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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

|(Mark One)                                   |                                                                                         
|-------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                            | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the Quarterly Period Ended June 30, 2003
|OR                                          
|o                                            | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-23911

Fog Cutter Capital Group Inc.(Exact name of registrant as specified in its charter)

|Maryland(State or other jurisdiction of
incorporation or organization)                         |  | 52-2081138(IRS Employer Identification No.)
|---------------------------------------------------------------------------------------------- |  | -------------------------------------------
|1410 SW Jefferson Street
Portland, OR 97201(Address of principal executive offices) (Zip Code)
|(503) 721-6500(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 ý    No o

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

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.

|ClassCommon Stock, par value $0.0001 per share |  | Outstanding at June 30, 20038,670,200 shares
|---------------------------------------------- |  | --------------------------------------------

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FOG CUTTER CAPITAL GROUP INC.  FORM 10-Q  I N D E X

|                             |  |                                                                                       |  | Page No.
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | --------
|PART IFINANCIAL INFORMATION
|Item 1.                      |  | Interim Financial Statements (Unaudited):                                             |  |         
|                             |  | Consolidated Statements of Financial Condition                                        |  | 3       
|                             |  | Consolidated Statements of Operations                                                 |  | 4       
|                             |  | Consolidated Statement of Changes in Stockholders' Equity                             |  | 6       
|                             |  | Consolidated Statements of Cash Flows                                                 |  | 7       
|                             |  | Notes to Consolidated Financial Statements                                            |  | 8       
|Item 2.                      |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 13      
|Item 3.                      |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 25      
|Item 4.                      |  | Controls and Procedures                                                               |  | 27      
|PART IIOTHER INFORMATION   
|Item 1.                      |  | Legal Proceedings                                                                     |  | 29      
|Item 2.                      |  | Changes in Securities and Use of Proceeds                                             |  | 29      
|Item 3.                      |  | Defaults Upon Senior Securities                                                       |  | 29      
|Item 4.                      |  | Submission of Matters to a Vote of Security Holders                                   |  | 29      
|Item 5.                      |  | Other Information                                                                     |  | 29      
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                      |  | 31      
|Signatures                   |  | 32                                                                                   

2

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PART IFINANCIAL INFORMATION

ITEM 1. INTERIM FINANCIAL STATEMENTS

FOG CUTTER CAPITAL GROUP INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(dollars in thousands, except share data)

|                                     |                                                                                                                                                                                                                     | June 30                                    |   | December 31 |        
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ----------- | -------
|
|
|Assets                               |                                                                                                                                                                                                                     |                                            |   |             |        
|                                     | Cash and cash equivalents                                                                                                                                                                                           |                                            | $ | 15,727      |        
|                                     | Securities available for sale, pledged under repurchase agreements, at estimated fair value                                                                                                                         |                                            |   | 49,313      |        
|                                     | Securities available for sale, at estimated fair value                                                                                                                                                              |                                            |   | 747         |        
|                                     | Loans, net                                                                                                                                                                                                          |                                            |   | 3,474       |        
|                                     | Investments in real estate, net                                                                                                                                                                                     |                                            |   | 21,289      |        
|                                     | Loans to senior executives                                                                                                                                                                                          |                                            |   | 2,941       |        
|                                     | Investment in BEP                                                                                                                                                                                                   |                                            |   | 6,696       |        
|                                     | Other assets                                                                                                                                                                                                        |                                            |   | 3,988       |        
|                                     |                                                                                                                                                                                                                     |                                            |   |             |        
|                                     |                                                                                                                                                                                                                     | Total assets                               |   | $           | 104,175
|                                     |                                                                                                                                                                                                                     |                                            |   |             |        
|Liabilities and Stockholders' Equity |                                                                                                                                                                                                                     |                                            |   |             |        
|                                     | Liabilities:                                                                                                                                                                                                        |                                            |   |             |        
|                                     | Borrowings and notes payable                                                                                                                                                                                        |                                            | $ | 30,139      |        
|                                     | Obligations under capital leases                                                                                                                                                                                    |                                            |   | 16,554      |        
|                                     | Dividend payable                                                                                                                                                                                                    |                                            |   |            |        
|                                     | Obligation to repurchase stock                                                                                                                                                                                      |                                            |   |            |        
|                                     | Deferred income taxes                                                                                                                                                                                               |                                            |   | 5,998       |        
|                                     | Accounts payable and accrued liabilities                                                                                                                                                                            |                                            |   | 3,830       |        
|                                     |                                                                                                                                                                                                                     |                                            |   |             |        
|                                     |                                                                                                                                                                                                                     | Total liabilities                          |   |             | 56,521 
|                                     |                                                                                                                                                                                                                     |                                            |   |             |        
|                                     | Commitments and contingencies                                                                                                                                                                                       |                                            |   |             |        
|                                     | Stockholders' Equity:                                                                                                                                                                                               |                                            |   |             |        
|                                     | Preferred stock, $.0001 par value; 25,000,000 shares authorized; no shares issued and outstanding                                                                                                                   |                                            |   |            |        
|                                     | Common stock, $.0001 par value; 200,000,000 shares authorized; 11,716,100 shares issued in 2003 and 11,518,600 shares issued in 2002; 8,670,200 shares outstanding in 2003 and 9,517,460 shares outstanding in 2002 |                                            |   | 167,902     |        
|                                     | Treasury stock; 3,045,900 common shares in 2003, and 2,001,140 common shares in 2002, at cost                                                                                                                       |                                            |   | (8,017      | )      
|                                     | Common stock, subject to put options; no shares in 2003; 1,044,760 common shares in 2002                                                                                                                            |                                            |   |            |        
|                                     | Accumulated deficit                                                                                                                                                                                                 |                                            |   | (114,487    | )      
|                                     | Accumulated other comprehensive income                                                                                                                                                                              |                                            |   | 2,256       |        
|                                     |                                                                                                                                                                                                                     |                                            |   |             |        
|                                     |                                                                                                                                                                                                                     | Total stockholders' equity                 |   |             | 47,654 
|                                     |                                                                                                                                                                                                                     |                                            |   |             |        
|                                     |                                                                                                                                                                                                                     | Total liabilities and stockholders' equity |   | $           | 104,175
|                                     |                                                                                                                                                                                                                     |                                            |   |             |        

The
accompanying notes are an integral part of these consolidated financial statements.

3

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FOG CUTTER CAPITAL GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited) (dollars in thousands, except share data)

|                                             |                                      | Quarter Ended
June 30, |                       | Six Months Ended
June 30, |                             
|-------------------------------------------- | ------------------------------------ | ---------------------- | --------------------- | ------------------------- | ----------------------------
|
|Net Interest Income:                         |                                      |                        |                       |                           |                             
|                                             | Loans                                |                        | $                     | 179                       |                             
|                                             | Loans to senior executives           |                        |                       | 55                        |                             
|                                             | Securities                           |                        |                       | 699                       |                             
|                                             | Other investments                    |                        |                       | 36                        |                             
|                                             |                                      |                        |                       |                           |                             
|                                             |                                      |                        | Total interest income |                           |                             
|                                             | Interest expense                     |                        |                       | 210                       |                             
|                                             |                                      |                        |                       |                           |                             
|                                             |                                      |                        | Net interest income   |                           |                             
|                                             |                                      |                        |                       |                           |                             
|Real Estate Operations:                      |                                      |                        |                       |                           |                             
|                                             | Operating income                     |                        |                       | 959                       |                             
|                                             | Gain on sale of real estate          |                        |                       | 281                       |                             
|                                             | Operating expense                    |                        |                       | (528                      | )                           
|                                             | Interest expense                     |                        |                       | (360                      | )                           
|                                             | Depreciation                         |                        |                       | (153                      | )                           
|                                             |                                      |                        |                       |                           |                             
|                                             |                                      |                        |                       |                           | Total real estate operations
|                                             |                                      |                        |                       |                           |                             
|Other Operating Income:                      |                                      |                        |                       |                           |                             
|                                             | Gain on sale of loans and securities |                        |                       | 4,595                     |                             
|                                             | Gain on sale of WFSG                 |                        |                       |                          |                             
|                                             | Equity in income of equity investees |                        |                       | 1,878                     |                             
|                                             | Loan origination fees                |                        |                       | 1,453                     |                             
|                                             | Other revenue                        |                        |                       | 400                       |                             
|                                             |                                      |                        |                       |                           |                             
|                                             |                                      |                        |                       |                           | Total other operating income
|                                             |                                      |                        |                       |                           |                             
|Operating Expenses:                          |                                      |                        |                       |                           |                             
|                                             | Compensation and employee benefits   |                        |                       | 3,615                     |                             
|                                             | Professional fees                    |                        |                       | 596                       |                             
|                                             | Fees paid to related parties         |                        |                       | 156                       |                             
|                                             | Other                                |                        |                       | 862                       |                             
|                                             |                                      |                        |                       |                           |                             
|                                             |                                      |                        |                       |                           | Total operating expenses    
|                                             |                                      |                        |                       |                           |                             
|Net income before provision for income taxes |                                      |                        | 4,055                 |                           |                             
|Provision for income taxes                   |                                      |                        | 1,469                 |                           |                             
|                                             |                                      |                        |                       |                           |                             
|Net Income                                   |                                      | $                      | 2,586                 |                           | $                           
|                                             |                                      |                        |                       |                           |                             

The
accompanying notes are an integral part of these consolidated financial statements.

4

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FOG CUTTER CAPITAL GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Unaudited)(dollars in thousands, except share data)

|                                            |  | Quarter Ended
June 30, |           | Six Months Ended
June 30,
|------------------------------------------- |  | ---------------------- | --------- | -------------------------
|
|Basic net income per share                  |  | $                      | 0.30      |                          
|Basic weighted average shares outstanding   |  |                        | 8,603,450 |                          
|Diluted net income per share                |  | $                      | 0.28      |                          
|Diluted weighted average shares outstanding |  |                        | 9,261,450 |                          
|Dividends declared per share                |  | $                      | 0.13      |                          

5

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FOG CUTTER CAPITAL GROUP INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(Unaudited)(dollars in thousands)

|                                                                                                            |  | Common Stock |   | Treasury Stock |         |  |           |  |   |        |   |   |       
|----------------------------------------------------------------------------------------------------------- |  | ------------ | - | -------------- | ------- |  | --------- |  | - | ------ | - | - | ------
|
|
|Balance at January 1, 2003                                                                                  |  | 9,517,460    |   | $              | 167,027 |  | 2,001,140 |  | $ | (4,886 | ) | $ | (3,131
|Comprehensive income:                                                                                       |  |              |   |                |         |  |           |  |   |        |   |   |       
|Net income                                                                                                  |  |              |   |                |        |  |          |  |   |       |   |   |      
|Other comprehensive income:                                                                                 |  |             |   |                |         |  |           |  |   |        |   |   |       
|Foreign currency translation                                                                                |  |             |   |                |        |  |          |  |   |       |   |   |      
|Unrealized holding gains on securities available for sale                                                   |  |             |   |                |        |  |          |  |   |       |   |   |      
|Reclassification adjustment for gains on securities and foreign currency translation included in net income |  |             |   |                |        |  |          |  |   |       |   |   |      
|                                                                                                            |  |              |   |                |         |  |           |  |   |        |   |   |       
|Total comprehensive income                                                                                  |  |             |   |                |        |  |          |  |   |       |   |   |      
|Purchase of treasury stock                                                                                  |  | (1,044,760   | ) |                |        |  | 1,044,760 |  |   | (3,131 | ) |   | 3,131 
|Common stock issued pursuant to exercise of stock options                                                   |  | 197,500      |   |                | 875     |  |          |  |   |       |   |   |      
|Dividends declared                                                                                          |  |             |   |                |        |  |          |  |   |       |   |   |      
|                                                                                                            |  |              |   |                |         |  |           |  |   |        |   |   |       
|Balance at June 30, 2003                                                                                    |  | 8,670,200    |   | $              | 167,902 |  | 3,045,900 |  | $ | (8,017 | ) | $ |      
|                                                                                                            |  |              |   |                |         |  |           |  |   |        |   |   |       

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The
accompanying notes are an integral part of these consolidated financial statements.

6

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FOG CUTTER CAPITAL GROUP INC.  CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(dollars in thousands)

|                                                                              |                                                                      | Quarter Ended
June 30,                   |        | Six Months Ended
June 30, |      
|----------------------------------------------------------------------------- | -------------------------------------------------------------------- | ---------------------------------------- | ------ | ------------------------- | -----
|
|Net income                                                                    |                                                                      | $                                        | 2,586  |                           | $    
|Adjustments to reconcile net income to net cash used in operating activities: |                                                                      |                                          |        |                           |      
|                                                                              | Depreciation                                                         |                                          |        | 180                       |      
|                                                                              | Loss on foreign currency translation                                 |                                          |        | (239                      | )    
|                                                                              | Gain on sale of securities available for sale                        |                                          |        | (4,587                    | )    
|                                                                              | Gain on sale of real estate                                          |                                          |        | (281                      | )    
|                                                                              | Gain on sale of loans                                                |                                          |        | (8                        | )    
|                                                                              | Proceeds from sale of loans                                          |                                          |        | 17                        |      
|                                                                              | Purchase of loans and discounted loans                               |                                          |        | (1,422                    | )    
|                                                                              | Principal repayments on loans and discounted loans                   |                                          |        | 366                       |      
|                                                                              | Equity in income of equity investees                                 |                                          |        | (1,878                    | )    
|                                                                              | Other                                                                |                                          |        | (23                       | )    
|                                                                              | Change in:                                                           |                                          |        |                           |      
|                                                                              |                                                                      | Accrued interest receivable              |        |                           | 89   
|                                                                              |                                                                      | Other assets                             |        |                           | 156  
|                                                                              |                                                                      | Accounts payable and accrued liabilities |        |                           | 2,655
|                                                                              |                                                                      |                                          |        |                           |      
|                                                                              | Net cash used in operating activities                                |                                          |        | (2,389                    | )    
|                                                                              |                                                                      |                                          |        |                           |      
|CASH FLOWS FROM INVESTING ACTIVITIES:                                         |                                                                      |                                          |        |                           |      
|                                                                              | Repayments of securities available for sale                          |                                          |        | 5,169                     |      
|                                                                              | Purchase of securities available for sale                            |                                          |        |                          |      
|                                                                              | Proceeds from sale of securities available for sale                  |                                          |        | 6,431                     |      
|                                                                              | Proceeds from sale of real estate                                    |                                          |        | 281                       |      
|                                                                              | Payments made in connection with acquisition of Subsidiary           |                                          |        |                          |      
|                                                                              | Investment in and loans to equity investees                          |                                          |        |                          |      
|                                                                              | Proceeds from investments in and loans to equity investees           |                                          |        | 2,900                     |      
|                                                                              | Transfer to restricted cash deposit                                  |                                          |        |                          |      
|                                                                              | Other                                                                |                                          |        | (504                      | )    
|                                                                              |                                                                      |                                          |        |                           |      
|                                                                              | Net cash provided by investing activities                            |                                          |        | 14,277                    |      
|                                                                              |                                                                      |                                          |        |                           |      
|CASH FLOWS FROM FINANCING ACTIVITIES:                                         |                                                                      |                                          |        |                           |      
|                                                                              | Proceeds from borrowings                                             |                                          |        |                          |      
|                                                                              | Repayments on borrowings                                             |                                          |        | (7,400                    | )    
|                                                                              | Payment of obligation to purchase treasury stock                     |                                          |        |                          |      
|                                                                              | Proceeds from issuance of common stock                               |                                          |        | 840                       |      
|                                                                              | Dividend payments on common stock                                    |                                          |        | (1,127                    | )    
|                                                                              | Other                                                                |                                          |        | (293                      | )    
|                                                                              |                                                                      |                                          |        |                           |      
|                                                                              | Net cash used in financing activities                                |                                          |        | (7,980                    | )    
|                                                                              |                                                                      |                                          |        |                           |      
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                       |                                                                      |                                          | 12     |                           |      
|                                                                              |                                                                      |                                          |        |                           |      
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                          |                                                                      |                                          | 3,920  |                           |      
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                              |                                                                      |                                          | 11,807 |                           |      
|                                                                              |                                                                      |                                          |        |                           |      
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                    |                                                                      | $                                        | 15,727 |                           | $    
|                                                                              |                                                                      |                                          |        |                           |      
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                            |                                                                      |                                          |        |                           |      
|                                                                              | Cash paid for interest                                               |                                          | $      | 633                       |      
|                                                                              | Notes payable issued to settle obligation to purchase treasury stock |                                          | $      |                          |      
|                                                                              | Sale of loan in exchange for treasury stock                          |                                          | $      |                          |      

The accompanying notes are an integral part of these consolidated financial statements.

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FOG CUTTER CAPITAL GROUP INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)

NOTE 1BASIS OF PRESENTATION

The accompanying interim consolidated financial statements of Fog Cutter Capital Group Inc. and Subsidiaries ("FCCG" or the "Company") are unaudited and
have been prepared in conformity with the requirements of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), particularly
Rule 10-01 thereof, which governs the presentation of interim financial statements. Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial statements. The accompanying interim consolidated financial statements should be read in conjunction with the Company's 2002
Annual Report on Form 10-K. A summary of the Company's significant accounting policies is set forth in Note 2 to the consolidated financial statements in the 2002 Annual
Report on Form 10-K.

In
the Company's opinion, all adjustments, comprised of normal recurring accruals necessary for the fair presentation of the interim financial statements, have been included in the
accompanying consolidated financial statements. Operating results for the six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2003.

The
preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. Certain items in the previously reported consolidated financial statements were reclassified to conform to the
June 30, 2003 presentation, none of which affected previously reported results of operations.

At
June 30, 2003, certain Company officers and directors controlled, directly or indirectly, the significant voting majority of the Company.

NOTE 2SIGNIFICANT TRANSACTIONS

Treasury Stock

On February 7, 2003, the Company purchased 1,044,760 shares of the Company's common stock (the "Option Shares") under a put option agreement (the "Put
Option") with a group of shareholders related to Lawrence A. Mendelsohn (the "Stockholders"). Prior to his resignation on August 30, 2002, Mr. Mendelsohn was the President and a member
of the Board of Directors of the Company.

Under
the Put Option, the Stockholders had the right to require the Company to purchase the Option Shares at a price per share equal to eighty percent (80%) of the book value per share
of the Company as of the end of the most recent calendar month preceding the delivery of the exercise notice.

The
Stockholders exercised their right to require the purchase of the Option Shares on December 24, 2002. The option price was determined to be $4.02 per share and the closing
date was February 7, 2003. Approximately $1.4 million of the total purchase price of $4.2 million for the shares was paid in cash to the Stockholders at closing. The remaining
purchase price of approximately $2.8 million was paid with a promissory note which matures 11 months following the closing date and bears interest at 0% for the first 90 days and
12% per annum thereafter. The note may be prepaid by the Company at any time without penalty or premium.

8

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The
acquisition of the Option Shares resulted in the Company recording $3.1 million in treasury stock as of March 31, 2003 and reducing the number of outstanding shares by
1,044,760. The effect of this transaction had been fully reflected in the stockholders' equity of the Company as of December 31, 2002. The Company also recorded notes payable of
$2.8 million. Performance under the notes payable is secured by the pledge of 696,500 shares of the Company's treasury stock.

Dividends

The Company has declared and paid a $0.13 per share dividend for both the first and second quarters of 2003. The first quarter dividend was paid on
March 7, 2003, to stockholders of record on February 28, 2003. The second quarter dividend was paid on June 3, 2003, to stockholders of record on May 20, 2003.

Strouds Acquisition Corporation

In March 2003, the Company structured a financing package to help stabilize Strouds Acquisition Corporation, a distressed specialty linen retailer. The
financing package allowed Strouds critical time to examine its business model and evaluate further strategic options. The Company's $3.0 million financing package for Strouds included a
$2.0 million loan participation in Fleet Retail Finance Inc.'s senior secured credit facility; a $900,000 subordinated secured loan; 100,000 shares of preferred stock; and common stock
warrants for up to 49.5% of Strouds' voting stock.

On
May 20, 2003, Strouds filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code and proceeded to liquidate its assets. As of June 30, 2003, the Company had
been repaid in full on its $2.0 million participation in the Fleet Retail credit facility and all of its $900,000 subordinated secured loan, plus interest.

As
of June 30, 2003, the Company no longer had any recorded investment in Strouds. During the six months ending June 30, 2003, the Company recorded a charge to earnings of
$0.1 million relating to its investment in the preferred stock and common stock warrants of Strouds.

Mortgage-Backed Securities

Through several transactions during the six months ended June 30, 2003, the Company sold mortgage-backed securities for $12.0 million in cash. These
transactions resulted in gains on the sale of securities of $9.4 million.

Bourne End Properties PLC

In June 2003, Bourne End Properties PLC ("Bourne End"), which is 26% owned by the Company, sold two of its retail shopping centers in England for a total
sales price of approximately GBP 31.0 million ($49.0 million). Proceeds from the sales were primarily used to repay Bourne End's real estate debt.
The gain to Bourne End was GBP 5.4 million ($8.6 million). During the six months ended June 30, 2003, the Company recorded $1.0 million as its equity in the earnings of
Bourne End.

NOTE 3VALUATION OF MORTGAGE-BACKED SECURITIES

When possible, the fair value of the Company's investment in mortgage-backed securities is determined by market quotes at each reporting date. At June 30,
2003, approximately $44.5 million (89% of the portfolio) of the Company's mortgage-backed securities consisted of a "AAA" rated FNMA certificate for which market quotes were obtained. For the
remaining mortgage-backed securities, where market quotes are not available, the fair value is determined by the Company as the present value of

9

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the
anticipated cash flows from the underlying collateral using certain assumptions. These assumptions include: (i) future rate of prepayment; (ii) discount rate used to calculate
present value; and (iii) default rates and loss severity on loan pools underlying the mortgage-backed securities. At June 30, 2003, the range of key economic assumptions used to
determine the fair value of the securities was as follows: an annual prepayment speed ranging from 11.4% to 33.2%; a monthly constant default rate ranging from 0.4% to 54.5%; a loss severity of 30%;
and a discount rate of 18% for the B-rated securities and 20% for the unrated securities.

The
Company evaluates, on an ongoing basis, the carrying value of its securities portfolio, which is accounted for as available-for-sale. To the extent
differences between the book basis of the securities and their current market values are deemed to be temporary in nature, such unrealized gains or losses are reflected directly in equity as "other
comprehensive income or loss." Declines in fair value are considered other-than-temporary when: (i) the carrying value of the beneficial interests exceeds the fair value
of such beneficial interests using current assumptions, and (ii) the timing and/or extent of cash flows expected to be received on the beneficial interests has adversely changed from the
previous valuation date. To the extent declines in fair value are considered other-than-temporary, a write-down is recorded in "Market Valuation Losses and
Impairments" in the consolidated statement of operations.

During
the quarters ended June 30, 2003 and 2002, no market valuation losses and impairments were recorded.

NOTE 4COMMITMENTS, CONTINGENCIES & OFF-BALANCE SHEET RISK

During 2001, the Company's Chief Executive Officer, Andrew Wiederhorn, and former president, Lawrence Mendelsohn, received letters from the United States
Attorney's office in Portland, Oregon
advising them that they were targets of a grand jury investigation into the failure of Capital Consultants, L.L.C. ("CCL"). CCL was a lender to a former affiliate of the Company. The
investigation is ongoing and it is not possible at this stage to predict its outcome. Messrs. Wiederhorn and Mendelsohn, pursuant to the terms of their respective employment agreements, may be
entitled to indemnity from the Company for litigation expenses and personal losses in connection with these investigations and any related litigation. Messrs. Wiederhorn and Mendelsohn have
notified the Company that they are reserving their rights to seek indemnity from the Company, however, they may be entitled to primary indemnification from other sources. At this time, it is not
possible to determine the extent of liability, if any, the Company may face with regard to these potential indemnity claims. The Company has not received, nor agreed to, any indemnity requests.

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

The
Company may utilize a wide variety of off-balance sheet financial techniques to manage its risk. In hedging the interest rate or exchange rate exposure of a foreign
currency, the Company may enter into hedge transactions to counter movements in interest rates or foreign currencies. These hedges may be in the form of currency and interest rate swaps, options, and
forwards, or combinations thereof. At June 30, 2003, the Company's economic hedging activities were limited to two Great Britain pound ("GBP") purchased put options. The contracts entitle FCCG
to sell a total of GBP 8.5 million for U.S. dollars ("USD") at an exchange rate of 1.46 USD per one GBP. The options expire during 2003. The estimated fair value of these currency hedging
contracts was approximately zero at June 30, 2003, due to the limited term remaining on the contracts.

10

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NOTE 5RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities". The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities,
non-controlling interests, and results of operations of a VIE need to be included in a company's consolidated financial statements. The provisions of this interpretation became effective
upon issuance. The Company is assessing the impact, if any, the adoption of this interpretation will have on results of operations, financial position, or liquidity of the Company.

In
November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under
certain guarantees and requires the guarantor to recognize a liability for the fair
value of an obligation assumed under a guarantee. The disclosure requirements of FIN 45 were effective for the Company as of December 31, 2002, and require disclosure of the nature of the
guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor's
obligations under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. The Company does not have
guarantees that are subject to the disclosure requirements of FIN 45. As a result, the Company's implementation of the requirements of FIN 45 did not have a material impact on results of operations,
financial position, or liquidity.

NOTE 6STOCK OPTIONS AND RIGHTS

The Company has adopted a non-qualified stock option plan ("the Option Plan") which provides for options to purchase shares of the Company's common
stock. The maximum number of shares of common stock that may be issued pursuant to options granted under the Option Plan is 3,500,000 shares.

The
Company applies Accounting Principles Board Opinion No. 25,"Accounting for Stock Issued to Employees,"and related
interpretations in accounting for the Option Plan. Accordingly, no compensation expense has been recognized in the Consolidated Statements of Operations for grants under the Option Plan. Had
compensation expense for the Company's Option Plan been determined based on the fair value at the grant date consistent with the methods of SFAS No. 123 "Accounting for

11

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Stock Based Compensation", the Company's net income and income per share for the six months ended June 30, 2003 and 2002 would have been decreased to the pro forma
amounts indicated below:

|                                                   |                                                                          | Six months ended June 30, |  
|-------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------- | -
|
|
|Net income:                                        |                                                                          |                           |  
|                                                   | As reported                                                              |                           | $
|                                                   | Pro forma compensation expense from stock based compensation, net of tax |                           |  
|                                                   |                                                                          |                           |  
|                                                   | Pro forma net income                                                     |                           | $
|                                                   |                                                                          |                           |  
|Net income per common and common share equivalent: |                                                                          |                           |  
|                                                   | Basic income per share:                                                  |                           |  
|                                                   |                                                                          | As reported               |  
|                                                   |                                                                          | Pro forma                 |  
|                                                   | Diluted income per share:                                                |                           |  
|                                                   |                                                                          | As reported               |  
|                                                   |                                                                          | Pro forma                 |  

There
were no options granted with exercise prices below the market value of the stock at the grant date. Fair values were estimated using the Black-Scholes option-pricing model with the
following weighted average assumptions used: 1% dividend yield, expected volatility of 25%, risk-free interest rate of 5.0% and expected lives of three to five years.

NOTE 8SUBSEQUENT EVENTS

The Company has entered into an agreement to purchase 15 freestanding retail buildings for a purchase price of $4.6 million. The Company is the lessee of
each of the buildings and currently sub-leases 12 of the 15 properties to a variety of small businesses. Each property has 4,500 square feet of retail space. The properties being purchased
are located in Texas, California, Arizona, Oklahoma and Mississippi. The transaction is expected to close during the quarter ended September 30, 2003.

On
July 31, 2003, the Company declared a cash dividend of $0.13 per share, payable on September 2, 2003 to stockholders of record as of August 21, 2003.

12

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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 Consolidated Financial Statements of Fog Cutter
Capital Group Inc. and the notes thereto included elsewhere in this filing. References in this filing to "Fog Cutter Capital Group Inc.," "we," "our," and "us" refer to Fog Cutter
Capital Group Inc. and its subsidiaries unless the context indicates otherwise.

GENERAL

Fog Cutter Capital Group Inc. ("FCCG" or the "Company") is a Nasdaq-listed corporation which focuses on the acquisition of assets where its expertise in
intensive asset management and financial structuring can create value. We maintain our headquarters in Portland Oregon, and also have executive offices in New York, Los Angeles, and London. We invest
primarily in the following types of assets:



Our
business strategy focuses on diversified investing, structuring and managing of financial assets. We provide debt or equity capital to businesses that are in the process of
restructuring their operations. Many of these investments are made in conjunction with partners. We maintain a flexible approach with respect to the nature of our investments, seeking to take
advantage of opportunities as they arise or are developed.

Critical Accounting Policies

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, affect its more significant judgments and estimates used in the
preparation of its financial statements.

Accounting For Equity Investees

The equity method of accounting is used for investments in associated companies which are not unilaterally controlled by the Company and in which the Company's
interest is generally between 20% and 50% of the outstanding voting rights. The Company's share of earnings or losses of associated companies, in which at least 20% of the voting securities is owned,
is included in the consolidated statement of operations.

Valuation

At June 30, 2003, our largest asset was our portfolio of mortgage-backed securities. Approximately $44.5 million (89%) of our mortgage-backed
securities consisted of a "AAA" rated FNMA certificate

13

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for
which market quotes were obtained. When available, we use listed market prices or dealer/lender value opinions to determine the fair value of the securities in our portfolio. However, in the
absence of these third-party quotations, fair values for these securities are determined by us, using a third-party valuation model and internally developed assumptions.

Valuation
models and assumptions impact the carrying value of our mortgage-backed securities and the amount and timing of gains and losses recognized. The use of different valuation
models or assumptions could produce different financial results. Changes in the fixed-income markets and the actual performance of our mortgage-backed securities may impact our estimates of fair value
in the future, potentially affecting, positively or negatively, our future operating results and equity.

Our
key valuation assumptions include default rates and loss severity, which account for the anticipated credit losses in the pools of loans underlying our mortgage-backed securities.
Other key valuation assumptions include prepayment rates and discount rates. Our internal valuation methodology calls for developing the key valuation assumptions of credit losses and prepayment
speeds based upon the observable recent history of performance, generally averaged across the latest three to six months, subject to general economic and market considerations. Our key valuation
assumption of discount rates is developed based on the assessment of the current yields required by investors for similar classes of fixed income instruments. We apply our valuation methodology
consistently and believe that the resulting fair value estimates are reasonable; however, these estimated values may differ from those realized in a bona fide sale transaction, given the judgmental
nature of the values of these assets. We believe our assumptions and the resulting estimated values of the mortgage-backed securities at June 30, 2003 are conservative, based on the facts and
circumstances as of that date; however, there can be no assurance that there will be no future losses on these securities due to changes in their performance or overall market conditions.

Sale Recognition

We continue to be involved in significant sales of mortgage-backed securities and other assets. Our accounting policy calls for the recognition of sales of
financial instruments, including mortgage-backed securities and loans, only when we have irrevocably surrendered control over these assets. We do not retain any recourse or performance obligations
with respect to our sales of assets. Our sales were cash sales, and the cash proceeds were not contingent upon any future event.

14

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

NET INCOME.    Our net income for the six months ended June 30, 2003, was $4.2 million, or $0.50 per share, compared with a net income of
$10.2 million, or $1.01 per share, for the six months ended June 30, 2002. The net income for the 2003 period is primarily attributable to net interest income of $1.6 million,
gain on sale of loans and securities of $9.4 million, loan origination fees of $2.3 million and equity in earnings of equity investees of $0.9 million, partially offset by other
operating expenses of
$8.8 million and provision for income taxes of $1.7 million. The net income for the 2002 period is primarily attributable to net interest income of $2.3 million; gain on sale of
loans and securities of $10.3 million, and equity in earnings of equity investees of $2.1 million, partially offset by other operating expenses of $3.8 million and provision for
income taxes of $0.8 million.

NET
INTEREST INCOME.    Our net interest income for the six months ended June 30, 2003 was $1.6 million, compared with $2.3 million for the six months
ended June 30, 2002. The decrease is primarily attributable to the sale of higher yielding subordinated mortgage-backed securities which were replaced with a lower yielding "AAA" rated FMNA
certificate. This, together with paydowns of the related debt facilities, resulted in decreases in interest income on securities of $1.6 million, partially offset by a decrease in interest
expense of $0.7 million. The following tables set forth information regarding the total amount of income from interest-earning assets and expense from interest-bearing liabilities and the
resulting average yields and rates:

|                              |                                                                | For the Six Months Ended June 30, 2003 |  
|----------------------------- | -------------------------------------------------------------- | -------------------------------------- | -
|
|
|Interest-Earning Assets:      |                                                                |                                        |  
|                              | Loan portfolios(1)                                             |                                        | $
|                              | Mortgage-backed securities available for sale                  |                                        |  
|                              | Other investments                                              |                                        |  
|                              |                                                                |                                        |  
|                              |                                                                | Total interest-earning assets          |  
|                              |                                                                |                                        |  
|Interest-Bearing Liabilities: |                                                                |                                        |  
|                              | Borrowings(2)                                                  |                                        | $
|                              |                                                                |                                        |  
|                              |                                                                | Total interest-bearing liabilities     |  
|                              |                                                                |                                        |  
|                              | Net interest income before provision for loan losses/spread(3) |                                        |  
|                              |                                                                |                                        |  
|                              | Net interest margin(4)                                         |                                        |  
|                              |                                                                |                                        |  

---

15

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|                              |                                                                | For the Six Months Ended June 30, 2002 |  
|----------------------------- | -------------------------------------------------------------- | -------------------------------------- | -
|
|
|Interest-Earning Assets:      |                                                                |                                        |  
|                              | Loan portfolios(1)                                             |                                        | $
|                              | Mortgage-backed securities available for sale                  |                                        |  
|                              | Other investments                                              |                                        |  
|                              |                                                                |                                        |  
|                              |                                                                | Total interest-earning assets          |  
|                              |                                                                |                                        |  
|Interest-Bearing Liabilities: |                                                                |                                        |  
|                              | Borrowings(2)                                                  |                                        | $
|                              |                                                                |                                        |  
|                              |                                                                | Total interest-bearing liabilities     |  
|                              |                                                                |                                        |  
|                              | Net interest income before provision for loan losses/spread(3) |                                        |  
|                              |                                                                |                                        |  
|                              | Net interest margin(4)                                         |                                        |  
|                              |                                                                |                                        |  

---

REAL ESTATE OPERATIONS.    Our real estate operations represent activity from our investment in commercial property located in Oregon
and California, as well as the operations of our leasehold interest in 104 freestanding retail buildings located throughout the United States. During the six months ended June 30, 2003, we
realized a net income from real estate operations of $0.1 million, compared with a net loss from real estate operations of $0.1 million for the six months ended June 30, 2002.

In
October 2002, the Company assumed leasehold interests in 109 free-standing retail stores located throughout the United States. The leasehold interests on five
retail stores were sold to the property owner for $0.1 million during the quarter ended June 30, 2003. The leased properties are sublet to a broad tenant mix including convenience
stores, shoe stores, video rental outlets, auto parts dealers, carpet retailers and other small businesses. The leases cover approximately 474,296 square feet of retail space located in 24 states. The
stores are free-standing, retail locations ranging from 4,500-7,000 square feet each. The initial term of the leasehold interests has an average expiration of approximately
6 years. However, the Company is entitled to exercise extension options which will allow the Company to control the properties for an additional 15 to 30 years. In approximately 70% of
the leases, the rent during the extended term is less than currently being charged or is below the Company's estimate of the then current market rents.

The
Company has the option to terminate a lease by giving notice to the property owner. The notice to terminate must include an offer to purchase the property at a price calculated using
a declining percentage of the original fair market value of the property at the time the original lease was initiated (generally in the 1970's and 1980's). The property owner then has the option to
accept the Company's offer to purchase the property or allow the lease to terminate.

Of
the leases, 46 were on terms and conditions that required capitalization of the obligation. As a result, the Company capitalized a $17.6 million investment in real estate as a
result of the transaction, and recognized a capital lease obligation of $16.9 million. The remaining 58 leases are classified as operating leases. All of our subleases are accounted for as
operating leases.

16

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OTHER
OPERATING INCOME.    Our other operating income was approximately $13.1 million for the six months ended June 30, 2003. This compares to other operating
income of $12.6 million for the six months ended June 30 2002. The primary components of our net other operating income include the following:

Equity In Earnings Of Equity Investees.We recognized our share of the earnings of equity investees in the amount of
$0.9 million during the six months ended June 30, 2003. This compares to earnings of $2.1 million during the 2002 period. These earnings are primarily the result of the sale of
property held by Bourne End.

In
February 2001, we completed the purchase of all of the outstanding capital stock of Bourne End through a 26% owned Jersey, Channel Islands company known as BEP Acquisitions
("BEP"). Bourne End is a specialist investor in retail property located in England and Scotland. BEP is highly leveraged and operating income from the properties is offset by interest expense and
depreciation. We account for this investment using the equity method, thereby recording our share of income and expense generated by BEP.

Gain On The Sale Of Loans And Securities.During the six months ended June 30, 2003 and 2002, we sold loans and
securities to unrelated third parties for approximately $12.0 million and $22.5 million, respectively, resulting in gains of approximately $9.4 million and $10.3 million,
respectively.

Loan Origination Income.During the period of our ownership of 51% of the operations of George Elkins Mortgage Banking
Company ("George Elkins"), the commercial mortgage broker generated $2.3 million and $0.5 million, respectively, in loan origination income which is included in our consolidated
statements of operation for the six months ended June 30, 2003 and 2002. We acquired George Elkins in May 2002.

OPERATING
EXPENSES.    During the six months ended June 30, 2003, operating expenses were comprised of compensation and employee benefits of $5.8 million,
professional fees of $1.1 million and other costs of $2.0 million. The compensation costs include $2.1 million in compensation paid to employees of George Elkins. A significant
portion of the compensation paid to employees of George Elkins consisted of commissions relating to the organization of commercial real estate loans. During
the six months ended June 30, 2002, operating expenses were comprised of compensation and employee benefits of $1.7 million, professional fees of $0.9 million and other costs of
$1.1 million.

RESULTS OF OPERATIONSQUARTER ENDED JUNE 30, 2003 COMPARED TO QUARTER ENDED JUNE 30, 2002

NET INCOME.    Our net income for the quarter ended June 30, 2003 was $2.6 million, or $0.30 per share, compared with net income of
$10.7 million, or $1.10 per share, for the quarter ended June 30, 2002. The net income for the 2003 period is attributable to net interest income of $0.8 million; gain on sale of
loans and securities of $4.6 million, equity in earnings of equity investees of $1.9 million, and loan origination fees of $1.5 million, partially offset by other operating
expenses of $5.2 million and $1.5 million in provision for income taxes. The net income for the 2002 period is attributable to net interest income of $1.2 million, gain on sale of
loans and securities of $10.2 million, equity in earnings of BEP of $2.1 million, and other revenue of $0.6 million, partially offset by other operating expenses of
$2.5 million and $0.8 million in provision for income taxes.

NET
INTEREST INCOME.    Our net interest income for the quarter ended June 30, 2003 was $0.8 million, compared with $1.2 million for the quarter ended
June 30, 2002. The decrease is primarily attributable to the sale of high yielding subordinated mortgage-backed securities which were replaced with a lower yielding "AAA" rated FNMA
certificate. This, together with paydowns of the related debt facilities, resulting in decreases in interest income on securities of $0.9 million, partially offset by a

17

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decrease
in interest expense of $0.4 million. The following tables set forth information regarding the total amount of income from interest-earning assets and expense from interest-bearing
liabilities and the resulting average yields and rates:

|                              |                                                                | For the Six Months Ended June 30, 2003 |  
|----------------------------- | -------------------------------------------------------------- | -------------------------------------- | -
|
|
|Interest-Earning Assets:      |                                                                |                                        |  
|                              | Loan portfolios(1)                                             |                                        | $
|                              | Mortgage-backed securities available for sale                  |                                        |  
|                              | Other investments                                              |                                        |  
|                              |                                                                |                                        |  
|                              |                                                                | Total interest-earning assets          |  
|                              |                                                                |                                        |  
|Interest-Bearing Liabilities: |                                                                |                                        |  
|                              | Borrowings(2)                                                  |                                        | $
|                              |                                                                |                                        |  
|                              |                                                                | Total interest-bearing liabilities     |  
|                              |                                                                |                                        |  
|                              | Net interest income before provision for loan losses/spread(3) |                                        |  
|                              |                                                                |                                        |  
|                              | Net interest margin(4)                                         |                                        |  
|                              |                                                                |                                        |  

---

18

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|                              |                                                                | For the Quarter Ended June 30, 2002 |                                   
|----------------------------- | -------------------------------------------------------------- | ----------------------------------- | ----------------------------------
|
|
|Interest-Earning Assets:      |                                                                |                                     |                                   
|                              | Loan portfolios(1)                                             |                                     | $                                 
|                              | Mortgage-backed securities available for sale                  |                                     |                                   
|                              | Other investments                                              |                                     |                                   
|                              |                                                                |                                     |                                   
|                              |                                                                |                                     | Total interest-earning assets     
|                              |                                                                |                                     |                                   
|Interest-Bearing Liabilities: |                                                                |                                     |                                   
|                              | Borrowings(2)                                                  |                                     | $                                 
|                              |                                                                |                                     |                                   
|                              |                                                                |                                     | Total interest-bearing liabilities
|                              |                                                                |                                     |                                   
|                              | Net interest income before provision for loan
losses/spread(3) |                                     |                                   
|                              |                                                                |                                     |                                   
|                              | Net interest margin(4)                                         |                                     |                                   
|                              |                                                                |                                     |                                   

---

REAL ESTATE OPERATIONS.    Our real estate operations represent activity from our investment in various office buildings, retail stores,
and other commercial property located throughout the United States. During the quarter ended June 30, 2003, we realized net income of $0.2 million from real estate operations, compared
with a loss of $0.1 million for the quarter ended June 30, 2002. The increase is primarily the result of a gain on the sale of real estate of $0.3 million during 2003.

OTHER
OPERATING INCOME.    Our other operating income was approximately $8.3 million for the three months ended June 30, 2003. This compares to other operating
income of $12.9 million for the three months ended June 30 2002. The primary components of our net other operating income include the following:

Equity in Earnings of Equity Investees.We recognized our share of the earnings of equity investees in the amount of
$1.9 million during the three months ended June 30, 2003. This compares to earnings of $2.1 million during the 2002 period. These earnings are primarily the result of the sale of
property held by Bourne End.

Gain on the Sale of Loans and Securities.During the three months ended June 30, 2003 and 2002, we sold loans and
securities to unrelated third parties for approximately $6.4 million and $19.9 million, respectively, resulting in gains of approximately $4.6 million and $10.2 million,
respectively.

Loan Origination Income.During the period of our ownership of 51% of the operations of George Elkins Mortgage Banking
Company ("George Elkins"), the commercial mortgage broker generated $1.5 million and $0.5 million, respectively, in loan origination income which is included in our consolidated
statements of operation for the three months ended June 30, 2003 and 2002. We acquired George Elkins in May 2002.

19

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OPERATING
EXPENSES.    During the three months ended June 30, 2003, operating expenses were comprised of compensation and employee benefits of $3.6 million,
professional fees of $0.6 million and other costs of $1.0 million. The compensation costs include $0.9 million in compensation paid to employees of George Elkins. A significant
portion of the compensation paid to employees of George Elkins consisted of commissions relating to the organization of commercial real estate loans. During the three months ended June 30,
2002, operating expenses were comprised of compensation and employee benefits of $1.1 million, professional fees of $0.7 million and other costs of $0.7 million.

CHANGES IN FINANCIAL CONDITION

GENERAL.    Total assets decreased from approximately $110.6 million at December 31, 2002 to approximately $104.2 million at
June 30, 2003. Total liabilities decreased from approximately $66.4 million at December 31, 2002 to approximately $56.5 million at June 30, 2003. Stockholders'
equity increased by approximately $3.4 million resulting primarily from net income of $4.2 million, and increases in other comprehensive income of $0.6 million, the issuance of
capital stock as a result of the exercise of stock options of $0.9 million, partially offset by dividend payments of $2.2 million.

SECURITIES
AVAILABLE FOR SALE.    The balance of mortgage-backed securities available for sale decreased from $59.3 million at December 31, 2002 to
$50.1 million at June 30, 2003. The decrease was primarily the result of the sale of mortgage-backed securities with a carrying value of $12.0 million and cash repayments of
securities of $7.3 million, partially offset by increases in market value of $10.0 million.

We
mark our securities portfolio to estimated fair value at the end of each month. We determine the fair value of the securities by utilizing market quotes, when available, or modeling
the anticipated cash flows using certain estimates (e.g. prepayment speeds, default rates, severity of losses, and discount
rate). As of each reporting period, we evaluate whether and to what extent any unrealized loss is to be recognized as other than temporary. At June 30, 2003, approximately $44.5 million
of our mortgage-backed securities portfolio consisted of a "AAA" rated FNMA certificate for which market value quotes were obtained.

We
are a party to an employment agreement which entitles the Company's president, Robert G. Rosen, to a bonus payment equal to 10% of the cumulative net proceeds from the sale of certain
of our mortgage-backed securities. All but approximately $5.5 million of the securities that were subject to the bonus formula had been sold as of June 30, 2003, and the bonuses relating
to the sold securities have been accrued and paid. The amount of unrealized gain included in stockholders' equity in the accompanying statement of financial position has been reduced by the amount of
the bonus that would have been payable to Mr. Rosen had the remaining $5.5 million securities been sold at their carrying value.

At
June 30, 2003, securities available for sale were as follows:

|                                                                      |  | Amortized
Cost (1) |        | Gross
Unrealized
Gains |   | Gross
Unrealized
Losses |  | Fair Value
|--------------------------------------------------------------------- |  | ------------------ | ------ | ---------------------- | - | ----------------------- |  | ----------
|
|Total Mortgage-backed securities, pledged under repurchase agreements |  | $                  | 46,452 |                        | $ | 2,882                   |  | $         
|Other Mortgage-backed securities                                      |  |                    | 247    |                        |   | 500                     |  |           
|                                                                      |  |                    |        |                        |   |                         |  |           
|Total Mortgage-backed securities                                      |  | $                  | 46,699 |                        | $ | 3,382                   |  | $         
|                                                                      |  |                    |        |                        |   |                         |  |           

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20

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LOAN PORTFOLIO.    During the six months ended June 30, 2003, our loan portfolio increased by approximately $1.2 million.
This was primarily the result of the acquisition of a new $1.4 million loan. Except for $0.4 million in distressed loans that were purchased at significant discounts, all of the loans in
our portfolio were performing according to their terms as of June 30, 2003.

INVESTMENTS
IN REAL ESTATE.    Investments in real estate remained relatively unchanged during the six months ended June 30, 2003. The primary assets in the portfolio
are comprised of capital leasehold interests in 46 free-standing retail stores located throughout the United States. The capital leases cover approximately 208,000 square feet of retail
space. The stores are free-standing, retail locations ranging from 4,500-7,000 square feet each. Leaseholds are, in general, 25-30 six months, and cover a broad
tenant mix including convenience stores, shoe stores, video stores, auto parts dealers, pawn shops, carpet retailers and other small businesses. As of June 30, 2003, we had capitalized a
$17.3 million investment in real estate and recorded a capital lease obligation of $16.6 million. We also own non-capitalized, operating leases on an additional 58 retail
stores covering 282,000 square feet. The operating leases have remaining initial terms averaging four six months, however, the terms of the leases may be extended at our election. The properties
subject to these operating leases are also sublet to similar types of small businesses as described above. The $0.6 million purchase price for the non-capitalized operating leases
is included in other assets in the accompanying statements of financial position. Of the 104 retail locations, 17 were vacant at June 30, 2003.

LOANS
TO SENIOR EXECUTIVES.    The Company has employment agreements with Mr. Wiederhorn and Mr. Rosen, which allowed these executives to borrow a specified
maximum amount from us to purchase shares of Common Stock. We granted loans to Mr. Wiederhorn and Mr. Rosen prior to the passage of the Sarbanes-Oxley Act of 2002. These loans are full
recourse, secured loans bearing interest at the prime rate. At June 30, 2003, in addition to the $2 million loan to Mr. Wiederhorn described below, we had outstanding loans to
Mr. Wiederhorn, including accrued interest, of approximately $0.9 million. The loans to Mr. Rosen were paid off before the 2002 year end. The Company is not obligated to
make additional advances on loans under the employment agreements. The loan to Mr. Wiederhorn is further described as follows:

Andrew Wiederhorn.On February 21, 2002, we loaned Mr. Wiederhorn $175,000 to finance the purchase of Common
Stock. This loan is full recourse to Mr. Wiederhorn and is secured by all of
Mr. Wiederhorn's rights under his employment agreement. We are entitled to net amounts payable under the employment agreement against any amounts payable by Mr. Wiederhorn upon any
default or at maturity of the loan. At Mr. Wiederhorn's direction (in accordance with the terms of his employment agreement), on February 21, 2002, we loaned a limited partnership
controlled by Mr. Wiederhorn's spouse (the "LP") $687,000 to finance the purchase of Common Stock. The loan is secured by the membership interests of two limited liability companies owned by
the LP. The limited liability companies each own a parcel of real property in Oregon and have no liabilities. At the time of the loan, the real property had an appraised value of $725,000. The loan is
also guaranteed by Mr. Wiederhorn. The Common Stock purchased with the proceeds of these loans does not serve as security for the loans. The loans are due on February 21, 2007, and bear
interest at the prime rate, as published in the Wall Street Journal, which interest is added to the principal annually.

Further
information on these loans to executives is included in our 2002 annual report on Form 10-K and proxy statements for our 2003 and prior years Annual Meeting of
Stockholders, and these executives' employment agreements have been previously filed with the SEC.

Prior
to the passage of the Sarbanes-Oxley Act of 2002, we loaned Mr. Wiederhorn $2.0 million. This loan is full recourse to Mr. Wiederhorn and his spouse and is
secured by trust deeds on two residences located in Oregon. The loan is due on August 1, 2007 and bears interest at 8.5% per annum, payable monthly. The Board of Directors (with
Mr. Wiederhorn abstaining) concluded that the

21

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terms
of the loan were at least as favorable to the Company as would be available in an arms length, third party transaction and approved the loan on July 9, 2002.

OTHER
ASSETS.    At June 30, 2003, the Company's other assets consisted of the following:

Capitalized deferred compensation

$
1,434,000Deposits in escrow


256,000Investment in operating leases


612,000Prepaid expenses


750,000Other


936,000Total

$
3,988,000


The
capitalized deferred compensation included in other assets relates to the acquisition of George Elkins. In conjunction with the acquisition, certain employees of George Elkins
entered into long-term employment agreements. These employees received payments totaling $1.9 million which we capitalized as deferred compensation. The employees are obligated to
perform under the employment agreements and must repay any unearned deferred compensation payments upon early termination. The deferred compensation is earned ratably over the terms of the employment
agreements, and we are amortizing the $1.9 million investment over the remaining terms, which range from 23 to 47 months.

BORROWINGS
AND NOTES PAYABLE.    Borrowings and notes payable decreased by approximately $5.3 million during the six months ended June 30, 2003, primarily due to
the payment of borrowings related to mortgage-backed securities, partially offset by the issuance of a note payable related to the purchase of common stock.

OBLIGATION
TO PURCHASE TREASURY STOCK.    During the six months ended June 30, 2003, we fulfilled our obligation to purchase treasury stock under an exercised put
option. On February 7, 2003, we purchased 1,044,760 shares of the Company's common stock (the "Option Shares") under a put option agreement (the "Put Option") with a group of shareholders
related to Lawrence A. Mendelsohn (the "Stockholders"). Prior to his resignation on August 30, 2002, Mr. Mendelsohn was the President and a member of the Board of Directors of the
Company. Approximately $1.4 million of the total purchase price of $4.2 million was paid in cash to the Stockholders at closing. The remaining purchase price of approximately
$2.8 million was paid with a promissory note which matures 11 months following the closing date and bears interest at 0% for the first 90 days and 12% per annum thereafter. The
note may be prepaid by the Company at any time without penalty or premium and is carried in "Borrowings and notes payable" at June 30, 2003 on the accompanying statements of financial
condition.

DEFERRED
INCOME TAXES.    Our deferred income taxes increased $1.9 million to $6.0 million at June 30, 2003. This was the result of an accrued provision
for income taxes of $1.7 million and the establishment of a tax liability of $0.2 million relating to unrealized appreciation on our mortgage-backed securities portfolio. As of
December 31, 2002, we had, for U.S. Federal tax purposes, a net operating loss carryforward ("NOL") of approximately $94 million which begins to expire in 2018. The NOL
may significantly reduce or eliminate the future payment of the tax liability. However, U.S. tax regulations impose limitations on the use of loss carry forwards following certain changes in
ownership. If such a change occurs, the limitation could significantly reduce the amount of benefits that would be available to offset future taxable income each year, starting with the year of
ownership change.

In
order to protect the NOL, on October 18, 2002, we announced a dividend distribution of one right (a "Right") to purchase one-tenth of a share of our common stock
for each outstanding share of common stock, payable to the stockholders of record on October 28, 2002 (the "Record Date"). Rights will also be attached to each common share issued after the
Record Date. Generally, each Right

22

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entitles
the registered holder to purchase one-tenth of a common share from us at a price of $15 per whole common share. The Rights are intended to protect our income tax loss carryforward
from the limitations imposed under the Internal Revenue Code if there is a change in control. Under certain circumstances, individuals attempting to acquire a 5% ownership interest in the Company (or
individuals attempting to increase their existing holdings in excess of 5% by more than 1%) will have their interests immediately diluted through distributions of stock to all other Right holders. The
description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between us and The Bank of New York, as Rights Agent, dated as of October 18, 2002. We filed a
summary of the Rights Agreement with the Securities and Exchange Commission on Form 8-K on October 18, 2002.

STOCKHOLDERS'
EQUITY.    Stockholders' equity increased by approximately $3.4 million during the six months ended June 30, 2003 primarily due to our net income of
$4.2 million, the issuance of new capital stock as a result of the exercise of stock options of $0.9 million, and increases in other comprehensive income of $0.6 million. These
increases were partially offset by declared dividends of $2.2 million.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund investments, engage in loan
acquisition and lending activities, meet collateral calls and for other general business purposes. The primary sources of funds for liquidity during the six months ended June 30, 2003 consisted
of net cash provided by investing activities, including interest and principal payments related to our mortgage-backed securities portfolio and the sale of mortgage-backed securities.

Our
borrowings and the availability of further borrowings are substantially affected by, among other things, changes in interest rates, changes in market spreads whereby the market value
of the collateral securing such borrowings may decline substantially, or decreases in credit quality of underlying assets. In the event of declines in market value or credit quality, we may be
required to provide additional collateral for, or repay a portion of outstanding balances of, our short-term borrowing facilities. However, our borrowings against securities consist of
non-recourse, short-term repurchase agreements held in wholly-owned subsidiaries. As a result, our potential risk from collateral calls is limited to the equity in the assets
being financed, which at June 30, 2003 totaled $22.1 million. We consider the potential exposure to collateral calls to be significantly less than the $22.1 million equity since
$20.6 million relates to our equity in a "AAA" rated FNMA security.
As of June 30, 2003, we had no outstanding collateral calls. For additional information with respect to our monthly mark-to-market of our securities available for sale
portfolio, see "CHANGES IN FINANCIAL CONDITIONSECURITIES AVAILABLE FOR SALE."

Fluctuations
in interest rates will continue to impact our net interest income to the extent our fixed rate assets are funded by variable rate debt or our variable rate assets reprice on
a different schedule or in relation to a different index than any floating rate debt which in turn could impact potential returns to shareholders. See "Item 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK."

At
June 30, 2003, we had total consolidated secured indebtedness of $46.7 million, as well as $9.8 million of other liabilities. The consolidated secured
indebtedness consisted of (i) $27.2 million of repurchase agreements secured by $49.3 million of mortgage-backed securities, (ii) $16.6 million outstanding of
obligations under capital leases maturing between 2010 and 2040 which are secured by real estate, and (iii) notes payable in connection with the acquisition of treasury stock (including accrual
interest of $0.1 million) of $2.9 million.    Approximately $27.2 million of this indebtedness had terms which allowed the lender to request additional collateral if
the value of the underlying

23

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collateral
declined. However, due to the non-recourse nature of this debt, our exposure to collateral calls is limited to the equity in the assets being financed.

If
our existing liquidity position were to prove insufficient, and we were unable to fund additional collateral requirements or to repay, renew or replace maturing indebtedness on terms
reasonably satisfactory to us, we may be required to sell (potentially on short notice) a portion of our assets, and could incur losses as a result. Furthermore, since from time to time there is
extremely limited liquidity in the market for subordinated and residual interests in mortgage-related securities, there can be no assurance that we will be able to dispose of such securities promptly
for fair value in such situations.

We
consider the sale of assets to be a normal, recurring part of our operations and we are currently generating positive cash flow as a result of these transactions. However, excluding
the sale of assets from time to time, we are currently operating with negative cash flow, since many of our assets do not generate current cash flows sufficient to cover current operating expenses. We
believe that our existing sources of funds will be adequate for purposes of meeting our liquidity needs, however, there can be no assurance that this will be the case. Material increases in interest
expense from variable-rate funding sources, collateral calls, or material decreases in monthly cash receipts, generally would negatively impact our liquidity. On the other hand, material
decreases in interest expense from variable-rate funding sources or an increase in market value of our mark-to-market financial assets generally would positively
affect our liquidity.

24

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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, and equity prices. We have some
exposure to foreign currency fluctuations (approximately 14% of the Company's equity is invested in assets located in the United Kingdom at June 30, 2003), which we have mitigated through the
purchase of two Great Britain pound ("GBP") put options. The contracts entitle us to sell a total of GBP 8.5 million for U.S. dollars ("USD") at an exchange rate of 1.46 USD per one GBP. The
options expire during 2003. Due to their limited remaining terms, the estimated fair value of these currency hedging contracts was approximately zero at June 30, 2003.

The
primary market risk to which we are exposed is interest rate risk. This type of risk is highly sensitive to many factors beyond our control, including governmental monetary and tax
policies, domestic and international economic and political considerations, and other factors. Changes in the general level of interest rates can affect our net interest income by affecting the spread
between our interest-earning assets and our interest-bearing liabilities. Changes in the level of interest rates can also affect, among other things, the value of our interest-earning assets
(including mortgage-backed securities) and our ability to acquire loans.

It
is our objective to attempt to control risks associated with interest rate movements. In general, our strategy is to limit our exposure to earnings variations and variations in the
value of assets and liabilities as interest rates change over time. Our asset and liability management strategy is formulated and monitored regularly to review, among other things, the sensitivity of
our assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, including those attributable to hedging transactions, purchase
and securitization activity, and maturities of investments and borrowings.

The
following table quantifies the potential changes in net interest income and net portfolio value as of June 30, 2003 should interest rates go up or down (shocked) by 100 or 200
basis points, assuming the yield curves of the rate shocks will be parallel to each other and instantaneous. Net portfolio value is calculated as the sum of the value of off-balance sheet
instruments and the present value of cash in-flows generated from interest-earning assets net of cash out-flows in respect of interest-bearing liabilities. The cash flows
associated with the loan portfolios and securities available for sale are calculated based on prepayment and default rates that vary by asset but not by changes in interest rates. Projected losses, as
well as prepayments, are generated based upon the actual experience with the subject pool, as well as similar, more seasoned pools. To the extent available, loan characteristics such as
loan-to-value ratio, interest rate, credit history and product types are used to produce the projected loss and
prepayment assumptions that are included in the cash flow projections of the securities. The following table applies the U.S. Treasury yield curve generally for assets and LIBOR for repurchase
agreement liabilities and assume a uniform change in both rates. The table assumes that changes in interest rates occur instantaneously. The table also reflects that we have a significant exposure to
LIBOR rates since our short-term repurchase agreement borrowings are generally based on LIBOR rates. Actual results could differ significantly from those estimated in the table.

|Projected Percent Change In | 
|--------------------------- | 
|
|-200 Basis Points           | 
|-100 Basis Points           | 
|0 Basis Points              | 
|100 Basis Points            | 
|200 Basis Points            | 

---

25

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The following table sets forth information as to the type of funding used to finance the Company's assets as of June 30, 2003. As indicated
in the table, a large percentage of the Company's fixed-rate assets are financed by floating-rate liabilities and the Company's variable-rate assets are generally
funded by variable-rate liabilities which use the same index.

Assets and Liabilities
As of June 30, 2003
(dollars in thousands)

|                                         |          | Basis Amount |        | Coupon Type |          | Liability |   | Type  
|---------------------------------------- | -------- | ------------ | ------ | ----------- | -------- | --------- | - | ------
|Interest-Bearing Assets                  |          |              |        |             |          |           |   |       
|Fixed-rate asset, financed floating      |          | $            | 4,804  |             | Fixed    |           | $ | 3,399 
|Fixed-rate assets, no financing          |          |              | 4,571  |             | Fixed    |           |   |      
|Variable-rate, financed variable         |          |              | 44,509 |             | 1 TCM(1) |           |   | 23,859
|Variable-rate assets, no financing       |          |              | 2,591  |             | Prime    |           |   |      
|Cash and cash equivalents                |          |              | 15,727 |             | N/A      |           |   |      
|                                         |          |              |        |             |          |           |   |       
|                                         |          | Subtotal     |        |             | 72,202   |           |   |       
|                                         |          |              |        |             |          |           |   |       
|Other Assets                             |          |              |        |             |          |           |   |       
|Investments in real estate               |          |              | 21,289 |             | N/A      |           |   | 16,554
|Investment in BEP                        |          |              | 6,696  |             | N/A      |           |   |      
|Other                                    |          |              | 3,988  |             | N/A      |           |   |      
|                                         |          |              |        |             |          |           |   |       
|                                         | Subtotal |              |        | 31,973      |          |           |   |       
|                                         |          |              |        |             |          |           |   |       
|Liability Only                           |          |              |        |             |          |           |   |       
|Note payable to acquire treasury stock   |          |              |       |             |          |           |   | 2,881 
|Income taxes payable                     |          |              |       |             |          |           |   | 5,998 
|Accounts payable and accrued liabilities |          |              |       |             |          |           |   | 3,830 
|                                         |          |              |        |             |          |           |   |       
|                                         |          | Total        |        | $           | 104,175  |           |   |       
|                                         |          |              |        |             |          |           |   |       

---

Asset and liability management involves managing the timing and magnitude of the repricing of assets and liabilities. It is our objective to
attempt to control risks associated with interest rate movements. Asset and liability management can utilize a wide variety of off-balance sheet financial techniques to assist it in the
management of interest rate risk. For example, in hedging the interest rate and exchange rate exposure of a foreign currency denominated asset or liability, we may enter into hedge transactions to
counter movements in the different currencies as well as interest rates in those currencies. These hedges may be in the form of currency and interest rate swaps, options, and forwards, or combinations
thereof. No such interest rate techniques were in use as of June 30, 2003.

Methods
for evaluating interest rate risk include an analysis of our interest rate sensitivity "gap," which is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered negative when the amount of interest-rate sensitive liabilities exceeds interest-rate sensitive assets.
During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a
period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. Since different
types of assets and liabilities with the same or similar maturities may react differently to changes in overall market rates or

26

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conditions,
changes in interest rates may affect net interest income positively or negatively even if an institution were perfectly matched in each maturity category.

The
following table sets forth the estimated contractual maturity or repricing of our interest-earning assets and interest-bearing liabilities at June 30, 2003.

As of June 30, 2003
(dollars in thousands)

|                                                                                        |  | Within
3 Months |        | 4 to 12
Months |   | One Year to
3 Years |   | More than
3 Years |        | TOTAL
|--------------------------------------------------------------------------------------- |  | --------------- | ------ | -------------- | - | ------------------- | - | ----------------- | ------ | -----
|Interest-sensitive assets(1):                                                           |  |                 |        |                |   |                     |   |                   |        |      
|Cash and cash equivalents                                                               |  | $               | 15,727 |                | $ |                     |   | $                 |        |      
|Securities available for sale                                                           |  |                 |       |                |   |                    |   |                   | 44,509 |      
|Loans                                                                                   |  |                 | 1,650  |                |   | 1,445               |   |                   |       |      
|Loans to senior executives                                                              |  |                 |       |                |   | 941                 |   |                   |       |      
|                                                                                        |  |                 |        |                |   |                     |   |                   |        |      
|Total rate-sensitive assets                                                             |  | $               | 17,377 |                | $ | 2,386               |   | $                 | 44,509 |      
|                                                                                        |  |                 |        |                |   |                     |   |                   |        |      
|Interest-sensitive liabilities:                                                         |  |                 |        |                |   |                     |   |                   |        |      
|Borrowings and notes payable                                                            |  | $               | 27,258 |                |   | 2,881               |   |                   |       |      
|Obligations under capital leases                                                        |  |                 |       |                |   |                    |   |                   |       |      
|                                                                                        |  |                 |        |                |   |                     |   |                   |        |      
|Total rate-sensitive liabilities                                                        |  | $               | 27,258 |                | $ | 2,881               |   | $                 |        |      
|                                                                                        |  |                 |        |                |   |                     |   |                   |        |      
|Interest rate sensitivity gap                                                           |  | $               | (9,881 | )              | $ | (495                | ) | $                 | 44,509 |      
|Cumulative interest rate sensitivity gap                                                |  | $               | (9,881 | )              | $ | (10,376             | ) | $                 | 34,133 |      
|Cumulative interest rate sensitivity gap as a percentage of total rate-sensitive assets |  |                 | -14    | %              |   | -14                 | % |                   | 47     | %    

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ITEM 4.    CONTROLS AND PROCEDURES

(a)Evaluation of disclosure controls and procedures.Our Chief Executive Officer and our Chief Financial Officer, after
evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as
of the end of the period covered by this report, have concluded that our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our
consolidated subsidiaries would be made known to them by others within those entities.

(b)Changes in internal controls.There were no significant changes in our internal controls over financial reporting that
occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

27

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FORWARD-LOOKING
STATEMENTS

CERTAIN
STATEMENTS CONTAINED HEREIN AND CERTAIN STATEMENTS CONTAINED IN FUTURE FILINGS BY THE COMPANY WITH THE SEC MAY NOT BE BASED ON HISTORICAL FACTS AND ARE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. FORWARD-LOOKING STATEMENTS WHICH ARE BASED
ON VARIOUS ASSUMPTIONS (SOME OF WHICH ARE BEYOND THE COMPANY'S CONTROL) MAY BE IDENTIFIED BY REFERENCE TO A FUTURE PERIOD OR PERIODS, OR BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY,"
"WILL," "BELIEVE," "EXPECT," "ANTICIPATE," "CONTINUE," OR SIMILAR TERMS OR VARIATIONS ON THOSE TERMS, OR THE NEGATIVE OF THOSE TERMS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN
FORWARD-LOOKING STATEMENTS DUE TO A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE RELATED TO THE ECONOMIC ENVIRONMENT, PARTICULARLY IN THE MARKET AREAS IN WHICH THE COMPANY OPERATES, THE
FINANCIAL AND SECURITIES MARKETS AND THE AVAILABILITY OF AND COSTS ASSOCIATED WITH SOURCES OF LIQUIDITY, COMPETITIVE PRODUCTS AND PRICING, THE REAL ESTATE MARKET, FISCAL AND MONETARY POLICIES OF THE
U.S. GOVERNMENT, CHANGES IN PREVAILING INTEREST RATES, ACQUISITIONS AND THE INTEGRATION OF ACQUIRED BUSINESSES, PERFORMANCE OF RETAIL/CONSUMER MARKETS, DETERIORATION IN CONSUMER CREDIT, CREDIT RISK
MANAGEMENT, ASSET/LIABILITY MANAGEMENT AND THE IMPACT OF ONGOING LITIGATION. EXCEPT AS MAY BE REQUIRED BY LAW, THE COMPANY DOES NOT UNDERTAKE, AND SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO PUBLICLY
RELEASE THE RESULTS OF ANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE DATE OF SUCH
STATEMENTS.

28

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PART IIOTHER INFORMATION

Item 1.    Legal Proceedings.

During 2001, the Company's Chief Executive Officer, Andrew Wiederhorn, and former president, Lawrence Mendelsohn, received letters from the United States
Attorney's office in Portland, Oregon advising them that they were targets of a grand jury investigation into the failure of Capital Consultants, L.L.C. ("CCL"). CCL was a lender to a
former affiliate of the Company. The investigation is ongoing and it is not possible at this stage to predict its outcome. Messrs. Wiederhorn and Mendelsohn, pursuant to the terms of their
respective employment agreements, may be entitled to indemnity from the Company for litigation expenses and personal losses in connection with these investigations and any related litigation.
Messrs. Wiederhorn and Mendelsohn have notified the Company that they are reserving their rights to seek indemnity from the Company, however, they may be entitled to primary indemnification
from other sources. At this time, it is not possible to determine the extent of liability, if any, the Company may face with regard to these potential indemnity claims. The Company has not received,
nor agreed to, any indemnity requests.

Item 2.    Changes in Securities and Use of Proceeds.

Not applicable.

Item 3.    Defaults Upon Senior Securities.

Not applicable.

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

On May 28, 2003, at the annual stockholders' meeting, the Company's stockholders elected seven persons to the Board of Directors and ratified the selection
of Ernst & Young LLP as the Company's auditors for the year ending December 31, 2003.

In
connection with the election of directors, the shares of common stock present in person or by proxy were voted as follows:

For

WithheldAndrew A. Wiederhorn

8,169,497

18,313Robert G. Rosen

8,169,497

18,241Don H. Coleman

8,170,369

17,441Christopher DeWolfe

8,170,469

17,341David Dale-Johnson

8,170,369

17,441K. Kenneth Kotler

8,167,969

19,841M. Ray Mathis

8,170,369

17,441


In
connection with the proposal to approve the ratification of the selection of Ernst & Young LLP, independent certified public accountants, as the Company's auditors for the year
ending December 31,
2003, 8,156,872 shares were voted in favor of the proposal, 28,293 shares were voted against the proposal and there were 2,645 abstentions.

Item 5.    Other Information.



Mendelsohn Put Option

On August 8, 2002, we entered into an agreement (the "Assignment"), effective July 31, 2002, in which we accepted the assignment of the obligations
of the grantor, pursuant to a Stock Option and

29

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Voting
Agreement dated October 16, 2001, granted by Mr. Wiederhorn to Mr. Mendelsohn, ("Mendelsohn") and other related stockholders for whom Mendelsohn was serving as agent,
(collectively, the "Stockholders"). At the time of the assignment, Mr. Mendelsohn was the President and a member of the Board of Directors of the Company. Mr. Mendelsohn resigned from
the Company on August 30, 2002.

Under
the Assignment, the Stockholders had the option (the "Put Option") to require us to purchase up to 1,044,760 shares of common stock (the "Option Shares") at a price per share equal
to eighty percent (80%) of the book value per share of the Company as of the end of the most recent calendar month preceding the delivery of the exercise notice (the "Evaluation Date").

The
Stockholders exercised their right to require us to purchase the Option Shares on December 24, 2002. The option price was determined to be $4.02 per share and the closing date
was February 7, 2003. One third of the purchase price for the shares purchased under the Option Agreement was paid in cash to the Stockholders at closing. The remaining purchase price was paid
with a promissory note which matures 11 months following the closing date and which bears interest at 0% for the first 90 days and 12% per annum thereafter. The note may be prepaid at
any time without penalty or premium.

Stock Purchase Loans to Officers

The Company has employment agreements with Mr. Wiederhorn and Mr. Rosen, which allowed these executives to borrow a specified maximum amount from us
to purchase shares of Common Stock. We granted loans to Mr. Wiederhorn and Mr. Rosen prior to the passage of the Sarbanes-Oxley Act of 2002. These loans are full recourse, secured loans
bearing interest at the prime rate. At June 30, 2003, in addition to the $2.0 million loan to Mr. Wiederhorn described in "Loan to Executive Officer" below, we had outstanding
loans to Mr. Wiederhorn, including accrued interest, of approximately $0.9 million.    The loans to Mr. Rosen were paid off before the 2002 year end. The
Company is not obligated to make additional advances on loans under the employment agreements. The loan to Mr. Wiederhorn is further described as follows:

Andrew Wiederhorn.On February 21, 2002, we loaned Mr. Wiederhorn $175,000 to finance the purchase of Common
Stock. This loan is full recourse to Mr. Wiederhorn and is secured by all of Mr. Wiederhorn's rights under his employment agreement. We are entitled to net amounts payable under the
employment agreement against any amounts payable by Mr. Wiederhorn upon any default or at maturity of the loan. At Mr. Wiederhorn's direction (in accordance with the terms of his
employment agreement), on February 21, 2002, we loaned a limited partnership controlled by Mr. Wiederhorn's spouse (the "LP") $687,000 to finance the purchase of Common Stock. The loan
is secured by the membership interests of two limited liability companies owned by the LP. The limited liability companies each own a parcel of real property in Oregon and have no liabilities. At the
time of the loan, the real property had an appraised value of $725,000. The loan is also guaranteed by Mr. Wiederhorn. The Common Stock purchased with the proceeds of these loans does not serve
as security for the loans. The loans are due on February 21, 2007, and bear interest at the prime rate, as published in the Wall Street Journal, which interest is added to the principal
annually.

Further
information on these loans to executives is included in our 2002 annual report on Form 10-K and proxy statements for our 2003 and prior years Annual Meeting of
Stockholders, and these executives' employment agreements have been previously filed with the SEC.

Loan to Executive Officer

Prior to the passage of the Sarbanes-Oxley Act of 2002, we loaned Mr. Wiederhorn $2.0 million. This loan is full recourse to Mr. Wiederhorn
and his spouse and is secured by trust deeds on two residences located in Oregon. The loan is due on August 1, 2007 and bears interest at 8.5% per

30

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annum,
payable monthly. The Board of Directors (with Mr. Wiederhorn abstaining) concluded that the terms of the loan were at least as favorable to the Company as would be available in an arms
length, third party transaction and approved the loan on July 9, 2002.

Fog Cutter Long-Term Vesting Trust

In the fourth quarter of 2000, we established a trust which purchased 525,000 shares of the Company's common stock from an unrelated shareholder. Our contribution
to the trust of approximately $1.3 million was included in compensation expense for the year ended December 31, 2000. The trust was established for the benefit of our employees and
directors to raise their ownership in the Company, thereby strengthening the mutuality of interests between them and our shareholders. While these shares are held in trust, they will be voted ratably
with ballots cast by all other shareholders. In December 2002, using the retained earnings on trust assets, the trust purchased an additional 100,000 shares of our stock in the open market.

Andrew
Wiederhorn, David Dale-Johnson and Don H. Coleman are the trustees for the trust. Pursuant to the terms of the trust, the trustees will, from time to time, allocate
the shares to our directors and employees. A beneficiary shall not have any rights with respect to any shares allocated unless and until the beneficiary completes five years of continuous service with
the Company, commencing with the date the beneficiary is first allocated such shares. Upon the beneficiary's completion of the vesting period, the trustees shall promptly distribute the shares
allocated to the beneficiary; provided, however, that the trustees may, in lieu of distributing the shares, make a cash payment to the beneficiary equal to the fair market value of the shares
allocated as of the date immediately prior to the date of distribution or distribute any combination of cash or shares, as determined by the trustees, in their sole discretion.

As
of June 30, 2003, the trustees had allocated 285,500 shares to our employees and directors.

Business Use of Private Aircraft

During the six months ended June 30, 2003, we paid $270,000 to Peninsula Capital Partners LLC ("Peninsula Capital"), an entity owned by
Mr. Wiederhorn, for the Company's business use of certain private aircraft. The Board of Directors is aware of the relationship and approved the fees for the use of the aircraft. The fee paid
is a reimbursement of costs to Peninsula Capital for the Company's use of the aircraft and is included in other expense on the accompanying statements of operations.

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





31

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SIGNATURES

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

| |  |                               |                                                                                          
| |  | ----------------------------- | -----------------------------------------------------------------------------------------
| |  | FOG CUTTER CAPITAL GROUP INC.
| |  | By:                           | /s/ANDREW A. WIEDERHORNAndrew A. Wiederhorn
Chairman and Chief Executive Officer         
| |  | By:                           | /s/R. SCOTT STEVENSONR. Scott Stevenson
Senior Vice President and Chief Financial Officer

Date:
August 4, 2003

32

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Exhibit Index

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|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1  |  | Purchase and Sale Agreement between WREP Islands, Limited and The Aggmore Limited Partnership, dated November 19, 2001, incorporated by reference to Exhibit 2.1 to a Form 8-K dated November 19, 2001,
as previously filed with the SEC on December 4, 2001.                                                                                        
|2.2  |  | Loan Option Agreement, by and between the Registrant and entities listed therein, dated January 1, 2002, incorporated by reference to Exhibit 2.1 to the Form 8-K dated March 6, 2002, as previously filed with the SEC on
March 8, 2002.                                                                                                            
|2.3  |  | Property Option Agreement, by and between the Registrant and the entities listed therein, dated effective March 6, 2002, incorporated by reference to Exhibit 2.2 to the Form 8-K dated March 6, 2002, as previously filed with the
SEC on March 8, 2002.                                                                                            
|2.4  |  | Medium Term Participation Agreement by and among Fog Cap L.P. and participants listed therein, dated March 6, 2002, incorporated by reference to Exhibit 2.3 to the Form 8-K dated March 6, 2002, as previously filed with the SEC on
March 8, 2002.                                                                                                 
|3.1  |  | Amended and Restated Articles of Incorporation of the Registrant, incorporated by reference to Exhibit 3.1 to the Form 10-Q for the period ended September 30, 1999, as previously filed with the SEC on November 22,
1999.                                                                                                                          
|3.2  |  | Bylaws of the Registrant, incorporated by reference to Exhibit 3.2 to Amendment No. 3 to the Registration Statement (Registration No. 333-39035) on Form S-11, as previously filed with the SEC on March 30, 1998.                                                                                                                                   
|4.1  |  | Common Stock Certificate Specimen, incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the Registration Statement (Registration No. 333-39035) on Form S-11, as previously filed with the SEC on March 30,
1998.                                                                                                                          
|4.2  |  | Form of Registration Rights Agreement, incorporated by reference to Exhibit 10.8 to Amendment No. 3 to the Registration Statement (Registration No. 333-39035) on Form S-11, as previously filed with the SEC on March 30,
1998.                                                                                                                     
|4.3  |  | Form of Stock Option Plan, incorporated by reference to Exhibit 10.3 to Amendment No. 3 to the Registration Statement (Registration No. 333-39035) on Form S-11, as previously filed with the SEC on March 30, 1998.                                                                                                                                 
|4.4  |  | Long Term Vesting Trust Agreement among the Registrant and Lawrence Mendelsohn, Andrew Wiederhorn and David Egelhoff, dated October 1, 2000, incorporated by reference to Exhibit 4.4 to the Form 10-K for the year ended December 31,
2002, as previously filed with the SEC on March 3, 2003.                                                      
|4.5  |  | Waiver, Release, Delegation and Amendment to Stock Option and Voting Agreement among Andrew A. Wiederhorn, Lawrence A. Mendelsohn, Joyce Mendelsohn, Tiffany Wiederhorn, and the Registrant, dated July 31, 2002, incorporated by reference to
Exhibit 2.1 to the Form 8-K dated August 8, 2002, as previously filed with the SEC on August 15, 2002.
|4.6  |  | Summary of Rights to Purchase Shares, incorporated by reference to Exhibit 99.1 to the Form 8-K dated October 18, 2002, as previously filed with the SEC on October 18, 2002.                                                                                                                                                                        
|4.7  |  | Rights Agreement dated as of October 18, 2002 between the Registrant and The Bank of New York, incorporated by reference to Exhibit 1 to Form 8-A, as previously filed with the SEC on October 29, 2002.                                                                                                                                             
|10.1 |  | Deed of Trust, by and among WREP Islands Limited, The Aggmore Limited Partnership and the Registrant and Fog Cap L.P., dated November 19, 2001, incorporated by reference to Exhibit 2.2 to the Form 8-K dated November 19, 2001, as
previously filed with the SEC on December 12, 2001.                                                             
|     |  |                                                                                                                                                                                                                                                                                                                                                      

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|10.2 |  | Stock Option Agreement, by and among individuals listed on Schedule 4 thereto, Aggmore Limited Partnership acting through its General Partner, Anglo Irish Equity Limited and the Registrant, dated November 19, 2001, incorporated by reference
to Exhibit 2.3 to the Form 8-K dated November 19, 2001, as previously filed with the SEC on December 4, 2001.                                                                                                                                            
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.3 |  | Employment Agreement dated September 4, 1999, and amended and restated December 31, 2001 between the Registrant and Fog Cap L.P. and Andrew A. Wiederhorn, incorporated by reference to Exhibit 10.10 to the Form 10-K for the year
ended December 31, 2001, as previously filed with the SEC on March 22, 2002.                                                                                                                                                                                          
|10.4 |  | Amended Employment Agreement dated October 9, 1999, and amended and restated December 31, 2001, between the Registrant and Fog Cap L.P. and Robert G. Rosen, incorporated by reference to Exhibit 10.12 to the Form 10-K for the year
ended December 31, 2001, as previously filed with the SEC on March 22, 2002.                                                                                                                                                                                        
|11.1 |  | Computation of Per Share Earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|31.1 |  | Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                      
|31.2 |  | Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                      
|32.1 |  | Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                   
|32.2 |  | Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                   
|99.1 |  | Letter, dated October 28, 1998, from Steven Kapiloff to Andrew Wiederhorn, incorporated by reference to Schedule 99.2 to the Form 10-Q for the period ended September 30, 1998, as previously filed with the SEC on November 23,
1998.                                                                                                                                                                                                                                                                    
|99.2 |  | Letter dated November 12, 1999 from Arthur Andersen LLP, incorporated by reference to Exhibit 99.1 to the Form 8-K dated November 12, 1999, as previously filed with the SEC on November 15, 1999.                                                                                                                                                                                                                                                                                                        
|99.3 |  | Settlement Agreement, dated as of December 10, 1999 by and between the Registrant, on behalf of itself and all of its subsidiaries and affiliates, Andrew A. Wiederhorn, and Lawrence A. Mendelsohn, and Wilshire Financial Services Group Inc.,
on behalf of itself and all of its subsidiaries and affiliates, other than First Bank of Beverly Hills, F.S.B., incorporated by reference to Exhibit 99.1 to the Form 8-K dated December 13, 1999, as previously filed with the SEC on
December 17, 1999.
|99.4 |  | Jordan D. Schnitzer Resignation Letter dated March 5, 2002, incorporated by reference to Exhibit 1.1 to the Form 8-K dated March 5, 2002, as previously filed with the SEC on March 7, 2002.                                                                                                                                                                                                                                                                                                              
|99.5 |  | Settlement Agreement, incorporated by reference to Exhibit 99.1 to the Form 8-K dated May 13, 2002, as previously filed with the SEC on May 14, 2002.                                                                                                                                                                                                                                                                                                                                                     
|99.6 |  | Lawrence A. Mendelsohn Resignation Letter dated August 30, 2002, incorporated by reference to Exhibit 1.1 to the Form 8-K dated August 30, 2002, as previously filed with the SEC on September 3, 2002.                                                                                                                                                                                                                                                                                                   

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