# UNITED STATES
SECURITIES
AND EXCHANGE COMMISSIONWashington,
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, 2003

# or

[     ]           Transitional Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                    to

# Commission
file number 0-21845

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

|Delaware                                                       | 93-1223879                          
|-------------------------------------------------------------- | ------------------------------------
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)
|                                                               |                                     
|14523 SW Millikan Way, Suite 200, Beaverton, OR                | 97005                               
|(Address of principal executive offices)                       | (Zip Code)                          

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

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

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [___]        No [ X ]

# Applicable only to issuers involved in bankruptcy proceedings during the preceding five years:

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, 2003
|--------------------------------------- | ----------------------------
|Common Stock, par value $0.01 per share | 18,635,491 shares           

# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

# INDEX

## PART I.
FINANCIAL INFORMATION

`Item 1.   Interim Condensed Consolidated Financial Statements (Unaudited):

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

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

                   Consolidated Statements of Stockholders' Equity......................5

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

                   Notes to Interim Condensed Consolidated Financial Statements.........8

         Item 2.   Management's Discussion and Analysis of Financial Condition
                   and Results of Operations...........................................16

         Item 3.   Quantitative and Qualitative Disclosures About Market Risk..........30

         Item 4.   Controls and Procedures.............................................32`

## PART II. OTHER
INFORMATION

`Item 1.   Legal Proceedings...................................................33

         Item 2.   Changes in Securities...............................................33

         Item 3.   Defaults Upon Senior Securities.....................................33

         Item 4.   Submission of Matters to a Vote of Security Holders.................33

         Item 5.   Other Information...................................................33

         Item 6.   Exhibits and Reports on Form 8-K....................................33

         Signature.....................................................................35`

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

`June 30,     December 31,
                                                                                           2003           2002
                                       ASSETS                                          ------------   ------------
Cash and cash equivalents ...........................................................  $     15,173   $     17,579
Government agency mortgage-backed securities available for sale, at fair value ......       166,027        211,082
AAA mortgage-backed securities available for sale, at fair value ....................        39,321         48,320
Other mortgage-backed securities available for sale, at fair value ..................         1,585          2,133
Investment securities available for sale, at fair value .............................        25,572         11,962
Loans, net of allowance for loan losses of $6,765 and $7,980 ........................       487,847        486,667
Discounted loans, net of allowance for loan losses of $41,069 and $40,920 ...........         5,622          6,630
Stock in Federal Home Loan Bank of San Francisco, at cost ...........................        11,080         10,808
Real estate owned, net ..............................................................           683          1,101
Leasehold improvements and equipment, net ...........................................         3,147          3,218
Accrued interest receivable .........................................................         3,766          4,043
Servicer advance receivables, net ...................................................        26,306         19,922
Service fees receivable .............................................................         2,760          2,334
Purchased mortgage servicing rights, net ............................................         9,255          5,405
Receivables from loan servicers .....................................................           502            462
Intangible assets, net ..............................................................         3,572          3,701
Prepaid expenses and other assets ...................................................        18,382          7,654
                                                                                       ------------   ------------
          TOTAL .....................................................................  $    820,600   $    843,021
                                                                                       ============   ============

                        LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
     Noninterest-bearing deposits ...................................................  $      4,355   $      3,659
     Interest-bearing deposits ......................................................       350,545        392,122
     Short-term borrowings ..........................................................        94,000         91,870
     Accounts payable and other liabilities .........................................        23,404         14,284
     FHLB advances ..................................................................       218,000        216,000
     Investment financing ...........................................................         5,232          4,284
     Trust preferred subordinated debt ..............................................        20,000         20,000
     Investor participation liability ...............................................         1,435          1,346
                                                                                       ------------   ------------
          Total liabilities .........................................................       716,971        743,565
                                                                                       ------------   ------------

COMMITMENTS AND CONTINGENCIES (NOTE 2)

STOCKHOLDERS' EQUITY:
     Preferred stock, $0.01 par value, 10,000,000 shares authorized, 0 shares
        outstanding .................................................................            --             --
     Common stock, $0.01 par value, 90,000,000 shares authorized, 24,251,037
        and 23,820,874 shares issued (including treasury shares of 5,626,212) .......       116,260        114,357
     Treasury stock, 5,626,212 shares, at cost ......................................       (15,106)       (15,106)
     Accumulated deficit ............................................................          (126)        (3,096)
     Accumulated other comprehensive income, net ....................................         2,601          3,301
                                                                                       ------------   ------------
          Total stockholders' equity ................................................       103,629         99,456
                                                                                       ------------   ------------
          TOTAL .....................................................................  $    820,600   $    843,021
                                                                                       ============   ============`

See notes to unaudited interim condensed consolidated financial statements

3

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

`Quarter Ended                Six Months Ended
                                                                                 June 30,                      June 30,
                                                                        ---------------------------   ---------------------------
                                                                            2003           2002           2003           2002
                                                                        ------------   ------------   ------------   ------------
INTEREST INCOME:
         Loans .......................................................  $      8,426   $      9,638   $     16,896   $     20,483
         Mortgage-backed securities ..................................         2,547          2,473          6,014          5,405
         Securities and federal funds sold ...........................           217            300            389            640
                                                                        ------------   ------------   ------------   ------------
       Total interest income .........................................        11,190         12,411         23,299         26,528
                                                                        ------------   ------------   ------------   ------------
INTEREST EXPENSE:
         Deposits ....................................................         2,776          3,928          5,989          8,350
         Borrowings ..................................................         3,233          3,234          6,696          6,505
                                                                        ------------   ------------   ------------   ------------
         Total interest expense ......................................         6,009          7,162         12,685         14,855
                                                                        ------------   ------------   ------------   ------------
NET INTEREST INCOME ..................................................         5,181          5,249         10,614         11,673
(RECAPTURE OF) PROVISION FOR LOSSES ON LOANS .........................          (700)           223           (670)           236
                                                                        ------------   ------------   ------------   ------------
NET INTEREST INCOME AFTER (RECAPTURE OF) PROVISION FOR LOSSES ON
    LOANS ............................................................         5,881          5,026         11,284         11,437
                                                                        ------------   ------------   ------------   ------------
OTHER INCOME:
         Servicing income ............................................         7,906          6,024         15,747         11,546
         Loan fees and charges .......................................            27             29             50             71
         Real estate owned, net ......................................          (112)           (65)           (87)          (111)
         Gain on sale of loans .......................................            75          2,436             80          2,480
         Loss on sale of securities ..................................            --             --             --            (62)
         Market valuation losses and impairments......................            --         (1,373)            --         (1,373)
         Investor participation interest .............................           (59)        (1,219)          (129)        (1,545)
         Other, net ..................................................           517            (55)           731          1,206
                                                                        ------------   ------------   ------------   ------------
         Total other income ..........................................         8,354          5,777         16,392         12,212
                                                                        ------------   ------------   ------------   ------------
OTHER EXPENSES:
         Compensation and employee benefits ..........................         7,391          6,177         14,162         11,818
         Professional services .......................................         1,542          1,031          2,691          2,818
         Occupancy ...................................................           527            539          1,080          1,082
         FDIC insurance premiums .....................................           107            104            215            209
         Data processing .............................................           279            337            533            601
         Communication ...............................................           216            290            449            602
         Insurance ...................................................           365            275            705            554
         Corporate travel and development ............................            43             79            126            169
         Depreciation.................................................           396            437            804            859
         Amortization of intangibles .................................            64             64            129            129
         Postage and courier expense .................................           314            217            574            520
         Provision for litigation claims .............................            --             --             --          3,600
         Other general and administrative expenses ...................           609            601          1,183          1,309
                                                                        ------------   ------------   ------------   ------------
         Total other expenses ........................................        11,853         10,151         22,651         24,270
                                                                        ------------   ------------   ------------   ------------
INCOME (LOSS) BEFORE MINORITY INTEREST AND
    INCOME TAXES .....................................................         2,382            652          5,025           (621)
MINORITY INTEREST ....................................................            --           (325)            --           (125)
                                                                        ------------   ------------   ------------   ------------
INCOME (LOSS) BEFORE INCOME TAXES ....................................         2,382            327          5,025           (746)
INCOME TAX PROVISION (BENEFIT) .......................................           976              1          2,055           (299)
                                                                        ------------   ------------   ------------   ------------
NET INCOME (LOSS) ....................................................  $      1,406   $        326   $      2,970   $       (477)
                                                                        ============   ============   ============   ============

Earnings (loss) per share - basic.....................................  $       0.08   $       0.02   $       0.16   $      (0.03)
Earnings (loss) per share - diluted...................................  $       0.07   $       0.02   $       0.15   $      (0.03)

Weighted average shares outstanding - basic...........................    18,435,365     16,196,365     18,330,116     16,188,615
Weighted average shares outstanding - diluted.........................    20,410,295     21,379,651     20,330,328     16,188,615`

See notes to unaudited interim condensed consolidated financial statements

4

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# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

# CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY

# (Unaudited)

# (Dollars in
thousands)

`Accumulated
                               Preferred Stock     Common Stock         Treasury Stock                       Other
                                ------------- --------------------- ----------------------- Accumulated  Comprehensive
                                Shares Amount   Shares      Amount      Shares     Amount    Deficit        Income         Total
                                ------ ------ ----------- --------- -----------  ----------  ---------   -------------  ---------
BALANCE, January 1, 2002......      -- $   --  20,349,458 $ 105,530  (4,168,854) $ (10,005)  $ (5,058)   $        953   $  91,420
Comprehensive income:
    Net income................                                                                  1,962                       1,962
    Unrealized holding gains
      on available for sale
      securities - net of tax
      expense of $1,851(1)....                                                                                  2,490       2,490
    Unrealized loss on
      interest-rate swap - net                                                                                   (142)       (142)
      of tax benefit of $101..                                                                                           --------
Total comprehensive income....                                                                                              4,310
Tax benefit from utilization
    of pre-reorganizational Net
    Operating Losses (Note 3).                                  815                                                           815
Exercise of stock options.....                     75,000        96                                                            96
Conversion of subordinated
    debentures................                  3,396,416     7,690                                                         7,690
Receipt of income tax refund
    related to pre-
    reorganizational income...                                  226                                                           226
Treasury stock acquired.......                                       (1,457,358)    (5,101)                                (5,101)
                                ------ ------ ----------- --------- -----------  ----------  ----------  -------------  ---------
BALANCE, December 31, 2002....      --     --  23,820,874   114,357  (5,626,212)   (15,106)     (3,096)         3,301      99,456
Comprehensive income:
    Net income................                                                                   2,970                      2,970
    Unrealized holding loss
      on available for sale
      securities - net of tax
      benefit of $426.........                                                                                   (561)       (561)
    Unrealized loss on
      interest-rate swap - net
      of tax benefit of $91...                                                                                   (139)       (139)
                                                                                                                         --------
Total comprehensive income....                                                                                              2,270
Tax benefit from utilization
    of pre-reorganizational
    Net Operating Losses
    (Note 3)..................                                1,352                                                         1,352
 Exercise of stock options....                    430,163       551                                                           551
                                ------ ------ ----------- --------- -----------  ----------  ----------  -------------  ---------
BALANCE, June 30, 2003........      -- $   --  24,251,037 $ 116,260  (5,626,212) $ (15,106)  $    (126)  $      2,601   $ 103,629
                                ====== ====== =========== ========= ===========  ==========  ==========  =============  =========
__________`

(1) Includes reclassification adjustment for gain included in net income of $1,321, net of tax expense of $937.

See notes to unaudited interim condensed consolidated financial statements

5

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

`Six Months Ended
                                                                                           June 30,
                                                                                  ---------------------------
                                                                                      2003           2002
                                                                                  ------------   ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss) ...........................................................  $      2,970           (447)
   Adjustments to reconcile net income (loss) to net cash provided by
      operating activities:
        (Recapture of) provision for losses on loans ...........................          (670)           236
        Provision for losses on real estate owned ..............................           110             18
        Valuation adjustment for mortgage servicing rights .....................          (139)           421
        Market valuation losses and impairments ................................            --          1,373
        Depreciation and amortization ..........................................           933            988
        Tax effect from utilization of net operating loss carryforward .........         1,352             --
        (Gain) loss on sale of real estate owned ...............................           (57)            88
        Loss on sale of mortgage servicing rights ..............................            --             22
        Gain on sale of loans ..................................................           (80)        (2,480)
        Loss on sale of securities .............................................            --             62
        (Gain) loss on disposal of equipment ...................................            (8)             6
        Amortization of discounts and deferred fees ............................         1,598          1,522
        Amortization of mortgage servicing rights ..............................         2,375          1,868
        Federal Home Loan Bank stock dividends .................................          (272)          (265)
        Minority interest ......................................................            --            125
      Change in:
        Servicer advance receivables ...........................................        (6,384)         3,074
        Service fees receivable ................................................          (426)           (92)
        Accrued interest receivable ............................................           277           (513)
        Receivables from other loan servicers ..................................           (40)           850
        Prepaid expenses and other assets ......................................           391            564
        Accounts payable and other liabilities .................................        (1,707)         4,965
        Investor participation liability .......................................            89            621
                                                                                  ------------   ------------
             Net cash provided by operating activities .........................           312         13,006
                                                                                  ------------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
        Purchase of loans ......................................................       (17,648)            --
        Proceeds from sale of loans ............................................         4,068             --
        Loan repayments ........................................................        74,579        106,846
        Loan originations ......................................................       (61,417)       (44,938)
        Purchase of discounted loans ...........................................       (30,075)           (10)
        Proceeds from sale of discounted loans .................................        30,308          7,395
        Purchase of mortgage-backed securities available for sale ..............       (27,784)      (131,979)
        Proceeds from sale of mortgage-backed securities available for sale ....            --         19,513
        Repayment of mortgage-backed securities available for sale .............        79,950         15,345
        Purchase of investment securities available for sale ...................       (13,458)       (13,731)
        Proceeds from sale of real estate owned ................................           822            498
        Purchases of leasehold improvements and equipment ......................          (738)          (819)
        Proceeds from sale of leasehold improvements and equipment .............            13             17
        Purchase of mortgage servicing rights ..................................        (6,088)          (115)
        Proceeds from sale of mortgage servicing rights ........................             2            297
                                                                                  ------------   ------------
             Net cash provided by (used in) investing activities ...............        32,534        (41,681)
                                                                                  ------------   ------------`

See notes to unaudited interim condensed consolidated financial statements

6

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

`Six Months Ended
                                                                                           June 30,
                                                                                  ---------------------------
                                                                                      2003           2002
                                                                                  ------------   ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
        Net decrease in deposits................................................  $    (40,881)  $    (35,818)
        Proceeds from FHLB advances     ........................................        18,000             --
        Repayments of FHLB advances.............................................       (16,000)            --
        Net increase in short-term borrowings...................................         2,130         52,333
        Proceeds from servicing acquisition notes...............................         4,006          2,444
        Repayment of servicing acquisition notes................................        (3,058)        (9,752)
        Issuance of convertible subordinated debentures.........................            --          7,690
        Issuance of common stock pursuant to exercise of stock options..........           551             40
                                                                                  ------------   ------------
             Net cash (used in) provided by financing activities................       (35,252)        16,937
                                                                                  ------------   ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS.......................................        (2,406)       (11,738)
CASH AND CASH EQUIVALENTS:
        Beginning of period.....................................................        17,579         39,974
                                                                                  ------------   ------------
        End of period...........................................................  $     15,173   $     28,236
                                                                                  ============   ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--Cash  paid for:
        Interest................................................................  $     12,145   $     15,292
        Income taxes............................................................           295            423
NONCASH INVESTING ACTIVITIES:
        Additions to real estate owned acquired in settlement of loans..........           457            517`

See notes to unaudited interim condensed consolidated financial statements

7

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

## 1. BASIS OF
PRESENTATION

The  accompanying  interim  condensed   consolidated   financial  statements  of
Wilshire  Financial  Services  Group  Inc.  and  its  subsidiaries   ("WFSG"  or  the
"Company")  are  unaudited  and should be read in  conjunction  with the 2002  Annual
Report on Form 10-K. A summary of the Company's  significant  accounting  policies is
set  forth in Note 1 to the  Consolidated  Financial  Statements  in the 2002  Annual
Report on Form 10-K.

In the  opinion of  management,  all  adjustments,  other  than the  adjustments
described below,  generally comprised of normal recurring accruals necessary for fair
presentation of the interim  condensed  consolidated  financial  statements have been
included and all  intercompany  accounts and  transactions  have been  eliminated  in
consolidation.  Operating  results  for the six months  ended  June 30,  2003 are not
necessarily  indicative  of the  results  that may be  expected  for the year  ending
December 31, 2003.

The   preparation  of  financial   statements  in  conformity   with  accounting
principles  generally accepted in the United States of America 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 amounts and results could differ from those estimates.

Certain  reclassifications  of 2002 amounts were made in order to conform to the
2003 presentation, none of which affect previously reported net income (loss).

## 2.
COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK

At June 30, 2003, the Company's banking subsidiary,  First Bank of Beverly Hills,
F.S.B. ("FBBH" or the "Bank"),  had outstanding  commitments to fund $10.0 million of
mortgage loans and to purchase $10.0 million of mortgage-backed securities.

The Company expects to incur additional  expenses in connection with legal costs
for prior officers.  These costs,  which totaled  approximately $0.8 million and $1.3
million,  respectively, for the quarter and six months ended June 30, 2003, relate to
the events  that gave rise to  litigation  arising  from the  financial  collapse  of
Capital  Consultants  LLC  ("CCL").  The  Company  on May  13,  2002  entered  into a
settlement  agreement  to  resolve  that  litigation  and  has  completed  all of its
obligations  under the settlement  agreement.  The litigation  will be dismissed when
plaintiffs  complete their  obligations.  Management,  after  consultation with legal
counsel,  believes that this  litigation will be dismissed.  However,  this dismissal
would not affect any  continuing  obligation of the Company for legal costs of
the prior officers arising from such events.

## 3. INCOME TAXES

The  Company  files  consolidated  federal  income tax  returns  with all of its
subsidiaries.  The operations of Wilshire Credit Corporation  ("WCC"),  the Company's
loan servicing  subsidiary,  are included in WFSG's  consolidated  income tax returns
for periods  beginning  October 1, 2002,  the  effective  date of WFSG's  purchase of
WCC's 49.99%  minority  interest.  For tax years through the year ended  December 31,
2001 and for the first three quarters of 2002,  WCC's  operations  were excluded from
WFSG's  consolidated  federal income tax return because WCC did not meet the required
ownership threshold of 80% (the Company's economic interest was 50.01%).

The  Company  recorded a current  income tax  provision  of  approximately  $1.0
million and $2.1  million,  respectively,  for the quarter and six months  ended June
30,  2003.  The  Company's  deferred  tax  provision  (benefit)  is  determined  on a
quarterly  basis  pursuant to an evaluation  of WFSG's net deferred tax asset.  These
deferred tax assets and liabilities  represent the tax effect of future deductible or
taxable  amounts.  They are  attributable  to  carryforwards,  such as net  operating
losses and capital  losses,  and also to temporary  differences  between amounts that
have  been  recognized  in the  financial  statements  and  amounts  that  have  been
recognized in the income tax returns.  An effective tax rate of approximately  41% is
applied to each  attribute  in  determining  the amount of the related  deferred  tax
asset or liability.  Decreases (increases) in the net deferred tax asset are recorded
as a deferred tax provision (benefit) in the consolidated statement of operations.

8

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

WFSG's  net  deferred  tax  asset at June  30,  2003 and  December  31,  2002 is
included  in  prepaid  expenses  and other  assets on the  accompanying  consolidated
statements  of financial  condition.  In accounting  for the deferred tax asset,  the
Company  applies  Statement  of  Financial  Accounting  Standards  ("SFAS")  No. 109,
"Accounting  for Income  Taxes."  SFAS No. 109  requires,  among other  things,  that
deferred  tax assets be reduced by a  valuation  allowance  if it is more likely than
not that  some  portion  or all of the  deferred  tax  asset  will  not be  realized.
Management  believes  that it is more likely than not that the Company will realize a
portion  of  the  deferred  tax  asset  and  has  recorded  the  valuation  allowance
accordingly.  As benefits relating to the Company's  pre-reorganization  (before June
10, 1999) period are realized and the valuation allowance is reduced,  the tax effect
is recorded as an increase to  stockholders'  equity 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"),  and
not as a tax benefit in the statement of operations.

In June  2002 the  Company  experienced  a change  in  control  as set  forth by
Section  382 of the  Internal  Revenue  Code.  In  general,  a change in  control  is
defined as a greater than 50% ownership  shift as measured over the prior  three-year
period.  The change in control will limit the  Company's  ability to utilize  certain
tax attributes, such as net operating loss and capital loss carryforwards,  in future
periods.  In  addition,  if the Company is found to have a net overall  built-in-gain
or  built-in-loss  at the  change  in  control  date,  the  realization  of  the  tax
attributes  could  be  enhanced  or  limited.  If  the  Company  has  a  net  overall
built-in-gain,  it will be allowed  to  utilize  additional  tax  attributes.  If the
Company  has  a  net  overall  built-in-loss,   it  will  be  subject  to  additional
limitations on the use of its tax attributes.

As of December 31, 2002, the Company had U.S. net operating  loss  carryforwards
and capital  loss  carryforwards  of  approximately  $109  million  and $12  million,
respectively.  In addition,  the Company has state net operating loss  carryforwards.
The federal  carryforward  period  runs  through  2021.  As a result of the change in
control  described above, the Company's net operating loss  carryforwards and capital
loss  carryforwards  that  were  generated  in the  pre-reorganizational  period  are
subject to a  limitation  on the amount that may be used  annually to offset  taxable
income.  The Company is  currently  in the process of  finalizing  calculations  with
respect to the amount of the annual limitation,  but estimates that the limitation is
approximately  $5 million  per year.  The Company has  adequately  provided  for this
limitation with its valuation allowance against the deferred tax asset.

## 4. PER SHARE DATA

Basic  earnings  per share is computed by  dividing  net income by the  weighted
average  number of shares of common  stock  outstanding  during the  period.  Diluted
earnings per share is computed by dividing net income by the weighted  average number
of common shares and potentially  dilutive stock options and  convertible  debentures
outstanding during the period.  Following is a reconciliation of the number of shares
used in the calculation of basic and diluted  earnings per share for the quarters and
six-month  periods  ended June 30, 2003 and 2002.  For the six months  ended June 30,
2002, the Company  incurred a net loss,  which  resulted in common stock  equivalents
having an anti-dilutive  effect on loss per share.  Therefore,  the  weighted-average
number of common shares  outstanding  was  equivalent for both basic and diluted loss
per share.

9

---

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

`Quarter Ended                Six Months Ended
                                                             June 30,                      June 30,
                                                    ---------------------------   ---------------------------
                                                        2003           2002           2003           2002
                                                    ------------   ------------   ------------   ------------
Basic earnings (loss) per share:
Net income (loss) ................................  $      1,406   $        326   $      2,970   $       (447)
Weighted average number of common shares
   outstanding - basic ...........................    18,435,365     16,196,365     18,330,116     16,188,615
                                                    ------------   ------------   ------------   ------------
Net income (loss) per share - basic ..............  $       0.08   $       0.02   $       0.16   $      (0.03)
                                                    ============   ============   ============   ============

Diluted earnings (loss) per share:
Net income (loss) ................................  $      1,406   $        326   $      2,970   $       (447)
Tax-effected interest expense attributable to 8%
   Convertible Debentures ........................            --            101             --            N/A
                                                    ------------   ------------   ------------   ------------
Net earnings (loss) assuming dilution ............  $      1,406   $        427   $      2,970   $       (447)
                                                    ------------   ------------   ------------   ------------
Weighted average number of common shares
   outstanding ...................................    18,435,365     16,196,365     18,330,116     16,188,615
Effect of potentially dilutive securities:
   8% Convertible Debentures .....................            --      3,396,416             --            N/A
   Outstanding stock options .....................     1,974,930      1,786,870      2,000,212            N/A
                                                    ------------   ------------   ------------   ------------
Weighted average number of common shares
   outstanding - diluted .........................    20,410,295     21,379,651     20,330,328     16,188,615
                                                    ------------   ------------   ------------   ------------
Net income (loss) per share - diluted..........     $       0.07   $       0.02   $       0.15   $      (0.03)
                                                    ============   ============   ============   ============`

The  Company  has two  stock-based  employee
compensation     plans,     the    1999    Equity
Participation    Plan   and   the   2002   Equity
Participation   Plan,  pursuant  to  which  stock
options  have been granted to its  directors  and
certain  employees.   The  Company  accounts  for
these   plans   under   the    recognition    and
measurement  principles of Accounting  Principles
Board  Opinion  No.  25,   Accounting  for  Stock
Issued     to     Employees,      and     related
Interpretations.    No    stock-based    employee
compensation  cost is reflected in net income, as
all  options  granted  under  those  plans had an
exercise  price equal to the market  value of the
underlying  common  stock on the  date of  grant.
The following table
illustrates the effect on net income (loss) and earnings (loss) per share if the
Company had applied the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, to stock-based employee
compensation.

`Quarter Ended                   Six Months Ended
                                                               June 30,                         June 30,
                                                     ----------------------------     ----------------------------
                                                        2003             2002            2003             2002
                                                     -----------      -----------     -----------     ------------
Net income (loss), as reported.................      $     1,406      $       326     $     2,970     $      (447)
Less:  Total stock-based employee compensation
   expense determined under fair value-based
   method for all awards, net of related tax
   effects.....................................              123              199             246             333
                                                     -----------      -----------     -----------     -----------

Pro forma net income (loss)....................      $     1,283      $       127     $     2,724     $      (780)
                                                     ===========      ===========     ===========     ============

Earnings (loss) per share:
   Basic - as reported.........................      $      0.08      $      0.02     $      0.16     $     (0.03)
                                                     ===========      ===========     ===========     ============
   Basic - pro forma...........................      $      0.07      $      0.01     $      0.15     $     (0.05)
                                                     ===========      ===========     ===========     ============

   Diluted - as reported.......................      $      0.07      $      0.02     $      0.15     $     (0.03)
                                                     ===========      ===========     ===========     ============
   Diluted - pro forma.........................      $      0.06      $      0.01     $      0.13     $     (0.05)
                                                     ===========      ===========     ===========     ============`

10

---

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

## 5. OPERATING
SEGMENTS

Effective the second
quarter of 2003, the Company redefined its operating segments in order to
reflect a complete separation of its investment operations from its servicing
operations. Consequently, the operating results of the Companys investment
subsidiary, Wilshire Funding Corporation (WFC), are now reported as
an individual business segment (Mortgage Investments), separate from
those of its loan servicing subsidiary, WCC. (In prior periods, the results of
WCC and WFC were combined into one operating segment known as Specialty
Servicing and Finance Operations.) The Company continues to conduct its
banking operations through FBBH.

The Company in the second
quarter of 2003 also revised the method by which it allocates certain operating
expenses among its business entities. As a result, in current and future periods
WCC will assume higher proportions of overall compensation and benefits,
insurance, depreciation and various other categories of expenses. The additional
expenses allocated to WCC from the other business segments totaled approximately
$0.2 million for the quarter and six-month period ended June 30, 2003. On an
annual basis, the total additional expenses transferred to WCC is expected to
approximate $1.5 million, with corresponding reductions at FBBH, WFC and the
holding company of approximately $0.2 million, $1.0 million and $0.3 million,
respectively. The Company believes that this new allocation methodology
accurately reflects the costs to be incurred by each business entity, and more
closely matches the operating segments expenses with their
revenue-producing activities.

The Companys
operating segments differ in terms of regulatory environment, funding sources
and asset acquisition strategies, as described below:

|o | Banking OperationsThrough FBBH, the Company conducts a
banking business focused primarily on specialty-niche products, including
small-balance commercial and multi-family real estate lending, investments in
residential whole loans, and investments in primarily AAA-rated and government
agency mortgage-backed securities. The primary sources of liquidity for the
Banks acquisitions and originations are wholesale certificates of deposit,
retail deposits, FHLB advances and repurchase agreements. The Bank is a
federally chartered savings bank and is regulated by the Office of Thrift
Supervision (OTS). At June 30, 2003, FBBH had total assets of $767.5
million.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Loan Servicing OperationsThrough its loan servicing subsidiary,
WCC, the Company conducts a full-service mortgage and consumer loan servicing
business, specializing in the servicing of labor-intensive mortgage pools
requiring expertise in loss mitigation and/or investor reporting. As of June 30,
2003, WCC serviced approximately $5.1 billion principal balance of residential
and commercial mortgage pools for more than 500 individual and institutional
investors and government agencies. WCCs funding sources consist primarily
of internal liquidity and commercial bank financing.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Mortgage Investment Operations The Companys investment
subsidiary, WFC, acquires mortgage-backed securities and pools of performing,
sub-performing and non-performing residential and commercial loans. WFC conducts
certain of these activities with an institutional investor where such
investments align the Companys interests with those of the institutional
investor. WFCs funding sources consist primarily of commercial bank
financing and co-investors, with debt service repayment terms that generally
parallel the cash flows of the underlying collateral.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Holding Company and Miscellaneous OperationsThe Companys
Holding Company and Miscellaneous Operations consist of other operating revenues
and expenses not directly attributable to the aforementioned business segments.
In addition, this segment includes interest expense on the $20 million of junior
subordinated debt issued in July 2002 and eliminations of intercompany accounts
and transactions. Primary sources of liquidity include funds available from the
Companys non-bank subsidiaries, proceeds from the July 2002 issuance of
junior subordinated debt and, to a limited extent, reimbursement payments
received from FBBH pursuant to a tax allocation agreement between the Company
and the Bank. However, OTS regulations limit the amount of these tax
reimbursement payments to the lesser of (1) the Banks stand-alone tax
liability and (2) the total tax payments made by the Company.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---

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

Segment data for the quarters ended June 30, 2003 and 2002 are as follows:

`Three Months Ended June 30, 2003
                                                         ------------------------------------------------------------------------
                                                                                                        Holding
                                                                                                       Company and
                                                                            Loan         Mortgage     Miscellaneous
                                                           Banking       Servicing     Investments     Operations       Total
                                                         ------------   ------------   ------------   ------------   ------------
  Interest income ....................................   $     10,417   $         19   $        729   $         25   $     11,190
  Interest expense ...................................          5,624            122             20            243          6,009
                                                         ------------   ------------   ------------   ------------   ------------
  Net interest income (expense) ......................          4,793           (103)           709           (218)         5,181
  (Recapture of) provision for loan losses ...........           (750)            --             50             --           (700)
                                                         ------------   ------------   ------------   ------------   ------------
  Net interest income (expense) after
     (recapture of) provision for loan
     losses ..........................................          5,543           (103)           659           (218)         5,881
  Realized gains on asset sales ......................             --             75             --             --             75
  Servicing income ...................................            204          8,016             (3)          (311)         7,906
  Other (loss) income ................................           (200)           430           (151)           294            373
  Compensation and benefits ..........................          1,144          5,457            151            639          7,391
  Other expense ......................................          1,247          1,790             58          1,367          4,462
                                                         ------------   ------------   ------------   ------------   ------------
  Income (loss) before taxes .........................          3,156          1,171            296         (2,241)         2,382
  Income tax provision (benefit) .....................          1,326             --            153           (503)           976
                                                         ------------   ------------   ------------   ------------   ------------
  Net income (loss) ..................................   $      1,830   $      1,171   $        143   $     (1,738)  $      1,406
                                                         ============   ============   ============   ============   ============
  Total assets .......................................   $    767,516   $     41,970   $     25,900   $    (14,786)  $    820,600
                                                         ============   ============   ============   ============   ============`

`Three Months Ended June 30, 2002
                                                         ------------------------------------------------------------------------
                                                                                                        Holding
                                                                                                       Company and
                                                                            Loan         Mortgage     Miscellaneous
                                                           Banking       Servicing     Investments     Operations       Total
                                                         ------------   ------------   ------------   ------------   ------------
  Interest income .................................   $     11,135   $         74   $      1,168   $         34   $     12,411
  Interest expense ................................          6,770            155            139             98          7,162
                                                      ------------   ------------   ------------   ------------   ------------
  Net interest income (expense) ...................          4,365            (81)         1,029            (64)         5,249
  Provision for loan losses .......................             --            153             70             --            223
                                                      ------------   ------------   ------------   ------------   ------------
  Net interest income (expense) after
     provision for loan losses ....................          4,365           (234)           959            (64)         5,026
  Realized and unrealized (losses) gains ..........         (1,373)         1,904            532             --          1,063
  Servicing income ................................            148          6,480             16           (620)         6,024
  Other (loss) income .............................           (179)        (1,089)          (569)           527         (1,310)
  Compensation and benefits .......................            936          4,663            217            361          6,177
  Other expense ...................................          1,384          1,749            201            640          3,974
                                                      ------------   ------------   ------------   ------------   ------------
  Income (loss) before minority interest
    and taxes .....................................            641            649            520         (1,158)           652
  Minority interest ...............................             --             --             --           (325)          (325)
                                                      ------------   ------------   ------------   ------------   ------------
  Income (loss) before taxes ......................            641            649            520         (1,483)           327
  Income tax provision (benefit) ..................            255             --             --           (254)             1
                                                      ------------   ------------   ------------   ------------   ------------
  Net income (loss) ...............................   $        386   $        649   $        520   $     (1,229)  $        326
                                                      ============   ============   ============   ============   ============
  Total assets ....................................   $    746,364   $     28,080   $     26,692   $      6,779   $    794,357
                                                      ============   ============   ============   ============   ============`

12

---

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

Segment data for the six months ended June 30, 2003 and 2002 are as follows:

`Six Months Ended June 30, 2003
                                                         ------------------------------------------------------------------------
                                                                                                        Holding
                                                                                                       Company and
                                                                            Loan         Mortgage     Miscellaneous
                                                           Banking       Servicing     Investments     Operations       Total
                                                         ------------   ------------   ------------   ------------   ------------
  Interest income ....................................   $     21,429   $         62   $      1,770   $         38   $     23,299
  Interest expense ...................................         11,867            263             48            507         12,685
                                                         ------------   ------------   ------------   ------------   ------------
  Net interest income (expense) ......................          9,562           (201)         1,722           (469)        10,614
  (Recapture of) provision for loan losses ...........           (750)            --             80             --           (670)
                                                         ------------   ------------   ------------   ------------   ------------
  Net interest income (expense) after (recapture of)
     provision for loan losses .......................         10,312           (201)         1,642           (469)        11,284
  Realized gains on asset sales ......................             --             75              5             --             80
  Servicing income ...................................            503         15,811             81           (648)        15,747
  Other (loss) income ................................           (238)           437           (314)           680            565
  Compensation and benefits ..........................          2,275         10,566            356            965         14,162
  Other expense ......................................          2,545          3,629            186          2,129          8,489
                                                         ------------   ------------   ------------   ------------   ------------
  Income (loss) before taxes .........................          5,757          1,927            872         (3,531)         5,025
  Income tax provision (benefit) .....................          2,418             --            357           (720)         2,055
                                                         ------------   ------------   ------------   ------------   ------------
  Net income (loss) ..................................   $      3,339   $      1,927   $        515   $     (2,811)  $      2,970
                                                         ============   ============   ============   ============   ============
  Total assets .......................................   $    767,516   $     41,970   $     25,900   $    (14,786)  $    820,600
                                                         ============   ============   ============   ============   ============`

`Six Months Ended June 30, 2002
                                                         ------------------------------------------------------------------------
                                                                                                        Holding
                                                                                                       Company and
                                                                            Loan         Mortgage     Miscellaneous
                                                           Banking       Servicing     Investments     Operations       Total
                                                         ------------   ------------   ------------   ------------   ------------
  Interest income ....................................   $     23,086   $        243   $      2,878   $        321   $     26,528
  Interest expense ...................................         13,996            337            337            185         14,855
                                                         ------------   ------------   ------------   ------------   ------------
  Net interest income (expense) ......................          9,090            (94)         2,541            136         11,673
  Provision for loan losses ..........................             --            166             70             --            236
                                                         ------------   ------------   ------------   ------------   ------------
  Net interest income (expense) after
     provision for loan losses .......................          9,090           (260)         2,471            136         11,437
  Realized and unrealized (losses) gains .............         (1,434)         1,904            576             (1)         1,045
  Servicing income ...................................            371         12,162            109         (1,096)        11,546
  Other (loss) income ................................           (165)          (497)          (618)           901           (379)
  Compensation and benefits ..........................          1,880          8,798            434            706         11,818
  Other expense ......................................          2,699          4,261            420          5,072         12,452
                                                         ------------   ------------   ------------   ------------   ------------
  Income (loss) before minority interest
    and taxes ........................................          3,283            250          1,684         (5,838)          (621)
  Minority interest ..................................             --             --             --           (125)          (125)
                                                         ------------   ------------   ------------   ------------   ------------
  Income (loss) before taxes .........................          3,283            250          1,684         (5,963)          (746)
  Income tax provision (benefit) .....................          1,349             --             --         (1,648)          (299)
                                                         ------------   ------------   ------------   ------------   ------------
  Net income (loss) ..................................   $      1,934   $        250   $      1,684   $     (4,315)          (447)
                                                         ============   ============   ============   ============   ============
  Total assets .......................................   $    746,364   $     28,080   $     26,692   $     (6,779)  $    794,357
                                                         ============   ============   ============   ============   ============`

13

---

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

## 6.   INTANGIBLE ASSETS

In June 2000,  FBBH acquired a branch location and
   recorded   goodwill  of  $3,393  and  a  core   deposit
   intangible of $1,294.  Through  December 31, 2001,  the
   goodwill was  amortized on a  straight-line  basis over
   an estimated  useful life of 15 years.  In January 2002
   the Company  adopted SFAS No. 142,  "Goodwill and Other
   Intangible   Assets,"  and,  as  a  result,  no  longer
   amortizes goodwill,  but tests it at least annually for
   impairment.  The Company will  continue to amortize the
   core deposit  intangible over an estimated  useful life
   of 5 years.

Following is a summary of the Company's
   intangible assets:

`Intangible Assets

                                                              As of June 30, 2003
                                                       ---------------------------------
                                                       Gross Carrying      Accumulated
                                                            Amount        Amortization
                                                       ---------------   ---------------

               Goodwill.............................   $         3,393   $          (339)
               Core deposit intangible..............             1,294              (776)
                                                       ---------------   ---------------
                  Total.............................   $         4,687   $        (1,115)
                                                       ===============   ===============`

For the quarter and six
months ended June 30, 2003 the Company recorded amortization expense of $65 and
$129, respectively, related to the core deposit intangible. The estimated
amortization of the balance for the remainder of 2003 and the five succeeding
fiscal years is $129 (2003), $259 (2004), $130 (2005), and none thereafter.

The Company tested goodwill
for impairment as of March 31, 2003 and determined that no impairment charge was
required. There were no conditions that indicated impairment as of June 30,
2003.

The Companys
purchased mortgage servicing rights (MSRs) totaled approximately $9.3 million at
June 30, 2003, $5.4 million at December 31, 2002, and $6.0 million at June 30,
2002. Amortization expense for MSRs was $1.5 million and $2.4 million,
respectively, for the quarter and six months ended June 30, 2003, and $0.9
million and $1.9 million, respectively, for the quarter and six months ended
June 30, 2002. The estimated amortization expense of the June 30, 2003 balance
of MSRs for the remainder of 2003 and the five succeeding fiscal years is $2.0
million (2003), $3.0 million (2004), $1.8 million (2005), $1.1 million (2006),
$0.6 million (2007), and $0.4 million (2008). The estimated amortization expense
is based only on currently held MSRs and on current information regarding loan
payments and prepayments. Actual results may vary as a result of changes in the
rate of prepayments and other market factors.

## 7.  LEGAL MATTERS

In June 2001, FBBH sold its
Bankcard Division to iPayment Holdings, Inc. for a total purchase price of
approximately $6.2 million, including approximately $0.4 million consisting of a
contingency payment due the Bank upon one merchant customers attainment of
certain processing volumes. In a lawsuit commenced by FBBH for payment of part
of the purchase price, iPayment, in September 2002, filed a cross-complaint
against the Bank for fraud, breach of contract and negligent misrepresentation.
iPayment contends that the Bank knew, or should have known, that a merchant was
concealing significant product returns by issuing checks as refunds, rather than
issuing credit card refunds as required by MasterCard operating rules. iPayment
claims damages for the difference in the purchase price due to the decreased
value to iPayment of the merchants account; chargebacks that iPayment may
have to pay and will not be able to recover from the merchant which may total
$5-6 million; and punitive damages. The Bank denies the claims, in part because
the portion of the purchase price for which the Bank is suing iPayment was held
back by iPayment and was dependent upon the processing volume of this merchant,
and the Bank also maintains that iPayment failed to mitigate any claimed
damages. The Bank intends to defend the cross-complaint vigorously. The factual
discovery process has not been completed. Although the Company expects to incur
costs in defending these claims, based on the results of the discovery
proceedings thus far and preliminary discussions with its lawyers, the Company
currently does not believe the ultimate resolution of the claims will have a
material impact on its financial condition or results of operations. The Company
has not recognized, for accounting purposes, the contingency payment from
iPayment which is the subject of this litigation.

14

---

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

WFSG on May 13, 2002
entered into a settlement agreement to resolve litigation which arose from the
financial collapse of CCL, and the Company has completed all of its obligations
under the settlement agreement. The litigation will be dismissed when plaintiffs
complete their obligations. Management, after consultation with legal counsel,
believes that this litigation will be dismissed.

The Company is a defendant
in other legal actions arising from transactions conducted in the ordinary
course of business. Some of these claims involve borrowers demanding amounts for
alleged damages. Management, after consultation with legal counsel, and based on
prior experience with consumer claims, believes the ultimate liability, if any,
arising from such actions will not materially affect the Companys
financial position, consolidated results of operations or cash flows.

## 8. NEW
ACCOUNTING PRONOUNCEMENTS

In January 2003, the
Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51". FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective for all new variable interest entities
created or acquired after January 31, 2003. For variable interest entities
created or acquired prior to February 1, 2003, the provisions of FIN 46 are
effective with the first interim period beginning after June 15, 2003. The
Company is currently evaluating the impact that the adoption of FIN 46 may have
on its financial position and results of operations.

In April 2003, the FASB
issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. SFAS No. 149 was issued to amend and clarify
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 149 is effective for contracts entered into or
modified subsequent to June 30, 2003 and for hedging relationships designated
subsequent to June 30, 2003. The Company does not believe that the adoption of
SFAS No. 149 will have a material impact on its financial position, results of
operations or cash flows.

In May 2003, the FASB
issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS No. 150 requires that
certain financial instruments, which under previous guidance were accounted for
as equity, must now be accounted for as liabilities. The Standard requires that
certain freestanding financial instruments be classified as liabilities,
including mandatorily redeemable financial instruments, obligations to
repurchase the issuers equity shares by transferring assets and certain
obligations to issue a variable number of shares. SFAS No. 150 is effective for
financial instruments entered into or modified subsequent to May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The Company does not believe that the adoption of SFAS No.
150 will have a material impact on its financial position, results of operations
or cash flows.

15

---

# 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 Interim  Condensed
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.,  a
financial services company,  conducts (1) community
banking  operations  (referred  to  herein  as  our
"Banking   Operations")  through  our  wholly-owned
subsidiary,  First  Bank of Beverly  Hills,  F.S.B.
("FBBH" or the "Bank");  (2)  specialized  mortgage
loan servicing  operations  through Wilshire Credit
Corporation  ("WCC")  and (3)  mortgage  investment
operations  through  Wilshire  Funding  Corporation
("WFC").  WFSG's  administrative,   investment  and
loan   servicing   headquarters   are   located  in
Beaverton,  Oregon.  The Bank is  headquartered  in
Calabasas,   California  and  conducts  its  branch
banking activities in Beverly Hills, California.

## RESULTS OF
OPERATIONSQUARTER AND SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO
QUARTER AND SIX MONTHS ENDED JUNE 30,
2002

Our  consolidated  net income for the  quarter
ended  June  30,   2003  was   approximately   $1.4
million,  or $0.08 per basic share,  compared  with
$0.3  million,  or $0.02 per basic  share,  for the
quarter ended June 30, 2002.  WFSG's pre-tax income
was  approximately  $2.4  million  for  the  second
quarter of 2003,  compared  with $0.3  million  for
the second quarter of 2002.

The increase in income for the second  quarter
     of 2003 over the second quarter of 2002 was primarily due to a $1.9 million
increase in consolidated net servicing income,  reflecting the continuing growth
of our loan servicing operations. In addition, our banking subsidiary recaptured
$0.75 million of loan loss reserves during the quarter  pursuant to a loan sale.
The results for the 2002 period included $1.4 million of impairment  write-downs
related to two  interest-only  mortgage-backed  securities (I/Os) at the banking
subsidiary,  with no such charges in the 2003 period. Partially offsetting these
factors was a $1.7 million  increase in consolidated  other operating  expenses,
which resulted primarily from higher  compensation costs due to the expansion of
our loan  servicing  operations,  and a $0.6 million  increase in legal expenses
which we continue to incur on behalf of some former officers.

For the six months  ended June 30,  2003,  our
net  income  was  approximately  $3.0  million,  or
$0.16 per basic share,  compared with a net loss of
$0.4  million,  or $0.03 per basic  share,  for the
six months ended June 30, 2002.  Our pre-tax income
was  approximately  $5.0  million for the first six
months of 2003,  compared  with a  pre-tax  loss of
$0.7 million for the corresponding 2002 period.

Our results for the six months  ended June 30,
2003 versus the  comparable  2002 period  reflect a
$4.2 million  increase in net servicing  income and
a net  increase  of $0.9  million in  recapture  of
loan  loss   reserves.   (The  2002   results  were
adversely   impacted   by  the  $1.4   million   of
impairment  charges cited above.) In addition,  our
consolidated  operating  expenses for the first six
months of 2003  declined by $1.6  million  compared
with the corresponding  2002 period.  This decrease
resulted from approximately  $4.75 million in legal
fees and  expenses  which were accrued in the first
quarter  of 2002 and  related  to the May 13,  2002
settlement  of  litigation  which arose from events
prior to our 1999  restructuring.  The  absence  of
such  expenses  in the current  year was  partially
offset  by an  increase  in  compensation  expense,
primarily at our loan servicing subsidiary.

Following  is a  discussion  of the  operating
results of the Company's three  principal  business
segments:  our Banking  Operations,  Loan Servicing
Operations and Mortgage Investment Operations.

## FIRST BANK OF BEVERLY HILLS, F.S.B.

The  following  table  compares  income before
taxes  for  FBBH  for the  quarters  and  six-month
periods  ended June 30,  2003 and 2002  (dollars in
thousands):

16

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`Quarter Ended June 30,                     Six Months Ended June 30,
                                   ------------------------------------------   ------------------------------------------
                                                                   Increase                                     Increase
                                       2003           2002        (Decrease)        2003           2002        (Decrease)
                                   ------------   ------------   ------------   ------------   ------------   ------------
Interest income .................  $     10,417   $     11,135   $       (718)  $     21,429   $     23,086   $     (1,657)
Interest expense ................         5,624          6,770         (1,146)        11,867         13,996         (2,129)
                                   ------------   ------------   ------------   ------------   ------------   ------------
Net interest income .............         4,793          4,365            428          9,562          9,090            472
Recapture of loan losses ........          (750)            --           (750)          (750)            --           (750)
                                   ------------   ------------   ------------   ------------   ------------   ------------
Net interest income after
  recapture of loan losses ......         5,543          4,365          1,178         10,312          9,090          1,222
Realized and unrealized losses ..            --         (1,373)         1,373             --         (1,434)         1,434
Servicing income ................           204            148             56            503            371            132
Other loss ......................          (200)          (179)           (21)          (238)          (165)           (73)
Compensation and benefits .......         1,144            936            208          2,275          1,880            395
Other expense ...................         1,247          1,384           (137)         2,545          2,699           (154)
                                   ------------   ------------   ------------   ------------   ------------   ------------
Income before taxes .............  $      3,156   $        641   $      2,515   $      5,757   $      3,283   $      2,474
                                   ============   ============   ============   ============   ============   ============`

Net Interest Income

The following table sets
forth information regarding the Banks income from interest-earning assets
and expenses from interest-bearing liabilities for the quarters ended June 30,
2003 and 2002.

`Quarter Ended June 30, 2003            Quarter Ended June 30, 2002
                                                   ------------------------------------   ------------------------------------
                                                    Average                  Annualized    Average                  Annualized
                                                    Balance      Interest    Yield/Rate    Balance      Interest    Yield/Rate
                                                   ----------   ----------   ----------   ----------   ----------   ----------
  Interest-Earning Assets:
  Federal funds and short-term investments .....   $   14,212   $       43         1.20%  $   20,655   $       94         1.80%
  Mortgage-backed and other securities .........      249,348        2,282         3.66      211,995        2,539         4.79
  Loans ........................................      482,905        8,092         6.70      482,309        8,502         7.05
                                                   ----------   ----------   ----------   ----------   ----------   ----------
      Total interest-earning assets ............   $  746,465   $   10,417         5.52%  $  714,959   $   11,135         6.16%
                                                   ----------   ----------   ----------   ----------   ----------   ----------
  Interest-Bearing Liabilities:
  Interest-bearing deposits.....................   $  365,404   $    2,776         3.05%  $  414,706   $    3,928         3.80%
  Borrowings....................................      305,997        2,848         3.73      232,965        2,842         4.89
                                                   ----------   ----------   ----------   ----------   ----------   ----------
      Total interest-bearing liabilities........   $  671,401   $    5,624         3.36%  $  647,671   $    6,770         4.19%
                                                   ----------   ----------   ----------   ----------   ----------   ----------

            Net interest income.................                $    4,793                             $    4,365
                                                                ==========                             ==========
            Net interest spread.................                                   2.16%                                  1.97%
            Net interest margin.................                                   2.58%                                  2.45%`

The following table sets
forth information regarding the Banks income from interest-earning assets
and expenses from interest-bearing liabilities for the six-month periods ended
June 30, 2003 and 2002.

`Six Months Ended June 30, 2003         Six Months Ended June 30, 2002
                                                   ------------------------------------   ------------------------------------
                                                    Average                  Annualized    Average                  Annualized
                                                    Balance      Interest    Yield/Rate    Balance      Interest    Yield/Rate
                                                   ----------   ----------   ----------   ----------   ----------   ----------
  Interest-Earning Assets:
  Federal funds and short-term investments......   $   14,525   $       94         1.29%  $   27,606   $      263         1.89%
  Mortgage-backed and other securities..........      256,259        5,145         4.02      196,699        4,916         5.00
  Loans ........................................      485,868       16,190         6.66      496,018       17,907         7.22
                                                   ----------   ----------   ----------   ----------   ----------   ----------
      Total interest-earning assets.............   $  756,652   $   21,429         5.63%  $  720,323   $   23,086         6.37%
                                                   ----------   ----------   ----------   ----------   ----------   ----------

  Interest-Bearing Liabilities:
  Interest-bearing deposits.....................   $  378,487   $    5,989         3.19%  $  424,578   $    8,350         3.97%
  Borrowings....................................      305,322        5,878         3.88      228,686        5,646         4.98
                                                   ----------   ----------   ----------   ----------   ----------   ----------
      Total interest-bearing liabilities........   $  683,809   $   11,867         3.50%  $  653,264   $   13,996         4.32%
                                                   ----------   ----------   ----------   ----------   ----------   ----------

            Net interest income.................                $    9,562                             $    9,090
                                                                ==========                             ==========
            Net interest spread.................                                   2.13%                                  2.05%
            Net interest margin.................                                   2.55%                                  2.55%`

17

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The Banks net
interest income was approximately $4.8 million for the quarter ended June 30,
2003, compared with $4.4 million for the quarter ended June 30, 2002. For the
six months ended June 30, 2003, the Banks net interest income was
approximately $9.6 million, compared with $9.1 million for the six months ended
June 30, 2002. The continuing declining interest-rate environment has impacted
the Banks interest-bearing liabilities to a slightly greater extent than
its interest-earning assets, resulting in a higher interest spread in the 2003
periods.

The Banks net
interest spread increased by 19 basis points, from 1.97% to 2.16%, from the
second quarter of 2002 to the second quarter of 2003. The yield on average
interest-earning assets declined by 64 basis points, from 6.16% to 5.52%, from
the second quarter of 2002 to the second quarter of 2003. This drop in yield was
exceeded by an 83-basis point decline, from 4.19% to 3.36%, in the Banks
cost of interest-bearing liabilities for the same periods.

For the six-month periods
ended June 30, the interest spread increased by 8 basis points, from 2.05% for
the 2002 period to 2.13% for the 2003 period. The Banks yield on
interest-earning assets declined from 6.37% for the six months ended June 30,
2002 to 5.63% for the six months ended June 30, 2003, and the Banks
average cost of funds reflected a slightly larger decrease, from 4.32% to 3.50%,
for the same periods.

The Banks interest
income on mortgage-backed and other investment securities decreased by
approximately $0.3 million from the second quarter of 2002 to the second quarter
of 2003, as the 113-basis point drop in yield, from 4.79% to 3.66%, more than
offset the $37 million increase in average aggregate principal balances invested
in the 2003 period. For the six months ended June 30, 2003, interest income on
mortgage-backed and other investment securities was $5.1 million, an increase of
$0.2 million from the corresponding 2002 period. The increase in income for the
six-month period was due to a larger increase in the average aggregate principal
balances invested ($59.6 million) and a slightly smaller drop in yield, from
5.00% to 4.02%. Utilizing new debt facilities, the Bank purchased approximately
$295 million in AAA-rated mortgage-backed and other investment securities in
2002 and an additional $41 million in the first six months of 2003. These
additions to the portfolio have sustained the Banks interest income on
securities despite significant prepayments triggering accelerated premium
amortization on these assets throughout the past two years as a result of the
continuing decline in interest rates.

The Banks interest
income on loans was approximately $8.1 million for the quarter ended June 30,
2003, compared with $8.5 million for the quarter ended June 30, 2002. For the
six months ended June 30, 2003, interest on loans was approximately $16.2
million, compared with $17.9 million for the six months ended June 30, 2002. The
decline in interest rates triggered both a repricing of FBBHs
variable-rate loans and rapid prepayments on its fixed-rate loans throughout
2002 and continuing into 2003. Consequently, the average aggregate loan balances
decreased by $10.1 million from the first six months of 2002 to the first six
months of 2003, and the yield decreased substantially for the same periods. In
the first six months of 2003, principal repayments on the Banks loans
totaled $74 million. The Bank originated and purchased a total of $79 million in
new loans during this period, the majority in the second quarter of 2003.

FBBHs interest
expense on deposits decreased by approximately $1.2 million from the second
quarter of 2002 to the second quarter of 2003 and by $2.4 million from the six
months ended June 30, 2002 to the six months ended June 30, 2003. These
decreases were the result of declines in both the average balance and average
rates paid for the quarters and six-month periods. The Bank raised significant
amounts of wholesale certificates of deposit in prior years to fund certain loan
acquisitions, but has since permitted the run-off of the higher-rate CDs and
utilized lower-costing debt facilities as its primary funding source. As a
result, the average balance of deposits decreased by $49.3 million and $46.1
million, respectively, for the quarter and six months ended June 30, 2003
compared with the corresponding 2002 periods. The average rate paid on deposits
decreased by 75 basis points and 78 basis points over the same periods.

The Banks interest
expense on borrowings was $2.8 million for the second quarters of both 2003 and
2002, as the effects of the higher volume in the 2003 period were offset by the
116-basis point decline in the average cost. For the six months ended June 30,
2003, interest expense on borrowings was $5.9 million, compared with $5.6
million for the six months ended June 30, 2002. This increase was due to a $76.6
million increase in the total average balance of borrowings for the periods. The
proceeds from these borrowings were used primarily to fund the purchases of
mortgage-backed and other securities described above and, to a lesser extent, to
replace matured certificates of deposit. This increase in the volume of
borrowings was partially offset by a decrease in the weighted-average rate paid
from 4.98% for the six months of 2002 to 3.88% for the first six months of 2003.

18

---

Recapture of Loan Losses
        Provisions for losses on
loans are charged to operations to maintain an allowance for losses on the loan
portfolio at a level which the Bank believes is adequate based on an evaluation
of the inherent risks in the portfolio. The Banks evaluation is based on
an analysis of the loan portfolio, historical loss experience, current economic
conditions and trends, collateral values, and other relevant factors.

Based on its quarterly
evaluations of the adequacy of its loan loss reserves, the Bank did not record a
provision for loan losses in 2002 or for the six months ended June 30, 2003. In
the second quarter of 2003, the Bank recaptured $0.75 million of loan loss
reserves, primarily as a result of the sale of its performing mobile home loan
portfolio.

Realized and Unrealized Losses
        The Banks realized
and unrealized losses totaled approximately $1.4 million for the quarter and six
months ended June 30, 2002, with no such activity through the first six months
of 2003. In June 2002, the Bank recorded approximately $1.4 million in
write-downs related to two interest-only mortgage-backed securities (I/Os).
These securities were purchased in March and April 2002 as a hedge against
possible increases in interest rates. However, as rates continued to fall, the
market values of the I/Os decreased significantly. Since this decline in market
value was deemed to be other than temporary, the write-downs were reflected as
Market valuation losses and impairments in the accompanying
statements of operations for the quarter and six-month period ended June 30,
2002, and not as a direct reduction to stockholders equity. The Bank also
recorded a loss of approximately $62 thousand on the sale of mortgage-backed
securities in the first quarter of 2002.

Compensation and Benefits
        The Banks
compensation and benefits totaled approximately $1.1 million for the second
quarter of 2003, compared with $0.9 million for the second quarter of 2002. For
the six months ended June 30, 2003, compensation and benefits totaled $2.3
million, compared with $1.9 million for the first six months of 2002. The
increase was due to an increase in the Banks employee head count from 2002
to 2003, primarily as a result of the expansion of its commercial lending
operations.

Other Expenses
        The Banks other
expenses were approximately $1.2 million for the quarter ended June 30, 2003,
compared with $1.4 million for the quarter ended June 30, 2002. For the six
months ended June 30, 2003, other expenses totaled $2.5 million, compared with
$2.7 million for the first six months of 2002. The Banks occupancy
expenses have declined from the prior year due to the sublease of the office
space which was previously used for its Bankcard divisions, and data processing
expenses have dropped substantially through the Banks efforts to control
overhead. These decreases were partially offset by higher legal expenses
associated with pending litigation related to the Banks sale of its
Bankcard operations in 2001 (see Note 7 to the interim condensed consolidated
financial statements).

## Changes in
Financial Condition  First Bank of Beverly Hills

Following are condensed statements of financial condition for FBBH as of June 30, 2003 and December 31, 2002:

`June 30,     December 31,
                                                                              2003           2002
                                                                          ------------   ------------
                                                                             (Dollars in thousands)
ASSETS:
Cash and cash equivalents ............................................    $     11,932   $     10,003
Mortgage-backed securities available for sale, at fair value .........         205,598        259,707
Other investment securities available for sale, at fair value ........          25,572         11,962
Loans, net ...........................................................         487,959        486,821
Real estate owned, net ...............................................             636          1,040
Other assets .........................................................          35,819         24,545
                                                                          ------------   ------------
    Total assets .....................................................    $    767,516   $    794,078
                                                                          ============   ============

LIABILITIES:
Deposits .............................................................    $    354,900   $    395,781
Short-term borrowings ................................................          88,000         91,870
FHLB advances ........................................................         218,000        216,000
Other liabilities ....................................................          27,085         13,795
                                                                          ------------   ------------
    Total liabilities ................................................         687,985        717,446

NET WORTH ............................................................          79,531         76,632
                                                                          ------------   ------------
    Total liabilities and net worth ..................................    $    767,516   $    794,078
                                                                          ============   ============`

19

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Mortgage-Backed and
Other Securities Available for Sale. The Banks total portfolio of
mortgage-backed securities (MBS) available for sale decreased by $54.1 million
during the six months ended June 30, 2003. This decrease was due to $79.9
million in principal repayments and $0.7 million in unrealized losses, as the
declining interest-rate environment continued to trigger significant paydowns on
the loans underlying the securities in the portfolio. These decreases were
partially offset by $27.8 million in purchases of AAA-rated and agency MBS
during the first two quarters.

The Banks portfolio
of treasury and other investment securities available for sale increased by
approximately $13.6 million during the six months ended June 30, 2003, primarily
as a result of $13.5 million of agency security purchases in the first two
quarters.

Loans, net.
The Banks portfolio of loans, net of discounts and allowances, increased
by approximately $1.1 million for the six months ended June 30, 2003. In the
current year to date, the Bank has originated $61.4 million of predominantly
commercial mortgage loans and purchased an additional $17.6 million multi-family
loans. These additions to the portfolio were partially offset by $73.8 million
of principal repayments and a sale of $4.1 million of loans secured by mobile
homes.

Real Estate Owned,
net. The Banks portfolio of real estate owned, net decreased by
approximately $0.4 million in the first six months of 2003, as a result of sales
and write-downs of properties totaling $0.9 million, partially offset by $0.5
million in new acquisitions through foreclosure.

Deposits.  The Bank's  deposits  decreased by  approximately  $40.9 million during the first six months of 2003,  primarily due to
maturities  of  higher-rate  certificates  of deposit.  The Bank has  permitted the run-off of such deposits in an effort to reduce its
overall cost of funds, and is utilizing short-term repurchase agreements and FHLB advances as its primary funding source.

Short-Term
Borrowings. The Banks short-term borrowings decreased by
approximately $3.9 million during the six months ended June 30, 2003. This
decrease was due to repayments of $96.9 million of repurchase agreements,
partially offset by repurchase advances and renewals totaling $93 million, at a
weighted-average cost of 1.33%. These borrowings are used primarily to finance
the Banks purchases of mortgage-backed and other investment securities.

FHLB
Advances. The Banks FHLB advances increased by $2 million for the
first six months of 2003. This increase was due to $18 million of new advances
during the period with a weighted average cost of 2.08%, partially offset by the
maturity of a $16 million advance bearing interest at 7.10%.

Net
Worth. The Banks total net worth increased by approximately
$2.9 million during the six months ended June 30, 2003. The Bank earned net
income for the period of $3.3 million, which was partially offset by after-tax
unrealized losses of approximately $0.3 million on its portfolio of
available-for-sale securities and $0.1 million on its hedging transactions.

## Regulatory
Capital Requirements

Federally insured savings
associations such as FBBH 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 has indicated that the capital
level of FBBH exceeds the minimum requirement for well capitalized
status under provisions of the Prompt Corrective Action Regulation.

The following table sets forth the Bank's regulatory capital ratios at June 30, 2003.

20

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# Regulatory
Capital Ratios

`Amount Required
                                                                              For Capital     To be Categorized
                                                                               Adequacy               as
                                                              Actual           Purposes       "Well Capitalized"
                                                        -----------------  -----------------  -----------------
                                                         Amount    Ratio    Amount    Ratio    Amount    Ratio
                                                        --------  -------  --------  -------  --------  -------
                                                                         (Dollars in thousands)
Total Capital to Risk-Weighted Assets (Risk-Based
    Capital).........................................   $ 80,553    15.6%  $ 41,190    =>8.0% $ 51,488  =>10.0%
Tier 1 Capital to Risk-Weighted Assets...............     74,130    14.4%     Not Applicable    30,893  => 6.0%
Core Capital to Tangible Assets......................     74,130     9.7%    30,526    =>4.0%   38,158  => 5.0%
Tangible Capital to Tangible Assets..................     74,130     9.7%    11,447    =>1.5%   Not Applicable`

## Liquidity and
Capital Resources

Liquidity is the
measurement of the Banks ability to meet potential cash requirements,
including ongoing commitments to repay borrowings, fund investments, purchase
pools of loans, and make payments for general business purposes. The Banks
sources of liquidity include wholesale and retail deposits, FHLB advances,
repurchase agreements, whole loan and mortgage-backed securities sales, and net
interest income. In April 2003, the FHLB raised the Banks authorized
borrowing limit from 30% to 35% of the Banks total assets as of the
previous quarter-end. Liquidity in the Banks operations is actively
managed on a daily basis and periodically reviewed by the Banks Board of
Directors.

At June 30, 2003 the
Banks cash balances totaled approximately $11.9 million, compared with
$10.0 million at December 31, 2002. The slight increase in cash was primarily
due to principal repayments of loans and mortgage-backed securities and proceeds
from new borrowings, partially offset by originations and purchases of new
loans, repayments of debt facilities and maturities of certificates of deposit.

At June 30, 2003, the Bank
had approximately $303.9 million of certificates of deposit. Scheduled
maturities of certificates of deposit during the 12 months ending June 30, 2004
and thereafter amounted to approximately $274.2 million and $29.7 million,
respectively. 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. Bank
management continues its effort to reduce its exposure to interest rate changes
by utilizing funding sources whose repricing characteristics more closely match
those of the Banks interest-earning assets.

In 2001 the OTS rescinded
the regulatory requirement that institutions maintain an average daily balance
of liquid assets of at least 4% of its liquidity base. Even though the
percentage requirement has been eliminated, each bank is still required by the
OTS to maintain adequate liquidity to assure safe and sound operation. It is the
Banks responsibility to determine the appropriate level of liquidity to be
maintained.

## LOAN SERVICING OPERATIONS

WFSG conducts its Loan
Servicing Operations through WCC, our servicing subsidiary which was formed
pursuant to our June 10, 1999 reorganization. Some of WCCs activities are
conducted with a co-investor which has participation interests in the returns
generated by the assets that serve as collateral for the related borrowings. The
share of such activities held by this co-investor is reflected as Investor
participation interest in the Companys consolidated statements of
operations.

The following table
compares WCCs operating income before taxes for the quarters and six-month
periods ended June 30, 2003 and 2002 (dollars in thousands).

21

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`Quarter Ended June 30,               Six Months Ended June 30,
                                ------------------------------------   ------------------------------------
                                                           Increase                               Increase
                                   2003         2002      (Decrease)      2003         2002      (Decrease)
                                ----------   ----------   ----------   ----------   ----------   ----------
Servicing income .............  $    8,016   $    6,480   $    1,536   $   15,811   $   12,162   $    3,649
Interest income ..............          19           74          (55)          62          243         (181)
Realized gains on sales ......          75        1,904       (1,829)          75        1,904       (1,829)
Other income (loss) ..........         430       (1,089)       1,519          437         (497)         934
                                ----------   ----------   ----------   ----------   ----------   ----------
   Total income ..............       8,540        7,369        1,171       16,385       13,812        2,573
                                ----------   ----------   ----------   ----------   ----------   ----------
Interest expense .............         122          155          (33)         263          337          (74)
Provision for loan losses ....          --          153         (153)          --          166         (166)
Compensation and benefits ....       5,457        4,663          794       10,566        8,798        1,768
Other expenses ...............       1,790        1,749           41        3,629        4,261         (632)
                                ----------   ----------   ----------   ----------   ----------   ----------
   Total expenses ............       7,369        6,720          649       14,458       13,562          896
                                ----------   ----------   ----------   ----------   ----------   ----------
Income before taxes ..........  $    1,171   $      649   $      522   $    1,927   $      250   $    1,677
                                ==========   ==========   ==========   ==========   ==========   ==========`

Servicing Income
        The components of WCC's servicing income are reflected in the following table:

`Quarter Ended               Six Months Ended
                                                                               June  30,                     June  30,
                                                                      ---------------------------   ---------------------------
                                                                          2003           2002           2003           2002
                                                                      ------------   ------------   ------------   ------------
                                                                                        (Dollars in thousands)
Servicing revenue ..................................................  $      7,878   $      6,509   $     14,702   $     12,051
Ancillary fees .....................................................         2,359          1,501          4,678          2,963
Amortization of mortgage servicing rights ..........................        (1,344)          (655)        (2,054)        (1,372)
Valuation adjustment for mortgage servicing rights .................           (81)          (233)            77           (276)
Custodial float ....................................................           308            373            588            680
Unreimbursed servicing expenses ....................................          (157)          (176)          (425)          (260)
Prepayment interest shortfall expense ..............................          (947)          (839)        (1,755)        (1,624)
                                                                      ------------   ------------   ------------   ------------
Total servicing income .............................................  $      8,016   $      6,480   $     15,811   $     12,162
                                                                      ============   ============   ============   ============`

WCCs total servicing
income for the quarter ended June 30, 2003 was approximately $8.0 million,
compared with $6.5 million for the quarter ended June 30, 2002. For the six
months ended June 30, 2003, servicing income totaled $15.8 million, compared
with $12.2 million for the six months ended June 30, 2002. The increase over the
prior periods was due to the continuing growth in WCCs servicing volume,
as shown in the table below. Through new contractual agreements and servicing
rights acquisitions, WCC increased its portfolio of serviced loans by
approximately $1.2 billion since June 30, 2002, despite significant repayments
precipitated by the decline in interest rates. As a result of this growth, our
total servicing income increased by approximately 30% from the first six months
of 2002 to the first six months of 2003. Subsequent to the second quarter of
2003, WCC purchased the servicing rights for approximately $0.4 billion in
unpaid principal balance of loans and contracted to service an additional $0.6
billion. The transfer of this new servicing was completed in July 2003.

The continuing decline in
mortgage interest rates which began in 2001, and the currently prevailing low
interest rate environment, have resulted in extremely rapid prepayments of loans
comprising our serviced asset base which, in turn, has negatively impacted our
servicing revenues. While WCCs amortization of mortgage servicing rights
(MSRs) and its prepayment interest shortfall expense increased in the quarter
and six months ended June 30, 2003 over the comparable 2002 periods, these
increases were primarily due to the significantly larger portfolio volume,
rather than an acceleration of prepayments. Float income earned on deposit
balances declined from the prior year to the current, due to a continued decline
in interest rates.

22

---

The following table sets forth the composition of loans serviced by WCC by type of loan at the dates indicated.

`June 30,     December 31,     June 30,
                                                             2003           2002           2002
                                                         ------------   ------------   ------------
                                                                        (Dollars in thousands)
Single-family residential .............................  $  4,658,978   $  3,668,401   $  3,555,128
Multi-family residential ..............................       111,048        121,908        118,672
Commercial real estate ................................       253,620        218,976        195,741
Consumer and other ....................................        77,701         78,880         80,060
                                                         ------------   ------------   ------------
     Total (1) ........................................  $  5,101,347   $  4,088,165   $  3,949,601
                                                         ============   ============   ============`

(1)  WCC's servicing  portfolio at June 30, 2003 and December 31, 2002 included  approximately $0.3 billion unpaid principal balance of
non-performing consumer loans in addition to those reflected in the above table.

Interest Income and Interest Expense
        WCCs interest income
decreased slightly for the quarter and six months ended June 30, 2003 compared
with the corresponding 2002 periods. The decrease was due to a drop in loan
volume as a result of WCCs sales of $7.3 million unpaid principal balance
of loans in the second quarter of 2002. Proceeds from these sales were used to
pay down certain debt facilities, resulting in a corresponding decrease in
interest expense from the prior year to the current year.

Realized Gains on Sales
        WCCs gains on sales
totaled $75 thousand for the quarter and six months ended June 30, 2003,
compared with $1.9 million for both the quarter and six months ended June 30,
2002. WCC sold $7.3 million unpaid principal balance of loans in the second
quarter of 2002, resulting in the $1.9 million gain. However, one half of this
gain was shared with a co-investor and is included in other income (loss) as
discussed below.

Other Income (Loss)
        The components of WCC's other income (loss) are reflected in the following table:

`Quarter Ended               Six Months Ended
                                                         June 30,                     June 30,
                                               ---------------------------   ---------------------------
                                                   2003           2002           2003           2002
                                               ------------   ------------   ------------   ------------
                                                                (Dollars in thousands)
Other income (loss):
Real estate owned, net ......................  $         --   $         (3)  $         --   $        (56)
Investor participation interest .............             2           (855)            (3)          (891)
Other, net ..................................           428           (231)           440            450
                                               ------------   ------------   ------------   ------------
    Total other income (loss) ...............  $        430   $     (1,089)  $        437   $       (497)
                                               ============   ============   ============   ============`

The increase in WCCs
total other income for the 2003 periods was a result of the $0.9 million of
Investor participation interest expense recorded for the quarter and
six months ended June 30, 2002. This charge primarily reflects the
co-investors share of WCCs gain on its sale of loans in June 2002.
WCCs other, net in the 2003 periods was due to a $0.3 million gain from a
litigation settlement and miscellaneous gains from recoveries of servicer
advances, in excess of carrying value.

Compensation and Benefits
        WCCs compensation and
employee benefits totaled approximately $5.5 million for the quarter ended June
30, 2003, compared with $4.7 million for the quarter ended June 30, 2002. For
the six months ended June 30, 2003, compensation expense was $10.6 million,
compared with $8.8 million for the six months ended June 30, 2002. The increase
in the 2003 periods was primarily due to a continuing increase in WCCs
employee head count as a result of the expansion of our loan servicing
operations. Additionally, in the second quarter of 2003 some existing employees
were transferred to WCCs payroll as part of the Companys
reallocation of certain operating expenses among its business segments (see Note
5 to the interim condensed consolidated financial statements).

Other Expenses
        WCCs other expenses
for the second quarter of 2003 totaled approximately $1.8 million, compared with
$1.7 million for the second quarter of 2002. The slight increase was due to
higher allocations of certain operating expenses, particularly insurance and
depreciation, to WCC from the other operating segments (see Note 5 to the
interim condensed consolidated financial statements).

For the six months ended
June 30, 2003, WCCs other expenses decreased by approximately $0.6 million
from the six months ended June 30, 2002. The decrease was primarily due to a
$0.7 million decline in legal expenses as a result of a significant accrual in
March 2002 in connection with the settlement of litigation arising from events
prior to our June 1999 restructuring. This decrease was partially offset by
slight increases in insurance, depreciation and other expense categories as a
result of the Companys reallocation of operating expenses as discussed
above.

23

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## Changes in
Financial Condition  Wilshire Credit Corporation

Following  are   condensed   statements  of
financial  condition for WCC as of June 30, 2003
and December 31, 2002:

`June 30,     December 31,
                                                                       2003           2002
                                                                   ------------   ------------
                                                                      (Dollars in thousands)
ASSETS:
Cash and cash equivalents .......................................  $         --   $      1,598
Discounted loans, net ...........................................           580            801
Servicer advance receivables, net ...............................        26,306         19,922
Purchased mortgage servicing rights, net ........................         8,801          4,692
Other assets ....................................................         6,283          5,807
                                                                   ------------   ------------
    Total assets ................................................  $     41,970   $     32,820
                                                                   ============   ============

LIABILITIES:
Short-term borrowings ...........................................  $      6,000   $         --
Investment financing ............................................         4,181          2,151
Other liabilities ...............................................         7,327          8,147
                                                                   ------------   ------------
    Total liabilities ...........................................        17,508         10,298

NET WORTH .......................................................        24,462         22,522
                                                                   ------------   ------------
    Total liabilities and net worth .............................  $     41,970   $     32,820
                                                                   ============   ============`

Discounted Loans,
net. WCCs discounted loans, net decreased by approximately $0.2
million from December 31, 2002 to June 30, 2003 primarily as a result of
principal payments received during the period.

Servicer Advance
Receivables, net.Servicer advance receivables, net increased by
approximately $6.4 million during the six months ended June 30, 2003. This
increase resulted primarily from new senior lien advances made by WCC during the
period, partially offset by recoveries of advances on loans previously made.

Purchased Mortgage
Servicing Rights, net. Purchased mortgage servicing rights, net (MSRs)
increased by approximately $4.1 million for the six months ended June 30, 2003.
WCC purchased approximately $6.1 million of MSRs associated with new servicing
portfolio acquisitions in March 2003 and also recorded a net recovery of $0.1
million in impairment charges previously taken. These increases were partially
offset by amortization of MSRs totaling $2.1 million.

Short-Term Borrowings
and Investment Financing. WCCs short-term borrowings and
investment financing increased by an aggregate of $8.0 million for the six
months ended June 30, 2003. WCC utilized its commercial bank lines of credit to
fund new servicer advances and its acquisitions of servicing rights during the
first two quarters.

## Liquidity and
Capital Resources

WCCs sources of cash
flow include primarily servicing revenue, sales of mortgage servicing assets
and/or interest-earning assets, and lines of credit from commercial banks. The
availability of liquidity from our line of credit facilities is subject to the
Companys maintenance of sufficient available collateral to pledge against
such borrowings. We are currently maintaining sufficient collateral under the
credit agreements. WCCs liquidity is actively managed on a daily basis and
is periodically reviewed by our Board of Directors. This process is intended to
ensure the maintenance of sufficient funds to meet the needs of the Company.

At June 30, 2003,
WCCs liquidity (including cash and unused borrowings under our credit
facilities) totaled $11.2 million, compared with approximately $21.1 million at
December 31, 2002. Based on our current and expected asset size, capital levels,
and organizational infrastructure, we believe there will be sufficient available
liquidity to meet our needs.

24

---

Adequate credit facilities
and other sources of funding are essential to the continuation of the
Companys ability to purchase servicing assets and secure new contractual
servicing agreements. The Companys growth strategy is dependent in part on
its ability to find credit facilities and equity partners to provide funding for
such business opportunities. Otherwise, such growth could be significantly
curtailed or delayed.

## MORTGAGE INVESTMENT OPERATIONS

WFSG conducts its Mortgage
Investment Operations through WFC, our wholly-owned investment subsidiary. Some
of WFCs activities are conducted with a co-investor which has
participation interests in the returns generated by the assets that serve as
collateral for the loans. The share of such activities held by this co-investor
is reflected as Investor participation interest in the
Companys consolidated statements of operations.

The following table
compares WFCs operating income before taxes for the quarters and six-month
periods ended June 30, 2003 and 2002 (dollars in thousands).

`Quarter Ended June 30,                Six Months Ended June 30,
                                          ------------------------------------   ------------------------------------
                                                                     Increase                               Increase
                                             2003         2002      (Decrease)      2003         2002      (Decrease)
                                          ----------   ----------   ----------   ----------   ----------   ----------
Interest income ........................  $      729   $    1,168   $     (439)  $    1,770   $    2,878   $   (1,108)
Realized gains on sales ................          --          532         (532)           5          576         (571)
Other loss .............................        (154)        (553)         399         (233)        (509)         276
                                          ----------   ----------   ----------   ----------   ----------   ----------
   Total income ........................         575        1,147         (572)       1,542        2,945       (1,403)
                                          ----------   ----------   ----------   ----------   ----------   ----------
Interest expense .......................          20          139         (119)          48          337         (289)
Provision for loan losses ..............          50           70          (20)          80           70           10
Compensation expense ...................         151          217          (66)         356          434          (78)
Other expenses .........................          58          201         (143)         186          420         (234)
                                          ----------   ----------   ----------   ----------   ----------   ----------
   Total expenses ......................         279          627         (348)         670        1,261         (591)
                                          ----------   ----------   ----------   ----------   ----------   ----------
Income before taxes ....................  $      296   $      520   $     (224)  $      872   $    1,684   $     (812)
                                          ==========   ==========   ==========   ==========   ==========   ==========`

Interest Income and Interest Expense
        WFCs interest income
was approximately $0.7 million for the quarter ended June 30, 2003, compared
with $1.2 million for the quarter ended June 30, 2002. For the six months ended
June 30, 2003, interest income was approximately $1.8 million, compared with
$2.9 million for the six months ended June 30, 2002. The decreases in the 2003
periods were primarily due to a decline in loan volume as a result of WFCs
sale of approximately $3.3 million unpaid principal balance of loans in June
2002. In addition, in the first quarter of 2002 WFC recorded approximately $0.3
million in loan interest income on the recovery of discounts and reserves on
loans which terminated during that period. Partially offsetting the decrease in
loan interest income were increases in interest on mortgage-backed securities of
$0.3 million and $0.5 million respectively, for the quarter and six months ended
June 30, 2003 over the corresponding 2002 periods. The continuing low
interest-rate environment has triggered an acceleration of repayments on the
loans underlying WFCs mortgage-backed securities. WFC records the receipt
of such payments directly to interest income since its portfolio of securities
has been written down to an amortized cost of zero.

WFCs interest expense
decreased by approximately $0.1 million from the second quarter of 2002 to the
second quarter of 2003 and by $0.3 million from the six months ended June 30,
2002 to the six months ended June 30, 2003. These decreases resulted from
WFCs repayments of debt facilities in June 2002 with the proceeds from the
loan sale described above and also from the continuing decline in interest
rates.

Realized Gains on Sales
        WFCs gains on sales
decreased by approximately $0.5 million and $0.6 million, respectively, from the
quarter and six-month periods ended June 30, 2002 to the corresponding 2003
periods. The larger gains in the 2002 periods reflect WFCs gain from the
sale of approximately $3.3 million unpaid principal balance of loans in June
2002. Since the loans sold were originally acquired with a co-investor, one half
of the gain on sale was shared with the co-investor and included in
Investor participation interest as discussed below.

25

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Other Loss
        The components of WFC's other loss are reflected in the following table:

`Quarter Ended               Six Months Ended
                                                             June 30,                      June 30,
                                                    ---------------------------   ---------------------------
                                                        2003           2002           2003           2002
                                                    ------------   ------------   ------------   ------------
                                                                      (Dollars in thousands)
Other loss:
Real estate owned, net ...........................  $          1   $        (28)  $        (14)  $        (49)
Investor participation interest ..................           (60)          (364)          (127)          (654)
Other, net .......................................           (95)          (161)           (92)           194
                                                    ------------   ------------   ------------   ------------
    Total other loss .............................  $       (154)  $       (553)  $       (233)  $       (509)
                                                    ============   ============   ============   ============`

Other loss includes the
co-investors share of certain investment activities conducted with WFC,
which is reported as Investor participation interest expense. The
larger expense amounts in the 2002 periods reflect the co-investors 50%
share of the gain on WFCs loan sale in June 2002.

Compensation Expense
        WFCs compensation and
employee benefits decreased by approximately $0.1 million for the quarter and
six months ended June 30, 2003 as compared with the corresponding 2002 periods.
As part of the Companys reallocation of operating expenses among its
business segments (see Note 5 to the interim condensed financial statements),
certain employees compensation has been transferred to WCC from WFC,
commencing in the second quarter of 2003.

Other Expenses
        WFCs other operating
expenses decreased by approximately $0.1 million from the second quarter of 2002
to the second quarter of 2003 and by $0.2 million from the six months ended June
30, 2002 to the six months ended June 30, 2003. These decreases were primarily
due to a decline in depreciation expense from the prior year to the current
year, as a result of the transfer of certain fixed assets from WFC to
WFSGs other business segments.

## Changes in
Financial Condition  Wilshire Funding Corporation

Following are WFC's condensed statements of financial condition for as of June 30, 2003 and December 31, 2002:

`June 30,     December 31,
                                                                            2003           2002
                                                                        ------------   ------------
                                                                           (Dollars in thousands)
ASSETS:
Cash and cash equivalents ............................................  $         35   $      1,172
Mortgage-backed securities available for sale, at fair value .........         1,335          1,828
Discounted loans, net ................................................         5,043          5,829
Real estate owned, net ...............................................            47             61
Intercompany receivables .............................................        18,343         16,354
Other assets .........................................................         1,097          1,851
                                                                        ------------   ------------
    Total assets .....................................................  $     25,900   $     27,095
                                                                        ============   ============
LIABILITIES:
Investment financing .................................................  $      1,051   $      2,133
Other liabilities ....................................................         3,611          4,150
                                                                        ------------   ------------
    Total liabilities ................................................         4,662          6,283
NET WORTH ............................................................        21,238         20,812
                                                                        ------------   ------------
    Total liabilities and net worth ..................................  $     25,900   $     27,095
                                                                        ============   ============`

26

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Mortgage-Backed
Securities Available for Sale. WFCs portfolio of mortgage-backed
securities available for sale decreased by approximately $0.5 million during the
six months ended June 30, 2003 as a result of continuing paydowns on the
underlying loan portfolios. WFC received $1.2 million in principal repayments in
the current year to date on its mortgage-backed securities, which have been
written down to an amortized cost of zero. Consequently, any payments received
on these securities are recorded directly to interest income.

Discounted Loans,
net. WFCs discounted loans, net decreased by approximately $0.8
million from December 31, 2002 to June 30, 2003 as a result of $0.7 million of
principal repayments and a loan loss provision of approximately $0.1 million.

Intercompany
Receivables.Intercompany receivables increased by approximately $2.0
million from year-end 2002 to June 30, 2003. This increase was primarily due to
an ongoing transfer of funds from WFC to WFSG to meet the holding companys
operating costs.

Investment
Financing. WFCs investment financing decreased by approximately
$1.1 million during the six months ended June 30, 2003, as a result of
repayments of debt facilities which financed previous asset acquisitions.

## Liquidity and
Capital Resources

WFCs sources of cash
flow include whole loan and mortgage-backed securities sales, net interest
income, and borrowings from co-investors. WFCs liquidity is actively
managed on a daily basis and is periodically reviewed by our Board of Directors.
This process is intended to ensure the maintenance of sufficient funds to meet
the needs of the Company. Based on our current and expected asset size, capital
levels, and organizational infrastructure, we believe there will be sufficient
available liquidity to meet WFCs operating needs.

We no longer own
subordinated mortgage-backed securities backed by loan pools serviced by
unaffiliated third parties, and currently hold subordinated mortgage-backed
securities only where we act as servicer of the loan pools backing these
securities. At June 30, 2003 WFC held $1.3 million of such mortgage-backed
securities.

Adequate credit facilities
and other sources of funding are essential to the continuation of the
Companys ability to acquire additional pools of loans and other
interest-earning assets. The Companys growth strategy is dependent in part
on its ability to find credit facilities and equity partners for purchases of
such assets. Otherwise, such growth could be significantly curtailed or delayed.

## HOLDING COMPANY AND MISCELLANEOUS OPERATIONS

Our Holding Company and
Miscellaneous Operations consist of other operating revenues and expenses not
directly attributable to our Banking, Loan Servicing or Mortgage Investment
Operations, and also includes eliminations of intercompany accounts and
transactions. Primary sources of liquidity include funds available from the
Companys wholly-owned non-bank subsidiaries, proceeds from the July 2002
issuance of junior subordinated debt, and payments received from FBBH pursuant
to a tax allocation agreement between the Company and the Bank. However, the OTS
has limited the amount of these payments to the lesser of (1) the Banks
stand-alone tax liability and (2) the total tax payments made by the Company. In
January 2003 the Bank remitted $0.4 million to the Company for a portion of its
2001 liability under the foregoing formula. WFSG will continue to depend on its
non-Bank subsidiaries to meet its liquidity needs.

## CRITICAL
ACCOUNTING POLICIES AND ESTIMATES

The Managements
Discussion and Analysis of Financial Condition and Results of Operations,
as well as disclosures included elsewhere in this Form 10-Q, are based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. 
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingencies.  On an ongoing basis, we
evaluate the estimates used, including those related to allowances for loan
losses, other than temporary impairment in the market values of investment
securities and other assets, assumptions used to estimate fair values of certain
financial instruments for which there is not an active market, the allocation of
basis between assets sold and retained, the selection of yields utilized to
recognize interest income on certain mortgage-backed securities, and
contingencies and litigation. We base our estimates on historical
experience, current conditions and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources as well as identifying and
assessing our accounting treatment with respect to commitments and
contingencies.  Actual results may differ from these estimates under
different assumptions or conditions.

27

---

We believe the following
critical accounting policies involve the more significant judgments and
estimates used in the preparation of the consolidated financial statements:

        Mortgage-Backed
and Other Investment Securities Available for Sale.The Companys
mortgage-backed and other investment securities available for sale are reported
at their current fair market value. In determining current fair value when
quotes from third parties are not available, we estimate the present value of
the anticipated cash flows of the securities based on certain assumptions,
including the amount and timing of future repayments, the discount rate to be
used, and default rates and expected losses (if any) on the loans underlying the
securities. If the change in market value is considered temporary, the
unrealized holding gains and losses are reported net of tax, when applicable, as
a separate component of accumulated other comprehensive income in
stockholders equity. In the event of a decline in market value, management
must evaluate whether the decline is temporary in nature or other than
temporary. Declines that are considered other than temporary are reflected as
Market valuation losses and impairments in the consolidated
statements of operations and not as a direct reduction to stockholders
equity. The Companys portfolio of mortgage-backed and other investment
securities available for sale has increased significantly over the past two
years and, as of June 30, 2003, represented nearly 30% of consolidated total
assets. Consequently, fluctuations in the securities values can have a
significant impact on our financial condition and results of operations.

 Allowance
for Loan Losses. In estimating the allowance for loan losses, management
utilizes historical experience as well as other factors, including the effect of
changes in the real estate market on collateral values, the effect on the loan
portfolio of current economic indicators and their probable impact on borrowers,
and increases or decreases in nonperforming and impaired loans. Changes in these
factors may cause managements estimate of the allowance to increase or
decrease and result in adjustments to the Companys provision for loan
losses in its consolidated statements of operations and the carrying value of
the Companys loans on its consolidated statement of financial condition.

 Mortgage
Servicing Rights. Our loan servicing business represents an increasingly
significant proportion of our core operations. In determining the fair value of
our mortgage servicing rights (MSRs), we make assumptions of market discount
rates, prepayment speeds, default rates and related servicing costs which affect
the estimated present value of future cash flows. Changes in these assumptions
and economic factors may result in increases or decreases in the carrying value
of our MSRs and increases or decreases in the amortization of MSRs and valuation
allowances related to MSRs, which may be temporary or other than temporary.

 Income
Taxes. At June 30, 2003 we had a total deferred tax asset of approximately
$52.6 million. This asset represents the tax effect of future deductible or
taxable amounts and is attributable to carryforwards, such as net operating
losses and capital losses, and also to temporary differences between amounts
that have been recognized in the financial statements and amounts that have been
recognized in the Companys income tax returns. In accounting for the
deferred tax asset, we apply Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes, which requires that deferred tax
assets be reduced by a valuation allowance if it is more likely than not that
some portion or all of the deferred tax asset will not be realized. We evaluate
the deferred tax asset quarterly and, as of June 30, 2003, have recorded a
valuation allowance of approximately $48.1 million. The net deferred tax asset,
$4.5 million, is included in prepaid expenses and other assets in our
consolidated statement of financial condition as of June 30, 2003. We currently
believe that it is more likely than not that this portion of the deferred tax
asset will be realized. However, there can be no assurance that the amount, if
any, that we ultimately realize will not differ materially from our assessment.
As portions of the deferred tax asset are realized and the valuation allowance
is reduced, the related benefits, to the extent they relate to our
post-reorganizational period, are recorded as a deferred tax benefit in our
consolidated statements of operations. As benefits relating to our
pre-reorganizational period are realized, they are recorded as a direct increase
to stockholders equity.


Contingencies. We are party to various legal proceedings, as discussed
above and in the notes to the consolidated financial statements.  These
matters have a degree of uncertainty associated with them.  We continually
assess the likely outcomes of these proceedings, the amounts of any related
ongoing costs, and the adequacy of amounts provided for these
matters.   There also can be no assurance that all matters that may be
brought against us or that we may bring against other parties are known to us at
any point in time.

28

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## 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 condition of the real estate market, interest rates, regulatory matters, the
availability of pools of servicing rights and loans at acceptable prices, and
the availability and conditions of financing for loan pool acquisitions,
mortgage loan servicing rights and other financial assets. 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.

29

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## 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 volatility 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 investment committee of the Company and the asset and liability committee of
the Bank (the Committees) which meet 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 activity, and
maturities of investments and borrowings. FBBHs Asset and Liability
Committee establishes rate sensitivity tolerances (within regulatory guidelines)
which are approved by the Banks Board of Directors, and coordinates with
the Banks Board with respect to overall asset and liability composition.

The Committees are
authorized to utilize 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. The Bank has entered into a $35
million notional principal amount interest rate swap agreement, which became
effective in December 2002 and matures in December 2004. Pursuant to the
agreement, the Bank will pay interest at a fixed rate of 2.22% and receive
quarterly interest payments at the three-month LIBOR rate.

We continually monitor the
interest rate sensitivity of our portfolios of interest-earning assets and
interest-bearing liabilities in conjunction with the current interest rate
environment. When a new pool of loans, securities or mortgage servicing rights
is acquired, we will assess the incremental change in our sensitivity to
interest rates, and determine accordingly whether or not to hedge.

In addition, as required by
OTS regulations, the Banks Asset and Liability Committee also regularly
reviews interest rate risk by forecasting the impact of alternative interest
rate environments on the interest rate sensitivity of Net Portfolio Value
(NPV), which is defined as the net present value of an
institutions existing assets, liabilities and off-balance sheet
instruments. The Committee further evaluates such impacts against the maximum
tolerable change in interest income that is authorized by the Board of Directors
of the Bank.

The following table
quantifies the potential changes in the Companys net portfolio value at
June 30, 2003, should interest rates increase or decrease by 100 to 300 basis
points, assuming the yield curves of the rate shocks will be parallel to each
other.

# Interest
Rate Sensitivity of Net Portfolio Value

`Net Portfolio Value            NPV as % of Assets
                                               -----------------------------------   ---------------------
                                                $Amount       $ Change    % Change   NPV Ratio    Change
                                               ----------    ----------   --------   ---------   ---------
        Change in Rates                               (Dollars in thousands)
         +300bp.............................   $  104,142    $ (19,537)      (16)%      12.91%       (165)bp
         +200bp.............................      111,388      (12,291)      (10)       13.56        (100)bp
         +100bp.............................      118,614       (5,065)       (4)       14.18         (38)bp
            0bp.............................      123,679           --        --        14.56          --
         -100bp.............................      127,229        3,550         3        14.77          21 bp
         -200bp.............................      134,319       10,640         9        15.36          80 bp
         -300bp.............................      144,427       20,748        17        16.31         175 bp`

In determining net
portfolio value, Management relies upon various assumptions, including, but not
limited to, prepayment speeds on the Companys assets and the discount
rates to be used. We review our assumptions regularly and adjust them when it is
deemed appropriate based on current and future expected market conditions.

30

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Management believes that
the assumptions (including prepayment assumptions) it uses to evaluate the
vulnerability of our operations to changes in interest rates approximate actual
experience and considers them reasonable. However, the interest rate sensitivity
of our assets and liabilities and the estimated effects of changes in interest
rates on NPV could vary substantially if different assumptions were used or
actual experience differs from the historical experience on which they are
based.

31

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## ITEM 4.
CONTROLS AND PROCEDURES

Evaluation of
Controls and Procedures
        We maintain a set of
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports filed under the Securities Exchange Act
of 1934, as amended (Exchange Act) is recorded, processed,
summarized and reported within the time periods specified in the SECs
rules and forms. Within the 90 days prior to the date of this report, we carried
out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-14 of the Exchange Act.
Based on that evaluation, our CEO and CFO concluded that the Companys
disclosure controls and procedures are effective in timely alerting him to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Companys Exchange Act
filings.

Changes in
internal controls
        There have been no
significant changes in the Companys internal controls or in other factors
that could significantly affect internal controls subsequent to the date of that
evaluation.

32

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# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

|PART II. |  | OTHER INFORMATION
|-------- |  | -----------------

|Item 1. |  | Legal Proceedings.
|------- |  | ------------------

The Company is a defendant in
other legal actions arising from transactions conducted in the ordinary course
of business. Some of these claims involve borrowers demanding material amounts
for alleged damages. Management, after consultation with legal counsel, and
based on prior experience with consumer claims, believes the ultimate liability,
if any, arising from such actions will not materially affect the Companys
financial position, consolidated results of operations or cash flows.

|Item 2. |  | Changes in Securities.
|------- |  | ----------------------

| | Not applicable.
| | ---------------

|Item 3. |  | Defaults Upon Senior Securities.
|------- |  | --------------------------------

| | Not applicable.
| | ---------------

|Item 4. |  | Submission of Matters to a Vote of Security Holders.
|------- |  | ----------------------------------------------------

On June 25, 2003, at the annual shareholder  meeting,  the Company's  stockholders  elected the following seven (7) persons to the
Board of Directors of the Company: Larry B. Faigin, Howard Amster, Robert M. Deutschman,  Stephen P. Glennon,  Robert H. Kanner, Edmund
M. Kaufman and Daniel A. Markee.

|Item 5. |  | Other Information.
|------- |  | ------------------

| | Not applicable.
| | ---------------

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

| | (a) | Exhibits.
| | --- | ---------

| |  | 10.1 | Amendment to  Change-in-Control  Agreement  between Wilshire  Financial  Services Group Inc. and Mr. Jay H. Memmott
| |  | ---- | -------------------------------------------------------------------------------------------------------------------

| |  | 10.2 | Amendment to  Change-in-Control  Agreement  between Wilshire  Financial  Services Group Inc. and Mr. Bradley B. Newman
| |  | ---- | ----------------------------------------------------------------------------------------------------------------------

| |  | 10.3 | Amendment to  Change-in-Control  Agreement  between Wilshire  Financial  Services Group Inc. and Mr. Mark H. Peterman
| |  | ---- | ---------------------------------------------------------------------------------------------------------------------

| |  | 31 | Certification by the Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| |  | -- | -----------------------------------------------------------------------------------------------------------------------------------

| |  | 32 | Certification by the Chief Executive Officer and Chief Financial Officer
                                  pursuant to 18 U.S.C.ss.1350, as adopted, pursuant to Section 906 of the
                                  Sarbanes-Oxley Act of 2002.
| |  | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | The  following  reports on Form 8-K were filed during the quarter  covered by this  report,  and  subsequently  through the date of issuance:
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | Current
Report on Form 8-K dated April 18, 2003, reporting the resignation of the
Companys Executive Vice President and Chief Financial Officer and
appointment of its interim Chief Financial Officer.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | Current
Report on Form 8-K dated April 30, 2003, reporting the Companys operating
results for the quarter ended March 31, 2003.
| | --------------------------------------------------------------------------------------------------------------------------------

| | Current
Report on Form 8-K dated May 6, 2003, announcing the date of the Companys
annual shareholder meeting.
| | --------------------------------------------------------------------------------------------------------------

| | Current Report on Form 8-K dated August 11, 2003, reporting the Company's operating results for the quarter ended June 30, 2003.
| | --------------------------------------------------------------------------------------------------------------------------------

34

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# SIGNATURE

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 12, 2003

|By: | /s/   STEPHEN P. GLENNON   
|--- | ---------------------------
|    | Stephen P. Glennon         
|    | Chief Executive Officer and
|    | Chief Financial Officer    

35

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