SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



                                    FORM 10-Q

(Mark one)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

    For the quarterly period ended September 30, 1998

                                       OR

[  ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

    For the transition period from to

                         COMMISSION FILE NUMBER 0-21845

                     Wilshire Financial Services Group Inc.
             (Exact name of registrant as specified in its charter)



              DELAWARE                                    93-1223879
(State or other jurisdiction of incorporation   (I.R.S. Employer Identification
       or organization)                                     No.)


  1776 SW MADISON STREET, PORTLAND, OR                   97205
(Address of principal executive offices)               (Zip Code)

                                 (503) 223-5600
              (Registrant's telephone number, including area code)


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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

          Indicate  the  number of shares  outstanding  of each of the  issuer's
classes of common stock, as of the latest practicable date.


             CLASS                            OUTSTANDING AT OCTOBER 31, 1998
Common Stock, par value $.01 per share                10,885,000 Shares

<PAGE>


             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

                                      INDEX

PART I.           FINANCIAL INFORMATION

      Consolidated Statements of Financial Condition..........................3

      Consolidated Statements of Operations...................................4

      Consolidated Statements of Cash Flows...................................5

      Consolidated Statements of Stockholders' Equity.........................6

      Notes to Interim Financial Statements...................................7

ITEM 2.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations..........................................14

ITEM 3.   Quantitative and Qualitative Disclosures About Market Risk.........27

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings..................................................30

Item 2.   Changes in Securities..............................................30

Item 3.   Defaults Upon Senior Securities....................................30

Item 4.   Submission of Matters to a Vote of Security Holders................30

Item 5.   Other Information..................................................30

Item 6.   Exhibits and Reports on Form 8-K...................................30



<PAGE>



             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


<TABLE>

<CAPTION>
                                                                                  SEPTEMBER      DECEMBER 31,
                                                                                   30, 1998           1997
                                                                                  UNAUDITED)
                                                                                      (dollars in thousands)
         ASSETS
<S>                                                                         <C>              <C>          
Cash and cash equivalents.................................................. $      54,672    $      66,115
Mortgage-backed securities available for sale, at fair value...............       245,901          298,964
Mortgage-backed securities held to maturity, at amortized cost.............        14,861           18,468
Securities held to maturity, at amortized cost.............................         6,728            5,946
Trading account securities.................................................            --           38,969
Loans, net.................................................................       438,785          153,908
Discounted loans, net......................................................       247,199          463,355
Loans held for sale, net, at lower of cost or market.......................       592,227          310,694
Stock in Federal Home Loan Bank of San Francisco, at cost..................         5,255            5,031
Real estate owned, net.....................................................       140,078          169,612
Leasehold improvements and equipment, net..................................         5,287            2,507
Due from affiliate, net....................................................        15,295           42,171
Accrued interest receivable................................................         8,731            6,641
Investment in Wilshire Real Estate Investment Trust Inc....................         9,164               --
Mortgage servicing rights, net.............................................         3,115            8,306
Income tax receivable, net.................................................        14,068               --
Prepaid expenses and other assets..........................................        40,861           38,340
TOTAL...................................................................... $   1,842,227    $   1,629,027

         LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
   Deposits..............................................................   $     534,091    $     362,598
   Short-term borrowings.................................................       1,076,078          966,500
   Notes payable.........................................................         184,245          184,245
   Accounts payable and other liabilities................................          31,507           16,562
     Total liabilities..................................................        1,825,921        1,529,905
Commitments and Contingencies
Stockholders' Equity:
   Common stock..........................................................         117,708           55,897
   Preferred stock.......................................................              --           27,500
   Treasury stock, at cost...............................................          (2,852)            (124)
   (Deficit) retained earnings...........................................         (93,440)           18,782
   Accumulated other comprehensive loss, net.............................          (5,110)          (2,933)
     Total stockholders' equity..........................................           16,306           99,122
TOTAL....................................................................   $    1,842,227   $    1,629,027
</TABLE>

                   See notes to interim financial statements.




<PAGE>



             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<TABLE>

<CAPTION>
                                                                     QUARTER ENDED              NINE MONTHS ENDED
                                                                     SEPTEMBER 30,                SEPTEMBER 30,
                                                                  1998         1997           1998           1997
                                                                             (dollars in thousands)
INTEREST INCOME:
<S>                                                      <C>               <C>            <C>             <C>          
  Loans................................................  $       33,557    $   23,659     $    92,603    $   59,950
  Mortgage-backed securities...........................           6,414         5,450          21,707        12,484
  Securities and federal funds sold....................           1,046           838           2,848         3,022
    Total interest income..............................          41,017        29,947         117,158        75,456
INTEREST EXPENSE:
  Deposits.............................................           6,964         6,354          18,086        20,008
  Borrowings...........................................          28,090        17,991          81,221        39,028
    Total interest expense.............................          35,054        24,345          99,307        59,036
NET INTEREST INCOME....................................           5,963         5,602          17,851        16,420
PROVISION FOR ESTIMATED LOSSES ON LOANS................          15,191         2,350          12,191           926
NET INTEREST (LOSS) INCOME AFTER PROVISION
  FOR ESTIMATED LOSSES ON LOANS........................          (9,228)        3,252           5,660        15,494
OTHER (LOSS) INCOME:
  Market valuation adjustments.........................         (76,580)          --          (76,580)          --
  Write-down of mortgage servicing rights..............         (12,704)          --          (13,704)          --
  Servicing revenue, net...............................           1,070         1,395           4,810         3,339
  Real estate owned, net...............................             144         1,835           3,616         4,574
  Bankcard income, net.................................           1,989           518           3,486         1,579
  Gain on sale of loans................................           1,460        20,036          27,904        31,252
  Gain (loss) on sale of securities....................            (433)        3,053           7,768         3,053
  Trading income.......................................              --         1,157           1,630         1,171
  Other, net...........................................          (2,049)          637           1,075         1,749
     Total other income (loss).........................         (87,103)       28,631         (39,995)        46,717
OTHER EXPENSES:
  Compensation and employee benefits...................          10,914         4,623          26,023        11,274
  Loan service fees and expenses paid to affiliate.....          12,898         9,711          32,995        19,423
  Professional services................................           2,494         1,142           5,702         2,104
  Occupancy............................................             797           312           1,769           727
  FDIC insurance premiums..............................             212           268             656           791
  Other general and administrative expenses............           9,348         3,522          18,517         6,669
     Total other expenses..............................          36,663        19,578          85,662        40,988
(LOSS) INCOME BEFORE INCOME TAX (BENEFIT)
     PROVISION.........................................        (132,994)       12,305        (119,997)        21,223
INCOME TAX (BENEFIT) PROVISION.........................         (14,028)        5,237          (8,192)         8,981
NET (LOSS) INCOME                                        $     (118,966)   $    7,068     $  (111,805)   $    12,242
(LOSS) EARNINGS PER SHARE:
  Basic................................................  $       (10.82)  $     0.85      $      (10.58) $     1.53
  Diluted                                                $       (10.82)  $     0.80      $      (10.58) $     1.47
WEIGHTED AVERAGE SHARES OUTSTANDING:
  Basic................................................      10,997,880     7,570,000      10,604,798     7,570,000
  Diluted..............................................      10,997,880     8,014,230      10,604,798     7,882,555
</TABLE>

                   See notes to interim financial statements.


<PAGE>



             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>

<CAPTION>
                                                                            QUARTER ENDED         NINE MONTHS ENDED
                                                                            SEPTEMBER 30,          SEPTEMBER 30,
                                                                         1998        1997         1998         1997
                                                                                    (DOLLARS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                    <C>            <C>          <C>          <C>       
NET (LOSS) INCOME................................................$    (118,966)  $   7,068  $  (111,805)  $  12,242
ADJUSTMENTS TO RECONCILE NET CASH USED IN OPERATING ACTIVITIES:
   MARKET VALUATION ADJUSTMENTS..................................       76,580          --       76,580         --
   PROVISION FOR ESTIMATED LOSSES ON LOANS.......................       15,191       2,350       12,191         926
   PROVISION FOR LOSSES ON REAL ESTATE OWNED.....................          418          --        2,142         --
   PROVISION FOR LOSSES ON MORTGAGE SERVICING RIGHTS.............       12,704          --       13,704         --
   DEPRECIATION AND AMORTIZATION.................................          458          99        1,075         302
   (GAIN) LOSS ON SALE OF REAL ESTATE OWNED......................          409      (1,164)      (2,018)     (4,275)
   ORIGINATION OF LOANS HELD FOR SALE............................     (287,213)    (21,220)    (534,022)    (50,962)
   PURCHASE OF LOANS HELD FOR SALE...............................     (128,104)   (182,835)    (507,046)   (532,354)
   PROCEEDS FROM SALE OF LOANS HELD FOR SALE.....................      141,752     184,214      361,548     375,565
   GAIN ON SALE OF LOANS.........................................       (1,460)    (19,639)     (27,904)    (30,855)
   (GAIN) LOSS ON SALE OF SECURITIES.............................          433      (3,053)      (7,768)     (3,053)
   UNREALIZED GAIN ON TRADING SECURITIES.........................         (146)        --          (318)        --
   AMORTIZATION OF DISCOUNTS AND DEFERRED FEES...................       (5,299)    (16,208)     (16,529)    (27,123)
   (INCOME) LOSS ON EQUITY INVESTMENTS...........................        4,764         (70)       4,314        (161)
   DEFERRED TAXES, NET...........................................        2,915       5,245        8,172       4,041
   OTHER.........................................................         (443)        --           (69)        --
CHANGE IN:
   TRADING ACCOUNT SECURITIES....................................          177     (10,385)      22,418      (3,622)
   ACCRUED INTEREST RECEIVABLE...................................         (198)        865       (2,090)     (2,865)
   PREPAID EXPENSES AND OTHER ASSETS.............................      (16,191)    (18,940)     (43,328)    (26,732)
   DUE TO AFFILIATES, NET........................................       35,287       6,030       27,999       1,280
   ACCOUNTS PAYABLE AND OTHER LIABILITIES........................       (5,240)    (13,009)       7,079     (15,460)
   NET CASH USED IN OPERATING ACTIVITIES.........................     (272,172)    (80,652)    (715,675)   (303,056)
CASH FLOWS FROM INVESTING ACTIVITIES:
   PURCHASE OF LOANS.............................................      (12,930)    (26,903)    (527,416)   (340,808)
   LOAN REPAYMENTS...............................................       92,795      50,606      221,911     116,969
   LOAN ORIGINATIONS.............................................      (22,862)        --       (39,540)        --
   PROCEEDS FROM SALE OF LOANS...................................      191,083         --       545,932         --
   PROCEEDS FROM SALE OF MORTGAGE-BACKED SECURITIES AVAILABLE    
      FOR SALE...................................................       21,320      12,148      150,530      12,418
   PURCHASE OF MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE.....      (68,652)    (76,739)    (132,945)   (184,393)
   REPAYMENT OF MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE....        8,645       3,733       32,599       4,163
   REPAYMENTS OF MORTGAGE-BACKED SECURITIES HELD TO MATURITY.....        1,411       1,552        3,545       3,036
   PURCHASE OF REAL ESTATE OWNED.................................       (5,193)        --       (18,263)        --
   PROCEEDS FROM SALE OF REAL ESTATE OWNED.......................       56,280      18,271      170,207      44,841
   PURCHASE OF SECURITIES AND FHLB STOCK.........................          --          --       (14,731)     (1,833)
   PURCHASES OF LEASEHOLD IMPROVEMENTS AND EQUIPMENT.............       (2,561)       (749)      (4,160)     (1,194)
   NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES...........      259,336     (18,081)     387,669    (347,071)
CASH FLOWS FROM FINANCING ACTIVITIES:
   NET INCREASE (DECREASE) IN DEPOSITS...........................      111,351     (37,565)     171,493     (93,845)
   PROCEEDS FROM SHORT-TERM BORROWINGS...........................      406,156     373,961    1,733,984   1,073,009
   REPAYMENTS OF SHORT-TERM BORROWINGS...........................     (496,398)   (299,382)  (1,620,497)   (512,587)
   ISSUANCE OF COMMON STOCK......................................          --          --        61,811         --
   PURCHASE OF TREASURY STOCK....................................       (2,728)        --        (2,728)        --
   PROCEEDS FROM NOTES PAYABLE...................................          --      100,000          --      109,245
   REDEMPTION OF PREFERRED STOCK.................................          --          --       (27,500)        --
         NET CASH PROVIDED BY FINANCING ACTIVITIES................      18,381     137,014      316,563     575,822
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..............       5,545      38,281      (11,443)    (74,305)
CASH AND CASH EQUIVALENTS:
   BEGINNING OF PERIOD...........................................       49,127      39,712       66,115     152,298
   END OF PERIOD.................................................  $    54,672   $  77,993  $    54,672   $  77,993
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--CASH PAID FOR:
   INTEREST...................................................... $     34,011   $  24,026  $    97,223   $  51,577
   INCOME TAXES..................................................           --         600        5,690       6,350
NONCASH INVESTING ACTIVITIES:
   ADDITIONS TO REAL ESTATE OWNED ACQUIRED IN SETTLEMENT OF
         LOANS...................................................       18,848      27,588      121,878     108,831
   TRANSFER OF SECURITIES CLASSIFIED AS TRADING TO AVAILABLE
       FOR SALE                                                         16,869         --        16,869         --
   EQUIPMENT ACQUIRED THROUGH CAPITAL LEASE......................          --          --           --          493
NONCASH FINANCING ACTIVITIES:
   PAY IN KIND PREFERRED STOCK DIVIDEND..........................          --          652          417         652
   PREFERRED STOCK ISSUED IN EXCHANGE FOR CANCELLATION OF 
        ACCOUNTS PAYABLE.........................................          --       27,500          --       27,500
</TABLE>

                   SEE NOTES TO INTERIM FINANCIAL STATEMENTS.




<PAGE>

             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>

<CAPTION>
                                                                                                        ACCUMULATED
                                                                                            (DEFICIT)      OTHER
                                                                                            RETAINED   COMPREHENSIVE
                                PREFERRED STOCK           COMMON STOCK    TREASURY STOCK    EARNINGS     INCOME (LOSS)   TOTAL
                                SHARES    AMOUNT     SHARES     AMOUNT   SHARES  AMOUNT
                                                                 (dollars in thousands)



<S>                               <C>       <C>        <C>          <C>     <C>    <C>         <C>        <C>           <C>
BALANCE, January 1, 1996......     --    $   --     1,300,863  $  6,800     --  $   --    $    255     $   (16)       $    7,039
 Comprehensive income:
 Net income..................                                                                4,967                         4,967
 Unrealized loss on available-
   for sale securities-net of tax                                                                          (81)              (81)
 Total comprehensive income...                                                                                             4,886
 Exchange of subordinated debt
    for common stock.........                       1,606,618    11,000                                                    1,000
 Issuance of common stock.....                      4,662,519    38,097                                                   38,097
BALANCE, December 31, 1996....     --        --     7,570,000    55,897      --    --        5,222         (97)           61,022
 Comprehensive income:
 Net income...................                                                              15,164                        15,164
 Unrealized loss on available
   for-sale securities--net of
   tax........................                                                                          (2,836)          (2,836)
 Total comprehensive income...                                                                                           12,328
 Treasury stock...............                                                    5,000       (124)                        (124)
 Issuance of preferred stock    27,500     27,500                                                                        27,500
 Preferred stock dividend...                                                                (1,604)                      (1,604)

BALANCE, December 31,
 1997.......................    27,500     27,500   7,570,000    55,897    5,000   (124)    18,782      (2,933)          99,122
 Comprehensive loss:
 Net loss...................                                                              (111,805)                    (111,805)
 Unrealized loss on available
    for-sale securities--net of
     tax....................                                                                           (1,907)           (1,907)
 Unrealized loss on foreign
    currency translation....                                                                             (270)             (270)
 Total comprehensive loss...                                                                                           (113,982)
 Treasury stock.............                                             180,000 (2,728)                                 (2,728)
 Preferred stock dividend...                                                                             (417)             (417)
 Preferred stock redemption.    (27,500)  (27,500)                                                                      (27,500)
 Common stock issuance......                        3,500,000    61,811                                                  61,811
BALANCE, September 30, 1998         --        --   11,070,000 $ 117,708  185,000$(2,852) $ (93,440) $  (5,110)       $   16,306
 (unaudited)................
</TABLE>



                   See notes to interim financial statements.




<PAGE>


             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

                      NOTES TO INTERIM FINANCIAL STATEMENTS
                             

1.       BASIS OF PRESENTATION

          The consolidated  financial  statements of Wilshire Financial Services
Group Inc. and Subsidiaries  (the "Company") are unaudited and should be read in
conjunction with the 1997 Annual Report on Form 10-K. A summary of the Company's
significant  accounting  policies  is set  forth  in Note 1 to the  Consolidated
Financial Statements in the 1997 Annual Report on Form 10-K.

          In  the  opinion  of  management,  all  adjustments,  other  than  the
adjustments  described below,  generally  comprised of normal recurring accruals
necessary for fair  presentations of the interim financial  statements have been
included and all intercompany  accounts and transactions have been eliminated in
consolidation.  Operating  results for the nine months ended  September 30, 1998
are not necessarily  indicative of the results that may be expected for the year
ending December 31, 1998.

          The  preparation of financial  statements in conformity with generally
accepted  accounting  principals  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosures  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.

          Certain  reclassifications  of 1997  amounts  were  made in  order  to
conform to the 1998 presentation,  none of which affect previously  reported net
income.


2.       GENERAL MARKET CONDITIONS

          Beginning in August 1998,  and more  significantly  since  October 12,
1998, the global financial marketplace has experienced  overwhelming changes and
volatility.  The market for mortgages  and  mortgage-backed  securities  and, in
particular,  subordinate  credit  related  tranches  of  these  securities,  has
experienced  dramatically widening spreads since August 1998. Liquidity problems
affecting certain Wall Street firms, hedge funds and other financial instruments
investors have exacerbated this market phenomenon  through forced liquidation of
their  assets.  This has led to an increased  need for  liquidity at the Company
both to meet  collateral  calls and as a preemptive  measure to protect  against
future  mortgage-backed  securities spread  distortions that the Company expects
may be experienced by the markets in general.

          As a result,  the Company sold a  significant  amount of its assets in
order to meet collateral  calls,  primarily by Salomon Smith Barney,  and reduce
outstanding  debt.  The Company  reported  two major  dispositions  of assets on
Current  Report Form 8-K  subsequent to September 30, 1998.  The first  reported
disposition  included (a) 68 classes of subordinate  mortgage-backed  securities
for  proceeds  of  approximately  $63.3  million,  (b) a pool of  non-performing
mortgage loans for proceeds of $211.8 million and (c) mortgage  servicing rights
for  proceeds of $1.4  million.  The second  disposition  of assets  reported on
Current Report Form 8-K was the sale of a pool of performing  mortgage loans for
proceeds of  approximately  $232.5  million.  The Company  reduced the  recorded
carrying  amount  of the  assets  in both  sales  to the  amount  realized  upon
disposition  and  reflected a  write-down  (see  footnote  3,  Market  Valuation
Adjustments)  in  determining  net loss during the quarter  ended  September 30,
1998.  Had the  Company  not been forced to sell these  assets,  primarily  as a
result of collateral calls by certain  affiliates of Salomon Smith Barney,  Inc.
but rather held these  assets  until market  conditions  stabilized,  management
believes the Company's losses would have been far less severe.



<PAGE>


             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

                NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)

          In addition to these significant asset sales, the Company, as a result
of reviewing its current operations,  reduced its workforce by approximately 19%
during  October  1998 (see  additional  discussion  in footnote  11,  Subsequent
Events).  The Company has also reduced the carrying value of certain capitalized
mortgage  servicing  rights  due to  faster  than  expected  prepayments  of the
underlying  loans and revised future  estimates of prepayments.  The Company has
recorded  a  total  write-down   related  to  servicing  rights  of  $12,704  in
determining  net loss for the quarter ended  September 30, 1998. The Company has
also evaluated the impact of the current market conditions on the estimated fair
value of the remainder of its mortgage-backed securities portfolio and reflected
in market  valuation  adjustments  that amount which has been deemed to be other
than temporary impairment.


3.       MARKET VALUATION ADJUSTMENTS

          As noted above,  subsequent to September 30, 1998,  the Company sold a
significant  amount  of  its  loans  and  mortgage-backed   securities  to  meet
collateral calls, primarily by certain affiliates of Salomon Smith Barney, Inc.,
and increase  liquidity  as well as recorded  other  adjustments  related to the
market conditions.  The declines in values on the assets included in these sales
have been  recognized as market  valuation  adjustments as of September 30, 1998
and recognized in determining  net loss for the quarter then ended. In addition,
the Company has  evaluated  the impact of the current  market  conditions on the
estimated  fair  value  of  the  remainder  of  its  mortgage-backed  securities
portfolio and reflected in market  valuation  adjustments  that amount which has
been deemed to be other than temporary impairment.  The evaluation of other than
temporary impairment considers the decline, as well as trends in the decline, of
the market values,  the relative severity of the declines in market values,  and
the Company's  ability to collect all amounts due  according to the  contractual
terms. If current market  conditions  continue to negatively impact the value of
these assets,  additional other than temporary impairment may be realized in the
future.

          Subsequent  to September 30, 1998,  the Company  sold,  primarily as a
result of collateral calls by certain affiliates of Salomon Smith Barney,  Inc.,
discounted  loans with a carrying value of $211.8  million,  loans held for sale
with a carrying  value of $232.5  million and  mortgage-backed  securities  with
carrying  value of  $63.3  million.  As a result  of  these  sales,  short  term
borrowings were reduced $500.2 million. These assets, and the related short term
financing,  are reflected in the Company's consolidated  statements of financial
condition  as of  September  30,  1998 net of the  applicable  market  valuation
adjustments.  The  effect  of these  sales  on the  consolidated  statements  of
financial  condition  as of  September  30, 1998 would be to reduce total assets
from  approximately  $1.8  billion to $1.3  billion.  Discounted  Loans would be
reduced  from  $247.2  million  to $35.4  million,  loans held for sale would be
reduced from $592.2  million to 359.7  million and  mortgage-backed  securities,
available for sale would be reduced from $245.9 million to $182.6 million. Short
term borrowings would be reduced from $1.1 billion to $575.9 million.

          Total market valuation adjustments for the quarter ended September 30,
1998 was $76.6  million.  Of this  amount,  $22.2  million  relates  to sales of
mortgage-backed  securities,  $5.2  million  relates  to  other  than  temporary
impairment of remaining  mortgage-backed  securities,  $34.9 million  relates to
sales of loans held for sale,  discounted loans and real estate owned, and $14.3
million   relates  to  hedge  losses   previously   deferred  in  the  Company's
consolidated  statement of financial  condition  (see  footnote 5,  Commitments,
Contingencies and Off-Balance Sheet Risk).

          Based on the use of the current available data in the valuation of its
assets, the Company's management believes it is proper to reflect the decline of
these assets as an adjustment in the quarter ended September 30, 1998.





<PAGE>


             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

                NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)

4.       DEBT RESTRUCTURING

          The recent dramatic events in the financial markets,  which included a
significant  reduction in  valuations  of, and  liquidity  for,  mortgage-backed
securities,  has had a significant adverse impact on the Company's liquidity and
financial condition. The decline in valuations resulted in collateral calls from
the Company's lenders,  which reduced the Company's cash position and eventually
prompted  asset  sales at  depressed  prices to meet  these  calls  and  provide
liquidity.  While these asset sales have improved the liquidity  position of the
Company, the market for mortgage-backed  securities -- particularly  subordinate
mortgage-backed  securities  -- has  not  recovered  and the  financial  markets
generally  continue to be volatile.  Further,  certain of the Company's  lenders
have  expressed  concern about  continued  lending given market  conditions  and
recent losses incurred by the Company.

          In order to address these liquidity concerns and improve the Company's
financial  condition,  management  entered into  discussions  with an unofficial
committee  of  holders  of  a  majority  of  the  Company's  $184.2  million  in
outstanding  publicly  issued notes and its financial  advisors,  Houlihan Lokey
Howard  &  Zukin,  and  legal  counselors,  Latham  and  Watkins,  concerning  a
restructuring of the Company's obligations under the notes.  Following extensive
discussions,  the  Company  and  the  unofficial  committee  agreed  today  to a
restructuring  of the Company whereby (i) the  noteholders  would exchange their
notes for common stock in the  Company;  (ii)  existing  holders of common stock
would receive  warrants or highly diluted new common stock in exchange for their
holdings;  and (iii) pending  consummation of the  restructure,  the noteholders
would forbear from declaring certain defaults which resulted from the net losses
incurred  by the Company  and  actions  taken by the Company to meet  collateral
calls.

          Management believes that this restructuring will significantly improve
the Company's financial position by reducing indebtedness by $184.2 million, the
interest cost associated with that indebtedness,  and significantly increase the
Company's  equity  account.  This  restructuring  is  subject  to  a  number  of
conditions,  including no material  adverse change and negotiation of definitive
documents.  The  Company  currently  expects  that  this  restructuring  will be
completed at the end of the first quarter of 1999.  Other  creditors,  including
trade creditors and secured creditors, are not expected to be adversely affected
by this restructuring.

          As a part of  this  restructuring,  the  Company  and  the  unofficial
committee  of  noteholders  anticipate   incorporation  of  servicing  functions
currently performed by WCC into the servicing subsidiary of WFSG.

          The Company's unaudited  consolidated  financial  statements have been
prepared on a going concern basis, which contemplates  continuity of operations,
realization of assets and the liquidation of liabilities in the normal course of
business.  The  appropriateness  of using the going  concern  basis is dependent
upon, among other things, the adequate resolution of the Company's near and long
term  liquidity  shortfall,  as  well  as  the  successful  consummation  of the
reorganization  described above. The  consolidated  financial  statements do not
include any adjustments relating to the Company's ability to continue as a going
concern.


5.       COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK

          At  September  30, 1998,  the Company had open short  positions on 875
5-year U.S. Treasury Notes and 450 French Franc futures contracts. To the extent
that  aggregate net losses on these  instruments  were  effective  hedges of the
underlying assets to which they relate, the losses are deferred as an adjustment
to the basis of those  assets and  amortized  using a method  approximating  the
interest  method.  The total amount of deferred losses as of September 30, 1998,
remaining in the consolidated statement of financial condition was $3.1 million.



<PAGE>


             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

                NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)

          During  the  third  quarter,   unusually  volatile  market  conditions
affecting  the value of  hedged  assets  caused a  breakdown  of the  historical
interest  rate   relationships  with  the  related  hedging   instruments.   The
correlation  between hedged assets and hedging  instruments was  insufficient to
support  continuation  of this  particular  hedging  strategy at that time. As a
result, all hedging  instruments  related to fixed-rate or lagging-index  assets
held or available for sale were closed out before or shortly after September 30,
1998.  $14.3  million of  previously  deferred  hedging  losses were  considered
ineffective  and charged to net loss during the quarter (see  footnote 3, Market
Valuation Adjustments).

          First Bank of Beverly  Hills,  F.S.B.  ("First  Bank"),  the Company's
savings bank subsidiary,  had  approximately  $129.0 million notional  principal
amount of interest rate swap agreements outstanding at September 30, 1998, which
were  designated as hedges of certain fixed rate loans in order to convert fixed
rate income streams to variable  rate.  These swaps had the effect of decreasing
the Company's net interest income by approximately  $64 thousand during the nine
months  ended  September  30, 1998.  The market  value of these swaps  currently
deferred was $(0.8) million at September 30, 1998.

          From time to time,  the Company  enters into various  commitments  and
letters  of intent  relating  to  purchases  of loans,  foreclosed  real  estate
portfolios and discrete operating companies.  There can be no assurance that any
of such transactions will ultimately be consummated.  It is the Company's policy
to generally record such transactions in the financial  statements in the period
in which such transactions are closed.


6.       INCOME TAXES

          The Company  files  consolidated  federal  income tax returns with its
domestic subsidiaries. Certain state and foreign tax returns are also filed on a
consolidated  basis while others are filed on a separate entity basis.  Deferred
tax assets and liabilities represent the tax effects,  based on current tax law,
of future  deductible or taxable  amounts  attributable to events that have been
recognized  in the  financial  statements.  A  valuation  allowance  is recorded
against  deferred tax assets when there is not  presumptive  evidence that it is
more likely than not that the deferred tax assets will be realized.

          During the quarter ended  September 30, 1998,  the Company  incurred a
substantial net operating loss for federal income tax purposes. A portion of the
federal  loss will be carried  back to the years 1996 and 1997.  The refund from
the  carryback  claim plus  refunds of taxes  previously  paid to the IRS and to
various state taxing authorities is expected to be approximately  $14.8 million.
In addition,  the Company expects to pay approximately $0.7 million of state and
foreign  income  taxes based on  separate  entity tax  liabilities.  The Company
recorded a tax benefit for the three and nine months ended September 30, 1998 in
the accompanying  consolidated statements of operations in amounts sufficient to
reflect the net refund of $14.1 million as a current income tax receivable.

          Due  to  uncertainty  relating  to  the  future  profitability  of the
Company, the net deferred tax asset of $30 to $40 million,  consisting primarily
of federal,  state and foreign net operating loss  carryforwards,  is completely
offset by a valuation allowance.


7.       LOSS PER SHARE

          The Company has outstanding  stock options which are considered common
stock  equivalents in the calculation of diluted earnings per share.  During the
quarter and nine months ended September 30, 1998, the Company  experienced a net
loss, which resulted in common stock equivalents having an anti-dilutive  effect
on  earnings  per  share.  Weighted  average  shares  outstanding  is  therefore
equivalent for basic and diluted earnings per share.



<PAGE>


             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

                NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)


8.       THIRD QUARTER SECURITIZATION

          In September  1998,  the Company  completed a  securitization  sale of
approximately $177.7 million unpaid principal balance of loans resulting in gain
on sale of  approximately  $4.5 million.  The gain on sale  resulting  from this
transaction  is offset by net losses of  approximately  $3.0  million  resulting
primarily from realized hedge losses associated with this securitization and the
Company's mortgage loan origination activity.


9.       INVESTMENT IN WREIT

          In April 1998, the Company  sponsored the initial  public  offering of
Wilshire Real Estate  Investment  Trust Inc.  ("WREIT"),  whereby WREIT received
approximately  $167.0  million of proceeds.  The Company is the Manager of WREIT
and, as such,  earns fee income from the  management of WREIT based on the level
of WREIT's investment  assets.  During the quarter ended September 30, 1998, the
Company earned approximately $1.3 million in management fee income.

          The  Company  purchased  990,000  shares  of  WREIT  common  stock  in
conjunction with the initial public  offering.  This investment is accounted for
under the equity  method of  accounting  and  therefore  , is not  adjusted  for
fluctuations in the market price of the underlying shares but rather,  increases
and decreases based on earnings of WREIT and, receipt of dividends.

          WREIT has been  significantly  impacted by general  market  conditions
(see footnote 2) in the same manner as the Company. As a result,  WREIT has sold
assets to increase  liquidity  and  experienced  significant  losses  during the
quarter ended  September 30, 1998. The Company's  investment in WREIT  decreased
approximately $4.3 million due primarily to the Company's  percentage  ownership
share of WREIT's  losses.  The carrying  amount of the  Company's  investment in
WREIT was approximately $9.2 million as of September 30, 1998.


10.      RELATED PARTY TRANSACTIONS

          During the quarter  ended  September  30,  1998,  the  Company  loaned
approximately  $15.6 million to WREIT. These loans are secured by operating real
estate  with loan to value  ratios of up to 85%,  are due on October 1, 2008 and
bear  interest  at 10% per annum.  WREIT also made a loan to the  Company in the
amount of $17.7 million during the quarter ended  September 30, 1998.  This loan
is  included  as an  offset  to  due  from  affiliates,  net  in  the  Company's
consolidated  statement of financial  condition as of September 30, 1998,  bears
interest at 13% per annum and is due with thirty days notice.

          During 1998, the Company made payments of  approximately  $3.9 million
to its two principal  stockholders.  These  amounts have been  reimbursed to the
Company by offsetting  other  amounts due to an  affiliated  entity owned by the
principal stockholders.


11.      SUBSEQUENT EVENTS

          In addition to the significant  events disclosed in footnotes 2, 3 and
4, the following significant events occurred subsequent to September 30, 1998.

<PAGE>


             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

                NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)

          During  October  1998,  the  Company  made  a  strategic  decision  to
eliminate its retail residential  mortgage and manufactured  housing origination
activity.  During the nine months ended  September 30, 1998,  these  origination
activities  accounted for  approximately  $95.5 million of the Company's  $573.6
million of origination  production.  The Company has  written-off  approximately
$1.2  million  of  goodwill  (included  in other  expenses  in the  consolidated
statement of operations)  established  upon  acquisition of the residential real
estate mortgage origination branches.

          In October 1998 the Company  reduced its  workforce  by  approximately
19%, the majority of which related to these origination activities.

          Management  of the Company is  currently  negotiating  with a European
insurance  company  to  acquire  its  wholly  owned  subsidiary,  which  holds a
portfolio  of loans and other  financial  instruments.  The  Company  expects to
finance  approximately  80% of the purchase price with unrelated  third parties.
The  Company has  granted  WREIT an option to  purchase  all or a portion of the
Company's interest in such assets. As of the date this Form 10-Q was required to
be filed with the Securities and Exchange  Commission,  it was uncertain whether
this  transaction  would  ultimately be  consummated.  Management of the Company
remains committed to the ultimate consummation of this transaction.  However, in
the event that this does not occur,  the Company  will be required to  write-off
against  the  Company's  earnings   approximately  $8.2  million  of  previously
capitalized  costs,  consisting of a non-refundable  deposit of $7.2 million and
capitalized deal costs of approximately $1.0 million.

          In October 1998, as the result of a recent examination,  the Office of
Thrift  Supervision agreed to lift the cease and desist order previously imposed
on First Bank.

          Subsequent  to September  30, 1998,  the Office of Thrift  Supervision
informed the Company and Wilshire Acquisitions Corporation,  a subsidiary of the
Company,  both  savings and loan  holding  companies,  that  formal  enforcement
actions may be imposed.  These actions respond to alleged  violations of certain
affiliated  transactions  regulations with First Bank.  Management requested the
OTS consider less formal  responses,  as the alleged  violations were induced by
external  conditions.  In the interim, the OTS notified First Bank that approval
would be  required  prior to  entering  into  certain  affiliated  transactions.
Management  believes these restrictions,  as well as other related  restrictions
that may be imposed, will have no material impact on its operations.

          In October 1998, the Company purchased George Elkins Mortgage Company,
a four branch  commercial  mortgage loan  originator  headquartered  in Southern
California  for  approximately  $3.7  million  in cash  and an  additional  $1.5
million,  which is contingent on certain operating performances through the year
2000. The purchase was consummated through First Bank.


12.      NEW ACCOUNTING PRONOUNCEMENTS

          The Financial  Accounting  Standards  Board ("FASB")  recently  issued
Statement of Financial  Accounting  Standards ("SFAS") No. 131 "DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED  INFORMATION" which establishes  standards
for the way public  entities  report  information  about  operating  segments in
annual  financial  statements and requires that those entities  report  selected
information  about  operating  segments in interim  financial  reports issued to
stockholders.  This  Statement is effective  for fiscal  years  beginning  after
December  15,  1997  with  interim  periods  presented   following  the  initial
presentation  in annual  financial  statements.  The  Company  will  incorporate
appropriate disclosures at the time these pronouncements are adopted.

          In 1998, the Company  adopted SFAS No. 130,  "Reporting  Comprehensive
Income",  which  requires  companies  to report all  changes in equity  during a
period, except those relating to investment by owners and


<PAGE>


             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

                NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)

          distributions  to owners,  in a financial  statement for the period in
which they are recognized. The Company has chosen to disclose comprehensive loss
for the quarter and nine months ended September 30, 1998, which  encompasses net
income,  unrealized  losses on available for sale securities and unrealized loss
on  foreign  currency  translations,  with  no tax  effect,  on the  face of the
accompanying consolidated statement of changes in stockholders' equity.

          In June  1998,  the FASB  issued  Statement  of  Financial  Accounting
Standards  No.  133,   "Accounting   for  Derivative   Instruments  and  Hedging
Activities."  The  Statement  establishes  accounting  and  reporting  standards
requiring  that  every  derivative   instrument  (including  certain  derivative
instruments  embedded in other  contracts)  be recorded in the balance  sheet as
either an asset or liability  measured at its fair value. The Statement requires
that changes in the derivative's fair value be recognized  currently in earnings
unless  specific  hedge  accounting  criteria are met.  Special  accounting  for
qualifying  hedges  allows a  derivative's  gains and  losses to offset  related
results on the hedged item in the income statement,  and requires that a company
must formally document,  designate, and assess the effectiveness of transactions
that receive hedge accounting.

          Management expects that the Company will adopt SFAS No. 133 on January
1, 2000.  Management  has not yet quantified the impact of adopting SFAS No. 133
on its financial statements and has not determined the method of its adoption of
SFAS No. 133. However,  the Statement could increase  volatility in earnings and
other comprehensive income.

          The American Institute of Certified Public Accountants recently issued
Statement  of  Position  ("SOP")  98-5,  "Reporting  on the  Costs  of  Start-up
Activities,"  which has been cleared by the FASB. This SOP provides  guidance on
the financial reporting of start-up and organizational costs.  Specifically,  it
requires costs of start-up activities and organizational costs to be expensed as
incurred and is effective for financial  statements  for fiscal years  beginning
after December 15, 1998. The initial application of this SOP will be reported as
a cumulative  effect of a change in  accounting  principle.  As of September 30,
1998, the Company had no capitalized start-up or organizational costs.

          In  October  1998,  the FASB  issued  SFAS No.  134,  "Accounting  for
Mortgage-Backed  Securities after the  Securitization of Mortgage Loans Held for
Sale by a Mortgage  Banking  Enterprise",  an  amendment  of SFAS No.  65.  This
statement is effective for the first fiscal quarter beginning after December 15,
1998. This statement standardizes how mortgage banking firms account for certain
securities  and other  interests they retain after  securitizing  mortgage loans
that were held for sale.  Adoption of this pronouncement is not expected to have
a material impact on the Company's consolidated financial statements.


<PAGE>



             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES


ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

          THE  FOLLOWING  DISCUSSION  SHOULD  BE READ IN  CONJUNCTION  WITH  THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND NOTES THERETO.

          Wilshire  Financial Services Group Inc. ("WFSG" or the "Company") is a
diversified  financial  services  company.  The Company conducts business in the
U.S. and Europe,  specializing in loan portfolio acquisition and securitization,
correspondent  lending and  servicing.  The  Company  offers  wholesale  banking
through its  subsidiary,  First Bank of Beverly Hills,  F.S.B.  ("First  Bank").
First Bank is a federally chartered savings institution  regulated by the Office
of Thrift Supervision ("OTS") with one branch and a merchant bankcard processing
center in  Southern  California.  Administrative  headquarters  of the  Company,
Wilshire  Funding  Corporation  ("WFC") and First Bank are located in  Portland,
Oregon.


GENERAL MARKET CONDITIONS

          Beginning in August 1998,  and more  significantly  since  October 12,
1998,  and  continuing to the present,  the Company has been  significantly  and
negatively  impacted  by  various  market  factors.  These  factors,  which  are
discussed further below,  resulted in a dramatic  reduction in market valuations
for certain of the Company's  mortgage-backed  securities  and other assets,  as
well as a reduction  in the  availability  of  borrowings  for those  assets and
certain of the Company's loan assets, thereby reducing the Company's liquidity.

          Turmoil in the Russian financial markets, following a prolonged period
of uncertainty in Asian financial  markets,  caused  investors to reassess their
risk tolerance.  This resulted in a dramatic  movement of liquidity  toward less
risky assets (e.g., U.S. Treasury instruments) and away from higher risk assets,
including most non-investment grade assets and commercial and other mortgage and
asset-backed securities.  On October 7, 1998, the Company issued a press release
announcing  changes in the expected  results for the quarter ended September 30,
1998 as a result of market conditions  through the date of that release.  At the
time of that  release,  the Company had no  indication  of the events that would
transpire beginning the week of October 12, 1998, as further described below.

          This movement toward higher quality investments  dramatically  reduced
available  liquidity to non-investment  grade assets.  Without available funding
sources,  many investors in these assets,  including  several  well-known  hedge
funds, were forced to liquidate  holdings at reduced prices.  With greater sales
pressure and supply outpacing  demand,  prices continued to fall as more lenders
made margin calls,  demanding  additional  collateral for their loan  positions.
Many companies were rapidly depleting available cash reserves.

          On October 12, 1998,  another  well-known  hedge fund was  liquidated.
This event triggered further collateral calls,  forcing additional  companies to
sell assets to cover  borrower  collateral  calls,  and  continuing the downward
spiral in prices.  On October  15,  1998 the Federal  Reserve  lowered  interest
rates, largely in response to this liquidity crisis.

          During  October and  continuing  into the month of November  1998, the
Company sold a significant  amount of assets in response to the above conditions
to meet collateral  calls by lenders,  primarily  certain  affiliates of Salomon
Smith Barney,  Inc., and to increase liquidity.  The downward pressure on prices
and the Company's need to sell assets to meet these collateral calls resulted in
the  Company  disposing  of  certain  assets  for  proceeds  which  resulted  in
significant  losses for the quarter and nine months  ended  September  30, 1998.
Beginning during the week of October 12, 1998, the Company sold,  primarily as a
result of collateral  calls,  Discounted  Loans with a carrying  value of $211.8
million,  Non-Discounted  Loans  with a  carrying  value of $232.5  million  and
mortgage-backed securities with carrying value of $63.3 million. Had the Company
not been forced to sell these assets,  but rather held these assets until market
conditions stabilized,  management believes the Company's losses would have been
far less severe.



<PAGE>



RESULTS OF  OPERATIONS--NINE  MONTHS ENDED  SEPTEMBER  30, 1998 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1997

NET LOSS

          The Company  had a net loss of  approximately  $111.8  million for the
nine months ended  September  30, 1998  compared to net income of  approximately
$12.2 million for the nine months ended September 30, 1997. The net loss for the
nine months ended September 30, 1998 is primarily  attributable to $76.6 million
of  market  valuation  adjustments  recognized  by the  Company,  write-down  of
mortgage  servicing rights of $13.7 million and provision for losses on loans of
$12.2 million, as further explained below.


NET INTEREST INCOME

          The Company's net interest income was approximately  $17.9 million for
the nine months ended September 30, 1998 compared to approximately $16.4 million
for  the  nine  months  ended   September   30,  1997,   an  increase  of  8.7%.
Interest-earning  assets increased from $1.1 billion as of September 30, 1997 to
$1.6 billion as of September 30, 1998. The increase in  interest-earning  assets
is  primarily   attributable  to  acquisitions  of  loans  and   mortgage-backed
securities  which in part were  funded  from the  Company's  issuance  of $100.0
million of 13% Series B Notes due 2004 (the "Series B Notes") in August 1997 and
its offering of 3,500,000 shares of common stock in February 1998.

          INTEREST  INCOME.  The  Company's  interest  income was  approximately
$117.2  million  for the nine  months  ended  September  30,  1998  compared  to
approximately  $75.5  million for the nine months ended  September  30, 1997, an
increase  of 55.3%.  The  increase  in the  Company's  interest  income  was due
primarily  to  an  increase  in  the  Company's  interest  earning  assets  from
approximately  $1.1 billion at September 30, 1997 to approximately  $1.6 billion
at September  30, 1998.  During the nine months ended  September  30, 1998,  the
Company  purchased  approximately  $1.0  billion  of  interest-earning   assets,
compared to approximately  $875.0 million during the nine months ended September
30, 1997. In addition, the Company originated $573.6 million of loans during the
nine months ended September 30, 1998,  compared to  approximately  $51.0 million
during the nine months ended September 30, 1997.

          INTEREST  EXPENSE.  The Company's  interest expense was  approximately
$99.3  million for the nine  months  ended  September  30,  1998  compared  with
approximately  $59.0  million for the nine months ended  September  30, 1997, an
increase of 68.2%. The increase in interest expense resulted from an increase in
the Company's  interest-bearing  liabilities  to  approximately  $1.8 billion at
September  30, 1998 from  approximately  $1.3 billion at September  30, 1997 and
includes the issuance of $100.0  million of the  Company's 13% Series B Notes in
the third quarter of 1997.


PROVISIONS FOR ESTIMATED LOSSES ON LOANS

          Provision  for  estimated  losses on loans for the nine  months  ended
September 30, 1998 was  approximately  $12.2 million resulting from provision of
approximately  $15.2 million  during the quarter ended  September 30, 1998.  The
provision of  approximately  $15.2 million  results  primarily  from  additional
provisions taken on Discounted Loans at the Company's non-banking  subsidiaries.
The provision results from increasing market yields on loans,  which have driven
down market values on many pools of loans  (primarily  Discounted  Loans) in the
Company's  portfolio.  The Company has provided for  additional  reserves to the
extent market values for pools of loans have been reduced below book value. This
compares with a net provision for estimated  losses on loans for the nine months
ended September 30, 1997 of approximately $0.9 million resulting from additional
provision of  approximately  $3.4  million,  which was  partially  offset by the
reversal of $2.5 million of excess reserves on loans previously sold.



<PAGE>



OTHER INCOME

          The Company's other loss was approximately  $40.0 million for the nine
months  ended  September  30,  1998  compared to income of  approximately  $46.7
million for the nine months ended  September  30, 1997.  The  components  of the
Company's non-interest income are reflected in the following table:


<TABLE>

<CAPTION>
                                                                  Nine Months Ended
                                                                     September 30,
                                                                  1998          1997
Other income:                                                   (Dollars in thousands)
<S>                                                          <C>              <C>     
  Market Valuation Adjustments.............................. $   (76,580)     $     --
  Write-down of mortgage servicing rights...................     (13,704)           --
  Servicing revenue.........................................       4,810          3,339
  Real estate owned, net....................................       3,616          4,574
  Bankcard income, net......................................       3,486          1,579
  Gain on sale of loans.....................................      27,904         31,252
  Gain on sale of securities................................       7,768          3,053
  Trading income............................................       1,630          1,171
  Other, net................................................       1,075          1,749
         Total other income................................. $   (39,995)     $  46,717
</TABLE>

          The decrease in other income  between the  comparable  periods was due
primarily  to market  valuation  adjustments  of $76.6  million,  write-down  of
mortgage  servicing rights of $13.7 million, a $3.3 million reduction in gain on
sale of loans,  offset by a $4.7 million  increase in gain on sale of securities
and a $1.9 million increase in bankcard income, net.

          MARKET  VALUATION  ADJUSTMENTS.  Subsequent to September 30, 1998, the
Company sold a significant amount of its loans and mortgage-backed securities to
meet collateral calls,  primarily by certain affiliates of Salomon Smith Barney,
Inc., and increase liquidity (see "General Market Conditions").  The declines in
values on the assets  included  in these  sales have been  recognized  as market
valuation  adjustments  to the  applicable  assets as of September  30, 1998 and
recognized in  determining  net loss for the nine months and quarter then ended.
In  addition,  the  Company  has  evaluated  the  impact of the  current  market
conditions  on the  remainder of its  mortgage-backed  securities  portfolio and
reflected in market  valuation  adjustments that amount which has been deemed to
be other than temporary impairment.

          Subsequent  to September 30, 1998,  the Company  sold,  primarily as a
result of collateral  calls,  discounted  loans with a carrying  value of $211.8
million,  loans  held for sale  with a  carrying  value of  $232.5  million  and
mortgage-backed  securities with carrying value of $63.3 million. As a result of
these sales,  short term borrowings  were reduced $500.2 million.  These assets,
and  the  related  short  term   financing,   are  reflected  in  the  Company's
consolidated  statements of financial  condition as of September 30, 1998 net of
the applicable  market valuation  adjustments.  The effect of these sales on the
consolidated statements of financial condition as of September 30, 1998 would be
to  reduce  total  assets  from  approximately  $1.8  billion  to  1.3  billion.
Discounted  Loans would be reduced from $247.2 million to $35.4  million,  loans
held  for sale  would be  reduced  from  $592.2  million  to 359.7  million  and
mortgage-backed  securities  available for the sale would be reduced from $245.9
million to $182.6  million.  Short term  borrowings  would be reduced  from $1.1
billion to $575.9 million.

          Total market valuation adjustments for the quarter ended September 30,
1998 was $76.6  million.  Of this  amount,  $22.2  million  relates  to sales of
mortgage-backed securities, $5.2 million relates to other than temporary




<PAGE>


impairment of unsold mortgage-backed securities,  $34.9 million relates to sales
of loans held for sale and discounted  loans and $14.3 million  relates to hedge
losses  previously  deferred and  classified in other assets in the statement of
financial condition.

          Based on the use of current  available  data in the  valuation  of its
assets, the Company's management believes it is proper to reflect the decline of
these assets as an adjustment in the nine months ended September 30, 1998.

          WRITE-DOWN OF MORTGAGE SERVICING RIGHTS.  During the nine months ended
September  30, 1998,  the Company  wrote-down  capitalized  servicing  rights by
approximately  $13.7  million.  The  write-down  is the  result of  faster  than
expected  prepayments  on loans being  serviced and revised  estimates of future
prepayments.

          GAIN ON SALE OF LOANS.  Gain on sale of loans  decreased  $3.3 million
during  the nine  months  ended  September  30,  1998 as a result of lower  than
expected  securitization  activity by the Company  during the current  year.  As
described under "General Market  Conditions,"  beginning in August 1998, turmoil
in the financial markets resulted in reduced demand for asset-backed  securities
and  therefore,  the Company was unable to complete  all planned  securitization
transactions,  resulting in lower than anticipated gain on sale of loans. During
the  nine  months  ended  September  30,  1998,  the  Company   completed  three
securitizations  of  approximately  $507.7 million  aggregate  unpaid  principal
balance and one whole loan sale of approximately  $72.3 million unpaid principal
balance.  These sale  transactions  resulted  in gains on sale of  approximately
$29.2 million. These gains were offset by net losses of $1.3 million,  primarily
resulting  from the sale of loans  originated  through the Company's  retail and
wholesale  residential mortgage channels.  The loss on sale is the net effect of
$1.5 million of gains, offset by hedge losses of $2.8 million.

          GAIN ON THE SALE OF SECURITIES. During the nine months ended September
30, 1998, the Company sold  mortgage-backed  securities  with carrying values of
approximately  $95.0  million to WREIT in  conjunction  with the initial  public
offering of common stock in April 1998, resulting in gains of approximately $0.7
million.  Additionally,  the Company sold, to unrelated parties, securities with
carrying  values  of  approximately  $53.3  million,  resulting  in net gains of
approximately $7.1 million. Subsequent to September 30, 1998, the Company sold a
substantial  amount of  mortgage-backed  securities to meet collateral calls and
increase  liquidity,  which  resulted  in the  recognition  of  losses  on  such
securities.  These losses are classified as market valuation  adjustments in the
Company's consolidated statement of operations.

          REAL ESTATE  OWNED,  NET.  The decrease in real estate  owned,  net is
primarily  due to gains  on the  disposition  of real  estate  acquired  through
foreclosure  or deed in lieu thereof from the Company's  portfolio of Discounted
Loans, including European assets.

          SERVICING  REVENUE.  Servicing revenue increased $1.5 million or 44.1%
during the nine  months  ended  September  30,  1998,  primarily  as a result of
contracting for the servicing  rights on loan  portfolios  owned by unaffiliated
third  parties  (including  securitizations)  and arranging for such loans to be
sub-serviced by Wilshire Credit Corporation  ("WCC"), an affiliated entity, at a
rate which is lower than the rate received by the Company.

          OTHER,  NET. Other net decreased $0.7 million or 38.5% during the nine
months ended  September 30, 1998. The net decrease is primarily  attributable to
loss of $4.3 million resulting from the Company's  ownership of WREIT, offset by
$2.5 million of loan fees and charges from origination activity and $1.9 million
of management fee income associated with the Company's management of WREIT.


OTHER EXPENSE

          The Company's  other expense totaled  approximately  $85.7 million for
the nine months ended September 30, 1998 compared to approximately $41.0 million
for the nine months ended  September  30,  1997,  primarily  attributable  to an
increase in loan service fees and expenses paid to affiliates which results from
increases in the Company's total 



<PAGE>



loan  portfolio and third party  servicing  (which is  sub-serviced  by WCC) and
increased compensation and employeebenefits and other general and administrative
expenses resulting from the expansion of business  operations and infrastructure
necessary to accommodate growth.

          LOAN SERVICE FEES AND EXPENSES  PAID TO  AFFILIATE.  The largest other
component of other expense in the nine months ended  September 30, 1998 was loan
service  fees  and  expenses,  which  includes  servicing  fees  paid to WCC and
collection-related  expenses  incurred  directly  by WCC and  reimbursed  by the
Company.  Loan service fees and expenses  paid to affiliate  were  approximately
$33.0  million  (of which  approximately  $21.3  million  represents  collection
related loan expenses) for the nine months ended  September 30, 1998 compared to
approximately  $19.4  million for the nine months ended  September  30, 1997, an
increase of approximately $13.6 million, or 69.9%. The $13.6 million increase is
primarily  attributable  to growth in the average  balance of total loans during
the nine months ended September 30, 1998 (considers the securitization of $507.7
unpaid  principal  balance of loans during June and September 1998 and the whole
loan sale of $72.3 million unpaid  principal  balance of loans during June 1998)
and collection related expenses incurred in the resolution of Discounted Loans.

          Subsequent to September  30, 1998, in response to collateral  calls by
certain  affiliates of Salomon Smith Barney,  Inc., the Company sold  Discounted
Loans with unpaid principal balance of approximately $266.5 million.

          Discounted  Loans tend to reduce net interest  margin and net interest
spread,   because  the  interest   cost  of  debt  (which  is  higher  than  for
Non-Discounted  Loans) is not offset by a  corresponding  increase  in  interest
income. Relatively little cash flow from a pool of Discounted Loans is generally
received in the first six to nine months  following  acquisition and the Company
only recognizes  interest and discount on Discounted  Loans in income when those
loans result in the receipt of cash. The Company also  experiences a much higher
level of collection related expenses associated with Discounted Loans, requiring
a  higher  level  of  cash   investment   prior  to   resolution.   Due  to  the
capital-intensive  nature of these  investments  and the  related  unpredictable
earnings stream, the Company believes its reduced investment in Discounted Loans
will improve cash flow and provide more predictable earnings.

          COMPENSATION AND EMPLOYEE BENEFITS. Compensation and employee benefits
were  approximately  $26.0 million for the nine months ended September 30, 1998,
compared to approximately  $11.3 million for the nine months ended September 30,
1997,  an increase of 130.8%.  The increase was  primarily due to an increase in
the  average  number of  full-time  equivalent  employees  from 205 for the nine
months ended  September 30, 1997 to 360 for the nine months ended  September 30,
1998,  reflecting  the  expansion  of  business  activities,  particularly  loan
acquisition and origination activities,  European operations,  and the growth of
activities at the non-bank  subsidiaries.  Subsequent to September 30, 1998, the
Company reduced it workforce by approximately 19%, primarily  resulting from the
Company's  elimination  of  its  retail  residential  and  manufactured  housing
origination activities.

          OTHER  GENERAL  AND   ADMINISTRATIVE   EXPENSES.   Other  general  and
administrative  expenses  increased from approximately $6.7 million for the nine
months ended  September  30, 1997 to  approximately  $18.5  million for the nine
months ended September 30, 1998, an increase of 177.7%,  due primarily to travel
and entertainment expense of $5.5 million, depreciation and amortization of $3.1
million (includes the write-off of goodwill  associated with retail  residential
mortgage origination  branches) and other general corporate costs resulting from
the expansion of business activities at the non-bank subsidiaries,  particularly
loan acquisition activities such as due diligence costs, European operations and
origination activities.


RESULTS OF OPERATIONS--QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO QUARTER
ENDED SEPTEMBER 30, 1997

NET LOSS

          The Company  had a net loss of  approximately  $119.0  million for the
quarter ended  September 30, 1998 compared to net income of  approximately  $7.1
million for the quarter ended  September 30, 1997.  The net loss for




<PAGE>



the quarter ended September 30, 1998 is primarily  attributable to $76.6 million
of  market  valuation  adjustments  recognized  by the  Company,  write-down  of
mortgage  servicing rights of $12.7 million and provision for losses on loans of
$15.2 million, as further explained below.


NET INTEREST INCOME

          The Company's net interest income was  approximately  $6.0 million for
the quarter ended September 30, 1998 compared to approximately  $5.6 million for
the quarter ended  September 30, 1997, an increase of 6.4%. The Company's  asset
base was larger at  September  30,  1998 as a result of growth in the  Company's
investment in loans,  mortgage-backed  securities  and other real estate related
assets.

          INTEREST INCOME. The Company's interest income was approximately $41.0
million for quarter ended  September 30, 1998  compared to  approximately  $29.9
million for the quarter  ended  September  30, 1997,  an increase of 37.0%.  The
increase in the  Company's  interest  income was due primarily to an increase in
the  Company's  interest  earning  assets  from  approximately  $1.1  billion at
September 30, 1997 to approximately $1.6 billion at September 30, 1998.

          INTEREST  EXPENSE.  The Company's  interest expense was  approximately
$35.1  million  for  the  quarter   ended   September   30,1998   compared  with
approximately  $24.3  million for the  quarter  ended  September  30,  1997,  an
increase of 44.0%. The increase in interest expense resulted from an increase in
the Company's  interest-bearing  liabilities  to  approximately  $1.8 billion at
September  30, 1998 from  approximately  $1.3 billion at September  30, 1997 and
includes the issuance of $100.0  million of the Company's  Series B Notes in the
third quarter of 1997.


PROVISIONS FOR ESTIMATED LOSSES ON LOANS

          Provision  for  estimated  losses  on  loans  for  the  quarter  ended
September 30, 1998 was  approximately  $15.2 million  resulting  primarily  from
additional  provision  taken on Discounted  Loans at the  Company's  non-banking
subsidiaries.  The  provision  results from  increasing  market yields on loans,
which  have  driven  down  market  values  on many  pools  of  loans  (primarily
Discounted  Loans) in the  Company's  portfolio.  The Company has  provided  for
additional  reserves  to the extent  market  values for pools of loans have been
reduced below book value. This compares with a provision for estimated losses on
loans for the quarter ended September 30, 1997 of $2.4 million.


OTHER INCOME

          The Company's other income was a loss of  approximately  $87.1 million
for the quarter ended  September  30, 1998  compared to income of  approximately
$28.6 million for the quarter ended  September 30, 1997.  The  components of the
Company's non-interest income are reflected in the following table:



<PAGE>


<TABLE>

<CAPTION>
                                                                       QUARTER ENDED
                                                                       SEPTEMBER 30,
                                                                   1998             1997
                                                                    (Dollars in thousands
Other income:
<S>                                                            <C>              <C>        
  Market Valuation Adjustments..............................   $     (76,580)   $        --
  Write-down of mortgage servicing rights...................         (12,704)            --
  Servicing revenue.........................................           1,070           1,395
  Real estate owned, net....................................             144           1,835
  Bankcard income, net......................................           1,989             518
  Gain on sale of loans.....................................           1,460          20,036
  Gain on sale of securities................................            (433)          3,053
  Trading income............................................             --            1,157
  Other, net................................................          (2,049)            637
                  Total other income........................   $     (87,103)   $     28,631
</TABLE>

          The decrease in other income for the quarter ended  September 30, 1998
was primarily  attributable  to market  valuation  adjustments of $76.6 million,
write-down  of mortgage  servicing  rights of $12.7  million,  an $18.6  million
reduction in gain on sale of loans, and a $1.7 million  reduction in real estate
owned, net.

          MARKET  VALUATION  ADJUSTMENTS.  Subsequent to September 30, 1998, the
Company sold a significant amount of its loans and mortgage-backed securities to
meet collateral calls,  primarily by certain affiliates of Salomon Smith Barney,
Inc., and increase liquidity (see "General Market Conditions").  The declines in
values on the assets  included  in these  sales have been  recognized  as market
valuation  adjustments  to the  applicable  assets as of September  30, 1998 and
recognized in  determining  net loss for the nine months and quarter then ended.
In  addition,  the  Company  has  evaluated  the  impact of the  current  market
conditions  on the  remainder of its  mortgage-backed  securities  portfolio and
reflected in market  valuation  adjustments that amount which has been deemed to
be other than temporary impairment.

          Subsequent  to September 30, 1998,  the Company  sold,  primarily as a
result of collateral calls by certain affiliates of Salomon Smith Barney,  Inc.,
discounted  loans with a carrying value of $211.8  million,  loans held for sale
with a carrying  value of $232.5  million and  mortgage-backed  securities  with
carrying  value of  $63.3  million.  As a result  of  these  sales,  short  term
borrowings were reduced $500.2 million. These assets, and the related short term
financing,  are reflected in the Company's consolidated  statements of financial
condition  as of  September  30,  1998 net of the  applicable  market  valuation
adjustments.  The  effect  of these  sales  on the  consolidated  statements  of
financial  condition  as of  September  30, 1998 would be to reduce total assets
from  approximately  $1.8  billion to $1.3  billion.  Discounted  Loans would be
reduced  from  $247.2  million  to $35.4  million,  loans held for sale would be
reduced from $592.2  million to $359.7  million and  mortgage-backed  securities
available for sale would be reduced from $245.9 million to $182.6 million. Short
term borrowings would be reduced from $1.1 billion to $575.9 million

          Total market valuation adjustments for the quarter ended September 30,
1998 was $76.6  million.  Of this  amount,  $22.2  million  relates  to sales of
mortgage-backed  securities,  $5.2  million  relates  to  other  than  temporary
impairment of unsold mortgage-backed securities,  $34.9 million relates to sales
of loans held for sale and discounted  loans and $14.3 million  relates to hedge
losses  previously  deferred and  classified in other assets in the statement of
financial condition.

          Based on the use of current  available  data in the  valuation  of its
assets, the Company's management believes it is proper to reflect the decline of
these assets as an adjustment in the quarter ended September 30, 1998.



<PAGE>



          WRITE-DOWN  OF MORTGAGE  SERVICING  RIGHTS.  During the quarter  ended
September  30, 1998,  the Company  wrote-down  capitalized  servicing  rights by
approximately  $12.7  million.  The  write-down  is the  result of  faster  than
expected  prepayments on loans being  serviced and revised  future  estimates of
prepayments.

          GAIN ON SALE OF  LOANS.  Gain on sale of loans for the  quarter  ended
September 30, 1998 decreased $18.6 million from $20.0 million during the quarter
ended  September  30,1997.  As  described  under  "General  Market  Conditions,"
beginning in August 1998 and  continuing  to present,  turmoil in the  financial
markets  resulted in reduced demand for  asset-backed  securities and therefore,
the  Company was unable to complete  all  planned  securitization  transactions,
resulting in lower than  expected gain on sale of loans.  The Company  completed
one securitization  transaction of approximately $177.7 million unpaid principal
amount of loans,  resulting in gain on sale of approximately $4.5 million.  This
gain was  offset by net  losses of  approximately  $3.0  million,  of which $2.2
million is attributable  to the sale of loans  originated by the Company through
its retail and wholesale  residential  mortgage  channels.  The net loss of $2.2
million  attributable to these  originations  includes  realized hedge losses of
approximately $3.7 million.

          GAIN  (LOSS)  ON THE SALE OF  SECURITIES.  During  the  quarter  ended
September  30,  1998,  the  Company  sold  securities  with  carrying  values of
approximately  $21.8 million,  resulting in loss of approximately  $0.4 million.
The loss on sale of securities  results from the Company's  need to sell certain
securities  during  the  quarter  ended  September  30,  1998 in  order to raise
liquidity in response to conditions in the  financial  marketplace  (see General
Market Conditions).

          REAL ESTATE OWNED, NET. The decrease in income from real estate owned,
net is the result of the ongoing  disposition of previously  acquired Discounted
Loans and real estate owned and a decrease in the Company's  investment in these
types of non-performing  assets.  See the discussion related to Discounted Loans
in "Changes in Financial Condition".

          SERVICING REVENUE. Servicing revenue decreased $0.3 million, or 23.3%,
during the quarter  ended  September  30, 1998,  primarily  as a result  reduced
service fees due to faster than expected prepayment on loans being serviced.

          OTHER,  NET.  Other,  net decreased $2.7 million to a net loss of $2.0
million during the quarter ended  September 30, 1998 from income of $0.6 million
during the quarter  ended  September  30, 1997.  The net loss of $2.0 million is
primarily  attributable  to loss of $4.8 million  resulting  from the  Company's
percentage  ownership of WREIT,  offset by loan fees and charges of $1.1 million
resulting from increased origination activity and management fee of $1.3 million
resulting from the Company's management of WREIT.


OTHER EXPENSE

          The Company's  other expense totaled  approximately  $36.7 million for
the quarter ended September 30, 1998 compared to approximately $19.6 million for
the quarter ended September 30, 1997,  primarily  attributable to an increase in
loan service fees and expenses paid to affiliates  which results from  increases
in the  Company's  total loan  portfolio  and third  party  servicing  (which is
sub-serviced by WCC) and increased  compensation and employee benefits and other
general and  administrative  expenses  resulting  from the expansion of business
operations and infrastructure necessary to accommodate growth.

          LOAN SERVICE FEES AND EXPENSES  PAID TO  AFFILIATE.  Loan service fees
and expenses,  which includes servicing fees paid to WCC and  collection-related
expenses  incurred  directly by WCC and reimbursed by the Company.  Loan service
fees and expenses paid to affiliate were  approximately  $12.9 million (of which
approximately $8.7 million represents  collection related loan expenses) for the
quarter ended September 30, 1998 compared to approximately  $9.7 million for the
quarter ended September 30, 1997, an increase of approximately  32.8%. The $12.9
million  increase is primarily  attributable to growth in the average balance of
total loans  during the nine months  ended  September  30, 1998 



<PAGE>



(considers the securitization of $507.7 unpaid principal balance of loans during
June and  September  1998  and the  whole  loan  sale of  $72.3  million  unpaid
principal  balance of loans during June 1998) and  collection  related  expenses
incurred in the resolution of discounted loans.

          Subsequent to September  30, 1998, in response to collateral  calls by
certain  affiliates of Salomon Smith Barney,  Inc., the Company sold  Discounted
Loans with unpaid principal balance of approximately $266.5 million.

          Discounted  Loans tend to reduce net interest  margin and net interest
spread,   because  the  interest   cost  of  debt  (which  is  higher  that  for
Non-Discounted  Loans) is not offset by a  corresponding  increase  in  interest
income. Relatively little cash flow from a pool of Discounted Loans is generally
received in the first six to nine months  following  acquisition and the Company
only recognizes  interest and discount on Discounted  Loans in income when those
loans result in the receipt of cash. The Company also experiences at much higher
level of collection related expenses associated with Discounted Loans, requiring
a  higher  level  of  cash   investment   prior  to   resolution.   Due  to  the
capital-intensive  nature of these  investments  and the  related  unpredictable
earnings stream, the Company believes its reduced investment in Discounted Loans
will improve cash flow and provide more predictable earnings.

          COMPENSATION AND EMPLOYEE BENEFITS. Compensation and employee benefits
were  approximately  $10.9  million for the quarter  ended  September  30, 1998,
compared to approximately $4.6 million for the quarter ended September 30, 1997,
an increase of 136.1%.  The  increase  was  primarily  due to an increase in the
average number of full-time  equivalent employees from 205 for the quarter ended
September 30, 1997 to 460 for the quarter ended  September 30, 1998,  reflecting
the  expansion  of  business  activities,   particularly  loan  acquisition  and
origination activities, European operations, and the growth of activities at the
non-bank subsidiaries. Subsequent to September 30, 1998, the Company reduced its
workforce  by  approximately  19%,   primarily   resulting  from  the  Company's
elimination  of its retail  residential  and  manufactured  housing  origination
activities.

          OTHER  GENERAL  AND   ADMINISTRATIVE   EXPENSES.   Other  general  and
administrative  expenses  increased  from  approximately  $3.5  million  for the
quarter ended September 30, 1997 to  approximately  $9.3 million for the quarter
ended  September  30, 1998,  an increase of 165.4%,  due primarily to travel and
entertainment  expense of $2.9 million,  depreciation  and  amortization of $2.3
million (includes the write-off of goodwill  associated with retail  residential
mortgage origination  branches) and other general corporate costs resulting from
the expansion of business activities at the non-bank subsidiaries,  particularly
loan acquisition activities such as due diligence costs, European operations and
origination activities.


CHANGES IN FINANCIAL CONDITION

          MORTGAGE-BACKED  AND OTHER SECURITIES.  For accounting  purposes,  the
Company's  mortgage-backed  and other securities are classified as available for
sale, trading account securities and held to maturity. The Company's holdings of
mortgage-backed  securities  available for sale  decreased  approximately  $53.1
million during the nine months ended September 30, 1998 primarily as a result of
the sale of approximately $142.8 million carrying amount ($95.0 million of which
was sold to WREIT in  conjunction  with its  initial  public  offering of common
stock)  purchases of  approximately  $132.9 million,  realized market  valuation
adjustment  of  approximately  $27.4  million,  transfer  from  trading  account
securities of  approximately  $16.9 million,  an increase in unrealized  loss on
available for sale  securities of  approximately  $2.7 and net other decrease of
$30.0 million which  primarily  represents  principal  repayment.  The Company's
holdings of trading account  securities  decreased $39.0 million during the nine
months  ended  September  30, 1998  primarily as a result of the sale of certain
subordinate  securities and the  aforementioned  transfer to available for sale.
The  Company  granted  WREIT a right of first  refusal  with  respect  to future
investments in mortgage-backed  securities  primarily  comprised of interests in
residential mortgage loans. As a consequence, the opportunity for the Company to
invest in such assets  would be limited to the extent  WREIT takes  advantage of
such investment opportunities.


<PAGE>


          LOANS, NET. The Company's  portfolio of performing and  sub-performing
loans  ("Non-Discounted  Loans"), net of discounts and allowances,  increased by
approximately  $284.9 million  during the nine months ended  September 30, 1998.
This increase is primarily  attributable  to the  acquisition of  Non-Discounted
Loans at First Bank,  reflecting the Company's  emphasis on increasing the level
of  investment  in  Non-Discounted  Loans  as a  percentage  of the  total  loan
portfolio. See "Discounted Loans" below.

          DISCOUNTED  LOANS,  NET. The Company's  portfolio of Discounted  Loans
decreased by approximately $216.2 million during the nine months ended September
30, 1998.  During the nine months  ended  September  30,  1998,  the Company has
reduced its  investment  level in Discounted  Loans,  resulting in a decrease in
balance due to attrition  resulting from  resolution of the loans either through
workout  with the  borrower or  acquisition  of  properties  securing  the loans
through   foreclosure  or  deed-in-lieu   thereof.   Discounted   loans  require
significant  capital  resources  prior to resolution,  which is typically six to
nine months  following  acquisition.  The Company  believes it can create a more
predictable and less capital intensive  earnings stream by reducing the level of
investment in these assets.  Subsequent to September 30, 1998, the Company sold,
in response to collateral  calls by an affiliate of Salomon Smith Barney,  Inc.,
approximately $266.5 million unpaid principal balance of Discounted Loans, which
resulted in $29.5  million of the Company's  $76.6  million of market  valuation
adjustments recognized in the Quarter ended September 30, 1998.

          LOANS HELD FOR SALE,  NET, AT LOWER OF COST OR MARKET.  Loans held for
sale, net, at lower of cost or market increased by approximately  $281.5 million
during the nine months ended  September 30, 1998  primarily as the net result of
acquisition  of  Non-Discounted  Loans,   securitization  and  whole  loan  sale
activity, and the Company's expansion of its loan originations.  The Company has
adopted  the  strategy  of  increasing   Non-Discounted   Loans  and  decreasing
Discounted  Loans as a percentage  of the total loan  portfolio.  Non-Discounted
Loans have the advantage of being financed at lower rates than Discounted  Loans
and provide more predictable  cash flows and earnings stream to the Company.  In
addition, Non-Discounted Loans are less capital intensive than Discounted Loans,
which often require the Company to expend cash to ready the loan for resolution,
which  typically  is six to nine months  following  acquisition.  Subsequent  to
September 30, 1998,  the Company sold loans held for sale with carrying value of
$232.5  million which are reflected in the  consolidated  statement of financial
condition as of September  30, 1998.  The effect of this sale would be to reduce
loans held for sale from $592.2 million to $359.7 million.

          DUE FROM AFFILIATE,  NET. Due from affiliate, net primarily represents
payments received in the normal course of servicing operations by WCC, which had
not yet been  remitted  to the  Company.  As of  September  30,  1998,  due from
affiliate,  net of approximately $15.3 million was net of $17.7 million due from
the Company to WREIT, resulting from a loan during the third quarter of 1998. In
addition,  due to  affiliates,  net at December 31, 1997 included  approximately
$1.6 million of PIK preferred  stock  dividend due to WCC from the Company,  and
subsequently in February 1998.

          MORTGAGE SERVICING RIGHTS. Mortgage servicing rights decreased by $5.2
million during the nine months ended  September 30, 1998 primarily  attributable
to the net effect of the  allocation of basis of  approximately  $6.0 million of
servicing   rights  relating  to  two   securitizations   and  the  purchase  of
approximately  $5.0 million of servicing  rights,  offset by the  write-down  of
approximately  $13.7  million of  servicing  rights  resulting  from faster than
expected  prepayments  on loans being  serviced  and revised  future  prepayment
estimates, and $2.5 million of amortization.

          INVESTMENT IN WILSHIRE REAL ESTATE INVESTMENT TRUST INC. Investment in
WREIT increased  $14.7 million as a result of the Company's  purchase of 9.9% of
the original  10,000,000  shares of common stock offered by WREIT as part of its
initial public offering in April 1998,  offset by the Company's  ownership share
of losses and dividends received.

          DEPOSITS.  First Bank increased its deposits by  approximately  $171.5
million or 47.3%  during the nine months  ended  September  30, 1998 to fund the
acquisition of  Non-Discounted  Loans.  Pursuant to a Cease and Desist Order, as
amended  (the  "Order"),  imposed  on  First  Bank by the  OTS,  First  Bank was
prohibited  from  increasing  its total  assets,  as measured at the end of each
calendar quarter above $750 million (increased from previous  limitation of $553



<PAGE>



million in April 1998),  unless such increase was an amount that  represents the
total net interest  credited on deposit  liabilities  earned during that quarter
plus any  increase  permitted  by the Order in prior  quarters.  First  Bank has
complied  with these  requirements.  In October  1998, as the result of a recent
examination,  the OTS agreed to lift the  Order.

          Subsequent  to September  30,  1998,  the OTS informed the Company and
Wilshire Acquisition Corporation,  a subsidiary of the Company, both savings and
loan holding companies,  that formal enforcement  actions may be imposed.  These
actions  respond  to  alleged  violations  of  certain  affiliated  transactions
regulations with First Bank.  Management  requested the OTS consider less formal
responses, as the alleged violations were induced by external conditions. In the
interim,  the OTS notified  First Bank that approval  would be required prior to
entering  into  certain  affiliated  transactions.   Management  believes  these
restrictions,  as well as other related  restrictions that may be imposed,  will
have no material impact on operations.

          SHORT-TERM    BORROWINGS.    Short-term    borrowings   increased   by
approximately  $109.6 million  during the nine months ended  September 30, 1998,
resulting from use of repurchase  agreements and warehouse financing to fund the
purchase of loans and securities.


LIQUIDITY AND CAPITAL RESOURCES

          Liquidity  is  the  measurement  of  the  Company's  ability  to  meet
potential cash requirements,  including ongoing commitments to repay borrowings,
fund  investments,  purchase pools of loans and fund newly originated loans, and
for  general  business  purposes.  The  Company's  sources of cash flow  include
certificates  of deposit,  securitization,  net interest  income and  borrowings
under its warehouse and repurchase  financing  facilities and from institutional
investors and other lenders and public and private debt offerings, including the
Notes  and the  Series B  Notes.  The  Company  has  also  borrowed  money on an
unsecured  basis from WREIT and WCC. In  addition,  First Bank  obtains  funding
through FHLB advances.  The Company's  liquidity is actively  managed on a daily
basis and reviewed  periodically by the Board of Directors of the Company.  This
process is intended to ensure the  maintenance  of sufficient  funds to meet the
needs of the  Company,  including  adequate  cash  flows for  off-balance  sheet
instruments.

          The recent dramatic events in the finanical markets,  which included a
significant  reduction in  valuations  of, and  liquidity  for,  mortgage-backed
securities,  has had a significant adverse impact on the Company's liquidity and
financial condition. The decline in valuations resulted in collateral calls from
the Company's lenders,  which reduced the Company's cash position and eventually
prompted  asset  sales at  depressed  prices to meet  these  calls  and  provide
liquidity.  While these asset sales have improved the liquidity  position of the
Company, the market for mortgage-backed  securities -- particularly  subordinate
mortgage-backed  securities  -- has  not  recovered  and the  financial  markets
generally  continue to be volatile.  Further,  certain of the Company's  lenders
have  expressed  concern about  continued  lending given market  conditions  and
recent losses incurred by the Company. At September 30, 1998, the Company's cash
balances  totaled   approximately   approximately  $54.7  million.   However,  a
significant  portion of this balance was held at First Bank and is not generally
available for use by other than First Bank.

          In order to address these liquidity concerns and improve the Company's
financial  condition,  management  entered into  discussions  with an unofficial
committee  of  holders  of  a  majority  of  the  Company's  $184.2  million  in
outstanding  publicly  issued notes and its financial  advisors,  Houlihan Lokey
Howard  &  Zukin,  and  legal  counselors,  Latham  and  Watkins,  concerning  a
restructuring of the Company's obligations under the notes.  Following extensive
discussions,  the  Company  and  the  unofficial  committee  agreed  today  to a
restructuring  of the Company whereby (i) the  noteholders  would exchange their
notes for common stock in the Company; and (ii) existing holders of common stock
would receive  warrants or highly diluted new common stock in exchange for their
holdings;  and (iii) pending  consummation of the  restructure,  the noteholders
would forbear from declaring certain defaults which resulted from the net losses
incurred  by the Company  and  actions  taken by the Company to meet  collateral
calls.

          Management believes that this restructuring will significantly improve
the Company's financial position by reducing indebtedness by $184.2 million, the
interest cost associated with that indebtedness, and significantly increase



<PAGE>



the  Company's  equity  account.  This  restructuring  is subject to a number of
conditions,  including no material  adverse change and negotiation of definitive
documents.  The  Company  currently  expects  that  this  restructuring  will be
completed at the end of the first quarter of 1999.  Other  creditors,  including
trade creditors and secured creditors, are not expected to be adversely affected
by this restructuring.

          As a part of  this  restructuring,  the  Company  and  the  unofficial
committee  of  noteholders  anticipate   incorporation  of  servicing  functions
currently performed by WCC into the servicing subsidiary of WFSG.

          The Company's unaudited  consolidated  financial  statements have been
prepared on a going concern basis, which contemplates  continuity of operations,
realization of assets and the liquidation of liabilities in the normal course of
business.  The  appropriateness  of using the going  concern  basis is dependent
upon, among other things, the adequate resolution of the Company's near and long
term  liquidity  shortfall,  as  well  as  the  successful  consummation  of the
reorganization described above.

          Sources of  liquidity  for First Bank include  wholesale  and brokered
certificates of deposit,  repurchase financing facilities and FHLB advances.  At
September 30, 1998, First Bank had approximately  $522.4 million of certificates
of deposit.  At September  30, 1998,  scheduled  maturities of  certificates  of
deposit during the 12 months ending  September 30, 1999 and thereafter  amounted
to approximately  $451.9 million and approximately $70.5 million,  respectively.
Brokered and other wholesale  deposits  generally are more responsive to changes
in interest  rates than core deposits and, thus, are more likely to be withdrawn
by the investor upon maturity as changes in interest rates and other factors are
perceived by  investors  to make other  investments  more  attractive.  However,
management of First Bank  believes it can adjust the rates paid on  certificates
of deposit to retain deposits in changing  interest rate  environments  and that
brokered and other  wholesale  deposits can be both a relatively  cost-effective
and stable source of funds.

          The  Company's  uses of cash  include the funding of purchases of U.S.
residential   Discounted  Loans  and  Non-  Discounted  Loans,   mortgage-backed
securities and newly originated mortgage and manufactured housing loans, payment
of   interest    expenses,    repayment    of   loans,    funding   of   initial
over-collateralization   requirements   for   securitization,    operating   and
administrative  expenses,  income taxes and capital expenditures.  The Company's
purchases  of pools of loans and other  assets are  expected to utilize  secured
borrowings  and be  highly  leveraged.  The  actual  dollar  amount  of  secured
borrowings  incurred by the Company will vary  depending on a number of factors,
including the amount of leverage  lenders are willing to make  available  (which
will be affected by market conditions), and management's determination as to the
appropriate  amount of leverage.  With respect to pools of Discounted  Loans and
Non-Discounted  Loans,  the  Company  generally  seeks  to  fund  90%  and  95%,
respectively,  of the purchase price of such pools of loans with borrowed money.
The  Company  draws on a number  of  sources  to  obtain  such  funds  including
certificates of deposit and repurchase arrangements with major investment banks.
Capital expenditures by the Company have not been material.

          The  Company  is  party  to  various   off-balance   sheet   financial
instruments  in the normal  course of business to manage its interest rate risk.
The Company conducts business with a variety of financial institutions and other
companies in the normal  course of business,  including  counter  parties to its
off-balance  sheet  financial  instruments.  The Company is subject to potential
financial  loss if the  counter  party is unable  to  complete  an  agreed  upon
transaction.  The Company seeks to limit  counter  party risk through  financial
analysis and other monitoring procedures.

          Adequate credit facilities and other sources of funding, including the
ability of the Company to securitize loans, are essential to the continuation of
the Company's ability to purchase pools of loans, mortgage-backed securities and
fund newly originated loans.  During the third quarter,  as described in GENERAL
MARKET  CONDITIONS,  financial markets were severely and negatively  impacted by
various  factors  which have resulted in reduced  availability  of liquidity and
capital to specialty finance companies and other holders of non-investment grade
assets and certain types 




<PAGE>



of loans.  This  includes the ability to raise new equity  capital and long term
debt, as well as the ability to securitize or finance certain types of loans.

          The  Company's  growth  strategy is  dependent on its ability to raise
additional debt and/or equity financing.  To the extent this market  environment
persists, such growth is likely to be significantly curtailed or delayed.

          The  Notes  and  Series  B  Notes  contain   certain   limitations  on
indebtedness  which may restrict the ability of the Company to issue  additional
indebtedness  in the future and the  Company  may be  obligated  to seek  equity
financing. There can be no assurance that any such debt or equity financing will
be available to the Company on financially attractive terms in the future.

          To the extent  permitted  by  regulations  and deemed  appropriate  by
management,  the Company is exploring  available liquidity and capital resources
at First Bank to conduct  certain  activities  through  First Bank  during  this
period of market tightness.

          First  Bank  is  required  under  applicable  federal  regulations  to
maintain  specified  levels of "liquid"  investments in qualifying types of U.S.
Government, federal agency and other investments having maturities of five years
or less.  Current OTS regulations  require that a savings  association  maintain
liquid  assets  of  not  less  than  4% of  its  average  daily  balance  of net
withdrawable  deposit  accounts and  borrowings  payable in one year or less, of
which  short-term  liquid  assets  must  consist  of not less than 1%.  Monetary
penalties may be imposed for failure to meet applicable liquidity  requirements.
First Bank has complied with these  requirements.  In addition,  the Company has
been  required to maintain  funds  sufficient  to meet two  semiannual  interest
payments  on the Notes and the  Series B Notes in liquid  assets.  On August 12,
1998,  the  Company  completed  a Consent  Solicitation,  pursuant  to which the
Company  obtained  the  consents  of  holders of the Notes and Series B Notes to
certain  amendments to the indentures  relating to the Notes and Series B Notes,
including the elimination of the liquidity requirements.


YEAR 2000 COMPLIANCE

          The  Company is reliant on  information  technology  for both  general
business  operations  and its loan  servicing  system.  The Company has formed a
committee to address year 2000 issues (the "Committee") that reports directly to
the  Company's  executive  committee.  The  Committee  is  headed  by the  Chief
Information Officer and includes representatives from across the Company.

          The  Committee  has  conducted an inventory of all systems  within the
Company,   classifying  each  as  either  "critical"  or   "non-critical."   For
non-critical  systems,  the Company has obtained a certification from the vendor
that the  applicable  package  is "year  2000  compliant."  For  systems  deemed
"critical," the Company has developed  detailed test plans and created  separate
year 2000 test environments.

          The Company has begun testing of critical  systems and is scheduled to
complete  all  necessary  testing by the end of 1998.  Testing of the  Company's
internally developed systems is near completion, and changes which have resulted
from testing to date are being coded and moved into  production.  Of the testing
begun on critical systems  supplied by outside vendors,  one system's testing is
complete and the other is scheduled during November 1998.  Following the testing
phase, each department's executive management will be responsible for certifying
that their staff has tested critical code and deemed it adequate.

          Aside from limited  hardware  costs,  the  Company's  primary  expense
related to year 2000  compliance is allocation  of existing  staff.  The Company
estimates   that  the  total  cost  related  to  year  2000   compliance  to  be
approximately $500,000.




<PAGE>


          The significant risk to the Company of year 2000 non-compliance is the
inability  to  perform  necessary  loan  servicing  activities.  Currently,  the
Company's loan portfolio is serviced by WCC, an affiliated  entity.  The Company
services loans for third parties (including securitizations), and contracts with
WCC for sub-servicing.  To the extent the loan servicing system is not year 2000
compliant, the ability to service the Company's loans and those of third parties
would be in jeopardy.

          Based on the  results of testing  performed  to date,  the  Company is
confident that it is appropriately  addressing the 2000 issues. Critical systems
supplied by outside vendors have undergone testing not only by the Company,  but
other  customers of the vendors as well. The Company's loan servicing  system is
an internally developed system and therefore,  information  technology personnel
are very familiar with the system and believe their efforts will have  favorable
results.  As a contingency plan, the Company is in the process of identifying an
alternative  servicer for the  Company's  loan  portfolio  and third party loans
currently serviced by the Company and its affiliate. To date the Company has not
formal agreement in place regarding back-up servicers.


IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS

          The Private Securities  Litigation Reform Act of 1995 provides a "safe
harbor"  for  forward-looking   statements  so  long  as  those  statements  are
identified as  forward-looking  and are  accompanied  by  meaningful  cautionary
statements  identifying  important  factors that could cause  actual  results to
differ materially from those projected in such statements. All of the statements
contained  in this  Quarterly  Report on Form 10-Q which are not  identified  as
historical  should be considered  forward-looking.  In  connection  with certain
forward-looking  statements  contained in this Quarterly Report on Form 10-Q and
those  that may be made in the future by or on behalf of the  Company  which are
identified as forward- looking, the Company notes that there are various factors
that could cause actual results to differ materially from those set forth in any
such forward-looking statements. Such factors include but are not limited to the
real  estate  market,  the cease and  desist  order,  the  availability  of loan
portfolios  at  acceptable  prices,  the  availability  of  financing  for  loan
portfolio   acquisitions,   interest  rates  and  expansion   outside  the  U.S.
Accordingly,  there  can be no  assurance  that the  forward-looking  statements
contained in this Quarterly  Report on Form 10-Q will be realized or that actual
results  will  not  be  significantly   higher  or  lower.  The  forward-looking
statements  have not been audited by,  examined by or  subjected to  agreed-upon
procedures by  independent  accountants,  and no third-party  has  independently
verified or reviewed such  statements.  Readers of this Quarterly Report on Form
10-Q should consider these facts in evaluating the information contained herein.
The  inclusion of the  forward-looking  statements  contained in this  Quarterly
Report on Form 10-Q should not be regarded as a representation by the Company or
any other person that the forward-looking statements contained in this Quarterly
Report on Form 10-Q will be achieved. In light of the foregoing, readers of this
Quarterly  Report on Form 10-Q are cautioned not to place undue  reliance on the
forward-looking statements contained herein.


ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

          It is the  objective  of the  Company  to  attempt  to  control  risks
associated with interest rate movements. In general, management's strategy is to
limit the Company's exposure to earnings  variations and variations in the value
of assets and  liabilities  as interest  rates change over time.  The  Company's
asset and liability management strategy is formulated and monitored by the asset
and  liability  committees  for the  Company  and  First  Bank (the  "Asset  and
Liability  Committees") which meet regularly to review,  among other things, the
sensitivity  of the Company's  assets and  liabilities to interest rate changes,
the book and  market  values of assets  and  liabilities,  unrealized  gains and
losses,  including  those  attributable  to hedging  transactions,  purchase and
securitization activity, and maturities of investments and borrowings. The Asset
and Liability Committees coordinate with First Bank's Board of Directors and the
Company's  investment  committees  with respect to overall  asset and  liability
composition.




<PAGE>



          The Asset and Liability  Committees  are  authorized to utilize a wide
variety  of  off-balance  sheet  financial  techniques  to  assist  them  in the
management of interest rate risk.  These  techniques  include interest rate swap
agreements,  pursuant  to which the  parties  exchange  the  difference  between
fixed-rate and floating-rate  interest payments on a specified  principal amount
(referred  to as the  "notional  amount")  for a  specified  period  without the
exchange of the underlying  principal amount.  Interest rate swap agreements are
utilized  to  reduce  the  Company's  exposure  caused by the  narrowing  of the
interest  spread  between fixed rate loans held for  investment  and  associated
liabilities  funding  those loans  caused by changes in market  interest  rates.
First  Bank had  approximately  $129.0  million  notional  principal  amount  of
interest rate swap  agreements  outstanding  at September  30, 1998,  which were
designated  as hedges of certain fixed rate loans in order to convert fixed rate
income  streams to variable  rate.  These swaps had the effect of decreasing the
Company's  net interest  income by  approximately  $64 thousand  during the nine
months ended September 30, 1998.

          The Company has also hedged the interest  rate  exposure of fixed-rate
or lagging-index loans or securities that are either held or available for sale.
The Company  creates a hedge which  matches the principal  amortization  of such
assets against the maturity of the Company's  liabilities  generally by entering
into  short  sales or  forward  sales of U.S.  Treasury  securities,  Government
securities,  interest rate futures  contracts or interest rate swap  agreements.
This  results in market gains or losses on hedging  instruments,  in response to
interest rate increases or decreases, respectively, which approximate the amount
of corresponding market losses or gains,  respectively,  on assets being hedged.
The Company  evaluates  the interest rate  sensitivity  of each pool of loans or
securities in conjunction with the current interest rate environment and decides
whether to hedge the interest  rate exposure of a particular  pool.  The Company
generally  does not  hedge  the  interest  rate  risk  associated  with  holding
non-lagging index adjustable-rate mortgages pending their sale or securitization
due to the decreased significance of such risk. In general, when a pool of loans
or securities are acquired,  the Company will determine  whether or not to hedge
and,  with  respect  to any  sale or  financing  of any  pool of  loans  through
securitization,  the Company will determine  whether or not to  discontinue  its
duration-matched  hedging activities with respect to the relevant loans.  During
the third quarter,  unusually volatile market conditions  affecting the value of
hedged assets caused a breakdown of the historical  interest rate  relationships
with the related hedging instruments.  The correlation between hedged assets and
hedging instruments was insufficient to support  continuation of this particular
hedging strategy at this time. As a result, all hedging  instruments  related to
fixed-rate  or  lagging-index  assets held or available for sale were closed out
before or shortly after September 30, 1998. $14.3 million of previously deferred
hedging losses were  considered  ineffective  and charged to earnings during the
quarter.

          In addition,  as required by OTS  regulations,  First Bank's Asset and
Liability Committee also regularly reviews interest rate risk by forecasting the
impact of  alternative  interest rate  environments  on net interest  income and
market value of portfolio equity  ("MVPE"),  which is defined as the net present
value of an  institution's  existing assets,  liabilities and off-balance  sheet
instruments,  and evaluating such impacts against the maximum  potential changes
in net interest  income and MVPE that is authorized by the board of directors of
First Bank.

          First  Bank's   interest  rate   sensitivity   of  MVPE  arising  from
fluctuations  in interest rates in a rising 200 to 400 basis point interest rate
environment  has  increased  since  year end due to  significant  changes in the
composition  of First  Bank's  loan  portfolio,  continued  amortization  of the
notional  amount of First Bank's swap, as well as changes in the overall  market
interest rate environment. As of December 31, 1997, the estimated change in MVPE
as a result of a 200 to 400 basis point rise in interest  rates was $2.9 million
to $12 million. As of September 30, 1998, the estimated change in MVPE was $13.5
million to $43.5 million for the  corresponding  change in interest  rates.  The
Asset and Liability  Committees  are in the process of reviewing the strategy to
mitigate risk of this additional exposure.

          Management  does not believe  that First  Bank's  sensitivity  of MVPE
arising  from an  increase  in rates of 100 basis  points or a decrease in rates
from 0 to 400 basis  points has  materially  changed  since  December  31, 1997.
Management also believes that the assumptions (including prepayment assumptions)
used by it to evaluate the  vulnerability of First Bank's  operations to changes
in interest rates  approximate  actual experience and considers them reasonable;
however,  the interest rate  sensitivity of First Bank's assets and  liabilities
and the  estimated  effects  of 

<PAGE>


changes in interest  rates on First  Bank's net  interest  income and MVPE could
vary  substantially  if  different  assumptions  were used or actual  experience
differs from the historical experience on which they are based.

<PAGE>



             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

PART II.     OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS.

          The Company is involved in various legal proceedings  occurring in the
ordinary  course of business which  management of the Company  believes will not
have a material  adverse effect on the financial  condition or operations of the
Company.


ITEM 2.    CHANGES IN SECURITIES.

          Not applicable.


ITEM 3.    DEFAULTS UPON SENIOR SECURITIES.

          The recent  dramatic  events in financial  markets,  which  included a
significant  reduction in  valuations  of, and  liquidity  for,  mortgage-backed
securities,  has had a significant adverse impact on the Company's liquidity and
financial  condition.  Primarily as a result of these market  conditions and the
resulting  losses,  the Company  expects to be unable to comply with the minimum
net worth requirements for certain of its outstanding indebtedness. As described
under Item 1 above,  the Company and the  unofficial  committee of  noteholders,
representing  a  majority  of  the  noteholders,  agreed  to  grant  conditional
forbearance  to the Company with respect to specified  covenant  defaults  which
resulted from the net losses incurred by the Company during this period and from
other actions taken by the Company during this period to meet margin calls.


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

          No matter  was  submitted  to a vote of  security  holders  during the
period covered by this report.


ITEM 5.    OTHER INFORMATION.


ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K.

         (a)      Exhibits.

         Exhibit 10        Term Sheet
         Exhibit 11        Statement re Computation of Per Share Earnings
         Exhibit 27        Financial Data Schedule

         (b)      Reports on Form 8-K

         Current Report on Form 8-K, dated November 5, 1998; and
         Current Report on Form 8-K dated November 11, 1998.



<PAGE>



                                   SIGNATURES


          Pursuant to the  requirements of the Securities  Exchange Act of 1934,
the  registrant  has duly  caused  this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                                  WILSHIRE FINANCIAL SERVICES GROUP INC.


Date: November 23, 1998


                                  By:    /S/   LAWRENCE A. MENDELSOHN
                                         LAWRENCE A. MENDELSOHN
                                         PRESIDENT


                                  By:    /S/   CHRIS TASSOS
                                         CHRIS TASSOS
                                         CHIEF FINANCIAL OFFICER