# 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 September 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 October 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):

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

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

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

                   Condensed 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`

2

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

`September 30,  December 31,
                                                                                      2003           2002
                                                                                  ------------   ------------
                                       ASSETS

Cash and cash equivalents ......................................................  $     23,716   $     17,579
Government agency mortgage-backed securities available for sale, at fair value .       153,121        211,082
AAA mortgage-backed securities available for sale, at fair value ...............        48,524         48,320
Other mortgage-backed securities available for sale, at fair value .............         1,236          2,133
Investment securities available for sale, at fair value ........................        22,222         11,962
Investment securities held to maturity, at amortized cost ......................         9,594             --
Loans, net of allowance for loan losses of $6,751 and $7,980 ...................       537,548        486,667
Discounted loans, net of allowance for loan losses of $33,945 and $40,920 ......         5,061          6,630
Stock in Federal Home Loan Bank of San Francisco, at cost ......................        11,786         10,808
Real estate owned, net .........................................................           473          1,101
Leasehold improvements and equipment, net ......................................         3,071          3,218
Accrued interest receivable ....................................................         3,879          4,043
Servicer advance receivables, net ..............................................        29,892         19,922
Service fees receivable ........................................................         2,709          2,334
Purchased mortgage servicing rights, net .......................................        10,163          5,405
Receivables from loan servicers ................................................         1,719            462
Intangible assets, net .........................................................         3,507          3,701
Prepaid expenses and other assets ..............................................        10,058          7,654
                                                                                  ------------   ------------
          TOTAL ................................................................  $    878,279   $    843,021
                                                                                  ============   ============


                        LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
     Noninterest-bearing deposits ..............................................  $      3,688   $      3,659
     Interest-bearing deposits .................................................       397,510        392,122
     Short-term borrowings .....................................................        96,000         91,870
     Accounts payable and other liabilities ....................................        15,297         14,284
     FHLB advances .............................................................       233,337        216,000
     Investment financing ......................................................         5,358          4,284
     Trust preferred subordinated debt .........................................        20,000         20,000
     Investor participation liability ..........................................         1,447          1,346
                                                                                  ------------   ------------
          Total liabilities ....................................................       772,637        743,565
                                                                                  ============   ============

COMMITMENTS AND CONTINGENCIES (NOTE 3)

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, 24,261,703
        and 23,820,874 shares issued (including treasury shares of 5,626,212) ..       117,666        114,357
     Treasury stock, 5,626,212 shares, at cost .................................       (15,106)       (15,106)
     Retained earnings (accumulated deficit) ...................................         2,549         (3,096)
     Accumulated other comprehensive income, net ...............................           533          3,301
                                                                                  ------------   ------------
          Total stockholders' equity ...........................................       105,642         99,456
                                                                                  ------------   ------------
          TOTAL ................................................................  $    878,279   $    843,021
                                                                                  ============   ============`

See notes to unaudited interim condensed consolidated financial statements

3

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

`Quarter Ended               Nine Months Ended
                                                                                 September  30,                September 30,
                                                                          ---------------------------   ---------------------------
                                                                              2003           2002           2003           2002
                                                                          ------------   ------------   ------------   ------------
INTEREST INCOME:
         Loans .........................................................  $      8,523   $      9,226   $     25,419   $     29,709
         Mortgage-backed securities ....................................         1,993          4,256          8,007          9,661
         Securities and federal funds sold .............................           342            274            731            914
                                                                          ------------   ------------   ------------   ------------
           Total interest income .......................................        10,858         13,756         34,157         40,284
                                                                          ------------   ------------   ------------   ------------
INTEREST EXPENSE:
         Deposits ......................................................         2,575          3,810          8,564         12,160
         Borrowings ....................................................         3,213          3,523          9,909         10,028
                                                                          ------------   ------------   ------------   ------------
           Total interest expense ......................................         5,788          7,333         18,473         22,188
                                                                          ------------   ------------   ------------   ------------
NET INTEREST INCOME ....................................................         5,070          6,423         15,684         18,096
PROVISION FOR (RECAPTURE OF) LOSSES ON LOANS ...........................            78            136           (592)           372
                                                                          ------------   ------------   ------------   ------------
NET INTEREST INCOME AFTER PROVISION FOR (RECAPTURE OF) LOSSES ON
    LOANS ..............................................................         4,992          6,287         16,276         17,724
                                                                          ------------   ------------   ------------   ------------
OTHER INCOME:
         Servicing income ..............................................        10,004          6,917         25,751         18,463
         Loan fees and charges .........................................            33             32             83            103
         Real estate owned, net ........................................          (109)           (45)          (196)          (156)
         (Loss) gain on sale of loans ..................................           (97)            25            (17)         2,505
         Gain on sale of securities ....................................           249          1,490            249          1,428
         Market valuation losses and impairments .......................            --         (2,238)            --         (3,611)
         Investor participation interest ...............................           (32)           (20)          (161)        (1,565)
         Other, net ....................................................            99            155            830          1,361
                                                                          ------------   ------------   ------------   ------------
           Total other income ..........................................        10,147          6,316         26,539         18,528
                                                                          ------------   ------------   ------------   ------------
OTHER EXPENSES:
         Compensation and employee benefits ............................         6,931          6,279         21,093         18,097
         Professional services .........................................         1,144            879          3,835          3,697
         Occupancy .....................................................           554            677          1,634          1,759
         FDIC insurance premiums .......................................           101            107            316            316
         Data processing ...............................................           278            237            811            838
         Communication .................................................           182            276            631            878
         Insurance .....................................................           360            316          1,065            870
         Corporate travel and development ..............................            75             74            201            243
         Depreciation ..................................................           386            486          1,190          1,345
         Amortization of intangibles ...................................            65             65            194            194
         Postage and courier expense ...................................           240            247            814            767
         Provision for litigation claims ...............................            --             --             --          3,600
         Other general and administrative expenses .....................           479          1,373          1,675          2,686
                                                                          ------------   ------------   ------------   ------------
           Total other expenses ........................................        10,795         11,016         33,459         35,290
                                                                          ------------   ------------   ------------   ------------
INCOME BEFORE MINORITY INTEREST AND INCOME TAXES .......................         4,344          1,587          9,356            962
MINORITY INTEREST ......................................................            --           (561)            --           (686)
                                                                          ------------   ------------   ------------   ------------
INCOME BEFORE INCOME TAXES .............................................         4,344          1,026          9,356            276
INCOME TAX PROVISION (BENEFIT) .........................................         1,669            159          3,711           (144)
                                                                          ------------   ------------   ------------   ------------
NET INCOME .............................................................  $      2,675   $        867   $      5,645   $        420
                                                                          ============   ============   ============   ============

Earnings per share - basic..............................................  $       0.14   $       0.05   $       0.31   $       0.02
Earnings per share - diluted............................................  $       0.13   $       0.04   $       0.28   $       0.02

Weighted average shares outstanding - basic.............................    18,633,781     18,000,489     18,432,450     16,799,210
Weighted average shares outstanding - diluted...........................    20,564,647     20,016,196     20,419,687     18,550,728`

See notes to unaudited interim condensed consolidated financial statements

4

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# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Unaudited)
(Dollars in thousands)

`(Accumulated   Accumulated
                               Preferred Stock     Common Stock         Treasury Stock      (Deficit)        Other
                                ------------- --------------------- -----------------------  Retained   Comprehensive
                                Shares Amount   Shares      Amount      Shares     Amount    Earnings       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 4).                                  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................                                                                   5,645                      5,645
    Unrealized holding loss
      on available for sale
      securities - net of tax
      benefit of $1,959.......                                                                                 (2,696)     (2,696)
    Unrealized loss on
      interest-rate swap - net
      of tax benefit of $51...                                                                                    (72)        (72)
                                                                                                                         --------
Total comprehensive income....                                                                                              2,877
Tax benefit from utilization
    of pre-reorganizational
    Net Operating Losses
    (Note 4)..................                                1,965                                                         1,965
Tax benefit from adjustment to
    pre-reorganizational Net
    Operating Losses (Note 4).                                  775                                                           775
 Exercise of stock options....                    440,829       569                                                           569
                                ------ ------ ----------- --------- -----------  ----------  ----------  -------------  ---------
BALANCE, September 30, 2003...      -- $   --  24,261,703 $ 117,666  (5,626,212) $ (15,106)  $    2,549  $        533   $ 105,642
                                ====== ====== =========== ========= ===========  ==========  ==========  =============  =========
__________`

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

(2)      Includes reclassification adjustment for gain included in net income of $289, net of tax expense of $205.

See notes to unaudited interim condensed consolidated financial statements

5

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# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

`Nine Months Ended
                                                                                         September 30,
                                                                                  ---------------------------
                                                                                      2003           2002
                                                                                  ------------   ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income ..................................................................  $      5,645   $        420
   Adjustments to reconcile net income to net cash provided by
      operating activities:
        (Recapture of) provision for losses on loans ...........................          (592)           372
        Provision for losses on real estate owned ..............................           159             33
        Valuation adjustment for mortgage servicing rights .....................          (102)           577
        Market valuation losses and impairments ................................            --          3,611
        Depreciation and amortization ..........................................         1,384          1,539
        Tax effect from utilization of net operating loss carryforward .........         1,965             --
        (Gain) loss on sale of real estate owned ...............................           (15)           102
        Loss (gain) on sale of loans ...........................................            17         (2,505)
        Gain on sale of securities .............................................          (249)        (1,428)
        (Gain) loss on disposal of equipment ...................................           (10)            43
        Amortization of discounts and deferred fees ............................         2,587          2,556
        Amortization of mortgage servicing rights ..............................         3,989          2,642
        Federal Home Loan Bank stock dividends .................................          (391)          (399)
        Minority interest ......................................................            --            686
      Change in:
        Servicer advance receivables ...........................................        (9,970)         2,415
        Service fees receivable ................................................          (375)           299
        Accrued interest receivable ............................................           164            (54)
        Receivables from other loan servicers ..................................        (1,257)         1,315
        Prepaid expenses and other assets ......................................          (517)           907
        Accounts payable and other liabilities .................................         1,696         (2,303)
        Investor participation liability .......................................           101            641
                                                                                  ------------   ------------
             Net cash provided by operating activities .........................         4,229         11,469
                                                                                  ------------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
        Purchase of loans ......................................................       (67,571)       (12,556)
        Proceeds from sale of loans ............................................         4,068             --
        Loan repayments ........................................................       122,001        146,433
        Loan originations ......................................................      (108,515)       (67,251)
        Purchase of discounted loans ...........................................       (30,093)           (10)
        Proceeds from sale of discounted loans .................................        30,308          7,395
        Purchase of mortgage-backed securities available for sale ..............       (81,714)      (254,233)
        Proceeds from sale of mortgage-backed securities available for sale ....         9,436         71,462
        Repayment of mortgage-backed securities available for sale .............       125,034         31,703
        Purchase of investment securities available for sale ...................       (20,458)       (13,731)
        Proceeds from sale of investment securities available for sale .........            --         10,599
        Proceeds from sale of real estate owned ................................         1,150            740
        Purchase of FHLB stock .................................................          (587)          (801)
        Purchases of leasehold improvements and equipment ......................        (1,054)        (1,585)
        Proceeds from sale of leasehold improvements and equipment .............            21             18
        Purchase of mortgage servicing rights ..................................        (8,647)           (80)
        Proceeds from sale of mortgage servicing rights ........................             2            335
                                                                                  ------------   ------------
             Net cash used in investing activities .............................       (26,619)       (81,562)
                                                                                  ------------   ------------`

See notes to unaudited interim condensed consolidated financial statements

6

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# WILSHIRE
FINANCIAL SERVICES GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

(Dollars in thousands)

`Nine Months Ended
                                                                                                September 30,
                                                                                         ---------------------------
                                                                                             2003           2002
                                                                                         ------------   ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
        Net increase (decrease) in deposits ...........................................  $      5,417   $    (21,203)
        Proceeds from FHLB advances ...................................................        56,337         94,000
        Repayments of FHLB advances ...................................................       (39,000)       (70,000)
        Net increase in short-term borrowings .........................................         4,130         56,569
        Proceeds from servicing acquisition notes .....................................         5,677          2,444
        Repayment of servicing acquisition notes ......................................        (4,603)       (11,239)
        Issuance of convertible subordinated debentures ...............................            --          7,690
        Issuance of trust preferred subordinated debt .................................            --         20,000
        Issuance of common stock pursuant to exercise of stock options ................           569             40
        Purchase of treasury stock ....................................................            --         (5,101)
                                                                                         ------------   ------------
             Net cash provided by financing activities ................................        28,527         73,200
                                                                                         ------------   ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS .............................................         6,137          3,107
CASH AND CASH EQUIVALENTS:
        Beginning of period ...........................................................        17,579         39,974
                                                                                         ------------   ------------
        End of period .................................................................  $     23,716   $     43,081
                                                                                         ============   ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--Cash  paid for:
        Interest ......................................................................  $     16,480   $     20,780
        Income taxes ..................................................................           374            473
NONCASH INVESTING ACTIVITIES:
        Additions to real estate owned acquired in settlement of loans ................           666          1,732
        Transfer of securities classified as available for sale to held to maturity ...         9,594             --
NONCASH FINANCING ACTIVITIES:
        Conversion of subordinated debentures into common stock .......................            --          7,690`

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 nine months ended
September 30, 2003 are not 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.

## 2. 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 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
nine-month periods ended September 30, 2003 and 2002.

`Quarter Ended               Nine Months Ended
                                                           September 30,                 September 30,
                                                    ---------------------------   ---------------------------
                                                        2003           2002           2003           2002
                                                    ------------   ------------   ------------   ------------
Net income .......................................  $      2,675   $        867   $      5,645   $        420
Weighted average number of common shares
   outstanding - basic ...........................    18,633,781     18,000,489     18,432,450     16,799,210
Outstanding stock options ........................     1,930,866      2,015,707      1,987,237      1,751,518
                                                    ------------   ------------   ------------   ------------
Weighted average number of common shares
   outstanding - diluted .........................    20,564,647     20,016,196     20,419,687     18,550,728
                                                    ------------   ------------   ------------   ------------
Net income per share - basic......................  $       0.14   $       0.05   $       0.31   $       0.02
                                                    ============   ============   ============   ============
Net income per share - diluted....................  $       0.13   $       0.04   $       0.28   $       0.02
                                                    ============   ============   ============   ============`

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.

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)

`Quarter Ended               Nine Months Ended
                                                              September 30,                 September 30,
                                                       ---------------------------   ---------------------------
                                                           2003           2002           2003           2002
                                                       ------------   ------------   ------------   ------------
Net income, as reported .............................  $      2,675   $        867   $      5,645   $        420
Less:  Total stock-based employee compensation
   expense determined under fair value-based
   method for all awards, net of related tax
   effects ..........................................           129            175            375            508
                                                       ------------   ------------   ------------   ------------
Pro forma net income (loss) .........................  $      2,546   $        692   $      5,270   $        (88)
                                                       ============   ============   ============   ============

Earnings (loss) per share:
   Basic - as reported...............................  $       0.14   $       0.05   $       0.31   $       0.02
                                                       ============   ============   ============   ============
   Basic - pro forma.................................  $       0.14   $       0.04   $       0.29   $      (0.01)
                                                       ============   ============   ============   ============

   Diluted - as reported.............................  $       0.13   $       0.04   $       0.28   $       0.02
                                                       ============   ============   ============   ============
   Diluted - pro forma...............................  $       0.12   $       0.03   $       0.26   $      (0.01)
                                                       ============   ============   ============   ============`

## 3.
COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK

At
September 30, 2003, the Companys banking subsidiary, First Bank of Beverly
Hills, F.S.B. (FBBH or the Bank), had outstanding
commitments to fund $41.1 million in mortgage loans and to purchase $1.5 million
of new loans.

The
Company expects to incur additional expenses in connection with legal costs for
prior officers. These costs, which totaled approximately $0.5 million and $1.8
million, respectively, for the quarter and nine months ended September 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 court has
ordered that pursuant to the settlement the litigation should be dismissed.
Management, after consultation with legal counsel, believes that this litigation
will be dismissed in the next few months. However, this dismissal will not
affect any continuing obligation of the Company for legal costs of officers
arising from such events.

## 4. 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 11, 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 2002 year
through October 10, 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 $1.7 million
and $3.7 million, respectively, for the quarter and nine months ended September
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 statements of operations.

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)

WFSGs
net deferred tax asset at September 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.

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. However, 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.
As a result of the change in control, the Companys net operating loss
carryforwards and capital loss carryforwards that were generated prior to the
change in control are subject to a limitation on the amount that may be used
annually to offset taxable income. The Company estimates that the limitation is
approximately $6 million per year. The Company has adequately provided for this
limitation with its valuation allowance against the deferred tax asset.

In
the third quarter of 2003 the Company identified approximately $1.975 million in
additional net operating losses at WCC which arose in the 1998 tax year. These
losses have been applied to WCCs year 2002 tax liability, resulting in a
reduction of approximately $0.8 million in accrued income taxes payable. The
Company has recorded the related tax benefit as a direct increase to
stockholders equity in the accompanying financial statements.

## 5. OPERATING
SEGMENTS

The
Companys reportable operating segments, as defined by the Companys
management, consist of its Banking Operations, Loan Servicing Operations, and
Mortgage Investment Operations. The 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 September 30, 2003, FBBH had total assets of
$819.8 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
September 30, 2003, WCC serviced approximately $5.9 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.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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)

|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.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Company in the second quarter of 2003 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 $0.4 million and $0.6 million, respectively, for the
quarter and nine-month period ended September 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.

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 September 30, 2003 and 2002 are as follows:

`Three Months Ended September 30, 2003
                                                  ------------------------------------------------------------------------
                                                                                                 Holding
                                                                                               Company and
                                                                    Loan          Mortgage    Miscellaneous
                                                    Banking       Servicing     Investments     Operations       Total
                                                  ------------   ------------   ------------   ------------   ------------
Interest income ................................  $     10,202   $         17   $        623   $         16   $     10,858
Interest expense ...............................         5,343            183             14            248          5,788
                                                  ------------   ------------   ------------   ------------   ------------
Net interest income (expense) ..................         4,859           (166)           609           (232)         5,070
Provision for loan losses ......................            --             --             78             --             78
                                                  ------------   ------------   ------------   ------------   ------------
Net interest income (expense) after
   provision for loan losses ...................         4,859           (166)           531           (232)         4,992
Realized gains (losses) on asset sales .........           249             --            (97)            --            152
Servicing income ...............................           419          9,889              6           (310)        10,004
Other (loss) income ............................          (214)           138           (254)           321             (9)
Compensation and benefits ......................         1,058          5,665            106            102          6,931
Other expense ..................................         1,159          1,715             13            977          3,864
                                                  ------------   ------------   ------------   ------------   ------------
Income (loss) before taxes .....................         3,096          2,481             67         (1,300)         4,344
Income tax provision (benefit) .................         1,300             --             47            322          1,669
                                                  ------------   ------------   ------------   ------------   ------------
Net income (loss) ..............................  $      1,796   $      2,481   $         20   $     (1,622)  $      2,675
                                                  ============   ============   ============   ============   ============
Total assets ...................................  $    819,815   $     50,460   $     24,024   $    (16,020)  $    878,279
                                                  ============   ============   ============   ============   ============



                                                                  Three Months Ended September 30, 2002
                                                  ------------------------------------------------------------------------
                                                                                                 Holding
                                                                                               Company and
                                                                    Loan          Mortgage    Miscellaneous
                                                    Banking       Servicing     Investments     Operations       Total
                                                  ------------   ------------   ------------   ------------   ------------
Interest income ................................  $     11,600   $         32   $      2,058   $         66   $     13,756
Interest expense ...............................         6,856            143             63            271          7,333
                                                  ------------   ------------   ------------   ------------   ------------
Net interest income (expense) ..................         4,744           (111)         1,995           (205)         6,423
Provision for loan losses ......................            --             --            136             --            136
                                                  ------------   ------------   ------------   ------------   ------------
Net interest income (expense) after
provision for loan losses ......................         4,744           (111)         1,859           (205)         6,287
Realized and unrealized (losses) gains .........          (748)            --             25             --           (723)
Servicing income ...............................           130          7,208            (16)          (405)         6,917
Other (loss) income ............................           (90)            42           (171)           341            122
Compensation and benefits ......................         1,035          4,672            224            348          6,279
Other expense ..................................         1,304          1,345            221          1,867          4,737
                                                  ------------   ------------   ------------   ------------   ------------
Income (loss) before minority interest
and taxes ......................................         1,697          1,122          1,252         (2,484)         1,587
Minority interest ..............................            --             --             --           (561)          (561)
                                                  ------------   ------------   ------------   ------------   ------------
Income (loss) before taxes .....................         1,697          1,122          1,252         (3,045)         1,026
Income tax provision (benefit) .................           717             --             --           (558)           159
                                                  ------------   ------------   ------------   ------------   ------------
Net income (loss) ..............................  $        980   $      1,122   $      1,252   $     (2,487)           867
                                                  ============   ============   ============   ============   ============
Total assets ...................................  $    789,674   $     28,865   $     26,167   $      2,179   $    846,885
                                                  ============   ============   ============   ============   ============`

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 nine months ended September 30, 2003 and 2002 are as follows:

`Nine Months Ended September 30, 2003
                                                  ------------------------------------------------------------------------
                                                                                                 Holding
                                                                                               Company and
                                                                    Loan          Mortgage    Miscellaneous
                                                    Banking       Servicing     Investments     Operations       Total
                                                  ------------   ------------   ------------   ------------   ------------
Interest income ................................  $     31,631   $         79   $      2,393   $         54   $     34,157
Interest expense ...............................        17,210            446             62            755         18,473
                                                  ------------   ------------   ------------   ------------   ------------
Net interest income (expense) ..................        14,421           (367)         2,331           (701)        15,684
(Recapture of) provision for loan losses .......          (750)            --            158             --           (592)
                                                  ------------   ------------   ------------   ------------   ------------
Net interest income (expense) after
   (recapture of) provision for loan
   losses ......................................        15,171           (367)         2,173           (701)        16,276
Realized gains (losses) on asset sales .........           249             75            (92)            --            232
Servicing income ...............................           922         25,700             87           (958)        25,751
Other (loss) income ............................          (452)           575           (568)         1,001            556
Compensation and benefits ......................         3,333         16,231            462          1,067         21,093
Other expense ..................................         3,704          5,344            201          3,117         12,366
                                                  ------------   ------------   ------------   ------------   ------------
Income (loss) before taxes .....................         8,853          4,408            937         (4,842)         9,356
Income tax provision (benefit) .................         3,718             --            402           (409)         3,711
                                                  ------------   ------------   ------------   ------------   ------------
Net income (loss) ..............................  $      5,135   $      4,408   $        535   $     (4,433)  $      5,645
                                                  ============   ============   ============   ============   ============
Total assets ...................................  $    819,815   $     50,460   $     24,024   $    (16,020)  $    878,279
                                                  ============   ============   ============   ============   ============



                                                                   Nine Months Ended September 30, 2002
                                                  ------------------------------------------------------------------------
                                                                                                 Holding
                                                                                               Company and
                                                                    Loan          Mortgage    Miscellaneous
                                                    Banking       Servicing     Investments     Operations       Total
                                                  ------------   ------------   ------------   ------------   ------------
Interest income ................................  $     34,686   $        275   $      4,936   $        387   $     40,284
Interest expense ...............................        20,852            480            401            455         22,188
                                                  ------------   ------------   ------------   ------------   ------------
Net interest income (expense) ..................        13,834           (205)         4,535            (68)        18,096
Provision for loan losses ......................            --            166            206             --            372
                                                  ------------   ------------   ------------   ------------   ------------
Net interest income (expense) after
   provision for loan losses ...................        13,834           (371)         4,329            (68)        17,724
Realized and unrealized (losses) gains .........        (2,183)         1,904            601             --            322
Servicing income ...............................           501         19,370             93         (1,501)        18,463
Other (loss) income ............................          (255)          (456)          (788)         1,242           (257)
Compensation and benefits ......................         2,915         13,469            659          1,053         18,097
Other expense ..................................         4,004          5,606            641          6,943         17,193
                                                  ------------   ------------   ------------   ------------   ------------
Income (loss) before minority interest
  and taxes ....................................         4,978          1,372          2,935         (8,323)           962
Minority interest ..............................            --             --             --           (686)          (686)
                                                  ------------   ------------   ------------   ------------   ------------
Income (loss) before taxes .....................         4,978          1,372          2,935         (9,009)           276
Income tax provision (benefit) .................         2,066             --             --         (2,210)          (144)
                                                  ------------   ------------   ------------   ------------   ------------
Net income (loss) ..............................  $      2,912   $      1,372   $      2,935   $     (6,799)  $        420
                                                  ============   ============   ============   ============   ============
Total assets ...................................  $    789,674   $     28,865   $     26,167   $      2,179   $    846,885
                                                  ============   ============   ============   ============   ============`

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 September 30, 2003
                                                       ---------------------------------
                                                       Gross Carrying      Accumulated
                                                           Amount         Amortization
                                                       ---------------   ---------------

               Goodwill.............................   $         3,393   $          (339)
               Core deposit intangible..............             1,294              (841)
                                                       ---------------   ---------------
                  Total.............................   $         4,687   $        (1,180)
                                                       ===============   ===============`

For
the quarter and nine months ended September 30, 2003 the Company recorded
amortization expense of $65 and $194, 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 $64 (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 September 30, 2003.

The
Companys purchased mortgage servicing rights (MSRs) totaled approximately
$10.2 million at September 30, 2003, $5.4 million at December 31, 2002, and $5.0
million at September 30, 2002. Amortization expense for MSRs was $1.6 million
and $4.0 million, respectively, for the quarter and nine months ended September
30, 2003, and $0.8 million and $2.6 million, respectively, for the quarter and
nine months ended September 30, 2002. The estimated amortization expense of the
September 30, 2003 balance of MSRs for the remainder of 2003 and the five
succeeding fiscal years is $1.1 million (2003), $3.5 million (2004), $2.3
million (2005), $1.4 million (2006), $0.8 million (2007), and $0.5 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 decreased value
to iPayment of the merchants account; chargebacks and credits that
iPayment has paid and will not be able to recover from the merchant which may
total $5-7 million; mitigation costs of approximately $2 million; and punitive
damages. The Bank denies the claims, 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 court has ordered that
pursuant to the settlement the litigation should be dismissed. Management, after
consultation with legal counsel, believes that this litigation will be dismissed
in the next few months.

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 period ending after December
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.

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 NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2002

Our
consolidated net income for the quarter ended September 30, 2003 was
approximately $2.7 million, or $0.14 per basic share, compared with $0.9
million, or $0.05 per basic share, for the quarter ended September 30, 2002.
WFSGs pre-tax income was approximately $4.3 million for the third quarter
of 2003, compared with $1.0 million for the third quarter of 2002.

The
increase in income for the third quarter of 2003 over the third quarter of 2002
was due primarily to a $3.1 million increase in consolidated net servicing
income. This increase primarily reflects the continued growth of our loan
servicing operations. Additionally, servicing income for the third quarter of
2003 includes a $1.3 million increase which the Company recorded pursuant to the
adjustment and retroactive application of the terms of certain servicing
contracts. Also, the results for the third quarter of 2002 included $2.2 million
in impairment write-downs related to two interest-only mortgage-backed
securities (I/Os) at our banking subsidiary, with no such charges in the 2003
period. Partially offsetting these gains was a $1.4 million decrease in net
interest income (primarily at Wilshire Funding Corporation, our mortgage
investment subsidiary) and a $1.2 million decline in gains on sales of
investment securities as compared with the third quarter of 2002. Our total
consolidated operating expenses declined by approximately $0.2 million as the
results for the third quarter of 2002 included $0.9 million of expenses and
charges related to the relocation of our corporate headquarters and loan
servicing operations to Beaverton, Oregon. However, we experienced a $0.7
million increase in compensation costs due to the growth of our loan servicing
operations and a $0.3 million increase in legal expenses.

For
the nine-month period ended September 30, 2003, our net income was approximately
$5.6 million, or $0.31 per basic share, compared with $0.4 million, or $0.02 per
basic share, for the nine months ended September 30, 2002. Our pre-tax income
was approximately $9.4 million for the nine months ended September 30, 2003,
compared with $0.3 million for the corresponding 2002 period.

Our
results for the nine months ended September 30, 2003 versus the comparable 2002
period reflect a $7.3 million increase in net servicing income, which includes
the $1.3 million additional servicing income recorded in the third quarter, as
discussed above. In addition, we recaptured $0.6 million of loan loss reserves
in the first three quarters of 2003, versus incurring a loan loss provision of
$0.4 million for the comparable 2002 period, for a net improvement of $1.0
million. The results for the first three quarters of 2002 also were adversely
impacted by $3.6 million of impairment charges related to the I/O securities
cited above. These increases in income for 2003 were partially offset by a $2.4
million decline in net interest income (primarily at Wilshire Funding
Corporation) and a $1.2 million decrease in gains on sales of investment
securities as compared with the first three quarters of 2002. Our consolidated
operating expenses for the nine months ended September 30, 2003 declined by $1.8
million compared with the corresponding 2002 period. The decrease in operating
expenses 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 the Companys
1999 restructuring. The absence of such expenses in the current year was
partially offset by a $3.0 million increase in compensation expense, primarily
at our loan servicing subsidiary.

16

---

We
continue to incur legal expenses on behalf of some of our former officers in
connection with the above-described litigation. Such costs totaled approximately
$0.5 million and $1.8 million, respectively, for the quarter and nine months
ended September 30, 2003, compared with $0.4 million and $1.3 million for
the corresponding 2002 periods.

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

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

`Quarter Ended September 30,                Nine Months Ended September 30,
                                     ------------------------------------------   ------------------------------------------
                                                                     Increase                                     Increase
                                         2003           2002        (Decrease)        2003           2002        (Decrease)
                                     ------------   ------------   ------------   ------------   ------------   ------------
Interest income ...................  $     10,202   $     11,600         (1,398)  $     31,631   $     34,686   $     (3,055)
Interest expense ..................         5,343          6,856         (1,513)        17,210         20,852         (3,642)
                                     ------------   ------------   ------------   ------------   ------------   ------------
Net interest income ...............         4,859          4,744            115         14,421         13,834            587
Recapture of loan losses ..........            --             --             --           (750)            --           (750)
                                     ------------   ------------   ------------   ------------   ------------   ------------
Net interest income after
  recapture of loan losses ........         4,859          4,744            115         15,171         13,834          1,337
Realized and unrealized gains
  (losses) ........................           249           (748)           997            249         (2,183)         2,432
Servicing income ..................           419            130            289            922            501            421
Other loss ........................          (214)           (90)          (124)          (452)          (255)          (197)
Compensation and benefits .........         1,058          1,035             23          3,333          2,915            418
Other expense .....................         1,159          1,304           (145)         3,704          4,004           (300)
                                     ------------   ------------   ------------   ------------   ------------   ------------
Income before taxes ...............  $      3,096   $      1,697   $      1,399   $      8,853   $      4,978   $      3,875
                                     ============   ============   ============   ============   ============   ============`

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 September 30, 2003 and 2002.

`Quarter Ended September 30, 2003     Quarter Ended September 30, 2002
                                                     ---------------------------------    ---------------------------------
                                                      Average               Annualized     Average               Annualized
                                                      Balance    Interest   Yield/Rate     Balance    Interest   Yield/Rate
                                                     ----------  ---------  ----------    ----------  ---------  ----------
     Interest-Earning Assets:
     Federal funds and short-term investments......  $   24,421  $      78        1.26%   $   16,134  $      75        1.82%
     Mortgage-backed and other securities..........     235,204      1,932        3.29       258,742      3,201        4.95
     Loans ........................................     503,432      8,192        6.51       471,399      8,324        7.06
                                                     ----------  ---------  ----------    ----------  ---------  ----------
        Total interest-earning assets..............  $  763,057  $  10,202        5.23%   $  746,275  $  11,600        6.08%
                                                     ----------  ---------  ----------    ----------  ---------  ----------

     Interest-Bearing Liabilities:
     Interest-bearing deposits.....................  $  377,265  $   2,574        2.71%   $  418,606  $   3,810        3.61%
     Borrowings....................................     311,937      2,769        3.52       262,256      3,046        4.61
                                                     ----------  ---------  ----------    ----------  ---------  ----------
        Total interest-bearing liabilities.........  $  689,202  $   5,343        3.07%   $  680,862  $   6,856        3.99%
                                                     ----------  ---------  ----------    ----------  ---------  ----------

     Net interest income...........................              $   4,859                            $   4,744
                                                                 =========                            =========
     Net interest spread...........................                               2.16%                                2.09%
     Net interest margin...........................                               2.53%                                2.52%`

17

---

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

`Nine Months Ended September 30, 2003  Nine Months Ended September 30, 2002
                                                   ------------------------------------  ------------------------------------
                                                      Average               Annualized     Average               Annualized
                                                      Balance    Interest   Yield/Rate     Balance    Interest   Yield/Rate
                                                     ----------  ---------  ----------    ----------  ---------  ----------
     Interest-Earning Assets:
     Federal funds and short-term investments......  $   17,824  $     173        1.28%   $   23,782  $     338        1.87%
     Mortgage-backed and other securities..........     249,241      7,076        3.79       217,380      8,117        4.98
     Loans ........................................     491,722     24,382        6.61       487,812     26,231        7.17
                                                     ----------  ---------  ----------    ----------  ---------  ----------
        Total interest-earning assets..............  $  758,787  $  31,631        5.50%   $  728,974  $  34,686        6.28%
                                                     ----------  ---------  ----------    ----------  ---------  ----------

     Interest-Bearing Liabilities:
     Interest-bearing deposits.....................  $  378,080  $   8,563        3.03%   $  422,587  $  12,160        3.85%
     Borrowings....................................     307,527      8,647        3.76       239,876      8,692        4.85
                                                     ----------  ---------  ----------    ----------  ---------  ----------
        Total interest-bearing liabilities.........  $  685,607  $  17,210        3.36%   $  662,463  $  20,852        4.21%
                                                     ----------  ---------  ----------    ----------  ---------  ----------

     Net interest income...........................              $  14,421                            $  13,834
                                                                 =========                            =========
     Net interest spread...........................                               2.14%                                2.07%
     Net interest margin...........................                               2.54%                                2.54%`

The
Banks net interest income was approximately $4.9 million for the quarter
ended September 30, 2003, compared with $4.7 million for the quarter ended
September 30, 2002. For the nine months ended September 30, 2003, the
Banks net interest income was approximately $14.4 million, compared with
$13.8 million for the nine months ended September 30, 2002.

The
continuing low 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 7 basis points, from
2.09% to 2.16%, from the third quarter of 2002 to the third quarter of 2003. The
yield on the Banks average interest-earning assets declined by 85 basis
points, from 6.08% to 5.23%, from the third quarter of 2002 to the third quarter
of 2003. However, this drop in yield was exceeded by a 92-basis point decline,
from 3.99% to 3.07%, in the Banks cost of interest-bearing liabilities for
the same periods.

For
the nine-month periods ended September 30, the interest spread increased by 7
basis points, from 2.07% for the 2002 period to 2.14% for the 2003 period. The
Banks yield on interest-earning assets declined from 6.28% for the nine
months ended September 30, 2002 to 5.50% for the nine months ended September 30,
2003, and the Banks average cost of funds reflected a slightly larger
decrease, from 4.21% to 3.36%, for the same periods.

The
Banks interest income on mortgage-backed and other investment securities
decreased by approximately $1.3 million from the third quarter of 2002 to the
third quarter of 2003, due to both a 166-basis point drop in yield, from 4.95%
to 3.29%, and a $23.5 million decline in the average investment balance. For the
nine months ended September 30, 2003, interest income on mortgage-backed and
other investment securities was $7.1 million, a decrease of $1.0 million from
the corresponding 2002 period. The slightly smaller decrease in income for the
nine-month period was due to a 119-basis point drop in yield, from 4.98% to
3.79%, partially offset by a $31.9 million increase in the average asset balance
for the current year to date. Utilizing new debt facilities, the Bank purchased
approximately $295 million in AAA-rated mortgage-backed and other investment
securities in 2002 and an additional $102 million in the first nine months of
2003.

The
Banks interest income on loans was approximately $8.2 million for the
quarter ended September 30, 2003, compared with $8.3 million for the quarter
ended September 30, 2002. For the nine months ended September 30, 2003, interest
on loans was approximately $24.4 million, compared with $26.2 million for the
nine months ended September 30, 2002. These decreases were due to declines in
the yield on loans of 55 and 56 basis points, respectively, from the quarter and
nine months ended September 30, 2002 to the corresponding 2003 periods as a
result of the continuing decline in interest rates. However, these declines in
yield were partially offset by increases in average balances, particularly in
the third quarter of 2003. The Bank originated and purchased a total of $176
million in new loans during the first three quarters of 2003, including $97
million in the third quarter, resulting in a higher earning volume despite
continuing significant principal repayments.

18

---

FBBHs
interest expense on deposits decreased by approximately $1.2 million from the
third quarter of 2002 to the third quarter of 2003 and by $3.6 million from the
nine months ended September 30, 2002 to the nine months ended September 30,
2003. These decreases were the result of declines in both the average balance
and average rates paid for the quarters and nine-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 $41.3
million and $44.5 million, respectively, for the quarter and nine months ended
September 30, 2003 compared with the corresponding 2002 periods. The average
rate paid on deposits decreased by 90 basis points and 82 basis points over the
same periods.

The
Banks interest expense on borrowings was approximately $2.8 million for
the third quarter of 2003, compared with approximately $3.0 million for the
third quarter of 2002. For the nine months ended September 30, 2003, interest
expense on borrowings was $8.6 million, a slight decrease from the $8.7 million
for the corresponding 2002 period. The decreases in 2003 were due to a 109-basis
point decline in the average cost for both the three- and nine-month periods
ended September 30, 2003 as compared with the corresponding 2002 periods. The
decline in cost was partially offset by the higher borrowing balance in the 2003
periods, as the Bank obtained additional FHLB advances to finance its
earning-asset acquisitions.

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 nine months ended
September 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 $0.2 million
for the quarter and nine months ended September 30, 2003, as a result of sales
of $9.2 million of government agency mortgage-backed securities.

For
the quarter and nine months ended September 30, 2002, the Bank recorded net
losses of $0.7 million and $2.2 million, respectively, on its portfolio
mortgage-backed securities. These losses were due primarily to write-downs
related to interest-only mortgage-backed securities (I/Os) totaling $2.2 million
and $3.6 million for the respective 2002 periods, partially offset by realized
gains on sales of securities. The I/Os 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 nine-month period ended September 30, 2002, and not as a direct reduction to
stockholders equity. The Bank disposed of the I/Os in the third and fourth
quarters of 2002.

Compensation and Benefits
        The
Banks compensation and benefits totaled approximately $1.1 million for the
third quarter of 2003, compared with $1.0 million for the third quarter of 2002.
For the nine months ended September 30, 2003, compensation and benefits totaled
$3.3 million, compared with $2.9 million for the first nine 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
September 30, 2003, compared with $1.3 million for the quarter ended September
30, 2002. For the nine months ended September 30, 2003, other expenses totaled
$3.7 million, compared with $4.0 million for the first nine months of 2002. The
Banks occupancy expenses have declined from the prior year due to the
sublease of excess office space after the sale of its Bankcard division, and
data processing expenses have dropped substantially through the Banks
efforts to control overhead. In addition, depreciation expense has declined as
certain equipment and leasehold improvements have become fully depreciated.
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).

19

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

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

`September 30,  December 31,
                                                                            2003           2002
                                                                        ------------   ------------
                                                                           (Dollars in thousands)
ASSETS:
Cash and cash equivalents ............................................  $     20,989   $     10,003
Mortgage-backed securities available for sale, at fair value .........       201,862        259,707
Other investment securities available for sale, at fair value ........        22,222         11,962
Investment securities held to maturity, at amortized cost ............         9,594             --
Loans, net ...........................................................       537,643        486,821
Real estate owned, net ...............................................           473          1,040
Other assets .........................................................        27,032         24,545
                                                                        ------------   ------------
    Total assets .....................................................  $    819,815   $    794,078
                                                                        ============   ============

LIABILITIES:
Deposits .............................................................  $    401,198   $    395,781
Short-term borrowings ................................................        88,000         91,870
FHLB advances ........................................................       233,337        216,000
Other liabilities ....................................................        17,838         13,795
                                                                        ------------   ------------
    Total liabilities ................................................       740,373        717,446

NET WORTH ............................................................        79,442         76,632
                                                                        ------------   ------------
    Total liabilities and net worth ..................................  $    819,815   $    794,078
                                                                        ============   ============`

Mortgage-Backed
and Other Securities Available for Sale. The Banks total portfolio
of mortgage-backed securities (MBS) available for sale decreased by $57.8
million over the nine months ended September 30, 2003. This decrease was
primarily due to $124.4 million in principal repayments and $3.9 million in
unrealized losses, as the declining interest-rate environment continued to
trigger significant paydowns on the loans underlying the securities in the
portfolio. In addition, the Bank sold approximately $9.2 million of agency MBS
in the third quarter. These portfolio decreases were partially offset by $81.7
million in purchases of AAA-rated and agency MBS during the first three
quarters, including $53.9 million in the third quarter.

The
Banks portfolio of treasury and other investment securities available for
sale increased by approximately $10.3 million during the nine months ended
September 30, 2003. The Bank purchased approximately $20.5 million of such
securities in the first three quarters, and transferred $9.6 million from
securities available for sale to its portfolio of investment securities held to
maturity.

Loans,
net. The Banks portfolio of loans, net of discounts and
allowances, increased by approximately $50.8 million for the nine months ended
September 30, 2003. In the current year to date, the Bank has originated $108.5
million of predominantly commercial mortgage loans and purchased an additional
$67.6 million of multi-family and commercial loans. These additions to the
portfolio were partially offset by $120.7 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 $0.6 million in the first nine months of 2003, as a
result of sales and write-downs of properties totaling $1.2 million, partially
offset by $0.7 million in new acquisitions through foreclosures.

Deposits.  The  Bank's  deposits  increased  by  approximately  $5.4  million  during  the nine  months  ended
September 30, 2003. This increase was due to a $46 million increase in the third quarter,  consisting  primarily of
new wholesale and brokered  certificates  of deposit.  As part of an ongoing  strategy to reduce its cost of funds,
the Bank generally seeks to utilize  lower-costing  debt  facilities as its primary  funding source,  and in recent
periods has permitted the run-off of higher-rate  certificates  of deposit.  However,  due to authorized  limits on
its FHLB  advance  borrowings,  the Bank from  time to time  must  raise new CDs to  finance  its  acquisitions  of
interest-earning assets.

20

---

Short-Term
Borrowings. The Banks short-term borrowings decreased by
approximately $3.9 million during the nine months ended September 30, 2003. This
decrease was due to repayments of $131.9 million of repurchase agreements,
partially offset by repurchase advances and renewals totaling $128 million.
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 $17.3 million for
the first nine months of 2003, as a result of $56.3 million of new advances
during the period, partially offset by maturities of $39.0 million of advances.
The Banks FHLB advances are currently limited to 35% of its total assets
as of the previous quarter-end.

Net
Worth. The Banks total net worth increased by approximately
$2.8 million during the nine months ended September 30, 2003. The Bank earned
net income for the period of $5.1 million, which was partially offset by a
decline in after-tax unrealized gains of approximately $2.3 million on its
portfolio of available-for-sale securities and hedging instruments.

## 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
September 30, 2003.

# 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).........................................  $  82,457     13.8%  $  47,766    =>8.0%  $  59,708    =>10.0%
Tier 1 Capital to Risk-Weighted Assets...............     75,991     12.7%     Not Applicable       35,825    => 6.0%
Core Capital to Tangible Assets......................     75,991      9.3%     32,727    =>4.0%     40,908    => 5.0%
Tangible Capital to Tangible Assets..................     75,991      9.3%     12,273    =>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
September 30, 2003 the Banks cash balances totaled approximately $21.0
million, compared with $10.0 million at December 31, 2002. The increase in cash
was due primarily to principal repayments of loans and mortgage-backed
securities and proceeds from new deposits and borrowings, partially offset by
originations and purchases of new loans, purchases of mortgage-backed and other
investment securities, and repayments of debt facilities.

21

---

At
September 30, 2003, the Bank had approximately $339.2 million of certificates of
deposit. Scheduled maturities of certificates of deposit during the 12 months
ending September 30, 2004 and thereafter amounted to approximately $294.0
million and $45.2 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 nine-month periods ended September 30, 2003 and 2002 (dollars in
thousands).

`Quarter Ended September 30,                Nine Months Ended September 30,
                                ------------------------------------------   ------------------------------------------
                                                                Increase                                     Increase
                                    2003           2002        (Decrease)        2003           2002        (Decrease)
                                ------------   ------------   ------------   ------------   ------------   ------------
Servicing income .............  $      9,889   $      7,208   $      2,681   $     25,700   $     19,370   $      6,330
Interest income ..............            17             32            (15)            79            275           (196)
Realized gains on sales ......            --             --             --             75          1,904         (1,829)
Other income (loss) ..........           138             42             96            575           (456)         1,031
                                ------------   ------------   ------------   ------------   ------------   ------------
   Total income ..............        10,044          7,282          2,762         26,429         21,093          5,336
                                ------------   ------------   ------------   ------------   ------------   ------------
Interest expense .............           183            143             40            446            480            (34)
Provision for loan losses ....            --             --             --             --            166           (166)
Compensation and benefits ....         5,665          4,672            993         16,231         13,469          2,762
Other expenses ...............         1,715          1,345            370          5,344          5,606           (262)
                                ------------   ------------   ------------   ------------   ------------   ------------
   Total expenses ............         7,563          6,160          1,403         22,021         19,721          2,300
                                ------------   ------------   ------------   ------------   ------------   ------------
Income before taxes ..........  $      2,481   $      1,122   $      1,359   $      4,408   $      1,372   $      3,036
                                ============   ============   ============   ============   ============   ============`

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

`Quarter Ended                Nine Months Ended
                                                               September  30,                 September  30,
                                                         ---------------------------   ---------------------------
                                                             2003           2002           2003           2002
                                                         ------------   ------------   ------------   ------------
                                                                          (Dollars in thousands)
Servicing revenue .....................................  $      8,628   $      6,931   $     23,330   $     18,982
Ancillary fees ........................................         2,817          1,573          7,495          4,536
Amortization of mortgage servicing rights .............        (1,452)          (562)        (3,506)        (1,934)
Valuation adjustment for mortgage servicing rights ....           (79)           (76)            (2)          (352)
Custodial float .......................................           267            472            855          1,152
Unreimbursed servicing expenses .......................          (388)          (228)          (813)          (488)
Prepayment interest shortfall expense .................            96           (902)        (1,659)        (2,526)
                                                         ------------   ------------   ------------   ------------
Total servicing income ................................  $      9,889   $      7,208   $     25,700   $     19,370
                                                         ============   ============   ============   ============`

22

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WCCs
total servicing income for the quarter ended September 30, 2003 was
approximately $9.9 million, compared with $7.2 million for the quarter ended
September 30, 2002. For the nine months ended September 30, 2003, servicing
income totaled $25.7 million, compared with $19.4 million for the nine months
ended September 30, 2002. The increase over the prior periods was due primarily
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 $0.8 billion in the
third quarter of 2003 and by $1.9 billion since September 30, 2002. This growth
was achieved despite significant repayments precipitated by the decline in
interest rates. As a result of this growth, WCCs total servicing revenues
and ancillary fees (including late charges) increased by approximately 31% from
the first nine months of 2002 to the first nine months of 2003. In October 2003
WCC contracted to service an additional $0.8 billion unpaid principal balance of
loans and completed the transfer of this new servicing.

The
increase in WCCs servicing income for the 2003 periods also reflects an
adjustment of $1.3 million which was recorded in September 2003. This adjustment
represents the reimbursement of deposits of interest made by WCC for prepaid
serviced loans in excess of the amount actually owed by WCC. WCC had previously
deposited these funds into custodial accounts in compliance with the related
servicing agreements. However, the terms of the servicing agreements were
subsequently clarified and retroactively applied, resulting in WCCs
recovery of these excess funds. The adjustment is reflected as a reduction to
prepayment interest shortfall expense in the above table for the
quarter and nine months ended September 30, 2003.

Net
servicing income has been negatively impacted due to the prevailing low
interest-rate environment, which has triggered extremely rapid prepayments of
loans comprising our serviced asset base. These accelerated prepayments have
resulted in significant amortization expense on our mortgage servicing rights
(MSRs) over the past three years (though the increases from 2002 to 2003 shown
above are attributable also to the larger portfolio volume). In addition, as a
result of the continuing low interest rates, float income earned on deposit
balances has declined from the prior year to the current.

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

`September 30,  December 31,   September 30,
                                                        2003           2002           2002
                                                    ------------   ------------   ------------
                                                              (Dollars in thousands)
         Single-family residential ..............   $  5,455,444   $  3,668,401   $  3,585,147
         Multi-family residential ...............        110,120        121,908        119,269
         Commercial real estate .................        277,964        218,976        223,040
         Consumer and other .....................         69,991         78,880         77,264
                                                    ------------   ------------   ------------
              Total (1) .........................   $  5,913,519   $  4,088,165   $  4,004,720
                                                    ============   ============   ============`

(1)  WCC's  servicing  portfolio at September  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 for the quarter and nine months ended September 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 2002. Proceeds from these sales were used to pay
down certain debt facilities, resulting in a corresponding decrease in interest
expense for the current year to date. The slight increase in interest expense
from the third quarter of 2002 to the third quarter of 2003 was due primarily to
additional borrowings in the 2003 period to fund WCCs advances on new
servicing arrangements.

Realized Gains on Sales
        WCCs
gains on sales totaled $75 thousand for the nine months ended September 30,
2003, compared with $1.9 million for the nine months ended September 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.

23

---

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

`Quarter Ended               Nine Months Ended
                                                           September 30,                 September 30,
                                                    ---------------------------   ---------------------------
                                                        2003           2002           2003           2002
                                                    ------------   ------------   ------------   ------------
                                                                      (Dollars in thousands)
Other income (loss):
Real estate owned, net ...........................  $         --   $         --   $         --   $        (56)
Investor participation interest ..................            (2)            (6)            (5)          (897)
Other, net .......................................           140             48            580            497
                                                    ------------   ------------   ------------   ------------
    Total other income (loss) ....................  $        138   $         42   $        575   $       (456)
                                                    ============   ============   ============   ============`

The
increase in WCCs total other income for 2003 was a result of the $0.9
million of Investor participation interest expense recorded for the
nine months ended September 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 primarily to a 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 $5.7 million for the
quarter ended September 30, 2003, compared with $4.7 million for the quarter
ended September 30, 2002. For the nine months ended September 30, 2003,
compensation expense was $16.2 million, compared with $13.5 million for the nine
months ended September 30, 2002. The increase in the 2003 periods was due
primarily to a continuing increase in WCCs employee head count as a result
of the growth 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 third quarter of 2003 totaled approximately $1.7 million,
compared with $1.3 million for the third quarter of 2002. The increase was due
primarily to a reversal of $0.5 million of legal expenses in the third quarter
of 2002, pursuant to an analysis of the legal accrual and estimated future
expenses.

For
the nine months ended September 30, 2003, WCCs other expenses decreased by
approximately $0.3 million compared with the nine months ended September 30,
2002. The decrease was due primarily to a $0.2 million decline in legal expenses
for the year to date 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. The high legal expenses in early 2002 were partially
offset by the $0.5 million reduction in the legal accrual in the third quarter
of 2002 as discussed above.

## Changes in
Financial Condition  Wilshire Credit Corporation

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

`September 30,  December 31,
                                                                       2003           2002
                                                                   ------------   ------------
                                                                      (Dollars in thousands)
    ASSETS:
    Cash and cash equivalents ..................................   $         27   $      1,598
    Discounted loans, net ......................................            543            801
    Servicer advance receivables, net ..........................         29,892         19,922
    Purchased mortgage servicing rights, net ...................          9,830          4,692
    Other assets ...............................................         10,168          5,807
                                                                   ------------   ------------
        Total assets ...........................................   $     50,460   $     32,820
                                                                   ============   ============

    LIABILITIES:
    Short-term borrowings ......................................   $      8,000   $         --
    Investment financing .......................................          4,609          2,151
    Other liabilities ..........................................          9,662          8,147
                                                                   ------------   ------------
         Total liabilities .....................................         22,271         10,298

    NET WORTH ..................................................         28,189         22,522
                                                                   ------------   ------------
        Total liabilities and net worth ........................   $     50,460   $     32,820
                                                                   ============   ============`

24

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Discounted
Loans, net. WCCs discounted loans, net decreased by approximately
$0.3 million from December 31, 2002 to September 30, 2003 primarily as a result
of principal payments received during the current year.

Servicer
Advance Receivables, net. Servicer advance receivables, net
increased by approximately $10.0 million during the nine months ended September
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 $5.1 million for the nine months ended
September 30, 2003. WCC purchased approximately $8.6 million of MSRs associated
with new servicing portfolio acquisitions in the first nine months of 2003.
These purchases were partially offset by $3.5 million of amortization of MSRs
for the year to date.

Short-Term
Borrowings and Investment Financing. WCCs short-term borrowings
and investment financing increased by an aggregate of $10.5 million for the nine
months ended September 30, 2003. WCC utilized its commercial bank lines of
credit to fund new servicer advances and its acquisitions of servicing rights
during the first three quarters.

## Liquidity and
Capital Resources

WCCs
sources of cash flow include primarily servicing revenue 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 WCCs operating needs.

At
September 30, 2003, WCCs liquidity (including cash and unused borrowings
under our credit facilities) totaled $9.4 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 for the near future. We will
attempt to increase our line of credit if it appears that additional liquidity
is needed.

Adequate
credit facilities and other sources of funding are essential to the continuation
of WCCs ability to purchase servicing assets, secure new contractual
servicing agreements, and to meet our advancing obligations under the servicing
agreements. Our 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.

25

---

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

`Quarter Ended September 30,                Nine Months Ended September 30,
                                          ------------------------------------------   ------------------------------------------
                                                                          Increase                                     Increase
                                              2003           2002        (Decrease)        2003           2002        (Decrease)
                                          ------------   ------------   ------------   ------------   ------------   ------------
Interest income ........................  $        623   $      2,058   $     (1,435)  $      2,393   $      4,936   $     (2,543)
Realized (losses) gains on sales .......           (97)            25           (122)           (92)           601           (693)
Other loss .............................          (248)          (187)           (61)          (481)          (695)           214
                                          ------------   ------------   ------------   ------------   ------------   ------------
   Total income ........................           278          1,896         (1,618)         1,820          4,842         (3,022)
                                          ------------   ------------   ------------   ------------   ------------   ------------
Interest expense .......................            14             63            (49)            62            401           (339)
Provision for loan losses ..............            78            136            (58)           158            206            (48)
Compensation expense ...................           106            224           (118)           462            659           (197)
Other expenses .........................            13            221           (208)           201            641           (440)
                                          ------------   ------------   ------------   ------------   ------------   ------------
   Total expenses ......................           211            644           (433)           883          1,907         (1,024)
                                          ------------   ------------   ------------   ------------   ------------   ------------
Income before taxes ....................  $         67   $      1,252   $     (1,185)  $        937   $      2,935   $     (1,998)
                                          ============   ============   ============   ============   ============   ============`

Interest Income and Interest Expense
        WFCs
interest income was approximately $0.6 million for the quarter ended September
30, 2003, compared with $2.1 million for the quarter ended September 30, 2002.
WFCs interest on mortgage-backed securities declined by approximately $0.9
million from the third quarter of 2002 to the third quarter of 2003, due to the
runoff of WFCs MBS portfolio as a result of prepayments on the loans
underlying the 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. In addition, interest on loans decreased by
approximately $0.5 million from the third quarter of 2002 to the third quarter
of 2003, as a result of a decline in WFCs portfolio of discounted loans
due to principal repayments.

For
the nine months ended September 30, 2003, WFCs interest income was
approximately $2.4 million, compared with $4.9 million for the nine months ended
September 30, 2002. The decrease in 2003 was 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 and also due to principal repayments. 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. WFCs interest on mortgage-backed securities
declined by approximately $0.4 million from the first nine months of 2002 to the
corresponding 2003 period, due to the runoff of WFCs MBS portfolio
precipitated by underlying loan prepayments.

WFCs
interest expense decreased slightly from the third quarter of 2002 to the third
quarter of 2003 and by $0.3 million from the nine months ended September 30,
2002 to the nine months ended September 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 $0.1 million and $0.7 million,
respectively, from the quarter and nine-month periods ended September 30, 2002
to the corresponding 2003 periods. The larger gains in 2002 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.

26

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

`Quarter Ended               Nine Months Ended
                                                           September 30,                 September 30,
                                                    ---------------------------   ---------------------------
                                                        2003           2002           2003           2002
                                                    ------------   ------------   ------------   ------------
                                                                     (Dollars in thousands)
Other loss:
Real estate owned, net ...........................  $        (43)  $        (33)  $        (57)  $        (82)
Investor participation interest ..................           (29)           (14)          (154)          (668)
Other, net .......................................          (176)          (140)          (270)            55
                                                    ------------   ------------   ------------   ------------
    Total other loss .............................  $       (248)  $       (187)  $       (481)  $       (695)
                                                    ============   ============   ============   ============`

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 from
the third quarter of 2002 to the third quarter of 2003 and by $0.2 million from
the nine months ended September 30, 2002 to the nine months ended September 30,
2003. 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 $0.2 million from the third
quarter of 2002 to the third quarter of 2003 and by $0.4 million from the nine
months ended September 30, 2002 to the nine months ended September 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 as of September 30,
2003 and December 31, 2002:

`September 30,  December 31,
                                                                            2003           2002
                                                                        ------------   ------------
                                                                           (Dollars in thousands)
ASSETS:
Cash and cash equivalents ............................................  $          8   $      1,172
Mortgage-backed securities available for sale, at fair value .........         1,019          1,828
Discounted loans, net ................................................         4,518          5,829
Real estate owned, net ...............................................             0             61
Intercompany receivables .............................................        17,120         16,354
Other assets .........................................................         1,359          1,851
                                                                        ------------   ------------
    Total assets .....................................................  $     24,024   $     27,095
                                                                        ============   ============

LIABILITIES:
Investment financing .................................................  $        749   $      2,133
Other liabilities ....................................................         2,203          4,150
                                                                        ------------   ------------
     Total liabilities ...............................................         2,952          6,283

NET WORTH ............................................................        21,072         20,812
                                                                        ------------   ------------
    Total liabilities and net worth ..................................  $     24,024   $     27,095
                                                                        ============   ============`

Mortgage-Backed
Securities Available for Sale. WFCs portfolio of mortgage-backed
securities available for sale decreased by approximately $0.8 million during the
nine months ended September 30, 2003 as a result of continuing paydowns on the
underlying loan portfolio. WFC received $1.5 million in principal and interest
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
$1.3 million from December 31, 2002 to September 30, 2003, primarily as a result
of $1.2 million of principal repayments and a loan loss provision of
approximately $0.2 million.

27

---

Intercompany
Receivables.Intercompany receivables increased by approximately $0.8
million from year-end 2002 to September 30, 2003. This increase was primarily
due to the ongoing transfer of funds from WFC to WFSG to meet the holding
companys operating costs, partially offset by WFCs settlement of its
tax obligation to WFSG for prior tax years.

Investment
Financing. WFCs investment financing decreased by approximately
$1.4 million during the nine months ended September 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 WFCs operating needs. 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 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 September 30, 2003 WFC held $1.0 million of such
mortgage-backed securities.

## 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, and in October 2003 the Bank remitted $0.8
million for its 2002 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.

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

28

---

 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 September 30, 2003, represented more than 25% 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 September 30, 2003 we had a total deferred tax asset of
approximately $53.8 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 September 30, 2003, have recorded a
valuation allowance of approximately $47.8 million. The net deferred tax asset,
$6.0 million, is included in prepaid expenses and other assets in our
consolidated statement of financial condition as of September 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.

29

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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.

30

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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 September 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.............................   $  103,239    $ (16,366)      (14)%      12.07%       (126)bp
         +200bp.............................      110,131       (9,474)       (8)       12.65         (68)bp
         +100bp.............................      116,853       (2,752)       (2)       13.19         (14)bp
            0bp.............................      119,605           --        --        13.33          --
         -100bp.............................      114,744       (4,861)       (4)       12.73         (60)bp
         -200bp.............................      110,250       (9,355)       (8)       12.19        (114)bp
         -300bp.............................      109,159      (10,446)       (9)       12.03        (130)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.

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. As of the end of the period covered by 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.
|------- |  | ----------------------------------------------------

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

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

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

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

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

| |  | 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.§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 August 11, 2003, reporting the Companys operating
results for the quarter ended June 30, 2003.
| | --------------------------------------------------------------------------------------------------------------------------------

| | Current
Report on Form 8-K dated August 11, 2003, reporting that the Companys
application for listing of its common stock on the Nasdaq SmallCap Market had
been approved and that trading would commence on August 13, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Current
Report on Form 8-K dated August 12, 2003, containing the amended certification
by the Companys Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 with respect to the
Companys Report on Form 10-Q for the quarter ended June 30, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

33

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| | Current
Report on Form 8-K dated November 12, 2003, reporting the Companys
operating results for the quarter ended September 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: November 14, 2003 | By: | /s/   STEPHEN P. GLENNON   
|----------------------- | --- | ---------------------------
|                        |     | Stephen P. Glennon         
|                        |     | Chief Executive Officer and
|                        |     | Chief Financial Officer    

35

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