Merit Securities Corp · 10-K · For 12/31/03

Filed On 4/14/04 7:32pm ET   ·   SEC File 33-83524   ·   Accession Number 929426-4-6

Annual Report   ·   Form 10-K
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Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Merit Securities Corp. 2003 Form 10-K                 37    215K 
 2: EX-23       Mscorp Form 2003 10-K Auditor's Consent                1      5K 
 3: EX-31       Msc 2003 Form 10-K Sarbox 302 Cert Peo                 2±    10K 
 4: EX-31       Msc 2003 Form 10-K Sarbox 302 Cert Cao                 2±     9K 
 5: EX-32       Msc 2003 Form 10-K Sarbox 906 Cert Peo                 1      6K 
 6: EX-32       Msc 2003 Form 10-K Sarbox 906 Cert Pao                 1      6K 
 7: 10-K        Merit Securities Corp. 2003 Form 10-K                PDF    149K 

10-K   ·   Merit Securities Corp. 2003 Form 10-K
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 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549

 FORM 10-K
(Mark One)                                                                      
 |X| ANNUAL REPORT PURSUANT TO SECTION
 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the
fiscal year ended December 31,
2003
OR
  |_|  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934                                        

MERIT SECURITIES CORPORATION
(Exact name of registrant as specified in its charter)

33-83524
 Commission File No.

               Virginia                                     54-1736551
      (State or other jurisdiction of                       (I.R.S. Employer
        incorporation or organization)                     Identification No.)

4551 Cox Road, Suite 300, Glen Allen, Virginia                  23060-6740    
(Address of principal executive offices)                     (Zip Code) 

(804) 217-5800 (Registrant's
telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: NONE

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|                                                                  

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

Aggregate market value of voting stock held by non-affiliates of the registrant 
as of the latest practicable date, June 30, 2003:   None                        

As of February 27, 2004, there were 1,000 shares of Merit Securities Corporation
common stock outstanding.                                                       

The registrant meets the conditions set forth in General Instruction I(1)(a) and
(b) of Form  10-K  and,  therefore,  is  furnishing  the  abbreviated  narrative
disclosure specified in Paragraph (2) of General Instruction I.                 

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MERIT SECURITIES CORPORATION
2003 FORM 10-K ANNUAL REPORT

 TABLE OF CONTENTS

                                                        [Enlarge/Download Table]


                                                                                                          Page 
                                                                                                         Number
PART I.                                                                                                        

                                                                                                               
         Item 1.  Business..................................................................................1  
         Item 2.  Properties................................................................................3  
         Item 3.  Legal Proceedings.........................................................................3  
         Item 4.  Submission of Matters to a Vote of Security Holders.......................................3  

PART II.                                                                                                       

         Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.....................3  
         Item 6.  Selected Financial Data...................................................................3  
         Item 7.  Management's Discussion and Analysis of Financial Condition and                              
                  Results of Operations.....................................................................3  
         Item 7A. Quantitative and Qualitative Disclosures about Market Risk...............................12  
         Item 8.  Financial Statements and Supplementary Data..............................................15  
         Item 9.  Changes In and Disagreements with Accountants on Accounting and                              
                  Financial Disclosure.....................................................................30  
         Item 9A. Controls and Procedures..................................................................30  

PART III.                                                                                                      

         Item 10. Directors and Executive Officers of the Registrant.......................................30  
         Item 11. Executive Compensation...................................................................31  
         Item 12. Security Ownership of Certain Beneficial Owners and Management...........................31  
         Item 13. Certain Relationships and Related Transactions...........................................31  
         Item 14. Principal Accountant Fees and Services...................................................31  

PART IV.                                                                                                       

         Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........................31  

SIGNATURES        .........................................................................................34  

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PART I

Item 1.    BUSINESS                                                             

Merit  Securities  Corporation  (the "Company") was  incorporated in Virginia on
August  19,  1994.  The  Company  is  a  wholly-owned,  limited-purpose  finance
subsidiary  of  Issuer  Holding  Corporation  ("IHC"),  which is a  wholly-owned
subsidiary of Dynex Capital,  Inc.  ("Dynex"),  a New York Stock Exchange listed
financial services company (symbol:  DX). The financial  statements  included in
Item 8 below  reflect  the Company and its wholly  owned  subsidiary,  Financial
Asset Securitization, Inc. (FASI).                                              

The Company was organized to facilitate the  securitization of loans through the
issuance and sale of non-recourse  securitization  financing (the "Bonds").  The
Bonds are secured by  securities  and loans  backed  primarily  by: (i) mortgage
loans secured by first or second liens on residential property, and manufactured
housing  installment  loans  secured by either a Uniform  Commercial  Code (UCC)
filing or a motor vehicle title, (ii) other mortgage  pass-through  certificates
or  mortgage-collateralized  obligations,  and (iii) consumer  installment loans
(collectively, the "Collateral"). In the future, the Company may also securitize
other types of loans or securities such as Federal National Mortgage Association
Mortgage-Backed   Certificates,   Federal   Home   Loan   Mortgage   Corporation
Mortgage-Backed   Certificates,  or  Government  National  Mortgage  Association
Mortgage-Backed Certificates.                                                   

After  payment  of  the  expenses  of an  offering  and  certain  administrative
expenses,  the net proceeds from an offering of Bonds have been used to purchase
Collateral  from IHC or various  third  parties.  IHC has used the  proceeds  to
reduce  indebtedness  incurred  to obtain  such loans or to  acquire  additional
Collateral.  After the  issuance of a series of Bonds,  the Company may sell the
Collateral securing that series of Bonds, subject to the lien of the Bonds.     

From the date of its  inception  to December  31,  2003,  the Company has issued
fifteen  (15) series of Bonds  totaling  approximately  $9.7  billion  aggregate
principal  amount.  To date,  eleven  (11) of these  series have been called and
collapsed  into  subsequent  issuances or called and  re-offered for sale. As of
December 31, 2003 and 2002, the Company had four (4) series of Bonds outstanding
totaling approximately $1.0 billion and $1.3 billion, respectively.             

At December 31, 2003, the Company had securities of approximately $308.6 million
remaining  for  issuance  under a shelf  registration  statement  filed with the
Securities and Exchange  Commission.  The Company does not currently  anticipate
issuing  additional  Bonds in the near future,  other than the possible call and
re-securitization or re-issuance of previously issued Bonds.                    

The Company  owns the right to redeem,  generally by class,  the  securitization
financing  on  its  balance   sheet  once  the   outstanding   balance  of  such
securitization financing reaches 35% or less of the original amount issued, or a
specified   date.   Generally   interest  rates  on  the  bonds  issued  in  the
securitization  financing  increase by 0.30%-2.00% if the bonds are not redeemed
by the Company.  The Company will  evaluate the benefit of calling such bonds at
the time they are  redeemable.  An  estimated  $200  million  of  securitization
financing  was  redeemable  in March 2004 and an estimated  $230 million will be
redeemable in August 2004.  These  non-recourse  securitization  financings  are
collateralized by manufactured  housing loans, and certain of the bonds may have
interest rates which exceed  current market rates.  The Company has the right to
call such bonds by class and is contemplating  calling these bonds and reissuing
them at the lower current  market rates.  In March 2004,  the Company  agreed to
redeem the highest  rated  bonds in the series  redeemable  in March  2004,  and
reissue the bonds at an  estimated  $7.3 million  premium to the  Company.  This
redemption and reissue is expected to be settled by the end of April 2004.      

The Company competes in a national market with various financial firms. Economic
conditions, interest rates, regulatory changes and market dynamics all influence
the securities market.                                                          

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Securitization                                                                  

The   Company's   predominate    securitization    structure   is   non-recourse
securitization  financing,  whereby loans and  securities are pledged to a trust
and the trust issues bonds  pursuant to an  indenture.  The Company  securitizes
loans and securities by transferring  these assets to a wholly owned trust,  and
the trust issues non-recourse securitization financing pursuant to an indenture.
Generally, the Company retains some form of control over the transferred assets,
and/or the trust is not deemed to be a  qualified  special  purpose  entity.  In
instances  where the  trust is  deemed  not to be a  qualified  special  purpose
entity,  the trust is included in the consolidated  financial  statements of the
Company.  Generally,  for accounting and tax purposes,  the loans and securities
financed  through the  issuance  of bonds in the  securitization  financing  are
treated as assets  (securitized  finance  receivables)  of the Company,  and the
non-recourse  securitization  financing is treated as debt of the  Company.  The
Company  earns  the net  interest  spread  between  the  interest  income on the
securitized  finance  receivables and the interest and other expenses associated
with the securitization  financing. The net interest spread is directly impacted
by the credit  performance of the underlying loans and securities,  by the level
of prepayments of the  underlying  loans and securities  and, to the extent bond
classes are  variable-rate,  may be affected by changes in short-term rates. The
Company's  investment  in the  securitization  financing  structure is typically
referred to as the  over-collateralization.  The Company analyzes and values its
investment in  securitization  financing on a "net investment  basis" (i.e., the
excess  of the  securitized  finance  receivable  collateral  pledged  over  the
outstanding  securitization  financing,  and the  resulting net cash flow to the
Company), as further discussed below.                                           

Investment Portfolio Risks                                                      

The  Company is exposed to several  types of risks  inherent  in its  investment
portfolio. These risks include credit risk (inherent in the loan and/or security
structure) and prepayment/interest rate risk (inherent in the underlying loan). 

Credit Risk.  Credit risk is the risk of loss to the Company from the failure by
a borrower (or the proceeds from the  liquidation of the underlying  collateral)
to fully repay the  principal  balance and  interest due on a loan. A borrower's
ability to repay, or the value of the underlying collateral, could be negatively
influenced by economic and market conditions.  These conditions could be global,
national,  regional or local in nature. Upon securitization of the pool of loans
or  securities  backed by loans,  the credit  risk  retained  by the  Company is
generally  limited  to its net  investment  in the  non-recourse  securitization
financing structure (referred to as "principal balance of net investment", or as
"over-collateralization") and/or subordinated securities that it may retain from
a  securitization.  For  securitized  pools of loans,  the Company  provides for
reserves for currently existing probable losses based on the current performance
of the  respective  pool; if losses are  experienced  more rapidly due to market
conditions than the Company has provided for in its reserves, the Company may be
required to provide for additional  reserves for these losses.  The Company also
has credit risk related to certain debt securities, principally on those pledged
as securitized finance receivables,  and recognizes losses when incurred or when
such security is deemed to be impaired on an other-than-temporary basis.        

The  Company  evaluates  and  monitors  its  exposure  to credit  losses and has
established  reserves for currently  existing  probable credit losses based upon
current loan  delinquencies,  historical  cure rates of  delinquent  loans,  and
historical and anticipated loss severity of the loans as they are liquidated and
general  economic  conditions.  For loans and securities  pledged as securitized
finance  receivables,  the  Company  considers  its credit  exposure  to include
over-collateralization  and retained subordinated securities. As of December 31,
2003, the Company's credit exposure on over-collateralization was $37.9 million.
The Company has reserves of $21.0 million relative to this credit exposure.  The
Company also has credit risk on loans that are not securitized amounting to $2.7
million at December 31, 2003.                                                   

The Company has various other forms of credit  enhancement which, based upon the
performance  of the  underlying  loans and  securities,  may provide  additional
protection  against  losses.  Specifically  $168.0  million of the single family
mortgage  loans in various pools are subject to various  mortgage pool insurance
policies whereby losses would need to exceed the remaining stop loss of at least
75.0% on such policies before the Company would incur losses;  and $52.4 million
of the single family  mortgage  loans are subject to various loss  reimbursement
agreements  totaling  $27.5  million with a remaining  aggregate  deductible  of
approximately $0.9 million.                                                     

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Prepayment/Interest Rate Risk. The interest rate environment may also impact the
Company.  For example, in a rising rate environment,  the Company's net interest
margin may be  reduced,  as the  interest  cost for its  funding  sources  could
increase more rapidly than the interest earned on the associated asset financed.
The  Company's  floating-rate  funding  sources are  substantially  based on the
one-month  London  Inter-Bank  Offered  Rate  ("LIBOR")  and  re-price  at least
monthly, while the associated assets are principally six-month LIBOR or one-year
Constant  Maturity  Treasury  ("CMT") based and generally  re-price every six to
twelve  months.  Additionally,  the Company has  approximately  $209  million of
fixed-rate  assets  financed  with  floating-rate  non-recourse   securitization
financing liabilities. In a declining rate environment,  net interest margin may
be enhanced for the opposite reasons.  In a period of declining  interest rates,
however,  loans and securities in the investment portfolio will generally prepay
more rapidly (to the extent that such loans are not prohibited from prepayment),
which may result in additional  amortization  of asset premium.  In a flat yield
curve  environment  (i.e.,  when the spread  between  the yield on the  one-year
Treasury  security and the yield on the ten-year  Treasury security is less than
1.0%),  single-family adjustable rate mortgage ("ARM") loans and securities tend
to  rapidly  prepay,  causing  additional  amortization  of asset and  liability
premium.  In addition,  the spread between the Company's funding costs and asset
yields would most likely compress,  causing a further reduction in the Company's
net interest margin.  Lastly, the Company's  investment portfolio may shrink, or
proceeds  returned from prepaid assets may be invested in lower yielding assets.
The severity of the impact of a flat yield curve to the Company  would depend on
the length of time the yield curve remained flat.                               

Item 2.    PROPERTIES                                                           

The Company,  as a  subsidiary organized by Dynex Capital, Inc., has no physical
properties.                                                                     

Item 3.    LEGAL PROCEEDINGS                                                    

None.                                                                           

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

Information in response to this Item is omitted pursuant to General  Instruction
I, Paragraph 2.                                                                 

 PART II

Item 5.  MARKET  FOR  THE  REGISTRANT'S COMMON EQUITY  AND  RELATED  STOCKHOLDER
MATTERS                                                       

All of the  Company's  outstanding  common  stock is owned by IHC.  Accordingly,
there is no market for its common stock.  The Company has paid no dividends with
respect to its common stock.                                                    

Item 6.  SELECTED FINANCIAL DATA                                                

Information in response to this Item is omitted pursuant to General  Instruction
I, Paragraph 2.                                                                 

Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS                                                 

The Company has  determined  that it recorded  allowance  for loan losses during
2003 in  excess  of its  actual  exposure  to credit  losses  for the  excess of
securitized  finance  receivables  pledged over the non-recourse  securitization
financing issued for one securitization transaction.  Accordingly, the Company's
exposure to credit losses was limited under the  securitization  structure,  and
such credit loss exposure had been fully depleted or reserved  during the second
quarter 2003. Under the securitization structure, with limited exception, future
credit losses are to be borne by the holders of the  subordinated  bond classes.
The Company  continued to record  provisions for loan losses in its consolidated
financial  statements  during  the second and third  quarters  of 2003.  At each
quarter  ended June 30, 2003 and  September  30, 2003,  the  allowance  for loan
losses exceeded the net investment in securitized  finance  receivables for this

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particular  securitization  transaction.  The  following  tables  summarize  the
significant effects of such restatements for such periods.                      

Consolidated Balance Sheets Data
(amounts in thousands)                                                          

                                                        [Enlarge/Download Table]

--------------------------------------------------------------- ----------------------- --- ------------------------
                                                                    (As Previously                                  
                                                                      Reported)                  (As Restated)      
--------------------------------------------------------------- -----------------------     ------------------------
                                                                  September 30, 2003          September 30, 2003    
                                                                -----------------------     ------------------------
                                                                                                                    
Securitized finance receivables - loans                             $     825,220               $     836,012       
Total assets                                                            1,137,875                   1,148,667       
Accumulated deficit                                                       (12,599)                     (1,807)      
Total stockholders' equity                                                 56,452                      67,244       
Total liabilities and stockholder's equity                              1,137,875                   1,148,667       

                                                                    June 30, 2003                June 30, 2003      
                                                                -----------------------     ------------------------
Securitized finance receivables - loans                             $     881,228               $     888,490       
Total assets                                                            1,205,478                   1,212,740       
Accumulated deficit                                                       (14,724)                     (7,462)      
Total stockholders' equity                                                 56,271                      63,533       
Total liabilities and stockholder's equity                              1,205,478                   1,212,740       
--------------------------------------------------------------- ----------------------- --- ------------------------

Consolidated Statements of Operations Data

(amounts in thousands)                                                          

                                                        [Enlarge/Download Table]

------------------------------------ ------------------------------------- --- -------------------------------------
                                              Three Months Ended                        Nine Months Ended           
                                              September 30, 2003                        September 30, 2003          
                                     -------------------------------------     -------------------------------------
                                          (As             (As Restated)             (As             (As Restated)   
                                       Previously                                Previously                         
                                       Reported)                                 Reported)                          
------------------------------------ ---------------- --- ---------------- --- ---------------- --- ----------------
                                                                                                                    
Provision for loan losses              $   (5,003)          $   (1,473)          $  (27,298)          $  (16,506)   
Net interest margin                         2,142                5,672               (4,390)               6,402    
Net income (loss)                           2,125                5,655               (5,829)               4,963    
Comprehensive income (loss)            $    4,068           $    7,598           $   (6,330)          $     4,462   
------------------------------------ ---------------- --- ---------------- --- ---------------- --- ----------------
                                                        [Enlarge/Download Table]


------------------------------------ ------------------------------------- --- -------------------------------------
                                       Three Months Ended June 30, 2003           Six Months Ended June 30, 2003    
                                     -------------------------------------     -------------------------------------
                                          (As             (As Restated)             (As             (As Restated)   
                                       Previously                                Previously                         
                                       Reported)                                 Reported)                          
------------------------------------ ---------------- --- ---------------- --- ---------------- --- ----------------
                                                                                                                    
Provision for loan losses              $  (17,292)          $  (10,030)          $  (22,295)          $  (15,033)   
Net interest margin                       (10,232)              (2,970)              (6,532)                 730    
Net (loss) income                         (10,272)              (3,010)              (7,953)                (691)   
Comprehensive (loss) income                (8,425)              (1,163)              (5,508)               1,754    
------------------------------------ ---------------- --- ---------------- --- ---------------- --- ----------------

Since the Company  continued to provide for loans  losses  during the second and
third  quarters of 2003, the Company  intends to amend its quarterly  reports on
Forms 10-Q/A for the  quarterly  periods  ended June 30, 2003 and  September 30,
2003 to  include  the  restated  consolidated  financial  statements  as soon as
practicable.  The effects of the restatement on the quarterly  periods have been
addressed within the Company's  Management  Discussion and Analysis for the year
ended December 31, 2003.                                                        

The Company was organized to facilitate the  securitization of loans through the
issuance and sale of non-recourse  securitization  financing (the "Bonds").  The
Bonds are secured by  securities  and loans  backed  primarily  by: (i) mortgage
loans secured by first or second liens on residential property, and manufactured
housing  installment  loans  secured by either a UCC  filing or a motor  vehicle
title, (ii) other mortgage pass-through certificates or  mortgage-collateralized
obligations,   and  (iii)  consumer   installment   loans   (collectively,   the
"Collateral").  In the future,  the Company may also  securitize  other types of
loans   or   securities   such  as   Federal   National   Mortgage   Association
Mortgage-Backed   Certificates,   Federal   Home   Loan   Mortgage   Corporation
Mortgage-Backed   Certificates,  or  Government  National  Mortgage  Association
Mortgage-Backed Certificates.                                                   

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After  payment  of  the  expenses  of an  offering  and  certain  administrative
expenses,  the net  proceeds  from an offering of Bonds will be used to purchase
Collateral  from IHC or various  third  parties.  IHC can be expected to use the
proceeds  to reduce  indebtedness  incurred  to obtain  such loans or to acquire
additional Collateral.  After the issuance of a series of Bonds, the Company may
sell the  Collateral  securing that series of Bonds,  subject to the lien of the
Bonds.                                                                          

The  Company  is a  financial  services  company,  which  invests  in loans  and
securities consisting of or secured by, principally single family mortgage loans
and manufactured  housing  installment  loans. The loans and securities in which
the Company invests have generally been pooled and pledged (i.e. securitized) as
collateral for non-recourse  bonds  ("non-recourse  securitization  financing"),
which  provides  long-term  financing  for such  loans  while  limiting  credit,
interest rate and  liquidity  risk.  The Company  earns the net interest  spread
between  the  interest  income  on the loans and  securities  in its  investment
portfolio and the interest and other expenses  associated with the  non-recourse
securitization financing financing.                                             

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of the Company's  financial condition and results of
operations are based in large part upon its consolidated  financial  statements,
which have been  prepared in conformity  with  accounting  principles  generally
accepted  in the  United  States  of  America  ("generally  accepted  accounting
principles".) The preparation of the financial statements requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reported period. Actual results could differ from those estimates.          

Critical  accounting  policies  are  defined  as those  that are  reflective  of
significant  judgements  or  uncertainties,  and which may result in  materially
different results under different assumptions and conditions, or the application
of which may have a material impact on the Company's financial  statements.  The
following are the Company's critical accounting policies.                       

Consolidation of Subsidiaries. The consolidated financial statements include the
accounts of the Company and its  wholly-owned  subsidiaries,  after  significant
inter-company transactions have been eliminated.                                

Impairments.  The Company  evaluates the debt and asset backed securities in its
investment  portfolio  for  other-than-temporary   impairments.  A  security  is
generally  defined to be  other-than-temporarily  impaired if, for a period of a
maximum of three  consecutive  quarters,  the  carrying  value of such  security
exceeds its estimated fair value and the Company  estimates,  based on projected
future cash flows or other fair value  determinants,  that the fair value is not
likely  to  exceed  the  carrying  value  in  the  foreseeable   future.  If  an
other-than-temporary  impairment  is deemed to exist,  the  Company  records  an
impairment  charge to adjust  the  carrying  value of the  security  down to its
estimated   fair   value.   In   certain   instances,   as  a   result   of  the
other-than-temporary impairment analysis, the recognition or accrual of interest
will be discontinued and the security will be placed on non-accrual status.     

Fair  Value.  Securities  classified  as  available-for-sale  are carried in the
accompanying   consolidated   financial  statements  at  estimated  fair  value.
Estimates of fair value for securities may be based on market prices provided by
certain  dealers.  Estimates  of fair value for  certain  other  securities  are
determined by  calculating  the present value of the projected cash flows of the
instruments using market-based discount rates,  prepayment rates and credit loss
assumptions.  The estimate of fair value for  securities  pledged as securitized
finance  receivables  is  determined  by  calculating  the present  value of the
projected cash flows of the instruments  using  prepayment rate  assumptions and
credit loss  assumptions  based on historical  experience  and estimated  future
activity,  and using  discount rates  commensurate  with those believed would be
used by third  parties.  Such  discount rate used in the  determination  of fair
value of  securities  pledged  as  securitized  finance  receivables  was 16% at
December 31, 2003 and 2002. Prepayment rate assumptions at December 31, 2003 and
2002 were  generally  at a  "constant  prepayment  rate," or CPR,  ranging  from
35%-40%  in 2003  and  30%-45%  in 2002,  for  securitized  finance  receivables
consisting of  securities  backed by  single-family  mortgage  loans,  and a CPR
equivalent  ranging from 10% for 2003 and 11% for 2002 for  securitized  finance
receivables  consisting of securities backed by manufactured  housing loans. CPR

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assumptions  for each  year are  based in part on the  actual  prepayment  rates
experienced for the prior six-month period and in part on management's  estimate
of future prepayment  activity.  The loss assumptions utilized vary depending on
the collateral pledged.                                                         

Estimates of fair value for other  financial  instruments are based primarily on
management's  judgment.   Since  the  fair  value  of  the  Company's  financial
instruments  are based on  estimates,  actual  gains and losses  recognized  may
differ from those estimates recorded in the consolidated financial statements.  

Allowance  for Loan  Losses.  The Company  has  limited  exposure to credit risk
retained on loans, which it has securitized through the issuance of non-recourse
securitization  financing.  The aggregate loss exposure is generally  limited to
the amount of collateral in excess of the related investment-grade  non-recourse
securitization     financing     issued     (commonly     referred     to     as
"over-collateralization"),  excluding  price  premiums and  discounts  and hedge
basis  adjustments.  The  allowance  for loan losses is included in  securitized
finance receivables in the accompanying balance sheets.                         

An allowance for loan losses has been  estimated and  established  for currently
existing probable losses to the extent losses are borne by the Company under the
terms of the securitization  transaction.  Factors considered in establishing an
allowance  include  current  loan   delinquencies,   historical  cure  rates  of
delinquent  loans,  and historical and anticipated loss severity of the loans as
they are  liquidated.  The  allowance  for  losses  is  evaluated  and  adjusted
periodically by management  based on the actual and estimated  timing and amount
of probable  credit losses,  using the above  factors,  as well as industry loss
experience. Where loans are considered homogeneous, the allowance for losses are
established and evaluated on a pool basis.  Otherwise,  the allowance for losses
is  established  and  evaluated on a  loan-specific  basis.  Provisions  made to
increase the allowance are a current period  expense to  operations.  Generally,
the Company considers manufactured housing loans to be impaired when they are 30
days past due. The Company also  provides an allowance  for  currently  existing
credit losses within outstanding  manufactured housing loans that are current as
to payment but which the Company has  determined to be impaired based on default
trends,  current market conditions and empirical observable  performance data on
the loans.  Single-family  loans are  considered  impaired when they are 60 days
past due. The Company's  actual  credit  losses may differ from those  estimates
used to establish the allowance.                                                

 FINANCIAL CONDITION

------------------------------------------------- ------------------------------
                                                  December 31,
                                                  ------------------------------
(amounts in thousands except series outstanding)       2003             2002    
                                                  --------------- --------------

Securitized finance receivables:                                                
     Loans, net                                     $   783,881     $  1,014,463
     Debt securities, available-for-sale                251,554          322,545
Other loans                                               2,683            6,505
Asset-backed security, held-to-maturity                     801            1,644
Non-recourse securitization financing                 1,018,899        1,294,884
Shareholder's equity                                     65,857           61,780

Securitization financing bond series outstanding              4                4
------------------------------------------------- --------------- --------------

Securitized finance receivables                                                 

As of December  31, 2003 and 2002,  the Company had four series of  non-recourse
securitization  financing  outstanding.   The  securitized  finance  receivables
decreased  to $1.0  billion at  December  31, 2003  compared to $1.3  billion at
December 31, 2002.  This  decrease of $301.6  million is primarily the result of
$276.8  million in paydowns on the  collateral,  decreases  in accrued  interest
receivable  of  $2.2  million  and  funds  held by  trustee,  $18.6  million  of
additional  allowance for loan losses,  and $5.5 million of impairment losses on
securities.  Principal pay-downs resulted from normal principal  amortization of
the  underlying  loan or security,  and higher than  anticipated  prepayments on
these assets due to the low interest-rate environment. Allowance for loan losses
have  increased  as a result of  provisions  for losses on current  manufactured
housing  loans.  The Company  expects to continue to incur credit losses on this

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portfolio  and  additional   reserves  will  be  required  until  the  Company's
over-collateralization    is   depleted.    Impairment   charges   result   from
other-than-temporary  decreases  in market  value on debt  securities  backed by
manufactured housing loan collateral.                                           

Other loans                                                                     

Other loans  decreased to $2.7 million at December 31, 2003 from $6.5 million at
December 31, 2002.  Other loans are composed of single family loans not included
in the  securitization  completed  in April 2002 and  retained by the Company as
individual  loans.  This decrease  resulted from  pay-downs on the loans of $3.8
million.                                                                        

Asset-backed security                                                           

The  asset-backed  security  decreased  to $0.8  million at December  31,  2003,
compared to $1.7 million at December 31, 2002 primarily as a result of principal
payments of $1.0 million during the year.                                       

Non-recourse securitization financing                                           

Non-recourse  securitization financing decreased to $1.0 billion at December 31,
2003 from $1.3 billion at December 31, 2002.  This decrease of $276.0 million is
the result of $284.1 million in paydowns and a $0.4 million  decrease in accrued
interest payable offset by $8.5 million of amortization and  reclassification of
premium and discounts during the twelve months ended December 31, 2003. Included
in the $284.1 million paydowns, for certain securitizations, was surplus cash in
the amount of $3.3 million that was retained  within the security  structure and
used to repay bonds  outstanding,  instead of being released to the Company,  as
provided for in the securitization indenture. For certain other securitizations,
since    cumulative    losses   have    depleted   the    required    level   of
over-collateralization  provided  as  credit  enhancement,  surplus  cash in the
amount of $4.9 million was retained to cover losses.                            

Shareholder's Equity                                                            

Shareholder's  equity increased to $65.8 million at December 31, 2003 from $61.8
million at December 31, 2002 due primarily to net income of $4.0 million.       

 RESULTS OF OPERATIONS

--------------------------------------------------------------------------------
                               For the Year Ended December 31,
                             ---------------------------------------------------
(amounts in thousands)             2003             2002               2001     
--------------------------------------------------------------------------------
Interest income                 $    83,471      $   106,270       $   151,870  
Interest expense                     55,814           66,485           111,361  
Provision for loan losses            18,611           28,559            18,670  
Net interest margin                   9,046           11,226            21,839  
Impairment charges                   (5,494)         (17,446)          (15,840) 
Net income (loss)                     4,025           (6,770)            4,986  
--------------------------------------------------------------------------------

2003 Compared to 2002                                                           

Interest  income  on  the  securitized  finance  receivables,  other  loans  and
asset-backed  securities  decreased to $83.5 million from $106.3 million for the
years  ended  December  31,  2003 and  2002,  respectively.  This  decrease  was
primarily a result of the continued impact of prepayments on interest income, as
average  securitized  finance  receivables  declined  from $1.5  billion to $1.2
billion for period ended December 31, 2002 and 2003, respectively,  coupled with
the overall decline in interest rates during 2003.                              

Interest  expense on non-recourse  securitization  financing  decreased to $55.8
million in 2003 from $66.5  million in 2002,  primarily  due to the  decrease in
one-month London InterBank Offered Rate ("LIBOR") during 2003 and the decline in
average   securitization   financing  bonds  due  to  paydowns  on  the  related
securitized  finance  receivables.  The average  securitization  financing bonds

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decreased from $1.4 billion in 2002 to $1.1 billion in 2003. The one-month LIBOR
decreased from 1.38% at December 31, 2002 to 1.12% at December 31, 2003.        

Provision for loan losses  decreased to $18.6 million in 2003 from $28.6 million
in 2002.  Included in provision for loan losses is $6.1 million recorded in 2003
specifically   for  currently   existing   credit   losses  within   outstanding
manufactured  housing loans that are current as to payment but which the Company
has  determined  to be  impaired.  Previously,  the Company  had not  considered
current loans to be impaired under generally accepted accounting  principles and
therefore  had not  previously  provided  for the  impairment  of  these  loans.
Continued  worsening  trends in both the  industry as a whole and the  Company's
pools of  manufactured  housing loans prompted the Company to prepare  extensive
analysis  on these  pools of  loans.  The  Company  has not  originated  any new
manufactured  housing loans since 1999, and has extensive  empirical data on the
historical  performance  of this  static  pool of loans.  The  Company  analyzed
performance  and default  activity for loans that were current at various points
in time over the last 36 months, and based on that analysis,  identified default
trends on these loans. The Company also considered  current market conditions in
this analysis,  with the expectation that these market conditions would continue
for the  foreseeable  future.  Given this new  observable  data, the Company now
believes  the  inclusion of amounts in the  provision  for loan losses for loans
which are current as to payment is an appropriate  application of the definition
of impairment within generally accepted accounting principles, and has accounted
for this provision as a change in accounting estimate and, accordingly, recorded
the amount as  additional  provision for loan losses.  The Company  continues to
experience  unfavorable  results in its  manufactured  housing loan portfolio in
terms of elevated  delinquencies  and loss  severity.  Within each  non-recourse
securitization  financing,  a group of loans are held within the  securitization
structure  as  additional  support for  potential  credit  losses and to provide
additional cash flow to cover such credit losses.  Once the cumulative  level of
losses surpassed the cash flow available from the credit reserve and losses have
depleted the over-collateralization,  future losses are passed to the holders of
the lowest classes of bonds within the structure.  In one of the  securitization
structures of the Company,  total cumulative  losses have surpassed the level of
the cash flow available from the credit reserve and have completely depleted the
over-collateralization.  During the three months ended December 31, 2003, losses
on this  securitization  began to pass to the subordinate class bondholders.  As
the  over-collateralization has been depleted in the current year, the Company's
provision for loan losses correspondingly declined.                             

Net interest  margin in 2003  decreased  to $9.0  million from $11.2  million in
2002.  This  decrease  was a result  of a decline  in  interest  earning  assets
partially  offset by a decrease from $28.6 million to $18.6 million in provision
for loan  losses and  reduced  borrowing  costs on  non-recourse  securitization
financing during the period.                                                    

Impairment charges decreased from $17.4 million in 2002 to $5.5 million in 2003.
This decrease is primarily a result of improved  economic  conditions  and lower
LIBOR  rates,  which  showed a projected  improvement  in fair value of the debt
security.  Compared to 2002,  actual losses,  projected loss rates and projected
constant  prepayment  rates decreased in 2003 resulting in one to three quarters
of projected gains during the year.  Also, the Eurodollar  curve reflected lower
projected interest rates in 2003 compared to 2002.                              

2002 Compared to 2001                                                           

Interest  income  on  the  securitized  finance  receivables,  other  loans  and
asset-backed  securities decreased to $106.3 million in 2002 from $151.9 million
in 2001.  This  decrease  was  primarily  a result  of the  continued  impact of
prepayments  on interest  income,  as average  securitized  finance  receivables
declined from $2.0 billion to $1.5 billion for the years ended December 31, 2001
and 2002,  respectively,  coupled  with the overall  decline in  interest  rates
during 2002.                                                                    

Interest expense on securitization financing bonds decreased to $66.5 million in
2002 from $111.4  million in 2001,  primarily  due to the  decrease in one-month
London  InterBank  Offered Rate ("LIBOR") during 2002 and the decline in average
securitization  financing  bonds due to prepayments  on the related  securitized
finance  receivables.  The average bonds  decreased from $1.5 billion in 2001 to
$1.4 billion in 2002 and one-month  LIBOR  decreased  from 1.87% at December 31,
2001 to 1.38% at December 31, 2002.                                             

Provision for loan losses  increased to $28.6 million in 2002 from $18.7 million
in 2001. Provision for losses increased by $9.9 million as a result of additions
for manufactured housing loans. The continuing  under-performance of these loans
prompted the Company to revise its estimate of losses to include a percentage of

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all loans with  delinquencies  greater than 30 days.  This  revision,  which was
instituted  during  the fourth  quarter  of 2002,  resulted  in an  increase  in
provision  for losses of $7.4 million  during the quarter.  Loss severity on the
manufactured  housing loans  continued to remain high during 2002 as a result of
the  saturation  in the  market  place  with  both  new and  used  (repossessed)
manufactured  housing  units.  Defaults in 2002 on  manufactured  housing  loans
averaged 4.5%,  versus 4.2% in 2001,  and loss severity  continued at 77% during
the year.                                                                       

Net interest  margin in 2002  decreased to $11.2  million from $21.8  million in
2001.  This  decrease was a result of an increase in  provision  for loan losses
from $18.7  million to $28.6  million and a decline in interest  earning  assets
partially  offset  by  reduced  borrowing  costs  on  non-recourse   securitized
financings outstanding during the period.                                       

Impairment  charges increased to $17.4 million in 2002 compared to $15.8 million
in 2001.  This  increase  resulted from the  under-performance  of the Company's
manufactured  housing loan portfolio in debt securities.  The impairment charges
on the debt securities result from revised  expectations on related  securitized
finance receivables.                                                            

Credit Exposures                                                                

With  non-recourse  securitization  financing  structures,  the Company  retains
credit  risk  relative  to the  amount  of  over-collateralization  required  in
conjunction  with the bond insurance.  Losses are generally first applied to the
over-collateralized  amount,  with any losses in excess of that amount  borne by
the  holders  of the  subordinated  classes of the  non-recourse  securitization
financing.  Generally,  surplus  cash that would  otherwise  be  released to the
Company is  retained  within the  securitization  structure  if losses  exceed a
certain  threshold.  The Company  only incurs  credit  losses to the extent that
losses are incurred in the repossession,  foreclosure and sale of the underlying
collateral.  Such  losses  generally  equal the excess of the  principal  amount
outstanding,  less any  proceeds  from  mortgage or hazard  insurance,  over the
liquidation  value of the  collateral.  To compensate  the Company for retaining
this loss  exposure,  the  Company  generally  receives  an excess  yield on the
collateralized  loans relative to the yield on the  non-recourse  securitization
financing. At December 31, 2003, the Company retained $37.9 million in aggregate
principal amount of over-collateralization compared to $54.9 million at December
31,  2002.  For certain  other  securitizations,  since  cumulative  losses have
depleted  the  required  level  of  over-collateralization  provided  as  credit
enhancement,  surplus  cash in the amount of $4.9  million was retained to cover
losses.  Other forms of credit enhancement that benefit the Company,  based upon
the  performance  of the underlying  loans,  may provide  additional  protection
against  losses.   These  additional   protections  include  loss  reimbursement
guarantees with a remaining balance of $27.5 million and a remaining  deductible
aggregating $0.9 million on $52.4 million of securitized  single family mortgage
loans, which are subject to such reimbursement  agreements.  In addition, $168.0
million of  securitized  single  family  mortgage  loans are  subject to various
mortgage  pool  insurance  policies  whereby  losses  would  need to exceed  the
remaining  stop loss of at least 75% on such  policies  before the Company would
incur losses.                                                                   

Recent Accounting Pronouncements                                                

In April 2002, the Financial  Accounting Standards Board (FASB) issued Statement
of Financial  Accounting Standards (SFAS) No. 145, "Recission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
Effective  January 1,  2003,  SFAS No. 145  requires  gains and losses  from the
extinguishment  or repurchase of debt to be  classified as  extraordinary  items
only if they meet the  criteria for such  classification  in APB Opinion No. 30.
Until January 1, 2003, gains and losses from the extinguishment or repurchase of
debt must be classified as  extraordinary  items, as the Company has done. After
January  1,  2003,  any  gain or  loss  resulting  from  the  extinguishment  or
repurchase of debt  classified as an  extraordinary  item in a prior period that
does not meet the criteria for such classification under APB Opinion No. 30 must
be  reclassified.  The Company  adopted this  statement on January 1, 2003.  The
Company adopted SFAS No. 145 and reclassified  gains from the  extinguishment of
debt from  extraordinary  items to Other Income  (Expense)  on the  Consolidated
Statements of Operations.                                                       

In July 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit or  Disposal  Activities."  Effective  January 1,  2003,  SFAS No. 146
requires   companies  to  recognize  costs  associated  with  exit  or  disposal
activities  when they are incurred rather than at the date of a commitment to an
exit or disposal plan.  This SFAS applies to activities that are initiated after
December 31, 2002. The adoption of SFAS No. 146 has not had a material impact on
the Company's financial position, results of operations or cash flows.          

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In December  2002,  the FASB issued SFAS No. 148,  "Accounting  for  Stock-Based
Compensation--Transition  and  Disclosure."  Effective  after December 15, 2002,
this statement amends SFAS No. 123,  "Accounting for Stock-Based  Compensation",
to provide  alternative methods of transition for a voluntary change to the fair
value based method of  accounting  for  stock-based  employee  compensation.  In
addition,  this statement amends the disclosure  requirements of SFAS No. 123 to
require prominent  disclosures in both annual and interim  financial  statements
about the method of accounting for  stock-based  employee  compensation  and the
effect of the method used on reported results.  The adoption of SFAS No. 148 has
not had a significant  impact on the Company's  financial  position,  results of
operations or cash flows.                                                       

In April 2003,  the FASB issued SFAS No. 149,  "Amendment  of  Statement  133 on
Derivative  Instruments and Hedging Activities."  Effective after June 30, 2003,
this Statement amends SFAS No. 133,  "Accounting for Derivative  Instruments and
Hedging  Activities",  to provide  clarification  of  financial  accounting  and
reporting for derivative  instruments,  including certain derivative instruments
embedded in other contracts.  In particular,  this statement (1) clarifies under
what  circumstances  a  contract  with  an  initial  net  investment  meets  the
characteristic of a derivative discussed in paragraph 6(b) of Statement 133, (2)
clarifies  when a  derivative  contains a  financing  component,  (3) amends the
definition   of  an   underlying   to  conform  it  to  language  used  in  FASB
Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees,  Including  Indirect  Guarantees of Indebtedness of Others," and
(4) amends certain other existing pronouncements.  Those changes are intended to
result in more consistent reporting of contracts as either derivatives or hybrid
instruments.  The Company's  adoption of SFAS No. 149 in July 2003 has not had a
significant impact on the Company's financial  position,  results of operations,
or cash flows.                                                                  

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
is effective for financial  instruments  entered into or modified  after May 31,
2003;  and otherwise is effective at the  beginning of the first interim  period
beginning  after June 15,  2003,  except for  mandatorily  redeemable  financial
instruments of nonpublic  entities,  which are subject to the provisions of this
Statement for the first fiscal period  beginning  after December 15, 2003.  This
Statement  amends SFAS No.  133,  "Accounting  for  Derivative  Instruments  and
Hedging  Activities,"  and SFAS No.  128,  "Earnings  per  Share," to  establish
standards  outlining how to classify and measure certain  financial  instruments
with  characteristics  of both liabilities and equity.  It requires that certain
financial   instruments  that  were  previously  classified  as  equity  now  be
classified  as a  liability  (or,  in  some  circumstances,  as an  asset).  The
Company's adoption of SFAS No. 150 in July 2003 has not had a significant impact
on the Company's financial position, results of operations, or cash flows.      

On November 25, 2002,  the FASB issued FIN No. 45,  "Guarantor's  Accounting and
Disclosure  Requirements  for  Guarantees,   Including  Indirect  Guarantees  of
Indebtedness of Others,  an  interpretation of FASB Statements No. 5, 57 and 107
and  Rescission  of FASB  Interpretation  No.  34."  FIN No.  45  clarifies  the
requirements  of SFAS No. 5,  "Accounting  for  Contingencies,"  relating to the
guarantor's  accounting for, and disclosure of, the issuance of certain types of
guarantees.  The  disclosure  requirements  of  FIN  No.  45 are  effective  for
financial  statements of interim or annual  periods that end after  December 15,
2002.  The Company had no guarantees  that require  disclosure at year-end 2003.
The  provisions  for initial  recognition  and  measurement  are  effective on a
prospective  basis for guarantees that are issued or modified after December 31,
2002,  irrespective of the guarantor's  year-end.  FIN No. 45 requires that upon
issuance  of a  guarantee,  the entity must  recognize a liability  for the fair
value of the obligation it assumes under that guarantee.  The Company's adoption
of FIN No. 45 in 2003 has not had a material  effect on the Company's  financial
position, results of operations or cash flows.                                  

In December  2003,  the FASB  re-issued FIN No. 46,  "Consolidation  of Variable
Interest  Entities  - an  interpretation  of ARB  No.  51,"  as  revised,  which
addresses  consolidation of variable interest  entities.  FIN No. 46 expands the
criteria  for  considering   whether  a  variable   interest  entity  should  be
consolidated by a business entity, and requires existing unconsolidated variable
interest  entities  (which  include,  but are not  limited to,  special  purpose
entities,  or SPEs) to be  consolidated  by their primary  beneficiaries  if the
entities  do  not  effectively  disperse  risks  among  parties  involved.  This
interpretation  applies  immediately to variable interest entities created after
January 31,  2003,  and to  variable  interest  entities in which an  enterprise
obtains an  interest  after that date.  It applies in the first  fiscal  year or
interim period beginning after December 15, 2003, to variable  interest entities
in which  an  enterprise  holds a  variable  interest  that it  acquired  before
February  1, 2003.  The Company  does not expect the  adoption of FIN No. 46, as
revised, to have a material effect on the Company's financial position,  results
of operations or cash flows.                                                    

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In November  2003,  the FASB reached a consensus  in Emerging  Issues Task Force
(EITF) Issue No. 03-1, "The Meaning of  Other-Than-Temporary  Impairment and its
Application to Certain  Investments"  that certain  quantitative and qualitative
disclosures  should be required for securities  accounted for under SFAS No. 115
and SFAS No. 124,  Accounting  for Certain  Investments  Held by  Not-for-Profit
Organizations,  that are  impaired  at the  balance  sheet date but for which an
other-than-temporary  impairment has not been recognized.  In December 2003, the
Company adopted the guidance set forth in EITF Issue No. 03-1,  which has had no
material effect on the Company's  financial  position,  results of operations or
cash flows.                                                                     

In December 2003, the Accounting  Standards  Executive  Committee (AcSEC) of the
American Institute of Certified Public  Accountants  (AICPA) issued Statement of
Position  (SOP) No.  03-3,  "Accounting  for  Certain  Loans or Debt  Securities
Acquired in a Transfer."  SOP No. 03-3 is effective for loans acquired in fiscal
years  beginning  after  December 15, 2004,  with early adoption  encouraged.  A
certain  transition  provision  applies for certain  aspects of loans  currently
within the scope of Practice  Bulletin 6,  Amortization  of Discounts on Certain
Acquired  Loans.  SOP No. 03-3  addresses  accounting  for  differences  between
contractual  cash  flows  and  cash  flows  expected  to be  collected  from  an
investor's  initial investment in loans or debt securities (loans) acquired in a
transfer if those  differences  are  attributable,  at least in part,  to credit
quality. It includes loans acquired in business  combinations and applies to all
non-governmental entities, including not-for-profit organizations.  SOP No. 03-3
does not apply to loans  originated by the entity.  The Company is reviewing the
implications  of SOP No. 03-3 but does not believe that its adoption will have a
significant  impact on its  financial  position,  results of  operations or cash
flows.                                                                          

 LIQUIDITY AND CAPITAL RESOURCES

Non-recourse Securitization Financing                                           

The Company has issued non-recourse debt in the form of securitization financing
to fund its  investment  portfolio.  The  obligations  under the  securitization
financing  structure are payable solely from the securitized finance receivables
pledged and are otherwise non-recourse to the Company.  Securitized financing is
not  subject  to  margin  calls.  The  maturity  of each  class of  non-recourse
securitization   financing  is  directly  affected  by  the  rate  of  principal
prepayments on the related collateral. Each series is also subject to redemption
in whole or in part at the option of the issuer and according to specific  terms
of the respective indentures,  including when the remaining balance of the bonds
equals 35% or less of the original  principal  balance of the bonds,  or as of a
certain date. At December 31, 2003, the Company had $1.0 billion of non-recourse
securitization financing outstanding.  One series of non-recourse securitization
financing  outstanding was redeemable at the option of the Company in March 2004
and the other will be redeemable  in August 2004  respectively.  The  respective
indentures  provide for increases in interest rates ranging from  0.30%-2.00% on
the underlying non-recourse securitization financing classes if such classes are
not  called  by  the  issuer.  It is  anticipated  that  the  redemption  of the
non-recourse securitization financing redeemable in March 2004 will be completed
by the end of April 2004. For purposes of the following table, these obligations
are not redeemed.                                                               

Contractual Obligations and Commitments                                         
The following  table shows expected cash payments on contractual  obligations of
the Company for the following time periods:                                     

                                                        [Enlarge/Download Table]


----------------------------------------- --------------------------------------------------------------------------
                                                                   Payments due by period                           
----------------------------------------- --------------------------------------------------------------------------
Contractual Obligations                       Total        < 1 year      1-3 years       3-5 years      > 5 years   
----------------------------------------- -------------- ------------- --------------- --------------- -------------
Long-Term Debt Obligations:                                                                                         
                                                                                                                    
Non-recourse securitization financing (1)  $1,021,130      $225,059      $  297,315      $  179,159      $  319,597 
----------------------------------------- -------------- ------------- --------------- --------------- -------------

(1)  Securitization  financing is  non-recourse  to the Company as the bonds are
     payable  solely from loans and securities  pledged as  securitized  finance
     receivables.  Payments due by period were estimated  based on the principal
     repayments forecast for the underlying loans and securities,  substantially
     all of which  is used to  repay  the  associated  securitization  financing
outstanding.                                                          

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Off-Balance Sheet Arrangements                                                  

The Company makes various representations and warranties relating to the sale or
securitization  of loans.  To the extent the Company were to breach any of these
representations  or  warranties,  and such breach  could not be cured within the
allowable time period,  the Company would be required to repurchase  such loans,
and could incur losses.  In the opinion of  management,  no material  losses are
expected to result from any such  representations and warranties and, therefore,
have not been accrued for as a liability.                                       

 Summary of Selected Quarterly Results (unaudited)
(amounts in thousands)

--------------------------------------------------------------------------------
Year ended December 31, 2003   First Quarter            Second Quarter          
---------------------------- ---------------- ----------------------------------
                                                (As previously      As restated)
                               reported)
--------------------------- ----------------- -------------------- -------------
Operating results:                                                              
Total interest income (1)      $  22,454         $   20,610           $  20,610 
Total interest expense (1)        13,751             13,550              13,550 
Net interest margin                3,700            (10,232)             (2,970)
Net income (loss)                  2,318            (10,272)             (3,010)

--------------------------- ----------------- -------------------- -------------

--------------------------------------------------------------------------------
Year ended December 31, 2003   Third Quarter                   Fourth Quarter   
---------------------------- ---------------------------------------------------
          (As previously   (As restated)
reported)     
--------------------------- ---------------- ----------------- -----------------
Operating results:                                                              
Total interest income (1)      $   19,498       $   19,498        $     20,910  
Total interest expense (1)         12,353           12,353              16,160  
Net interest margin                 2,142            5,672               2,644  
Net income (loss)                   2,125            5,655                (938) 

--------------------------- ---------------- ----------------- -----------------

--------------------------------------------------------------------------------
                              First       Second        Third         Fourth
Year ended December 31, 2002   Quarter      Quarter       Quarter       Quarter 
---------------------------- ----------- ----------- ---------------- ----------
Operating results:                                                              
Total interest income (1)    $   27,255  $  28,191   $     25,959     $  24,865 
Total interest expense (1)       17,744     17,272         16,365        15,104 
Net interest margin               3,634      5,640          4,108        (2,156)
Net income (loss)                 1,673        654          1,843       (10,940)

------------------------------------------------------------------ -------------
(1)  Interest  income and interest  expense  reflects  the  reclassification  of
deferred  hedging  basis  adjustments  as  discussed  in Note 2 of the  Notes to
Financial Statements.                                                           

During  the  three-months  ended  December  31,  2003,  the  Company  recognized
impairment  charges of $4.0 million on a debt  security  supported by underlying
manufactured housing and single-family loans.                                   

Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK           

Market  risk  generally  represents  the risk of loss that may  result  from the
potential  change in the value of a financial  instrument due to fluctuations in
interest  and in equity and  commodity  prices.  Market risk is inherent to both
derivative and non-derivative financial instruments,  and accordingly, the scope
of the Company's  market risk management  extends beyond  derivatives to include
all  market  risk  sensitive  financial  instruments.  As a  financial  services

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company,  net interest margin  comprises the primary  component of the Company's
earnings and cash flows.  The Company is subject to risk resulting from interest
rate  fluctuations  to the extent  that there is a gap between the amount of the
Company's interest-earning assets and the amount of interest-bearing liabilities
that are prepaid,  mature or re-price within  specified  periods.  The Company's
strategy  has been to mitigate  interest  rate risk  through  the  creation of a
diversified investment portfolio that generates stable income and cash flow in a
variety of interest rate and prepayment environments.                           

The Company and IHC monitor the  aggregate  cash flow,  projected  net yield and
estimated  market value of the  securitized  finance  receivables  under various
interest rate and prepayment assumptions.  While certain investments may perform
poorly  in  an  increasing  or  decreasing  interest  rate  environment,   other
investments may perform well, and others may not be impacted at all.            

The Company  focuses on the  sensitivity of its investment  portfolio cash flow,
and measures such sensitivity to changes in interest rates.  Changes in interest
rates are defined as interest  rate  movements  in 100 basis point and 200 basis
point ratable increments,  both up and down, over the ensuing twelve months from
the  measurement  date. The Company  estimates its net interest margin cash flow
for the next  twenty-four  months  assuming that  interest  rates over such time
period  follow the forward LIBOR curve (based on the 90-day  Eurodollar  futures
contract) as of December 31, 2003. Once the base case has been  estimated,  cash
flows are  projected  for each of the defined  interest  rate  scenarios.  Those
scenario  results  are then  compared  against  the base case to  determine  the
estimated change to cash flow.                                                  

The following  table  summarizes the Company's net interest margin cash flow and
market  value  sensitivity  analysis  as of December  31,  2003.  This  analysis
represents management's estimate of the percentage change in net interest margin
cash flow and value  expressed as a percentage  change in  shareholders'  equity
given a parallel shift in interest  rates, as discussed  above.  The "Base" case
represents the interest rate  environment as it existed as of December 31, 2003.
As of December  31,  2003,  one-month  LIBOR was 1.12% and  six-month  LIBOR was
1.22%. The analysis is heavily dependent upon the assumptions used in the model.
The effect of changes in future interest rates,  the shape of the yield curve or
the mix of assets and  liabilities  may cause actual  results to differ from the
modeled results. In addition,  certain financial instruments provide a degree of
"optionality." The most significant option affecting the Company's  portfolio is
the borrower's  option to prepay the loans.  The model applies  prepayment  rate
assumptions  representing  management's  estimate  of  prepayment  activity on a
projected basis for each collateral pool in the investment portfolio.  The model
applies the same prepayment rate assumptions for all five cases indicated below.
Given the current composition and performance of the investment  portfolio,  and
the  limitation to  estimating  twenty-four  months of net interest  margin cash
flows,  variations in  prepayment  rate  assumptions  are not expected to have a
material impact on the net interest margin cash flows.  Projected results assume
no additions or  subtractions to the Company's  portfolio,  and no change to the
Company's liability structure. Historically, there have been significant changes
in the Company's non-recourse  securitization financing,  underlying collateral,
and  asset-backed  securities  held-to-maturity  and there are likely to be such
changes in the future.                                                          

Projected in Net        
      Basis Point         Interest Margin Cash        Projected Change in Value,
Increase (Decrease) in         Flow From            expressed as a percentage of
Interest Rates             Base Case                 Shareholders'Equity
------------------------ ------------------------- -----------------------------
+200                   (20.3)%                       (22.4)%  
+100                   (10.8)%                       (11.2)%  
Base                                                          
-100                    11.6%                         11.6%   
-200                    16.6%                         17.4%   

Approximately  $352.4  million  of  the  Company's  investment  portfolio  as of
December  31, 2003 is comprised  of loans or  securities  that have coupon rates
which adjust over time (subject to certain periodic and lifetime limitations) in
conjunction with changes in short-term interest rates. Approximately 72% and 14%
of the ARM loans or  securities  underlying  the Company's  securitized  finance
receivables are indexed to and reset based upon the level of six-month LIBOR and
one-year CMT,  respectively.  These ARM assets are financed with adjustable-rate
non-recourse securitization financing borrowings.                               

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Generally,  during a period of rising  short-term  interest rates, the Company's
net interest  spread  earned on its  investment  portfolio  will  decrease.  The
decrease of the net  interest  spread  results from (i) the lag in resets of the
ARM loans  underlying  the ARM securities and  securitized  finance  receivables
relative to the rate resets on the associated borrowings and (ii) rate resets on
the ARM loans  which are  generally  limited  to 1% every six months or 2% every
twelve months and subject to lifetime caps, while the associated borrowings have
no such  limitation.  As short-term  interest rates  stabilize and the ARM loans
reset, the net interest margin may be restored to its former level as the yields
on the ARM loans adjust to market  conditions.  Conversely,  net interest margin
may increase following a fall in short-term interest rates. This increase may be
temporary  as the yields on the ARM loans  adjust to the new  market  conditions
after a lag period. In each case, however, the Company expects that the increase
or decrease in the net interest spread due to changes in the short-term interest
rates  to be  temporary.  The net  interest  spread  may  also be  increased  or
decreased  by the  proceeds  or  costs  of  interest  rate  swap,  cap or  floor
agreements, to the extent that the Company has entered into such agreements.    

The remaining  portion of the Company's  securitized  finance  receivables as of
December 31, 2003, approximately $719.3 million, is comprised of loans that have
coupon rates that are fixed.  The Company has limited its interest  rate risk on
such collateral  primarily  through (i) the issuance of fixed-rate  non-recourse
securitization  financing which  approximated  $464.7 million as of December 31,
2003, and (ii) equity, which was $65.9 million.  Overall, the Company's interest
rate risk is  primarily  related  to the rate of change in  short-term  interest
rates, not the level of short-term interest rates.                              

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Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                          

MERIT SECURITIES CORPORATION                                                    

                                                        [Enlarge/Download Table]

                                                                                                          
Independent Auditors' Report ...........................................................................16
Consolidated Balance Sheets - December 31, 2003 and 2002................................................17
Consolidated Statements of Operations - For the years ended December 31, 2003, 2002 and 2001............18
Consolidated Statements of Shareholder's Equity - For the years ended December 31, 2003, 2002 and 2001..19
Consolidated Statements of Cash Flows - For the years ended December 31, 2003, 2002 and 2001............20
Notes to Consolidated Financial Statements - For the years ended December 31, 2003, 2002 and 2001.......21

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INDEPENDENT AUDITORS' REPORT                                                    

The Board of Directors                                                          
Merit Securities Corporation                                                    

We have audited the accompanying consolidated balance sheets of Merit Securities
Corporation and subsidiaries  (the  "Corporation"),  as of December 31, 2003 and
2002,  and the related  consolidated  statements  of  operations,  shareholder's
equity,  and cash flows for each of the three years in the period ended December
31, 2003. These financial statements are the responsibility of the Corporation's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.                                                 

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.                                               

In our opinion,  such consolidated  financial  statements present fairly, in all
material respects,  the financial  position of Merit Securities  Corporation and
subsidiaries  as of  December  31,  2003  and  2002,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.                                                   

DELOITTE & TOUCHE LLP                                                           

Richmond, Virginia                                                              
April 9, 2004                                                                   

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MERIT SECURITIES CORPORATION                                                    
CONSOLIDATED BALANCE SHEETS                                                     

December 31, 2003 and 2002                                                      
(amounts in thousands except share data)                                        

                                         2003               2002
                                           -----------------  ------------------
Assets:                                                                         
Securitized finance receivables:                                        
     Loans, net                            $    783,881       $  1,014,463
     Debt securities, available-for-sale        251,554            322,545
Other loans                                       2,683              6,505
 Asset-backed security, held-to-maturity            801              1,644
 Due from affiliates, net                        45,837             11,507
                                           -----------------  ------------------
                                           $  1,084,756       $  1,356,664
                                           =================  ==================
Liabilities and Shareholder's Equity:                                           
Liabilities:                                                                    
Non-recourse securitization financing      $  1,018,899       $  1,294,884
                                           -----------------  ------------------
                                              1,018,899          1,294,884
                                           -----------------  ------------------
Shareholder's Equity:                                                           
Common stock, no par value                                                
10,000 shares authorized,                                             
  1,000 issued and outstanding                       10                 10
Additional paid-in capital                       68,674             68,674
 Accumulated other comprehensive loss                (82)              (134)
 Accumulated deficit                              (2,745)            (6,770)
                                           -----------------  ------------------
                                                 65,857             61,780
                                           -----------------  ------------------
                                           $  1,084,756      $   1,356,664
                                           =================  ==================

See accompanying notes to these consolidated financial statements.              

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MERIT SECURITIES CORPORATION                                                    
CONSOLIDATED STATEMENTS OF OPERATIONS                                           

For the years ended December 31, 2003, 2002 and 2001                            
(amounts in thousands)                                                          

                                                        [Enlarge/Download Table]


                                                             2003             2002              2001       
                                                     ------------------------------------------------------
  Interest income:                                                                                         
                                                                                                           
    Securitized finance receivables                      $    83,019       $   106,192      $   151,870    
     Other loans                                                 137                78                -    
     Asset-backed security                                       315                 -                -    
                                                     ------------------------------------------------------
                                                              83,471           106,270          151,870    
                                                     ------------------------------------------------------

  Interest and related expense:                                                                            
    Interest expense on non-recourse securitization                                                        
    financing                                                 52,140            64,494          109,633    
    Other securitization financing expense                     3,674             1,991            1,728    
                                                     ------------------------------------------------------
                                                              55,814            66,485          111,361    
                                                     ------------------------------------------------------

  Net interest margin before provision for loan                                                            
  losses                                                      27,657            39,785           40,509    
  Provision for loan losses                                  (18,611)          (28,559)         (18,670)   
                                                     ------------------------------------------------------
  Net interest margin                                          9,046            11,226           21,839    

Impairment charges                                            (5,494)          (17,446)         (15,840)   
Other income (expense)                                           473              (550)          (1,013)   
                                                     ------------------------------------------------------
 Net income (loss)                                        $     4,025      $    (6,770)     $     4,986    
                                                     ======================================================

See accompanying notes to these consolidated financial statements.              

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MERIT SECURITIES CORPORATION                                                    
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY                                 

For the years ended  December  31,  2003,  2002 and 2001  (amounts in  thousands
except share data)                                                              

                                                        [Enlarge/Download Table]

                                                                             Accumulated        Retained                     
                                     Common                  Additional         Other           Earnings                     
                                  Stock Shares    Common      Paid-in       Comprehensive     (Accumulated                   
                                  Outstanding      Stock      Capital       Income (Loss)       Deficit)          Total      
                                 ------------------------------------------------------------------------------------------- 
                                                                                                                             
Balance at January 1, 2001             1,000           10   $    147,240     $    (43,073)     $     12,043     $   116,220  
Comprehensive income:                                                                                                        
Net income                                 -            -              -                -             4,986           4,986  
Unrealized gain on investments                                                                                               
  available-for-sale                                    -              -           46,260                 -          46,260  
                                                                                                              ---------------
Total comprehensive income                                                                                           51,246  
Dividends and capital                                                                                                        
distributions                              -            -        (54,466)               -           (17,029)        (71,495) 
                                 --------------- ---------- ------------- ------------------ ---------------- ---------------
Balance at December 31, 2001        1,000              10         92,774            3,187                 -          95,971  

Comprehensive loss:                                                                                                          
Net loss                                   -            -              -                -            (6,770)         (6,770) 
Unrealized loss on investments                                                                                               
  available-for-sale                       -            -              -           (3,321)                -          (3,321) 
                                                                                                              ---------------
Total comprehensive loss                                                                                            (10,091) 
Dividends and capital                                                                                                        
  distributions                            -            -        (24,100)               -                 -         (24,100) 
                                 -------------- ----------- ------------- ------------------ ---------------- ---------------
   Balance at December 31, 2002     1,000              10         68,674             (134)           (6,770)         61,780  

Comprehensive income:                                                                                                        
Net income                                 -            -              -                -             4,025           4,025  
Unrealized gain on investments                                                                                               
  available-for-sale                       -            -              -               52                 -              52  
                                                                                                              ---------------
Total comprehensive income                                                                                            4,077  
                                 --------------- ---------- ------------- ------------------ ---------------- ---------------
Balance at December 31, 2003        1,000          $   10       $ 68,674    $         (82)     $     (2,745)    $    65,857  

                                 =============== ========== ============= ================== ================ ===============

See accompanying notes to these consolidated financial statements.              

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MERIT SECURITIES CORPORATION                                                    
STATEMENTS OF CASH FLOWS                                                        
For the years ended December 31, 2003, 2002 and 2001                            
(amounts in thousands)                                                          

                                                        [Enlarge/Download Table]


                                                                     2003              2002              2001        
                                                                     ----              ----              ----        
Operating activities:                                                                                                
                                                                                                                     
  Net income (loss)                                              $      4,025     $     (6,770)     $      4,986     
    Adjustments to reconcile net income (loss) to net cash                                                           
      provided by operating activities:                                                                              
        Impairment charges                                              5,494           17,446            15,840     
        Provision for loan losses                                      18,611           28,559            18,670     
        Amortization, net                                               5,742            6,901             9,264     
        Other                                                           2,901           (1,358)            1,210     
                                                              -------------------------------------------------------
           Net cash provided by operating activities                   36,773           44,778            49,970     
                                                              -------------------------------------------------------
Investing activities:                                                                                                
  Purchase of loans and debt securities                                     -         (157,097)                -     
  Principal payments on collateral                                    276,828          389,487           577,625     
  Net decrease in loans                                                 3,796            4,149                 -     
  Payments received on securities                                       1,039            2,081                 -     
  Proceeds from sale of securitized finance receivables                     -                -            48,710     
                                                              -------------------------------------------------------
           Net cash provided by investing activities                  281,663          238,620           626,335     
                                                              -------------------------------------------------------
Financing activities:                                                                                                
  Proceeds from issuance of bonds                                           -          172,653           503,914     
  Principal payments on non-recourse securitization financing        (284,106)        (420,775)       (1,108,734)    
  Increase in due from affiliates                                     (34,330)         (11,176)                -     
  Dividends and capital distributions                                       -          (24,100)          (71,495)    
                                                              -------------------------------------------------------
           Net cash used for financing activities                    (318,436)        (283,398)         (676,315)    
                                                              -------------------------------------------------------
Net change in cash                                                          -                -               (10)    
Cash at beginning of year                                                   -                -                10     
                                                              -------------------------------------------------------
Cash at end of year                                              $          -     $          -      $          -     
                                                              =======================================================
Supplemental disclosure of cash flow information:                                                                    
  Cash paid for interest                                         $     46,921     $     60,870      $    105,654     
                                                              =======================================================

See accompanying notes to these consolidated financial statements.              

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MERIT SECURITIES CORPORATION                                                    
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                      

For the years ended December 31, 2003, 2002 and 2001                            
(dollar amounts in thousands)                                                   

NOTE 1 - THE COMPANY                                                            

     Merit   Securities   Corporation   (the   "Company")  is  a  wholly  owned,
limited-purpose finance subsidiary of Issuer Holding Corporation,  Inc. ("IHC").
The Company was organized to facilitate the  securitization of loans through the
issuance  and  sale  of  non-recourse   securitization   financing.   IHC  is  a
wholly-owned  subsidiary  of Dynex  Capital,  Inc.  ("Dynex"),  a New York Stock
Exchange  listed  financial   services  company  (symbol:   DX).  The  financial
statements  include the amounts of the Company and its wholly owned  subsidiary,
Financial Asset Securitization, Inc. (FASI).                                    

Basis of Presentation                                                           

The  accompanying  consolidated  financial  statements  have  been  prepared  in
accordance with accounting principles generally accepted in the United States of
America, hereinafter referred to as "generally accepted accounting principles". 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                             

Federal Income Taxes                                                            

As a  subsidiary  of IHC,  which is a  subsidiary  of Dynex,  the  Company  is a
qualified  real estate  investment  trust (REIT)  subsidiary  under the Internal
Revenue Code. As a qualified REIT subsidiary,  the Company is not subject to tax
so long as Dynex maintains its REIT status.  Accordingly,  no provision has been
made for income taxes for the Company in the accompanying  financial statements,
as Dynex believes it has met the prescribed  distribution  requirements.  Should
the Company not maintain its qualified REIT subsidiary  status in the future, or
if Dynex does not maintain its REIT status, it may be subject to income taxes.  

Securitized Finance Receivables                                                 

Securitized  finance  receivables  consists of debt securities and loans,  which
have been pledged to secure non-recourse  securitization  financing.  These debt
securities  and loans are backed  primarily by  adjustable-rate  and  fixed-rate
mortgage  loans secured by first liens on single family  residential  properties
and  manufactured   housing  installment  loans  secured  by  either  a  Uniform
Commercial Code ("UCC") filing or a motor vehicle title.                        

The Company has  classified all of its debt  securities  included in securitized
finance receivables as available-for-sale.  As such, debt securities included in
securitized  finance  receivables  at December 31, 2003 and 2002 are reported at
fair value, with unrealized gains and losses excluded from earnings and reported
as accumulated other comprehensive income (loss).                               

Debt Issuance Costs                                                             

Costs incurred in connection with the issuance of non-recourse debt and recourse
debt are deferred and  amortized  over the estimated  lives of their  respective
debt obligations using the effective yield method.                              

Price Premiums, Discounts and Hedging Basis Adjustments                         

Premiums  and  discounts on  investments  and  obligations  are  amortized  into
interest  income  or  expense,  respectively,  over  the  life  of  the  related
investment  or  obligation  using the  effective  yield  method.  Hedging  basis
adjustments  on associated  debt  obligations  are  amortized  over the expected
remaining  life  of the  debt  instrument.  If the  indenture  for a  particular
non-recourse  securitization  financing  structure  provides  for a  step-up  of

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interest rates on the optional  redemption  date and the Company has the ability
and intent to exercise its call option, then premiums,  discounts,  and deferred
hedging losses are amortized to that optional redemption date. Otherwise,  these
amounts are amortized over the estimated maturity dates of the securitization.  

Loans Not Pledged                                                               

The  Company  holds  loans  which are not  pledged to a trust and are carried at
amortized cost. These are reported as "Other loans" on the consolidated  balance
sheets.                                                                         

Interest Income                                                                 

Interest  income  is  recognized  when  earned  according  to the  terms  of the
underlying investment and when, in the opinion of management, it is collectible.
For loans,  the  accrual of  interest is  discontinued  when,  in the opinion of
management,  the interest is not  collectible  in the normal course of business,
when the loan is past due and when the  primary  servicer  of the loan  fails to
advance the interest and/or  principal due on the loan. For securities and other
investments,  the accrual of interest is  discontinued  when,  in the opinion of
management,  it is  possible  that  all  amounts  contractually  due will not be
collected.  Loans  are  considered  past due when the  borrower  fails to make a
timely payment in accordance with the underlying  loan  agreement,  inclusive of
all  applicable  cure  periods.  All  interest  accrued  but not  collected  for
investments  that are placed on  non-accrual  status or  charged-off is reversed
against interest income.  Interest on these  investments is accounted for on the
cash-basis  or  cost-recovery  method,  until  qualifying  for return to accrual
status.  Investments  are returned to accrual  status when all the principal and
interest amounts  contractually  due are brought current and future payments are
reasonably assured.                                                             

Asset-backed Security                                                           

Asset-backed security is a debt security which is classified as held-to-maturity
and are carried at amortized cost pursuant to SFAS No. 115.                     

Use of Estimates                                                                

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. The primary estimates inherent in the
accompanying financial statements are discussed below.                          

Fair Value.  The  Company  uses  estimates  in  establishing  fair value for its
financial instruments.  Estimates of fair value for financial instruments may be
based on market prices provided by certain dealers.  Estimates of fair value for
certain other  financial  instruments  are determined by calculating the present
value of the projected cash flows of the instruments using appropriate  discount
rates,  prepayment  rates  and  credit  loss  assumptions.  Securitized  finance
receivables  make up a  significant  portion of the Company's  investments.  The
estimate of fair value for securities within securitized  finance receivables is
determined by  calculating  the present value of the projected net cash flows of
the  instruments,  using discount rates,  prepayment rate assumptions and credit
loss  assumptions  established  by  management.  The  discount  rate used in the
determination  of fair value of the securitized  finance  receivables was 16% at
December 31, 2003 and 2002. The Company's  ownership  interest in such financial
instruments  is  represented  by interests  rated `BBB' or below,  and generally
concentrated in the  over-collateralization  or residual interest components. As
such, the Company  utilizes a discount rate of 16% in determining the fair value
of its financial  instruments.  Prepayment rate assumptions at December 31, 2003
and 2002 were generally at a "constant  prepayment  rate," or CPR,  ranging from
35%-40% for 2003,  and 30%-45% for 2002,  for  securitized  finance  receivables
consisting of  securities  backed by  single-family  mortgage  loans,  and a CPR
equivalent of 10% for 2003 and 11% for 2002, for securitized finance receivables
consisting of securities  backed by manufactured  housing loans. CPR assumptions
for each year are based in part on the actual  prepayment rates  experienced for
the  prior  six-month  period  and in part on  management's  estimate  of future
prepayment  activity.  The loss  assumptions  utilized  vary for each  series of
securitized finance receivables, depending on the collateral pledged.           

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Estimates of fair value for other  financial  instruments are based primarily on
management's  judgment.   Since  the  fair  value  of  the  Company's  financial
instruments  are based on  estimates,  actual  gains and losses  recognized  may
differ from those estimates recorded in the consolidated  financial  statements.
The fair value of all balance sheet  financial  instruments is presented in Note
6.                                                                              

Allowance  for Loan  Losses.  The Company  has credit  risk on loans  pledged in
securitization  financing  transactions  and classified as  securitized  finance
receivables in its investment  portfolio.  An allowance for loan losses has been
estimated and established for currently  existing  probable losses to the extent
losses  are  borne  by  the  Company  under  the  terms  of  the  securitization
transaction.  Factors  considered in establishing  an allowance  include current
loan  delinquencies,  historical cure rates of delinquent  loans, and historical
and anticipated loss severity of the loans as they are liquidated. The allowance
for losses is evaluated and adjusted  periodically  by  management  based on the
actual and  estimated  timing and amount of probable  credit  losses,  using the
above factors,  as well as industry loss experience.  Where loans are considered
homogeneous,  the allowance for losses are  established  and evaluated on a pool
basis.  Otherwise,  the allowance for losses is  established  and evaluated on a
loan-specific  basis.  Provisions  made to increase  the  allowance as a current
period  expense to operations.  Generally,  the Company  considers  manufactured
housing  loans to be impaired  when they are 30 days past due.  The Company also
provides an allowance for currently  existing  credit losses within  outstanding
manufactured  housing loans that are current as to payment but which the Company
has determined to be impaired based on default trends, current market conditions
and empirical observable performance data on the loans.  Single-family loans are
considered impaired when they are 60 days past due. Other loans are evaluated on
a  specific  identification  basis  to  determine  if  further  impairments  are
required.  Generally the basis on these loans has been reduced such that further
impairments have not been warranted.                                            

Impairments.  The Company  evaluates all securities in its investment  portfolio
for  other-than-temporary  impairments.  A security is  generally  defined to be
other-than-temporarily  impaired  if for a maximum  period of three  consecutive
quarters the fair value of such security  exceeds its estimated  carrying  value
and the Company  estimates,  based on projected  future cash flows or other fair
value  determinants,  that the carrying value is not likely to exceed fair value
in the foreseeable  future. If an  other-than-temporary  impairment is deemed to
exist, the Company records an impairment  charge to adjust the carrying value of
the security down to its estimated fair value. In certain instances, as a result
of the  other-than-temporary  impairment analysis, the recognition or accrual of
interest will be  discontinued  and the security  will be placed on  non-accrual
status.                                                                         

Prepaid Shelf Registration Fees                                                 

Fees incurred in connection with filing a shelf registration for the issuance of
non-recourse  securitization  financing  are deferred and  recognized  with each
securitization prorata to the size of the issuance.                             

Securitization Transactions                                                     

The Company  securitizes loans and securities by transferring  these assets to a
wholly owned trust, and the trust issues non-recourse  securitization  financing
pursuant to an indenture.  Generally,  the Company  retains some form of control
over the  transferred  assets,  and/or the trust is not deemed to be a qualified
special  purpose  entity.  In  instances  where the trust is deemed  not to be a
qualified  special  purpose  entity,  the trust is included in the  consolidated
financial statements of the Company. For accounting and tax purposes,  the loans
and  securities  financed  through the issuance of  non-recourse  securitization
financing  are  treated  as  assets  of  the  Company,   and  the   non-recourse
securitization  financing  are treated as debt of the  Company.  The Company may
retain certain of the bonds issued by the trust, and the Company  generally will
transfer  collateral  in excess of the bonds  issued.  This excess is  typically
referred to as over-collateralization.                                          

Recent Accounting Pronouncements                                                

In April 2002, the Financial  Accounting Standards Board (FASB) issued Statement
of Financial  Accounting Standards (SFAS) No. 145, "Recission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
Effective  January 1,  2003,  SFAS No. 145  requires  gains and losses  from the
extinguishment  or repurchase of debt to be  classified as  extraordinary  items
only if they meet the  criteria for such  classification  in APB Opinion No. 30.

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Until January 1, 2003, gains and losses from the extinguishment or repurchase of
debt must be classified as  extraordinary  items, as the Company has done. After
January  1,  2003,  any  gain or  loss  resulting  from  the  extinguishment  or
repurchase of debt  classified as an  extraordinary  item in a prior period that
does not meet the criteria for such classification under APB Opinion No. 30 must
be reclassified.  The Company adopted SFAS No. 145 and  reclassified  gains from
the extinguishment of debt from extraordinary items to Other Income (Expense) on
the Consolidated Statements of Operations.                                      

In July 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit or  Disposal  Activities."  Effective  January 1,  2003,  SFAS No. 146
requires   companies  to  recognize  costs  associated  with  exit  or  disposal
activities  when they are incurred rather than at the date of a commitment to an
exit or disposal plan.  This SFAS applies to activities that are initiated after
December 31, 2002. The adoption of SFAS No. 146 has not had a material impact on
the Company's financial position, results of operations or cash flows.          

In December  2002,  the FASB issued SFAS No. 148,  "Accounting  for  Stock-Based
Compensation--Transition  and  Disclosure."  Effective  after December 15, 2002,
this statement amends SFAS No. 123,  "Accounting for Stock-Based  Compensation",
to provide  alternative methods of transition for a voluntary change to the fair
value based method of  accounting  for  stock-based  employee  compensation.  In
addition,  this statement amends the disclosure  requirements of SFAS No. 123 to
require prominent  disclosures in both annual and interim  financial  statements
about the method of accounting for  stock-based  employee  compensation  and the
effect of the method used on reported results.  The adoption of SFAS No. 148 has
not had a significant  impact on the Company's  financial  position,  results of
operations or cash flows.                                                       

In April 2003,  the FASB issued SFAS No. 149,  "Amendment  of  Statement  133 on
Derivative  Instruments and Hedging Activities."  Effective after June 30, 2003,
this Statement amends SFAS No. 133,  "Accounting for Derivative  Instruments and
Hedging  Activities",  to provide  clarification  of  financial  accounting  and
reporting for derivative  instruments,  including certain derivative instruments
embedded in other contracts.  In particular,  this statement (1) clarifies under
what  circumstances  a  contract  with  an  initial  net  investment  meets  the
characteristic of a derivative discussed in paragraph 6(b) of Statement 133, (2)
clarifies  when a  derivative  contains a  financing  component,  (3) amends the
definition   of  an   underlying   to  conform  it  to  language  used  in  FASB
Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees,  Including  Indirect  Guarantees of Indebtedness of Others," and
(4) amends certain other existing pronouncements.  Those changes are intended to
result in more consistent reporting of contracts as either derivatives or hybrid
instruments.  The Company's  adoption of SFAS No. 149 in July 2003 has not had a
significant impact on the Company's financial  position,  results of operations,
or cash flows.                                                                  

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
is effective for financial  instruments  entered into or modified  after May 31,
2003;  and otherwise is effective at the  beginning of the first interim  period
beginning  after June 15,  2003,  except for  mandatorily  redeemable  financial
instruments of nonpublic  entities,  which are subject to the provisions of this
Statement for the first fiscal period  beginning  after December 15, 2003.  This
Statement  amends SFAS No.  133,  "Accounting  for  Derivative  Instruments  and
Hedging  Activities,"  and SFAS No.  128,  "Earnings  per  Share," to  establish
standards  outlining how to classify and measure certain  financial  instruments
with  characteristics  of both liabilities and equity.  It requires that certain
financial   instruments  that  were  previously  classified  as  equity  now  be
classified  as a  liability  (or,  in  some  circumstances,  as an  asset).  The
Company's adoption of SFAS No. 150 in July 2003 has not had a significant impact
on the Company's financial position, results of operations, or cash flows.      

On November 25, 2002,  the FASB issued FIN No. 45,  "Guarantor's  Accounting and
Disclosure  Requirements  for  Guarantees,   Including  Indirect  Guarantees  of
Indebtedness of Others,  an  interpretation of FASB Statements No. 5, 57 and 107
and  Rescission  of FASB  Interpretation  No.  34."  FIN No.  45  clarifies  the
requirements  of SFAS No. 5,  "Accounting  for  Contingencies,"  relating to the
guarantor's  accounting for, and disclosure of, the issuance of certain types of
guarantees.  The  disclosure  requirements  of  FIN  No.  45 are  effective  for
financial  statements of interim or annual  periods that end after  December 15,
2002.  The Company had no guarantees  that require  disclosure at year-end 2003.
The  provisions  for initial  recognition  and  measurement  are  effective on a
prospective  basis for guarantees that are issued or modified after December 31,
2002,  irrespective of the guarantor's  year-end.  FIN No. 45 requires that upon
issuance  of a  guarantee,  the entity must  recognize a liability  for the fair
value of the obligation it assumes under that guarantee.  The Company's adoption

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of FIN No. 45 in 2003 has not had a material effect on the Company's  results of
financial position, results of operations or cash flows.                        

In December  2003,  the FASB  re-issued FIN No. 46,  "Consolidation  of Variable
Interest  Entities  - an  interpretation  of ARB  No.  51,"  as  revised,  which
addresses  consolidation of variable interest  entities.  FIN No. 46 expands the
criteria  for  considering   whether  a  variable   interest  entity  should  be
consolidated by a business entity, and requires existing unconsolidated variable
interest  entities  (which  include,  but are not  limited to,  special  purpose
entities,  or SPEs) to be  consolidated  by their primary  beneficiaries  if the
entities  do  not  effectively  disperse  risks  among  parties  involved.  This
interpretation  applies  immediately to variable interest entities created after
January 31,  2003,  and to  variable  interest  entities in which an  enterprise
obtains an  interest  after that date.  It applies in the first  fiscal  year or
interim period beginning after December 15, 2003, to variable  interest entities
in which  an  enterprise  holds a  variable  interest  that it  acquired  before
February  1, 2003.  The Company  does not expect the  adoption of FIN No. 46, as
revised, to have a material effect on the Company's financial position,  results
of operations or cash flows.                                                    

In November  2003,  the FASB reached a consensus  in Emerging  Issues Task Force
(EITF) Issue No. 03-1, "The Meaning of  Other-Than-Temporary  Impairment and its
Application to Certain  Investments"  that certain  quantitative and qualitative
disclosures  should be required for securities  accounted for under SFAS No. 115
and SFAS No. 124,  Accounting  for Certain  Investments  Held by  Not-for-Profit
Organizations,  that are  impaired  at the  balance  sheet date but for which an
other-than-temporary  impairment has not been recognized.  In December 2003, the
Company adopted the guidance set forth in EITF Issue No. 03-1,  which has had no
material effect on the Company's  financial  position,  results of operations or
cash flows.                                                                     

In December 2003, the Accounting  Standards  Executive  Committee (AcSEC) of the
American Institute of Certified Public  Accountants  (AICPA) issued Statement of
Position  (SOP) No.  03-3,  "Accounting  for  Certain  Loans or Debt  Securities
Acquired in a Transfer."  SOP No. 03-3 is effective for loans acquired in fiscal
years  beginning  after  December 15, 2004,  with early adoption  encouraged.  A
certain  transition  provision  applies for certain  aspects of loans  currently
within the scope of Practice  Bulletin 6,  Amortization  of Discounts on Certain
Acquired  Loans.  SOP No. 03-3  addresses  accounting  for  differences  between
contractual  cash  flows  and  cash  flows  expected  to be  collected  from  an
investor's  initial investment in loans or debt securities (loans) acquired in a
transfer if those  differences  are  attributable,  at least in part,  to credit
quality. It includes loans acquired in business  combinations and applies to all
non-governmental entities, including not-for-profit organizations.  SOP No. 03-3
does not apply to loans  originated by the entity.  The Company is reviewing the
implications  of SOP No. 03-3 but does not believe that its adoption will have a
significant  impact on its  financial  position,  results of  operations or cash
flows.                                                                          

Reclassifications                                                               

Certain  reclassifications  have been made to the financial  statements for 2002
and 2001 to conform to the presentation for 2003, including the reclassification
of the extraordinary  gain recorded in the year ended December 31, 2002 pursuant
to the adoption of SFAS No. 145,  "Recission of FASB  Statements  No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical  Corrections." In addition
certain basis adjustments were reclassified from securitized finance receivables
within assets to non-recourse securitization financing within liabilities on the
balance  sheet  and from  interest  income to  interest  expense  on the  income
statement.  These  remaining  unamortized  deferred  hedging  amounts were basis
adjustments  recorded prior to 2001,  which related to financing  hedges and are
more appropriately recorded as part of the related debt.                        

NOTE 3 - SECURITIZED FINANCE RECEIVABLES                                        

Securitized  finance  receivables  consists of loans and debt securities  backed
primarily by  adjustable-rate  and  fixed-rate  mortgage  loans secured by first
liens on single family residential housing and manufactured  housing installment
loans secured by a UCC filing. All securitized  finance  receivables are pledged
to secure repayment of the related non-recourse  securitization  financing.  All
principal  and  interest  (less  servicing-related  fees) on the  collateral  is
remitted  to a  trustee  and  is  available  for  payment  on  the  non-recourse
securitization  financing. The Company's exposure to loss on securitized finance
receivables is generally  limited to the amount of collateral  pledged in excess
of the related non-recourse securitization financing issued, as the non-recourse

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securitization financing is non-recourse to the Company. The securitized finance
receivables  can be sold by the  Company,  but only  subject  to the lien of the
non-recourse securitization financing indenture.                                

The following table summarizes the components of securitized finance receivables
as of December  31, 2003 and  December  31,  2002.  Debt  securities  pledged as
securitized  finance  receivables  are  considered  available-for-sale,  and are
therefore  recorded  at  fair  value.  Loans  pledged  as  securitized   finance
receivables are carried at amortized cost.                                      

--------------------------------- ---------------------- --- -------------------
                                   2003                       2002
--------------------------------- ----------------------     -------------------
Loans, at amortized cost         $    804,871               $  1,035,163    
Allowance for loan losses             (20,990)                   (20,700)   
--------------------------------- ---------------------- --- -------------------
                                  783,881                  1,014,463
Debt securities, at fair value        251,554                    322,545    
--------------------------------- ---------------------- --- -------------------
                             $  1,035,435               $  1,337,008
--------------------------------- ---------------------- --- -------------------

The following table summarizes the amortized cost basis,  gross unrealized gains
and losses and estimated  fair value of debt  securities  pledged as securitized
finance receivables as of December 31, 2003 and December 31, 2002:              

------------------------------------- ------------------ --- -------------------
                                       2003                   2002
------------------------------------- ------------------     -------------------
Debt securities, at amortized cost   $    251,554           $    322,482    
Gross unrealized gains                          -                     63    
------------------------------------- ------------------ --- -------------------
Estimated fair value                 $    251,554           $    322,545    
------------------------------------- ------------------ --- -------------------

The components of securitized  finance receivables at December 31, 2003 and 2002
are as follows:                                                                 

                                                        [Enlarge/Download Table]


------------------------------- ------------------------------------------ ------------------------------------------
                                                  2003                                       2002                    
------------------------------- ------------------------------------------ ------------------------------------------
                                 Loans, net       Debt          Total       Loans, net    Debt            Total      
                                               Securities                                 Securities                 
------------------------------- ------------- ------------- -------------- -------------- ----------- ---------------
Collateral:                                                                                                          
                                                                                                                     
     Manufactured housing           $470,319    $172,847       $643,166        $537,695     $196,424      $734,119   
     Single family                   317,552      76,749        394,301         481,222      124,077       605,299   
                                ------------- ------------- -------------- -------------- ----------- ---------------
                                     787,871     249,596      1,037,467       1,018,917      320,501     1,339,418   
Funds held by trustees                     1           -              1              12            -            12   
Accrued interest receivable            4,847       1,565          6,412           6,559        2,080         8,639   
Unamortized (discounts) and                                                                                          
    premiums, net                     (8,838)        393         (8,445)        (11,025)         (99)      (11,124)  
Unrealized gain, net                       -           -               -              -           63            63   
------------------------------- ------------- ----------- ---------------- -------------- ----------- ---------------
                                 $   783,881   $ 251,554   $ 1,035,435       $1,014,463     $322,545    $1,337,008   
------------------------------- ------------- ----------- ---------------- -------------- ----------- ---------------

NOTE 4 - ALLOWANCE FOR LOAN LOSSES                                              

The following table summarizes the activity for the allowance for loan losses on
securitized  finance receivables for the years ended December 31, 2003, 2002 and
2001:                                                                           

--------------------------------- ----------- ------------ --------------       
                         2003         2002          2001
--------------------------------- ----------- ------------ --------------       
Allowance at beginning of year     $ 20,700     $ 15,364     $ 21,401           
Provision for loan losses            18,611       28,559       18,670           
Credit losses, net of recoveries    (18,321)     (23,223)     (24,707)          
--------------------------------- ----------- ------------ --------------       
Allowance at end of year           $ 20,990     $ 20,700     $ 15,364           
--------------------------------- ----------- ------------ --------------       

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The Company  continues to  experience  unfavorable  results in its  manufactured
housing loan portfolio in terms of elevated  delinquencies  and loss severity on
repossessed  units.  For the year 2003,  the Company added $18,611 in provisions
for loan losses related to the manufactured housing loan portfolio.  Included in
this amount is $6,120 in provision for loan losses recorded in 2003 specifically
for currently  existing credit losses within  outstanding  manufactured  housing
loans that are current as to payment but which the Company has  determined to be
impaired.  Previously,  the  Company  had not  considered  current  loans  to be
impaired under generally  accepted  accounting  principles and therefore had not
previously  provided for these  loans.  Continued  worsening  trends in both the
industry  as a whole  and the  Company's  pools of  manufactured  housing  loans
prompted the Company to prepare an analysis on these pools of loans. The Company
has not  originated  any new  manufactured  housing  loans since  1999,  and has
empirical data on the historical  performance of this static pool of loans.  The
Company analyzed performance and default activity for loans that were current at
various  points in time  over the last 36  months,  and based on that  analysis,
identified  default trends on these loans.  The Company also considered  current
market  conditions  in this  analysis,  with the  expectation  that these market
conditions would continue for the foreseeable future.  Given this new observable
data,  the Company now believes the  inclusion of amounts in the  provision  for
loan  losses  for loans  which  are  current  as to  payment  is an  appropriate
application of the definition of impairment within generally accepted accounting
principles,  and has accounted for the amount as a change in accounting estimate
and accordingly recorded the amount as additional provision for loan losses.    

Within each  non-recourse  securitization  financing,  a group of loans are held
within the  securitization  structure as a credit reserve to provide  additional
cash flow to cover losses.  Once the  cumulative  level of losses have surpassed
the cash flow  available  from the credit  reserve and losses has  depleted  the
over-collateralization,  future  losses are passed to the  holders of the lowest
classes  of bonds  within the  structure.  In some  cases,  the  aggregate  loss
exposure  may be  increased  by the use of surplus  cash or cash  reserve  funds
contained  within the  security  structure to cover  losses.  On one of the deal
structures of the Company,  total cumulative losses have surpassed the cash flow
available   from  the  credit   reserve  and  have   completely   depleted   the
over-collateralization.  During the three months ended December 31, 2003, losses
on this securitization  began to pass to the subordinate class bondholders.  The
reserves for loan losses on this securitization  decreased as these losses began
to be borne by the subordinated bondholders.                                    

The allowance for loan losses on the over-collateralization  totaled $20,990 and
$20,700  at  December  31,  2003  and 2002  respectively,  and are  included  in
securitized finance receivables in the accompanying consolidated balance sheets.
Over-collateralization at December 31, 2003 and 2002 totaled $37,947 and $54,915
respectively.                                                                   

NOTE 5 - NON-RECOURSE SECURITIZATION FINANCING                                  

The  Company,   through   limited-purpose   finance  subsidiaries,   has  issued
non-recourse  debt in the form of non-recourse  securitization  financing.  Each
series of non-recourse  securitization  financing may consist of various classes
of bonds,  either at fixed or variable rates of interest.  Payments  received on
the securitized finance receivables and any reinvestment income thereon are used
to make payments on the non-recourse  securitization financing (see Note 3). The
obligations under the non-recourse  securitization  financing are payable solely
from the securitized finance  receivables and are otherwise  non-recourse to the
Company.  The  stated  maturity  date  for each  class  of  bonds  is  generally
calculated  based  on  the  final  scheduled  payment  date  of  the  underlying
collateral pledged.  The actual maturity of each class will be directly affected
by the rate of principal  prepayments on the related collateral.  Each series is
also  subject  to  redemption  according  to  specific  terms of the  respective
indentures, generally when the remaining balance of the bonds equals 35% or less
of the original  principal  balance of the bonds,  or on a specific  date.  As a
result,   the  actual  maturity  of  any  class  of  a  series  of  non-recourse
securitization financing is likely to occur earlier than its stated maturity.   

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The components of non-recourse securitization financing along with certain other
information at December 31, 2003 and 2002 are summarized below:                 

                                                        [Enlarge/Download Table]

------------------------------------ ------------------------------------ -- ---------------------------------------
                                                    2003                                      2002                  
                                     ------------------------------------    ---------------------------------------
                                          Bonds             Range of              Bonds               Range of      
                                      Outstanding        Interest Rates        Outstanding         Interest Rates   
                                     ---------------    -----------------    ----------------    -------------------
                                                                                                                    
Variable-rate classes                 $    556,381          1.4%-3.4%         $    786,503            1.7%-3.0%     
Fixed-rate classes                         464,749          6.5%-8.9%              518,734            6.2%-9.0%     
Accrued interest payable                     2,846                                   3,234                          
Deferred bond issuance costs                (1,216)                                 (4,197)                         
Deferred hedging                            (1,640)                                 (4,229)                         
Unamortized premiums and                                                                                            
  (discounts), net                          (2,221)                                 (5,161)                         
                                     ---------------                         ----------------                       
                                      $  1,018,899                            $  1,294,884                          
                                     ===============                         ================                       

Range of stated maturities              2015-2033                               2015-2033                           
Estimated weighted average life         4.2 years                               4.0 years                           
Number of series                            4                                       4                               
------------------------------------ --------------- -- ----------------- -- ---------------- -- -------------------

Each  series of  non-recourse  securitization  financing  may consist of various
classes  of  bonds,  either at fixed or  variable  rates of  interest.  Payments
received  on the  loans  pledged  as  securitized  finance  receivables  and any
reinvestment  income  thereon  are  used to make  payments  on the  non-recourse
securitization  financing (see Note 3). The obligations  under the  non-recourse
securitization  financing  are  payable  solely  from  the  securitized  finance
receivables and are otherwise  non-recourse to the Company. The maturity of each
class is directly  affected by the rate of principal  prepayments on the related
mortgage  collateral.  In determining average prepayment speed assumptions,  the
Company utilizes the last six month's prepayment experience, market, and Company
expectations of prepayment  speeds based on the forward LIBOR curve. Each series
is also  subject to  redemption  according to specific  terms of the  respective
indentures.  As a result,  the actual  maturity  of any class of a  non-recourse
securitization  financing  series  is likely to occur  earlier  than its  stated
maturity.   Non-recourse   securitization   financings   are  carried  at  their
outstanding principal balance, net of unamortized premiums and discounts.       

The variable rate classes are based on one-month London  InterBank  Offered Rate
("LIBOR").  The  average  effective  rate of interest  expense for  non-recourse
securitization  financing was 4.6%,  4.7%, and 6.1% for the years ended December
31, 2003, 2002 and 2001, respectively.                                          

NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS                                    

The following  table  presents the carrying  values and estimated fair values of
the Company's recorded financial instruments as of December 31, 2003 and 2002:  

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                                                        [Enlarge/Download Table]

 ------------------------------------ --- ----------------------------------- --- --------------------------------
                                                         2003                                  2002               
                                          -----------------------------------     --------------------------------
                                              Carrying            Fair               Carrying          Fair       
                                               Amount            Value                Amount           Value      
 -----------------------------------------------------------------------------------------------------------------
 Financial instruments:                                                                                           
 Assets:                                                                                                          
   Securitized finance receivables:                                                                               
                                                                                                                  
      Loans, net                           $    804,871      $      783,881        $  1,035,163    $  1,014,463   
      Debt securities                           251,554             251,554             322,482         322,545   
   Other loans                                    2,683               3,126               6,505           6,727   
   Asset-backed security                            801                 942               1,644           2,073   
  Liabilities:                                                                                                    
    Non-recourse securitization               1,018,899             981,581           1,294,884       1,257,221   
      financing                                                                                                   
------------------------------------------------------------------------------------------------------------------

Carrying  amount  excludes the  allowance for loan losses.  The  estimated  fair
values of financial  instruments  have been determined  using  available  market
information  or by  determining  the present value of the projected  future cash
flows  using   appropriate   discount   rates,   credit  losses  and  prepayment
assumptions.  However,  a degree of judgment is necessary in  evaluating  market
data and forming these projected future cash flows.                             

Financial Instruments.  The fair value of the securitized finance receivables is
based on the  present  value  of the  projected  cash  flows  using  appropriate
discount rates, credit loss and prepayment assumptions.  The Company's ownership
interest in such financial  instruments is represented by interests  rated `BBB'
or below, and generally concentrated in the  over-collateralization  or residual
interest  components.  As such,  the Company  utilizes a discount rate of 16% in
determining the fair value of its financial instruments. The fair value of loans
was based on management's estimate.  Non-recourse debt is both floating,  fixed,
and is  considered  within the  security  structure  along  with the  associated
securitized finance receivables.                                                

NOTE 7 - IMPAIRMENT CHARGES                                                     

Impairment  charges include  other-than-temporary  impairment of debt securities
pledged as securitized  finance  receivables of $5,494,  $17,446 and $15,840 for
2003, 2002 and 2001,  respectively  arising from deteriorating  market values of
securities  backed by manufactured  housing loans.  Impairment  charges for 2002
also  included  $1,883  for the  adjustment  to the lower of cost or market  for
certain delinquent  single-family  mortgage loans acquired in 2002 which at that
time were considered as held-for-sale.                                          

NOTE 8 - OTHER MATTERS                                                          

At both  December  31, 2003 and 2002,  the Company had  remaining  $308,602  for
issuance  under shelf  registration  statements  filed with the  Securities  and
Exchange Commission.                                                            

NOTE 9 - SUMMARY OF FOURTH QUARTER RESULTS                                      

The  following  table  summarizes  selected  information  for the quarter  ended
December 31, 2003:                                                              

------------------------------------------------- ------------------------------
                                                Fourth Quarter, 2003
------------------------------------------------- ------------------------------
Operating results:                                                              
Net interest margin before provision for losses      $          4,749           
Provisions for loan losses                                     (2,105)          
Net interest margin                                             2,644           
Impairment charges                                             (4,040)          
Other income                                                      458           
Net (loss)                                            $          (938)          
------------------------------------------------- ------------------------------

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Item 9.    CHANGES  IN  AND DISAGREEMENTS  WITH ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE                                      

None                                                                            

Item 9A. Controls and Procedures                                                

(a) Evaluation of disclosure controls and procedures.         

                  Disclosure  controls  and  procedures  are  controls and other
                  procedures  that  are  designed  to  ensure  that  information
                  required to be disclosed  in the  Company's  reports  filed or
                  submitted  under  the  Exchange  Act is  recorded,  processed,
                  summarized and reported  within the time periods  specified in
                  the SEC's rules and forms.  Disclosure controls and procedures
                  include, without limitation,  controls and procedures designed
                  to ensure that  information  required to be  disclosed  in the
                  Company's  reports filed under the Exchange Act is accumulated
                  and  communicated  to  management,   including  the  Company's
                  management,   as  appropriate,   to  allow  timely   decisions
regarding required disclosures.             

                  As of the end of the period covered by this annual report, the
                  Company carried out an evaluation of the  effectiveness of the
                  design and operation of the Company's  disclosure controls and
                  procedures  pursuant to Rule 13a-15  under the  Exchange  Act.
                  This evaluation was carried out under the supervision and with
                  the participation of the Company's management. Based upon that
                  evaluation,   the  Company's  management  concluded  that  the
                  Company's  disclosure  controls and  procedures are effective,
except as described below.                  

                  The Company  identified an internal control deficiency related
                  to the  recording  of  allowance  for loan losses in excess of
                  loss obligations. The Company will restate the interim periods
                  of June 30,  2003 and  September  30,  2003 as a result of the
                  deficiency.  Management  believes  that it has  performed  the
                  appropriate procedures to ensure that the information included
                  herein  for the year ended  December  31,  2003 is  materially
                  accurate in all  reasonable  aspects.  This  internal  control
                  deficiency   did  not   impact  the   consolidated   financial
statements of the Company's parent.         

                  In conducting  its review of disclosure  controls,  management
                  concluded that sufficient  disclosure controls and procedures,
                  other  than  this   deficiency,   did  exist  to  ensure  that
                  information  required to be disclosed in the Company's reports
                  filed  or  submitted  under  the  Exchange  Act  is  recorded,
                  processed,  summarized  and  reported  within the time periods
specified in the SEC's rules and forms.     

(b) Changes in internal controls.                             

                  The Company's  management is also responsible for establishing
                  and  maintaining  adequate  internal  control  over  financial
                  reporting.  There were no changes  in the  Company's  internal
                  control over financial reporting identified in connection with
                  the  evaluation of it that occurred  during the Company's last
                  fiscal  quarter that  materially  effected,  or are reasonably
                  likely to materially  affect  internal  control over financial
reporting.                                  

PART III

Item 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                   

Information in response to this Item is omitted pursuant to General  Instruction
I, Paragraph 2.                                                                 

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Item 11.   EXECUTIVE COMPENSATION                                               

Information in response to this Item is omitted pursuant to General  Instruction
I, Paragraph 2.                                                                 

Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT       

Information in response to this Item is omitted pursuant to General  Instruction
I, Paragraph 2.                                                                 

Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                       

Information in response to this Item is omitted pursuant to General  Instruction
I, Paragraph 2.                                                                 

Item 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES                               

Information  in  response to this Item is omitted,  as  permitted  by Form 10-K,
because the Company is an asset-backed issuer as defined in Rule 13a-14(g) under
the Securities Exchange Act of 1934, as amended.                                

 PART IV

Item 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K      

(a)      Exhibits                                             

                     3.1      Articles  of   Incorporation  of   the  Registrant
                            (Attached   as  an   exhibit   to   Registrant's
                              Registration Statement No. 33-83524  on  Form  S-3
                             filed  August 31, 1994,  incorporated  herein  by
reference).         

                     3.2      Bylaws of the Registrant (Attached  as  an exhibit
                            to  Registrant's   Registration   Statement  No.
                              33-83524  on  Form  S-3  filed  August  31,  1994,
              incorporated herein by reference).

                     3.3      Amended and Restated  Articles of Incorporation of
                              the Registrant, effective April 19, 1995 (Attached
                              as an exhibit to the  Registrant's  Current Report
                              on Form 8-K,  filed April 21,  1995,  incorporated
 herein by reference).

                     4.1      Indenture between Registrant and Trustee, dated as
                              of August  1,  1994  (Attached  as an  exhibit  to
                              Registrant's  Registration  Statement No. 33-83524
                              on Form S-3 filed  August 31,  1994,  incorporated
 herein by reference).

                     4.2      Form of Supplement  Indenture  between  Registrant
                              and   Trustee   (Attached   as   an   exhibit   to
                              Registrant's  Registration  Statement No. 33-83524
                              on Form S-3 filed  August 31,  1994,  incorporated
 herein by reference).

                     4.3      Copy of the  Indenture,  dated as of  November  1,
                              1994,  by and  between  the  Registrant  and Texas
                              Commerce  Bank  National  Association,  as Trustee
                              (Attached  as  an  exhibit  to  the   Registrant's
                              Current  Report on Form 8-K,  filed  December  19,
                    1994, incorporated herein by reference).

                     4.4      Copy of the Series 11 Indenture Supplement,  dated
                              as of March 1, 1998, by and between Registrant and
                              Texas  Commerce  Bank  National  Association,   as
                              Trustee (related  schedules and exhibits available
                              upon  request  of the  Trustee).  (Attached  as an
                              exhibit  of  Registrant's  Current  Report on Form
                              8-K, filed June 12, 1998,  incorporated  herein by
reference).         

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                     4.5      Copy of the Series 12 Indenture Supplement,  dated
                              as of March 1, 1999, by and between the Registrant
                              and Texas Commerce Bank National  Association,  as
                              Trustee (related  schedules and exhibits available
                              upon  request  of the  Trustee).  (Attached  as an
                              exhibit  of  Registrant's  Current  Report on Form
                              8-K, filed April 12, 1999,  incorporated herein by
reference).         

                     4.6      Copy of the Series 13 Indenture Supplement,  dated
                              as  of  August  1,  1999,   by  and   between  the
                              Registrant   and  Texas   Commerce  Bank  National
                              Association,  as Trustee  (related  schedules  and
                              exhibits  available  upon request of the Trustee).
                              (Attached  as an exhibit of  Registrant's  Current
                              Report  on Form 8-K,  filed  September  13,  1999,
              incorporated herein by reference).

                     4.7      Copy  of  the  Structured   Asset   Securitization
                              Corporation  Series 2002-9  Indenture  Supplement,
                              dated  as  of  April  1,  2002,   by  and  between
                              Structured Asset Securitization Corporation and J.
                              P. Morgan Chase, as Trustee (related schedules and
                              exhibits  available  upon request of the Trustee).
                              (Attached  as  an  exhibit  of  Structured   Asset
                              Securitization  Corporation's  Current  Report  on
                              Form  8-K,  filed  April  25,  2002,  incorporated
 herein by reference).

                     31.1     Certification   of  Principal  Executive   Officer
                              pursuant to Section 302 of the  Sarbanes-Oxley Act
of 2002.            

                     31.2     Certification   of  Principal   Financial  Officer
                              pursuant to  Section 302 of the Sarbanes-Oxley Act
of 2002.            

                     32.1     Certification  of   Principal   Executive  Officer
                              pursuant to  Section 906 of the Sarbanes-Oxley Act
of 2002.            

                     32.2     Certification of  Chief Financial Officer pursuant
                             to Section 906 of the Sarbanes-Oxley Act of 2002.

                   10.1     Standard  Provisions  to   Servicing   Agreement
                            (Attached   as  an   exhibit   to   Registrant's
                              Registration Statement  No. 33-83524  on  Form S-3
                              filed  August 31,  1994,  incorporated  herein  by
reference).         

                     10.2     Form  of  Servicing   Agreement  (Attached  as  an
                             exhibit to  Registrant's  Registration  Statement
                              No. 33-83524 on  Form S-3  filed  August 31, 1994,
              incorporated herein by reference).

                     10.3     Standard   Terms  to  Master  Servicing  Agreement
                              (Attached   as   an    exhibit   to   Registrant's
                              Registration Statement No.  33-83524  on  Form S-3
                              filed  August 31, 1994,  incorporated   herein  by
reference).         

                     10.4     Form of Master Servicing  Agreement  (Attached  as
                              an exhibit to Registrant's Registration  Statement
                              No. 33-83524 on  Form S-3  filed  August 31, 1994,
              incorporated herein by reference).

                     10.5     Copy of the  Standard  Terms to  Master  Servicing
                              Agreement,  June 1, 1995  Edition  (Attached as an
                              exhibit to the Registrant's Current Report on Form
                              8-K, filed July 10, 1995,  incorporated  herein by
reference).         

                     99.1     Form of Prospectus  Supplement of Bonds secured by
                              adjustable-rate  mortgage  loans  (Attached  as an
                              exhibit to  Registrant's  Pre-Effective  Amendment
                              No. 4 to  Registration  Statement No.  33-83524 on
                              Form S-3  filed  December  5,  1994,  incorporated
 herein by reference).

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                     99.2     Form  of  Financial   Guaranty   Assurance  Policy
                              (Attached   as   an   exhibit   to    Registrant's
                              Registration  Statement  No.  33-83524 on Form S-3
                              filed  August  31,  1994,  incorporated  herein by
reference).         

                     99.3     Form of  GEMICO  Mortgage  Pool  Insurance  Policy
                              (Attached   as   an   exhibit   to    Registrant's
                              Registration  Statement  No.  33-83524 on Form S-3
                              filed  August  31,  1994,  incorporated  herein by
reference).         

                     99.4     Form  of   PMI   Mortgage   Insurance   Co.   Pool
                              Insurance  Policy   (Attached  as  an  exhibit  to
                              Registrant's  Registration  Statement No. 33-83524
                              on  Form S-3  filed  August 31, 1994, incorporated
 herein by reference).

                     99.5     Form of Prospectus  Supplement of Bonds secured by
                              fixed-rate  mortgage loans (Attached as an exhibit
                              to Registrant's  Pre-Effective  Amendment No. 4 to
                              Registration  Statement  No.  33-83524 on Form S-3
                              filed  December 5, 1994,  incorporated  herein  by
reference).         

                     99.6     Copy of the  Saxon  Mortgage  Funding  Corporation
                              Servicing  Guide  for  Credit   Sensitive   Loans,
                              February 1, 1995  Edition  (Attached as an exhibit
                              to the  Registrant's  Current  Report on Form 8-K,
                              filed  March  8,  1995,   incorporated  herein  by
reference).         

(b)     Reports on Form 8-K                                 

None                                        

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II                                                                              

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.                                          

                                                MERIT SECURITIES CORPORATION

Dated:  April 14, 2004                 By:    /s/ Stephen J. Benedetti          
                                              ----------------------------------
                                Stephen J. Benedetti
                     President

Pursuant to the  requirements  of the Securities and Exchange Act of 1934,  this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.                    

                                                        [Enlarge/Download Table]

             Signature                                      Capacity                  Date          

                                                                                                    
/s/ Stephen J. Benedetti                      Principal Executive Officer/Director    April 14, 2004
--------------------------------------------                                                        
Stephen J. Benedetti                                                                                

/s/ Kevin J. Sciuk                            Principal Financial Officer/Controller  April 14, 2004
--------------------------------------------                                                        
Kevin J. Sciuk                                                                                      

/s/ J. Thomas O'Brien, Jr.                                  Director                  April 14, 2004
--------------------------------------------                --------                                
J. Thomas O'Brien, Jr.                                                                              

/s/ Christopher T. Bennett                                  Director                  April 14, 2004
--------------------------------------------                --------                                
Christopher T. Bennett                                                                              

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 EXHIBIT INDEX

                                                        [Enlarge/Download Table]

                                                                         Sequentially
Exhibit                                                                Numbered Page 

                                                                                     
23.1     Consent of DELOITTE & TOUCHE LLP                                      I     

31.1     Certification of Principal Executive Officer pursuant to                    
                        Section 302 of the Sarbanes-Oxley Act of 2002.         II    

31.2     Certification of Principal Financial Officer pursuant to                    
                        Section 302 of the Sarbanes-Oxley Act of 2002.         III   

32.1     Certification of Principal Executive Officer pursuant to                    
                        Section 906 of the Sarbanes-Oxley Act of 2002          IV    

32.2     Certification of Chief Financial Officer pursuant to                        
                        Section 906 of the Sarbanes-Oxley Act of 2002.         V     

35

Dates Referenced Herein   and   Documents Incorporated By Reference

				Referenced-On Page
This 10-K Filing		Date		First		Last			Other Filings
		8/1/94		33
		8/19/94		3
		8/31/94		33		35
		11/1/94		33
		12/5/94		34		35
		12/19/94		33
		2/1/95		35
		3/8/95		35
		4/19/95		33
		4/21/95		33
		6/1/95		34
		7/10/95		34
		3/1/98		33
		6/12/98		33					8-K
		3/1/99		34
		4/12/99		34					8-K
		8/1/99		34
		9/13/99		34					8-K
		12/31/01		10		30			10-K, 10-K/A, 8-K
		4/1/02		34
		4/25/02		34
		11/25/02		12		26
		12/15/02		12		26
		12/31/02		3		31			10-K, NT 10-K
		1/1/03		11		26
		1/31/03		12		27
		2/1/03		12		27
		5/31/03		12		26
		6/15/03		12		26
		6/30/03		1		32			10-Q, 10-Q/A
		9/30/03		5		32			10-Q, 10-Q/A
		12/15/03		12		27
For The Period Ended		12/31/03		1		32			NT 10-K
		2/27/04		1
		4/9/04		18
Filed On		4/14/04		36
Filed As Of		4/15/04
		12/15/04		13		27
Top									List All Filings