 66,450  |   |  | $ | 86,361  |  
|                  |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|At end of period: |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        
|                  | Loans receivable, net                                                       |  | $                                             | 107,392 |      |  | $    | 100,353 |      |  | $    | 106,325 |   |  | $ | 116,711 |   |  | $ | 127,240 |  
|                  |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|                  | Retained interests in transferred assets                                    |  | $                                             | 33,537  |      |  | $    | 32,341  |      |  | $    | 28,423  |   |  | $ | 20,151  |   |  | $ | 14,853  |  
|                  |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|                  | Total assets                                                                |  | $                                             | 162,698 |      |  | $    | 161,478 |      |  | $    | 165,191 |   |  | $ | 163,349 |   |  | $ | 165,839 |  
|                  |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|                  | Notes and debentures payable                                                |  | $                                             | 76,310  |      |  | $    | 72,977  |      |  | $    | 73,973  |   |  | $ | 74,790  |   |  | $ | 76,290  |  
|                  |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|                  | Preferred stock of consolidated
subsidiary                                  |  | $                                             | 7,000   |      |  | $    | 7,000   |      |  | $    | 7,000   |   |  | $ | 7,000   |   |  | $ | 7,000   |  
|                  |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|                  | Common shareholders equity                                                 |  | $                                             | 72,908  |      |  | $    | 72,667  |      |  | $    | 73,314  |   |  | $ | 72,151  |   |  | $ | 70,166  |  
|                  |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|                  | Number of common shares
outstanding                                         |  |                                               | 11,854  |      |  |      | 11,854  |      |  |      | 11,829  |   |  |   | 11,829  |   |  |   | 11,631  |  
|                  |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Ratios:           |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        
|                  | Return on average assets(1)                                                 |  |                                               | 6.5     | %    |  |      | 6.9     | %    |  |      | 8.2     | % |  |   | 8.5     | % |  |   | 9.7     | %
|                  |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|                  | Return on average common
shareholders equity(2)                            |  |                                               | 14.1    | %    |  |      | 15.1    | %    |  |      | 18.1    | % |  |   | 19.2    | % |  |   | 23.3    | %
|                  |                                                                             |  |                                               |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  



---

|(1) |  | Based on the average value of our total assets on 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 shareholders equity on 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)

|                                                     |  |                                      |       |         |  |         |       |         |  |       |       |   |  |   |       |   |  |   |        | 
|---------------------------------------------------- |  | ------------------------------------ | ----- | ------- |  | ------- | ----- | ------- |  | ----- | ----- | - |  | - | ----- | - |  | - | ------ | 
|                                                     |  | FOR THE YEAR ENDED DECEMBER 31, 2001
|                                                     |  |                                     
|                                                     |  | First                                |       | Second  |  | Third   |       | Fourth  |  |       |       |  
|                                                     |  | Quarter                              |       | Quarter |  | Quarter |       | Quarter |  | Total
|                                                     |  |                                      |       |         |  |         |       |         |  |      
|Operating income                                     |  | $                                    | 5,253 |         |  | $       | 5,582 |         |  | $     | 4,836 |   |  | $ | 5,081 |   |  | $ | 20,752 | 
|Net operating income                                 |  | $                                    | 2,333 |         |  | $       | 2,455 |         |  | $     | 2,132 |   |  | $ | 2,424 |   |  | $ | 9,344  | 
|Net gain (loss) on investments                       |  | $                                    | 127   |         |  | $       | 2,071 |         |  | $     | (242  | ) |  | $ | (733  | ) |  | $ | 1,223  | 
|Net increase in net assets
resulting from operations |  | $                                    | 2,460 |         |  | $       | 4,526 |         |  | $     | 1,890 |   |  | $ | 1,691 |   |  | $ | 10,567 | 

|                                                     |  |           |       |  |  |   |       |  |  |   |        |   |  |   |        |   |  |   |       | 
|---------------------------------------------------- |  | --------- | ----- |  |  | - | ----- |  |  | - | ------ | - |  | - | ------ | - |  | - | ----- | 
|                                                     |  | PER SHARE
|                                                     |  |          
|Operating income                                     |  | $         | 0.443 |  |  | $ | 0.471 |  |  | $ | 0.408  |   |  | $ | 0.429  |   |  | $ | 1.751 | 
|Net operating income                                 |  | $         | 0.197 |  |  | $ | 0.207 |  |  | $ | 0.180  |   |  | $ | 0.204  |   |  | $ | 0.788 | 
|Net gain (loss) on investments                       |  | $         | 0.011 |  |  | $ | 0.175 |  |  | $ | (0.021 | ) |  | $ | (0.061 | ) |  | $ | 0.104 | 
|Net increase in net assets
resulting from operations |  | $         | 0.208 |  |  | $ | 0.382 |  |  | $ | 0.159  |   |  | $ | 0.143  |   |  | $ | 0.892 | 

|                                                     |  |                                      |       |         |  |         |       |         |  |       |       |  |  |   |       |  |  |   |        | 
|---------------------------------------------------- |  | ------------------------------------ | ----- | ------- |  | ------- | ----- | ------- |  | ----- | ----- |  |  | - | ----- |  |  | - | ------ | 
|                                                     |  | FOR THE YEAR ENDED DECEMBER 31, 2000
|                                                     |  |                                     
|                                                     |  | First                                |       | Second  |  | Third   |       | Fourth  |  |       |       | 
|                                                     |  | Quarter                              |       | Quarter |  | Quarter |       | Quarter |  | Total
|                                                     |  |                                      |       |         |  |         |       |         |  |      
|Operating income                                     |  | $                                    | 5,161 |         |  | $       | 5,303 |         |  | $     | 5,210 |  |  | $ | 5,910 |  |  | $ | 21,584 | 
|Net operating income                                 |  | $                                    | 2,478 |         |  | $       | 2,624 |         |  | $     | 2,395 |  |  | $ | 2,807 |  |  | $ | 10,304 | 
|Net gain (loss) on investments                       |  | $                                    | 138   |         |  | $       | 80    |         |  | $     | 59    |  |  | $ | 672   |  |  | $ | 949    | 
|Net increase in net assets
resulting from operations |  | $                                    | 2,616 |         |  | $       | 2,704 |         |  | $     | 2,454 |  |  | $ | 3,479 |  |  | $ | 11,253 | 

|                                                     |  |           |       |  |  |   |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|---------------------------------------------------- |  | --------- | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                                     |  | PER SHARE
|                                                     |  |          
|Operating income                                     |  | $         | 0.436 |  |  | $ | 0.448 |  |  | $ | 0.440 |  |  | $ | 0.500 |  |  | $ | 1.824 | 
|Net operating income                                 |  | $         | 0.209 |  |  | $ | 0.222 |  |  | $ | 0.202 |  |  | $ | 0.237 |  |  | $ | 0.870 | 
|Net gain (loss) on investments                       |  | $         | 0.012 |  |  | $ | 0.007 |  |  | $ | 0.005 |  |  | $ | 0.057 |  |  | $ | 0.081 | 
|Net increase in net assets
resulting from operations |  | $         | 0.221 |  |  | $ | 0.229 |  |  | $ | 0.207 |  |  | $ | 0.294 |  |  | $ | 0.951 | 

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, 2001 and 2000, including the
schedule of investments as of December 31, 2001 and the related consolidated statements of income, shareholders
equity and cash flows for each of the three years in the period ended December 31, 2001 and the financial
highlights for each of the five years in the period ended December 31, 2001 present fairly, in all material
respects, the financial position of PMC Capital, Inc. and its subsidiaries at December 31, 2001 and 2000 and the
results of their operations and their cash flows and the financial highlights for the periods indicated, in
conformity with accounting principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as financial statements) are the responsibility of
the Companys management; our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of securities as of December 31, 2001 and
2000, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Dallas, Texas
March 7, 2002, except for Note 10, as  to
which the date is March 18, 2002

F-4



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS

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,
|                                    |                                                                                                            |                                                              |                                                  |                                  |      |                         
|                                    |                                                                                                            |                                                              |                                                  |                                  |      | 2001                     |      | 2000   |      | 1999 |      | 1998   |      | 1997
|                                    |                                                                                                            |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |     
|Per share operating performance(1): |                                                                                                            |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                    | Net asset value, beginning of period                                                                       |                                                              | $                                                | 6.13                             |      |                          | $    | 6.20   |      |      | $    | 6.10   |      |      | $    | 6.03   |      |      | $    | 5.64   |     
|                                    |                                                                                                            |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                    |                                                                                                            | Net operating income                                         |                                                  |                                  | 0.79 |                          |      |        | 0.87 |      |      |        | 0.98 |      |      |        | 1.12 |      |      |        | 1.21 |     
|                                    |                                                                                                            | Net gains or losses on securities
realized and unrealized(2) |                                                  |                                  | 0.10 |                          |      |        | 0.08 |      |      |        | 0.16 |      |      |        | 0.20 |      |      |        | 0.47 |     
|                                    |                                                                                                            |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                    |                                                                                                            |                                                              |                                                  | Total from investment operations |      |                          | 0.89 |        |      |      | 0.95 |        |      |      | 1.14 |        |      |      | 1.32 |        |      |      | 1.68 | 
|                                    |                                                                                                            |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                    | Less distributions to:                                                                                     |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |        |     
|                                    |                                                                                                            |                                                              | Preferred shareholder of consolidated subsidiary |                                  |      | 0.02                     |      |        |      | 0.02 |      |        |      | 0.02 |      |        |      | 0.02 |      |        |      | 0.02 |     
|                                    |                                                                                                            |                                                              | Common shareholders                              |                                  |      | 0.85                     |      |        |      | 1.00 |      |        |      | 1.02 |      |        |      | 1.23 |      |        |      | 1.27 |     
|                                    |                                                                                                            |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                    |                                                                                                            |                                                              |                                                  | Total distributions              |      |                          | 0.87 |        |      |      | 1.02 |        |      |      | 1.04 |        |      |      | 1.25 |        |      |      | 1.29 | 
|                                    |                                                                                                            |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                    | Net asset value, end of period                                                                             |                                                              | $                                                | 6.15                             |      |                          | $    | 6.13   |      |      | $    | 6.20   |      |      | $    | 6.10   |      |      | $    | 6.03   |     
|                                    |                                                                                                            |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                    | Per share market value, end of period                                                                      |                                                              | $                                                | 7.09                             |      |                          | $    | 8.00   |      |      | $    | 8.25   |      |      | $    | 8.56   |      |      | $    | 14.56  |     
|                                    |                                                                                                            |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                    | Total investment return                                                                                    |                                                              |                                                  | (1                               | )%   |                          |      | 9      | %    |      |      | 9      | %    |      |      | (33    | )%   |      |      | 13     | %   
|                                    |                                                                                                            |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|Ratios and supplemental data:       |                                                                                                            |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                    | Net assets, end of period (in thousands)                                                                   |                                                              | $                                                | 72,908                           |      |                          | $    | 72,667 |      |      | $    | 73,314 |      |      | $    | 72,151 |      |      | $    | 70,166 |     
|                                    |                                                                                                            |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                    | Ratio of expenses to average net assets                                                                    |                                                              |                                                  | 16                               | %    |                          |      | 15     | %    |      |      | 15     | %    |      |      | 16     | %    |      |      | 16     | %   
|                                    |                                                                                                            |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                    | Ratio of operating income to average net assets                                                            |                                                              |                                                  | 13                               | %    |                          |      | 14     | %    |      |      | 16     | %    |      |      | 19     | %    |      |      | 21     | %   
|                                    |                                                                                                            |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                    | Ratio of net operating income and realized and
unrealized gain (loss) on investments to
average net assets |                                                              |                                                  | 15                               | %    |                          |      | 15     | %    |      |      | 18     | %    |      |      | 20     | %    |      |      | 24     | %   
|                                    |                                                                                                            |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       
|                                    | Portfolio turnover(3)                                                                                      |                                                              |                                                  | 56                               | %    |                          |      | 44     | %    |      |      | 87     | %    |      |      | 58     | %    |      |      | 20     | %   
|                                    |                                                                                                            |                                                              |                                                  |                                  |      |                          |      |        |      |      |      |        |      |      |      |        |      |      |      |       

Footnotes:



---

|(1) |  | The per share changes during the year are based on the basic weighted average number of shares outstanding 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,
|                                           |                                                                                                                                      |   |         |         |             
|                                           |                                                                                                                                      |   |         |         | 2001         |   | 2000   
|                                           |                                                                                                                                      |   |         |         |              |   |        
|ASSETS                                     |                                                                                                                                      |   |         |         |              |   |         |        
|Investments at value:                      |                                                                                                                                      |   |         |         |              |   |         |        
|                                           | Loans receivable, net                                                                                                                |   | $       | 107,392 |              |   | $       | 100,353 | 
|                                           | Retained interests in transferred assets                                                                                             |   |         | 33,537  |              |   |         | 32,341  | 
|                                           | Cash equivalents                                                                                                                     |   |         | 16,989  |              |   |         | 21,655  | 
|                                           | Mortgage-backed security of affiliate                                                                                                |   |         | 1,701   |              |   |         | 1,841   | 
|                                           | Restricted investments                                                                                                               |   |         | 95      |              |   |         | 177     | 
|                                           | Investment in unconsolidated subsidiaries                                                                                            |   |         | 67      |              |   |         | 148     | 
|                                           | Assets acquired in liquidation                                                                                                       |   |         | 329     |              |   |         |        | 
|                                           |                                                                                                                                      |   |         |         |              |   |         |        
|Total investments at value                 |                                                                                                                                      |   | 160,110 |         |              |   | 156,515 |        
|                                           |                                                                                                                                      |   |         |         |              |   |         |        
|Other assets:                              |                                                                                                                                      |   |         |         |              |   |         |        
|                                           | Due from affiliates                                                                                                                  |   |         | 607     |              |   |         | 2,278   | 
|                                           | Deferred charges, deposits and other assets                                                                                          |   |         | 873     |              |   |         | 938     | 
|                                           | Receivable for loans sold                                                                                                            |   |         | 184     |              |   |         | 750     | 
|                                           | Accrued interest receivable                                                                                                          |   |         | 462     |              |   |         | 579     | 
|                                           | Cash                                                                                                                                 |   |         | 329     |              |   |         | 254     | 
|                                           | Property and equipment, net                                                                                                          |   |         | 133     |              |   |         | 164     | 
|                                           |                                                                                                                                      |   |         |         |              |   |         |        
|Total other assets                         |                                                                                                                                      |   | 2,588   |         |              |   | 4,963   |        
|                                           |                                                                                                                                      |   |         |         |              |   |         |        
|Total assets                               |                                                                                                                                      | $ | 162,698 |         |              | $ | 161,478 |        
|                                           |                                                                                                                                      |   |         |         |              |   |         |        
|LIABILITIES AND SHAREHOLDERS EQUITY       |                                                                                                                                      |   |         |         |              |   |         |        
|Liabilities:                               |                                                                                                                                      |   |         |         |              |   |         |        
|                                           | Notes and debentures payable                                                                                                         |   | $       | 76,310  |              |   | $       | 72,977  | 
|                                           | Dividends payable                                                                                                                    |   |         | 2,434   |              |   |         | 3,026   | 
|                                           | Borrower advances                                                                                                                    |   |         | 798     |              |   |         | 1,549   | 
|                                           | Accrued interest payable                                                                                                             |   |         | 1,193   |              |   |         | 1,284   | 
|                                           | Accounts payable                                                                                                                     |   |         | 753     |              |   |         | 1,088   | 
|                                           | Due to affiliates                                                                                                                    |   |         | 189     |              |   |         | 667     | 
|                                           | Other liabilities                                                                                                                    |   |         | 1,113   |              |   |         | 1,220   | 
|                                           |                                                                                                                                      |   |         |         |              |   |         |        
|Total liabilities                          |                                                                                                                                      |   | 82,790  |         |              |   | 81,811  |        
|                                           |                                                                                                                                      |   |         |         |              |   |         |        
|Commitments and contingencies              |                                                                                                                                      |   |         |         |              |   |         |        
|                                          
|Cumulative preferred stock of subsidiary   |                                                                                                                                      |   | 7,000   |         |              |   | 7,000   |        
|                                           |                                                                                                                                      |   |         |         |              |   |         |        
|Shareholders equity:                      |                                                                                                                                      |   |         |         |              |   |         |        
|                                           | Common stock, authorized 30,000,000 shares of $.01 par value,
11,853,516 shares issued and outstanding at December 31,
2001 and 2000 |   |         | 119     |              |   |         | 119     | 
|                                           | Additional paid-in capital                                                                                                           |   |         | 71,508  |              |   |         | 71,508  | 
|                                           | Undistributed (dividends in excess of) retained earnings                                                                             |   |         | (340    | )            |   |         | 238     | 
|                                           | Net unrealized appreciation (depreciation) on investments                                                                            |   |         | 1,621   |              |   |         | 802     | 
|                                           |                                                                                                                                      |   |         |         |              |   |         |        
|                                           |                                                                                                                                      |   | 72,908  |         |              |   | 72,667  |        
|                                           |                                                                                                                                      |   |         |         |              |   |         |        
|Total liabilities and shareholders equity |                                                                                                                                      | $ | 162,698 |         |              | $ | 161,478 |        
|                                           |                                                                                                                                      |   |         |         |              |   |         |        
|Net asset value per common share           |                                                                                                                                      | $ | 6.15    |         |              | $ | 6.13    |        
|                                           |                                                                                                                                      |   |         |         |              |   |         |        

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, 2001(Dollars in thousands, except footnotes)

|                                     |                                                       |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  |  |       |      |  
|------------------------------------ | ----------------------------------------------------- | ------------------------- | ------------------------- |  | ---------------- | -- | ----------------- | - | ------- | ------ | ---- |  | ----- | ---- | ----- | - | ------- | ------ | - |  | ----- | ---- | ------ |  | --- | -- |  | - | ------- | ------- |  |  | ----- | ---- | -
|                                     |                                                       |                           |                           |  | Loans Receivable |    | Serviced Loans(2)
|                                     |                                                       |                           |                           |  |                  |    |                  
|                                     |                                                       |                           |                           |  | Number           |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      | Number |  |     |    |  |   |         |         | 
|                                     |                                                       |                           |                           |  | of               |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      | of     |  |     |    |  |   |         |         | 
|                                     |                                                       |                           |                           |  | Loans            |    | Value             |   | %       |        | Cost |  | %     |      | Loans |   | Cost    |        | %
|                                     |                                                       |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |  
|Category/Issuer(1)                   |                                                       |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  | 
|Loans to small business concerns(3): |                                                       |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  | 
|                                     | First Western SBLC, Inc. and Subsidiaries             |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  |  |      
|                                     | (Small business lending company loans)                |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  |  |      
|                                     |                                                       |                           | Hotels and motels         |  |                  | 50 |                   |   | $       | 9,423  |      |  |       | 8.8  | %     |   | $       | 9,480  |   |  |       | 8.8  | %      |  |     | 67 |  |   | $       | 43,853  |  |  |       | 13.7 | %
|                                     |                                                       |                           | Restaurants               |  |                  | 22 |                   |   |         | 1,910  |      |  |       | 1.8  | %     |   |         | 1,954  |   |  |       | 1.8  | %      |  |     | 33 |  |   |         | 8,775   |  |  |       | 2.7  | %
|                                     |                                                       |                           | Retail, other             |  |                  | 21 |                   |   |         | 998    |      |  |       | 0.9  | %     |   |         | 1,032  |   |  |       | 1.0  | %      |  |     | 31 |  |   |         | 4,381   |  |  |       | 1.4  | %
|                                     |                                                       |                           | Gasoline/service stations |  |                  | 10 |                   |   |         | 1,403  |      |  |       | 1.3  | %     |   |         | 1,412  |   |  |       | 1.3  | %      |  |     | 12 |  |   |         | 6,232   |  |  |       | 1.9  | %
|                                     |                                                       |                           | Services                  |  |                  | 29 |                   |   |         | 1,399  |      |  |       | 1.3  | %     |   |         | 1,416  |   |  |       | 1.3  | %      |  |     | 47 |  |   |         | 6,885   |  |  |       | 2.1  | %
|                                     |                                                       |                           | Car washes                |  |                  | 3  |                   |   |         | 445    |      |  |       | 0.4  | %     |   |         | 653    |   |  |       | 0.6  | %      |  |     | 3  |  |   |         | 2,538   |  |  |       | 0.8  | %
|                                     |                                                       |                           | Food and grocery stores   |  |                  | 1  |                   |   |         | 140    |      |  |       | 0.1  | %     |   |         | 140    |   |  |       | 0.1  | %      |  |     | 1  |  |   |         | 580     |  |  |       | 0.2  | %
|                                     |                                                       |                           | Laundromats               |  |                  | 4  |                   |   |         | 201    |      |  |       | 0.2  | %     |   |         | 215    |   |  |       | 0.2  | %      |  |     | 6  |  |   |         | 1,014   |  |  |       | 0.3  | %
|                                     |                                                       |                           | Wholesale                 |  |                  | 6  |                   |   |         | 267    |      |  |       | 0.2  | %     |   |         | 267    |   |  |       | 0.2  | %      |  |     | 9  |  |   |         | 1,514   |  |  |       | 0.5  | %
|                                     |                                                       |                           | Manufacturing             |  |                  | 4  |                   |   |         | 138    |      |  |       | 0.1  | %     |   |         | 138    |   |  |       | 0.1  | %      |  |     | 4  |  |   |         | 710     |  |  |       | 0.2  | %
|                                     |                                                       |                           | Other                     |  |                  | 3  |                   |   |         | 267    |      |  |       | 0.2  | %     |   |         | 267    |   |  |       | 0.2  | %      |  |     | 4  |  |   |         | 1,110   |  |  |       | 0.3  | %
|                                     |                                                       |                           | Health care               |  |                  | 3  |                   |   |         | 32     |      |  |       | 0.0  | %     |   |         | 32     |   |  |       | 0.0  | %      |  |     | 5  |  |   |         | 234     |  |  |       | 0.1  | %
|                                     |                                                       |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  | 
|                                     |                                                       | Total                     |                           |  | 156              |    |                   |   | 16,623  |        |      |  | 15.3  | %    |       |   | 17,006  |        |   |  | 15.6  | %    |        |  | 222 |    |  |   | 77,826  |         |  |  | 24.2  | %   
|                                     |                                                       |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  | 
|                                     | Western Financial Capital Corporation                 |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  |  |      
|                                     | (Small business investment company loans)             |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  |  |      
|                                     |                                                       |                           | Hotels and motels         |  |                  | 12 |                   |   |         | 13,286 |      |  |       | 12.4 | %     |   |         | 13,286 |   |  |       | 12.3 | %      |  |     | 31 |  |   |         | 32,217  |  |  |       | 10.0 | %
|                                     |                                                       |                           | Other notes receivable    |  |                  | 4  |                   |   |         | 136    |      |  |       | 0.1  | %     |   |         | 136    |   |  |       | 0.1  | %      |  |     | 5  |  |   |         | 504     |  |  |       | 0.2  | %
|                                     |                                                       |                           | Health care               |  |                  | 6  |                   |   |         | 82     |      |  |       | 0.1  | %     |   |         | 118    |   |  |       | 0.1  | %      |  |     | 7  |  |   |         | 528     |  |  |       | 0.2  | %
|                                     |                                                       |                           | Services                  |  |                  | 1  |                   |   |         | 379    |      |  |       | 0.4  | %     |   |         | 379    |   |  |       | 0.4  | %      |  |     | 6  |  |   |         | 2,593   |  |  |       | 0.8  | %
|                                     |                                                       |                           | Retail, other             |  |                  | 2  |                   |   |         | 1,521  |      |  |       | 1.4  | %     |   |         | 1,521  |   |  |       | 1.4  | %      |  |     | 2  |  |   |         | 1,521   |  |  |       | 0.5  | %
|                                     |                                                       |                           | Wholesale                 |  |                  | 1  |                   |   |         | 245    |      |  |       | 0.2  | %     |   |         | 245    |   |  |       | 0.2  | %      |  |     | 1  |  |   |         | 245     |  |  |       | 0.1  | %
|                                     |                                                       |                           | Gasoline/service stations |  |                  |   |                   |   |         |       |      |  |       |     |       |   |         |       |   |  |       |     |        |  |     | 4  |  |   |         | 1,419   |  |  |       | 0.4  | %
|                                     |                                                       |                           | Restaurants               |  |                  |   |                   |   |         |       |      |  |       |     |       |   |         |       |   |  |       |     |        |  |     | 1  |  |   |         | 998     |  |  |       | 0.3  | %
|                                     |                                                       |                           | Manufacturing             |  |                  |   |                   |   |         |       |      |  |       |     |       |   |         |       |   |  |       |     |        |  |     | 1  |  |   |         | 364     |  |  |       | 0.1  | %
|                                     |                                                       |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  | 
|                                     |                                                       | Total                     |                           |  | 26               |    |                   |   | 15,649  |        |      |  | 14.6  | %    |       |   | 15,685  |        |   |  | 14.5  | %    |        |  | 58  |    |  |   | 40,389  |         |  |  | 12.6  | %   
|                                     |                                                       |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  | 
|                                     | PMC Investment Corporation                            |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  |  |      
|                                     | (Specialized small business investment company loans) |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  |  |      
|                                     |                                                       |                           | Hotels and motels         |  |                  | 32 |                   |   |         | 33,121 |      |  |       | 30.9 | %     |   |         | 33,121 |   |  |       | 30.9 | %      |  |     | 74 |  |   |         | 72,594  |  |  |       | 22.6 | %
|                                     |                                                       |                           | Health care               |  |                  | 1  |                   |   |         | 108    |      |  |       | 0.1  | %     |   |         | 108    |   |  |       | 0.1  | %      |  |     | 1  |  |   |         | 108     |  |  |       | 0.0  | %
|                                     |                                                       |                           | Services                  |  |                  | 1  |                   |   |         | 31     |      |  |       | 0.0  | %     |   |         | 31     |   |  |       | 0.0  | %      |  |     | 1  |  |   |         | 31      |  |  |       | 0.0  | %
|                                     |                                                       |                           | Gasoline/service stations |  |                  | 2  |                   |   |         | 959    |      |  |       | 0.9  | %     |   |         | 981    |   |  |       | 0.9  | %      |  |     | 7  |  |   |         | 3,456   |  |  |       | 1.1  | %
|                                     |                                                       |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  | 
|                                     |                                                       | Total                     |                           |  | 36               |    |                   |   | 34,219  |        |      |  | 31.9  | %    |       |   | 34,241  |        |   |  | 31.9  | %    |        |  | 83  |    |  |   | 76,189  |         |  |  | 23.7  | %   
|                                     |                                                       |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  | 
|                                     | PMC Capital, Inc.                                     |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  |  |      
|                                     | (Commercial loans)                                    |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  |  |      
|                                     |                                                       |                           | Hotels and motels         |  |                  | 30 |                   |   |         | 34,686 |      |  |       | 32.4 | %     |   |         | 34,686 |   |  |       | 32.2 | %      |  |     | 96 |  |   |         | 111,402 |  |  |       | 34.6 | %
|                                     |                                                       |                           | Apartment complex         |  |                  | 2  |                   |   |         | 964    |      |  |       | 0.9  | %     |   |         | 964    |   |  |       | 0.9  | %      |  |     | 4  |  |   |         | 2,502   |  |  |       | 0.8  | %
|                                     |                                                       |                           | Services                  |  |                  | 2  |                   |   |         | 664    |      |  |       | 0.6  | %     |   |         | 664    |   |  |       | 0.6  | %      |  |     | 7  |  |   |         | 6,678   |  |  |       | 2.1  | %
|                                     |                                                       |                           | Gasoline/service stations |  |                  | 3  |                   |   |         | 718    |      |  |       | 0.7  | %     |   |         | 720    |   |  |       | 0.7  | %      |  |     | 3  |  |   |         | 720     |  |  |       | 0.2  | %
|                                     |                                                       |                           | Restaurants               |  |                  | 1  |                   |   |         | 411    |      |  |       | 0.4  | %     |   |         | 411    |   |  |       | 0.4  | %      |  |     | 3  |  |   |         | 2,367   |  |  |       | 0.7  | %
|                                     |                                                       |                           | Health care               |  |                  | 1  |                   |   |         | 703    |      |  |       | 0.7  | %     |   |         | 703    |   |  |       | 0.7  | %      |  |     | 1  |  |   |         | 703     |  |  |       | 0.2  | %
|                                     |                                                       |                           | Commercial real estate    |  |                  | 2  |                   |   |         | 1,101  |      |  |       | 1.0  | %     |   |         | 1,101  |   |  |       | 1.0  | %      |  |     | 3  |  |   |         | 1,338   |  |  |       | 0.4  | %
|                                     |                                                       |                           | Other                     |  |                  | 3  |                   |   |         | 1,654  |      |  |       | 1.5  | %     |   |         | 1,654  |   |  |       | 1.5  | %      |  |     | 3  |  |   |         | 1,654   |  |  |       | 0.5  | %
|                                     |                                                       |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  | 
|                                     |                                                       | Total                     |                           |  | 44               |    |                   |   | 40,901  |        |      |  | 38.2  | %    |       |   | 40,903  |        |   |  | 38.0  | %    |        |  | 120 |    |  |   | 127,364 |         |  |  | 39.5  | %   
|                                     |                                                       |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  | 
|                                     |                                                       | Total loans receivable(4) |                           |  | 262              |    |                   | $ | 107,392 |        |      |  | 100.0 | %    |       | $ | 107,835 |        |   |  | 100.0 | %    |        |  | 483 |    |  | $ | 321,768 |         |  |  | 100.0 | %   
|                                     |                                                       |                           |                           |  |                  |    |                   |   |         |        |      |  |       |      |       |   |         |        |   |  |       |      |        |  |     |    |  |   |         |         |  | 

(Continued on next page)

F-7



---



##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
DECEMBER 31, 2001(Continued  dollars in thousands, except footnotes)

|                                                        |                                                              |                                                                              |         |        |        |   |       |      |     |   |         |        |        |  |       |      |     |  
|------------------------------------------------------- | ------------------------------------------------------------ | ---------------------------------------------------------------------------- | ------- | ------ | ------ | - | ----- | ---- | --- | - | ------- | ------ | ------ |  | ----- | ---- | --- | -
|                                                        |                                                              |                                                                              |         | Value  |        | % |       | Cost |     | %
|                                                        |                                                              |                                                                              |         |        |        |   |       |      |     |  
|Category/Issuer(1)                                      |                                                              |                                                                              |         |        |        |   |       |      |     |   |         |        |        |  |       |     
|Total loans receivable (from prior page)                |                                                              | $                                                                            | 107,392 |        |        |   | 67.1  | %    |     | $ | 107,835 |        |        |  | 68.0  | %   
|                                                        |                                                              |                                                                              |         |        |        |   |       |      |     |   |         |        |        |  |       |     
|Investment in retained interests in transferred assets: |                                                              |                                                                              |         |        |        |   |       |      |     |   |         |        |        |  |       |     
|                                                        |                                                              | Retained interests of loans sold to PMC Capital LP 1999-1 and affiliate      |         |        | 10,018 |   |       |      | 6.3 | % |         |        | 9,532  |  |       |      | 6.0 | %
|                                                        |                                                              | Retained interests of loans sold to PMC Capital LP 1998-1 and affiliate      |         |        | 5,069  |   |       |      | 3.2 | % |         |        | 4,685  |  |       |      | 3.0 | %
|                                                        |                                                              | Retained interests of loans sold to PMC Joint Venture, LP 2000 and affiliate |         |        | 5,310  |   |       |      | 3.3 | % |         |        | 5,092  |  |       |      | 3.2 | %
|                                                        |                                                              | Retained interests of loans sold to PMC Joint Venture, LP 2001 and affiliate |         |        | 10,159 |   |       |      | 6.3 | % |         |        | 9,656  |  |       |      | 6.1 | %
|                                                        |                                                              | Retained interests of loans sold to First Western 1997                       |         |        | 967    |   |       |      | 0.6 | % |         |        | 783    |  |       |      | 0.5 | %
|                                                        |                                                              | Retained interests of secondary market loan sales                            |         |        | 2,014  |   |       |      | 1.2 | % |         |        | 1,804  |  |       |      | 1.1 | %
|                                                        |                                                              |                                                                              |         |        |        |   |       |      |     |   |         |        |        |  |       |     
|                                                        | Total investment in retained interests in transferred assets |                                                                              |         | 33,537 |        |   |       | 20.9 | %   |   |         | 31,552 |        |  |       | 19.9 | %  
|                                                        |                                                              |                                                                              |         |        |        |   |       |      |     |   |         |        |        |  |       |     
|Money market and fund deposit accounts(5):              |                                                              |                                                                              |         |        |        |   |       |      |     |   |         |        |        |  |       |     
|                                                        |                                                              | Bank One money market saving accounts                                        |         |        | 10,242 |   |       |      | 6.4 | % |         |        | 10,242 |  |       |      | 6.5 | %
|                                                        |                                                              | Dreyfus, Cash Management Plus money market fund                              |         |        | 2,002  |   |       |      | 1.3 | % |         |        | 2,002  |  |       |      | 1.3 | %
|                                                        |                                                              | SunTrust, overnight repo account                                             |         |        | 716    |   |       |      | 0.4 | % |         |        | 716    |  |       |      | 0.5 | %
|                                                        |                                                              | Merrill Lynch Premier fund                                                   |         |        | 3,046  |   |       |      | 1.9 | % |         |        | 3,046  |  |       |      | 1.9 | %
|                                                        |                                                              | Goldman Sachs, Prime Obligation money market fund                            |         |        | 779    |   |       |      | 0.5 | % |         |        | 779    |  |       |      | 0.5 | %
|                                                        |                                                              | Certificates of deposit                                                      |         |        | 204    |   |       |      | 0.1 | % |         |        | 204    |  |       |      | 0.1 | %
|                                                        |                                                              |                                                                              |         |        |        |   |       |      |     |   |         |        |        |  |       |     
|                                                        | Total money market and fund deposit accounts                 |                                                                              |         | 16,989 |        |   |       | 10.6 | %   |   |         | 16,989 |        |  |       | 10.8 | %  
|                                                        |                                                              |                                                                              |         |        |        |   |       |      |     |   |         |        |        |  |       |     
|Other investments:                                      |                                                              |                                                                              |         |        |        |   |       |      |     |   |         |        |        |  |       |     
|                                                        |                                                              | Investment in PMC Funding Corp and subsidiary                                |         |        | 47     |   |       |      | 0.0 | % |         |        | 47     |  |       |      | 0.0 | %
|                                                        |                                                              | Investment in PMC Advisers, Ltd and subsidiary                               |         |        | 20     |   |       |      | 0.0 | % |         |        | 20     |  |       |      | 0.0 | %
|                                                        |                                                              | Investment in Class B certificate of PMC Capital LP 1998-1                   |         |        | 1,701  |   |       |      | 1.1 | % |         |        | 1,622  |  |       |      | 1.0 | %
|                                                        |                                                              | Assets acquired in liquidation                                               |         |        | 329    |   |       |      | 0.2 | % |         |        | 329    |  |       |      | 0.2 | %
|                                                        |                                                              | Restricted investments                                                       |         |        | 95     |   |       |      | 0.1 | % |         |        | 95     |  |       |      | 0.1 | %
|                                                        |                                                              |                                                                              |         |        |        |   |       |      |     |   |         |        |        |  |       |     
|                                                        | Total other investments                                      |                                                                              |         | 2,192  |        |   |       | 1.4  | %   |   |         | 2,113  |        |  |       | 1.3  | %  
|                                                        |                                                              |                                                                              |         |        |        |   |       |      |     |   |         |        |        |  |       |     
|Total investments(6)                                    |                                                              | $                                                                            | 160,110 |        |        |   | 100.0 | %    |     | $ | 158,489 |        |        |  | 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 ($55.4 million) and the loans contributed to the
SPEs ($158.0 million). The balance does not include approximately $162.1 million of loans receivable serviced on
behalf of PMC Commercial Trust.
|   
|(3) |  | Interest rates on loans receivable range from 6.0% to 15.0% at December 31, 2001.                                                                                                                                                                                      
|   
|(4) |  | Balances at value are the cost of loans
receivable less loan loss reserves of $443,000.                                                                                                                                                                                
|   
|(5) |  | Interest or dividend rates on money market and fund deposit accounts range from 1.0% to 2.3% at December 31, 2001.                                                                                                                                                     
|   
|(6) |  | The aggregate cost of investments for Federal income tax purposes is approximately $153.4 million (unaudited).                                                                                                                                                         

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

F-8



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##### Table of Contents



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

|                                                                            |                                                      |                                                                 |        |                          |        |      |        |        |     |   |        |        |        |  
|--------------------------------------------------------------------------- | ---------------------------------------------------- | --------------------------------------------------------------- | ------ | ------------------------ | ------ | ---- | ------ | ------ | --- | - | ------ | ------ | ------ | -
|                                                                            |                                                      |                                                                 |        | Years Ended December 31,
|                                                                            |                                                      |                                                                 |        |                         
|                                                                            |                                                      |                                                                 |        | 2001                     |        | 2000 |        | 1999  
|                                                                            |                                                      |                                                                 |        |                          |        |      |        |       
|Investment income:                                                          |                                                      |                                                                 |        |                          |        |      |        |        |     |   |        |       
|                                                                            | Interest                                             |                                                                 | $      | 11,568                   |        |      | $      | 13,540 |     |   | $      | 14,195 |       
|                                                                            | Income from retained interests in transferred assets |                                                                 |        | 5,340                    |        |      |        | 4,020  |     |   |        | 3,467  |       
|                                                                            | Premium income                                       |                                                                 |        | 501                      |        |      |        | 573    |     |   |        | 1,090  |       
|                                                                            | Other investment income, net                         |                                                                 |        | 794                      |        |      |        | 823    |     |   |        | 843    |       
|                                                                            |                                                      |                                                                 |        |                          |        |      |        |        |     |   |        |       
|Total investment income                                                     |                                                      |                                                                 | 18,203 |                          |        |      | 18,956 |        |     |   | 19,595 |       
|                                                                           
|Other income, net                                                           |                                                      |                                                                 | 2,167  |                          |        |      | 2,148  |        |     |   | 2,320  |       
|Equity in income of unconsolidated subsidiaries, net                        |                                                      |                                                                 | 382    |                          |        |      | 480    |        |     |   | 712    |       
|                                                                            |                                                      |                                                                 |        |                          |        |      |        |        |     |   |        |       
|Total income                                                                |                                                      |                                                                 | 20,752 |                          |        |      | 21,584 |        |     |   | 22,627 |       
|                                                                            |                                                      |                                                                 |        |                          |        |      |        |        |     |   |        |       
|Expenses:                                                                   |                                                      |                                                                 |        |                          |        |      |        |        |     |   |        |       
|                                                                            | Interest                                             |                                                                 |        | 5,402                    |        |      |        | 5,383  |     |   |        | 5,313  |       
|                                                                            | Salaries and related benefits                        |                                                                 |        | 4,199                    |        |      |        | 4,182  |     |   |        | 4,049  |       
|                                                                            | General and administrative                           |                                                                 |        | 811                      |        |      |        | 750    |     |   |        | 860    |       
|                                                                            | Rent                                                 |                                                                 |        | 321                      |        |      |        | 315    |     |   |        | 286    |       
|                                                                            | Legal and accounting                                 |                                                                 |        | 273                      |        |      |        | 260    |     |   |        | 235    |       
|                                                                            | Profit sharing plan                                  |                                                                 |        | 242                      |        |      |        | 247    |     |   |        | 243    |       
|                                                                            | Small Business Administration fees                   |                                                                 |        | 105                      |        |      |        | 86     |     |   |        | 86     |       
|                                                                            | Directors and shareholders expense                   |                                                                 |        | 55                       |        |      |        | 57     |     |   |        | 68     |       
|                                                                            |                                                      |                                                                 |        |                          |        |      |        |        |     |   |        |       
|Total expenses                                                              |                                                      |                                                                 | 11,408 |                          |        |      | 11,280 |        |     |   | 11,140 |       
|                                                                            |                                                      |                                                                 |        |                          |        |      |        |        |     |   |        |       
|Net operating income                                                        |                                                      |                                                                 | 9,344  |                          |        |      | 10,304 |        |     |   | 11,487 |       
|                                                                           
|Realized and unrealized gain (loss) on investments:                         |                                                      |                                                                 |        |                          |        |      |        |        |     |   |        |       
|                                                                            |                                                      | Investments written-off, net                                    |        |                          | (2,328 | )    |        |        | (17 | ) |        |        | (1,805 | )
|                                                                            |                                                      | Sale of assets                                                  |        |                          | 2,732  |      |        |        | 564 |   |        |        | 2,564  |  
|                                                                            |                                                      | Change in unrealized appreciation (depreciation) on investments |        |                          | 819    |      |        |        | 402 |   |        |        | 1,174  |  
|                                                                            |                                                      |                                                                 |        |                          |        |      |        |        |     |   |        |       
|Total realized and unrealized gain (loss) on investments                    |                                                      |                                                                 | 1,223  |                          |        |      | 949    |        |     |   | 1,933  |       
|                                                                            |                                                      |                                                                 |        |                          |        |      |        |        |     |   |        |       
|Net operating income and realized and unrealized
gain (loss) on investments |                                                      | $                                                               | 10,567 |                          |        | $    | 11,253 |        |     | $ | 13,420 |       
|                                                                            |                                                      |                                                                 |        |                          |        |      |        |        |     |   |        |       
|Preferred dividends                                                         |                                                      | $                                                               | 250    |                          |        | $    | 251    |        |     | $ | 250    |       
|                                                                            |                                                      |                                                                 |        |                          |        |      |        |        |     |   |        |       
|Basic weighted average common shares outstanding                            |                                                      |                                                                 | 11,854 |                          |        |      | 11,841 |        |     |   | 11,829 |       
|                                                                            |                                                      |                                                                 |        |                          |        |      |        |        |     |   |        |       
|Diluted weighted average common shares outstanding                          |                                                      |                                                                 | 11,854 |                          |        |      | 11,845 |        |     |   | 11,831 |       
|                                                                            |                                                      |                                                                 |        |                          |        |      |        |        |     |   |        |       
|Basic and diluted earnings per common share                                 |                                                      | $                                                               | 0.87   |                          |        | $    | 0.93   |        |     | $ | 1.11   |       
|                                                                            |                                                      |                                                                 |        |                          |        |      |        |        |     |   |        |       

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, 2001, 2000 AND 1999(In thousands, except share and per share data)

|                                                                            |                                 |   |        |   |         |   |            |   |             |   |                |         |              |   |       |   |  |   |        |         |  
|--------------------------------------------------------------------------- | ------------------------------- | - | ------ | - | ------- | - | ---------- | - | ----------- | - | -------------- | ------- | ------------ | - | ----- | - |  | - | ------ | ------- | -
|                                                                            |                                 |   |        |   |         |   |            |   |             |   |                |         |              |   | Net   |   |  |   |       
|                                                                            |                                 |   |        |   |         |   |            |   |             |   | Undistributed  |         | Unrealized   |   |       |   | 
|                                                                            |                                 |   |        |   |         |   |            |   |             |   | (Dividends in  |         | Appreciation |   |       |   | 
|                                                                            |                                 |   |        |   |         |   | Additional |   | Excess of)  |   | (Depreciation) |         |              |   |      
|                                                                            |                                 |   | Common |   | Paid-in |   | Retained   |   | on          |   |                |         |             
|                                                                            |                                 |   | Stock  |   | Capital |   | Earnings   |   | Investments |   | Total         
|                                                                            |                                 |   |        |   |         |   |            |   |             |   |               
|Balance, January 1, 1999                                                    |                                 | $ | 118    |   |         | $ | 71,312     |   |             | $ | 1,495          |         |              | $ | (774  | ) |  | $ | 72,151 |        
|Net operating income and realized and
unrealized gain (loss) on investments |                                 |   |       |   |         |   |           |   |             |   | 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 |        
|Net operating income and realized and
unrealized gain (loss) on investments |                                 |   |       |   |         |   |           |   |             |   | 10,851         |         |              |   | 402   |   |  |   | 11,253 |        
|Issuances of common stock pursuant
to stock option plan, 24,400 shares      |                                 |   | 1      |   |         |   | 196        |   |             |   |               |         |              |   |      |   |  |   | 197    |        
|Dividends:                                                                  |                                 |   |        |   |         |   |            |   |             |   |                |         |              |   |       |   |  |   |        |        
|                                                                            | Preferred                       |   |        |  |         |   |            |  |             |   |                | (251    | )            |   |       |  |  |   |        | (251    | )
|                                                                            | Common ($1.00 per common share) |   |        |  |         |   |            |  |             |   |                | (11,846 | )            |   |       |  |  |   |        | (11,846 | )
|                                                                            |                                 |   |        |   |         |   |            |   |             |   |                |         |              |   |       |   |  |   |        |        
|Balance, December 31, 2000                                                  |                                 |   | 119    |   |         |   | 71,508     |   |             |   | 238            |         |              |   | 802   |   |  |   | 72,667 |        
|Net operating income and realized and
unrealized gain (loss) on investments |                                 |   |       |   |         |   |           |   |             |   | 9,748          |         |              |   | 819   |   |  |   | 10,567 |        
|Dividends:                                                                  |                                 |   |        |   |         |   |            |   |             |   |                |         |              |   |       |   |  |   |        |        
|                                                                            | Preferred                       |   |        |  |         |   |            |  |             |   |                | (250    | )            |   |       |  |  |   |        | (250    | )
|                                                                            | Common ($0.85 per common share) |   |        |  |         |   |            |  |             |   |                | (10,076 | )            |   |       |  |  |   |        | (10,076 | )
|                                                                            |                                 |   |        |   |         |   |            |   |             |   |                |         |              |   |       |   |  |   |        |        
|Balance, December 31, 2001                                                  |                                 | $ | 119    |   |         | $ | 71,508     |   |             | $ | (340           | )       |              | $ | 1,621 |   |  | $ | 72,908 |        
|                                                                            |                                 |   |        |   |         |   |            |   |             |   |                |         |              |   |       |   |  |   |        |        

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(In thousands)

|                                                     |                                                                                                                                                    |   |                                                      |         |                          |        |         |         |      |        |         |         |   |         |  
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---------------------------------------------------- | ------- | ------------------------ | ------ | ------- | ------- | ---- | ------ | ------- | ------- | - | ------- | -
|                                                     |                                                                                                                                                    |   |                                                      |         | Years Ended December 31,
|                                                     |                                                                                                                                                    |   |                                                      |         |                         
|                                                     |                                                                                                                                                    |   |                                                      |         | 2001                     |        | 2000    |         | 1999
|                                                     |                                                                                                                                                    |   |                                                      |         |                          |        |         |         |     
|Cash flows from operating activities:                |                                                                                                                                                    |   |                                                      |         |                          |        |         |         |      |        |         |        
|                                                     | Net operating income and realized and unrealized gain (loss) on investments                                                                        |   | $                                                    | 10,567  |                          |        | $       | 11,253  |      |        | $       | 13,420  |  
|                                                     | 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                          |         |                          | (5,608 | )       |         |      | (8,606 | )       |         |   | (19,308 | )
|                                                     |                                                                                                                                                    |   | Proceeds from sale of guaranteed loans               |         |                          | 7,778  |         |         |      | 9,584  |         |         |   | 19,152  |  
|                                                     |                                                                                                                                                    |   | Realized and unrealized (gain) loss on investments   |         |                          | (1,223 | )       |         |      | (949   | )       |         |   | (1,933  | )
|                                                     |                                                                                                                                                    |   | Unrealized premium income, net                       |         |                          | (14    | )       |         |      | (255   | )       |         |   | (664    | )
|                                                     |                                                                                                                                                    |   | Depreciation and amortization                        |         |                          | 159    |         |         |      | 177    |         |         |   | 184     |  
|                                                     |                                                                                                                                                    |   | Accretion of loan discount and deferred fees         |         |                          | (167   | )       |         |      | (288   | )       |         |   | (780    | )
|                                                     |                                                                                                                                                    |   | Deferred fees collected                              |         |                          |       |         |         |      | 47     |         |         |   | 163     |  
|                                                     |                                                                                                                                                    |   | Equity in income of unconsolidated subsidiaries, net |         |                          | (382   | )       |         |      | (480   | )       |         |   | (712    | )
|                                                     |                                                                                                                                                    |   | Other operating assets and liabilities               |         |                          | (1,151 | )       |         |      | (1,847 | )       |         |   | 633     |  
|                                                     |                                                                                                                                                    |   |                                                      |         |                          |        |         |         |      |        |         |        
|Net cash provided by operating activities            |                                                                                                                                                    |   | 9,959                                                |         |                          |        | 8,636   |         |      |        | 10,155  |        
|                                                     |                                                                                                                                                    |   |                                                      |         |                          |        |         |         |      |        |         |        
|Cash flows from investing activities:                |                                                                                                                                                    |   |                                                      |         |                          |        |         |         |      |        |         |        
|                                                     | Loans funded                                                                                                                                       |   |                                                      | (60,369 | )                        |        |         | (35,552 | )    |        |         | (64,956 | )
|                                                     | Purchase of loans through exercise of option                                                                                                       |   |                                                      | (2,272  | )                        |        |         |        |      |        |         |        |  
|                                                     | Principal collected and other adjustments                                                                                                          |   |                                                      | 10,063  |                          |        |         | 11,233  |      |        |         | 15,431  |  
|                                                     | Proceeds from retained interests in transferred assets                                                                                             |   |                                                      | 3,181   |                          |        |         | 3,000   |      |        |         | 3,626   |  
|                                                     | Proceeds from mortgage-backed security of affiliate                                                                                                |   |                                                      | 144     |                          |        |         | 248     |      |        |         | 161     |  
|                                                     | Proceeds from sale of assets                                                                                                                       |   |                                                      |        |                          |        |         | 65      |      |        |         | 71      |  
|                                                     | Distributions from unconsolidated subsidiaries                                                                                                     |   |                                                      | 462     |                          |        |         | 494     |      |        |         | 750     |  
|                                                     | Purchase of property and equipment and other assets                                                                                                |   |                                                      | (33     | )                        |        |         | (15     | )    |        |         | (39     | )
|                                                     | Investment in retained interests in transferred assets                                                                                             |   |                                                      | (2,508  | )                        |        |         | (1,094  | )    |        |         | (3,524  | )
|                                                     | Release of (investment in) restricted cash                                                                                                         |   |                                                      | 82      |                          |        |         | 792     |      |        |         | (366    | )
|                                                     | Advances (to) from unconsolidated affiliates, net                                                                                                  |   |                                                      | (226    | )                        |        |         | (548    | )    |        |         | 929     |  
|                                                     |                                                                                                                                                    |   |                                                      |         |                          |        |         |         |      |        |         |        
|Net cash used in investing activities                |                                                                                                                                                    |   | (51,476                                              | )       |                          |        | (21,377 | )       |      |        | (47,917 | )      
|                                                     |                                                                                                                                                    |   |                                                      |         |                          |        |         |         |      |        |         |        
|Cash flows from financing activities:                |                                                                                                                                                    |   |                                                      |         |                          |        |         |         |      |        |         |        
|                                                     | Proceeds from issuance of notes and debentures payable                                                                                             |   |                                                      | 10,000  |                          |        |         | 17,310  |      |        |         | 10,000  |  
|                                                     | Proceeds from issuance of common stock                                                                                                             |   |                                                      |        |                          |        |         | 197     |      |        |         |        |  
|                                                     | Proceeds from debt issued by SPEs, net                                                                                                             |   |                                                      | 44,511  |                          |        |         | 24,713  |      |        |         | 55,126  |  
|                                                     | Payment of dividends on common stock                                                                                                               |   |                                                      | (10,668 | )                        |        |         | (12,018 | )    |        |         | (11,829 | )
|                                                     | Payment of dividends on preferred stock                                                                                                            |   |                                                      | (250    | )                        |        |         | (251    | )    |        |         | (250    | )
|                                                     | Payment of notes payable                                                                                                                           |   |                                                      | (6,667  | )                        |        |         | (6,666  | )    |        |         | (6,667  | )
|                                                     | Payment of SBA debentures                                                                                                                          |   |                                                      |        |                          |        |         | (11,640 | )    |        |         | (4,150  | )
|                                                     | Payment of issuance costs on notes and debentures                                                                                                  |   |                                                      |        |                          |        |         | (188    | )    |        |         |        |  
|                                                     |                                                                                                                                                    |   |                                                      |         |                          |        |         |         |      |        |         |        
|Net cash provided by financing activities            |                                                                                                                                                    |   | 36,926                                               |         |                          |        | 11,457  |         |      |        | 42,230  |        
|                                                     |                                                                                                                                                    |   |                                                      |         |                          |        |         |         |      |        |         |        
|Net increase (decrease) in cash and cash equivalents |                                                                                                                                                    |   | (4,591                                               | )       |                          |        | (1,284  | )       |      |        | 4,468   |        
|Cash and cash equivalents, beginning of year         |                                                                                                                                                    |   | 21,909                                               |         |                          |        | 23,193  |         |      |        | 18,725  |        
|                                                     |                                                                                                                                                    |   |                                                      |         |                          |        |         |         |      |        |         |        
|Cash and cash equivalents, end of year               |                                                                                                                                                    | $ | 17,318                                               |         |                          | $      | 21,909  |         |      | $      | 23,193  |        
|                                                     |                                                                                                                                                    |   |                                                      |         |                          |        |         |         |      |        |         |        
|Supplemental disclosure:                             |                                                                                                                                                    |   |                                                      |         |                          |        |         |         |      |        |         |        
|                                                     | Interest paid                                                                                                                                      |   | $                                                    | 5,493   |                          |        | $       | 5,348   |      |        | $       | 5,328   |  
|                                                     |                                                                                                                                                    |   |                                                      |         |                          |        |         |         |      |        |         |        
|                                                     | Loans and interest receivable transferred from SPE, net                                                                                            |   | $                                                    | 6,409   |                          |        | $       |        |      |        | $       |        |  
|                                                     |                                                                                                                                                    |   |                                                      |         |                          |        |         |         |      |        |         |        
|                                                     | Reclassification
from loans receivable to assets acquired in liquidation                                                                           |   | $                                                    | 314     |                          |        | $       |        |      |        | $       | 377     |  
|                                                     |                                                                                                                                                    |   |                                                      |         |                          |        |         |         |      |        |         |        
|                                                     | Loans and interest receivable transferred to SPEs, net                                                                                             |   | $                                                    | 4,215   |                          |        | $       | 3,154   |      |        | $       | 4,832   |  
|                                                     |                                                                                                                                                    |   |                                                      |         |                          |        |         |         |      |        |         |        

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 are engaged in the business of originating loans to small businesses
either directly or through our three principal subsidiaries: First
Western SBLC, Inc. (First Western), PMC Investment Corporation
(PMCIC) and Western Financial Capital Corporation (Western
Financial). We primarily originate loans to individuals and small
business concerns in the lodging industry. We also emphasize lending to
the medical, restaurant, 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 investments pursuant
to fee arrangements with PMC Commercial Trust (PMC Commercial). PMC
Commercial is a real estate investment trust and our affiliate as a
result of common management.

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

In addition, at December 31, 2001, PMC Capital owns approximately 33.3%
of PMC Joint Venture, L.P. 2000 (the 2000 Joint Venture) and 59.5% of
PMC Joint Venture, L.P. 2001 (the 2001 Joint Venture), and together
with the 1998 Partnership and the 1999 Partnership, the special purpose
entities (SPEs). PMC Commercial owns the remaining interests in the
2001 Joint Venture and the 2000 Joint Venture.

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

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

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

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

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

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

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##### Table of Contents



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

The 2000 Joint Venture and 2001 Joint Venture were formed as Delaware
limited partnerships in connection with structured loan sale
transactions completed with our affiliate, PMC Commercial. The 2000
Joint Venture and 2001 Joint Venture are SPEs that acquired loans from
us and PMC Commercial and issued debt through private placements.

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

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

Valuation of Investments
All investments are valued at our Board of Directors estimate of fair
value with the resulting unrealized gains and losses being recorded in
earnings.

Loans Receivable:The Board of Directors 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. 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. For loans originated under the SBA
7(a) program, when we sell the SBA-guaranteed portion of loans, a
portion of the sale proceeds representing the difference in the face
amount of the unguaranteed portion of the loans and the value of the
loans (the Retained Loan Discount) is recorded as a reduction in basis
of the retained portion of the loan rather than premium income.

Retained Interests in Transferred Assets:Retained Interests represents
our ownership interest in loans receivable that have been contributed to
the SPEs and have been recorded as sold. The fair value of our Retained
Interests is based on our estimates of the present value of cash flows
we expect to receive from the SPEs. The future cash flows are based in
part upon our estimate of prepayment speeds, loan losses and discount
rates. We estimate prepayment speeds and loan losses based on the
current and anticipated interest rate environment, the current and
anticipated competitive environment and our historical experience with
these and similar loans receivable. The discount rates that we utilize
are determined for each of the components of the Retained Interests as
estimates of market rates based on interest rate levels considering the
risks inherent in the transaction. There can be no assurance of the
accuracy of these estimates.

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

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

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

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

Assets Acquired in Liquidation:Assets acquired in liquidation are
carried at our Board of Directors estimate of fair value, based upon
appraisals and other factors.

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

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##### Table of Contents



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

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

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

Net Unrealized Appreciation (Depreciation) on Investments
Net unrealized appreciation (depreciation) on investments on the
accompanying consolidated balance sheet represents the difference in
cost and fair value of our investments.

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

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

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

Realized and Unrealized Gain (Loss) on Investments
Realized and unrealized gain (loss) on investments consists of the following:



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

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

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

Reclassifications
Certain prior period amounts have been reclassified to conform to the
current year presentation. These reclassifications had no effect on
previously reported net operating income and realized and unrealized
gain (loss) on investments (hereinafter referred to as net income) or
shareholders equity.

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##### Table of Contents



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

Note 2. Loans Receivable:

Loans receivable consisted of the following:

|                       |  |                |         |      |  |   |         | 
|---------------------- |  | -------------- | ------- | ---- |  | - | ------- | 
|                       |  | December 31,  
|                       |  |               
|                       |  | 2001           |         | 2000
|                       |  |                |         |     
|                       |  | (In thousands)
|SBIC commercial loans  |  | $              | 49,868  |      |  | $ | 60,422  | 
|Other commercial loans |  |                | 40,901  |      |  |   | 23,652  | 
|SBA 7(a) loans         |  |                | 16,623  |      |  |   | 16,279  | 
|                       |  |                |         |      |  |   |         | 
|Balance, end of period |  | $              | 107,392 |      |  | $ | 100,353 | 
|                       |  |                |         |      |  |   |         | 

At December 31, 2001 and 2000, respectively, approximately $38.5 million
and $29.7 million of our loans receivable, net had a variable interest
rate (reset on a quarterly basis) based upon either the prime rate or
LIBOR and $68.9 million and $70.7 million had a fixed interest rate,
respectively. The weighted average interest rate of our fixed-rate
loans receivable was 9.8% and 10.2% at December 31, 2001 and 2000,
respectively. The weighted average interest rate of our variable-rate
loans receivable was 7.4% and 11.1% at December 31, 2001 and 2000,
respectively.

Our loans receivable are geographically concentrated as follows:

|               |  |                                |     |      |  |  |     |  
|-------------- |  | ------------------------------ | --- | ---- |  |  | --- | -
|               |  | Percentage of Loans Receivable
|               |  | December 31,                  
|               |  |                               
|               |  | 2001                           |     | 2000
|               |  |                                |     |     
|Texas          |  |                                | 24  | %    |  |  | 20  | %
|Georgia        |  |                                | 12  | %    |  |  | 15  | %
|North Carolina |  |                                | 11  | %    |  |  | 6   | %
|Pennsylvania   |  |                                | 7   | %    |  |  | 3   | %
|Florida        |  |                                | 6   | %    |  |  | 4   | %
|Ohio           |  |                                | 5   | %    |  |  | 3   | %
|South Carolina |  |                                | 5   | %    |  |  | 3   | %
|Arizona        |  |                                | 2   | %    |  |  | 11  | %
|Other          |  |                                | 28  | %    |  |  | 35  | %
|               |  |                                |     |      |  |  |     |  
|               |  |                                | 100 | %    |  |  | 100 | %
|               |  |                                |     |      |  |  |     |  

At December 31, 2001, loans receivable to businesses in the lodging
industry comprised 84% of our loans receivable, net. Any economic
factors that negatively impact the lodging industry could have a
material adverse effect on our financial condition or results of
operations.

Loans receivable of $6.2 million and $3.0 million were either greater
than 60 days past due, litigation against the borrowers has commenced,
the loan has been identified as impaired or the loans are in the process
of liquidation at December 31, 2001 and 2000. Impaired loans at
December 31, 2001 include two limited service hospitality properties we
acquired through foreclosure during 2002. The aggregate value of these
properties, as reduced for costs of selling, was estimated to be $2.1
million (see Note 17).

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##### Table of Contents



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

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

|                                   |  |                          |        |      |  |   |     |  
|---------------------------------- |  | ------------------------ | ------ | ---- |  | - | --- | -
|                                   |  | Years Ended December 31,
|                                   |  |                         
|                                   |  | 2001                     |        | 2000
|                                   |  |                          |        |     
|                                   |  | (In thousands)          
|Balance, beginning of period       |  | $                        | 659    |      |  | $ | 190 |  
|Provision for losses               |  |                          | 809    |      |  |   | 486 |  
|Principal balance written-off, net |  |                          | (1,025 | )    |  |   | (17 | )
|                                   |  |                          |        |      |  |   |     |  
|Balance, end of period             |  | $                        | 443    |      |  | $ | 659 |  
|                                   |  |                          |        |      |  |   |     |  

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

|                        |  |                |       |      |  |   |       |  
|----------------------- |  | -------------- | ----- | ---- |  | - | ----- | -
|                        |  | December 31,  
|                        |  |               
|                        |  | 2001           |       | 2000
|                        |  |                |       |     
|                        |  | (In thousands)
|Impaired loans          |  | $              | 6,152 |      |  | $ | 3,046 |  
|Unrealized depreciation |  |                | (443  | )    |  |   | (659  | )
|                        |  |                |       |      |  |   |       |  
|                        |  | $              | 5,709 |      |  | $ | 2,387 |  
|                        |  |                |       |      |  |   |       |  

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,
additional interest income of approximately $347,000 and $162,000 would
have been recognized during the years ended December 31, 2001 and 2000,
respectively.

Note 3. Retained Interests in Transferred Assets:

In a typical structured loan sale transaction, we contribute loans
receivable to an SPE in exchange for an ownership interest in that
entity. The SPE issues notes payable (the Structured Notes) (usually
through a private placement) to third parties (Noteholders). The SPE
then distributes a portion of the Structured Notes proceeds to us. The
Structured Notes are collateralized solely by the assets of the SPE
which means that should the SPE fail to make payments on the debt, the
Noteholders have no recourse to us. Upon the completion of a structured
loan sale transaction, we record the transfer of loans receivable as a
sale and as a result neither the loans receivable contributed to the
SPE, the Structured Notes issued by the SPE, nor the operating results
of the SPE are included in our consolidated financial statements. The
difference between (i) the carrying value of the loans receivable sold
and (ii) the sum of (a) cash received and (b) the present value of the
future cash flows from the Retained Interests constitutes the gain or
loss on sale. Retained Interests are carried at estimated fair value,
with realized and unrealized gains and losses included in the
consolidated statements of income.

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##### Table of Contents



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

Information pertaining to our SPEs is as follows:

|                      |                                        |  |                        |        |               |      |                   |        |                   |      |               |        |               |      |          |        |  
|--------------------- | -------------------------------------- |  | ---------------------- | ------ | ------------- | ---- | ----------------- | ------ | ----------------- | ---- | ------------- | ------ | ------------- | ---- | -------- | ------ | -
|                      |                                        |  | 1998                   |        | 1999          |      | 2000              |        | 2001             
|                      |                                        |  | Partnership            |        | Partnership   |      | Joint Venture (1) |        | Joint Venture (1)
|                      |                                        |  |                        |        |               |      |                   |        |                  
|                      |                                        |  | (Dollars in thousands)
|Transaction date      |                                        |  | 11/24/98               |        |               |      | 06/03/99          |        |                   |      | 12/18/00      |        |               |      | 06/27/01 |       
|At inception:         |                                        |  |                        |        |               |      |                   |        |                   |      |               |        |               |      |          |       
|                      | Principal amount of sold loans         |  | $                      | 43,144 |               |      | $                 | 60,468 |                   |      | $             | 28,039 |               |      | $        | 49,257 |  
|                      | Structured Notes issued                |  | $                      | 39,646 |               |      | $                 | 55,648 |                   |      | $             | 24,955 |               |      | $        | 45,316 |  
|                      | Interest rate on the Structured Notes  |  | Prime - 1%             |        |               | 6.60 | %                 |        |                   | 7.28 | %             |        |               | 6.36 | %       
|                      | Structured Notes rating(2)             |  | "Aaa"                  |        | "Aaa"         |      | "Aaa"             |        | "Aaa"            
|                      | Weighted average interest rate         |  | Prime + 1.26%          |        |               | 9.59 | %                 |        |                   | 9.54 | %             |        |               | 9.78 | %       
|                      | Weighted average life(3)               |  | 5.05 years             |        | 4.49 years    |      | 5.24 years        |        | 5.26 years       
|                      | Aggregate losses assumed(4)            |  |                        | 3.25   | %             |      |                   | 3.02   | %                 |      |               | 2.41   | %             |      |          | 2.86   | %
|                      | Discount rate assumptions(5)           |  |                        | 12.5   | %             |      |                   | 13.8   | %                 |      | 9.3% to 14.0% |        | 8.5% to 13.3%
|                      | Prepayment rate assumption(6)          |  |                        | 8.0    | %             |      |                   | 12.0   | %                 |      |               | 8.0    | %             |      |          | 9.0    | %
|                      | Net gain recorded                      |  | $                      | 925    |               |      | $                 | 2,564  |                   |      | $             | 564    |               |      | $        | 2,732  |  
|                      | Value of Retained Interests            |  | $                      | 7,126  |               |      | $                 | 9,731  |                   |      | $             | 5,573  |               |      | $        | 9,186  |  
|At December 31, 2001: |                                        |  |                        |        |               |      |                   |        |                   |      |               |        |               |      |          |       
|                      | Principal outstanding on sold loans(7) |  | $                      | 29,926 |               |      | $                 | 47,909 |                   |      | $             | 26,612 |               |      | $        | 48,648 |  
|                      | Structured Notes balance outstanding   |  | $                      | 30,663 |               |      | $                 | 47,560 |                   |      | $             | 23,738 |               |      | $        | 44,814 |  
|                      | Cash in the collection account         |  | $                      | 2,893  |               |      | $                 | 4,406  |                   |      | $             | 227    |               |      | $        | 448    |  
|                      | Cash in the reserve account            |  | $                      | 2,600  |               |      | $                 | 3,107  |                   |      | $             | 1,603  |               |      | $        | 2,531  |  
|                      | Weighted average interest rate         |  | Prime + 1.20%          |        |               | 9.50 | %                 |        |                   | 9.32 | %             |        |               | 9.78 | %       
|                      | Discount rate assumptions(5)           |  | 4.8% to 12.9%          |        | 8.4% to 13.1% |      | 8.4% to 13.1%     |        | 8.2% to 12.9%    
|                      | Prepayment rate assumption(6)          |  |                        | 11.0   | %             |      |                   | 8.0    | %                 |      |               | 8.0    | %             |      |          | 9.0    | %
|                      | Weighted average remaining life(3)     |  | 3.79 years             |        | 4.22 years    |      | 4.44 years        |        | 5.28 years       
|                      | Aggregate losses assumed(4)            |  |                        | 2.22   | %             |      |                   | 2.01   | %                 |      |               | 2.06   | %             |      |          | 2.82   | %
|                      | Aggregate losses to date               |  |                        |       | %             |      |                   |       | %                 |      |               |       | %             |      |          |       | %



---

|(1) |  | Balances represent PMC Capitals share of the respective joint venture.                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Structured Notes issued by the SPEs were rated by Moodys Investors Service, Inc.                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(3) |  | The weighted average life is calculated by summing the product of (i) the sum of the principal collections expected in each future period multiplied
by (ii) the number of periods until collection, and then dividing that total by (iii) the remaining or initial principal balance, as applicable.                                                                                                                                                                     
|   
|(4) |  | Represents aggregate estimated losses as a percentage of the principal outstanding based upon per annum losses ranging from 0.3% to 0.8%.                                                                                                                                                                                                                                                                                                                                 
|   
|(5) |  | Discount rates are based upon our estimate of comparable rates which would be used by potential purchasers of similar assets. As there is no
quoted market value for our Retained Interests, changes to the general interest rate environment do not necessarily affect our discount rates.
As of December 31, 2001, the discount rates were (i) 4.8% to 8.4% for our OC Pieces, (ii) 9.9% to 10.1% for our Reserve Funds and (iii)
12.9% to 13.1% for our IO Receivables.
|   
|(6) |  | The prepayment rate is based on performance of the loan pools, adjusted for anticipated principal payments considering the current loan
pools and similar loans.                                                                                                                                                                                                                                                                                                          
|   
|(7) |  | Approximately 86% concentrated in the lodging industry and 29% to borrowers in Texas. No other state had a concentration greater than 10%.                                                                                                                                                                                                                                                                                                                                

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

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##### Table of Contents



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

The components of our Retained Interests are as follows:



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

Our Retained Interests are comprised of the following:

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

|                         |  |                   |        |          |  |              |        |               |  |   |       |  |  |   |       | 
|------------------------ |  | ----------------- | ------ | -------- |  | ------------ | ------ | ------------- |  | - | ----- |  |  | - | ----- | 
|                         |  | December 31, 2000
|                         |  |                  
|                         |  | Total             |        | OC Piece |  | Reserve Fund |        | IO Receivable
|                         |  |                   |        |          |  |              |        |              
|                         |  | (In thousands)   
|First Western            |  | $                 | 4,004  |          |  | $            |       |               |  | $ | 1,142 |  |  | $ | 2,862 | 
|1996 Limited Partnership |  |                   | 6,568  |          |  |              | 5,749  |               |  |   | 819   |  |  |   |      | 
|1998 Limited Partnership |  |                   | 5,249  |          |  |              | 1,999  |               |  |   | 2,086 |  |  |   | 1,164 | 
|1999 Limited Partnership |  |                   | 10,832 |          |  |              | 4,346  |               |  |   | 2,465 |  |  |   | 4,021 | 
|2000 Joint Venture       |  |                   | 5,688  |          |  |              | 3,256  |               |  |   | 1,314 |  |  |   | 1,118 | 
|                         |  |                   |        |          |  |              |        |               |  |   |       |  |  |   |       | 
|                         |  | $                 | 32,341 |          |  | $            | 15,350 |               |  | $ | 7,826 |  |  | $ | 9,165 | 
|                         |  |                   |        |          |  |              |        |               |  |   |       |  |  |   |       | 

First Western sold the unguaranteed portion of its loans receivable
through a private placement in 1997. First Western retains the right to
service all of these loans receivable. Pursuant to the sale, First
Western maintains a reserve fund and receives cash flow from the IO
Receivable established in connection with the sold loans receivable. In
addition, the SBA guaranteed portions of First Westerns loans
receivable are sold to either dealers in government guaranteed loans
receivable or institutional investors (Secondary Market Loan Sales) as
the loans are funded. On all Secondary Market Loan Sales, we retain an
excess spread between the interest rate paid to us from our borrowers
and the rate we pay to the purchaser of the guaranteed portion of the
note. At December 31, 2001 and 2000, the aggregate principal balance of
serviced loans receivable on which we have an excess spread was $52.6
million and $65.9 million, respectively, and the weighted average excess
spread (before estimated servicing costs) was 1.9% and 2.0%,
respectively.

In determining the fair value of the Retained Interests related to our
SBA 7(a) transactions, our assumptions at December 31, 2001 included a
prepayment speed ranging from 20% to 30% per annum, a loss rate ranging
from 0.4% to 0.7% per annum and discount rates ranging from 10.2% to
13.2%.

F-18



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##### Table of Contents



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

PMC Capital Limited Partnership (the 1996 Partnership) completed a
private placement of approximately $40.7 million of its Loan-Backed
Fixed Rate Notes, Series 1996-A (the 1996 L.P. Notes) in November
1996. During the year ended December 31, 1996, PMC Capital contributed
approximately $45.7 million in loans to the 1996 Partnership. On
November 1, 2001, we acquired, through exercise of our option, the
remaining $6.4 million in loans receivable by repaying the remaining
balance on the 1996 L.P. Notes of $710,000. We did not recognize any
gain or loss on the acquisition of the loans receivable.

First Western completed a securitization in 1994 and sold approximately
$26.4 million of its loans. On November 16, 2001, we acquired, through
exercise of our option, the remaining $2.4 million in loans for
approximately $2.4 million. We realized a gain of approximately $77,000
(which had previously been recognized as an unrealized gain) as a result
of the acquisition of the loans receivable.

The following is a sensitivity analysis of our Retained Interests to
highlight the volatility that results when prepayments, losses and
discount rates are different than our assumptions. The following
summarizes the results of the sensitivity analysis as of December 31,
2001:

|                                                  |  |                 |            |                 |  |   |           | 
|------------------------------------------------- |  | --------------- | ---------- | --------------- |  | - | --------- | 
|Changed Assumption                                |  | Pro-Forma Value |            | Asset Reduction
|                                                  |  |                 |            |                
|Losses increase by 50 basis points per annum(1)   |  | $               | 31,116,000 |                 |  | $ | 2,421,000 | 
|Losses increase by 100 basis points per annum(1)  |  | $               | 28,775,000 |                 |  | $ | 4,762,000 | 
|Rate of prepayment increases by 5% per annum(2)   |  | $               | 32,259,000 |                 |  | $ | 1,278,000 | 
|Rate of prepayments increases by 10% per annum(2) |  | $               | 31,288,000 |                 |  | $ | 2,249,000 | 
|Discount rates increase by 100 basis points       |  | $               | 32,300,000 |                 |  | $ | 1,237,000 | 
|Discount rates increase by 200 basis points       |  | $               | 31,144,000 |                 |  | $ | 2,393,000 | 



---

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

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

F-19



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##### Table of Contents



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

The following information summarizes the financial position of the SPEs
at December 31, 2001 and 2000. We own 100% of the 1998 Partnership and
the 1999 Partnership and 33.3% of the 2000 Joint Venture and 59.5% of
the 2001 Joint Venture at December 31, 2001. At December 31, 2000 we
owned 38.6% of the 2000 Joint Venture. Balances for the 2000 Joint
Venture and the 2001 Joint Venture represent 100% of the limited
partnership interests.

Summary of Financial Position:

|                      |  |                    |      |                    |  |                   |      |           |  |      |      |      |  |      |      |  |  |   |      |  |  |   |      |  |  |           |      | 
|--------------------- |  | ------------------ | ---- | ------------------ |  | ----------------- | ---- | --------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  | - | ---- |  |  | - | ---- |  |  | --------- | ---- | 
|                      |  |                    |      |                    |  |                   |      |           |  |      |      |      |  |      |      |  |  |   |      |  |  |   |      |  |  | PMC Joint
|                      |  | PMC Capital, L. P. |      | PMC Capital, L. P. |  | PMC Joint Venture |      | Venture  
|                      |  | 1998-1             |      | 1999-1             |  | L.P. 2000         |      | L.P. 2001
|                      |  |                    |      |                    |  |                   |      |          
|                      |  | 2001               |      | 2000               |  | 2001              |      | 2000      |  | 2001 |      | 2000 |  | 2001
|                      |  |                    |      |                    |  |                   |      |           |  |      |      |      |  |     
|                      |  | (In millions)     
|Loans Receivable, Net |  | $                  | 29.8 |                    |  | $                 | 34.9 |           |  | $    | 47.9 |      |  | $    | 55.3 |  |  | $ | 79.7 |  |  | $ | 83.6 |  |  | $         | 78.2 | 
|                      |  |                    |      |                    |  |                   |      |           |  |      |      |      |  |      |      |  |  |   |      |  |  |   |      |  |  |           |      | 
|Total Assets          |  | $                  | 35.4 |                    |  | $                 | 38.5 |           |  | $    | 55.7 |      |  | $    | 59.8 |  |  | $ | 85.7 |  |  | $ | 87.4 |  |  | $         | 83.6 | 
|                      |  |                    |      |                    |  |                   |      |           |  |      |      |      |  |      |      |  |  |   |      |  |  |   |      |  |  |           |      | 
|Notes Payable         |  | $                  | 30.7 |                    |  | $                 | 33.3 |           |  | $    | 47.6 |      |  | $    | 51.1 |  |  | $ | 71.1 |  |  | $ | 74.5 |  |  | $         | 71.8 | 
|                      |  |                    |      |                    |  |                   |      |           |  |      |      |      |  |      |      |  |  |   |      |  |  |   |      |  |  |           |      | 
|Total Liabilities     |  | $                  | 30.8 |                    |  | $                 | 34.0 |           |  | $    | 47.8 |      |  | $    | 52.2 |  |  | $ | 71.3 |  |  | $ | 74.7 |  |  | $         | 72.0 | 
|                      |  |                    |      |                    |  |                   |      |           |  |      |      |      |  |      |      |  |  |   |      |  |  |   |      |  |  |           |      | 
|Partners Capital     |  | $                  | 4.6  |                    |  | $                 | 4.5  |           |  | $    | 7.9  |      |  | $    | 7.6  |  |  | $ | 14.4 |  |  | $ | 12.7 |  |  | $         | 11.6 | 
|                      |  |                    |      |                    |  |                   |      |           |  |      |      |      |  |      |      |  |  |   |      |  |  |   |      |  |  |           |      | 

The following information summarizes the results of operations for the
periods ended December 31, 2001, 2000 and 1999. Amounts represent 100%
of the limited partnership interests for the 2000 Joint Venture and the
2001 Joint Venture.

Summary of Operations:

|                 |  |                    |     |                    |  |                    |     |           |  |      |     |      |  |      |     |         |  |         |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |           |     | 
|---------------- |  | ------------------ | --- | ------------------ |  | ------------------ | --- | --------- |  | ---- | --- | ---- |  | ---- | --- | ------- |  | ------- | --- |  |  | - | --- |  |  | - | --- |  |  | - | --- |  |  | --------- | --- | 
|                 |  |                    |     |                    |  |                    |     |           |  |      |     |      |  |      |     |         |  |         |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  | PMC Joint
|                 |  | PMC Capital, L. P. |     | PMC Capital, L. P. |  | PMC Capital, L. P. |     | Venture  
|                 |  | 1998-1             |     | 1999-1             |  | 2000               |     | L.P. 2001
|                 |  |                    |     |                    |  |                    |     |          
|                 |  | 2001               |     | 2000               |  | 1999               |     | 2001      |  | 2000 |     | 1999 |  | 2001 |     | 2000(1) |  | 2001(2)
|                 |  |                    |     |                    |  |                    |     |           |  |      |     |      |  |      |     |         |  |        
|                 |  | (In millions)     
|Interest Income  |  | $                  | 3.1 |                    |  | $                  | 4.1 |           |  | $    | 3.9 |      |  | $    | 5.2 |         |  | $       | 5.7 |  |  | $ | 3.4 |  |  | $ | 7.9 |  |  | $ | 0.3 |  |  | $         | 4.0 | 
|                 |  |                    |     |                    |  |                    |     |           |  |      |     |      |  |      |     |         |  |         |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |           |     | 
|Total Revenues   |  | $                  | 3.2 |                    |  | $                  | 4.2 |           |  | $    | 4.0 |      |  | $    | 5.6 |         |  | $       | 5.7 |  |  | $ | 3.5 |  |  | $ | 8.1 |  |  | $ | 0.3 |  |  | $         | 4.2 | 
|                 |  |                    |     |                    |  |                    |     |           |  |      |     |      |  |      |     |         |  |         |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |           |     | 
|Interest Expense |  | $                  | 2.1 |                    |  | $                  | 2.8 |           |  | $    | 2.7 |      |  | $    | 3.3 |         |  | $       | 3.4 |  |  | $ | 2.1 |  |  | $ | 5.3 |  |  | $ | 0.2 |  |  | $         | 2.4 | 
|                 |  |                    |     |                    |  |                    |     |           |  |      |     |      |  |      |     |         |  |         |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |           |     | 
|Total Expenses   |  | $                  | 2.2 |                    |  | $                  | 3.0 |           |  | $    | 2.9 |      |  | $    | 3.4 |         |  | $       | 3.6 |  |  | $ | 2.2 |  |  | $ | 5.5 |  |  | $ | 0.2 |  |  | $         | 2.5 | 
|                 |  |                    |     |                    |  |                    |     |           |  |      |     |      |  |      |     |         |  |         |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |           |     | 
|Net Income       |  | $                  | 1.0 |                    |  | $                  | 1.2 |           |  | $    | 1.1 |      |  | $    | 2.2 |         |  | $       | 2.1 |  |  | $ | 1.3 |  |  | $ | 2.6 |  |  | $ | 0.1 |  |  | $         | 1.7 | 
|                 |  |                    |     |                    |  |                    |     |           |  |      |     |      |  |      |     |         |  |         |     |  |  |   |     |  |  |   |     |  |  |   |     |  |  |           |     | 



---

|(1) |  | From December 14, 2000 (inception) to December 31, 2001
|--- |  | -------------------------------------------------------
|   
|(2) |  | From June 27, 2001 (inception) to December 31, 2001    

PMC Capitals limited partnership allocation of the assets, liabilities
and partners capital of the 2000 Joint Venture as of December 31, 2001
was $28.6 million, $23.8 million and $4.8 million, respectively. PMC
Capitals limited partnership allocation of the assets, liabilities and
partners capital of the 2000 Joint Venture as of December 31, 2000 was
$29.9 million, $25.0 million and $4.9 million, respectively. PMC
Capitals limited partnership allocation of the assets, liabilities and
partners capital of the 2001 Joint Venture as of December 31, 2001 was
$51.9 million, $45.0 million and $6.9 million, respectively.

Our limited partnership allocation of the net income of the 2000 Joint
Venture for the periods ended December 31, 2001 and 2000 was
approximately $602,000 and $46,000, respectively. Our limited
partnership allocation of the net income of the 2001 Joint Venture for
the period ended December 31, 2001 was approximately $929,000.

F-20



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##### Table of Contents



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

In accordance with SFAS No. 140, our consolidated financial statements
do not include these SPE assets, liabilities, capital, revenues or
expenses, including the 1996 Partnership. At December 31, 2000, we
owned 100% of the 1996 Partnership. We acquired the remaining net assets
of the 1996 Partnership during 2001. Our consolidated balance sheets at
December 31, 2001 and 2000 do not include the $171.6 million and $141.1
million of assets, respectively, and $147.4 million and $117.7 million
of liabilities, respectively, related to our structured loan sale
transactions recorded by the SPEs. Our Retained Interests related to
these structured loan sale transactions was $30.6 million and $28.3
million at December 31, 2001 and 2000, respectively.

Our ownership of the 2001 Joint Venture and the 2000 Joint Venture is
based on our share of the capital of the joint ventures, respectively.
Our share of the cash flows from the 2001 Joint Venture and the 2000
Joint Venture is based upon the underlying loans receivable contributed
by us to the 2001 Joint Venture and the 2000 Joint Venture.

With regard to the 2000 and 2001 Joint Ventures, we have agreed with PMC
Commercial to cross-indemnify each other to the extent that the poor
performance of the loans receivable of one company impairs the cash flow
distributions to the other company. At December 31, 2001, our maximum
exposure under this indemnification agreement was approximately $17.8
million which represents the net present value of the Retained Interests
reflected on PMC Commercials consolidated balance sheet. Based on the
current performance of our loans receivable transferred to the SPEs, we
do not believe we will have any obligation under the indemnification
provisions; however, if the performance of our transferred loans
receivable significantly deteriorated, we may be requested to perform
under this indemnification agreement.

The income from our Retained Interests is comprised of the yield earned
on our Retained Interests. The yield earned is determined based on our
estimates of future cash flows. We update our cash flow assumptions on
a quarterly basis and any changes to cash flow assumptions will affect
the yield on our Retained Interests. For the years ended December 31,
2001 and 2000, the yield on our weighted average Retained Interests was
14.9% and 14.2%, respectively. In addition, we are the servicer for all
loans held by the SPEs. Servicing fee income for the years ended
December 31, 2001, 2000 and 1999 for the SPEs was approximately
$410,000, $283,000 and $220,000 and is included in other income in our
consolidated statements of income. We have not established a servicing
asset or liability as our servicing fees approximate market rates.

We received approximately $8.5 million and $7.0 million in cash
distributions from our SPEs during the years ended December 31, 2001 and
2000, respectively.

F-21



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##### Table of Contents



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

Note 4. Investment in Unconsolidated Subsidiaries:

The following are condensed financial statements of our non-investment
company act subsidiaries (PMC Advisers and PMC Funding) as of December
31, 2001 and 2000 and for the three years in the period ended December
31, 2001:

CONDENSED COMBINED BALANCE SHEETS(In thousands)

|                       |        |                                             |                              |   |              |     |      |   |      |     | 
|---------------------- | ------ | ------------------------------------------- | ---------------------------- | - | ------------ | --- | ---- | - | ---- | --- | 
|                       |        |                                             |                              |   | December 31,
|                       |        |                                             |                              |   |             
|                       |        |                                             |                              |   | 2001         |     | 2000
|                       |        |                                             |                              |   |              |     |     
|                       | Assets |                                             |                              |   |              |     |      |   |     
|Investments at value:  |        |                                             |                              |   |              |     |      |  
|                       |        | Property and equipment                      |                              | $ | 294          |     |      | $ | 272  |    
|                       |        | Due from affiliates                         |                              |   | 21           |     |      |   |     |    
|                       |        | Cash equivalents                            |                              |   | 40           |     |      |   | 93   |    
|                       |        | Other assets                                |                              |   | 12           |     |      |   | 131  |    
|                       |        |                                             |                              |   |              |     |      |  
|                       |        |                                             | Total assets                 |   | $            | 367 |      |   | $    | 496 | 
|                       |        |                                             |                              |   |              |     |      |  
|Liabilities and Equity |        |                                             |                              |   |              |     |      |  
|Liabilities:           |        |                                             |                              |   |              |     |      |  
|                       |        | Other liabilities                           |                              | $ | 300          |     |      | $ | 348  |    
|                       |        |                                             |                              |   |              |     |      |  
|                       |        |                                             | 300                          |   |              |     | 348  |  
|                       |        |                                             |                              |   |              |     |      |  
|Equity:                |        |                                             |                              |   |              |     |      |  
|                       |        | Common stock and additional paid-in capital |                              |   | 527          |     |      |   | 527  |    
|                       |        | Accumulated deficit                         |                              |   | (460         | )   |      |   | (379 | )  
|                       |        |                                             |                              |   |              |     |      |  
|                       |        |                                             | 67                           |   |              |     | 148  |  
|                       |        |                                             |                              |   |              |     |      |  
|                       |        |                                             | Total liabilities and equity |   | $            | 367 |      |   | $    | 496 | 
|                       |        |                                             |                              |   |              |     |      |  

CONDENSED COMBINED STATEMENTS OF INCOME
(In thousands)

|           |                       |                |     |                          |       |      |     |       |       |   |     |       |       | 
|---------- | --------------------- | -------------- | --- | ------------------------ | ----- | ---- | --- | ----- | ----- | - | --- | ----- | ----- | 
|           |                       |                |     | Years Ended December 31,
|           |                       |                |     |                         
|           |                       |                |     | 2001                     |       | 2000 |     | 1999 
|           |                       |                |     |                          |       |      |     |      
|Income:    |                       |                |     |                          |       |      |     |       |       |   |     |      
|           | Management fee income |                | $   | 2,264                    |       |      | $   | 2,199 |       |   | $   | 2,289 |      
|           | Sale of asset, net    |                |     |                         |       |      |     |      |       |   |     | 235   |      
|           | Other income, net     |                |     | 10                       |       |      |     | 40    |       |   |     | 18    |      
|           |                       |                |     |                          |       |      |     |       |       |   |     |      
|           |                       | Total income   |     |                          | 2,274 |      |     |       | 2,239 |   |     |       | 2,542 | 
|           |                       |                |     |                          |       |      |     |       |       |   |     |      
|Expenses:  |                       |                |     |                          |       |      |     |       |       |   |     |      
|           | Overhead allocation   |                |     | 1,803                    |       |      |     | 1,699 |       |   |     | 1,726 |      
|           | Miscellaneous         |                |     | 89                       |       |      |     | 60    |       |   |     | 104   |      
|           |                       |                |     |                          |       |      |     |       |       |   |     |      
|           |                       | Total expenses |     |                          | 1,892 |      |     |       | 1,759 |   |     |       | 1,830 | 
|           |                       |                |     |                          |       |      |     |       |       |   |     |      
|Net income |                       | $              | 382 |                          |       | $    | 480 |       |       | $ | 712 |      
|           |                       |                |     |                          |       |      |     |       |       |   |     |      

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

F-22



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##### Table of Contents



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

Note 5. Notes and Debentures Payable:

Outstanding notes and debentures payable were as follows:

|                    |  |               |        |               |  |                   |  |      |            |              |            |   |            |   |            | 
|------------------- |  | ------------- | ------ | ------------- |  | ----------------- |  | ---- | ---------- | ------------ | ---------- | - | ---------- | - | ---------- | 
|                    |  |               |        |               |  |                   |  |      |            | December 31,
|                    |  |               |        |               |  |                   |  |      |            |             
|                    |  | Interest Rate |        | Maturity Date |  | 2001              |  | 2000
|                    |  |               |        |               |  |                   |  |     
|Notes payable:      |  |               | 7.200  | %             |  | July 19, 2001     |  | $    |           |              |            | $ | 6,667,000  |  
|                    |  |               | 6.970  | %             |  | December 15, 2002 |  |      | 5,000,000  |              |            |   | 5,000,000  |  
|                    |  |               | 8.600  | %             |  | April 19, 2003    |  |      | 5,000,000  |              |            |   | 5,000,000  |  
|                    |  |               | 3.570  | %(1)          |  | April 19, 2004    |  |      | 5,000,000  |              |            |   | 5,000,000  |  
|                    |  |               | 3.670  | %(2)          |  | July 19, 2004     |  |      | 10,000,000 |              |            |   | 10,000,000 |  
|                    |  |               | 7.440  | %             |  | July 19, 2005     |  |      | 10,000,000 |              |            |   | 10,000,000 |  
|                    |  |               | 3.570  | %(1)          |  | July 19, 2006     |  |      | 10,000,000 |              |            |   |           |  
|                   
|Debentures payable: |  |               | 7.510  | %             |  | December 1, 2002  |  |      | 510,000    |              |            |   | 510,000    |  
|                    |  |               | 8.200  | %             |  | September 1, 2004 |  |      | 3,000,000  |              |            |   | 3,000,000  |  
|                    |  |               | 8.200  | %             |  | September 1, 2004 |  |      | 3,000,000  |              |            |   | 3,000,000  |  
|                    |  |               | 7.840  | %             |  | March 1, 2005     |  |      | 3,000,000  |              |            |   | 3,000,000  |  
|                    |  |               | 6.690  | %             |  | June 1, 2005      |  |      | 5,000,000  |              |            |   | 5,000,000  |  
|                    |  |               | 6.8750 | %             |  | September 1, 2005 |  |      | 7,000,000  |              |            |   | 7,000,000  |  
|                    |  |               | 7.590  | %             |  | September 1, 2006 |  |      | 2,490,000  |              |            |   | 2,490,000  |  
|                    |  |               | 7.452  | %(3)          |  | September 1, 2010 |  |      | 3,000,000  |              |            |   | 3,000,000  |  
|                    |  |               | 7.452  | %(3)          |  | September 1, 2010 |  |      | 4,310,000  |              |            |   | 4,310,000  |  
|                    |  |               |        |               |  |                   |  |      |            |              |            |   |            |   |            | 
|                    |  |               |        |               |  |                   |  |      |            | $            | 76,310,000 |   |            | $ | 72,977,000 | 
|                    |  |               |        |               |  |                   |  |      |            |              |            |   |            |   |            | 



---

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

Our notes payable are uncollateralized and require us to meet certain
covenants, the most restrictive of which require (i) that net loans
receivable exceed 150% of 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, 2001, we
were in compliance with all of the covenants of these notes.

Debentures payable represent amounts due to the SBA as a result of
borrowings made pursuant to the SBIA. At December 31, 2001, the SBA had
committed to us for the issuance of $5.2 million ($4.2 million expiring
September 2003 and $1.0 million expiring September 2004) in new SBA
debentures.

We have a $10 million uncollateralized revolving credit facility,
amended in October 2001, which expires March 2003. Advances pursuant to
the credit facility bear interest at our option of the banks prime rate
less 50 basis points or LIBOR plus 175 basis points. The credit
facility requires 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 debt will not fall
below 110% for PMC Capital and 135% including our consolidated
subsidiaries. In addition, we have a $5 million discretionary guidance
line facility which expires March 2003. At December 31, 2001 and 2000
we had no outstanding amounts borrowed on these credit facilities, and
we were in compliance with all covenants of these facilities.

F-23



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##### Table of Contents



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

Principal payments required on the notes payable and debentures payable
at December 31, 2001, are as follows:

|             |      |       |            |                |  |               |            |            |  |   |            |            | 
|------------ | ---- | ----- | ---------- | -------------- |  | ------------- | ---------- | ---------- |  | - | ---------- | ---------- | 
|Year Ending  |      |       |            |                |  |               |            |            |  |   |            |           
|December 31, |      | Total |            | SBA Debentures |  | Notes Payable
|             |      |       |            |                |  |              
|             | 2002 |       | $          | 5,510,000      |  |               | $          | 510,000    |  |   | $          | 5,000,000  | 
|             | 2003 |       |            | 5,000,000      |  |               |            |           |  |   |            | 5,000,000  | 
|             | 2004 |       |            | 21,000,000     |  |               |            | 6,000,000  |  |   |            | 15,000,000 | 
|             | 2005 |       |            | 25,000,000     |  |               |            | 15,000,000 |  |   |            | 10,000,000 | 
|             | 2006 |       |            | 12,490,000     |  |               |            | 2,490,000  |  |   |            | 10,000,000 | 
|Thereafter   |      |       | 7,310,000  |                |  |               | 7,310,000  |            |  |   |           |           
|             |      |       |            |                |  |               |            |            |  |   |            |           
|             |      | $     | 76,310,000 |                |  | $             | 31,310,000 |            |  | $ | 45,000,000 |           
|             |      |       |            |                |  |               |            |            |  |   |            |           

Note 6. 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). 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
$90,000 were recognized on the 3% Preferred Stock during each of the
years ended December 31, 2001, 2000 and 1999.

The 4% Preferred Stock was issued during 1994 ($2,000,000) and 1995
($2,000,000), and must be redeemed at par no later than 15 years from
the date of issuance. Dividends of $160,000, $161,000 and $160,000 were
recognized on the 4% Preferred Stock during the years ended December 31,
2001, 2000 and 1999, respectively.

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

Note 7. Net Unrealized Appreciation (Depreciation) on Investments and
Realized and Unrealized Gain (Loss) on Investments:

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

|                                                          |  |                |       |      |  |   |       |  
|--------------------------------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | -
|                                                          |  | December 31,  
|                                                          |  |               
|                                                          |  | 2001           |       | 2000
|                                                          |  |                |       |     
|                                                          |  | (In thousands)
|Loans receivable                                          |  | $              | (443  | )    |  | $ | (659  | )
|Retained interests in transferred assets                  |  |                | 1,985 |      |  |   | 1,379 |  
|Other investments                                         |  |                | 79    |      |  |   | 82    |  
|                                                          |  |                |       |      |  |   |       |  
|Net unrealized appreciation (depreciation)
on investments |  | $              | 1,621 |      |  | $ | 802   |  
|                                                          |  |                |       |      |  |   |       |  

F-24



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##### Table of Contents



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

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

|                                                                |  |                              |            |            |  |       |            |   |  |   |            |  
|--------------------------------------------------------------- |  | ---------------------------- | ---------- | ---------- |  | ----- | ---------- | - |  | - | ---------- | -
|                                                                |  | Year Ended December 31, 2001
|                                                                |  |                             
|                                                                |  | Retained Interests           |            |            |  |       |            |   |  |  
|                                                                |  | in Transferred Assets/       |            | Loans      |  |       |            |  
|                                                                |  | Other Investments            |            | Receivable |  | Total
|                                                                |  |                              |            |            |  |      
|Investments written-off, net                                    |  | $                            | (1,303,000 | )          |  | $     | (1,025,000 | ) |  | $ | (2,328,000 | )
|Sale of assets                                                  |  |                              |           |            |  |       | 2,732,000  |   |  |   | 2,732,000  |  
|Change in unrealized
appreciation (depreciation)
on investments |  |                              | 603,000    |            |  |       | 216,000    |   |  |   | 819,000    |  
|                                                                |  |                              |            |            |  |       |            |   |  |   |            |  
|Total realized and unrealized
gain (loss) on investments        |  | $                            | (700,000   | )          |  | $     | 1,923,000  |   |  | $ | 1,223,000  |  
|                                                                |  |                              |            |            |  |       |            |   |  |   |            |  

|                                                                |  |                              |         |            |  |       |          |   |  |   |         |  
|--------------------------------------------------------------- |  | ---------------------------- | ------- | ---------- |  | ----- | -------- | - |  | - | ------- | -
|                                                                |  | Year Ended December 31, 2000
|                                                                |  |                             
|                                                                |  | Retained Interests           |         |            |  |       |          |   |  |  
|                                                                |  | in Transferred Assets/       |         | Loans      |  |       |          |  
|                                                                |  | Other Investments            |         | Receivable |  | Total
|                                                                |  |                              |         |            |  |      
|Investments written-off, net                                    |  | $                            |        |            |  | $     | (17,000  | ) |  | $ | (17,000 | )
|Sale of assets                                                  |  |                              |        |            |  |       | 564,000  |   |  |   | 564,000 |  
|Change in unrealized
appreciation (depreciation)
on investments |  |                              | 871,000 |            |  |       | (469,000 | ) |  |   | 402,000 |  
|                                                                |  |                              |         |            |  |       |          |   |  |   |         |  
|Total realized and unrealized
gain (loss) on investments        |  | $                            | 871,000 |            |  | $     | 78,000   |   |  | $ | 949,000 |  
|                                                                |  |                              |         |            |  |       |          |   |  |   |         |  

|                                                                |  |                              |            |            |  |       |           |   |  |   |            |  
|--------------------------------------------------------------- |  | ---------------------------- | ---------- | ---------- |  | ----- | --------- | - |  | - | ---------- | -
|                                                                |  | Year Ended December 31, 1999
|                                                                |  |                             
|                                                                |  | Retained Interests           |            |            |  |       |           |   |  |  
|                                                                |  | in Transferred Assets/       |            | Loans      |  |       |           |  
|                                                                |  | Other Investments            |            | Receivable |  | Total
|                                                                |  |                              |            |            |  |      
|Investments written-off, net                                    |  | $                            | (1,270,000 | )          |  | $     | (535,000  | ) |  | $ | (1,805,000 | )
|Sale of assets                                                  |  |                              |           |            |  |       | 2,564,000 |   |  |   | 2,564,000  |  
|Change in unrealized
appreciation (depreciation)
on investments |  |                              | 770,000    |            |  |       | 404,000   |   |  |   | 1,174,000  |  
|                                                                |  |                              |            |            |  |       |           |   |  |   |            |  
|Total realized and unrealized
gain (loss) on investments        |  | $                            | (500,000   | )          |  | $     | 2,433,000 |   |  | $ | 1,933,000  |  
|                                                                |  |                              |            |            |  |       |           |   |  |   |            |  

Note 8. Taxable Income:

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

F-25



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##### Table of Contents



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

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

|                                                |                                                                     |   |                          |        |      |   |        |      |   |   |        |        |  
|----------------------------------------------- | ------------------------------------------------------------------- | - | ------------------------ | ------ | ---- | - | ------ | ---- | - | - | ------ | ------ | -
|                                                |                                                                     |   | Years Ended December 31,
|                                                |                                                                     |   |                         
|                                                |                                                                     |   | 2001                     |        | 2000 |   | 1999  
|                                                |                                                                     |   |                          |        |      |   |       
|                                                |                                                                     |   | (In thousands)          
|Net income available to common shareholders     |                                                                     | $ | 10,317                   |        |      | $ | 11,002 |      |   | $ | 13,170 |       
|                                                | Book/tax difference on retained interest in
transferred assets, net |   |                          | 1,516  |      |   |        | (127 | ) |   |        | (210   | )
|                                                | Book/tax difference on gains on sales                               |   |                          | (2,732 | )    |   |        | (564 | ) |   |        | (2,564 | )
|                                                | Other book/tax differences, net                                     |   |                          | 188    |      |   |        | 253  |   |   |        | 350    |  
|                                                |                                                                     |   |                          |        |      |   |        |      |   |   |        |       
|Taxable income available to common shareholders |                                                                     | $ | 9,289                    |        |      | $ | 10,564 |      |   | $ | 10,746 |       
|                                                |                                                                     |   |                          |        |      |   |        |      |   |   |        |       
|Distributions to common shareholders            |                                                                     | $ | 10,076                   |        |      | $ | 11,846 |      |   | $ | 12,007 |       
|                                                |                                                                     |   |                          |        |      |   |        |      |   |   |        |       

Distributions per share for dividend reporting purposes were as follows:

|                      |  |                          |       |         |  |           |     |         |  |           |       |         |  |        |       |   |  |   |       |  |  |  |     |  
|--------------------- |  | ------------------------ | ----- | ------- |  | --------- | --- | ------- |  | --------- | ----- | ------- |  | ------ | ----- | - |  | - | ----- |  |  |  | --- | -
|                      |  | Years Ended December 31,
|                      |  |                         
|                      |  | 2001                     |       | 2000    |  | 1999     
|                      |  |                          |       |         |  |          
|                      |  | Amount                   |       |         |  |           |     | Amount  |  |           |       |         |  | Amount |       |   |  |  
|                      |  | Per Share                |       | Percent |  | Per Share |     | Percent |  | Per Share |       | Percent
|                      |  |                          |       |         |  |           |     |         |  |           |       |        
|Ordinary income       |  | $                        | 0.850 |         |  |           | 100 | %       |  | $         | 0.774 |         |  |        | 77.4  | % |  | $ | 1.020 |  |  |  | 100 | %
|Return of capital (1) |  |                          |      |         |  |           |    |         |  |           | 0.226 |         |  |        | 22.6  | % |  |   |      |  |  |  |    |  
|                      |  |                          |       |         |  |           |     |         |  |           |       |         |  |        |       |   |  |   |       |  |  |  |     |  
|                      |  | $                        | 0.850 |         |  |           | 100 | %       |  | $         | 1.000 |         |  |        | 100.0 | % |  | $ | 1.020 |  |  |  | 100 | %
|                      |  |                          |       |         |  |           |     |         |  |           |       |         |  |        |       |   |  |   |       |  |  |  |     |  



---

|(1) |  | The computation of return of capital provides for several timing differences, most notably relating to the recognition
of gain treatment on structured loan sale transactions.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 9. Earnings Per Common Share Computations:

The computations of basic earnings per common share are based on our
weighted average shares outstanding. The weighted average shares
outstanding were 11,854,000, 11,841,000 and 11,829,000 for the years
ended December 31, 2001, 2000 and 1999, respectively. Due to the effect
of stock options, our fully diluted weighted average shares outstanding
were 11,854,000, 11,845,000 and 11,831,000 during the years ended
December 31, 2001, 2000 and 1999, respectively. There was no change in
the weighted average shares outstanding during 2001 since our stock
options were anti-dilutive.

Earnings are defined as the net operating income and realized and
unrealized gain (loss) on investments and are reduced by the preferred
stock dividend requirements of PMCIC. Preferred stock dividend
requirements were approximately $250,000 during each of the years ended
December 31, 2001, 2000 and 1999.

Note 10. Dividends Paid and Declared:

During April, July and September 2001, we paid quarterly dividends of
$0.25, $0.20 and $0.20 per share of Common Stock in dividends to common
shareholders. During December 2001, we declared a $0.20 per share
dividend to common shareholders of record on December 31, 2001, which
was paid during January 2002. On March 18, 2002, our Board of Directors
declared a dividend of $0.16 per share to common shareholders of record
on March 28, 2002, which is payable on April 8, 2002.

Note 11. Dividend Reinvestment and Cash Purchase Plan:

We have a dividend reinvestment and cash purchase plan (the Plan) for up to
1,000,000 shares of common stock. Participants in the Plan have the option to
reinvest all or a portion of dividends received. We use the open market to
purchase shares with the proceeds from the dividend reinvestment portion of the
plan. Accordingly, we do not
issue new shares or receive the proceeds. As a result we had no share
issuances pursuant to the Plan during the years ended December 31, 2001, 2000
and 1999.

F-26



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##### Table of Contents



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

Note 12. 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,
$242,000, $247,000 and $243,000, respectively, has been expensed during
each of the years ended December 31, 2001, 2000 and 1999. Contributions
to the profit sharing plan are at the discretion of our Board of
Directors.

Note 13. Stock Based Compensation Plan:

We have two stock based compensation plans; the PMC Capital, Inc. 1997
Non-Employee Director Stock Option Plan and the PMC Capital, Inc. 1997
Employee Stock Option Plan (the Option Plans). Under the Option
Plans, we are authorized to issue up to 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.

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 was issued which, if fully
adopted by us would have changed the methods we apply in recognizing the
cost of our Option Plans. Adoption of the cost recognition provisions
of SFAS No. 123 is optional and we did not 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.

Stock Options

We granted stock options during the years ended December 31, 2001, 2000
and 1999 to certain employees and directors. The stock options granted
(1) all have contractual terms of five years, (2) have an exercise price
equal to the fair market value of the stock at grant date, and (3) vest
within 30 days of the date of grant.

A summary of the status of our stock options as of December 31, 2001,
2000 and 1999 and the changes during the years ended on those dates are
as follows:

|                                                                     |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |         |   |  |   |       | 
|-------------------------------------------------------------------- |  | ---------- | ------- | -------- |  | ---------- | ----- | -------- |  | ---------- | ------- | -------- |  | - | ----- |  |  | - | ------- | - |  | - | ----- | 
|                                                                     |  | 2001       |         | 2000     |  | 1999      
|                                                                     |  |            |         |          |  |           
|                                                                     |  | 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                                             |  |            | 209,905 |          |  | $          | 11.72 |          |  |            | 196,055 |          |  | $ | 12.15 |  |  |   | 134,855 |   |  | $ | 14.18 | 
|Granted                                                              |  |            | 57,250  |          |  | $          | 8.00  |          |  |            | 66,800  |          |  | $ | 9.03  |  |  |   | 65,000  |   |  | $ | 8.04  | 
|Exercised                                                            |  |            |        |          |  |            |      |          |  |            | (24,400 | )        |  | $ | 8.06  |  |  |   |        |   |  |   |      | 
|Forfeited                                                            |  |            | (15,800 | )        |  | $          | 11.11 |          |  |            | (28,550 | )        |  | $ | 11.55 |  |  |   | (800    | ) |  | $ | 11.06 | 
|Expired                                                              |  |            |        |          |  |            |      |          |  |            |        |          |  |   |      |  |  |   | (3,000  | ) |  | $ | 14.13 | 
|                                                                     |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |         |   |  |   |       | 
|Outstanding
at December 31                                           |  |            | 251,355 |          |  | $          | 10.96 |          |  |            | 209,905 |          |  | $ | 11.72 |  |  |   | 196,055 |   |  | $ | 12.15 | 
|                                                                     |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |         |   |  |   |       | 
|Exercisable
at December 31                                           |  |            | 198,605 |          |  | $          | 11.75 |          |  |            | 150,605 |          |  | $ | 12.77 |  |  |   | 131,455 |   |  | $ | 14.16 | 
|                                                                     |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |         |   |  |   |       | 
|Weighted-average
fair value of stock
options granted
during the year |  | $          | 0.35    |          |  |            |       |          |  | $          | 0.57    |          |  |   |       |  |  | $ | 0.35    |   |  |   |       | 
|                                                                     |  |            |         |          |  |            |       |          |  |            |         |          |  |   |       |  |  |   |         |   |  |   |       | 

F-27



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##### Table of Contents



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

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, 2001, 2000 and 1999:

|                        |  |      |       |      |  |      |       |   |  |  |       |  
|----------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|Assumption              |  | 2001 |       | 2000 |  | 1999
|                        |  |      |       |      |  |     
|Expected Term (years)   |  |      | 3.0   |      |  |      | 3.0   |   |  |  | 3.0   |  
|Risk-Free Interest Rate |  |      | 4.39  | %    |  |      | 6.40  | % |  |  | 5.81  | %
|Expected Dividend Yield |  |      | 10.63 | %    |  |      | 11.03 | % |  |  | 12.43 | %
|Expected Volatility     |  |      | 17.69 | %    |  |      | 19.78 | % |  |  | 18.36 | %

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, 2001, 2000 and 1999 would
approximate the following pro-forma amounts:

|                                            |  |                                       |        |       |  |          |        |       |  |          |        |       |  |   |        |  |  |   |        |  |  |   |        | 
|------------------------------------------- |  | ------------------------------------- | ------ | ----- |  | -------- | ------ | ----- |  | -------- | ------ | ----- |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                            |  | December 31,                         
|                                            |  |                                      
|                                            |  | 2001                                  |        | 2000  |  | 1999    
|                                            |  |                                       |        |       |  |         
|                                            |  | As                                    |        | Pro-  |  | As       |        | Pro-  |  | As       |        | Pro- 
|                                            |  | Reported                              |        | Forma |  | Reported |        | Forma |  | Reported |        | Forma
|                                            |  |                                       |        |       |  |          |        |       |  |          |        |      
|                                            |  | (In thousands, except per share data)
|SFAS No. 123 charge                         |  | $                                     |       |       |  | $        | 24     |       |  | $        |       |       |  | $ | 28     |  |  | $ |       |  |  | $ | 28     | 
|APB 25 charge                               |  | $                                     |       |       |  | $        |       |       |  | $        |       |       |  | $ |       |  |  | $ |       |  |  | $ |       | 
|Net income                                  |  | $                                     | 10,567 |       |  | $        | 10,543 |       |  | $        | 11,253 |       |  | $ | 11,225 |  |  | $ | 13,420 |  |  | $ | 13,392 | 
|Basic and diluted
earnings per
common share |  | $                                     | 0.87   |       |  | $        | 0.87   |       |  | $        | 0.93   |       |  | $ | 0.93   |  |  | $ | 1.11   |  |  | $ | 1.11   | 

The following table summarizes information about stock options
outstanding at December 31, 2001:

|                |                      |                     |  |             |         |             |   |              |       |             |  |          |      |  |  |         |         |  |   |       |       | 
|--------------- | -------------------- | ------------------- |  | ----------- | ------- | ----------- | - | ------------ | ----- | ----------- |  | -------- | ---- |  |  | ------- | ------- |  | - | ----- | ----- | 
|                |                      |                     |  | Number      |         |             |   |              |       | Weighted    |  | Number   |      |  |  |        
|                |                      |                     |  | Outstanding |         | Weighted    |   | Average      |       | Exercisable |  | Weighted
|                |                      |                     |  | at          |         | Average     |   | Remaining    |       | at          |  | Average 
|Range of        |                      | December 31,        |  | Exercise    |         | Contractual |   | December 31, |       | Exercise   
|Exercise Prices |                      | 2001                |  | Price       |         | Life        |   | 2001         |       | Price      
|                |                      |                     |  |             |         |             |   |              |       |            
|                |                      | $7.8125 to $9.06    |  |             | 140,450 |             |   | $            | 8.43  |             |  |          | 3.60 |  |  |         | 87,700  |  |   | $     | 8.69  | 
|                | $14.0625 to $14.3125 |                     |  | 110,905     |         |             | $ | 14.16        |       |             |  | 0.80     |      |  |  | 110,905 |         |  | $ | 14.16 |      
|                |                      |                     |  |             |         |             |   |              |       |             |  |          |      |  |  |         |         |  |   |      
|                |                      | $7.8125 to $14.3125 |  |             | 251,355 |             |   | $            | 10.96 |             |  |          | 2.40 |  |  |         | 198,605 |  |   | $     | 11.75 | 
|                |                      |                     |  |             |         |             |   |              |       |             |  |          |      |  |  |         |         |  |   |      

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

Note 14. Related Party Transactions:

Pursuant to SBA rules and regulations, distributions from our
consolidated subsidiaries, First Western, PMCIC and Western Financial,
are limited. As of December 31, 2001 and 2000, the amounts of dividends
available for distribution were approximately $0.5 million and $1.2
million, respectively.

We are affiliated with PMC Commercial through common management. Our
executive officers are the same as the executive officers of PMC
Commercial and three of our seven directors or officers are trust
managers of PMC Commercial.

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. Commencing July 1, 2000, the
highest rate charged was reduced from 1.67% to 1.55%. In addition, the
investment management agreements (i) provide for an annual fee of 0.70%
of the original cost of properties owned by
PMC Commercial and (ii) include compensation to PMC Advisers for its
assistance in the issuance of PMC Commercials debt and equity
securities and the acquisition by PMC Commercial of limited service
hospitality properties. The investment management agreements were
amended on July 1, 2001 to provide for a fee of $10,000 upon the sale of
each limited service

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

hospitality property and an annual loan origination
fee equal to five basis points of loans funded for the first $20 million
in loans and 2.5 basis points thereafter.

Fees pursuant to the investment management agreements were as follows:

|                                   |  |                          |       |      |  |      |       |  |  |   |       | 
|---------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                   |  | Years Ended December 31,
|                                   |  |                         
|Type of Fee                        |  | 2001                     |       | 2000 |  | 1999
|                                   |  |                          |       |      |  |     
|                                   |  | (In thousands)          
|Loan servicing and origination fee |  | $                        | 1,743 |      |  | $    | 1,599 |  |  | $ | 1,726 | 
|Lease supervision                  |  |                          | 441   |      |  |      | 500   |  |  |   | 482   | 
|Structured financing               |  |                          | 60    |      |  |      | 100   |  |  |   |      | 
|Property acquisition/disposition   |  |                          | 20    |      |  |      |      |  |  |   | 81    | 
|                                   |  |                          |       |      |  |      |       |  |  |   |       | 
|                                   |  | $                        | 2,264 |      |  | $    | 2,199 |  |  | $ | 2,289 | 
|                                   |  |                          |       |      |  |      |       |  |  |   |       | 

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, 2001, 2000 and 1999, was
$1,803,000, $1,699,000 and $1,726,000, 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.

Note 15. Commitments and Contingencies:

Operating Leases

In September 1998, we entered into a five-year lease for office space
commencing December 1998. We may at our option, renew the term of the
lease for two additional five-year periods. At December 31, 2001, we
had additional agreements to lease office space in Missouri, Arizona and
Georgia. Rental expense amounted to approximately $321,000, $315,000
and $286,000 during the years ended December 31, 2001, 2000 and 1999,
respectively. Future minimum payments under this lease are $284,000 for
2002 and 2003 and $24,000 for 2004.

Loan Commitments

Loan commitments outstanding at December 31, 2001, including the
unfunded portion of projects in the construction phase, amounted to
approximately $19.5 million. Of these commitments, $7.0 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.

Employment Agreements

We have employment contracts with certain of our officers for terms
expiring through June 2004. Annual remuneration during the term of the
contracts does not exceed $315,000 for any one individual. Future
minimum payments under these contracts are $1,185,000 for 2002 and 2003
and $592,000 for 2004.

During the years ended December 31, 2001, 2000 and 1999 compensation to
officers was approximately $1.6 million, $1.6 million and $1.7 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.

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

Structured Loan Sale Transactions

PMC Capital and PMC Commercial have entered into an indemnification
agreement regarding the performance of their respective loans receivable
sold to the 2001 Joint Venture and the 2000 Joint Venture. To the
extent that poor performance by one of the companys sold loans
receivable (the Underperforming Company) is pervasive enough to cause
the other company (the Performing Company) to not receive cash flow
that it otherwise would have received, then the Underperforming Company
must make the Performing Company whole. If the cash flow reduction is
considered to be temporary, then interest will be paid as compensation
to the Performing Company. If the reduction of cash flows is deemed
permanent, the balance of reduction to cash flows must be paid to the
Performing Company by the Underperforming Company. At December 31,
2001, our maximum exposure under the indemnification agreement was
approximately $17.8 million which represents the net present value of
the Retained Interests reflected on PMC Commercials consolidated
balance sheet. Based on our present cash flow assumptions, including
stress test analysis of increasing the anticipated losses on each of the
loan pools, it does not appear that the loans receivable sold by us will
cause any permanent cash flow reductions to PMC Commercial nor will the
loans receivable sold by PMC Commercial cause any permanent cash flow
reduction to us. If the performance of our sold loans receivable
significantly deteriorated, it could be necessary for us to perform
under this indemnification agreement.

Note 16. Impact of Recently Issued Accounting Pronouncements:

In August 2001, the Financial Accounting Standards Board approved SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 144 requires that long-lived assets to be disposed of
other than by sale be considered held and used until their disposition.
SFAS No. 144 also requires that long-lived assets to be disposed of by
sale be accounted for under the requirements of SFAS No. 121 which
requires that such assets be measured at the lower of carrying amounts
or fair value less costs to sell and to cease depreciation
(amortization). SFAS No. 144 describes a probability-weighted cash flow
estimation approach to deal with situations in which alternative courses
of action to recover the carrying amount of a long-lived asset under
consideration or a range is estimated for the amount of possible future
cash flows. As a result, discontinued operations are no longer measured
on a net realizable basis, and future operating losses are no longer
recognized before they occur. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years. We will adopt SFAS No.
144 on January 1, 2002 and we do not expect that the adoption will have
a material impact on our results of operations or financial position.

Note 17. Subsequent Events:

We acquired two limited service hospitality properties through foreclosure
during January and February 2002. The aggregate value of these properties, as
reduced for costs of selling, was estimated to be $2.1 million. As of December
31, 2001 the underlying loans receivable were written down by $631,000. No
additional losses were recognized at the time we foreclosed upon the assets.
We anticipate that we will operate these properties, through management
contracts, until such time as we can sell the properties. Management believes
that the net proceeds from the sale of these properties will equal or exceed
our basis in these properties.

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##### Table of Contents



Report of Independent Accountants
On Accompanying Consolidating Information

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, 2001 and for the year then ended appears on page F-4 of this Annual Report on Form 10-K. That
audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a
whole. The consolidating information is presented for purposes of additional analysis of the consolidated
financial statements rather than to present the financial position, results of operations and cash flows of the
individual companies. The consolidating information has been subjected to the auditing procedures applied in the
audit of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in
relation to the consolidated financial statements taken as a whole.

PricewaterhouseCoopers LLP

Dallas, Texas
March 7, 2002, except for Note 10, as  to
which the date is March 18, 2002

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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001(In thousands)

|                                           |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |        |   |  | 
|------------------------------------------ | --------------------------------------------------------- | - | ------- | ------- | ------------ | - | ----------- | ------- | ----------- | - | ------- | ------- | ------------ | - | ------------ | ------ | ----------- | - | ------------- | ------ | ---------- | - | ------- | ------ | - | - | ------ | ------ | - |  | 
|                                           |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        | FIRST      |   | WESTERN |        |   |   |       
|                                           |                                                           |   |         |         |              |   |             |         |             |   |         |         | CONSOLIDATED |   |              |        |             |   | WESTERN SBLC, |        | FINANCIAL  |   | PMC    
|                                           |                                                           |   |         |         |              |   |             |         |             |   |         |         | BEFORE       |   | PMC CAPITAL, |        | INC. AND    |   | CAPITAL       |        | INVESTMENT
|                                           |                                                           |   |         |         | CONSOLIDATED |   | ELIMINATION |         | ELIMINATION |   | INC.    |         | SUBSIDIARIES |   | CORPORATION  |        | CORPORATION
|                                           |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |            
|ASSETS                                     |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |       
|Investments at value:                      |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |       
|                                           | Loans receivable, net                                     |   | $       | 107,392 |              |   | $           |        |             |   | $       | 107,392 |              |   | $            | 40,901 |             |   | $             | 16,623 |            |   | $       | 15,649 |   |   | $      | 34,219 |  
|                                           | Retained interests in transferred assets                  |   |         | 33,537  |              |   |             |        |             |   |         | 33,537  |              |   |              | 30,556 |             |   |               | 2,981  |            |   |         |       |   |   |        |       |  
|                                           | Cash equivalents                                          |   |         | 16,989  |              |   |             |        |             |   |         | 16,989  |              |   |              | 6,603  |             |   |               | 919    |            |   |         | 2,389  |   |   |        | 7,078  |  
|                                           | Mortgage-backed security of affiliate                     |   |         | 1,701   |              |   |             |        |             |   |         | 1,701   |              |   |              | 1,701  |             |   |               |       |            |   |         |       |   |   |        |       |  
|                                           | Restricted investments                                    |   |         | 95      |              |   |             |        |             |   |         | 95      |              |   |              |       |             |   |               | 95     |            |   |         |       |   |   |        |       |  
|                                           | Investment in unconsolidated subsidiaries                 |   |         | 67      |              |   |             | (22,632 | )           |   |         | 22,699  |              |   |              | 22,699 |             |   |               |       |            |   |         |       |   |   |        |       |  
|                                           | Assets acquired in liquidation                            |   |         | 329     |              |   |             |        |             |   |         | 329     |              |   |              |       |             |   |               | 315    |            |   |         |       |   |   |        | 14     |  
|                                           |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |       
|Total investments at value                 |                                                           |   | 160,110 |         |              |   | (22,632     | )       |             |   | 182,742 |         |              |   | 102,460      |        |             |   | 20,933        |        |            |   | 18,038  |        |   |   | 41,311 |       
|                                           |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |       
|Other assets:                              |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |       
|                                           | Due from affiliates                                       |   |         | 607     |              |   |             | (19,479 | )           |   |         | 20,086  |              |   |              | 19,553 |             |   |               |       |            |   |         | 533    |   |   |        |       |  
|                                           | Deferred charges, deposits and other assets               |   |         | 873     |              |   |             |        |             |   |         | 873     |              |   |              | 169    |             |   |               | 219    |            |   |         | 216    |   |   |        | 269    |  
|                                           | Receivable for loans sold                                 |   |         | 184     |              |   |             |        |             |   |         | 184     |              |   |              | 14     |             |   |               | 170    |            |   |         |       |   |   |        |       |  
|                                           | Accrued interest receivable                               |   |         | 462     |              |   |             |        |             |   |         | 462     |              |   |              | 199    |             |   |               | 18     |            |   |         | 48     |   |   |        | 197    |  
|                                           | Cash                                                      |   |         | 329     |              |   |             |        |             |   |         | 329     |              |   |              | 231    |             |   |               | 73     |            |   |         | 18     |   |   |        | 7      |  
|                                           | Property and equipment, net                               |   |         | 133     |              |   |             |        |             |   |         | 133     |              |   |              | 133    |             |   |               |       |            |   |         |       |   |   |        |       |  
|                                           |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |       
|Total other assets                         |                                                           |   | 2,588   |         |              |   | (19,479     | )       |             |   | 22,067  |         |              |   | 20,299       |        |             |   | 480           |        |            |   | 815     |        |   |   | 473    |       
|                                           |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |       
|Total assets                               |                                                           | $ | 162,698 |         |              | $ | (42,111     | )       |             | $ | 204,809 |         |              | $ | 122,759      |        |             | $ | 21,413        |        |            | $ | 18,853  |        |   | $ | 41,784 |       
|                                           |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |       
|LIABILITIES AND SHAREHOLDERS EQUITY       |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |       
|Liabilities:                               |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |       
|                                           | Notes and debentures payable                              |   | $       | 76,310  |              |   | $           |        |             |   | $       | 76,310  |              |   | $            | 45,000 |             |   | $             |       |            |   | $       | 10,310 |   |   | $      | 21,000 |  
|                                           | Dividends payable                                         |   |         | 2,434   |              |   |             |        |             |   |         | 2,434   |              |   |              | 2,371  |             |   |               |       |            |   |         |       |   |   |        | 63     |  
|                                           | Borrower advances                                         |   |         | 798     |              |   |             |        |             |   |         | 798     |              |   |              | 278    |             |   |               | 345    |            |   |         | 153    |   |   |        | 22     |  
|                                           | Accrued interest payable                                  |   |         | 1,193   |              |   |             |        |             |   |         | 1,193   |              |   |              | 442    |             |   |               | 23     |            |   |         | 286    |   |   |        | 442    |  
|                                           | Accounts payable                                          |   |         | 753     |              |   |             |        |             |   |         | 753     |              |   |              | 66     |             |   |               | 640    |            |   |         | 47     |   |   |        |       |  
|                                           | Due to affiliates                                         |   |         | 189     |              |   |             | (19,479 | )           |   |         | 19,668  |              |   |              | 722    |             |   |               | 18,199 |            |   |         |       |   |   |        | 747    |  
|                                           | Other liabilities                                         |   |         | 1,113   |              |   |             |        |             |   |         | 1,113   |              |   |              | 972    |             |   |               | 81     |            |   |         | 25     |   |   |        | 35     |  
|                                           |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |       
|Total liabilities                          |                                                           |   | 82,790  |         |              |   | (19,479     | )       |             |   | 102,269 |         |              |   | 49,851       |        |             |   | 19,288        |        |            |   | 10,821  |        |   |   | 22,309 |       
|                                           |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |       
|Cumulative preferred stock of subsidiary   |                                                           |   | 7,000   |         |              |   | 3,000       |         |             |   | 4,000   |         |              |   |             |        |             |   |              |        |            |   |        |        |   |   | 4,000  |       
|                                           |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |       
|Shareholders equity:                      |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |       
|                                           | Cumulative preferred stock of subsidiary, 3%              |   |         |        |              |   |             | (3,000  | )           |   |         | 3,000   |              |   |              |       |             |   |               |       |            |   |         |       |   |   |        | 3,000  |  
|                                           | Common stock                                              |   |         | 119     |              |   |             | (22     | )           |   |         | 141     |              |   |              | 119    |             |   |               |       |            |   |         | 21     |   |   |        | 1      |  
|                                           | Additional paid-in capital                                |   |         | 71,508  |              |   |             | (22,373 | )           |   |         | 93,881  |              |   |              | 71,508 |             |   |               | 2,000  |            |   |         | 7,934  |   |   |        | 12,439 |  
|                                           | Undistributed (dividends in excess of) retained earnings  |   |         | (340    | )            |   |             | (1,237  | )           |   |         | 897     |              |   |              | (386   | )           |   |               | 1,113  |            |   |         | 113    |   |   |        | 57     |  
|                                           | Net unrealized appreciation (depreciation) on investments |   |         | 1,621   |              |   |             |        |             |   |         | 1,621   |              |   |              | 1,667  |             |   |               | 12     |            |   |         | (36    | ) |   |        | (22    | )
|                                           |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |       
|                                           |                                                           |   | 72,908  |         |              |   | (26,632     | )       |             |   | 99,540  |         |              |   | 72,908       |        |             |   | 3,125         |        |            |   | 8,032   |        |   |   | 15,475 |       
|                                           | Less treasury stock                                       |   |         |        |              |   |             | 1,000   |             |   |         | (1,000  | )            |   |              |       |             |   |               | (1,000 | )          |   |         |       |   |   |        |       |  
|                                           |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |       
|Total shareholders equity                 |                                                           |   | 72,908  |         |              |   | (25,632     | )       |             |   | 98,540  |         |              |   | 72,908       |        |             |   | 2,125         |        |            |   | 8,032   |        |   |   | 15,475 |       
|                                           |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |       
|Total liabilities and shareholders equity |                                                           | $ | 162,698 |         |              | $ | (42,111     | )       |             | $ | 204,809 |         |              | $ | 122,759      |        |             | $ | 21,413        |        |            | $ | 18,853  |        |   | $ | 41,784 |       
|                                           |                                                           |   |         |         |              |   |             |         |             |   |         |         |              |   |              |        |             |   |               |        |            |   |         |        |   |   |        |       

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

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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2001(In thousands, except per share data)

|                                                                            |                                                      |                                                                 |        |          |        |        |        |             |   |               |        |             |        |             |        |             |        |            |       |           |      |     |       |       |    |   |       |       |      |  
|--------------------------------------------------------------------------- | ---------------------------------------------------- | --------------------------------------------------------------- | ------ | -------- | ------ | ------ | ------ | ----------- | - | ------------- | ------ | ----------- | ------ | ----------- | ------ | ----------- | ------ | ---------- | ----- | --------- | ---- | --- | ----- | ----- | -- | - | ----- | ----- | ---- | -
|                                                                            |                                                      |                                                                 |        |          |        |        |        |             |   |               |        |             |        |             |        |             |        | FIRST      |       |           |      |     |       |      
|                                                                            |                                                      |                                                                 |        |          |        |        |        |             |   |               |        | CONSOLI-    |        |             |        |             |        | WESTERN    |       | WESTERN   |      |     |       |      
|                                                                            |                                                      |                                                                 |        |          |        |        |        |             |   |               |        | DATED       |        |             |        |             |        | SBLC,
INC. |       | FINANCIAL |      | PMC
|                                                                            |                                                      |                                                                 |        | CONSOLI- |        | ELIMI- |        | BEFORE      |   | PMC           |        | AND
SUBSID- |        | CAPITAL     |        | INVESTMENT 
|                                                                            |                                                      |                                                                 |        | DATED    |        | NATION |        | ELIMINATION |   | CAPITAL, INC. |        | IARIES      |        | CORPORATION |        | CORPORATION
|                                                                            |                                                      |                                                                 |        |          |        |        |        |             |   |               |        |             |        |             |        |            
|Investment income:                                                          |                                                      |                                                                 |        |          |        |        |        |             |   |               |        |             |        |             |        |             |        |            |       |           |      |     |       |       |    |   |       |      
|                                                                            | Interest                                             |                                                                 | $      | 11,568   |        |        | $      |            |   |               | $      | 11,568      |        |             | $      | 3,708       |        |            | $     | 1,897     |      |     | $     | 1,672 |    |   | $     | 4,291 |     
|                                                                            | Income from retained interests in transferred assets |                                                                 |        | 5,340    |        |        |        |             |   |               |        | 5,340       |        |             |        | 4,595       |        |            |       | 745       |      |     |       |      |    |   |       |      |     
|                                                                            | Premium income                                       |                                                                 |        | 501      |        |        |        |            |   |               |        | 501         |        |             |        | 487         |        |            |       | 14        |      |     |       |      |    |   |       |      |     
|                                                                            | Other investment income, net                         |                                                                 |        | 794      |        |        |        |            |   |               |        | 794         |        |             |        | 439         |        |            |       | 78        |      |     |       | 34    |    |   |       | 243   |     
|                                                                            |                                                      |                                                                 |        |          |        |        |        |             |   |               |        |             |        |             |        |             |        |            |       |           |      |     |       |       |    |   |       |      
|Total investment income                                                     |                                                      |                                                                 | 18,203 |          |        |        |       |             |   |               | 18,203 |             |        |             | 9,229  |             |        |            | 2,734 |           |      |     | 1,706 |       |    |   | 4,534 |      
|Other income, net                                                           |                                                      |                                                                 | 2,167  |          |        |        |       |             |   |               | 2,167  |             |        |             | 1,919  |             |        |            | 168   |           |      |     | 42    |       |    |   | 38    |      
|Equity in income of unconsolidated subsidiaries, net                        |                                                      |                                                                 | 382    |          |        |        | (5,762 | )           |   |               | 6,144  |             |        |             | 6,144  |             |        |            |      |           |      |     |      |       |    |   |      |      
|                                                                            |                                                      |                                                                 |        |          |        |        |        |             |   |               |        |             |        |             |        |             |        |            |       |           |      |     |       |       |    |   |       |      
|Total income                                                                |                                                      |                                                                 | 20,752 |          |        |        | (5,762 | )           |   |               | 26,514 |             |        |             | 17,292 |             |        |            | 2,902 |           |      |     | 1,748 |       |    |   | 4,572 |      
|                                                                            |                                                      |                                                                 |        |          |        |        |        |             |   |               |        |             |        |             |        |             |        |            |       |           |      |     |       |       |    |   |       |      
|Expenses:                                                                   |                                                      |                                                                 |        |          |        |        |        |             |   |               |        |             |        |             |        |             |        |            |       |           |      |     |       |       |    |   |       |      
|                                                                            | Interest                                             |                                                                 |        | 5,402    |        |        |        |            |   |               |        | 5,402       |        |             |        | 3,008       |        |            |       | 3         |      |     |       | 840   |    |   |       | 1,551 |     
|                                                                            | Salaries and related benefits                        |                                                                 |        | 4,199    |        |        |        |            |   |               |        | 4,199       |        |             |        | 4,199       |        |            |       |          |      |     |       |      |    |   |       |      |     
|                                                                            | General and administrative                           |                                                                 |        | 811      |        |        |        |            |   |               |        | 811         |        |             |        | 709         |        |            |       | 66        |      |     |       | 20    |    |   |       | 16    |     
|                                                                            | Rent                                                 |                                                                 |        | 321      |        |        |        |            |   |               |        | 321         |        |             |        | 321         |        |            |       |          |      |     |       |      |    |   |       |      |     
|                                                                            | Legal and accounting                                 |                                                                 |        | 273      |        |        |        |            |   |               |        | 273         |        |             |        | 273         |        |            |       |          |      |     |       |      |    |   |       |      |     
|                                                                            | Profit sharing plan                                  |                                                                 |        | 242      |        |        |        |            |   |               |        | 242         |        |             |        | 242         |        |            |       |          |      |     |       |      |    |   |       |      |     
|                                                                            | Small Business Administration fees                   |                                                                 |        | 105      |        |        |        |            |   |               |        | 105         |        |             |        |            |        |            |       |          |      |     |       | 36    |    |   |       | 69    |     
|                                                                            | Directors and shareholders expense                   |                                                                 |        | 55       |        |        |        |            |   |               |        | 55          |        |             |        | 54          |        |            |       | 1         |      |     |       |      |    |   |       |      |     
|                                                                            |                                                      |                                                                 |        |          |        |        |        |             |   |               |        |             |        |             |        |             |        |            |       |           |      |     |       |       |    |   |       |      
|Total expenses                                                              |                                                      |                                                                 | 11,408 |          |        |        |       |             |   |               | 11,408 |             |        |             | 8,806  |             |        |            | 70    |           |      |     | 896   |       |    |   | 1,636 |      
|                                                                            |                                                      |                                                                 |        |          |        |        |        |             |   |               |        |             |        |             |        |             |        |            |       |           |      |     |       |       |    |   |       |      
|Net operating income                                                        |                                                      |                                                                 | 9,344  |          |        |        | (5,762 | )           |   |               | 15,106 |             |        |             | 8,486  |             |        |            | 2,832 |           |      |     | 852   |       |    |   | 2,936 |      
|                                                                            |                                                      |                                                                 |        |          |        |        |        |             |   |               |        |             |        |             |        |             |        |            |       |           |      |     |       |       |    |   |       |      
|Realized and unrealized gain (loss) on investments:                         |                                                      |                                                                 |        |          |        |        |        |             |   |               |        |             |        |             |        |             |        |            |       |           |      |     |       |       |    |   |       |      
|                                                                            |                                                      | Investments written-off, net                                    |        |          | (2,328 | )      |        |             |  |               |        |             | (2,328 | )           |        |             | (1,048 | )          |       |           | (799 | )   |       |       |   |   |       |       | (481 | )
|                                                                            |                                                      | Sale of assets                                                  |        |          | 2,732  |        |        |             |  |               |        |             | 2,732  |             |        |             | 2,732  |            |       |           |     |     |       |       |   |   |       |       |     |  
|                                                                            |                                                      | Change in unrealized appreciation
(depreciation) on investments |        |          | 819    |        |        |             |  |               |        |             | 819    |             |        |             | 397    |            |       |           | 285  |     |       |       | (3 | ) |       |       | 140  |  
|                                                                            |                                                      |                                                                 |        |          |        |        |        |             |   |               |        |             |        |             |        |             |        |            |       |           |      |     |       |       |    |   |       |      
|Total realized and unrealized gain (loss) on investments                    |                                                      |                                                                 | 1,223  |          |        |        |       |             |   |               | 1,223  |             |        |             | 2,081  |             |        |            | (514  | )         |      |     | (3    | )     |    |   | (341  | )    
|                                                                            |                                                      |                                                                 |        |          |        |        |        |             |   |               |        |             |        |             |        |             |        |            |       |           |      |     |       |       |    |   |       |      
|Net operating income and realized and unrealized
gain (loss) on investments |                                                      | $                                                               | 10,567 |          |        | $      | (5,762 | )           |   | $             | 16,329 |             |        | $           | 10,567 |             |        | $          | 2,318 |           |      | $   | 849   |       |    | $ | 2,595 |      
|                                                                            |                                                      |                                                                 |        |          |        |        |        |             |   |               |        |             |        |             |        |             |        |            |       |           |      |     |       |       |    |   |       |      
|Preferred dividends                                                         |                                                      | $                                                               | 250    |          |        | $      | (250   | )           |   | $             | 500    |             |        | $           | 250    |             |        | $          |      |           |      | $   |      |       |    | $ | 250   |      
|                                                                            |                                                      |                                                                 |        |          |        |        |        |             |   |               |        |             |        |             |        |             |        |            |       |           |      |     |       |       |    |   |       |      
|Basic and diluted earnings per share                                        |                                                      | $                                                               | 0.87   |          |        |        |        |             |   |               |        |             |        |             |        |             |        |            |       |           |      |     |       |       |    |   |       |      
|                                                                            |                                                      |                                                                 |        |          |        |        |        |             |   |               |        |             |        |             |        |             |        |            |       |           |      |     |       |       |    |   |       |      

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

F-33



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF SHAREHOLDERS EQUITY
DECEMBER 31, 2001(In thousands)

|                                          |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   |               |         |            |   |       |       |       |   |       |        |   |   |         |         |  
|----------------------------------------- | --------------------------------------------- | - | --------- | ------ | ------ | - | ------- | --- | -------- | - | -------------- | ------- | ---------- | - | ------------- | ------- | ---------- | - | ----- | ----- | ----- | - | ----- | ------ | - | - | ------- | ------- | -
|                                          |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   | Undistributed |         | Net        |   |       |       |       |   |       |        |  
|                                          |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   | (Dividends in |         | Unrealized |   |       |       |       |   |       |        |  
|                                          |                                               |   |           |        |        |   |         |     |          |   | Additional     |         | Excess of) |   | Appreciation  |         |            |   |       |       | Total
|                                          |                                               |   | Preferred |        | Common |   | Paid-in |     | Retained |   | (Depreciation) |         | Treasury   |   | Shareholders'
|                                          |                                               |   | Stock, 3% |        | Stock  |   | Capital |     | Earnings |   | on Investments |         | Stock      |   | Equity       
|                                          |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   |              
|PMC CAPITAL, INC.                         |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   |               |         |            |   |       |       |       |   |       |        |   |   |         |        
|                                          | Balances, January 1, 2001                     |   | $         |       |        |   | $       | 119 |          |   | $              | 71,508  |            |   | $             | (230    | )          |   | $     | 1,270 |       |   | $     |       |   |   | $       | 72,667  |  
|                                          | Net income                                    |   |           |       |        |   |         |    |          |   |                |        |            |   |               | 10,170  |            |   |       | 397   |       |   |       |       |   |   |         | 10,567  |  
|                                          | Preferred dividend of consolidated subsidiary |   |           |       |        |   |         |    |          |   |                |        |            |   |               | (250    | )          |   |       |      |       |   |       |       |   |   |         | (250    | )
|                                          | Dividends on common stock                     |   |           |       |        |   |         |    |          |   |                |        |            |   |               | (10,076 | )          |   |       |      |       |   |       |       |   |   |         | (10,076 | )
|                                          |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   |               |         |            |   |       |       |       |   |       |        |   |   |         |        
|                                          | Balance, December 31, 2001                    |   | $         |       |        |   | $       | 119 |          |   | $              | 71,508  |            |   | $             | (386    | )          |   | $     | 1,667 |       |   | $     |       |   |   | $       | 72,908  |  
|                                          |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   |               |         |            |   |       |       |       |   |       |        |   |   |         |        
|FIRST WESTERN SBLC, INC. AND SUBSIDIARIES |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   |               |         |            |   |       |       |       |   |       |        |   |   |         |        
|                                          | Balances, January 1, 2001                     |   | $         |       |        |   | $       |    |          |   | $              | 2,000   |            |   | $             | 1,730   |            |   | $     | (273  | )     |   | $     | (1,000 | ) |   | $       | 2,457   |  
|                                          | Net income                                    |   |           |       |        |   |         |    |          |   |                |        |            |   |               | 2,033   |            |   |       | 285   |       |   |       |       |   |   |         | 2,318   |  
|                                          | Dividends to parent company                   |   |           |       |        |   |         |    |          |   |                |        |            |   |               | (2,650  | )          |   |       |      |       |   |       |       |   |   |         | (2,650  | )
|                                          |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   |               |         |            |   |       |       |       |   |       |        |   |   |         |        
|                                          | Balance, December 31, 2001                    |   | $         |       |        |   | $       |    |          |   | $              | 2,000   |            |   | $             | 1,113   |            |   | $     | 12    |       |   | $     | (1,000 | ) |   | $       | 2,125   |  
|                                          |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   |               |         |            |   |       |       |       |   |       |        |   |   |         |        
|WESTERN FINANCIAL CAPITAL CORPORATION     |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   |               |         |            |   |       |       |       |   |       |        |   |   |         |        
|                                          | Balances, January 1, 2001                     |   | $         |       |        |   | $       | 21  |          |   | $              | 7,934   |            |   | $             | 261     |            |   | $     | (33   | )     |   | $     |       |   |   | $       | 8,183   |  
|                                          | Net income                                    |   |           |       |        |   |         |    |          |   |                |        |            |   |               | 852     |            |   |       | (3    | )     |   |       |       |   |   |         | 849     |  
|                                          | Dividends to parent company                   |   |           |       |        |   |         |    |          |   |                |        |            |   |               | (1,000  | )          |   |       |      |       |   |       |       |   |   |         | (1,000  | )
|                                          |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   |               |         |            |   |       |       |       |   |       |        |   |   |         |        
|                                          | Balance, December 31, 2001                    |   | $         |       |        |   | $       | 21  |          |   | $              | 7,934   |            |   | $             | 113     |            |   | $     | (36   | )     |   | $     |       |   |   | $       | 8,032   |  
|                                          |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   |               |         |            |   |       |       |       |   |       |        |   |   |         |        
|PMC INVESTMENT CORPORATION                |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   |               |         |            |   |       |       |       |   |       |        |   |   |         |        
|                                          | Balances, January 1, 2001                     |   | $         | 3,000  |        |   | $       | 1   |          |   | $              | 12,439  |            |   | $             | 552     |            |   | $     | (162  | )     |   | $     |       |   |   | $       | 15,830  |  
|                                          | Net income                                    |   |           |       |        |   |         |    |          |   |                |        |            |   |               | 2,455   |            |   |       | 140   |       |   |       |       |   |   |         | 2,595   |  
|                                          | Dividends to parent company                   |   |           |       |        |   |         |    |          |   |                |        |            |   |               | (2,700  | )          |   |       |      |       |   |       |       |   |   |         | (2,700  | )
|                                          | Dividends, preferred                          |   |           |       |        |   |         |    |          |   |                |        |            |   |               | (250    | )          |   |       |      |       |   |       |       |   |   |         | (250    | )
|                                          |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   |               |         |            |   |       |       |       |   |       |        |   |   |         |        
|                                          | Balance, December 31, 2001                    |   | $         | 3,000  |        |   | $       | 1   |          |   | $              | 12,439  |            |   | $             | 57      |            |   | $     | (22   | )     |   | $     |       |   |   | $       | 15,475  |  
|                                          |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   |               |         |            |   |       |       |       |   |       |        |   |   |         |        
|ELIMINATION ADJUSTMENTS                   |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   |               |         |            |   |       |       |       |   |       |        |   |   |         |        
|                                          | Equity in income of subsidiaries              |   |          |        |        |   |        |     |          |   |               |         |            |   | (5,762        | )       |            |   |      |       |       |   |      |        |   |   | (5,762  | )      
|                                          | Dividends to parent company                   |   |           |       |        |   |         |    |          |   |                |        |            |   |               | 6,350   |            |   |       |      |       |   |       |       |   |   |         | 6,350   |  
|                                          | Preferred dividend of consolidated subsidiary |   |           |       |        |   |         |    |          |   |                |        |            |   |               | 250     |            |   |       |      |       |   |       |       |   |   |         | 250     |  
|                                          | Stock of subsidiaries                         |   |           | (3,000 | )      |   |         | (22 | )        |   |                | (22,373 | )          |   |               |        |            |   |       |      |       |   |       | 1,000  |   |   |         | (24,395 | )
|                                          | Undistributed earnings of subsidiaries        |   |           |       |        |   |         |    |          |   |                |        |            |   |               | (2,075  | )          |   |       |      |       |   |       |       |   |   |         | (2,075  | )
|                                          |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   |               |         |            |   |       |       |       |   |       |        |   |   |         |        
|                                          |                                               |   | (3,000    | )      |        |   | (22     | )   |          |   | (22,373        | )       |            |   | (1,237        | )       |            |   |      |       |       |   | 1,000 |        |   |   | (25,632 | )      
|                                          |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   |               |         |            |   |       |       |       |   |       |        |   |   |         |        
|CONSOLIDATED                              |                                               | $ |          |        |        | $ | 119     |     |          | $ | 71,508         |         |            | $ | (340          | )       |            | $ | 1,621 |       |       | $ |      |        |   | $ | 72,908  |        
|                                          |                                               |   |           |        |        |   |         |     |          |   |                |         |            |   |               |         |            |   |       |       |       |   |       |        |   |   |         |        

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

F-34



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##### Table of Contents



PMC CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001(In thousands)

|                                                     |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         |             |        |             |          |             |        |           |        |         |        |         |        |        |    |         |         |        |      |  
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------ | ---------------------------------------------------- | ------- | -------- | ------ | ------- | ------ | ----------- | ----- | ------------ | ------- | ----------- | ------ | ----------- | -------- | ----------- | ------ | --------- | ------ | ------- | ------ | ------- | ------ | ------ | -- | ------- | ------- | ------ | ---- | -
|                                                     |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         | CONSOLI-    |        |             |          |             |        | FIRST     |        |         |        |         |        |        |   
|                                                     |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         | DATED       |        |             |          |             |        | WESTERN   |        | WESTERN |        |         |        |       
|                                                     |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        | ELIMI-      |       | BEFORE       |         |             |        |             |          | SBLC,
INC.  |        | FINANCIAL |        | PMC    
|                                                     |                                                                                                                                                    |                                                        |                                                      |         | CONSOLI- |        | NATION  |        | ELIMINATION |       | PMC          |         | AND
SUBSID- |        | CAPITAL     |          | INVESTMENT 
|                                                     |                                                                                                                                                    |                                                        |                                                      |         | DATED    |        | ENTRIES |        | ENTRIES     |       | CAPITAL INC. |         | IARIES      |        | CORPORATION |          | CORPORATION
|                                                     |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         |             |        |             |          |            
|Cash flows from operating activities:                |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         |             |        |             |          |             |        |           |        |         |        |         |        |        |    |         |        
|                                                     | Net operating income and realized and
unrealized gain (loss) on investments                                                                        |                                                        | $                                                    | 10,567  |          |        | $       | (5,762 | )           |       | $            | 16,329  |             |        | $           | 10,567   |             |        | $         | 2,318  |         |        | $       | 849    |        |    | $       | 2,595   |       
|                                                     | 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                          |         |          | (5,608 | )       |        |             |      |              |         |             | (5,608 | )           |          |             |       |           |        |         | (5,608 | )       |        |        |   |         |         |        |     |  
|                                                     |                                                                                                                                                    |                                                        | Proceeds from sale of guaranteed loans               |         |          | 7,778  |         |        |             |      |              |         |             | 7,778  |             |          |             |       |           |        |         | 7,778  |         |        |        |   |         |         |        |     |  
|                                                     |                                                                                                                                                    |                                                        | Realized and unrealized (gain) loss on investments   |         |          | (1,223 | )       |        |             |      |              |         |             | (1,223 | )           |          |             | (2,081 | )         |        |         | 514    |         |        |        | 3  |         |         |        | 341  |  
|                                                     |                                                                                                                                                    |                                                        | Unrealized premium income, net                       |         |          | (14    | )       |        |             |      |              |         |             | (14    | )           |          |             |       |           |        |         | (14    | )       |        |        |   |         |         |        |     |  
|                                                     |                                                                                                                                                    |                                                        | Depreciation and amortization                        |         |          | 159    |         |        |             |      |              |         |             | 159    |             |          |             | 72     |           |        |         |       |         |        |        | 29 |         |         |        | 58   |  
|                                                     |                                                                                                                                                    |                                                        | Accretion of loan discount and deferred fees         |         |          | (167   | )       |        |             |      |              |         |             | (167   | )           |          |             | (6     | )         |        |         | (107   | )       |        |        | (9 | )       |         |        | (45  | )
|                                                     |                                                                                                                                                    |                                                        | Equity in income of unconsolidated subsidiaries, net |         |          | (382   | )       |        |             | 5,762 |              |         |             | (6,144 | )           |          |             | (6,144 | )         |        |         |       |         |        |        |   |         |         |        |     |  
|                                                     |                                                                                                                                                    |                                                        | Other operating assets and liabilities               |         |          | (1,151 | )       |        |             |      |              |         |             | (1,151 | )           |          |             | (577   | )         |        |         | (461   | )       |        |        | 81 |         |         |        | (194 | )
|                                                     |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         |             |        |             |          |             |        |           |        |         |        |         |        |        |    |         |        
|Net cash provided by operating activities            |                                                                                                                                                    |                                                        | 9,959                                                |         |          |        |        |        |             |       | 9,959        |         |             |        | 1,831       |          |             |        | 4,420     |        |         |        | 953     |        |        |    | 2,755   |        
|                                                     |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         |             |        |             |          |             |        |           |        |         |        |         |        |        |    |         |        
|Cash flows from investing activities:                |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         |             |        |             |          |             |        |           |        |         |        |         |        |        |    |         |        
|                                                     | Loans funded                                                                                                                                       |                                                        |                                                      | (60,369 | )        |        |         |       |             |       |              | (60,369 | )           |        |             | (34,373  | )           |        |           | (2,403 | )       |        |         | (5,556 | )      |    |         | (18,037 | )     
|                                                     | Purchase of loans through exercise of option                                                                                                       |                                                        |                                                      | (2,272  | )        |        |         |       |             |       |              | (2,272  | )           |        |             |         |             |        |           | (2,272 | )       |        |         |       |        |    |         |        |       
|                                                     | Principal collected and other adjustments                                                                                                          |                                                        |                                                      | 10,063  |          |        |         |       |             |       |              | 10,063  |             |        |             | 4,152    |             |        |           | 1,924  |         |        |         | 405    |        |    |         | 3,582   |       
|                                                     | Proceeds from sale of (purchase of) loans to (from) affiliates                                                                                     |                                                        |                                                      |        |          |        |         |       |             |       |              |        |             |        |             | (29,848) |             |        |           |       |         |        |         | 6,503  |        |    |         | 23,345  |       
|                                                     | Proceeds from retained interests in transferred assets                                                                                             |                                                        |                                                      | 3,181   |          |        |         |       |             |       |              | 3,181   |             |        |             | 2,059    |             |        |           | 1,122  |         |        |         |       |        |    |         |        |       
|                                                     | Proceeds from mortgage-backed security of affiliate                                                                                                |                                                        |                                                      | 144     |          |        |         |       |             |       |              | 144     |             |        |             | 144      |             |        |           |       |         |        |         |       |        |    |         |        |       
|                                                     | Distributions from unconsolidated subsidiaries                                                                                                     |                                                        |                                                      | 462     |          |        |         |       |             |       |              | 462     |             |        |             | 462      |             |        |           |       |         |        |         |       |        |    |         |        |       
|                                                     | Purchase of property and equipment and other assets                                                                                                |                                                        |                                                      | (33     | )        |        |         |       |             |       |              | (33     | )           |        |             | (33      | )           |        |           |       |         |        |         |       |        |    |         |        |       
|                                                     | Investment in retained interests in transferred assets                                                                                             |                                                        |                                                      | (2,508  | )        |        |         |       |             |       |              | (2,508  | )           |        |             | (2,508   | )           |        |           |       |         |        |         |       |        |    |         |        |       
|                                                     | Release of (investment in) restricted cash                                                                                                         |                                                        |                                                      | 82      |          |        |         |       |             |       |              | 82      |             |        |             |         |             |        |           | 82     |         |        |         |       |        |    |         |        |       
|                                                     | Advances (to) from unconsolidated afffiliates, net                                                                                                 |                                                        |                                                      | (226    | )        |        |         |       |             |       |              | (226    | )           |        |             | 2,293    |             |        |           |       |         |        |         | (712   | )      |    |         | (1,807  | )     
|                                                     |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         |             |        |             |          |             |        |           |        |         |        |         |        |        |    |         |        
|Net
cash provided by (used in) investing activities  |                                                                                                                                                    |                                                        | (51,476                                              | )       |          |        |        |        |             |       | (51,476      | )       |             |        | (57,652     | )        |             |        | (1,547    | )      |         |        | 640     |        |        |    | 7,083   |        
|                                                     |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         |             |        |             |          |             |        |           |        |         |        |         |        |        |    |         |        
|Cash flows from financing activities:                |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         |             |        |             |          |             |        |           |        |         |        |         |        |        |    |         |        
|                                                     |                                                                                                                                                    | Proceeds from issuance of notes and debentures payable |                                                      |         | 10,000   |        |         |        |            |       |              |         | 10,000      |        |             |          | 10,000      |        |           |        |        |        |         |        |       |    |         |         |       |     
|                                                     |                                                                                                                                                    | Proceeds from debt issued by SPEs, net                 |                                                      |         | 44,511   |        |         |        |            |       |              |         | 44,511      |        |             |          | 44,511      |        |           |        |        |        |         |        |       |    |         |         |       |     
|                                                     |                                                                                                                                                    | Payment of dividends to parent                         |                                                      |         |         |        |         |        |            |       |              |         |            |        |             |          | 6,350       |        |           |        | (2,650  | )      |         |        | (1,000 | )  |         |         | (2,700 | )   
|                                                     |                                                                                                                                                    | Payment of dividends on common stock                   |                                                      |         | (10,668  | )      |         |        |            |       |              |         | (10,668     | )      |             |          | (10,668     | )      |           |        |        |        |         |        |       |    |         |         |       |     
|                                                     |                                                                                                                                                    | Payment of dividends on preferred stock                |                                                      |         | (250     | )      |         |        |            |       |              |         | (250        | )      |             |          |            |        |           |        |        |        |         |        |       |    |         |         | (250   | )   
|                                                     |                                                                                                                                                    | Payment of notes payable                               |                                                      |         | (6,667   | )      |         |        |            |       |              |         | (6,667      | )      |             |          | (6,667      | )      |           |        |        |        |         |        |       |    |         |         |       |     
|                                                     |                                                                                                                                                    | Advances (to) from unconsolidated affiliates, net      |                                                      |         |         |        |         |        |            |       |              |         |            |        |             |          | 573         |        |           |        | (573    | )      |         |        |       |    |         |         |       |     
|                                                     |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         |             |        |             |          |             |        |           |        |         |        |         |        |        |    |         |        
|Net cash provided by (used in) financing activities  |                                                                                                                                                    |                                                        | 36,926                                               |         |          |        |        |        |             |       | 36,926       |         |             |        | 44,099      |          |             |        | (3,223    | )      |         |        | (1,000) |        |        |    | (2,950) |        
|                                                     |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         |             |        |             |          |             |        |           |        |         |        |         |        |        |    |         |        
|Net increase (decrease) in cash and cash equivalents |                                                                                                                                                    |                                                        | (4,591                                               | )       |          |        |        |        |             |       | (4,591       | )       |             |        | (11,722     | )        |             |        | (350      | )      |         |        | 593     |        |        |    | 6,888   |        
|Cash and cash equivalents, beginning of year         |                                                                                                                                                    |                                                        | 21,909                                               |         |          |        |        |        |             |       | 21,909       |         |             |        | 18,556      |          |             |        | 1,342     |        |         |        | 1,814   |        |        |    | 197     |        
|                                                     |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         |             |        |             |          |             |        |           |        |         |        |         |        |        |    |         |        
|Cash and cash equivalents, end of year               |                                                                                                                                                    | $                                                      | 17,318                                               |         |          | $      |        |        |             | $     | 17,318       |         |             | $      | 6,834       |          |             | $      | 992       |        |         | $      | 2,407   |        |        | $  | 7,085   |        
|                                                     |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         |             |        |             |          |             |        |           |        |         |        |         |        |        |    |         |        
|Supplemental disclosure:                             |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         |             |        |             |          |             |        |           |        |         |        |         |        |        |    |         |        
|                                                     |                                                                                                                                                    | Interest paid                                          |                                                      | $       | 5,493    |        |         | $      |            |       |              | $       | 5,493       |        |             | $        | 3,139       |        |           | $      | 10      |        |         | $      | 812    |    |         | $       | 1,532  |     
|                                                     |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         |             |        |             |          |             |        |           |        |         |        |         |        |        |    |         |        
|                                                     | Loans and interest receivable transferred from SPE,
net                                                                                            |                                                        | $                                                    | 6,409   |          |        | $       |       |             |       | $            | 6,409   |             |        | $           | 6,409    |             |        | $         |       |         |        | $       |       |        |    | $       |        |       
|                                                     |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         |             |        |             |          |             |        |           |        |         |        |         |        |        |    |         |        
|                                                     | Reclassification
from loans receivable to assets acquired in liquidation                                                                           |                                                        | $                                                    | 314     |          |        | $       |       |             |       | $            | 314     |             |        | $           | 314      |             |        | $         |       |         |        | $       |       |        |    | $       |        |       
|                                                     |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         |             |        |             |          |             |        |           |        |         |        |         |        |        |    |         |        
|                                                     |                                                                                                                                                    | Loans and interest receivable transferred to SPE       |                                                      | $       | 4,215    |        |         | $      |            |       |              | $       | 4,215       |        |             | $        | 4,215       |        |           | $      |        |        |         | $      |       |    |         | $       |       |     
|                                                     |                                                                                                                                                    |                                                        |                                                      |         |          |        |         |        |             |       |              |         |             |        |             |          |             |        |           |        |         |        |         |        |        |    |         |        

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

F-35



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##### Table of Contents



EXHIBITS

|        |  |                                                                                                                                                                                                                                         
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                         
|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 (incorporated by reference from Registrants Form 10-K for the
fiscal year ended December 31, 1996).                                                                    
|        |  |                                                                                                                                                                                                                                         
|4.13    |  | Debenture dated September 28, 1994 for $3,000,000 loan with SBA
(incorporated by reference from Registrants Form 10-K for the fiscal
year ended December 31, 1994).                                                                    
|        |  |                                                                                                                                                                                                                                         
|4.14    |  | Debenture dated September 28, 1994 for $3,000,000 loan with SBA
(incorporated by reference from Registrants Form 10-K for the fiscal
year ended December 31, 1994).                                                                    
|        |  |                                                                                                                                                                                                                                         
|4.18    |  | Senior Note dated December 15, 1993 for $2,000,000 with Peerless
Insurance Company (incorporated by reference from Registrants Form
10-K for the fiscal year ended December 31, 1994).                                                 
|        |  |                                                                                                                                                                                                                                         
|4.19    |  | Senior Note dated December 15, 1993 for $3,000,000 with Security Life
of Denver Insurance Company (incorporated by reference from
Registrants Form 10-K for the fiscal year ended
December 31, 1994).                                  
|        |  |                                                                                                                                                                                                                                         
|4.20    |  | Debenture dated March 29, 1995 for $3,000,000 loan with SBA
(incorporated by reference from Registrants Form 10-K for the fiscal
year ended December 31, 1995).                                                                        
|        |  |                                                                                                                                                                                                                                         
|4.21    |  | Debenture dated June 28, 1995 for $5,000,000 loan with SBA
(incorporated by reference from Registrants Form 10-K for the fiscal
year ended December 31, 1995).                                                                         
|        |  |                                                                                                                                                                                                                                         
|4.22    |  | Debenture dated September 27, 1995 for $7,000,000 loan with SBA
(incorporated by reference from Registrants Form 10-K for the fiscal
year ended December 31, 1995).                                                                    
|        |  |                                                                                                                                                                                                                                         
|4.26    |  | Debenture dated December 6, 1992 for $510,000 loan with SBA assumed
from J & D Capital Corporation (incorporated by reference from
Registrants Form 10-K for the fiscal year ended
December 31, 1995).                                 

E-1



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##### Table of Contents



|      |  |                                                                                                                                                                                                             
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.27  |  | Senior Note dated April 19, 1995 for $5,000,000 with Security Life of
Denver Insurance Company (incorporated by reference from Registrants
Form 10-K for the fiscal year ended December 31, 1995).         
|      |  |                                                                                                                                                                                                             
|4.28  |  | Senior Note dated April 19, 1995 for $2,000,000 with Peerless Insurance
Company (incorporated by reference from Registrants Form 10-K for the
fiscal year ended December 31, 1995).                        
|      |  |                                                                                                                                                                                                             
|4.29  |  | Senior Note dated April 19, 1995 for $2,000,000 with Indiana Insurance
Company (incorporated by reference from Registrants Form 10-K for the
fiscal year ended December 31, 1995).                         
|      |  |                                                                                                                                                                                                             
|4.30  |  | Senior Note dated April 19, 1995 for $1,000,000 with Security Life of
Denver Insurance Company (incorporated by reference from Registrants
Form 10-K for the fiscal year ended December 31, 1995).         
|      |  |                                                                                                                                                                                                             
|4.32  |  | Senior Note Agreement dated July 19, 1999 for $10,000,000 with
Equitable Life Insurance Company of Iowa (incorporated by reference
from Registrants Form 10-K for the fiscal year ended December 31,
1999).
|      |  |                                                                                                                                                                                                             
|4.33  |  | Senior Note Agreement dated July 19, 2000 for $10,000,000 with
Equitable Life Insurance Company of Iowa (incorporated by reference
from Registrants Form 10-K for the fiscal year ended December 31,
2000).
|      |  |                                                                                                                                                                                                             
|4.34  |  | Debenture dated September 27, 2000 for $4,310,000 loan with SBA
(incorporated by reference from Registrants Form 10-K for the fiscal
year ended December 31, 2000).                                        
|      |  |                                                                                                                                                                                                             
|4.35  |  | Debenture dated September 27, 2000 for $3,000,000 loan with SBA
(incorporated by reference from Registrants Form 10-K for the fiscal
year ended December 31, 2000).                                        
|      |  |                                                                                                                                                                                                             
|*4.36 |  | Senior Note Agreement dated July 19, 2001 for $10,000,000 with Security
Life of Denver Insurance Company.                                                                                                   
|      |  |                                                                                                                                                                                                             
|*10.1 |  | Employment contract between the Registrant and Lance B. Rosemore dated
July 1, 2001.                                                                                                                        
|      |  |                                                                                                                                                                                                             
|*10.2 |  | Employment contract between the Registrant and Andrew S. Rosemore dated
July 1, 2001.                                                                                                                       
|      |  |                                                                                                                                                                                                             
|*10.4 |  | Employment contract between the Registrant and Jan F. Salit dated July
1, 2001.                                                                                                                             
|      |  |                                                                                                                                                                                                             
|*10.5 |  | Employment contract between the Registrant and Barry N. Berlin dated
July 1, 2001.                                                                                                                          
|      |  |                                                                                                                                                                                                             
|*10.6 |  | Employment contract between the Registrant and Mary J. Brownmiller
dated July 1, 2001.                                                                                                                      

E-2



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##### Table of Contents



|       |  |                                                                                                                                                                                                                                                                              
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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   |  | PMC Capital, Inc. 1997 Non-Employee Stock Option Plan (incorporated by
reference from Registrants Form 10-K for the fiscal year ended
December 31, 1996).                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                              
|10.9   |  | PMC Capital, Inc. 1997 Employee Stock Option Plan (incorporated by
reference from Registrants Form 10-K for the fiscal year ended
December 31, 1996).                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                              
|*10.10 |  | Employment contract between the Registrant and Cheryl T. Murray dated
July 1, 2001.                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                              
|10.11  |  | Servicing Agreement by and among Harris Trust savings Bank, as Trustee
and Supervisory Servicer, PMC Capital L.P. 1998-1, as Issuer, and PMC
Capital, Inc., as Servicer (incorporated by reference from Registrants
Form 10-K for the fiscal year ended December 31, 1998). 
|       |  |                                                                                                                                                                                                                                                                              
|10.12  |  | Second Amendment to Loan Agreement and Amendment to Loan Documents and
Renewal and Extension of loan dated as of March 15, 1998 (incorporated
by reference from Registrants Form 10-Q for the quarterly period ended
March 31, 1998).                                       
|       |  |                                                                                                                                                                                                                                                                              
|10.13  |  | Servicing Agreement by and among Harris Trust Savings Bank, as Trustee
and Supervisory Servicer, PMC Capital L.P. 1999-1, as Issuer, and PMC
Capital, Inc., as Servicer (incorporated by reference from Registrants
Form 10-Q for the quarterly period ended June 30, 1999).
|       |  |                                                                                                                                                                                                                                                                              
|10.14  |  | Trust Indenture between PMC Joint Venture, L.P. 2000 and BNY Midwest
Trust Company, dated as of December 15, 2000. (incorporated by
reference from Registrants Form 8-K filed on
March 13, 2001).                                                                           
|       |  |                                                                                                                                                                                                                                                                              
|10.15  |  | Servicing Agreement by and among BNY Midwest Trust Company, PMC Joint
Venture, L.P. 2000 and PMC Capital and PMC Commercial Trust, dated as
of December 15, 2000 (incorporated by reference from Registrants Form
8-K filed on March 13, 2001).                             

E-3



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##### Table of Contents



|       |  |                                                                                                                                                                                                                                                                                                            
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.16  |  | Servicing Agreement by and among BNY Midwest Trust Company as Trustee
and Supervisory Servicer, PMC Joint Venture, L.P. 2001, as Issuer, and
PMC Capital, Inc. and PMC Commercial Trust, as Servicers (incorporated
by reference from Registrants Form 10-Q for the quarterly period ended
June 30, 2001).
|       |  |                                                                                                                                                                                                                                                                                                            
|10.17  |  | Trust Indenture by and among BNY Midwest Trust Company as Trustee and
PMC Joint Venture, L.P. 2001, as Issuer (incorporated by reference from
Registrants Form 10-Q for the quarterly period ended
June 30, 2001).                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                            
|*10.18 |  | Third Amendment to Credit Agreement dated June 12, 2001 between PMC
Capital, Inc. and Bank One, NA.                                                                                                                                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                            
|*10.19 |  | Fourth Amendment to Credit Agreement dated July 18, 2001 between PMC
Capital, Inc. and Bank One, NA.                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                            
|*10.20 |  | Fifth Amendment to Credit Agreement dated August 2001 between PMC
Capital, Inc. and Bank One, NA.                                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                            
|*10.21 |  | Sixth Amendment to Credit Agreement dated October 2001 between PMC
Capital, Inc. and Bank One, NA.                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                                                                            
|*10.22 |  | Investment Management Agreement between PMC Capital, PMC Commercial and
PMC Advisers, Ltd. dated July 2001.                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                            
|*21.1  |  | Subsidiaries of Registrant                                                                                                                                                                                                                                                                                 



---

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

E-4