##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K


Mark One


|                                     |  |                                                                                                  |  | 
|------------------------------------ |  | ------------------------------------------------------------------------------------------------ |  | 
|x                                    |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934     |  | 
|For the year ended December 31, 2002
|                                     |  | OR                                                                                               |  | 
|o                                    |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 |  | 

Commission File No.: 0-22353

FLAGSTAR CAPITAL CORPORATION

(Exact name of registrant as specified in its
charter)


|                                         |  |                    
|---------------------------------------- |  | -------------------
|Michigan                                 |  | 38-3386801         
|(State or other jurisdiction of          |  | (I.R.S. Employer   
|Incorporation or organization)           |  | Identification No.)
|                                        
|5151 Corporate Drive, Troy, Michigan     |  | 48098-2639         
|(Address of principal executive offices) |  | (Zip Code)         

Registrants telephone number, including
area code:

(248) 312-2000


Securities registered pursuant to
Section 12(b) of the Act: None.

Securities registered pursuant to
Section 12(g) of the Act: None.

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 ninety days.

Yes ü               No


Indicate by check
mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrants 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

As of
March 19, 2003, 1,000,000 shares of the registrants
Common Stock, $1.00 par value, were issued and outstanding and
2,300,000 shares of the registrants Series A
Preferred Shares, $25.00 par value, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

NONE.









---

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 COMPANYS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                   
|ITEM 6: SELECTED FINANCIAL DATA                                                              
|ITEM 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|ITEM 7a: MARKET RISK                                                                         
|ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III                                                                                     
|ITEM 11: EXECUTIVE COMPENSATION                                                              
|ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV                                                                                      
|ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|SIGNATURES                                                                                   
|SECTION 302 CERTIFICATION                                                                    
|906 Certification of Chief Executive Officer                                                 
|906 Certification of Chief Financial Officer                                                 



---



##### Table of Contents



TABLE OF CONTENTS

|         |  |                                                                                           |  |   
|-------- |  | ----------------------------------------------------------------------------------------- |  | --
|PART I   |  |                                                                                          
|Item 1.  |  | Business                                                                                  |  | 3 
|Item 2.  |  | Properties                                                                                |  | 4 
|Item 3.  |  | Legal Proceedings                                                                         |  | 4 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                   |  | 4 
|PART II  |  |                                                                                          
|Item 5.  |  | Market for Companys Common Equity and
    Related Stockholder Matters                    |  | 5 
|Item 6.  |  | Selected Financial Data                                                                   |  | 6 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  | 6 
|Item 7a. |  | Market Risk                                                                               |  | 10
|Item 8.  |  | Financial Statements and Supplementary Data                                               |  | 12
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  | 24
|PART III |  |                                                                                          
|Item 10. |  | Directors and Executive Officers of the
    Corporation                                   |  | 24
|Item 11. |  | Executive Compensation                                                                    |  | 25
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  | 25
|Item 13. |  | Certain Relationships and Related Transactions                                            |  | 25
|PART IV  |  |                                                                                          
|Item 14. |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |  | 26
|         |  | Signatures                                                                                |  | 27

When used in this Form 10-K or future
filings by the Company with the Securities and Exchange
Commission, in the Companys press releases or other public
or stockholder communications, or in oral statements made with
the approval of an authorized executive officer, the words or
phrases would be, will allow,
intends to, will likely result,
are expected to, will continue, is
anticipated, estimate, project, or
similar expressions are intended to identify forward
looking statement within the meaning of the Private
Securities Litigation Reform Act of 1995.

The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements,
which speak only as of the date made, and to advise readers that
various factors, including regional and national economic
conditions, substantial changes in levels of market interest
rates, credit and other risks of lending and investment
activities and competitive and regulatory factors, could affect
the Companys financial performance and could cause the
Companys actual results for future periods to differ
materially from those anticipated or projected.

The Company does not undertake, and specifically
disclaims any obligation, to update any forward-looking
statements to reflect occurrences or unanticipated events or
circumstances after the date of such statements.

2



---



##### Table of Contents








PART I







ITEM 1: BUSINESS


General

Flagstar Capital Corporation (the
Company) was incorporated in Michigan in
June 1995 and remained dormant until reorganized in
December 1997. The Company was formed by Flagstar Bank, FSB
(the Bank), a federally chartered savings bank, to
provide the Bank and its parent holding company and sole
stockholder, Flagstar Bancorp, Inc. (Flagstar), with
a means of raising capital for bank regulatory purposes in a
cost-effective manner.

The principal business of the Company is to
acquire and hold residential mortgage loans (Mortgage
Loans) that will generate net income for distribution to
stockholders. The Company intends to acquire all its Mortgage
Loans from the Bank, consisting of whole loans secured by first
mortgages on single-family residential real estate properties.
The residential mortgage loans consist of Adjustable Rate
Mortgages (ARMs) and Fixed Rate Mortgages
(FRMs).

On February 24, 1998, the Company offered to
the public and sold 2,000,000 shares of the Companys
8.50%, noncumulative, Series A Preferred Shares,
$25 par value per share, providing gross proceeds totaling
$50.0 million (the Series A Preferred
Shares), and sold to the Bank, 499,900 shares of the
Companys common stock, $1.00 par value providing
proceeds totaling $65.5 million (the Common
Stock).

On May 24, 1998, in response to the
underwriters exercising their over-allotment option, the Company
issued an additional 300,000 shares of its Series A
Preferred Shares to the public and 500,000 shares of Common
Stock to the Bank, providing additional gross proceeds totaling
$17.0 million.

The Company used the net proceeds raised from the
initial public offering of the Series A Preferred Shares
and the sale of the Common Stock to the Bank to purchase from
the Bank the Companys initial portfolio of
$113.5 million of Mortgage Loans (Initial
Portfolio). The Companys Initial Portfolio consisted
of ARMs and FRMs. Reinvestments made in Mortgage Loans have been
and will continue to be made with a composition of Mortgage
Loans that will allow the Company to maintain the original
composition of approximately 70% ARMs and 30% FRMs. Mortgage
Loans are purchased from the Bank on a fair value basis.

The Company removed its preferred stock listing
from the Nasdaq Stock Market on July 12, 2001. On
July 13, 2001, the Company moved those same shares to the
New York Stock Exchange. The securities, which formerly traded
under the symbol FLGSP, now trade under the symbol
FBC-P.

In September 2001, the Bank contributed its
common stock investment in the Company to Flagstar Intermediate
Holding Company (IHC), a newly formed, wholly-owned
subsidiary. The purpose of the transaction was to allow the Bank
greater flexibility in the manner in which the common stock of
the Company is held. The change also increased the mortgage
investments the Company is allowed to invest in while still
complying with various federal tax requirements. At the same
time, IHC contributed $150 million of equity to the
Company. The Company then invested the proceeds in a 15%
interest in mortgage securities that are owned by Flagstar LLC.

On March 20, 2003, Flagstar notified the
public in a press release that they would redeem all of the
Series A Preferred Shares on June 30, 2003.

In order to preserve its status as a real estate
investment trust (REIT) under the Internal Revenue
Service Code (Code), the Company must distribute
annually at least 90% (95% in taxable years prior to
January 1, 2001) of its REIT taxable income
(excluding capital gains) to stockholders and meet certain
capital ownership and administrative tests as defined by the
Code. The Company must also annually satisfy three gross income
requirements. First, at least 75% of the Companys gross
income for each taxable year must be derived directly or
indirectly from investments relating to real property or
mortgages on real property or from certain types of temporary
investments. Second, at least 95% of the Companys gross
income for each taxable year must be derived from the above
described real property investments and from dividends, interest,

3



---



##### Table of Contents



and gain from the sale or other disposition of
stock or securities and certain other types of gross income.
Third, short-term gains from the sale or other disposition of
stock or securities, and gains on the sale or other disposition
of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) from
the date of acquisition must represent less than 30% of the
Companys gross income for each taxable year.


The Company must also satisfy three tests
relating to the nature of its assets at the close of each
quarter of its taxable year. First, real estate assets must
represent at least 75% of the value of the Companys total
assets. Second, not more than 25% of the Companys total
assets may be represented by securities other than those in the
75% asset class. Third, of the investments included in the 25%
asset class, the value of any one issuers securities owned
by the Company may not exceed 5% of the value of the
Companys total assets and the Company may not own more
than 10% of any one issuers outstanding voting securities.

The Company does not anticipate that it will
engage in the business of originating Mortgage Loans and does
not expect to compete with mortgage conduit programs, investment
banking firms, savings and loan associations, banks, thrift and
loan associations, finance companies, mortgage bankers or
insurance companies in acquiring its Mortgage Loans. As noted
above, the Company has purchased all of its Mortgage Loans from
the Bank and intends on making all of its future purchases from
the Bank.

The Company has entered into an Advisory
Agreement (the Advisory Agreement) with the Bank
(the Advisor) requiring an annual payment of
$250,000. The Bank provides advice to the Board of Directors and
manages the operations of the Company as defined in the Advisory
Agreement. The Advisory Agreement has an initial term of five
years which commenced on February 24, 1998 and will
automatically renew for additional five year periods, unless the
Company delivers prior notice to the Advisor as defined in the
Advisory Agreement.

The Company also entered into a Servicing
Agreement (the Servicing Agreement) with the Bank
for the servicing of the Mortgage Loans. Pursuant to the
Servicing Agreement, the Bank services the Mortgage Loans held
by the Company, in accordance with normal industry practices.
The Servicing Agreement can be terminated without cause upon a
thirty-day advance notice and payment of a termination fee equal
to 2% of the aggregate outstanding principal amount of the loans
then serviced under the Servicing Agreement. The servicing fee
is 0.375% per annum of the outstanding principal balance of the
Mortgage Loans.

The Company operations are conducted in a manner
that will not subject it to regulation under the Investment
Company Act of 1940. The Company may, under certain
circumstances, purchase the Series A Preferred Shares and
other shares of its capital stock in the open market or
otherwise, provided, however, that the Company will not redeem
or repurchase any shares of its Common Stock for so long as any
Series A Preferred Shares are outstanding without the
approval of a majority of the Independent Directors. The Company
has no present intention of repurchasing any shares of its
capital stock, and any such action would be taken only in
conformity with applicable federal and state laws and the
regulations and the requirements for qualifying as a REIT.

The Company has no foreign operations.






ITEM 2: PROPERTIES


The principal executive offices of the Company
are located at 5151 Corporate Drive, Troy, Michigan 48098
and its telephone number is (248) 312-2000.






ITEM 3: LEGAL PROCEEDINGS


The Company is not the subject to any litigation.
The Company is not currently involved in or, to the
Companys knowledge, currently threatened with any
litigation with respect to the Mortgage Loans included in the
portfolio.






ITEM 4: SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS


None

4



---



##### Table of Contents








PART II







|        |                                                                       
|------- | ----------------------------------------------------------------------
|ITEM 5: | MARKET FOR COMPANYS COMMON EQUITY AND
    RELATED STOCKHOLDER MATTERS

The Company is authorized to issue up to
1,000,000 shares of Common Stock and 2,300,000 shares of
Preferred Stock, $25 par value per share (Preferred
Stock). All of the 1,000,000 shares of Common Stock and
all of the 2,300,000 shares of Preferred Stock have been issued.
IHC owns 100% of the Companys 1,000,000 shares of Common
Stock outstanding at December 31, 2002 and, accordingly,
there is no trading market for the Companys Common Stock.
In addition, IHC intends that, as long as any Series A
Preferred Shares are outstanding, it will maintain ownership of
the outstanding Common Stock of the Company. All voting rights
are vested in the Common Stock. The holder of Common Stock is
entitled to one vote per share. Holders of Common Stock are
entitled to receive dividends when, and if declared by the Board
of Directors of the Company out of funds legally available. No
dividends or other distributions may be made with respect to the
Common Stock as long as any shares of Preferred Stock are
outstanding and the full dividends on those shares have been
paid. The Company must distribute annually at least 90% (95% in
taxable years prior to January 1, 2001) of its annual
REIT taxable income to stockholders. In the event of
the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, after there have been set
aside for the holders of Preferred Stock the full preferential
amounts to which such holders are entitled, the holders of
Common Stock will be entitled to any assets remaining after the
payment of all debts and liabilities.

Restrictions on Ownership and
Transfer:

The Companys Certificate of Incorporation
contains certain restrictions on the number of shares of Common
Stock and Preferred Stock that individual stockholders may own.
For the Company to qualify as a REIT under the Code, no more
than 50% in number or value of its outstanding shares of capital
stock may be owned, directly or indirectly, by five or fewer
individuals during the last half of a taxable year or during a
proportionate part of a shorter taxable year (the Five or
Fewer Test). The capital stock of the Company must also be
beneficially owned by 100 or more persons during at least
335 days of a taxable year or during a proportionate part
of a shorter taxable year (the One Hundred Person
Test). IHCs ownership of 100% of the shares of
Common Stock of the REIT will not adversely affect the
Companys REIT qualification because each stockholder of
Flagstar Bancorp, Inc. (the sole stockholder of the Bank,
IHCs parent) counts as a separate beneficial owner for
purposes of the Five or Fewer Test and the capital stock of
Flagstar Bancorp, Inc. is widely held. Further, the Certificate
of Incorporation of the Company contains restrictions on the
acquisition of Preferred Stock intended to ensure compliance
with the One Hundred Persons Test. Such provisions include a
restriction that if any transfer of shares of capital stock of
the Company would cause the Company to be beneficially owned by
fewer than 100 persons, such transfer shall be null and
void and the intended transferee will acquire no rights to the
stock.

Common Stock

There is no established public trading market in
the Common Stock of the Company. As of March 19, 2003,
there were 1,000,000 issued and outstanding shares of Common
Stock held by one stockholder, IHC. The following table reflects
the distributions paid or payable by the Company on the Common
Stock for each quarter during the years ended December 31,
2002, 2001, and 2000.

|                        |  |      |           |  |      |   |           |      |  |   |         | 
|----------------------- |  | ---- | --------- |  | ---- | - | --------- | ---- |  | - | ------- | 
|For the Quarters ended: |  | 2002 |           |  | 2001 |   |           | 2000 | 
|                       
|                        | 
|March 31                |  | $    | 2,029,657 |  |      | $ | 670,046   |      |  | $ | 438,526 | 
|June 30                 |  | $    | 1,345,557 |  |      | $ | 568,702   |      |  | $ | 535,188 | 
|September 30            |  | $    | 1,860,652 |  |      | $ | 506,576   |      |  | $ | 692,077 | 
|December 31             |  | $    | 2,000,851 |  |      | $ | 2,789,353 |      |  | $ | 629,915 | 

5



---



##### Table of Contents



Preferred Stock

The Series A Preferred Shares are listed on
the New York Stock Exchange, under the trading symbol
FBC-P. As of March 19, 2003, there were
2,300,000 issued and outstanding Series A Preferred Shares
held by approximately 133 shareholders. The following table
reflects the respective high and low sales prices for the
Series A Preferred Shares for each quarter of 2002, 2001,
and 2000. The table also indicates the distributions paid by the
Company for each quarter.

|                   |  |            |        |  |           |   |        |               |  |   |              |  |  |   |           | 
|------------------ |  | ---------- | ------ |  | --------- | - | ------ | ------------- |  | - | ------------ |  |  | - | --------- | 
|Quarter ended      |  | High Price |        |  | Low Price |   |        | Closing Price |  |   | Distribution | 
|                  
|                   | 
|December 31, 2002  |  | $          | 25.350 |  |           | $ | 24.500 |               |  | $ | 25.200       |  |  | $ | 1,221,875 | 
|September 30, 2002 |  | $          | 25.750 |  |           | $ | 24.750 |               |  | $ | 25.120       |  |  | $ | 1,221,875 | 
|June 30, 2002      |  | $          | 25.450 |  |           | $ | 24.800 |               |  | $ | 25.120       |  |  | $ | 1,221,875 | 
|March 31, 2002     |  | $          | 25.500 |  |           | $ | 24.750 |               |  | $ | 25.000       |  |  | $ | 1,221,875 | 
|December 31, 2001  |  | $          | 25.600 |  |           | $ | 24.650 |               |  | $ | 25.200       |  |  | $ | 1,221,875 | 
|September 30, 2001 |  | $          | 25.400 |  |           | $ | 24.150 |               |  | $ | 24.750       |  |  | $ | 1,221,875 | 
|June 30, 2001      |  | $          | 25.100 |  |           | $ | 24.150 |               |  | $ | 24.700       |  |  | $ | 1,221,875 | 
|March 31, 2001     |  | $          | 25.000 |  |           | $ | 22.500 |               |  | $ | 24.500       |  |  | $ | 1,221,875 | 
|December 31, 2000  |  | $          | 22.625 |  |           | $ | 20.500 |               |  | $ | 22.125       |  |  | $ | 1,221,875 | 
|September 30, 2000 |  | $          | 22.250 |  |           | $ | 18.188 |               |  | $ | 22.250       |  |  | $ | 1,221,875 | 
|June 30, 2000      |  | $          | 19.375 |  |           | $ | 17.875 |               |  | $ | 18.250       |  |  | $ | 1,221,875 | 
|March 31, 2000     |  | $          | 20.125 |  |           | $ | 18.250 |               |  | $ | 19.000       |  |  | $ | 1,221,875 | 






ITEM 6: SELECTED FINANCIAL
DATA


|                                                 |                                                    |                                        |   |         |      |  |   |         |  |  |   |         | 
|------------------------------------------------ | -------------------------------------------------- | -------------------------------------- | - | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                                                 |                                                    |                                       
|                                                 |                                                    | At or for the years ended December 31, |  
|                                                 |                                                    |                                        |  
|                                                 |                                                    | 2002                                   |   |         | 2001 |  |   | 2000    | 
|                                                 |                                                    |                                        |   |         |      |  |   |         | 
|                                                 |                                                    |                                       
|                                                 |                                                    | (In thousands)                         |  
|Summary of Statement of Earnings:                |                                                    |                                        |   |         |      |  |   |         |  |  |   |        
|                                                 | Net interest income                                |                                        | $ | 12,509  |      |  | $ | 9,888   |  |  | $ | 7,572   | 
|                                                 | Net earnings                                       |                                        | $ | 12,124  |      |  | $ | 9,422   |  |  | $ | 7,183   | 
|                                                 | Net earnings available to common stockholders      |                                        | $ | 7,237   |      |  | $ | 4,534   |  |  | $ | 2,296   | 
|                                                 | Net earnings per common share                      |                                        | $ | 7.24    |      |  | $ | 4.53    |  |  | $ | 2.29    | 
|Summary of Statement of Financial
    Condition: |                                                    |                                        |   |         |      |  |   |         |  |  |   |        
|                                                 | Mortgage loans, net                                |                                        | $ | 109,672 |      |  | $ | 119,532 |  |  | $ | 123,012 | 
|                                                 | Investment in mortgage securities                  |                                        | $ | 125,883 |      |  | $ | 117,612 |  |  | $ |        | 
|                                                 | Total assets                                       |                                        | $ | 279,898 |      |  | $ | 283,152 |  |  | $ | 129,746 | 
|                                                 | Total stockholders equity                         |                                        | $ | 279,077 |      |  | $ | 279,077 |  |  | $ | 129,077 | 
|Other data:                                      |                                                    |                                        |   |         |      |  |   |         |  |  |   |        
|                                                 | Dividends paid on preferred stock                  |                                        | $ | 4,887   |      |  | $ | 4,887   |  |  | $ | 4,887   | 
|                                                 | Shares of preferred stock outstanding              |                                        |   | 2,300   |      |  |   | 2,300   |  |  |   | 2,300   | 
|                                                 | Shares of common stock outstanding                 |                                        |   | 1,000   |      |  |   | 1,000   |  |  |   | 1,000   | 
|                                                 | Average yield on mortgage loans                    |                                        |   | 6.282%  |      |  |   | 6.876%  |  |  |   | 7.114%  | 
|                                                 | Average yield on investment in mortgage securities |                                        |   | 6.136%  |      |  |   | 7.126%  |  |  |   | %      | 






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7: | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Flagstar Capital Corporation was formed by
Flagstar Bank, FSB, a federally chartered savings bank, to
provide the Bank and its parent holding company and sole
stockholder, Flagstar Bancorp, Inc., with a means of raising
capital for bank regulatory purposes in a cost-effective manner.

6



---



##### Table of Contents



The principal business of the Company is to
acquire and hold residential mortgage loans that will generate
net income for distribution to stockholders. The Company intends
to acquire all its Mortgage Loans from the Bank, consisting of
whole loans secured by first mortgages on single-family
residential real estate properties. The residential mortgage
loans consist of Adjustable Rate Mortgages (ARMs),
and Fixed Rate Mortgages (FRMs).

On February 24, 1998, the Company sold in a
public offering 2,000,000 shares of the Companys
8.50%, noncumulative, Series A Preferred Shares,
$25 par value per share, providing gross proceeds totaling
$50.0 million (the Series A Preferred
Shares), and sold to the Bank, 499,900 shares of the
Companys common stock, $1.00 par value providing
proceeds totaling $65.5 million (the Common
Stock).

On May 24, 1998, in response to the
underwriters exercising their over-allotment option, the Company
issued an additional 300,000 shares of its Series A
Preferred Shares, to the public and 500,000 shares of
Common Stock to the Bank, providing additional gross proceeds
totaling $17.0 million, gross.

The Company removed its preferred stock listing
from the Nasdaq Stock Market on July 12, 2001. On
July 13, 2001, the Company moved those same shares to the
New York Stock Exchange. The securities, which formerly traded
under the symbol FLGSP, now trade under the symbol
FBC-P.

In September 2001, the Bank contributed its
common stock investment in the Company to Flagstar Intermediate
Holding Company, a newly formed, wholly-owned subsidiary. The
purpose of the transaction is to allow the Bank greater
flexibility in the manner in which the common stock of the
Company is held. The change will also increase the mortgage
investments the Company is allowed to invest in while still
complying with various federal tax requirements. At the same
time, IHC contributed $150 million of equity to the
Company. The Company then invested the proceeds in a 15%
interest in mortgage securities 100% owned by Flagstar LLC.

On March 20, 2003, Flagstar notified the
public that they would redeem all of the Series A Preferred
Shares on June 30, 2003. The Series A Preferred Shares
will be redeemed for cash, at a redemption price of
$25.00 per share, plus the accrued and unpaid dividends for
the most recent quarter, if any. The Series A Preferred
Shares will not be convertible into any other securities of the
Company or Flagstar. The Company will ensure sufficient cash
flow, through the collection of payments on the Mortgage Loans
and Investment Securities, to meet this financial commitment.

Results of Operations

The Company reported net earnings for the year
ended December 31, 2002 of $12.1 million, compared to
$9.4 million and $7.2 million for the years ended
December 31, 2001 and 2000, respectively. For the year
ended December 31, 2002, interest income totaled
$12.5 million of which $5.8 million was from mortgage
loans and $6.7 million was from investments in mortgage
securities. Offsetting expenses were comprised of $250,000 in
advisory fees, $11,000 in outside director fees and $124,000 in
administrative expenses. In comparison, interest income totaled
$9.9 million of which $7.4 million was from mortgage
loans and $2.5 million was from investments in mortgage
securities for the year ended December 31, 2001, which was
offset by $250,000 in advisory fees, $3,000 in outside director
fees and $213,000 in other administrative expenses. For the year
ended December 31, 2000, interest income from mortgage
loans was $7.6 million, which was offset by $250,000 in
advisory fees, $6,000 in outside director fees and $133,000 in
other administrative expenses. The Company reported earnings per
common share of $7.24, $4.53 and $2.29 per share for the
years ended December 31, 2002, 2001 and 2000, respectively.

The Company declared and paid $4,887,000 in
preferred stock dividends for each of the years ended
December 31, 2002, 2001 and 2000, respectively.

The Company declared and paid or accrued common
stock distributions of $7,237,000, $4,535,000, and $2,296,000
for the years ended December 31, 2002, 2001 and 2000,
respectively.

7



---



##### Table of Contents



Mortgage Loans

As of December 31, 2002, the Company owned
Mortgage Loans with a principal balance of $109,413,000. This
amount represents the principal amount of mortgage loans
purchased with the Initial Portfolio remaining plus the
principal amount of mortgage loans purchased during the period
beginning at February 24, 1998 to December 31, 1998
and for the years ended December 31, 1999, 2000, 2001 and
2002. Purchases were made to replace principal amortizations and
payoffs in the portfolio. All Mortgage Loans were purchased from
the Bank. In conjunction with the purchase of these Mortgage
Loans the Company paid a premium amount equal to $475,000,
$270,000 and $109,000 for the years ended December 31,
2002, 2001 and 2000, respectively. This premium amount is
recorded by the Company as an adjustment to the basis of the
Mortgage Loans.

The following table reflects the composition of
Mortgage Loans at December 31, 2002:

|              |       |       |     |           |         |   |            |             |  |         |         |         |  |     |       |       |      |  |     |            |  |  |     |     |  |  |      |       |  
|------------- | ----- | ----- | --- | --------- | ------- | - | ---------- | ----------- |  | ------- | ------- | ------- |  | --- | ----- | ----- | ---- |  | --- | ---------- |  |  | --- | --- |  |  | ---- | ----- | -
|              |       |       |     | Principal |         |   | Average    |             |  | Average |         |         |  |     |       |       |     
|Product Type  |       | Loans |     |           | Balance |   |            | Balance     |  |         | Yield   |         |  | WAM |       |       | WARM |  |     | % of Total | 
|             
|              |      
|3 year ARM    |       |       | 95  |           |         | $ | 22,629,000 |             |  | $       | 238,196 |         |  |     | 5.943 | %     |      |  | 360 |            |  |  | 337 |     |  |  | 20.7 | %    
|5 year ARM    |       |       | 258 |           |         |   | 56,221,000 |             |  |         | 217,910 |         |  |     | 6.179 |       |      |  | 359 |            |  |  | 343 |     |  |  | 51.4 |      
|7 year ARM    |       |       | 50  |           |         |   | 16,704,000 |             |  |         | 334,091 |         |  |     | 6.736 |       |      |  | 360 |            |  |  | 332 |     |  |  | 15.3 |      
|15 year Fixed |       |       | 86  |           |         |   | 6,571,000  |             |  |         | 77,474  |         |  |     | 6.526 |       |      |  | 180 |            |  |  | 130 |     |  |  | 6.0  |      
|30 year Fixed |       |       | 62  |           |         |   | 7,288,000  |             |  |         | 123,812 |         |  |     | 6.917 |       |      |  | 360 |            |  |  | 317 |     |  |  | 6.6  |      
|              |       |      
|              | Total |       |     | 551       |         |   | $          | 109,413,000 |  |         | $       | 198,572 |  |     |       | 6.282 | %    |  |     | 348        |  |  |     | 325 |  |  |      | 100.0 | %
|              |       |      

The following table reflects the composition of
Mortgage Loans at December 31, 2001:

|              |       |       |     |           |         |   |            |             |  |         |         |         |  |     |       |       |      |  |     |            |  |  |     |     |  |  |      |       |  
|------------- | ----- | ----- | --- | --------- | ------- | - | ---------- | ----------- |  | ------- | ------- | ------- |  | --- | ----- | ----- | ---- |  | --- | ---------- |  |  | --- | --- |  |  | ---- | ----- | -
|              |       |       |     | Principal |         |   | Average    |             |  | Average |         |         |  |     |       |       |     
|Product Type  |       | Loans |     |           | Balance |   |            | Balance     |  |         | Yield   |         |  | WAM |       |       | WARM |  |     | % of Total | 
|             
|              |      
|3 year ARM    |       |       | 114 |           |         | $ | 36,362,000 |             |  | $       | 318,965 |         |  |     | 6.817 | %     |      |  | 360 |            |  |  | 342 |     |  |  | 30.6 | %    
|5 year ARM    |       |       | 81  |           |         |   | 23,607,000 |             |  |         | 291,445 |         |  |     | 7.197 |       |      |  | 360 |            |  |  | 332 |     |  |  | 19.9 |      
|7 year ARM    |       |       | 108 |           |         |   | 33,556,000 |             |  |         | 310,714 |         |  |     | 6.800 |       |      |  | 357 |            |  |  | 339 |     |  |  | 28.2 |      
|15 year Fixed |       |       | 125 |           |         |   | 10,272,000 |             |  |         | 82,176  |         |  |     | 6.522 |       |      |  | 180 |            |  |  | 142 |     |  |  | 8.6  |      
|30 year Fixed |       |       | 122 |           |         |   | 15,105,000 |             |  |         | 123,812 |         |  |     | 6.917 |       |      |  | 360 |            |  |  | 317 |     |  |  | 12.7 |      
|              |       |      
|              | Total |       |     | 550       |         |   | $          | 118,902,000 |  |         | $       | 216,185 |  |     |       | 6.876 | %    |  |     | 343        |  |  |     | 318 |  |  |      | 100.0 | %
|              |       |      

Allowance for Loan Losses

The Companys allowance for loan losses
remained the same at $250,000 at December 31, 2002.
Management has based the allowance on assessments of relevant
factors including the types and amount of delinquent loans,
historical loss experience on such types of loans experienced by
the Bank, and current economic conditions. Management is of the
opinion that the allowance for loan losses is adequate to meet
potential losses in the portfolio. The Companys
non-performing assets consisted of three mortgage loans totaling
$790,000 or 0.8% of the portfolio, at December 31, 2002.
The Company, in accordance with applicable disclosure
requirements, defines an asset as non-performing if it meets any
of the following criteria: 1) a loan more than 90 days
past due; 2) real estate acquired in a settlement of a
loan; or 3) a restructured loan whose terms have been
modified due to the borrowers inability to pay as
contractually specified including loans the Company has
classified as impaired. Loans are generally placed into
non-accrual status when they become 90 days delinquent.
Gross interest income of approximately $52,000 would have been
recorded in 2002 on non-accrual loans if the loans had performed
in accordance with their original terms.

The Company had a $250,000 allowance for loan
losses at December 31, 2001. The Companys
non-performing assets consisted of three mortgage loans totaling
$1,250,000, or 1.05% of the portfolio, at December 31,
2001. The Company has certain representations and warranties
from the Bank, which are related to the performance of the
Mortgage Loans. Gross interest income of approximately $32,000
would have been recorded in 2001 on non-accrual loans if the
loans had performed in accordance with their original terms.

8



---



##### Table of Contents



The Bank, in its role as Advisor, has implemented
comprehensive internal asset review systems to provide for early
detection of problem assets. Although this system will not
eliminate future losses due to unanticipated declines in the
real estate market or economic downturns, it should provide for
timely identification of any losses created from problem loans.

|                                              |                                |   |         |   | 
|--------------------------------------------- | ------------------------------ | - | ------- | - | 
|                                             
|Activity within the Allowance for Loan Losses |                               
|                                              |                               
|Balance, January 1, 2002                      |                                | $ | 250,000 |  
|                                              | Provision for loan losses      |   |         |  | 
|                                              | Charge-offs, net of recoveries |   |         |  | 
|                                              |                                |   |        
|Balance, December 31, 2002                    |                                | $ | 250,000 |  
|                                              |                                |   |        

Investment in Mortgage Securities

During September 2001, the Company invested
in mortgage securities owned by Flagstar, LLC, a second-tier
subsidiary of the Bank. The Company currently has a 15% interest
in these mortgage securities, which is equal to
$125.9 million. The mortgage securities currently have a
yield of 6.136% and interest payments are made monthly to the
Company. The mortgage securities are managed and serviced by the
Bank.

Interest Rate Risk

The Companys income consists primarily of
interest payments on Mortgage Loans and mortgage securities.
Currently, the Company does not use any derivative products to
manage interest rate risk. If there is a decline in interest
rates (as measured by the indices upon which the interest rates
of the ARMs are based), then the Company will experience a
decrease in income available to be distributed to its
stockholders. There can be no assurance that an interest rate
environment in which there is a significant decline in interest
rates, over an extended period of time, would not adversely
affect the Companys ability to pay dividends on the
Series A Preferred Shares.

Significant Concentration of Credit
Risk

Concentration of credit risk arises when a number
of customers engage in similar business activities, or
activities in the same geographical region, or have similar
economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in
economic conditions. Concentration of credit risk indicates the
relative sensitivity of the Companys performance to both
positive and negative developments affecting a particular
industry. The geographic concentrations within the Mortgage
Loans directly affects the overall credit risk of the Company.

The following table shows Mortgage Loans by
geographic area as of December 31, 2002:

|           |       |           |            |             |          |  |      |       |  
|---------- | ----- | --------- | ---------- | ----------- | -------- |  | ---- | ----- | -
|           |       | Principal |            |             | Percent  | 
|Location   |       | Balance   |            |             | Of Total | 
|          
|           |      
|Colorado   |       | $         | 13,983,000 |             |          |  | 12.6 | %    
|Michigan   |       |           | 13,034,000 |             |          |  | 11.7 |      
|Washington |       |           | 11,743,000 |             |          |  | 10.6 |      
|Texas      |       |           | 11,166,000 |             |          |  | 10.0 |      
|Illinois   |       |           | 5,194,000  |             |          |  | 4.7  |      
|Florida    |       |           | 4,843,000  |             |          |  | 4.4  |      
|Oregon     |       |           | 4,712,000  |             |          |  | 4.2  |      
|Arizona    |       |           | 4,475,000  |             |          |  | 4.0  |      
|Other      |       |           | 40,263,000 |             |          |  | 37.8 | *    
|           |       |          
|           | Total |           | $          | 109,413,000 |          |  |      | 100.0 | %
|           |       |          




|  |                                                                         
|- | ------------------------------------------------------------------------
|* | No other state has more than 3% of the total
    Mortgage Loan portfolio

Approximately 44.9% of the Companys total
Mortgage Loans are secured by residential real estate properties
located in Michigan, Washington, Colorado and Texas.
Consequently, a high concentration of

9



---



##### Table of Contents



residential mortgage loans in these four states,
may subject the Company to a greater risk of default in the
event of adverse economic, political or business developments
and natural hazards in Michigan, Washington, Colorado and Texas
that may affect the ability of residential property owners in
these four states to make payments of principal and interest on
the underlying mortgages.


Liquidity Risk Management

The objective of liquidity management is to
ensure the availability of sufficient cash flows to meet all of
the Companys financial commitments. In managing liquidity,
the Company takes into account various legal limitations placed
on a REIT as discussed below in REIT QUALIFICATION.

The Companys principal liquidity needs are
to maintain the current portfolio size through the acquisition
of additional mortgage loans as Mortgage Loans currently in the
portfolio mature or prepay, and to pay dividends on the Series A
Preferred Shares and Common Shares issued. The Company does not
have and does not anticipate having any material capital
expenditures.

To the extent that the Board of Directors
determines that additional funding is required, the Company may
raise such funds through additional equity offerings, debt
financing or retention of cash flow (after consideration of
provisions of the Code pertaining to a REIT), or a combination
of these methods. The Company, however, may not, without the
approval of a majority of the Independent Directors, incur debt
in excess of 20% of the aggregate amount of the net proceeds
received from the sale of the Series A Preferred Shares and
Common Stock of the Company. This limitation includes
intercompany advances made by the Bank to the Company.

The Company may also issue additional series of
Preferred Stock. However, the Company may not issue additional
shares of Preferred Stock senior to the Series A Preferred
Shares without the consent of holders of at least 66 2/3%
of the shares of Preferred Stock outstanding at that time. The
Company also may not issue additional shares of Preferred Stock
on a parity with the Series A Preferred Shares without the
approval of a majority of the Companys Independent
Directors.

On March 20, 2003, Flagstar notified the
public that they would redeem all of the Series A Preferred
Shares on June 30, 2003. The Series A Preferred Shares
will be redeemed for cash, at a redemption price of
$25.00 per share, plus the accrued and unpaid dividends for
the most recent quarter, if any. The Series A Preferred
Shares will not be convertible into any other securities of the
Company or Flagstar. The Company will ensure sufficient cash
flow, through the collection of payments on the Mortgage Loans
and Investment Securities, to meet this financial commitment.






ITEM 7a: MARKET RISK


The Company considers that its primary business
objective is to ensure the availability of sufficient cash flows
to meet the obligations mandated by the Series A Preferred
Shares. In managing its investments, the Company accepts a
certain credit risk exposure and assumes some interest rate risk.

Interest rate risk generally refers to the
potential volatility in net interest income resulting from
changes in interest rates. The Companys risk occurs when
it must replace amortized loans with current production
mortgages. These replacement loans are chosen in a manner to
maintain an interest rate risk posture similar to the Initial
Portfolio. The Company must monitor the ratio of fixed costs
(the Series A Preferred Shares dividends, advisory
fees, and servicing costs) to the interest income potential of
the Mortgage Loans. When, in managements opinion, the
coverage ratio is at risk of being depleted, the Company must
look to its parent company, IHC, for support or utilize the
investment powers of the Company.

The Company will record higher levels of interest
income in a rising interest rate environment and will experience
declining interest income during periods of falling interest
rates. This happens because the Companys assets reprice
while the Series A Preferred Shares have a fixed cost of
8.5%.

10



---



##### Table of Contents



At December 31, 2002 the Company had a
coverage ratio (Projected interest income divided by REIT
dividends plus Advisory fees plus Servicing Fees) of
2.85 compared to 3.19 at December 31, 2001 and 1.69 at
December 31, 2000.

REIT Qualification

As of December 31, 2002, the Company
believed that it was in compliance with the REIT tax rules and
that it will continue to qualify as a REIT under the provisions
of the Code. The Company calculates:



| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | its Qualified REIT Assets, as defined in the
    Code, to be 100% of its total assets, as compared to the federal
    tax requirements that at least 75% of its total assets must be
    Qualified REIT assets.
|
| |  | that 100% of its revenues qualify for the 75%
    source of income test and 100% of its revenues qualify for the
    95% source of income test under the REIT rules.                                           
|
| |  | none of the revenues were subject to the 30%
    income limitation under the REIT rules.                                                                                                                       

The Company also met all REIT requirements
regarding the ownership of its common and preferred stocks.

11



---



##### Table of Contents








ITEM 8: FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA


REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS

Board of Directors

Flagstar Capital Corporation


We have audited the accompanying balance sheets
of Flagstar Capital Corporation as of December 31, 2002 and
2001 and the related statements of earnings, stockholders
equity and cash flows for each of the three years in the period
ended December 31, 2002. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Flagstar Capital Corporation as of December 31,
2002 and December 31, 2001, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2002, in conformity with auditing
standards generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Southfield, Michigan

February 15, 2003


12



---



##### Table of Contents



FLAGSTAR CAPITAL CORPORATION

BALANCE SHEETS

(in thousands)


|                                                                                                                                  |                                            |                 |         |         |      |   |         |         | 
|--------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------------- | ------- | ------- | ---- | - | ------- | ------- | 
|                                                                                                                                  |                                            |                
|                                                                                                                                  |                                            | At December 31, |        
|                                                                                                                                  |                                            |                 |        
|                                                                                                                                  |                                            | 2002            |         |         | 2001 |  
|                                                                                                                                  |                                            |                 |         |         |      |  
|ASSETS                                                                                                                           
|Cash                                                                                                                              |                                            | $               | 10,658  |         |      | $ | 2,022   |        
|                                                                                                                                  | Mortgage loans                             |                 |         | 109,922 |      |   |         | 119,782 | 
|                                                                                                                                  | Allowance for loan losses                  |                 |         | 250     |      |   |         | 250     | 
|                                                                                                                                  |                                            |                 |         |         |      |  
|Net mortgage loans                                                                                                                |                                            |                 | 109,672 |         |      |   | 119,532 |        
|Investment in mortgage securities                                                                                                 |                                            |                 | 125,883 |         |      |   | 117,612 |        
|Other investments                                                                                                                 |                                            |                 | 24,117  |         |      |   | 32,388  |        
|Accrued interest receivable                                                                                                       |                                            |                 | 485     |         |      |   | 1,897   |        
|Loan payments in process  due from
    parent                                                                                    |                                            |                 | 8,459   |         |      |   | 8,980   |        
|Other assets                                                                                                                      |                                            |                 | 624     |         |      |   | 721     |        
|                                                                                                                                  |                                            |                 |         |         |      |  
|                                                                                                                                  | Total assets                               |                 | $       | 279,898 |      |   | $       | 283,152 | 
|                                                                                                                                  |                                            |                 |         |         |      |  
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                         
|Liabilities                                                                                                                       |                                            |                 |         |         |      |   |         |        
|Due to parent                                                                                                                     |                                            | $               | 709     |         |      | $ | 2,789   |        
|Other liabilities                                                                                                                 |                                            |                 | 112     |         |      |   | 1,286   |        
|                                                                                                                                  |                                            |                 |         |         |      |  
|                                                                                                                                  | Total liabilities                          |                 |         | 821     |      |   |         | 4,075   | 
|Stockholders equity                                                                                                              |                                            |                 |         |         |      |   |         |        
|Series A preferred stock  $25.00
    liquidation value, 2,300,000 shares authorized and issued at
    December 31, 2002 and 2001 |                                            |                 | 57,500  |         |      |   | 57,500  |        
|Common stock  $1.00 par value,
    1,000,000 shares authorized and issued at December 31, 2002
    and 2001                      |                                            |                 | 1,000   |         |      |   | 1,000   |        
|Additional paid in capital                                                                                                        |                                            |                 | 220,577 |         |      |   | 220,577 |        
|Retained earnings                                                                                                                 |                                            |                 |        |         |      |   |        |        
|                                                                                                                                  |                                            |                 |         |         |      |  
|                                                                                                                                  | Total stockholders equity                 |                 |         | 279,077 |      |   |         | 279,077 | 
|                                                                                                                                  |                                            |                 |         |         |      |  
|                                                                                                                                  | Total liabilities and stockholders equity |                 | $       | 279,898 |      |   | $       | 283,152 | 
|                                                                                                                                  |                                            |                 |         |         |      |  

The accompanying notes are an integral part of
these statements.

13



---



##### Table of Contents



FLAGSTAR CAPITAL CORPORATION

STATEMENTS OF EARNINGS

(in thousands, except per share
data)


|                                                  |                                           |                       |        |        |        |   |       |       |       |   |       |       |       | 
|------------------------------------------------- | ----------------------------------------- | --------------------- | ------ | ------ | ------ | - | ----- | ----- | ----- | - | ----- | ----- | ----- | 
|                                                  |                                           |                      
|                                                  |                                           | For the years ended   |       
|                                                  |                                           | December 31,          |       
|                                                  |                                           |                       |       
|                                                  |                                           | 2002                  |        |        | 2001   |   |       | 2000  |      
|                                                  |                                           |                       |        |        |        |   |       |       |      
|Interest income                                   |                                           |                       |        |        |        |   |       |       |       |   |       |      
|                                                  | Interest on mortgage loans                |                       | $      | 5,777  |        |   | $     | 7,371 |       |   | $     | 7,572 |      
|                                                  | Interest on mortgage securities           |                       |        | 6,732  |        |   |       | 2,517 |       |   |       |      |      
|                                                  |                                           |                       |        |        |        |   |       |       |      
|                                                  |                                           | Total interest income |        |        | 12,509 |   |       |       | 9,888 |   |       |       | 7,572 | 
|                                                  | Net interest income                       |                       |        | 12,509 |        |   |       | 9,888 |       |   |       | 7,572 |      
|Expenses                                          |                                           |                       |        |        |        |   |       |       |       |   |       |      
|                                                  | Advisory fee expense  paid to parent     |                       |        | 250    |        |   |       | 250   |       |   |       | 250   |      
|                                                  | Other general and administrative expenses |                       |        | 135    |        |   |       | 216   |       |   |       | 139   |      
|                                                  |                                           |                       |        |        |        |   |       |       |      
|                                                  | Total expenses                            |                       |        | 385    |        |   |       | 466   |       |   |       | 389   |      
|                                                  |                                           |                       |        |        |        |   |       |       |      
|Net earnings                                      |                                           | $                     | 12,124 |        |        | $ | 9,422 |       |       | $ | 7,183 |      
|Preferred stock dividends                         |                                           |                       | 4,887  |        |        |   | 4,887 |       |       |   | 4,887 |      
|                                                  |                                           |                       |        |        |        |   |       |       |      
|Net earnings available to common
    stockholders |                                           | $                     | 7,237  |        |        | $ | 4,535 |       |       | $ | 2,296 |      
|                                                  |                                           |                       |        |        |        |   |       |       |      
|Earnings per common share                         |                                           | $                     | 7.24   |        |        | $ | 4.53  |       |       | $ | 2.29  |      
|                                                  |                                           |                       |        |        |        |   |       |       |      

The accompanying notes are an integral part of
these statements.

14



---



##### Table of Contents



FLAGSTAR CAPITAL CORPORATION

STATEMENT OF STOCKHOLDERS
EQUITY

(in thousands)


|                                                                          |  |           |        |  |        |   |            |         |  |   |          |       |  |               |        |   |  |   |         |  
|------------------------------------------------------------------------- |  | --------- | ------ |  | ------ | - | ---------- | ------- |  | - | -------- | ----- |  | ------------- | ------ | - |  | - | ------- | -
|                                                                          |  | Series A  |        |  |        |   | Additional |         |  |   |          | Total | 
|                                                                          |  | Preferred |        |  | Common |   |            | Paid in |  |   | Retained |       |  | Stockholders |       
|                                                                          |  | Stock     |        |  | Stock  |   |            | Capital |  |   | Earnings |       |  | Equity        |       
|                                                                          |  |           |        |  |        |   |            |         |  |   |          |       |  |               |       
|Balance at December 31, 1999                                              |  | $         | 57,500 |  |        | $ | 1,000      |         |  | $ | 70,577   |       |  | $             |       |   |  | $ | 129,077 |  
|Net earnings                                                              |  |           |        |  |        |   |            |         |  |   |          |       |  |               | 7,183  |   |  |   | 7,183   |  
|Dividends paid on the 8.50% Non Cumulative
    Series A Preferred Shares  |  |           |        |  |        |   |            |         |  |   |          |       |  |               | (4,887 | ) |  |   | (4,887  | )
|Distributions paid or payable to common
    stockholder ($2.29 per share) |  |           |        |  |        |   |            |         |  |   |          |       |  |               | (2,296 | ) |  |   | (2,296  | )
|                                                                          |  |           |        |  |        |   |            |         |  |   |          |       |  |               |       
|Balance at December 31, 2000                                              |  |           | 57,500 |  |        |   | 1,000      |         |  |   | 70,577   |       |  |               |       |   |  |   | 129,077 |  
|Additional investment from parent                                         |  |           |        |  |        |   |            |         |  |   | 150,000  |       |  |               |        |   |  |   | 150,000 |  
|Net earnings                                                              |  |           |        |  |        |   |            |         |  |   |          |       |  |               | 9,422  |   |  |   | 9,422   |  
|Dividends paid on the 8.50% Non Cumulative
    Series A Preferred Shares  |  |           |        |  |        |   |            |         |  |   |          |       |  |               | (4,887 | ) |  |   | (4,887  | )
|Distributions paid or payable to common
    stockholder ($4.53 per share) |  |           |        |  |        |   |            |         |  |   |          |       |  |               | (4,535 | ) |  |   | (4,535  | )
|                                                                          |  |           |        |  |        |   |            |         |  |   |          |       |  |               |       
|Balance at December 31, 2001                                              |  |           | 57,500 |  |        |   | 1,000      |         |  |   | 220,577  |       |  |               |       |   |  |   | 279,077 |  
|Net earnings                                                              |  |           |        |  |        |   |            |         |  |   |          |       |  |               | 12,124 |   |  |   | 12,124  |  
|Dividends paid on the 8.50% Non Cumulative
    Series A Preferred Shares  |  |           |        |  |        |   |            |         |  |   |          |       |  |               | (4,887 | ) |  |   | (4,887  | )
|Distributions paid or payable to common
    stockholder ($7.24 per share) |  |           |        |  |        |   |            |         |  |   |          |       |  |               | (7,237 | ) |  |   | (7,237  | )
|                                                                          |  |           |        |  |        |   |            |         |  |   |          |       |  |               |       
|Balance at December 31, 2002                                              |  | $         | 57,500 |  |        | $ | 1,000      |         |  | $ | 220,577  |       |  | $             |       |   |  | $ | 279,077 |  
|                                                                          |  |           |        |  |        |   |            |         |  |   |          |       |  |               |       

The accompanying notes are an integral part of
these statements.

15



---



##### Table of Contents



FLAGSTAR CAPITAL CORPORATION

STATEMENTS OF CASH FLOWS

(in thousands)


|                                                                                       |                                                    |                                                         |         |        |         |   |          |       |          |   |         |      |        |  
|-------------------------------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------------------------- | ------- | ------ | ------- | - | -------- | ----- | -------- | - | ------- | ---- | ------ | -
|                                                                                       |                                                    |                                                        
|                                                                                       |                                                    | For the years ended December 31,                        |        
|                                                                                       |                                                    |                                                         |        
|                                                                                       |                                                    | 2002                                                    |         |        | 2001    |   |          | 2000  |         
|                                                                                       |                                                    |                                                         |         |        |         |   |          |       |         
|Operating activities                                                                   |                                                    |                                                         |         |        |         |   |          |       |          |   |         |     
|Net earnings                                                                           |                                                    | $                                                       | 12,124  |        |         | $ | 9,422    |       |          | $ | 7,183   |     
|Adjustments to reconcile net earnings to net cash
    provided by operating activities |                                                    |                                                         |         |        |         |   |          |       |          |   |         |     
|                                                                                       | Decrease (increase) in accrued interest receivable |                                                         |         | 1,411  |         |   |          | (363  | )        |   |         | (133 | )     
|                                                                                       | Decrease (increase) in other assets                |                                                         |         | 86     |         |   |          | (721  | )        |   |         |     |       
|                                                                                       | (Decrease) increase in other liabilities           |                                                         |         | (1,173 | )       |   |          | 1,247 |          |   |         | 4    |       
|                                                                                       |                                                    |                                                         |         |        |         |   |          |       |         
|                                                                                       |                                                    | Net cash provided by operating activities               |         |        | 12,448  |   |          |       | 9,585    |   |         |      | 7,054  |  
|Investing activities                                                                   |                                                    |                                                         |         |        |         |   |          |       |          |   |         |     
|Net change in investment in mortgage securities                                        |                                                    |                                                         | (8,271  | )      |         |   | (117,612 | )     |          |   |        |     
|Net change in other investments                                                        |                                                    |                                                         | 8,271   |        |         |   | (32,388  | )     |          |   |        |     
|Purchase of mortgage loans                                                             |                                                    |                                                         | (74,652 | )      |         |   | (56,574  | )     |          |   | (24,521 | )   
|Principal repayments received on mortgage loans                                        |                                                    |                                                         | 85,034  |        |         |   | 52,538   |       |          |   | 20,911  |     
|                                                                                       |                                                    |                                                         |         |        |         |   |          |       |         
|                                                                                       |                                                    | Net cash provided by (used in) investing
    activities |         |        | 10,382  |   |          |       | (154,036 | ) |         |      | (3,610 | )
|Financing activities                                                                   |                                                    |                                                         |         |        |         |   |          |       |          |   |         |     
|Additional investment in parent                                                        |                                                    |                                                         |        |        |         |   | 150,000  |       |          |   |        |     
|Dividends paid to common stockholder                                                   |                                                    |                                                         | (9,307  | )      |         |   | (2,376   | )     |          |   | (2,277  | )   
|Dividends paid to preferred stockholders                                               |                                                    |                                                         | (4,887  | )      |         |   | (4,887   | )     |          |   | (4,887  | )   
|                                                                                       |                                                    |                                                         |         |        |         |   |          |       |         
|                                                                                       |                                                    | Net cash (used in) provided by financing
    activities |         |        | (14,194 | ) |          |       | 142,737  |   |         |      | (7,164 | )
|                                                                                       |                                                    |                                                         |         |        |         |   |          |       |         
|Net increase (decrease) in cash                                                        |                                                    |                                                         | 8,636   |        |         |   | (1,714   | )     |          |   | (3,720  | )   
|Beginning cash                                                                         |                                                    |                                                         | 2,022   |        |         |   | 3,736    |       |          |   | 7,456   |     
|                                                                                       |                                                    |                                                         |         |        |         |   |          |       |         
|Ending cash                                                                            |                                                    | $                                                       | 10,658  |        |         | $ | 2,022    |       |          | $ | 3,736   |     
|                                                                                       |                                                    |                                                         |         |        |         |   |          |       |         

The accompanying notes are an integral part of
these statements

16



---



##### Table of Contents



FLAGSTAR CAPITAL CORPORATION

Notes to the Financial Statements

Note 1  Nature of
Business

Flagstar Capital Corporation (the
Company) is a wholly-owned operating subsidiary of
Flagstar Intermediate Holding Company (IHC). IHC is
a wholly-owned subsidiary of Flagstar Bank, FSB (the
Bank) a federally chartered stock savings bank,
which itself is a wholly-owned subsidiary of Flagstar Bancorp,
Inc (Flagstar) a financial services holding company.
The Company is a Michigan corporation, which commenced
operations on February 24, 1998. The Companys primary
business consists of acquiring, holding, and managing
residential mortgage loans.

On February 24, 1998, the Company offered to
the public and sold 2,000,000 shares of the Companys 8.50%
noncumulative Series A, $25 liquidation value per share,
preferred stock. The sale provided gross proceeds totaling
$50.0 million (the Series A Preferred
Shares). The Company also sold to the Bank,
499,900 shares of the Companys common stock (the
Common Stock), $1.00 par value, providing
proceeds totaling $65.5 million

On May 24, 1998, in response to the
underwriters exercising their over-allotment option, the Company
issued additional 300,000 shares of its Series A
Preferred Shares to the public and 500,000 shares of Common
Stock to the Bank, providing additional gross proceeds of
$17.0 million.

The Company used the net proceeds raised from the
initial public offering of the Series A Preferred Shares
and the sale of the Common Stock to the Bank to purchase, from
the Bank, the Companys Initial Portfolio of
$113.5 million of residential mortgage loans
(Mortgage Loans), at their estimated fair values.

The Company removed its preferred stock listing
from the Nasdaq Stock Market on July 12, 2001. On
July 13, 2001, the Company moved those same shares to the
New York Stock Exchange. The securities, which formerly traded
under the symbol FLGSP, now trade under the symbol
FBC-P.

In September 2001, the Bank contributed its
common stock investment in the Company to Flagstar Intermediate
Holding Company (IHC), a newly formed, wholly-owned
subsidiary. The purpose of the transaction is to allow the Bank
greater flexibility in the manner in which the common stock of
the Company is held. The change will also increase the mortgage
investments the Company is allowed to invest in while still
complying with various federal tax requirements. At the same
time IHC contributed $150 million of equity to the Company.
The Company then invested $150 million, a 15% interest, in
mortgage securities and other net assets of Flagstar LLC, an 85%
owned subsidiary of IHC.

On March 20, 2003, Flagstar notified the
public in a press release that they would redeem all of the
Series A Preferred Shares on June 30, 2003.

Note 2  Summary of Significant
Accounting Policies

Mortgage
loans:

Mortgage loans are carried at the principal
amount outstanding, net of any purchase discount or premium. The
amortization of premiums or discounts is recorded as an
adjustment to interest income using a method, which approximates
the interest method.

Non-accrual loans are those loans on which the
accrual of interest has ceased. Loans are placed on non-accrual
status immediately if, in the opinion of management, principal
or interest is not likely to be paid in accordance with the
terms of the loan agreement, or when principal or interest is
past due 90 days or more and collateral is insufficient to cover
principal and interest. Interest income on non-accrual loans is
recognized only to the extent of cash receipts. However, where
there is doubt regarding the ultimate collectibility of the loan
principal, cash receipts, whether designated as principal or
interest, are thereafter applied to reduce the carrying value of
the loan. Loans are restored to accrual status only when
interest and principal payments are brought current and future
payments are reasonably assured.

17



---



##### Table of Contents



FLAGSTAR CAPITAL CORPORATION


Notes to the Financial Statements 
(Continued)

The Statement of Financial Accounting Standards
No. 114, entitled Accounting by Creditors for
Impairment of a Loan (SFAS 114), requires
that the carrying value of an impaired loan be based on the
present value of expected future cash flows, discounted at the
loans effective interest rate or, as a practical
expedient, at the loans observable market price, or the
fair value or the collateral, if the loan is collateral
dependent. Under SFAS 114, a loan is considered impaired
when, based on current information, it is probable that the
borrower will be unable to pay contractual interest or principal
payments as scheduled in the loan agreement. SFAS 114
applies to all loans except smaller-balance homogeneous consumer
loans, loans carried at fair value or the lower of cost or fair
value, debt securities and leases. The Company will apply
SFAS 114 to non-accrual mortgage loans. In addition,
SFAS 114 modifies the accounting for in-substance
foreclosures (ISF). A collateralized loan is
considered an ISF and is reclassified to Assets Acquired as Loan
Satisfactions only when the Company has taken physical
possession of the collateral regardless of whether formal
foreclosure proceedings have taken place. The Company did not
have any non-accrual loans classified as impaired.

The Statement of Financial Accounting Standards
No. 118, entitled Accounting by Creditors for
Impairment of a Loan  Income Recognition and
Disclosure (SFAS 118), permits a creditor
to use existing methods for recognizing interest revenue on
impaired loans. The Company recognizes interest income on
impaired loans pursuant to the discussion above for non-accrual
loans.

Allowance
for loan losses:

An allowance for loan losses is provided when a
risk of loss is inherent in the credit extension process. An
allowance is a general allowance and is based on a periodic
review and analysis of the Mortgage Loans. The periodic analysis
will include consideration of such factors as the risk rating of
individual credits, the size and diversity of the portfolio,
economic conditions and market conditions, prior loss
experience, results of periodic credit reviews of the portfolio,
and any guarantees provided by the seller of the loans. The
allowance for loan losses is increased by provisions for losses
charged against income and is reduced by charge-offs, net of
recoveries. Charge-offs are recorded when, in the judgment of
management, an extension of credit is deemed uncollectible, in
whole or in part. As of December 31, 2002 and 2001 the
allowance for loan losses totaled $250,000.

The Company also has certain representations and
warranties from the Bank which are related to the performance of
the mortgage loans.

Investment
in mortgage securities:

The Companys investment in mortgage
securities represents a 15% interest in mortgage loans owned by
Flagstar LLC. This investment is carried at the principal amount
of the outstanding underlying mortgage loans net of unearned
purchase discount or premium. These mortgages are similar in
characteristics to the mortgage loans owned directly by the
Company.

Other
investments:

These investments represent the 15% interest in
accrued interest receivable and other net assets of Flagstar LLC.

Cash:

The Company considers all short-term, highly
liquid investments that are both readily convertible to cash and
have a maturity of generally three months or less at the time of
purchase to be cash equivalents. At December 31, 2002 and
2001, the Companys cash was held in the custody of the
Bank.

18



---



##### Table of Contents



FLAGSTAR CAPITAL CORPORATION


Notes to the Financial Statements 
(Continued)

Offering
costs:

Costs incurred in connection with the raising of
capital through the sale of preferred stock were recorded as an
adjustment to the additional paid in capital of the Company.

Dividends:

Preferred
stock

Dividends on the Series A Preferred Shares
are non-cumulative. The stock was issued on February 24,
1998. Quarterly dividends are payable on the last business day
of March, June, September and December at a rate of 8.50% per
annum of the initial liquidation preference ($25.00 per share).

Common
stock

Stockholders are entitled to receive dividends
when, and if declared by the Board of Directors, out of funds
available after the preferred dividends have been paid.

Earnings
per common share:

Earnings per common share are computed by
dividing net income after preferred dividends by the weighted
average number of common shares outstanding. There are no
dilutive securities, which would require a diluted earnings per
share computation. The Company had 1,000,000 weighted average
shares outstanding during 2002, 2001 and 2000, respectively.

Income
taxes:

The Company has elected for Federal income tax
purposes, to be treated as a Real Estate Investment Trust
(REIT) and intends to comply with the provisions of
the Internal Revenue Code of 1986 (the Code), as
amended. Accordingly, the Company will not be subject to federal
income tax to the extent it distributes its income to
shareholders and as long as certain asset, income and stock
ownership tests are met in accordance with the Code. As the
Company expects to qualify as a REIT for federal income tax
purposes, no provision for income taxes is included in the
accompanying financial statements.

Use
of estimates:

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

Recently
issued accounting standards:

In June 2002, the FASB issued SFAS
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, which addresses financial accounting
and reporting for costs associated with exit or disposal
activities. Under SFAS No. 146, such costs will be
recognized when the liability is incurred, rather than at the
date of commitment to an exit plan. SFAS No. 146 is
effective for exit or disposal activities that are initiated
after December 31, 2002, with early application permitted.
Management is currently evaluating the impact of the adoption of
SFAS No. 146 on its financial statements.

In October 2002, the FASB issued SFAS
No. 147, Acquisitions of Certain Financial
Institutions, an amendment of FASB Statements No. 72
and 144 and FASB Interpretation No. 9, which
addresses accounting for purchases of certain financial
institutions. SFAS No. 147 is effective October 1,
2002, with

19



---



##### Table of Contents



FLAGSTAR CAPITAL CORPORATION


Notes to the Financial Statements 
(Continued)

early application permitted. The Company does not
have any goodwill that was subject to Statement No. 72 and
therefore the provisions of Statement No. 147 required no
change in classification or treatment of recorded goodwill.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of FASB Statement No. 123, which
provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS No. 123 to
require prominent disclosure in both annual and interim
financial statements about the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. The Company has adopted the
requirements of SFAS No. 123 in January 2000 and SFAS
No. 148 effective December 31, 2002 with no material
effect on its financial statements.

Note 3  Mortgage
Loans

The following reflects the composition of
Mortgage Loans at December 31,:

|              |            |                           |                      |            |            |             |             |         |      |       |            |            |            |             |             |      |      |       |   | 
|------------- | ---------- | ------------------------- | -------------------- | ---------- | ---------- | ----------- | ----------- | ------- | ---- | ----- | ---------- | ---------- | ---------- | ----------- | ----------- | ---- | ---- | ----- | - | 
|              |            | 2002                      |                      |            | 2002       |             |             | 2001    |      |       | 2001       |           
|Product Type  |            | Balance                   |                      |            | % of Total |             |             | Balance |      |       | % of Total |           
|              |            |                          
|              |            |                           |                      |           
|              | 3 year ARM |                           | $                    | 22,629,000 |            |             |             | 20.7    | %    |       | $          | 36,362,000 |            |             |             | 30.6 | %   
|              | 5 year ARM |                           |                      | 56,221,000 |            |             |             | 51.4    |      |       |            | 23,607,000 |            |             |             | 19.9 |     
|              | 7 year ARM |                           |                      | 16,704,000 |            |             |             | 15.3    |      |       |            | 33,556,000 |            |             |             | 28.2 |     
|              |            |                           |                      |           
|              |            | Subtotal ARM              |                      |            | 95,554,000 |             |             |         | 87.4 |       |            |            | 93,525,000 |             |             |      | 78.7 |      
|              |            |                           |                      |           
|15 year Fixed |            |                           | 6,571,000            |            |            |             | 6.0         |         |      |       | 10,272,000 |            |            |             | 8.6         |     
|30 year Fixed |            |                           | 7,288,000            |            |            |             | 6.6         |         |      |       | 15,105,000 |            |            |             | 12.7        |     
|              |            |                           |                      |           
|              |            | Subtotal Fixed            |                      |            | 13,859,000 |             |             |         | 12.6 |       |            |            | 25,377,000 |             |             |      | 21.3 |      
|              |            |                           |                      |           
|              |            |                           | Total Mortgage Loans |            | $          | 109,413,000 |             |         |      | 100.0 | %          |            | $          | 118,902,000 |             |      |      | 100.0 | %
|              |            |                           |                      |            |            |             |             |         |      |       |            |           
|              |            | Unamortized premium       |                      |            | 509,000    |             |             |         |      |       |            |            | 880,000    |             |             |      |      |      
|              |            | Allowance for loan losses |                      |            | (250,000   | )           |             |         |      |       |            |            | (250,000   | )           |             |      |      |      
|              |            |                           |                      |            |            |             |             |         |      |       |            |           
|              |            |                           |                      | Total      |            | $           | 109,672,000 |         |      |       |            |            |            | $           | 119,532,000 |      |      |       |   | 
|              |            |                           |                      |            |            |             |             |         |      |       |            |           

Loans on which interest has been discontinued
totaled $790,000 at December 31, 2002 and $1,250,000 at
December 31, 2001. Interest that would have been accrued on
such loans totaled approximately $52,000, $32,000 and
$22,000 during 2002, 2001 and 2000, respectively.

There were no impaired loans at December 31,
2002 and 2001.

Properties collateralizing Mortgage Loans are
geographically disbursed throughout the United States. As of
December 31, 2002, approximately 11.7% of these properties
are located in Michigan (measured by principal balance), 10.6%
are located in the state of Washington and another 12.6% are
located in the state of Colorado. No other state contains more
than 10% of the properties collateralizing these loans.

Note 4  Related Party
Transactions

The Company has entered into an Advisory
Agreement (the Advisory Agreement) with the Bank
(the Advisor) requiring an annual payment of
$250,000. The Bank provides advice to the Board of Directors and
manages the operations of the Company as defined in the
Agreement. The Agreement has an initial term of five years
commencing on February 24, 1998 and automatically renews
for additional five year periods, unless the Company delivers a
notice of non-renewal to the Bank as defined in the Advisory
Agreement. Advisory

20



---



##### Table of Contents



FLAGSTAR CAPITAL CORPORATION


Notes to the Financial Statements 
(Continued)

fees incurred for the years ended
December 31, 2002, 2001 and 2000 totaled approximately
$250,000 for each year.

The Company also entered into a servicing
agreement with the Bank for the servicing of the Mortgage Loans.
Pursuant to the servicing agreement, the Bank performs the
servicing for the Mortgage Loans, in accordance with normal
industry practices. The servicing agreement can be terminated
without cause upon a thirty-day advance notice given to the
Bank. The servicing fee is 0.375% of the outstanding principal
balance of the Mortgage Loans. The servicing fee is withheld by
the Bank and netted from interest income proceeds received on
the Mortgage Loans.

Note 5  Fair Value of
Financial Instruments

Statement of Financial Accounting Standards
No. 107, entitled Disclosures About Fair Value of
Financial Instruments (SFAS 107),
requires the Company to disclose fair value information about
financial instruments for which it is practicable to estimate
the value, whether or not such financial instruments are
recognized on the balance sheet. Fair value is defined as the
amount at which a financial instrument could be exchanged in a
current transaction between willing parties, other than in a
forced sale or liquidation, and is best evidenced by a quoted
market price, if one exists. The calculation of estimated fair
value is based on market conditions at a specific point in time
and may not be reflective of future fair values.

Certain financial instruments and all
non-financial instruments are excluded from the scope of
SFAS 107. Accordingly, the fair value disclosures required
by SFAS 107 provide only a partial estimate of the fair
value of the Company. Fair values among REITs are not comparable
due to the wide-range of limited valuation techniques and
numerous estimates, which must be made. This lack of an
objective valuation standard introduces a great degree of
subjectivity to these derived or estimated fair values.
Therefore, readers are cautioned in using this information for
purposes of evaluating the financial condition of the Company
compared with other REITs.

Mortgage
loans:

The fair value of the Companys residential
mortgage loans is estimated by comparing values for similar
residential mortgages sold in the secondary market.

At December 31, 2002 and 2001, the estimated
fair value of the Mortgage Loans was $111,148,000 and
$121,334,000, respectively, based on the valuation technique
described in the preceding paragraph.

Investment
in mortgage securities:

The fair value of the Companys investment
in mortgage securities is estimated by comparing values for
similar mortgage securities sold in the secondary market.

At December 31, 2002 and 2001, the estimated
fair value of the Investment in mortgage securities was
$128,702,000 and $119,621,000, respectively, based on the
valuation technique described in the preceding paragraph.

Assets
and liabilities in which fair value approximates carrying
value:

The fair values of certain financial assets and
liabilities carried at cost, including cash, accrued interest
receivable, loan payments in process-due from parent, due to
parent, and other liabilities are considered to approximate
their respective carrying value due to their short-term nature
and negligible credit losses.

21



---



##### Table of Contents



FLAGSTAR CAPITAL CORPORATION


Notes to the Financial Statements 
(Continued)

Note 6  Quarterly Financial
Data (Unaudited)

The following table represents summarized data
for each of the quarters in 2002, 2001 and 2000 (in thousands,
except earnings per share data):

|                                              |                      |                |       |   |         |   |       |         |    |   |         |   |    |   |       |   |    | 
|--------------------------------------------- | -------------------- | -------------- | ----- | - | ------- | - | ----- | ------- | -- | - | ------- | - | -- | - | ----- | - | -- | 
|                                              |                      |               
|                                              |                      | 2002           |      
|                                              |                      |                |      
|                                              |                      | Fourth         |       |   | Third   |   |       | Second  |    |   | First   |  
|                                              |                      | Quarter        |       |   | Quarter |   |       | Quarter |    |   | Quarter |  
|                                              |                      |                |       |   |         |   |       |         |    |   |         |  
|Interest income                               |                      | $              | 3,325 |   |         | $ | 3,175 |         |    | $ | 2,666   |   |    | $ | 3,343 |  
|                                              | Provision for losses |                |       |  |         |   |       |        |    |   |         |  |    |   |       |  |   
|                                              |                      |               
|Net interest income                           |                      |                | 3,325 |   |         |   | 3,175 |         |    |   | 2,666   |   |    |   | 3,343 |  
|Outside director fees                         |                      |                | 8     |   |         |   | 1     |         |    |   | 1       |   |    |   | 1     |  
|Management fees                               |                      |                | 62    |   |         |   | 62    |         |    |   | 63      |   |    |   | 63    |  
|Non-interest expense                          |                      |                | 33    |   |         |   | 29    |         |    |   | 35      |   |    |   | 27    |  
|                                              |                      |               
|                                              |                      | Total expenses |       |   | 103     |   |       |         | 92 |   |         |   | 99 |   |       |   | 91 | 
|                                              |                      |               
|Net earnings                                  |                      |                | 3,222 |   |         |   | 3,083 |         |    |   | 2,567   |   |    |   | 3,252 |  
|Preferred stock dividends                     |                      |                | 1,222 |   |         |   | 1,222 |         |    |   | 1,222   |   |    |   | 1,222 |  
|                                              |                      |               
|Net earnings available to common stockholders |                      | $              | 2,000 |   |         | $ | 1,861 |         |    | $ | 1,345   |   |    | $ | 2,030 |  
|                                              |                      |               
|Earnings per common share                     |                      | $              | 2.00  |   |         | $ | 1.86  |         |    | $ | 1.35    |   |    | $ | 2.03  |  
|                                              |                      |               

|                                              |                      |         |       |     |         |   |       |         |  |   |         |    |  |   |       |     | 
|--------------------------------------------- | -------------------- | ------- | ----- | --- | ------- | - | ----- | ------- |  | - | ------- | -- |  | - | ----- | --- | 
|                                              |                      |        
|                                              |                      | 2001    |      
|                                              |                      |         |      
|                                              |                      | Fourth  |       |     | Third   |   |       | Second  |  |   | First   |   
|                                              |                      | Quarter |       |     | Quarter |   |       | Quarter |  |   | Quarter |   
|                                              |                      |         |       |     |         |   |       |         |  |   |         |   
|Interest income                               |                      | $       | 4,142 |     |         | $ | 1,820 |         |  | $ | 1,889   |    |  | $ | 2,037 |    
|                                              | Provision for losses |         |       |    |         |   |       |        |  |   |         |   |  |   |       |    | 
|                                              |                      |        
|Net interest income                           |                      |         | 4,142 |     |         |   | 1,820 |         |  |   | 1,889   |    |  |   | 2,037 |    
|Outside director fees                         |                      |         | 1     |     |         |   | 1     |         |  |   |        |    |  |   | 1     |    
|Management fees                               |                      |         | 63    |     |         |   | 62    |         |  |   | 63      |    |  |   | 62    |    
|Non-interest expense                          |                      |         | 67    |     |         |   | 29    |         |  |   | 35      |    |  |   | 82    |    
|                                              |                      |        
|                                              | Total expenses       |         |       | 131 |         |   |       | 92      |  |   |         | 98 |  |   |       | 145 | 
|                                              |                      |        
|Earnings before income taxes                  |                      |         | 4,011 |     |         |   | 1,728 |         |  |   | 1,791   |    |  |   | 1,892 |    
|Preferred stock dividends                     |                      |         | 1,222 |     |         |   | 1,222 |         |  |   | 1,222   |    |  |   | 1,222 |    
|                                              |                      |        
|Net earnings available to common stockholders |                      | $       | 2,789 |     |         | $ | 506   |         |  | $ | 569     |    |  | $ | 670   |    
|                                              |                      |        
|Earnings per common share                     |                      | $       | 2.79  |     |         | $ | 0.51  |         |  | $ | 0.57    |    |  | $ | 0.67  |    
|                                              |                      |        

22



---



##### Table of Contents



FLAGSTAR CAPITAL CORPORATION


Notes to the Financial Statements 
(Continued)

|                                              |                      |         |       |    |         |   |       |         |  |   |         |     |  |   |       |     | 
|--------------------------------------------- | -------------------- | ------- | ----- | -- | ------- | - | ----- | ------- |  | - | ------- | --- |  | - | ----- | --- | 
|                                              |                      |        
|                                              |                      | 2000    |      
|                                              |                      |         |      
|                                              |                      | Fourth  |       |    | Third   |   |       | Second  |  |   | First   |    
|                                              |                      | Quarter |       |    | Quarter |   |       | Quarter |  |   | Quarter |    
|                                              |                      |         |       |    |         |   |       |         |  |   |         |    
|Interest income                               |                      | $       | 1,945 |    |         | $ | 2,006 |         |  | $ | 1,857   |     |  | $ | 1,764 |    
|                                              | Provision for losses |         |       |   |         |   |       |        |  |   |         |    |  |   |       |    | 
|                                              |                      |        
|Net interest income                           |                      |         | 1,945 |    |         |   | 2,006 |         |  |   | 1,857   |     |  |   | 1,764 |    
|Outside director fees                         |                      |         | 2     |    |         |   | 3     |         |  |   | 1       |     |  |   | 1     |    
|Management fees                               |                      |         | 63    |    |         |   | 63    |         |  |   | 62      |     |  |   | 62    |    
|Non-interest expense                          |                      |         | 28    |    |         |   | 27    |         |  |   | 37      |     |  |   | 40    |    
|                                              |                      |        
|                                              | Total expenses       |         |       | 93 |         |   |       | 93      |  |   |         | 100 |  |   |       | 103 | 
|                                              |                      |        
|Earnings before income taxes                  |                      |         | 1,852 |    |         |   | 1,914 |         |  |   | 1,757   |     |  |   | 1,660 |    
|Preferred stock dividends                     |                      |         | 1,222 |    |         |   | 1,222 |         |  |   | 1,222   |     |  |   | 1,222 |    
|                                              |                      |        
|Net earnings available to common stockholders |                      | $       | 630   |    |         | $ | 692   |         |  | $ | 535     |     |  | $ | 433   |    
|                                              |                      |        
|Earnings per common share                     |                      | $       | 0.63  |    |         | $ | 0.69  |         |  | $ | 0.53    |     |  | $ | 0.44  |    
|                                              |                      |        

23



---



##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 9: | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
    ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.






PART III




|         |                                                        
|-------- | -------------------------------------------------------
|ITEM 10: | DIRECTORS AND EXECUTIVE OFFICERS OF THE
    CORPORATION

The persons who are directors and executive
officers of the Company are as follows:

|                  |  |     |    |  |                                           |                                                                       |       |  |      |         |  |  |      | 
|----------------- |  | --- | -- |  | ----------------------------------------- | --------------------------------------------------------------------- | ----- |  | ---- | ------- |  |  | ---- | 
|                  |  |     |    |  |                                           | Director                                                              |       |  | Term |        
|Name              |  | Age |    |  | Position(s) Held with Company during 2002 |                                                                       | Since |  |      | Expires | 
|                 
|                  | 
|Thomas J. Hammond |  |     | 59 |  |                                           | Chairman of the Board                                                 |       |  | 1997 |         |  |  | 2005 | 
|Mark T. Hammond   |  |     | 37 |  |                                           | Vice Chairman of the Board, President and Chief
    Executive Officer |       |  | 1997 |         |  |  | 2004 | 
|Michael W. Carrie |  |     | 48 |  |                                           | Director, Executive Vice President and Chief
    Financial Officer    |       |  | 1997 |         |  |  | 2003 | 
|Joan H. Anderson  |  |     | 52 |  |                                           | Director and Executive Vice President                                 |       |  | 1997 |         |  |  | 2005 | 
|Mary Kay McGuire  |  |     | 45 |  |                                           | Director and Secretary                                                |       |  | 1997 |         |  |  | 2003 | 

The independent directors of the Company are as
follows:

|                 |  |     |    |  |                                               |          |       |  |      |         |  |  |      | 
|---------------- |  | --- | -- |  | --------------------------------------------- | -------- | ----- |  | ---- | ------- |  |  | ---- | 
|                 |  |     |    |  |                                               | Director |       |  | Term |        
|Name             |  | Age |    |  | Position(s) Held with the Company during 2002 |          | Since |  |      | Expires | 
|                
|                 | 
|Jack Christenson |  |     | 61 |  |                                               | Director |       |  | 1997 |         |  |  | 2004 | 
|Robert W. DeWitt |  |     | 61 |  |                                               | Director |       |  | 1997 |         |  |  | 2005 | 

The following sets forth the business experience
and other information for each of the current directors of the
Company:

Company Directors

Thomas J. Hammondhas served as Chairman of the Board of
Directors of the Company since its formation in 1997.
Mr. Hammond serves as Chairman of the Board of Directors
and the Chief Executive Officer of Flagstar Intermediate Holding
Company, the parent company of Flagstar Capital Corporation.

Mark T. Hammondhas
been Vice-Chairman of the Board of Directors and President of
the Company since its formation in 1997 and Chief Executive
Officer as of December 2002. Mr. Hammond serves as
Vice-Chairman of the Board of Directors and President of
Flagstar Intermediate Holding Company, the parent company of
Flagstar Capital Corporation. Mr. Hammond is the son of
Thomas J. Hammond.

Joan H. Andersonhas
been a Director and an Executive Vice President since the
Companys formation in 1997. Ms. Anderson also serves
as a Director and Executive Vice President of Flagstar
Intermediate Holding Company, the parent company of Flagstar
Capital Corporation.

Michael W. Carriehas served as Director, Executive
Vice-President, and Chief Financial Officer since the
Companys formation in 1997. Mr. Carrie also serves as
a Director, Executive Vice-President and Chief Financial Officer
of Flagstar Intermediate Holding Company, the parent company of
Flagstar Capital Corporation.

Mary Kay McGuirehas
served as Director and Secretary of the Company since its
formation in 1997. Ms. McGuire also serves as Director,
Senior Vice President, and Secretary of Flagstar Intermediate
Holding Company, the parent company of Flagstar Capital
Corporation.

24



---



##### Table of Contents



Independent Directors

The Companys Certificate of Designation
establishing the Series A Preferred Shares requires that,
so long as any Series A Preferred Shares are outstanding,
certain actions by the Company be approved by a majority of the
Independent Directors of the Company. Messrs. Christenson
and DeWitt are the Companys Independent Directors. For as
long as there are only two Independent Directors, any action
that requires the approval of a majority of Independent
Directors must be approved by both Independent Directors.
Additionally, the audit committee is comprised of the
independent directors.

If at any time the Company fails to declare and
pay a quarterly dividend on the Series A Preferred Shares,
the number of directors constituting the Board of Directors of
the Company will be increased by two at the Companys next
annual meeting. The holders of Series A Preferred Shares,
voting together with the holders of any other outstanding series
of Preferred Stock as a single class, will be entitled to elect
the two additional directors to serve on the Companys
Board of Directors. Any member of the Board of Directors elected
by holders of the Companys Preferred Stock will be deemed
to be an Independent Director for purposes of the actions
requiring the approval of a majority of the Independent
Directors.

The following sets forth the business experience
and other information for each of the Independent Directors of
the Company.

Jack Christensonhas
served as a Director since 1997. He is the President and owner
of Jack Christenson, Inc., a residential brokerage company that
is based in Troy, Michigan.

Robert W. DeWitthas
served as a Director since 1997. He is the President and owner
of DeWitt Building Co., Inc., a residential and commercial
building company based in Lathrup Village, Michigan founded in
1979.






ITEM 11: EXECUTIVE
COMPENSATION


The Company pays the Independent Directors of the
Company fees for their services as directors. The Independent
Directors receive a fee of $1,200 for attendance at each meeting
of the Board of Directors and $100 for each telephone meeting of
the Board of Directors. The Independent Directors were paid a
total of $11,000 for the year ended December 31, 2002.
However, multiple fees are not paid for two or more meetings
attended on the same day. The Company does not pay any
compensation to its officers or employees of the Bank, or to
directors who are not Independent Directors.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|ITEM 12: | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
    OWNERS AND MANAGEMENT

None.






|         |                                                   
|-------- | --------------------------------------------------
|ITEM 13: | CERTAIN RELATIONSHIPS AND RELATED
    TRANSACTIONS

Set forth below are certain transactions between
the Company and its directors, affiliates, a related parties.
Management believes that the transactions with related parties
described herein have been conducted on substantially the same
terms as similar transactions with unrelated parties.

The Bank administers the day-to-day operations of
the Company and is entitled to receive fees in connection with
the Advisory Agreement. Advisory fees paid to parent equaled
$250,000 for each of the years ended December 31, 2002,
2001 and 2000, respectively.

The Bank services the Mortgage Loans included in
the Companys portfolio and is entitled to receive fees in
connection with the Servicing Agreement.

The Companys cash balance of approximately
$10.7 million as of December 31, 2002 and
$2.0 million as of December 31, 2001 is held in a
demand deposit account with the Bank.

25



---



##### Table of Contents








PART IV







|         |                                                                    
|-------- | -------------------------------------------------------------------
|ITEM 14: | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
    REPORTS ON FORM 8-K

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)(1) |  | The following financial statements of the Company
    are included in this Form 10-K under Item 8:                                                                                                                                                                                                                                                                                                                                                                                           
|       |  | Report of Independent Certified Public Accountants                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       |  | Balance Sheets at December 31, 2002 and 2001                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|       |  | Statements of Earnings for the years ended
    December 31, 2002, 2001, and 2000                                                                                                                                                                                                                                                                                                                                                                                                             
|       |  | Statements of Stockholders Equity for the
    years ended December 31, 2002, 2001, and 2000                                                                                                                                                                                                                                                                                                                                                                                                 
|       |  | Statements of Cash Flows for the years ended
    December 31, 2002, 2001, and 2000                                                                                                                                                                                                                                                                                                                                                                                                           
|       |  | Notes to Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|      
|(a)(2) |  | All other schedules for which provision is made
    in the applicable accounting regulations of the Securities and
    Exchange Commission are not required under the related
    instruction or are inapplicable and therefore have been omitted.                                                                                                                                                                                                                                           
|      
|(a)(3) |  | Exhibits:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       |  | 99.1 Section 906 Certification, as
    furnished by the Chief Executive Officer pursuant to SEC.
    Release No. 34-47551                                                                                                                                                                                                                                                                                                                                                                    
|       |  | 99.2 Section 906 Certification, as
    furnished by the Chief Financial Officer pursuant to SEC.
    Release No. 34-47551                                                                                                                                                                                                                                                                                                                                                                    
|(b)    |  | Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       |  | The Company filed a Form 8-K on
    August 7, 2002 for the purpose of reporting that its
    Principal Executive Officer and its Principal Financial Officer
    each submitted to the Securities and Exchange Commission on
    August 7, 2002 the certifications required by
    Section 906 of the Sarbanes-Oxley Act of 2002 in connection
    with the Companys filing on August 7, 2002 of its
    Quarterly Report on Form-10Q for the quarter ended June 30,
    2002.              
|       |  | The Company filed a Form 8-K on
    November 12, 2002 for the purpose of reporting that its
    Principal Executive Officer and its Principal Financial Officer
    each submitted to the Securities and Exchange Commission on
    November 12, 2002 the certifications required by
    Section 906 of the Sarbanes-Oxley Act of 2002 in connection
    with the Companys filing on November 12, 2002 of its
    Quarterly Report on Form-10Q for the quarter ended
    September 30, 2002.
|       |  | The Company filed a Form 8-K on
    March 20, 2003 for the purpose of reporting that its
    Principal Executive Officer and its Principal Financial Officer
    each submitted to the Securities and Exchange Commission on
    March 20, 2003 the certifications required by
    Section 906 of the Sarbanes-Oxley Act of 2002 in connection
    with the Companys filing of a press release announcing the
    redemption of the Series A Preferred Shares on
    June 30, 2003.         




* Filed herewith.


26



---



##### Table of Contents








SIGNATURES


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



| |                             
| | ----------------------------
| | FLAGSTAR CAPITAL CORPORATION

Date: March 28, 2003

| |                               
| | ------------------------------
| | /s/ MARK T. HAMMOND           
| |                               
| | Mark T. Hammond               
| | Vice Chairman of the Board and
| | Chief Executive Officer       
| | (Duly Authorized Officer)     

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant and in the
capacities indicated on March 28, 2003.

|                                           |  |                                                                     
|------------------------------------------ |  | --------------------------------------------------------------------
|Signature                                  |  | Title                                                               
|                                           |  |                                                                     
|By: /s/ THOMAS J. HAMMONDThomas J. Hammond |  | Chairman of the Board                                               
|By: /s/ MARK T. HAMMONDMark T. Hammond     |  | Vice Chairman of the Board President and Chief
    Executive Officer
|By: /s/ MICHAEL W. CARRIEMichael W. Carrie |  | Director, Executive Vice President and Chief
    Financial Officer  
|By: /s/ JOAN H. ANDERSONJoan H. Anderson   |  | Director, Executive Vice President                                  
|By: /s/ MARY KAY MCGUIREMary Kay McGuire   |  | Director and Secretary                                              
|By: /s/ JACK CHRISTENSONJack Christenson   |  | Director                                                            
|By: /s/ ROBERT W. DEWITTRobert W. DeWitt   |  | Director                                                            

27



---



##### Table of Contents








SECTION 302 CERTIFICATION


I, Mark T. Hammond certify that:

1) I have reviewed this annual report on
Form 10-K of Flagstar Capital Corp;

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

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

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



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

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



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

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



| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | /s/ MARK T. HAMMOND 
     _______________________________________ 
     Signature President and CEO 
     Title

Date: March 28, 2003

28



---



##### Table of Contents



SECTION 302 CERTIFICATION

I, Michael W. Carrie certify that:

1) I have reviewed this annual report on
Form 10-K of Flagstar Capital Corp;

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

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

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



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

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



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

6) The registrants other certifying
officers and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | /s/ MICHAEL W. CARRIE 
     _______________________________________ 
     Signature Chief Financial Officer and EVP 
     Title

Date: March 28, 2003


29



---



##### Table of Contents



EXHIBIT INDEX

|        |      |  |             |                                                                                                                     
|------- | ---- |  | ----------- | --------------------------------------------------------------------------------------------------------------------
|Exhibit |      |  |            
|No.     |      |  | Description
|        |      |  |            
|        | 1    |  |             | The following consolidated financial statements
    of the Company are included in this Form 10-K under Item 8:     
|        |      |  |             | Managements Report                                                                                                 
|        |      |  |             | Report of Independent Certified
    Public Accountant                                                               
|        |      |  |             | Consolidated Statements of Financial
    Condition  December 31, 2002 and 2001                                     
|        |      |  |             | Consolidated Statements of Earnings
    for the years ended December 31, 2002, 2001, and 2000                       
|        |      |  |             | Consolidated Statements of Cash Flows
    for the years ended December 31, 2002, 2001,  and
    2000                
|        |      |  |             | Consolidated Statements of
    Stockholders Equity for the years ended December
    31,  2002, 2001, and 2000      
|        |      |  |             | Notes to Consolidated Financial
    Statements                                                                      
|       
|        | 99.1 |  |             | Section 906 Certification, as furnished by the
    Chief Executive Officer pursuant to SEC.
    Release No. 34-47551
|       
|        | 99.2 |  |             | Section 906 Certification, as furnished by the
    Chief Financial Officer pursuant to SEC.
    Release No. 34-47551

30