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 June 30, 1999

                                       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         (I.R.S. Employer Identification No.)
     incorporation or organization)

  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 |_|

      Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. 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 July 31, 1999
Common Stock, par value $.01 per share                   20,033,600 Shares
<PAGE>

             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

                                      INDEX

PART I. FINANCIAL INFORMATION

    Item 1.  Interim Financial Statements (Unaudited):

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

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

                Consolidated Statements of Cash Flows..........................6

                Consolidated Statements of Stockholders' Equity (Deficit)......8

                Notes to Interim Financial Statements..........................9

    Item 2.  Management's Discussion and Analysis of Financial Condition
                and Results of Operations.....................................18

    Item 3.  Quantitative and Qualitative Disclosures About Market Risk.......32

PART II. OTHER INFORMATION

    Item 1.  Legal Proceedings................................................34

    Item 2.  Changes in Securities............................................34

    Item 3.  Defaults Upon Senior Securities..................................34

    Item 4.  Submission of Matters to a Vote of Security Holders..............34

    Item 5.  Other Information................................................34

    Item 6.  Exhibits and Reports on Form 8-K.................................34


                                       2
<PAGE>

             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                    (Dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                                Predecessor
                                                                       Reorganized Company        Company
                                                                   --------------------------   -----------
                                                                     June 30,        May 31,    December 31,
                                                                       1999           1999          1998
                                                                   -----------    -----------   -----------
                                                                   (Unaudited)    (Unaudited)
<S>                                                                <C>            <C>           <C>
                                      ASSETS

Cash and cash equivalents ......................................   $    24,304    $    26,552   $    23,468
Mortgage-backed securities available for sale, at fair value ...        98,315         99,647       114,463
Mortgage-backed securities held to maturity, at amortized cost .        11,551         11,993        13,580
Securities held to maturity, at amortized cost .................         5,971          5,969         5,962
Loans, net .....................................................       502,175        491,576       455,561
Discounted loans, net ..........................................        27,624         29,058        51,989
Loans held for sale, net, at lower of cost or market ...........        46,301         45,757       284,672
Stock in Federal Home Loan Bank of San Francisco, at cost ......         4,655          4,655         5,332
Real estate owned, net .........................................        31,332         35,374        62,168
Leasehold improvements and equipment, net ......................         6,111          6,156         8,185
Accrued interest receivable ....................................         4,509          5,138         5,468
Investment in Wilshire Real Estate Investment Trust Inc. .......         4,027          4,218         5,979
Servicer advances ..............................................        19,568          7,552         5,007
Mortgage servicing rights, net .................................            --             --         2,346
Income tax receivable ..........................................            --             --         9,865
Prepaid expenses and other assets ..............................        11,497         15,723        30,208
                                                                   -----------    -----------   -----------
TOTAL ..........................................................   $   797,940    $   789,368   $ 1,084,253
                                                                   ===========    ===========   ===========

                        LIABILITIES & STOCKHOLDERS' EQUITY

Liabilities:
     Deposits ..................................................   $   492,729    $   497,424   $   510,430
     Short-term borrowings .....................................       171,339        164,854       420,816
     Notes payable .............................................            --             --       184,245
     Notes payable to Wilshire Real Estate Investment Trust Inc.        10,763         10,748        16,973
     Accounts payable and other liabilities ....................        29,549         27,442        44,584

     Minority interest in subsidiary ...........................         5,857             --            --
                                                                   -----------    -----------   -----------
        Total liabilities ......................................       710,237        700,468     1,177,048
                                                                   -----------    -----------   -----------

Commitments and Contingencies (see Note 5)

Stockholders' Equity (Deficit):
     Common stock ..............................................        88,900         88,900       117,708
     Treasury stock, at cost ...................................            --             --        (2,852)
     Retained deficit ..........................................          (802)            --      (183,294)

     Accumulated other comprehensive loss, net .................          (395)            --       (24,357)
                                                                   -----------    -----------   -----------
        Total stockholders' equity (deficit) ...................        87,703         88,900       (92,795)
                                                                   -----------    -----------   -----------
TOTAL ..........................................................   $   797,940    $   789,368   $ 1,084,253
                                                                   ===========    ===========   ===========
</TABLE>

                   See notes to interim financial statements


                                       3
<PAGE>

             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
                    (Dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                          Reorganized
                                                            Company           Predecessor Company
                                                         -------------   ----------------------------
                                                           One Month      Two Months     Three Months
                                                             Ended          Ended           Ended
                                                         June 30, 1999   May 31, 1999   June 30, 1998
                                                         -------------   ------------   -------------
<S>                                                         <C>            <C>            <C>
INTEREST INCOME:
         Loans ..........................................   $   4,400      $   8,163      $  34,157
         Mortgage-backed securities .....................       1,175          2,190          6,186
         Securities and federal funds sold ..............         306            309            980
                                                            ---------      ---------      ---------
         Total interest income ..........................       5,881         10,662         41,323
                                                            ---------      ---------      ---------
INTEREST EXPENSE:
         Deposits .......................................       2,145          4,437          5,736
         Borrowings .....................................         706          2,065         28,057
                                                            ---------      ---------      ---------
         Total interest expense .........................       2,851          6,502         33,793
                                                            ---------      ---------      ---------
NET INTEREST INCOME .....................................       3,030          4,160          7,530
PROVISION FOR ESTIMATED LOSSES ON LOANS .................          81          2,627         (1,500)
                                                            ---------      ---------      ---------
NET INTEREST INCOME AFTER PROVISION
         FOR ESTIMATED LOSSES ON LOANS ..................       2,949          1,533          9,030
                                                            ---------      ---------      ---------
OTHER INCOME:
         Servicing revenue ..............................       1,442          1,394          1,369
         Real estate owned, net .........................         153             (7)         3,399
         Bankcard income, net ...........................         407          1,084            997
         Gain on sale of loans ..........................          12            610         26,444
         Gain on sale of securities .....................          --             --          6,116
         Trading income .................................          --             --            172
         Minority interest ..............................         160             --             --
         Other, net .....................................       1,096          1,260          2,473
                                                            ---------      ---------      ---------
         Total other income .............................       3,270          4,341         40,970
                                                            ---------      ---------      ---------
OTHER EXPENSES:
         Compensation and employee benefits .............       3,210          4,324          9,192
         Loan service fees and expenses .................       1,203          3,256         11,239
         Professional services ..........................         603           (588)         1,815
         Occupancy ......................................         204            586            539
         FDIC insurance premiums ........................          97            194            208
         Corporate travel and development ...............         521            395          2,178
         Depreciation and amortization ..................         216            452            611
         Other general and administrative expenses ......         842          1,686          3,420
                                                            ---------      ---------      ---------
         Total other expenses ...........................       6,896         10,305         29,202
                                                            ---------      ---------      ---------
(LOSS) INCOME BEFORE REORGANIZATION ITEMS, INCOME TAX
     EXPENSE AND EXTRAORDINARY ITEM .....................        (677)        (4,431)        20,798
REORGANIZATION ITEMS (see Note 2) .......................          --        (37,601)            --
                                                            ---------      ---------      ---------
(LOSS) INCOME BEFORE INCOME TAX EXPENSE AND EXTRAORDINARY
     ITEM ...............................................        (677)       (42,032)        20,798
INCOME TAX EXPENSE ......................................         125            283          8,972
                                                            ---------      ---------      ---------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM .................        (802)       (42,315)        11,826
EXTRAORDINARY ITEM, NET OF TAX (see Note 4) .............          --        225,606             --
                                                            ---------      ---------      ---------
NET (LOSS) INCOME .......................................   $    (802)     $ 183,291      $  11,826
                                                            =========      =========      =========
(LOSS) EARNINGS PER SHARE:
   Basic:
     (Loss) income before extraordinary item ............   $   (0.04)     $   (3.89)     $    1.07
     Net (loss) income ..................................       (0.04)         16.84           1.07
   Diluted:
     (Loss) income before extraordinary item ............         N/A      $   (3.89)     $    1.01
     Net (loss) income ..................................         N/A          16.84           1.01
</TABLE>

                   See notes to interim financial statements


                                       4
<PAGE>

             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
                    (Dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                         Reorganized
                                                           Company        Predecessor Company
                                                          ----------    -------------------------
                                                          One Month     Five Months    Six Months
                                                            Ended          Ended         Ended
                                                           June 30,        May 31,      June 30,
                                                             1999           1999          1998
                                                          ---------      ---------      ---------
<S>                                                       <C>            <C>            <C>
INTEREST INCOME:
         Loans ......................................     $   4,400      $  21,710      $  59,046
         Mortgage-backed securities .................         1,175          5,481         15,293
         Securities and federal funds sold ..........           306            674          1,802
                                                          ---------      ---------      ---------
         Total interest income ......................         5,881         27,865         76,141
                                                          ---------      ---------      ---------
INTEREST EXPENSE:
         Deposits ...................................         2,145         11,206         11,122
         Borrowings .................................           706         11,923         53,131
                                                          ---------      ---------      ---------
         Total interest expense .....................         2,851         23,129         64,253
                                                          ---------      ---------      ---------
NET INTEREST INCOME .................................         3,030          4,736         11,888
PROVISION FOR ESTIMATED LOSSES ON LOANS .............            81          2,697         (3,000)
                                                          ---------      ---------      ---------
NET INTEREST INCOME AFTER PROVISION
     FOR ESTIMATED LOSSES ON LOANS ..................         2,949          2,039         14,888
                                                          ---------      ---------      ---------
OTHER INCOME:
         Servicing revenue ..........................         1,442          3,309          2,740
         Real estate owned, net .....................           153          1,466          3,472
         Bankcard income, net .......................           407          2,381          1,497
         Gain on sale of loans ......................            12          3,165         26,444
         Gain on sale of securities .................            --             --          8,201
         Trading income .............................            --             --          1,630
         Minority interest ..........................           160             --             --
         Other, net .................................         1,096          3,484          3,124
                                                          ---------      ---------      ---------
         Total other income .........................         3,270         13,805         47,108
                                                          ---------      ---------      ---------
OTHER EXPENSES:
         Compensation and employee benefits .........         3,210         11,796         15,109
         Loan service fees and expenses .............         1,203          8,523         20,097
         Professional services ......................           603          2,752          3,208
         Occupancy ..................................           204          1,385            972
         FDIC insurance premiums ....................            97            501            444
         Corporate travel and development ...........           521            775          2,796
         Depreciation and amortization ..............           216          1,161            892
         Other general and administrative expenses ..           842          4,527          5,481
                                                          ---------      ---------      ---------
         Total other expenses .......................         6,896         31,420         48,999
                                                          ---------      ---------      ---------
(LOSS) INCOME BEFORE REORGANIZATION ITEMS, INCOME TAX
     EXPENSE AND EXTRAORDINARY ITEM .................          (677)       (15,576)        12,997
REORGANIZATION ITEMS (see Note 2) ...................            --        (52,034)            --
                                                          ---------      ---------      ---------
(LOSS) INCOME BEFORE INCOME TAX EXPENSE AND
     EXTRAORDINARY ITEM .............................          (677)       (67,610)        12,997
INCOME TAX EXPENSE ..................................           125            658          5,836
                                                          ---------      ---------      ---------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM .............          (802)       (68,268)         7,161
EXTRAORDINARY ITEM, NET OF TAX (see Note 4) .........            --        225,606             --
                                                          ---------      ---------      ---------
NET (LOSS) INCOME ...................................     $    (802)     $ 157,338      $   7,161
                                                          =========      =========      =========
(LOSS) EARNINGS PER SHARE:
    Basic:
     (Loss) income before extraordinary item ........     $   (0.04)     $   (6.28)     $    0.65
     Net (loss) income ..............................         (0.04)         14.45           0.65
    Diluted:
     (Loss) income before extraordinary item ........           N/A      $   (6.28)     $    0.61
     Net (loss) income ..............................           N/A          14.45           0.61
</TABLE>

                   See notes to interim financial statements


                                       5
<PAGE>

             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                   Reorganized
                                                                                    Company          Predecessor Company
                                                                                    ---------     --------------------------
                                                                                    One Month     Five Months     Six Months
                                                                                      Ended          Ended          Ended
                                                                                     June 30,        May 31,       June 30,
                                                                                       1999           1999           1998
                                                                                    ---------      ---------      ---------
<S>                                                                                 <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net (loss) income ..........................................................     $    (802)     $ 157,338      $   7,161
   Adjustments to reconcile net (loss) income to net cash provided by (used in)
      operating activities:
        Provision for estimated losses on loans ...............................            81          2,697         (3,000)
        Provision for losses on real estate owned .............................            --             --          1,724
        Asset valuation adjustments ...........................................            --            647             --
        Depreciation and amortization .........................................           216          1,161            892
        Gain on sale of real estate owned .....................................          (217)        (2,192)        (2,427)
        Loss on disposal of equipment .........................................            --             62             --
        Origination of loans held for sale ....................................           (30)            --       (246,809)
        Purchase of loans held for sale .......................................            --         (1,629)      (378,942)
        Proceeds from sale of loans held for sale .............................            --        255,845        219,796
        Gain on sale of loans .................................................           (12)        (3,165)       (26,444)
        Gain on sale of securities ............................................            --             --         (8,201)
        Unrealized gain on trading securities .................................            --             --           (172)
        Amortization of discounts and deferred fees ...........................            (6)           869        (11,505)
        Income on equity investments ..........................................             7           (291)            --
        Other .................................................................            --             --          5,181
        Reorganization items:
          Write-off of unamortized debt issuance costs ........................            --         11,319             --
          European reorganization costs .......................................            --          2,492             --
          Adjustments to carrying amounts of assets and liabilities pursuant
            to fresh-start reporting ..........................................            --         37,601             --
          Gain on extinguishment of debt ......................................            --       (225,606)            --
   Change in:
        Trading account securities ............................................            --             --         22,241
        Servicer advances .....................................................       (12,016)        (2,545)            --
        Accrued interest receivable ...........................................           629            330         (1,892)
        Prepaid expenses and other assets .....................................         4,250          9,039        (26,137)
        Accounts payable and other liabilities ................................         2,106         12,893          4,811
        Minority interest .....................................................         5,857             --             --
                                                                                    ---------      ---------      ---------
        Net cash provided by (used in) operating activities ...................            63        256,865       (443,723)
                                                                                    ---------      ---------      ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
        Purchase of loans .....................................................       (17,694)       (87,988)      (514,486)
        Loan repayments .......................................................        13,940         70,412        129,116
        Loan originations .....................................................        (6,504)       (11,915)       (16,678)
        Proceeds from sale of loans ...........................................            12             --        354,849
        Proceeds from sale of mortgage-backed securities available for sale ...            --             --        129,210
        Purchase of mortgage-backed securities available for sale .............            --             --        (64,293)
        Repayment of mortgage-backed securities available for sale ............         1,085          9,010         23,954
        Repayments of mortgage-backed securities held to maturity .............           438          1,544          2,134
        Proceeds from FHLB stock dividend .....................................            --            750             --
        Purchase of real estate owned .........................................            --           (708)       (13,070)
        Proceeds from sale of real estate owned ...............................         4,580         28,359        113,927
        Purchase of equity securities .........................................            --             --        (14,731)
        Purchases of leasehold improvements and equipment .....................          (128)          (768)        (1,599)
                                                                                    ---------      ---------      ---------
        Net cash (used in) provided by investing activities ...................        (4,271)         8,696        128,333
                                                                                    ---------      ---------      ---------
</TABLE>

                   See notes to interim financial statements


                                       6
<PAGE>

             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
                                   (Unaudited)
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                              Reorganized
                                                                                Company             Predecessor Company
                                                                              -----------      ----------------------------
                                                                               One Month       Five Months      Six Months
                                                                                 Ended           Ended             Ended
                                                                                June 30,         May 31,          June 30,
                                                                                  1999            1999             1998
                                                                              -----------      -----------      -----------
<S>                                                                           <C>              <C>              <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
        Net (decrease) increase in deposits .............................     $    (4,695)     $   (13,256)     $    60,142
        Proceeds from short-term borrowings .............................          24,559           99,579        1,327,828
        Repayments of short-term borrowings .............................         (17,904)        (353,800)      (1,124,099)
        Proceeds from debtor-in-possession financing ....................              --            5,000               --
        Proceeds from notes to Wilshire Real Estate Investment Trust Inc.              --               --              220
        Issuance of common stock ........................................              --               --           61,811
        Redemption of preferred stock ...................................              --               --          (27,500)
                                                                              -----------      -----------      -----------
             Net cash provided by (used in) financing activities ........           1,960         (262,477)         298,402
                                                                              -----------      -----------      -----------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ....................          (2,248)           3,084          (16,988)
CASH AND CASH EQUIVALENTS:
        Beginning of period .............................................          26,552           23,468           66,115
                                                                              -----------      -----------      -----------
        End of period ...................................................     $    24,304      $    26,552      $    49,127
                                                                              ===========      ===========      ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--Cash paid for:
        Interest ........................................................     $     2,768      $    17,083      $    63,212
        Income taxes ....................................................              --            6,252            5,690
NONCASH INVESTING ACTIVITIES:
        Additions to real estate owned acquired in settlement of loans ..             355            3,547          102,324
NONCASH FINANCING ACTIVITIES:
        Pay in kind preferred stock dividend ............................              --               --              417
NONCASH REORGANIZATION ITEMS:
        Cancellation of old common stock ................................              --          114,856               --
        Issuance of new common stock in exchange for notes payable
             and accrued interest thereon ...............................              --           88,900               --
</TABLE>

                   See notes to interim financial statements


                                       7
<PAGE>

             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                   (Unaudited)
                    (Dollars in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                                Accumulated
                                  Preferred Stock       Common Stock         Treasury Stock       Retained     Other
                                                                                                  Earnings  Comprehensive
                                  Shares   Amount    Shares      Amount     Shares     Amount     (Deficit)     Loss         Total
                                  ------   ------    ------      ------     ------     ------     ---------     ----         -----
<S>                                        <C>     <C>         <C>          <C>       <C>        <C>          <C>          <C>
BALANCE, January 1, 1999              --   $  --   11,070,000  $ 117,708    185,000   $(2,852)   $(183,294)   $(24,357)    $(92,795)
   Comprehensive income:
     Net income...............                                                                     157,338                  157,338
     Unrealized holding losses
       on available for sale
       securities - net of tax                                                                                    (720)        (720)
     Unrealized loss on foreign
       currency translation...                                                                                  (1,662)      (1,662)
                                                                                                                           --------
   Total comprehensive income.                                                                                              154,956
   Impact of reorganization:
    Elimination of former
     equity in connection with
     bankruptcy plan..........                    (11,070,000)  (117,708)  (185,000)    2,852       25,956      26,739      (62,161)
    Issuance of new equity in
     connection with bankruptcy
     plan.......................                   20,033,600     88,900                                                     88,900
                                   ------------------------------------------------------------------------------------------------
BALANCE, May 31, 1999
   (Fresh-start reporting date)       --   $   --  20,033,600  $  88,900         --   $    --    $      --    $     --     $ 88,900
   Comprehensive loss:
     Net loss.................                                                                        (802)                    (802)
     Unrealized holding losses
       on available for sale
       securities - net of tax                                                                                    (394)        (394)
     Unrealized losses on
       foreign currency
       translation............                                                                                      (1)          (1)
                                                                                                                           --------
   Total comprehensive loss...                                                                                               (1,197)
                                   ------------------------------------------------------------------------------------------------
BALANCE, June 30, 1999                --   $   --  20,033,600  $  88,900         --   $    --    $    (802)   $   (395)   $  87,703
                                   ================================================================================================
</TABLE>

                   See notes to interim financial statements


                                       8
<PAGE>

             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                      NOTES TO INTERIM FINANCIAL STATEMENTS
                                   (Unaudited)
            (Dollars in thousands, except share data and where noted)

1. BASIS OF PRESENTATION

      The accompanying interim consolidated financial statements of Wilshire
Financial Services Group Inc. and Subsidiaries (the "Company" or "WFSG") are
unaudited and should be read in conjunction with the report on Form 8-K dated
June 10, 1999 relating to the emergence from bankruptcy and change in control of
the Company. A summary of the Company's significant accounting policies is set
forth in Note 4 to the Consolidated Financial Statements in the Company's 1998
Annual Report on Form 10-K.

      On June 10, 1999, the Company completed its plan of reorganization under
Chapter 11 of the United States Bankruptcy Code and emerged from bankruptcy, as
discussed further in Note 2. The Company adopted fresh-start reporting (see Note
3), and restated its assets and liabilities to reflect their current fair values
as of the close of business on May 31, 1999, the day management concluded that
substantially all conditions precedent to the plan of reorganization had been
satisfied. Under the provisions of fresh-start reporting, the Company's retained
deficit and other equity accounts were reclassified to common stock. The
financial statements presented include consolidated statements of financial
condition of the reorganized company as of May 31, 1999 and June 30, 1999;
consolidated statements of operations of the predecessor company for the
two-month and five-month periods ended May 31, 1999; and a consolidated
statement of operations of the reorganized company for the month ended June 30,
1999.

      In the opinion of management, all adjustments, other than the adjustments
described below, generally comprised of normal recurring accruals necessary for
fair presentation of the interim consolidated financial statements, have been
included and all intercompany accounts and transactions have been eliminated in
consolidation. Operating results for the month ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the period ending
December 31, 1999.

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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 1998 amounts were made in order to conform to
the 1999 presentation, none of which affect previously reported net income.

2. RESTRUCTURING OF THE COMPANY

      In order to address liquidity concerns and to improve the Company's
financial condition, the Company and an unofficial committee of holders of a
majority of the Company's $184.2 million in outstanding publicly issued notes
agreed, in November 1998, to a restructuring of the Company whereby (i) the
noteholders would exchange their notes for new common stock in the Company; (ii)
the Company's existing common stock and options would be canceled; and (iii)
noteholders would reallocate up to 0.6% of the new common stock to the then
existing stockholders of the Company.


                                       9
<PAGE>

             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)

      In connection with the plan of reorganization (the "Plan"), the Company
filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy
Code in the Federal Court of Wilmington, Delaware on March 3, 1999. On April 12,
1999, the Plan was approved by the bankruptcy court. On June 10, 1999, the Plan
became effective, the Company emerged from bankruptcy and a new Board of
Directors was seated. However, there can be no assurance that the reorganization
of the Company will have the desired economic effect.

      Pursuant to the Plan, the holders of the Company's $184.2 million in
outstanding publicly issued notes received approximately 96.16 shares of new
common stock for every $1,000 of notes, including accrued interest through March
2, 1999 (see Note 4 - Extraordinary Item). A portion of the new common stock was
reallocated by the noteholders so that holders of the old common stock received
approximately 0.6% of the outstanding shares of new common stock. The principal
shareholders, Andrew A. Wiederhorn and Lawrence A. Mendelsohn, received 1 share
of new common stock for every 136.07 shares of old common stock held by them.
The registered holders other than the principal shareholders received
approximately 1 share of new common stock for every 77.28 shares of old common
stock. An affiliate of the Company, Wilshire Real Estate Investment Trust
("WREIT"), holds 2,874,791 shares of new common stock, representing a 14.4%
ownership interest in the Company (see Note 8--Investment in WREIT).

      In addition, as part of the Plan, the servicing of the Company's assets
will be conducted by WCC Inc., a newly formed, majority-owned subsidiary of the
Company. Prior to the reorganization, the Company's assets were serviced by
Wilshire Credit Corporation, a company owned by Andrew A. Wiederhorn and
Lawrence A. Mendelsohn, the Company's principal shareholders. Wilshire Credit
Corporation was also adversely affected by the market turmoil of late 1998.
Accordingly, the Company entered into concurrent negotiations with the owners of
Wilshire Credit Corporation and the principal creditor of Wilshire Credit
Corporation, Capital Consultants, Inc. ("CCI"), to incorporate the servicing
operations of WCC into WFSG as part of the Plan.

      Pursuant to such negotiations, the Company exchanged the net assets of
Wilshire Servicing Corporation ("WSC"), a wholly owned subsidiary of the
Company, for 100% of the voting common stock (representing 50.01% of the
economic value) of WCC Inc. The remaining 49.99% economic interest of WCC Inc.
is held by an affiliate of Capital Consultants, Inc., which took control of
Wilshire Credit Corporation as part of the Plan. The affiliate received 100% of
the Class B non-voting common stock of WCC Inc. in exchange for the transfer of
the assets and certain liabilities of Wilshire Credit Corporation.

      As part of the agreement for the transfer of the servicing operations from
Wilshire Credit Corporation to WCC Inc., Wilshire Credit Corporation continues
to service some of the accounts for WCC Inc. through August 1999. Wishire Credit
Corporation uses the facilities and employees of WCC Inc. for this servicing.
WCC Inc. pays Wilshire Credit Corporation a fee for this servicing and Wilshire
Credit Corporation, in turn, reimburses WCC Inc. for its facilities and
employees.

      In January 1999, WREIT agreed to provide the Company debtor-in-possession
financing of up to $10.0 million (the "DIP Facility") as part of a compromise
and settlement of a $17.0 million obligation payable from the Company to WREIT.
The DIP Facility bears interest at 12% and is secured by the stock of First Bank
of Beverly Hills, FSB ("First Bank"), WFSG's savings bank subsidiary. WREIT
funded $5.0 million of the DIP Facility on March 3, 1999, but did not provide
the remaining balance. Accordingly, 50%, or approximately $8.5 million, of the
obligation was treated pari passu with WFSG's noteholders and converted to newly
issued common stock of WFSG on the effective date of the Plan. Following the
completion of WFSG's reorganization, the DIP Facility became an ordinary secured
lending facility with no special priority accorded by bankruptcy law.

      Revenues and expenses resulting from the reorganization of the Company
while it was in Chapter 11 have been segregated and recorded as Reorganization
Items in the consolidated statements of operations and include the following for
the two months and five months ended May 31, 1999:


                                       10
<PAGE>

             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)

<TABLE>
<CAPTION>
                                                         Two Months Ended  Five Months Ended
                                                            May 31, 1999     May 31, 1999
                                                            ------------     ------------
                                                                (Dollars in thousands)
<S>                                                            <C>             <C>
Write-off of unamortized debt issuance costs ...............   $    --         $11,319
Professional services ......................................        --             609
European restructuring costs ...............................        --           2,492
Fresh-start reporting adjustments to assets and liabilities.    37,601          37,601
Other general and administrative expenses ..................        --              13
                                                               -------         -------
                                                               $37,601         $52,034
                                                               =======         =======
</TABLE>

      Costs incurred to issue the notes were previously capitalized and were
being amortized over the life of the notes. The remaining unamortized balance of
such costs associated with the notes have been written-off. Professional
services included in Reorganization Items represent services provided in
connection with the Plan after the March 3, 1999 Chapter 11 filing date.

      In March 1999, WFSG developed and communicated a plan to restructure its
European operations and reduce its workforce. Costs included in Reorganization
Items as of May 31, 1999 consist primarily of severance related compensation,
the write-off of certain leasehold improvements and other office closure related
costs.

      The effects of the fresh-start reporting adjustments are detailed on the
following page in reconciling the predecessor Company's balance sheet to the
successor Company's balance sheet as of May 31, 1999.

      Due to the reorganization of the Company, management of the Company does
not believe that the results of operations of the predecessor company for the
five months ended May 31, 1999 are indicative of the performance of the
reorganized company following the effective date of the Plan.

3. FRESH-START REPORTING

      The Company's Plan was accounted for in accordance with the American
Institute of Certified Public Accountants Statement of Position 90-7, Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code ("SOP 90-7").
The accounting of SOP 90-7 resulted in the creation of a new entity for
financial reporting purposes. The Company adopted fresh-start reporting because
holders of the Company's existing common stock immediately before filing and
confirmation of the Plan received less than 50% of the new common stock of the
emerging entity and the Company's reorganized value is less than its
postpetition liabilities and allowed claims. The reorganization value of the
Company was determined by estimating the fair value of its net assets as of the
fresh-start reporting date.

      For financial reporting purposes, the Company accounted for the
consummation of the reorganization effective May 31, 1999. The periods prior to
this date have been designated "Predecessor Company" and the period subsequent
to this date has been designated "Reorganized Company." As a result of the
adoption of the fresh-start reporting, the reorganized Company's consolidated
financial statements are not comparable to the predecessor Company's
consolidated financial statements.


                                       11
<PAGE>

             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)

         The effect of the plan of reorganization and the implementation of
fresh-start reporting on the Company's balance sheet as of May 31, 1999 is as
follows (unaudited):

<TABLE>
<CAPTION>
                                                                         Adjustments to Record Confirmation of Plan
                                                  Predecessor    -----------------------------------------------------  Reorganized
                                                    Company's    Forgiveness  Fresh-Start   Cancellation   ssuance of    Company's
                                                Balance Sheet      of Debt   Adjustments    of Old Stock   New Stock   Balance Sheet
                                                -------------      -------   -----------    ------------   ---------   -------------
                     ASSETS                                                    (Dollars in thousands)
<S>                                                <C>           <C>          <C>             <C>            <C>        <C>
Cash and cash equivalents...................       $   26,552    $            $               $              $          $    26,552
Mortgage-backed securities available for sale          99,124                     523                                        99,647
Mortgage-backed securities held to maturity.           11,993                                                                11,993
Securities held to maturity.................            5,969                                                                 5,969
Loans, net..................................          490,498                   1,078                                       491,576
Discounted loans, net.......................           29,058                                                                29,058
Loans  held for sale, net, at lower of cost or
    market                                             45,757                                                                45,757
Stock in Federal Home Loan Bank of
    San Francisco, at cost..................            4,655                                                                 4,655
Real estate owned, net......................           33,966                   1,408                                        35,374
Leasehold improvements and equipment, net...            6,474                    (318)                                        6,156
Accrued interest receivable.................            5,138                                                                 5,138
Investment in Wilshire Real Estate
    Investment Trust Inc....................            6,370                  (2,152)                                        4,218
Servicer advances...........................            7,552                                                                 7,552
Mortgage servicing rights, net..............            2,192                  (2,192)                                           --
Prepaid expenses and other assets...........           19,219         --       (3,496)              --            --         15,723
                                                   ----------    -------     --------         --------       -------     ----------
TOTAL ASSETS                                       $  794,517    $    --     $( 5,149)        $     --       $    --     $  789,368
                                                   ==========    =======     ========         ========       =======     ==========

       LIABILITIES & STOCKHOLDERS' EQUITY

Liabilities:
   Liabilities not subject to compromise:
     Deposits...............................       $  497,174    $           $    250         $              $           $  497,424
     Short-term borrowings..................          163,064                   1,790                                       164,854
     Notes payable to Wilshire Real Estate
       Investment Trust Inc.................           13,486                  (2,738)                                       10,748
     Accounts payable and other liabilities.           26,165                   1,277                                        27,442
   Liabilities subject to compromise........          225,606   (225,606)          --               --            --             --
                                                   ----------    -------     --------         --------       -------     ----------
        Total liabilities...................          925,495   (225,606)         579               --            --        700,468
                                                   ----------    -------     --------         --------       -------     ----------
Stockholders' Equity:
     Common stock ..........................          117,708                                 (117,708)       88,900         88,900
     Treasury stock ........................           (2,852)                                   2,852                           --
     Retained deficit ......................         (213,961)   225,606      (37,601)         114,856       (88,900)            --
     Accumulated other comprehensive loss,
       net .................................          (31,873)        --       31,873               --            --             --
                                                   ----------    -------     --------         --------       -------     ----------
        Total stockholders' equity .........         (130,978)   225,606       (5,728)              --            --         88,900
                                                   ----------    -------     --------         --------       -------     ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
     EQUITY ................................       $  794,517    $    --     $ (5,149)        $     --       $    --     $  789,368
                                                   ==========    =======     ========         ========       =======     ==========
</TABLE>


                                       12
<PAGE>

             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)

4. EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT

      In connection with its restructuring, the Company exchanged its notes
payable and certain other outstanding claims for new common stock in the
Company. This gain on extinguishment of debt is reported in the consolidated
statements of operations for the period ended May 31, 1999 as an extraordinary
item in the amount of $225,606, and is comprised of the following liabilities:

                                                          (Dollars in thousands)
Notes payable ...........................................       $184,245
Accrued interest on notes payable .......................         14,536
Payable to Wilshire Credit Corporation ..................         18,338
Payable to Wilshire Real Estate Investment Trust Inc. ...          8,487
                                                                --------
                                                                $225,606
                                                                ========

      The above debt was cancelled as part of the Plan, and the Notes payable,
accrued interest thereon and payable to Wilshire Real Estate Investment Trust
Inc. were converted into equity of the Reorganized Company. No funds were
expended in the extinguishment of such debt.

      It is anticipated that the gain on extinguishment of debt will cause a
reduction of tax attributes, such as net operating losses, capital losses and
the tax basis of assets.

5. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK

      First Bank had approximately $36.7 million notional principal amount of
interest rate swap agreements outstanding at June 30, 1999, which were
designated as hedges of certain fixed rate loans in order to convert fixed rate
income streams on loans to variable rate. These swaps had the effect of
decreasing the Company's net interest income by approximately $28 thousand for
the month ended June 30, 1999, $56 thousand for the two months ended May 31,
1999, and $182 thousand for the five months ended May 31, 1999. The market value
of these swaps currently deferred was $0.1 million at June 30, 1999.

      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.

      The Company is a defendant in legal actions arising from transactions
conducted in the ordinary course of business. Management, after consultation
with legal counsel, believes the ultimate liability, if any, arising from such
actions will not materially affect the Company's consolidated results of
operations or financial position.

      As part of the restructuring the Company issued a Liquidation Bond to CCI
which is a non-interest bearing obligation to pay CCI, upon any liquidation or
dissolution of WCC Inc., $19.3 million less any distributions that CCI receives
from its 49.99% ownership interest in WCC Inc. WCC Inc. is obligated to keep the
bond collateralized with assets of WCC Inc. or WFSG having a fair market value
equal to the bond and, to the extent that it does not do so, WFSG is responsible
for the deficiency.

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 consolidated financial statements.


                                       13
<PAGE>

             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)

      In connection with the Plan, the Company recorded gains relating to the
extinguishment of certain debt, which are expected to reduce or eliminate the
Company's net operating loss carryforward. Any remaining net operating loss
carryforward will be subject to limitations based on the fair value of the
Company on the effective date of the Plan.

      The Company has established a valuation allowance against all deferred tax
assets, consisting primarily of federal, state and foreign net operating loss
carryforwards, as there is not presumptive evidence that it is more likely than
not that the deferred tax assets will be realized. Benefits realized from the
ultimate utilization of such deferred tax assets subsequent to the effective
date will be recorded as direct additions to equity.

      The future utilization of the loss carryforwards will be subject to
significant limitations as a result of the Company's reorganization. In
addition, the net operating loss carryforwards, and possibly other tax
attributes, will be reduced by the cancellation of the Company's notes payable
and other indebtedness.

7. (LOSS) EARNINGS PER SHARE

      For the month ended June 30, 1999, loss per share is calculated by
dividing net loss by the 20,033,600 outstanding shares of the Company's new
common stock. There are no common stock equivalents, as all of the Company's
outstanding stock options on its old common stock were cancelled as part of its
restructuring.

      For the two months and five months ended May 31, 1999, (loss) earnings per
share is calculated by dividing (loss) income by the 10,885,000 outstanding
shares of the Company's old common stock. The weighted average shares
outstanding is the same for basic and diluted (loss) earnings per share, because
the exercise price of the options exceeded the average market price of the
common stock during the periods, and the exercise of the options would have been
anti-dilutive. The loss per share is as follows:

<TABLE>
<CAPTION>
                                                            Two Months      Five Months
                                                              Ended             Ended
                                                          May 31, 1999      May 31, 1999
                                                          ------------      ------------
<S>                                                     <C>               <C>
Loss before extraordinary item ......................   $        (3.89)   $        (6.28)
Extraordinary item, net of tax ......................            20.73             20.73
Net income ..........................................            16.84             14.45

Weighted average shares outstanding-basic and diluted       10,885,000        10,885,000
</TABLE>

      For the three and six months ended June 30, 1998, the company had
outstanding stock options which were considered common stock equivalents in the
calculation of earnings per share. The weighted average shares outstanding were
as follows:

                                                    Three Months    Six Months
                                                       Ended          Ended
                                                   June 30, 1998   June 30, 1998
                                                   -------------   -------------
Weighted average shares outstanding-basic ........   11,065,000     10,403,889
Weighted average shares outstanding-diluted ......   11,672,711     11,019,162

8. INVESTMENT IN WREIT

      In April 1998, the Company sponsored the initial public offering of WREIT,
whereby WREIT received approximately $167.0 million of proceeds. A subsidiary of
the Company is the manager of WREIT and earns a management fee based on the
level of WREIT's investment assets and is entitled to an incentive fee if
certain targets are met. The Company, through its subsidiary, earned management
fee income of $0.3 million for the one month ended June 30, 1999, $0.6 million
for the two months ended May 31, 1999 and $1.5 million for the five months ended
May 31, 1999. No incentive fees were earned.


                                       14
<PAGE>

             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)

      The Company purchased 990,000 shares of WREIT common stock in connection
with the initial public offering. This investment is accounted for by the equity
method of accounting and, therefore, is not adjusted for changes in the market
price of the underlying shares but rather, increases and decreases based on the
stockholders' equity of WREIT.

      In accordance with the provisions of fresh-start reporting, the Company's
investment in WREIT was restated to reflect the current fair value based on the
WREIT's closing stock price on May 31, 1999. The fair value of the investment
was less than the Company's pro rata interest in the WREIT's book value as of
that day. The difference, approximately $2.2 million, is presented as a contra
asset to the Investment in WREIT balance in the accompanying consolidated
statements of financial condition as of May 31, 1999 and June 30, 1999 and is
considered negative goodwill. The difference is being amortized over the average
life of WREIT's assets.

      At June 30, 1999, the Company had notes payable to WREIT totaling $10.8
million which included a $5.0 million note payable bearing interest at 12% and
an $8.5 million unsecured note (book value of $5.7 million) bearing interest at
6%. Pursuant to the Company's reorganization, WREIT owned 14.4% of the Company's
outstanding common stock at June 30, 1999.

9. SIGNIFICANT TRANSACTIONS

      During the quarter ended June 30, 1999, the Company sold approximately
$103.3 million carrying value of loans held for sale to unrelated third parties
for $103.9 million. These sales were made primarily to repay short-term
borrowing facilities for which the assets served as collateral and to provide
liquidity.

10. REGULATORY MATTERS

      On June 3, 1999, the OTS issued a directive that indicates that it
considers First Bank to be in "troubled condition." This directive places
restrictions on First Bank's ability to engage in certain activities without
prior approval of the OTS, including, but not limited to: increasing asset size;
making new loans, investments or capital expenditures; paying dividends or
making other capital distributions; and hiring senior executive officers,
directors or consultants. First Bank does not agree with the "troubled
institution" designation and is deciding whether to appeal the restrictions
imposed by the OTS directive. However, there can be no assurance as to whether
any such appeal would be successful.

11. OPERATING SEGMENTS

      The Company's reportable operating segments, as defined by the Company's
management, are thrift banking and non-banking operations. The operating
segments vary in terms of regulatory environment, funding sources and asset
acquisition focus. A description of the Company's operating segments is as
follows:

      Thrift Banking - The Company's thrift banking operations are conducted
through First Bank. First Bank engages in the acquisitions of mortgage loans,
origination of mortgage loans, and merchant bankcard processing. The primary
source of financing for First Bank's acquisitions and originations is wholesale
and brokered certificates of deposit, and to a lesser extent, committed
short-term line of credit facilities and FHLB advances. First Bank is a
federally chartered savings bank and is regulated by the Office of Thrift
Supervision.

      Non-banking - The Company's non-banking operations are conducted primarily
through Wilshire Funding Corporation, and to a lesser extent, WCC Inc. and
Wilshire Financial Services Group Europe Inc. In addition to mortgage loan
acquisition, the non-banking operating segment also conducts loan sale,
securitization and servicing


                                       15
<PAGE>

             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)

operations. Historically, the primary funding sources utilized for non-banking
operations were line of credit and repurchase agreement facilities with
nationally recognized investment banking firms.

      Segment data for the one month ended June 30, 1999, two months ended May
31, 1999 and three months ended June 30, 1998 are as follows:

<TABLE>
<CAPTION>
                                             One Month Ended June 30, 1999         Two Months Ended May 31, 1999
                                          ----------------------------------    ----------------------------------
                                            Thrift       Non-                    Thrift        Non-
                                           Banking     Banking       Total       Banking     Banking       Total
                                          ---------   ---------    ---------    ---------   ---------    ---------
<S>                                       <C>         <C>          <C>          <C>         <C>          <C>
Interest income .......................   $   4,207   $   1,674    $   5,881    $   7,368   $   3,294    $  10,662
Interest expense ......................       2,398         453        2,851        4,829       1,673        6,502
                                          ---------   ---------    ---------    ---------   ---------    ---------
Net interest income ...................       1,809       1,221        3,030        2,539       1,621        4,160
Provision for loan losses .............          --          81           81           --       2,627        2,627
                                          ---------   ---------    ---------    ---------   ---------    ---------
Net interest income (loss) after
  provision for loan losses ...........       1,809       1,140        2,949        2,539      (1,006)       1,533
Other income ..........................         921       2,349        3,270        1,701       2,640        4,341
Other expense .........................       1,614       5,282        6,896        3,312       6,993       10,305
                                          ---------   ---------    ---------    ---------   ---------    ---------
Income (loss) before reorganization
  items, taxes and extraordinary item .       1,116      (1,793)        (677)         928      (5,359)      (4,431)
Reorganization items ..................          --          --           --           --     (37,601)     (37,601)
                                          ---------   ---------    ---------    ---------   ---------    ---------
Income (loss) before taxes and
  extraordinary item ..................       1,116      (1,793)        (677)         928     (42,960)     (42,032)
Income tax provision (benefit) ........         480        (355)         125          399        (116)         283
                                          ---------   ---------    ---------    ---------   ---------    ---------
Income (loss) before extraordinary item         636      (1,438)        (802)         529     (42,844)     (42,315)
Extraordinary item, net of tax ........          --          --           --           --     225,606      225,606
                                          ---------   ---------    ---------    ---------   ---------    ---------
Net income (loss) .....................   $     636   $  (1,438)   $    (802)   $     529   $ 182,762    $ 183,291
                                          =========   =========    =========    =========   =========    =========
Total assets ..........................   $ 611,304   $ 186,636    $ 797,940    $ 606,954   $ 182,414    $ 789,368
                                          =========   =========    =========    =========   =========    =========
</TABLE>

                                           Three Months Ended June 30, 1998
                                     -------------------------------------------
                                       Thrift           Non-
                                       Banking         Banking          Total
                                     -----------     -----------    -----------
Interest income .................    $    11,461     $    29,862    $    41,323
Interest expense ................          8,018          25,775         33,793
                                     -----------     -----------    -----------
Net interest income .............          3,443           4,087          7,530
Provision for loan losses .......         (3,000)          1,500         (1,500)
                                     -----------     -----------    -----------
Net interest income after
  provision for loan losses .....          6,443           2,587          9,030
Other income ....................          1,314          39,656         40,970
Other expense ...................          3,238          25,964         29,202
                                     -----------     -----------    -----------
Income before taxes .............          4,519          16,279         20,798
Income tax provision ............          1,976           6,996          8,972
                                     -----------     -----------    -----------
Net income ......................    $     2,543     $     9,283    $    11,826
                                     ===========     ===========    ===========
Total assets ....................    $   635,714     $ 1,313,154    $ 1,948,868
                                     ===========     ===========    ===========


                                       16
<PAGE>

             WILSHIRE FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
                NOTES TO INTERIM FINANCIAL STATEMENTS-(Continued)

      Segment data for the one month ended June 30, 1999, five months ended May
31, 1999 and six months ended June 30, 1998 is as follows:

<TABLE>
<CAPTION>
                                             One Month Ended June 30, 1999        Five Months Ended May 31, 1999
                                          ----------------------------------    ----------------------------------
                                            Thrift       Non-                    Thrift        Non-
                                           Banking     Banking       Total       Banking     Banking       Total
                                          ---------   ---------    ---------    ---------   ---------    ---------
<S>                                       <C>         <C>          <C>          <C>         <C>          <C>
Interest income .......................   $   4,207   $   1,674    $   5,881    $  17,771   $  10,094    $  27,865
Interest expense ......................       2,398         453        2,851       11,680      11,449       23,129
                                          ---------   ---------    ---------    ---------   ---------    ---------
Net interest income (loss) ............       1,809       1,221        3,030        6,091      (1,355)       4,736
Provision for loan losses .............          --          81           81           --       2,697        2,697
                                          ---------   ---------    ---------    ---------   ---------    ---------
Net interest income (loss) after
  provision for loan losses ...........       1,809       1,140        2,949        6,091      (4,052)       2,039
Other income ..........................         921       2,349        3,270        4,278       9,527       13,805
Other expense .........................       1,614       5,282        6,896        7,678      23,742       31,420
                                          ---------   ---------    ---------    ---------   ---------    ---------
Income (loss) before reorganization
  items, taxes and extraordinary item .       1,116      (1,793)        (677)       2,691     (18,267)     (15,576)
Reorganization items ..................          --          --           --           --     (52,034)     (52,034)
                                          ---------   ---------    ---------    ---------   ---------    ---------
Income (loss) before taxes and
extraordinary item ....................       1,116      (1,793)        (677)       2,691     (70,301)     (67,610)
Income tax provision (benefit) ........         480        (355)         125        1,357        (699)         658
                                          ---------   ---------    ---------    ---------   ---------    ---------
Income (loss) before extraordinary item         636      (1,438)        (802)       1,334     (69,602)     (68,268)
  Extraordinary item, net of tax ......          --          --           --           --     225,606      225,606
                                          ---------   ---------    ---------    ---------   ---------    ---------
Net income (loss) .....................   $     636   $  (1,438)   $    (802)   $   1,334   $ 156,004    $ 157,338
                                          =========   =========    =========    =========   =========    =========
Total assets ..........................   $ 611,304   $ 186,636    $ 797,940    $ 606,954   $ 182,414    $ 789,368
                                          =========   =========    =========    =========   =========    =========
</TABLE>

                                              Six Months Ended June 30, 1998
                                     ------------------------------------------
                                       Thrift           Non-
                                       Banking         Banking          Total
                                     -----------     -----------    -----------
Interest income .................    $    19,614     $    56,527    $    76,141
Interest expense ................         13,852          50,401         64,253
                                     -----------     -----------    -----------
Net interest income .............          5,762           6,126         11,888
Provision for loan losses .......         (5,100)          2,100         (3,000)
                                     -----------     -----------    -----------
Net interest income after
  provision for loan losses .....         10,862           4,026         14,888
Other income ....................          1,446          45,662         47,108
Other expense ...................          7,097          41,902         48,999
                                     -----------     -----------    -----------
Income before taxes .............          5,211           7,786         12,997
Income tax provision ............          2,271           3,565          5,836
                                     -----------     -----------    -----------
Net income ......................    $     2,940     $     4,221    $     7,161
                                     ===========     ===========    ===========
Total assets ....................    $   635,714     $ 1,313,154    $ 1,948,868
                                     ===========     ===========    ===========


                                       17
<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 and analysis should be read in conjunction with
the Consolidated Financial Statements of Wilshire Financial Services Group Inc.
and the notes thereto included elsewhere in this filing. References in this
filing to "Wilshire Financial Services Group Inc.," "WFSG," the "Company," "we,"
"our," and "us" refer to Wilshire Financial Services Group Inc. and our wholly
owned subsidiaries, unless the context indicates otherwise.

      Wilshire Financial Services Group Inc. is a diversified financial services
company. We conduct business in the U.S. and Europe, specializing in loan
portfolio acquisition and securitization, and servicing. We offer wholesale
banking through our 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 WFSG
and First Bank are located in Portland, Oregon.

OVERVIEW AND RESTRUCTURING OF WFSG

      In response to adverse market conditions in the second half of 1998 and
the resulting effect on our operations, we focused our efforts during the six
months ended June 30, 1999 on stabilizing the assets remaining at our non-thrift
banking subsidiaries and restructuring WFSG through a voluntary prepackaged
Chapter 11 bankruptcy filing. First Bank remained focused on the execution of
its primary business plan as it was relatively unaffected by the severe market
conditions which dramatically affected the non-banking subsidiaries during the
second half of 1998.

      In connection with the plan of reorganization (the "Plan"), we filed a
voluntary petition for relief under Chapter 11 Bankruptcy Code in the Federal
Court of Wilmington, Delaware on March 3, 1999. On April 12, 1999, the Plan was
approved by the bankruptcy court. On June 10, 1999, the Plan became effective,
we emerged from bankruptcy and a new Board of Directors was seated. Upon the
Plan becoming effective, we adopted fresh start reporting (as
described in Note 3 to the interim consolidated financial statements), which had
the effect of revaluing our assets and liabilities to fair value and eliminating
the stockholders' deficit as of the Plan's effective date. Due to
the Company's restructuring, management believes that the financial results for
the quarter and six months ended June 30, 1999 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999.

      Wilshire Credit Corporation, a former affiliate of the Company, provided
loan servicing to us prior to the reorganization. As part of the Plan, the loan
servicing operations of Wilshire Credit Corporation, and the assets and stock of
a wholly-owned subsidiary, Wilshire Servicing Corporation, were transferred to
WCC Inc., a newly formed, majority-owned subsidiary. This will allow us to
service our own assets and provide third-party servicing. We own 50.01% of WCC
Inc. with the remaining 49.99% owned by an unaffiliated third party.

      On June 3, 1999, the OTS issued a directive that indicates that it
considers First Bank to be in "troubled condition." This directive places
restrictions on First Bank's ability to engage in certain activities without
first obtaining OTS approval, including, but not limited to: increasing asset
size; making new loans, investments or capital expenditures; paying dividends or
making other capital distributions; and hiring senior executive officers,
directors or consultants. First Bank does not agree with the "troubled
institution" designation and is deciding whether to appeal the restrictions
imposed by the OTS directive. However, there can be no assurance as to whether
any such appeal would be successful.

      During the six months ended June 30, 1999, and continuing to the present,
we remain committed to reducing corporate overhead where deemed appropriate by
management. We have made strategic reductions in overhead


                                       18
<PAGE>

related to our operations in Europe, which still have adequate capacity to
absorb additional investment activity. We continue to review our expense levels
on a line of business basis and will make strategic reductions or investments,
as necessary, to counter reductions in business activities or to build for
anticipated growth.

RESULTS OF OPERATIONS--ONE MONTH ENDED JUNE 30, 1999

      For financial reporting purposes, we accounted for the consummation of our
restructuring effective May 31, 1999 (though the restructuring was completed on
June 10, 1999). The following discussion relates to the operating results of the
"Reorganized Company" for the one-month period subsequent to our restructuring.

Net Loss

      Our net loss for the month ended June 30, 1999 was approximately $0.8
million, or $0.04 per share. The net loss is primarily attributable to other
operating expenses of $6.9 million, partially offset by net interest income
after provision for loan losses of $2.9 million and other income of $3.3
million.

Net Interest Income

      Our net interest income for the month ended June 30, 1999 was
approximately $3.0 million, which consisted of interest income of $5.9 million,
partially offset by interest expense of $2.9 million. Approximately $4.4
million, or 75%, of our interest income was derived from our portfolio of loans
and discounted loans, with the other $1.5 million, or 25%, from mortgage-backed
and other securities. Our interest expense consisted of $2.2 million of interest
on deposits at First Bank and $0.7 million of interest on short-term debt
facilities. We no longer incur interest expense on our 13% Series B notes (the
"Notes") payable, as the Notes were cancelled and converted to equity as part of
our restructuring.

Provisions for Estimated Losses on Loans

      Provision for losses on loans for the month ended June 30, 1999 was
approximately $0.1 million, resulting from additional provisions taken on
Discounted Loans in our European portfolio.

Other Income

      Our other income was approximately $3.3 million for the month ended June
30, 1999, consisting primarily of servicing revenue of $1.4 million, bankcard
income, net, of $0.4 million, income from real estate operations of $0.2 million
and other, net, of $1.1 million.

      Approximately 97% of the servicing revenue was derived from the loan
servicing operations of WCC Inc., a newly formed, majority-owned subsidiary.
These operations were previously conducted by an affiliate, Wilshire Credit
Corporation, but were transferred to WCC Inc. as part of our restructuring. As
part of the agreement for the transfer of the servicing operations from Wilshire
Credit Corporation to WCC Inc., Wilshire Credit Corporation continues to service
some of the accounts for WCC Inc. through August 1999. Wilshire Credit
Corporation uses the facilities and employees of WCC Inc. for this servicing.
WCC Inc. pays Wilshire Credit Corporation a fee for this servicing (included in
Loan service fees and expenses) and Wilshire Credit Corporation, in turn,
reimburses WCC Inc. for its facilities and employees (included in Servicing
revenue).

      During the month ended June 30, 1999, gross bankcard processing revenue
was $1.4 million, of which $0.6 million was attributable to internet commerce,
$0.6 million was from mail order transaction processing, and $0.2 million
resulted from audiotext transactions. These bankcard revenues were partially
offset by bankcard processing expenses of $1.0 million.


                                       19
<PAGE>

      Real estate owned, net consisted primarily of gains on sales of property
acquired in foreclosure or deed-in-lieu thereof. Other, net includes primarily
$0.8 million of loan fees and charges and $0.3 million of management fees earned
from WREIT.

Other Expenses

      Our other expenses totaled approximately $6.9 million for the month ended
June 30, 1999. These expenses consisted primarily of compensation and employee
benefits expenses of $3.2 million, loan service fees and expenses of $1.2
million (see Servicing revenue), professional services of $0.6 million,
corporate travel and development of $0.5 million and other general and
administrative expenses (consisting primarily of insurance, taxes and general
corporate overhead) of approximately $0.8 million.

RESULTS OF OPERATIONS--SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1998

      In the following discussion, the amounts for the six months ended June 30,
1999 represent the sum of the Predecessor Company's operations for the five
months ended May 31, 1999 and the Reorganized Company's operations for the one
month ended June 30, 1999, as reported in the accompanying consolidated
statements of operations.

Net Income

      Our net income for the six months ended June 30, 1999 was approximately
$156.5 million, which included an extraordinary gain on the extinguishment of
debt of $225.6 million (see Note 4 - Extraordinary Item). Excluding the
extraordinary gain, our net loss for the six months ended June 30, 1999 was
approximately $69.1 million, compared with net income of approximately $7.2
million for the six months ended June 30, 1998. The decline in operating results
is primarily attributable to $52.0 million of costs related to our
restructuring, a $30.0 million decrease in other income, a $5.8 million increase
in provisions for estimated losses on loans and a $4.1 million decrease in net
interest income, partially offset by a $10.7 million decrease in other expenses.

Net Interest Income

      Our net interest income was approximately $7.8 million for the six months
ended June 30, 1999, compared with approximately $11.9 million for the six
months ended June 30, 1998. This decrease was due to a decline in interest
income of $42.4 million, partially offset by a decline in interest expense of
$38.3 million, reflecting our reduction in the levels of loans and other
interest-earning assets and paydown of the related short-term borrowing
facilities and the reduction of interest expense on the Notes, as discussed
further below.

      Interest Income. Our interest income was approximately $33.7 million for
the six months ended June 30, 1999 compared with approximately $76.1 million for
the six months ended June 30, 1998, a decrease of $42.4 million. This decrease
was primarily due to a decrease in our interest-earning assets from
approximately $1.6 billion at June 30, 1998, to approximately $692 million at
June 30, 1999, resulting from the sale of certain loans and other assets to
provide liquidity and repay certain short-term borrowing facilities.

      Interest Expense. Our interest expense was approximately $26.0 million for
the six months ended June 30, 1999, compared with approximately $64.3 million
for the six months ended June 30, 1998, a decrease of $38.3 million. The
decrease in interest expense was primarily due to a decrease in our
interest-bearing liabilities from approximately $1.8 billion at June 30, 1998 to
approximately $675 million at June 30, 1999, resulting primarily from the
repayments of short-term borrowing facilities with proceeds from the asset sales
described above. In addition, during the six months ended June 30, 1999, we
recognized interest on the Notes only through the date on which we filed our
voluntary Chapter 11 petition, which was March 3, 1999. As a result, the amount
of interest expense recognized on the Notes for the six months ended June 30,
1999 was approximately $4.2 million, compared with approximately $12.0 million
for the six months ended June 30, 1998. Upon the completion of our
restructuring, the Notes were cancelled and converted to equity of WFSG.


                                       20
<PAGE>

Provisions for Estimated Losses on Loans

      Provision for estimated losses on loans for the six months ended June 30,
1999 was approximately $2.8 million, resulting primarily from additional
provisions taken at our non-banking subsidiaries. This compares with a net
recovery of $3.0 million for the six months ended June 30, 1998, which was
primarily due to First Bank's recapture of reserves on loans sold or paid off.

Other Income

      Our other income decreased to approximately $17.1 million for the six
months ended June 30, 1999 from approximately $47.1 million for the six months
ended June 30, 1998. The components of our other income are reflected in the
following table:

                                                              Six Months Ended
                                                                  June 30,
                                                         ----------------------
                                                           1999            1998
                                                         -------        -------
                                                          (Dollars in thousands)
Other income:
         Servicing revenue .......................       $ 4,751        $ 2,740
         Real estate owned, net ..................         1,619          3,472
         Bankcard income, net ....................         2,788          1,497
         Gain on sale of loans ...................         3,177         26,444
         Gain on sale of securities ..............            --          8,201
         Trading income ..........................            --          1,630
         Minority interest .......................           160             --
         Other, net ..............................         4,580          3,124
                                                         -------        -------
                  Total other income .............       $17,075        $47,108
                                                         =======        =======

      The decrease in other income was primarily attributable to a $23.3 million
decrease in gain on sale of loans, an $8.2 million decrease in gain on sale of
securities, a $1.9 million decrease in real estate owned, net and a $1.6 million
decrease in trading income, partially offset by a $2.0 million increase in
servicing revenue, a $1.5 million increase in other, net and a $1.3 million
increase in bankcard income, net. The components of other income are further
described below.

      Servicing Revenue. Servicing revenue for the six months ended June 30,
1999 was $4.7 million, compared with $2.7 million for the comparable period in
1998, an increase of $2.0 million. The increase reflects the servicing activity
for the month of June, 1999 of WCC Inc., a newly formed, majority-owned
subsidiary. Such operations were previously performed by a former affiliate,
Wilshire Credit Corporation, but were transferred to WCC Inc. effective May 31,
1999 as part of our reorganization (see Note 2). As part of the agreement for
the transfer of the servicing operations from Wilshire Credit Corporation to WCC
Inc., Wilshire Credit Corporation continues to service some of the accounts for
WCC Inc. through Auust 1999. Wilshire Credit Corporation uses the facilities and
employees of WCC Inc. for this servicing. WCC Inc. pays Wilshire Credit
Corporation a fee for this servicing (included in Loan service fees and
expenses) and Wilshire Credit Corporation, in turn, reimburses WCC Inc. for its
facilities and employees (included in Servicing revenues).

      Real Estate Owned, net. Real estate owned, net decreased approximately
$1.9 million from the six months ended June 30, 1998 to the six months ended
June 30, 1999 primarily due to a decrease in gains on the sale of properties
acquired through foreclosure or deed-in-lieu thereof, reflecting our decision to
focus more on non-discounted loans.

      Bankcard Income, net. Bankcard income, net was approximately $2.8 million
for the six months ended June 30, 1999, an increase of $1.3 million from the six
months ended June 30, 1998. This increase is attributable to the expansion of
bankcard processing operations which includes internet commerce processing
activity. During the six months ended June 30, 1999, gross bankcard processing
revenue was $7.8 million, of which $4.5 million was attributable to internet
commerce and $1.3 million was attributable to audio text transactions. The
remainder of approximately $2.0 million is primarily attributable to mail order
transaction processing.


                                       21
<PAGE>

      The financial results of First Bank's bankcard processing operations for
the six months ended June 30, 1999 and 1998 have been as follows:

                                                            Six Months Ended
                                                                June 30,
                                                       ------------------------
                                                         1999             1998
                                                       -------          -------
                                                         (Dollars in thousands)
Bankcard revenues ............................         $ 7,750          $ 4,723
Bankcard processing expenses .................          (4,962)          (3,226)
Other expenses ...............................          (1,458)          (1,094)
                                                       -------          -------
Net ..........................................         $ 1,330          $   403
                                                       =======          =======

      Gain on Sale of Loans. Gain on sale of loans decreased by approximately
$23.3 million from the six months ended June 30, 1998 to the six months ended
June 30, 1999. The decrease is primarily due to gains of $26.4 million on sales
of approximately $402.3 million unpaid principal balance of loans during the six
months ended June 30, 1998 and reduced sales activity during the six months
ended June 30, 1999.

      Gain on Sale of Securities. Gain on sale of securities was $8.2 million
for the six months ended June 30, 1999 compared to no gain on sale of securities
for the six months ended June 30, 1999, a decrease of $8.2 million. This
decrease reflected the lack of sales activity in the most recent period.

      Other, net. Other, net increased by approximately $1.5 million from the
six months ended June 30, 1998 to the six months ended June 30, 1999. The
increase is primarily attributable to an increase in management fees earned from
WREIT of $0.8 million for the six months ended June 30, 1999. WREIT did not
commence operations until April 6, 1998 and therefore, the fees earned from
WREIT for the six months ended June 30, 1998 represent only three months'
activity.

Other Expenses

      Our other expenses totaled approximately $38.3 million for the six months
ended June 30, 1999 compared with approximately $49.0 million for the six months
ended June 30, 1998, a decrease of $10.7 million. This decrease was primarily
due to decreases in loan service fees and expenses of $10.4 million and
corporate travel and development of $1.5 million, partially offset by an
increase in depreciation and amortization of $0.5 million.

      Loan Service Fees and Expenses. Loan service fees and expenses decreased
from approximately $20.1 million for the six months ended June 30, 1998 to
approximately $9.7 million for the six months ended June 30, 1999. This decrease
was primarily due to a decline in the balance of loans from $1.3 billion at June
30, 1998 to $576 million at June 30, 1999, as we sold a large portion of our
loan portfolio to increase liquidity and reduce outstanding debt.

      Corporate Travel and Development. Corporate travel and development
decreased from approximately $2.8 million for the six months ended June 30, 1998
to approximately $1.3 million for the six months ended June 30, 1999, primarily
due to substantially reduced travel activity in 1999 as acquisition activity
declined.

      Depreciation and Amortization. Depreciation and Amortization increased
from approximately $0.9 million for the six months ended June 30, 1998 to
approximately $1.4 million for the six months ended June 30, 1999, primarily due
to additional investments in leasehold improvements and equipment (including a
new internal accounting and reporting system) and growth at First Bank.

Reorganization Items


                                       22
<PAGE>

      During the six months ended June 30, 1999, we incurred approximately $52.0
million of expenses related to the WFSG restructuring (see Note 2). These
expenses primarily consisted of net write-downs of the reported amounts of
assets and liabilities of approximately $37.6 million, the write-off of
unamortized debt issuance costs of $11.3 million, professional services of $0.6
million and costs related to the restructuring of our European operations of
$2.5 million. There were no such reorganization items for the six months ended
June 30, 1998. The $52.0 million of reorganization expenses, as well as $4.2
million of interest expense recognized during the period related to the Notes,
will be non-recurring due to WFSG's reorganization. We recognized interest
expense on the Notes only through March 3, 1999, the date WFSG filed its
petition under Chapter 11 of the Bankruptcy Code.

RESULTS OF OPERATIONS--QUARTER ENDED JUNE 30, 1999 COMPARED TO QUARTER ENDED
JUNE 30, 1998

      In the following discussion, the amounts for the three months ended June
30, 1999 represent the sum of the Predecessor Company's operations for the two
months ended May 31, 1999 and the Reorganized Company's operations for the one
month ended June 30, 1999, as reported in the accompanying consolidated
statements of operations.

Net Income

      Our net income for the quarter ended June 30, 1999 was approximately
$182.5 million, which included an extraordinary gain on the extinguishment of
debt of $225.6 million (see Note 4 - Extraordinary Item). Excluding the
extraordinary gain, our net loss for the three months ended June 30, 1999 was
approximately $43.1 million, compared with net income of approximately $11.8
million for the quarter ended June 30, 1998. The decline in operating results is
primarily attributable to $37.6 million of costs related to our restructuring, a
$33.4 million decrease in other income, a $4.2 million increase in provisions
for estimated losses on loans and a $0.3 million decrease in net interest
income, partially offset by a $12.0 million decrease in other expenses.

Net Interest Income

      Our net interest income was approximately $7.2 million for the quarter
ended June 30, 1999, compared with approximately $7.5 million for the quarter
ended June 30, 1998. This decrease was due to a decline in interest income of
$24.8 million, partially offset by a decline in interest expense of $24.4
million, reflecting our reduction in the levels of loans and other
interest-earning assets and paydown of the related short-term borrowing
facilities.

      Interest Income. Our interest income was approximately $16.5 million for
the quarter ended June 30, 1999, compared with approximately $41.3 million for
the quarter ended June 30, 1998, a decrease of $24.8 million. This decrease was
primarily due to a decrease in our interest-earning assets from approximately
$1.6 billion at June 30, 1998, to approximately $692 million at June 30, 1999,
resulting from the sale of certain loans and other assets to provide liquidity
and repay certain short-term borrowing facilities.

      Interest Expense. Our interest expense was approximately $9.4 million for
the quarter ended June 30, 1999, compared with approximately $33.8 million for
the quarter ended June 30, 1998, a decrease of $24.4 million. The decrease in
interest expense was primarily due to a decrease in our interest-bearing
liabilities from approximately $1.8 billion at June 30, 1998, to approximately
$675 million at June 30, 1999 resulting primarily from the repayments of
short-term borrowing facilities with proceeds from the asset sales described
above. In addition, during the quarter ended June 30, 1999, we did not recognize
interest on our 13% Notes, as we stopped accruing such interest as of the March
3, 1999 Chapter 11 filing date, which was prior to the start of the second
quarter. During the quarter ended June 30, 1998, we incurred interest expense on
the Notes of approximately $6.0 million. Upon the completion of our
restructuring, the Notes were cancelled and converted to equity of WFSG.


                                       23
<PAGE>

Provisions for Estimated Losses on Loans

      Provision for estimated losses on loans for the quarter ended June 30,
1999 was approximately $2.7 million, resulting primarily from additional
provisions taken at our non-banking subsidiaries. This compares with a net
recovery of $1.5 million for the quarter ended June 30, 1998, which was
primarily due to First Bank's recapture of reserves on loans sold or paid off.

Other Income

      Our other income decreased to approximately $7.6 million for the quarter
ended June 30, 1999 from approximately $41.0 million for the quarter ended June
30, 1998. The components of our other income are reflected in the following
table:

                                                               Quarter Ended
                                                                 June 30,
                                                          ----------------------
                                                            1999           1998
                                                          -------        -------
                                                          (Dollars in thousands)
Other income:
         Servicing revenue .......................        $ 2,836        $ 1,369
         Real estate owned, net ..................            146          3,399
         Bankcard income, net ....................          1,491            997
         Gain on sale of loans ...................            622         26,444
         Gain on sale of securities ..............             --          6,116
         Trading income ..........................             --            172
         Minority interest .......................            160             --
         Other, net ..............................          2,356          2,473
                                                          -------        -------
                  Total other income .............        $ 7,611        $40,970
                                                          =======        =======

      The decrease in other income was primarily attributable to a $25.8 million
decrease in gain on sale of loans, a $6.1 million decrease on gain on sale of
securities and a $3.3 million decrease in real estate owned, net, offset in part
by a $1.5 million increase in servicing revenue and a $0.5 million increase in
bankcard income, net. The components of other income are further described
below.

      Servicing Revenue. Servicing revenue for the three months ended June 30,
1999 was $2.8 million, compared with $1.4 million for the comparable period in
1998, an increase of $1.4 million. The increase reflects the servicing activity
for the month of June, 1999 of WCC Inc., a newly formed, majority-owned
subsidiary. Such operations were previously performed by a former affiliate,
Wilshire Credit Corporation, but were transferred to WCC Inc. effective May 31,
1999 as part of our reorganization (see Note 2). As part of the agreement for
the transfer of the servicing operations from Wilshire Credit Corporation to WCC
Inc., Wilshire Credit Corporation continues to service some of the accounts for
WCC Inc. through August 1999. Wilshire Credit Corporation uses the facilities
and employees of WCC Inc. for this servicing. WCC Inc. pays Wilshire Credit
Corporation a fee for this servicing (included in Loan service fees and
expenses) and Wilshire Credit Corporation, in turn, reimburses WCC Inc. for its
facilities and employees (included in Servicing revenues).

      Real Estate Owned, net. Real estate owned, net decreased approximately
$3.3 million from the quarter ended June 30, 1998 to the quarter ended June 30,
1999 due to a decrease in gains on the sale of properties acquired through
foreclosure or deed-in-lieu thereof.

      Bankcard Income, net. Bankcard income, net was approximately $1.5 million
during the quarter ended June 30, 1999, an increase of $0.5 million from the
comparable period in 1998. This increase is attributable to the expansion of
bankcard processing operations which includes internet commerce processing
activity. During the quarter ended June 30, 1999, gross bankcard processing
revenue was $4.3 million, of which $2.7 million was


                                       24
<PAGE>

attributable to internet commerce and $0.8 million was attributable to audio
text transactions. The remainder of approximately $0.8 million is primarily
attributable to mail order transaction processing.

      The financial results of First Bank's bankcard processing operations for
the quarters ended June 30, 1999 and 1998 have been as follows:

                                                             Quarter Ended
                                                                June 30,
                                                       ------------------------
                                                         1998              1999
                                                       -------          -------
                                                         (Dollars in thousands)
Bankcard revenues ............................         $ 4,264          $ 3,126
Bankcard processing revenues .................          (2,773)          (2,129)
Other expenses ...............................            (733)            (588)
                                                       -------          -------
Net ..........................................         $   758          $   409
                                                       =======          =======

      Gain on Sale of Loans. Gain on sale of loans decreased by approximately
$25.8 million from the quarter ended June 30, 1998 to the quarter ended June 30,
1999. The decrease is primarily due to gains of $26.4 million on sales of
approximately $402.3 million unpaid principal balance of loans during the
quarter ended June 30, 1998 and reduced sales activity during the quarter ended
June 30, 1999.

      Gain on Sale of Securities. Gain on sale of securities decreased by
approximately $6.1 million due to sales of securities during the quarter ended
June 30, 1998 resulting in gains of approximately $6.1 million and no sales
activity during the quarter ended June 30, 1999.

      Other, net. Other, net consists primarily of management fees earned from
WREIT and loan fees and charges. These revenues remained stable from the quarter
ended June 30, 1998, to the quarter ended June 30, 1999.

Other Expenses

      Our other expenses totaled approximately $17.2 million for the quarter
ended June 30, 1999 compared with approximately $29.2 million for the quarter
ended June 30, 1998, a decrease of $12.0 million. This decrease was primarily
due to decreases in loan service fees and expenses of $6.8 million, professional
services of $1.8 million, compensation and employee benefits of $1.7 million,
corporate travel and development of $1.3 million, and other general and
administrative expenses of $0.9 million.

      Loan Service Fees and Expenses. Loan service fees and expenses decreased
from $11.2 million for the quarter ended June 30, 1998 to approximately $4.4
million for the quarter ended June 30, 1999. This decrease was primarily due to
a decline in the balance of loans from $1.3 billion at June 30, 1998 to $576
million at June 30, 1999, as we sold a large portion of our loan portfolio to
increase liquidity and reduce outstanding debt.

      Professional Services. Professional services decreased by approximately
$1.8 million from the quarter ended June 30, 1998 to the quarter ended June 30,
1999. Expense for the 1999 quarter included the reversal of approximately $1.5
million of previously accrued expenses pursuant to a review by management and
determination that the recorded liability balance exceeded revised estimated
liabilities.

      Compensation and Employee Benefits. Compensation and employee benefits
totaled approximately $7.5 million for the quarter ended June 30, 1999, compared
with approximately $9.2 million for the quarter ended June 30, 1998. The
decrease was primarily due to the reduction in workforce in our European
operations in March 1999, the effects of which were realized during the second
quarter of 1999.

      Corporate Travel and Development. Corporate travel and development
decreased from approximately $2.2 million for the three months ended June 30,
1998 to approximately $0.9 million for the three months ended June 30, 1999 due
to substantially reduced travel activity in 1999 as acquisition activity
declined.


                                       25
<PAGE>

      Other General and Administrative Expenses. Other general and
administrative expenses decreased from approximately $3.7 million for the three
months ended June 30, 1998 to approximately $2.5 million for the three months
ended June 30, 1999. The decrease was primarily due to a $0.6 million decrease
in due diligence expense which reflected the decline in acquisition activity, a
$0.4 million decrease in advertising and a $0.2 million decrease in recruiting
and hiring costs.

Reorganization Items

      During the quarter ended June 30, 1999, we incurred approximately $37.6
million of expenses related to the WFSG restructuring (see Note 2). These
expenses consisted of net write-downs of the reported amounts of assets and
liabilities to their fair values pursuant to the adoption of fresh-start
reporting (see Note 3). These reorganization expenses will be non-recurring due
to the consummation of WFSG's restructuring in June 1999. There were no such
items for the quarter ended June 30, 1998.

CHANGES IN FINANCIAL CONDITION

      The following discussion compares the balances of certain asset, liability
and stockholders' equity (deficit) amounts of the Reorganized Company as of June
30, 1999 with those of the Predecessor Company as of December 31, 1998 as
reported in the accompanying consolidated statements of financial condition.

      Mortgage-Backed and Other Securities. For accounting purposes, our
mortgage-backed and other securities are classified as available for sale or
held to maturity. Our holdings of mortgage-backed securities available for sale
decreased approximately $16.1 million during the six months ended June 30, 1999.
This decrease was primarily due to principal repayments of $10.1 million and
write-downs to fair value of $5.7 million. Our holdings of mortgage-backed
securities held to maturity decreased approximately $2.0 million during the six
months ended June 30, 1999 primarily due to principal repayments. The following
table sets forth our holdings of mortgage-backed and other securities as of June
30, 1999 and December 31, 1998:

Mortgage-Backed Securities and Other Securities

                                                        June 30,    December 31,
                                                          1999          1998
                                                        --------      --------
                                                        (Dollars in thousands)
Available for sale:
     Mortgage-backed securities ....................    $ 60,300      $ 66,829
     Agency mortgage-backed securities .............      38,015        47,634
Held to maturity:
     U.S. Government and other securities ..........       5,971         5,962
     Mortgage-backed securities ....................      11,551        13,580
                                                        --------      --------
          Total investment securities ..............    $115,837      $134,005
                                                        ========      ========

      Loans, net. Our portfolio of loans, net of discounts and allowances,
increased by approximately $46.6 million during the six months ended June 30,
1999. This increase is primarily attributable to the acquisition of
Non-Discounted Loans at First Bank, reflecting our emphasis on increasing the
level of investment in Non-Discounted Loans as a percentage of the total loan
portfolio. See "Discounted Loans, net" below.

      Discounted Loans, net. Our portfolio of Discounted Loans decreased by
approximately $24.4 million during the six months ended June 30, 1999. The
decrease is primarily attributable to our sale of Discounted Loans to repay
certain short-term borrowing facilities and provide liquidity. It is anticipated
that our future investments in Discounted Loans as a percentage of our total
loan portfolio will be reduced. Discounted Loans require significant


                                       26
<PAGE>

capital resources prior to resolution, which is generally six to nine months
following acquisition. We believe we can create a more predictable and less
capital intensive earnings stream by reducing the level of investment in these
assets. Nonetheless, we make our investment decisions on an opportunistic basis
and will evaluate investment opportunities as they arise.

      Loans Held for Sale, Net, at Lower of Cost or Market. Loans held for sale,
net, at lower of cost or market decreased by approximately $238.4 million during
the six months ended June 30, 1999 primarily as a result of the sale of loans to
increase liquidity and reduce outstanding borrowings.

      Real estate owned, net. Real estate owned, net decreased by approximately
$30.8 million during the six months ended June 30, 1999. The decrease was
primarily due to sales of properties for proceeds of approximately $32.9 million
partially offset by acquisitions of real estate through foreclosure or
deed-in-lieu thereof from our portfolio of discounted loans.

      Mortgage Servicing Rights, net. Mortgage servicing rights, net decreased
by $2.3 million during the six months ended June 30, 1999, primarily due to the
write-off, for fresh-start reporting purposes (see Note 3), of previously
capitalized or purchased servicing rights.

      Investment in Wilshire Real Estate Investment Trust Inc. Investment in
WREIT decreased by approximately $2.0 million primarily due to a write-down in
the carrying value in accordance with the provisions of fresh-start reporting.

      Deposits. First Bank's deposits decreased by approximately $17.7 million
during the six months ended June 30, 1999. This decrease is primarily
attributable to a corresponding reduction in First Bank's asset portfolio. On
June 3, 1999, the OTS issued a directive which, among other things, prohibits
First Bank, without prior OTS approval, from increasing total assets during any
quarter in excess of an amount equal to net interest credited on deposits for
the quarter.

      Short-Term Borrowings. Short-term borrowings decreased by approximately
$249.5 million during the six months ended June 30, 1999, resulting primarily
from our reduction of total loans from $792.2 million at December 31, 1998 to
$576.1 million at June 30, 1999.

      Notes payable. The Notes payable of $184.2 million at December 31, 1998
were cancelled in June 1999. Pursuant to our prepackaged Chapter 11 bankruptcy
filing, these Notes were converted into equity of WFSG, as described more fully
in Note 2 to the interim consolidated financial statements.

      Accounts Payable and Other Liabilities. WREIT has prepaid certain
servicing fees to WFSG. These amounts are included in Accounts payable and other
liabilities. The initial amount of the prepaid fees may be in dispute between
WREIT and WFSG with WFSG contending that the initial amount is as low as $2.3
million and WREIT contending the amount is $3.2 million. Without admission, the
Company has recorded the amount at $3.2 million.

LIQUIDITY AND CAPITAL RESOURCES

      Liquidity is the measurement of our ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, fund
investments, purchase pools of loans, and for general business purposes. Our
sources of cash flow include certificates of deposit, securitizations, whole
loan and mortgage-backed securities sales, net interest income and borrowings
under warehouse and repurchase financing facilities (if available) and from
institutional investors and other lenders and public and private debt offerings.
We also have borrowed money from WREIT. In addition, First Bank has available
funding through FHLB advances. Our liquidity is actively managed on a daily
basis and was and will be reviewed periodically by our Board of Directors. 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.


                                       27
<PAGE>

      The Company has repurchase agreements outstanding that mature monthly and,
with the parties' agreement, may be rolled into new 30 day repurchase
agreements. In addition, the Company has discussed additional lending
arrangements with investment banks which may provide financing on a transaction
by transaction basis. There can be no assurance that lenders will continue to
roll the repurchase agreements or will not change material terms, including, but
not limited to, advance rates and interest rates on these financing
arrangements. In addition, given current market conditions, the Company may not
be able to securitize loans as a source of liquidity.

      The dramatic events in the financial markets in late 1998, which included
a significant reduction in valuations of and liquidity for mortgage-backed
securities, has had a significant adverse impact on our liquidity and financial
condition. Many of our lenders determined that the value of these assets had
decreased and demanded cash or securities to continue lending, which reduced our
cash position and eventually prompted asset sales at depressed prices to meet
these calls and provide liquidity. While these asset sales have improved our
liquidity position, the market for mortgage-backed securities, particularly
subordinate mortgage-backed securities, remains depressed and the financial
markets generally continue to be volatile. Further, certain of the Company's
lenders have expressed concern about continued lending to this industry given
market conditions and to the Company given the losses incurred by the Company.
It is not clear to what extent the Company can rely on short-term warehouse or
repurchase agreements as a source of liquidity. At June 30, 1999, our cash
balances totaled approximately $24.3 million; however, $17.2 million of the
balance was held at First Bank and is not available for use by any Wilshire
company other than First Bank.

      We mark our securities portfolio to fair value at the end of each month
based upon broker/dealer marks, subject to an internal review process. With
respect to many of our subordinate securities, marks are typically available
from either a single or, at most, a small group of broker/dealers. For those
securities that are subject to repurchase or other financing arrangements with
broker/dealers, we employ the mark supplied by the financing broker even if, as
is sometimes the case, we believe that the mark represents less than fair value.
As of each reporting period, we evaluate whether and to what extent any
unrealized loss is to be recognized as other than temporary.

      Our restructuring as described in Note 2 to the consolidated financial
statements significantly improved our financial position by reducing
indebtedness, eliminating the ongoing interest cost associated with that
indebtedness, and significantly increasing our equity account.

      Based on our current and expected asset size, capital levels, and
organizational infrastructure, management believes that cash flows will be
sufficient to meet our needs. However, we intend to aggressively seek new
capital to permit us to more fully and more efficiently utilize our acquisition
and loan servicing platforms. There can be no assurance, however, that we will
be able to obtain new capital.

      Following the losses incurred by the Company in the second half of 1998,
the Company began discussions with a number of potential new equity investors in
order to strengthen its diminished equity base and obtain additional capital to
operate and develop the business. These discussions were suspended pending the
completion of our restructuring. There can be no assurance that any such
discussions will be recommenced or will lead to any investments being made.

      Sources of liquidity for First Bank include wholesale and brokered
certificates of deposit. At June 30, 1999, First Bank had approximately $479.3
million of certificates of deposit. At June 30, 1999, scheduled maturities of
certificates of deposit during the 12 months ending June 30, 2000 and thereafter
amounted to approximately $405.0 million and approximately $74.3 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.


                                       29
<PAGE>

      Mortgage-backed securities which are subject to repurchase agreements, as
well as loans and real estate which secure other indebtedness, periodically are
revalued by the lender, and a decline in the value that is recognized by the
lender (whether or not the lender recognized the full fair value of the
security) may result in the lender requiring us to provide additional collateral
to secure the indebtedness. Primarily as a result of asset sales, we have had
adequate cash and cash equivalents to meet calls for additional collateral to
repay a portion of the related indebtedness or to meet our other operating and
financing requirements. In certain instances, lenders under repurchase
agreements secured by mortgage-backed securities have withheld principal and/or
interest payments on such securities in order to reduce outstanding, unpaid
margin calls. At June 30, 1999, there were approximately $10.9 million of
outstanding collateral calls, as determined by our lenders, net of withheld
principal and interest payments. If we are unable to fund additional collateral
requirements or to repay, renew or replace maturing indebtedness on terms
reasonably satisfactory to us, we may be required to sell (on short notice) a
portion of our assets, and could incur losses as a result. Furthermore, since,
from time to time, there is extremely limited liquidity in the market for
subordinate and residual interests in mortgage-related securities, there can be
no assurance that we will be able to dispose of such securities promptly for
fair value in such situations.

      We are party to various off-balance sheet financial instruments in the
normal course of business to manage our interest rate risk. We conduct business
with a variety of financial institutions and other companies in the normal
course of business, including counterparties to our off-balance sheet financial
instruments. We are subject to potential financial loss if the counterparty is
unable to complete an agreed upon transaction. We seek to limit counterparty
risk through financial analysis and other monitoring procedures.

      Adequate credit facilities and other sources of funding, including our
ability to securitize loans, are essential to the continuation of the Company's
ability to purchase pools of loans and mortgage-backed securities. During the
third and fourth quarters of 1998, 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 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 and growth at First Bank. To the extent this market environment
persists, such growth is likely to be significantly curtailed or delayed.

      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 that 1%. Monetary penalties may be
imposed for failure to meet applicable liquidity requirements. First Bank has
complied with these requirements.

      Federally insured savings associations such as the Bank are required to
maintain minimum levels of regulatory capital. Those standards generally are as
stringent as the comparable capital requirements imposed on national banks. The
OTS also is authorized to impose capital requirements in excess of these
standards on a case-by-case basis. In connection with the 1998 examination the
OTS indicated that the capital level of First Bank exceeds the minimum
requirement for "well capitalized" status under provisions of the Prompt
Corrective Action Regulation. On June 3, 1999, the OTS issued a directive that
indicates that it considers First Bank to be in "troubled condition." This
directive places restrictions on First Bank's ability to engage in certain
activities, including, but not limited to: increasing asset size; making new
loans, investments or capital expenditures; paying dividends or making other
capital distributions; and hiring senior executive officers, directors or
consultants. First Bank does not agree with the "troubled institution"
designation and is deciding whether to appeal the restrictions imposed by the
OTS directive. However, there can be no assurance as to whether any such appeal
will be successful.


                                       30
<PAGE>

OTHER-YEAR 2000 COMPLIANCE

      Many existing computer software programs and other technologically
dependent systems use two digits to indicate the year in date fields and, as
such, could fail or create erroneous results by or at the Year 2000. We utilize
a number of technologically dependent systems to operate, service mortgage loans
and manage mortgage assets. WFSG, together with WCC Inc. (a subsidiary
controlled by WFSG) and Wilshire Servicing Company U.K. Limited (a wholly-owned
subsidiary of WFSG), who are our two Servicers, formed a committee to address
year 2000 issues ("the Committee") that reports directly to WFSG's executive
committee. The Committee is headed by WFSG's Chief Information Officer and
includes representatives from across departments within WFSG and our Servicers
as well as our management.

      The Committee established and completed a project plan with respect to
Year 2000 readiness. In the first phase of the project, the Committee conducted
an inventory of all systems for WFSG and our Servicers, classifying each as
either "critical" or "non-critical". For systems deemed "critical", the
Committee developed detailed test plans and created separate Year 2000 test
environments. After the testing phase, in which Year 2000 issues were
identified, phases of resolution, re-testing, implementation and certification
were completed.

      We began testing of all critical systems in 1997 and completed all
necessary testing of such systems, including both systems supplied by outside
vendors and internally developed systems, by the end of February 1999. In each
case, issues which were identified were resolved. Changes which resulted from
testing were coded, retested and implemented and moved into production.
Following these phases, each department's executive management certified that
their staff had tested critical code and deemed it adequate. In addition, for
all critical systems supplied by outside vendors, the Committee obtained a
written certification from the vendor that the applicable package is "Year 2000
compliant". With respect to non-critical systems supplied by outside vendors,
the Committee has consulted substantially all of the vendors' Internet sites and
has obtained copies of Year 2000 compliance certifications from those sites. All
phases of the Committee's Year 2000 readiness project were completed by the end
of April 1999. As a result, WFSG's management believes that the Company is Year
2000 compliant in all material respects.

      In addition to the information technology systems ("IT systems"), various
"environmental systems" ("non-IT systems") used for the Company's business,
including the telephone, elevator and security systems, incorporate technology
that could be impaired by the year 2000 date change. The Committee has received
written certification that each significant non-IT system is Year 2000
compliant.

      The financial impact of becoming Year 2000 compliant has not been and is
not expected to be material to us or our results of operations. Aside from
limited hardware costs, our primary expense related to Year 2000 compliance is
allocation of existing staff. The Committee estimates the total cost related to
Year 2000 compliance to be approximately $0.5 million, substantially all of
which had been incurred by December 31, 1998.

      Our most likely worst case Year 2000 scenario would be one in which we are
unable to perform necessary loan servicing activities. To the extent the loan
servicing system is not Year 2000 compliant, the ability to service loans would
be in jeopardy. This, in turn, would limit the collections of payments on
mortgage loans, which would, further, hinder the Company's ability to meet its
own debt service and other cash requirements. Although we do not believe that it
is reasonably likely that the Year 2000 date change will cause such a scenario
to occur, the Committee has developed a contingency plan with procedures for
manual loan servicing, for up to a week, should the loan servicing system cease
to be operational. The loan servicing system was developed internally, and we
believe that, in the event of an unexpected Year 2000 issue, the source of the
issue could be isolated, and the issue could be corrected, rapidly by our
existing staff without significant cost. Accordingly, we do not believe that
such a failure of the loan servicing system would result in any material loss of
revenue or have any other material impact on the Company.

      Based on the results of the Committee's Year 2000 readiness project, we
are confident that we are appropriately addressing the Year 2000 issues.
Critical IT systems supplied by outside vendors have undergone testing not only
by us, but by other customers of the vendors as well. Our 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.


                                       31
<PAGE>

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.


                                       32
<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

      It is our objective to attempt to control risks associated with interest
rate movements. In general, management's strategy is to limit our exposure to
earnings variations and variations in the value of assets and liabilities as
interest rates change over time. Our 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 our 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.

      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 our 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 $36.7 million notional principal amount of interest rate swap
agreements outstanding at June 30, 1999, which were designated as hedges of
certain fixed rate loans in order to convert variable rate liabilities to fixed
rate. These swaps had the effect of decreasing our net interest income by
approximately $0.2 million during the six months ended June 30, 1999.

      At times, we have 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 our 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. We
evaluate the interest rate sensitivity of each pool of loans or securities in
conjunction with the current interest rate environment and decide whether to
hedge the interest rate exposure of a particular pool. We generally do 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, we
will determine whether or not to hedge and, with respect to any sale or
financing of any pool of loans through securitization, will determine whether or
not to discontinue its duration-matched hedging activities with respect to the
relevant loans.

      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.


                                       32
<PAGE>

      The following table quantifies the potential changes in First Bank's net
portfolio value, at May 31, 1999, should interest rates go up or down (shocked)
by 100 to 300 basis points, assuming the yield curves of the rate shocks will be
parallel to each other.

                                                    Net Portfolio
     Change in Rates                                    Value
     ---------------               ---------------------------------------------
                                   $ Amount           $ Change         % Change
                                   --------           ---------         --------
    300 Basis Points               $ 1,501            $(49,099)           -97%
    200 Basis Points                19,975             (30,625)           -61%
    100 Basis Points                36,861             (13,739)           -27%
      0 Basis Points                50,600                  --             --
   -100 Basis Points                59,816               9,216             18%
   -200 Basis Points                65,795              15,195             30%
   -300 Basis Points                69,998              19,398             38%

      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 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.


                                       33
<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

                  Pursuant to the Company's plan of reorganization, which became
            effective on June 10, 1999, (i) the holders of the Company's $184.2
            million in publicly issued notes exchanged their notes for new
            common stock of the Company and (ii) the Company's existing common
            stock and options were cancelled. In connection with the
            reorganization, the Company amended and restated its articles of
            incorporation and by-laws. Pursuant to the amended and restated
            articles of incorporation, the Company is now authorized to issue
            90,000,000 shares of common stock and 10,000,000 shares of preferred
            stock. Previously, the Company had been authorized to issue
            50,000,000 shares of common stock and 10,000,000 shares of preferred
            stock. The amended and restated by-laws no longer require a
            staggered board of directors.

      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 was unable to comply with the minimum net worth and other
            requirements for certain of its outstanding indebtedness. Pursuant
            to the Company's restructuring plan, which became effective on June
            10, 1999, such indebtedness was converted into new common stock of
            the Company.

      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

                  Not applicable.

      Item 6. Exhibits and Reports on Form 8-K

            (a) Exhibits.

      10.1  Amendment No. 1 to Management Agreement

      10.2  Loan Servicing Agreement


                                       34
<PAGE>

      10.3  Amended and Restated Loan Servicing Agreement with UK Servicer

      11    Statement re Computation of Per Share Earnings

      27    Financial Data Schedule

            (b)   Reports on Form 8-K during the three months ended June 30,
                  1999:

                  (i)   Report on Form 8-K dated June 10, 1999, reporting the
                        emergence from bankruptcy and change in control of the
                        Company; the resignation of a Director of the Company;
                        the resignation of the Chief Executive Officer of First
                        Bank; and the imposition of restrictions on First Bank.

                  (ii)  Report on Form 8-K dated June 23, 1999 reporting the
                        denial of the Company's request for continued listing of
                        its common stock on the Nasdaq National Stock Market.


                                       35
<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: August 16, 1999

                                      By: /s/ LAWRENCE A. MENDELSOHN
                                          --------------------------------------
                                          Lawrence A. Mendelsohn
                                          President


                                      By: /s/ CHRIS TASSOS
                                          --------------------------------------
                                          Chris Tassos
                                          Chief Financial Officer


                                       36