##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549-1004




---

Form 10-K

|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
    2002                                                 
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                                 

Commission file number 0-23637



---

Global Preferred Holdings, Inc.

(Exact Name of Registrant as Specified in its
Charter)


|                                                                   |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------
|DELAWARE                                                           |  | 58-2179041                                 
|(State or other Jurisdiction of
    Incorporation or Organization) |  | (I.R.S. Employer
    Identification Number)

6455 EAST JOHNS CROSSING, SUITE 402

DULUTH, GEORGIA 30097


(770) 248-3311


(Address, Including Zip Code and Telephone
Number, Including Area Code, of Registrants Principal
Executive Offices)




---

Securities registered under Section 12(b)
of the Exchange Act:

|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of Each Class |  | Name of Each Exchange on Which Registered
|                    |  |                                          
|None                |  | None                                     

Securities registered under Section 12(g)
of the Exchange Act:

Common Stock, Par Value $.001




(Title of class)


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  o

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.     o

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

The aggregate market value of the voting stock
held by non-affiliates of the registrant as of June 30,
2002 was approximately $23,941,438, computed on the basis of the
last price at which the common equity was sold ($10.00 per
share).

At March 14, 2003, there were 4,141,684
shares of common stock outstanding.



---






---

TABLE OF CONTENTS



|                                             |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                      
|                                             | Item 1. Business                                                                             
|                                             | Item 2. Properties                                                                           
|                                             | Item 3. Legal Proceedings                                                                    
|                                             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                     
|                                             | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                             | Item 6. Selected Financial Data                                                              
|                                             | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                             | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                             | Item 8. Financial Statements and Supplementary Data                                          
|                                             | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                    
|                                             | Item 14. Controls and Procedures                                                             
|PART IV                                     
|                                             | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|EX-99.1 SECTION 906 CERTIFICATION OF THE CEO
|EX-99.2 SECTION 906 CERTIFICATION OF THE CFO
|EX-99.3 SAFE HARBOR COMPLIANCE STATEMENT    



---



##### Table of Contents



TABLE OF CONTENTS

|         |  |                                                                                           |  |  |    | 
|-------- |  | ----------------------------------------------------------------------------------------- |  |  | -- | 
|PART I  
|Item 1.  |  | Business                                                                                  |  |  |    | 
|Item 2.  |  | Properties                                                                                |  |  |    | 
|Item 3.  |  | Legal Proceedings                                                                         |  |  |    | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                   |  |  |    | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |  |  |    | 
|Item 6.  |  | Selected Financial Data                                                                   |  |  |    | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |  |    | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |  |  |    | 
|Item 8.  |  | Financial Statements and Supplementary Data                                               |  |  |    | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |  |    | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                        |  |  | ** | 
|Item 11. |  | Executive Compensation                                                                    |  |  | ** | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |  | ** | 
|Item 13. |  | Certain Relationships and Related Transactions                                            |  |  | ** | 
|Item 14. |  | Controls and Procedures                                                                   |  |  |    | 
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |  |  |    | 



---



|   |                                                                                                                                                                                                                              
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Portions of the definitive proxy statement for
    the annual meeting of stockholders, which the registrant intends
    to file no later than 120 days after December 31, 2002
    are incorporated by reference in Part III.

1



---



##### Table of Contents






PART I




Item 1.     Business

Overview

Global Preferred Holdings, Inc. was incorporated
in Delaware in 1995 as a holding company, owning all of the
outstanding capital stock of Global Preferred Re Limited, a
Bermuda company registered as a long-term insurer under the
Bermuda Insurance Act 1978 (Global Preferred Re).
Global Preferred Re, formed during 1995, commenced its
reinsurance operations during 1996. References in this report to
Global Preferred, we, us,
our and our company refer to Global
Preferred Holdings, Inc. and, unless the context otherwise
requires or otherwise as expressly stated, our Bermuda
subsidiary, Global Preferred Re.

Global Preferred, through Global Preferred Re,
provides reinsurance for life insurance and annuity products. We
were formed to provide an opportunity for the independent agents
associated with an independent marketing organization to
participate indirectly in the reinsurance of the policies they
sold. An independent marketing organization (IMO) is
an organization of independent agents that contracts with one or
more insurance companies to distribute and market securities and
insurance products. Many of the individual agents who own a
significant portion of the outstanding common stock of Global
Preferred are currently associated with World Financial Group,
Inc., an affiliate of AEGON USA, Inc.

Our principal business objective is to align the
long-term interests of independent marketing organizations and
life insurance companies. Through these collaborative
relationships, we believe both the IMOs and insurers benefit
from mutually rewarding relationships based on parallel
interests, a dedication to quality business, and a focus on
managing insurance and distribution risk for long-term economic
rewards. Traditional reinsurance risk management solutions
rarely provide for an independent collaborative environment that
satisfies the long-term financial interests of both the
insurance companies and the IMOs. We offer a constructive
reinsurance solution to quality life and annuity marketing
organizations and insurance carriers that seek to solidify their
long-term relationships and values.

The strength of our reinsurance business is based
on our historical relationship with the independent agents of
World Financial Group, which is an IMO that markets the products
we currently reinsure. Although our reinsurance business is
directed to us through these independent agent relationships,
the life insurance and annuity policies that we currently
reinsure are underwritten and issued by various ceding life
companies. In the insurance industry, the term
ceding refers to the use of reinsurance to transfer
from one insurance company to another some or all of the risks
associated with one or more insurance policies. We often refer
to the life insurance companies that reinsure life insurance and
annuity policies through us as the ceding life
companies. The ceding life companies who issue the
policies we reinsure are:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | Western Reserve Life Assurance Co. of Ohio, a
    subsidiary of AEGON USA, Inc. (Western Reserve);  
|
| |  | American Skandia Life Assurance Corporation
    (American Skandia);                                 
|
| |  | Pacific Life Insurance Company (Pacific
    Life); and                                              
|
| |  | Kemper Investors Life Insurance Company, an
    affiliate of Zurich Insurance Company (Zurich Life).

Currently, our largest reinsurance relationship
is with Western Reserve, which accounted for 91% of our
reinsurance premiums and reinsured policy revenues as of
December 31, 2002.

When we reinsure a policy for a life insurance
company, we continue to reinsure that policy for as long as the
policy remains in effect. Although the life insurance company
may have the right to cancel the reinsurance on one or more
policies, this right can generally occur only upon certain
defaults or after a period of 10 years or longer, depending
on the particular reinsurance agreement. By maintaining a
continued financial interest in these policies, we share the
ongoing revenue streams associated with the

2



---



##### Table of Contents



policies. Additionally, as we reinsure new
policies, we expand the base of policies in which we maintain an
economic interest.


For the year ended December 31, 2002, we
earned net income of $1.5 million on revenues of
$33.0 million. Our total assets and stockholders
equity at December 31, 2002 was $74.3 million and
$43.3 million, respectively. As of December 31, 2002,
we had reinsured approximately 265,000 life insurance policies
with an aggregate face value of approximately $8.5 billion
and approximately 49,000 annuities with aggregate contract
benefits of approximately $224.7 million.

Recent Development

During the first quarter of 2003, Global
Preferred formed two wholly owned subsidiaries, Global Preferred
Solutions, Inc. and Global Preferred Resources, Inc. Global
Preferred Solutions will provide actuarial and management
advisory services to marketing organizations and life insurers.
Global Preferred Solutions principal focus will be to aid
clients in their assessment of the strategic and structural
benefits of sharing the economics of the business produced
through their distributor-insurer relationships. Global
Preferred Solutions will also offer product development,
pricing, valuation, and risk management consulting services for
life insurers and marketing organizations.

Global Preferred Resources will offer its
management support structure to marketing organizations, banks,
broker/dealers, and insurance companies who are considering the
formation of, or have formed, a producer-owned reinsurance
enterprise. The objective of Global Preferred Resources is to
leverage the core competencies and economies of scale of Global
Preferred Holdings and enable companies to bring best practices
and independent objectivity to their reinsurance enterprise.

Life Insurance Overview

According to A.M. Best, life insurance in force
in the United States at December 31, 2001 totaled $25.3
trillion.

Life insurance products typically fall within a
spectrum ranging from insurance protection products that pay a
sum of money upon the death of the insured to asset accumulation
products that offer the insured a tax-advantaged investment
vehicle for long-term savings and retirement income. At the
insurance protection end of the spectrum is term life insurance.
Term life insurance is often renewable on a yearly basis and
pays a sum of money upon the death of the insured. In general,
as you move along the spectrum, the investment component becomes
increasingly more meaningful, with the end point being a
variable annuity product, which is an asset accumulation
product. Variable annuities provide the policyholder the
opportunity to vary benefit payments depending on the investment
results of the assets held in the account.

We currently reinsure two types of insurance
products: variable universal life insurance and variable
annuities. We have the capability, and it is our intent, to
expand the scope of our reinsurance to include other life
insurance products, such as term life, whole life, universal
life and fixed annuities.

Variable Universal
Life.Variable universal life is an
investment-oriented insurance product that combines an
investment product with a death benefit. This product enables
the policyholder to vary the timing and amount of premium
payments, the level of death benefit protection, and the
investment allocation of policy funds. Premiums paid by the
policyholder, which comprise a separate pool of assets, are
placed in the insurance companys fixed account or separate
accounts. For the funds in the separate accounts, the
policyholder may choose among alternative investment vehicles,
usually including stock funds, corporate or government bond
funds, and money-market accounts. The death benefits and cash
values in variable universal life policies vary to reflect the
investment experience of the policys fixed or separate
accounts. The policy may have a guaranteed minimum death benefit
while cash values vary with the investment performance of the
fixed or separate account.

Variable Annuities.Variable annuity policies provide for flexible premium payments
and guarantee that the policyholder will receive periodic
benefit payments beginning on a specified date. Prior to the

3



---



##### Table of Contents



specified date, premium payments made and
resulting income earned accumulate on a tax-deferred basis.
Similar to variable universal life, variable annuity
policyholders may allocate their account balances among a
variety of investment vehicles. Accordingly, the resulting
benefit payments to the annuity policyholder will vary depending
on the performance of the invested assets. Variable annuity
policies may provide a guaranteed minimum death benefit prior to
the commencement of annuity benefit payments.


Reinsurance Overview

Life insurance companies spread the risks they
assume by purchasing insurance, known as reinsurance, from other
insurers, known as reinsurers. A reinsurer agrees to indemnify
another insurance company, commonly referred to as the ceding
life company, for all or a portion of the insurance risks
underwritten by the ceding life company under one or more of its
own insurance polices. According to Standard & Poors,
the percentage of new life insurance business written in the
United States that is reinsured has risen from 34% in 1990 to
almost 70% in 2002.

Ceding life companies receive a number of direct
benefits from reinsurance, including:



| |   |                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Reduced net liability on individual risks;                                                                                                                                                      
|
| |  | Catastrophe protection from large events or an
    aggregation of multiple small claims;                                                                                                        
|
| |  | Reduced fluctuations in profit and loss margins
    that are inherent to the insurance industry;                                                                                                
|
| |  | Assistance in maintaining acceptable leverage
    ratios; and                                                                                                                                   
|
| |  | Additional underwriting capacity by permitting
    them to assume larger risks and underwrite a greater number of
    policies without being required to increase their capital and
    surplus.

In addition to the direct benefits of
reinsurance, a ceding life company that reinsures through an
organization that has a relationship with the distribution
channel that sells the product that is reinsured may receive a
number of indirect benefits that more closely align their
economic interests with those of the distribution channel. These
indirect benefits may include higher quality, more profitable
business, longer-term relationships, and higher sales volumes.

In exchange for assuming a portion of the risk
associated with a reinsured policy, the reinsurer receives a
portion of the revenue stream associated with the policy so long
as the reinsurance remains in effect.

Reinsurance can be written on either a
proportional, also known as quota share or pro rata, basis or a
non-proportional, referred to as excess share or excess of loss,
basis. Under quota share reinsurance, the reinsurer indemnifies
the ceding life company against a predetermined percentage or
share of the benefits paid by the ceding life company under
policies it has issued. In reinsurance written on an excess
share basis, the reinsurer indemnifies the ceding life company
against that portion of benefits paid on the original policy in
excess of a specified dollar amount.

Types of Reinsurance

We currently write three types of reinsurance on
a quota share basis: renewable term (consisting of monthly
renewable term and yearly renewable term), coinsurance and
modified coinsurance.

Renewable Term.Renewable term, also referred to as
risk premium reinsurance, which includes monthly renewable term
and yearly renewable term, is a plan of reinsurance in which the
premium rates are not directly related to the premium rates on
the original plan of insurance. Under renewable term
reinsurance, the ceding life company reinsures a portion of the
mortality risk with us. The amount reinsured in any one period
is not based on the face amount of the policy, but rather on the
portion of the net amount of risk we reinsure. The net amount of
risk is typically defined as the difference between the death
benefit and the cash value of a policy. The ceding life company
establishes the policy reserves, which are reduced for the
mortality risk reinsured with us, and pays all policy benefits,
commissions and

4



---



##### Table of Contents



expenses involved in issuing and maintaining the
business and, correspondingly, we establish reserves specific to
the mortality risk reinsured.


Coinsurance.Under a
coinsurance arrangement, the insured risks are ceded to us on
essentially the same basis as underwritten by the ceding life
company. The ceded risks include mortality, persistency,
investment, and expense. We share the risks pro rata with the
ceding life company. We receive a proportionate share of gross
premiums from the ceding life company and provide contractual
expense allowances to the ceding life company to pay for the
expenses associated with the reinsured policies. Expenses
include commissions and costs associated with underwriting,
marketing, policy issue, and maintenance. We also pay our
proportionate share of death benefits and other policy benefits
to the ceding life company. The reserves on the ceded portion of
the policy are held by us and are our obligations.
Correspondingly, we invest the assets related to the reserves
and receive investment income from those assets.

Modified Coinsurance.Modified coinsurance is similar to
coinsurance except the ceding life company retains the reserves
and the assets related to the reserves. Modified coinsurance is
used primarily for products that develop cash values and allows
the ceding life company to retain the associated assets for
investment purposes.

Under coinsurance and modified coinsurance
agreements, our reinsurance premiums are materially higher than
premiums paid on the renewable term reinsurance since we are
reinsuring more risks. During the first year in which a policy
is reinsured on a coinsurance basis, we are required to
reimburse the ceding life company for our share of acquisition
costs, including first year commissions and issuance expenses.
Consequently, our net cash outlays could be as much as, or more
than, the first year life insurance premiums and as much as 10%
of annuity premiums. In year two and beyond, however, our cash
outlays for reinsurance allowances are significantly lower than
in the first year of a policy.

Industry Trend

We believe that over the last few decades the
production and distribution of life insurance has experienced
several fundamental trends.



| |                                                        
| | -------------------------------------------------------
| | Trends in the Production of Life Insurance
    Products



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Product
    Proliferation.The life insurance
    market has evolved from one offering a handful of
    industry-standardized products to one with products that are
    highly differentiated across the industry and even within a
    particular company. This has been driven primarily by the
    markets demand for more complex, investment-oriented
    products, as well as technological improvements that have
    enabled the support and administration of such products.                                                                                                                                                                                                                       
|
| |  | Demutualization.A
    number of large mutual life insurance companies have converted
    into publicly traded stock companies. We believe that this
    conversion has caused those companies to focus more on
    maximizing product profitability and stockholder value.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Consolidation Among Life Insurance
    Companies.Industry pressures on
    profitability and the desire to achieve economies of scale have
    driven consolidation of life insurance companies. Although we
    believe that larger, stronger insurance companies have a more
    focused approach to distribution channels, it has also created a
    greater degree of competition among fewer insurers for access to
    those distribution channels. This increased competition has
    pressured insurance companies to increase agent commissions,
    thereby lowering their profit margins, and increasing the
    insurers focus on securing stable, reliable access to
    distribution channels.



| |                                                          
| | ---------------------------------------------------------
| | Trends in the Distribution of Life
    Insurance Products



| |   |                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Diversification of Distribution
    Channels.Historically, most life
    insurers distributed their products through their own captive
    agency sales force. Although this traditional distribution
    channel is still utilized, insurers are now increasingly selling
    their products through IMOs (including independent

5



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | agents, brokerage firms, banks and other
    alternative distribution channels), enabling the insurers to
    focus their resources on their principal expertise: product
    development, underwriting and policy administration. As a
    result, insurers increasingly rely on IMOs for agent
    recruitment, training and sales support.                                                  
|
| |  | Increasingly Complex Regulatory
    Environment.Regulation of insurance
    sales has become more extensive as products have become more
    complicated and the distribution systems have become more
    diverse. As a result, the cost of compliance with such
    regulations has risen dramatically and has made it more
    difficult for IMOs to manage a diverse portfolio of products.
|
| |  | Consolidation among Distribution Channels and
    the Emergence of National Distribution
    Franchises.In order to achieve
    economies of scale and increased bargaining power, a number of
    IMOs have grown and acquired other, smaller IMOs.                                                                                                                                           

We believe that these trends have led to a
misalignment of interests between the distributors of life
insurance products and the life insurance companies that create
those products. The separation of life insurance companies from
distribution channels, followed by the growing strength of those
distribution channels, creates an environment where the
distributors control access to the life insurance consumers. The
independent distributors ability to select the products to
sell to the public has given them significantly greater
influence over product development. Often, product selection
decisions are driven by a desire for immediate commissions
rather than on the value provided by long-term relationships
focused on writing persistent, high quality business.
Additionally, this short-term focus has inhibited the product
development process, as life insurance companies are reluctant
to invest in the development of products for distribution
relationships that may not be long lasting. We believe that
these trends have created an environment in which life insurance
companies seek more stable and reliable distribution networks in
which distributors have long-term incentives to write
persistent, high quality business and the insurance companies
have less pressure to pay higher commissions to the distributors
solely to gain and maintain access to the consumers.

The Global Preferred Value
Proposition

We strive to align the interests between life
insurance distributors and life insurance companies by
developing long-term, collaborative reinsurance relationships.
The foundation for these relationships is our ability to provide
IMOs meaningful financial incentives, tied to the profitability
of the reinsurance business directed to us, and the opportunity
to participate in a reinsurance structure with low barriers to
entry. Among these possible financial incentives is equity
participation in the reinsured business, with such levels of
equity participation driven by the volume and quality of
reinsurance business directed to us.



| |                         
| | ------------------------
| | Benefits to Distributors



| |   |                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Participates in Benefits from Reinsurance.Through the financial incentives we
    provide, distributors receive financial benefits in addition to
    traditional commissions. Alternatively, we provide focused
    advisory services to IMOs interested in establishing their own
    reinsurance structure.                                                              
|
| |  | Increases in Net Operating
    Margins.Similarly, to the extent that
    the receipt of financial incentives results in a recognizable
    item for income statement purposes, distributors will be able to
    substantially increase their net operating margins without
    incurring additional costs.                                                                  
|
| |  | Enhances Ability to Assess Quality of
    Business.As the overall economic
    package to the distributor is increasingly influenced by the
    long-term performance of the business they sell, distributors
    will be driven to gain more information regarding the drivers of
    profitability and they will seek to enhance the quality of
    business they produce.
|
| |  | Increases Involvement in Product
    Development.As distributors become
    increasingly focused on long-term product success, they will
    want to become more involved in product development decisions to
    improve sales volume and profitability within the products they
    sell.                                                                                 

6



---



##### Table of Contents





| |                    
| | -------------------
| | Benefits to Insurer



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Stabilizes Product
    Distribution.Reinsurance-driven
    partnerships with distribution channels interested in
    performance-based incentives should result in more stable
    relationships with the channels, as the financial benefits are
    realized over a number of years in addition to immediate
    commission payouts, which create no need for a long-term tie
    between the distribution channels and the insurers.                                                                                                                                                                                                                                                                    
|
| |  | Motivates Distributor to Focus on Quality of
    Business.As distributors
    economic interests become more aligned with those of the
    insurers whose policies they sell, they will become more focused
    on the quality of that business.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Helps Alleviate Downward Margin
    Pressure.By complementing commission
    dollars with the other financial incentives we provide,
    distributors should be less inclined to seek continual
    commission increases from insurers, resulting in measurable
    improvements in the insurers margins. Further, insurers
    should realize expense savings otherwise expended to maintain
    stability and growth in sales. As insurers recognize the
    long-term benefits we are creating for them with the
    distribution channels and improved margins, those insurers will
    be more likely to choose us for reinsurance to help assure
    continued long-term distribution relationships.
|
| |  | Focuses Distribution System on Specific
    Products.Since the financial
    incentives paid by us will be linked to the sale of specific
    products, distributors will place an emphasis on selling those
    products in order to receive the additional financial benefits.                                                                                                                                                                                                                                                                                                                                                                                                                           

In addition to collaborative reinsurance
relationships, through our subsidiaries, newly formed in the
first quarter of 2003, we also offer actuarial and management
advisory services to both IMOs and insurers. Our independence
and objectivity, coupled with depth of experience and expertise
associated with distribution systems and insurers, offers value
added business solutions from a single source entity that can be
essential in todays environment. By providing these
benefits to both the IMO and the insurer, we are able to develop
long-term relationships with both parties, thereby contributing
to our growth opportunities.

Growth Strategy

Our objectives are to build strong financial
performance, loyal independent marketing organization
relationships, and stockholder value. We aim to achieve these
objectives through the following growth strategies:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Broadening Existing Relationships.We will seek to grow our business by
    (1) broadening the pool of products that we reinsure for
    the ceding life companies with which we have existing
    reinsurance arrangements and (2) establishing new
    reinsurance arrangements with other life insurance companies
    that sell products through our existing independent agent
    relationships. We believe that our existing agreements provide
    the foundation for future cooperation in the development,
    distribution and underwriting of new life insurance and annuity
    products. We also believe that the reinsurance agreement that we
    entered into with Pacific Life is an example of the new
    relationships that we are striving to establish with leading
    life insurance companies that desire to establish long-term
    distribution relationships.
|
| |  | Forming New Relationships with IMOs.Using financial incentives, we intend
    to form new relationships with IMOs distributing both variable
    and fixed life insurance and annuity products. These new
    relationships may be with independent insurance agencies,
    broker/dealers, regional investment firms, banks or other
    financial institutions. Our business objective is to align the
    long-term interests of independent marketing organizations and
    life insurance companies. Through these collaborative
    relationships, we believe that both the IMOs and insurers
    benefit from mutually rewarding relationships based on parallel
    interests, a dedication to quality business, and a focus on
    managing insurance and distribution risk for long-term economic
    rewards.                                                                 

7



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continuing to Expand Reinsurance Coverage of
    Current Business.Some of our existing
    reinsurance agreements provide us certain contractual rights to:
    (1) reinsure policies issued since January 1, 2002
    that we are not currently reinsuring, and (2) expand the
    scope of our reinsurance on policies we currently reinsure.
    Specifically, our agreements with Western Reserve grant us the
    right, subject to minimum sales volume thresholds, to reinsure,
    on a coinsurance and modified coinsurance basis, up to 20% of
    all single life variable universal life products, other than the
    Financial Freedom Builder product, introduced for sale after
    January 1, 2002 and sold by agents associated with World
    Financial Group. Regarding these variable universal life
    products, we have the contractual right to commence reinsurance
    on all policies issued from January 1, 2002 through
    December 31, 2002, on or before December 31, 2003, and
    on all policies issued from January 1, 2003 through
    March 31, 2004, on or before March 31, 2004.
    Exercising any of these rights may require additional capital.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Further, our agreements with Western Reserve
    grant us the right, through March 31, 2003, to convert
    certain Financial Freedom Builder variable universal life
    insurance policies we are currently reinsuring on a monthly
    renewable term basis to a coinsurance and modified coinsurance
    basis. This expansion of our reinsurance would require
    additional capital that exceeds our current resources. We do not
    expect to secure additional capital prior to the expiration date
    of this right on March 31, 2003.                                                                                                                                                           
|
| | Furthering this strategy, effective
    January 1, 2002, we amended certain of our reinsurance
    agreements with Western Reserve to convert our reinsurance of
    Financial Freedom Builder variable universal life insurance
    policies, issued from April 1, 2001 through
    December 31, 2001, from a monthly renewable term basis to a
    coinsurance and modified coinsurance basis. In addition, we
    amended certain of our reinsurance agreements with Western
    Reserve to begin reinsuring newly issued Freedom Elite Builder
    variable universal life insurance policies issued from
    July 1, 2001 through December 31, 2001 on a
    coinsurance and modified coinsurance basis.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Expanding Reinsurance Coverage of New Business
    Under Existing Agreements.Some of our
    existing reinsurance agreements also provide us the right to
    reinsure certain new policies as they are written, subject to
    minimum sales volume thresholds. Specifically, our agreements
    with Western Reserve grant us the right to reinsure up to 20% of
    all single life variable universal life products, other than the
    Financial Freedom Builder product, on a coinsurance and modified
    coinsurance basis for policies issued after January 1, 2002
    through March 31, 2004 and sold by the agents associated
    with World Financial Group. This right is also applicable for
    reinsurance on monthly renewable term basis for all single life
    variable universal life insurance policies issued through
    March 31, 2006. Further, we have the right to prospectively
    increase our reinsurance quota share percentage (currently 14%)
    to between 40% to 50% for certain new variable annuity products
    issued through December 31, 2003 and sold by those agents,
    depending on the volume of direct written variable annuity
    premiums issued by Western Reserve or its U.S. affiliates in the
    previous calendar year. The reinsurance of new policies and
    products will continue to increase our base of policies
    reinsured and generate additional revenues under our existing
    reinsurance agreements.



| |                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Furthering this strategy, effective
    January 1, 2002, we amended certain of our reinsurance
    agreements with Western Reserve to increase our reinsurance
    quota share percentage on variable annuity policies, issued from
    January 1, 1999 to present, from 10% to 14%.

Distribution Relationships and Sales
Strategies

Our strategy is to generate reinsurance business
through strong, incentive-based relationships with IMOs that
have the desire and ability to establish long-term reinsurance
relationships with the life insurance companies whose products
they sell. Further, through our new subsidiaries, we offer
advisory and management services to IMOs that desire to
establish a reinsurance structure, or may have an existing
reinsurance structure.

8



---



##### Table of Contents



We believe that IMOs that develop long-term
relationships have a greater incentive to place profitable and
persistent business with those life insurers that reinsure
through their reinsurance partner. This three-party relationship
creates positive economic opportunities for each party, as the
IMO may benefit above and beyond commissions, and we and the
life insurance company benefit through increased sales and
incremental profitability of the business.

All of the policies we currently reinsure have
resulted from the marketing efforts of the independent agents
who have been associated with World Financial Group and its
predecessor, World Marketing Alliance, Inc. (WMA
Agency). Our relationship with World Financial Group was
formed in June 2001, when certain assets of WMA Agency were sold
to World Financial Group. As a result of the asset acquisition,
substantially all of the agents of WMA Agency became associated
with World Financial Group. Our relationship with WMA Agency
dates back to our founding in 1995, when we were principally
formed to provide an opportunity for its agents to participate
indirectly in the reinsurance of the business they produced.
Many of those individual agents purchased an equity ownership in
our company through a private sale of common stock in 1995 and a
subsequent sale of preferred stock in 2000. We believe that this
equity participation provides an effective incentive for those
individuals to establish strong relationships with the ceding
life companies that reinsure through us.

We expect to generate additional reinsurance
business through the continuing efforts of World Financial
Group, as contemplated by the following agreements:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | An agreement between World Financial Group and
    us, which requires that World Financial Group will, for a period
    extending through June 8, 2008, use commercially reasonable
    efforts to assist us in attaining the opportunity to reinsure
    all insurance products sold by its agents for insurance
    companies with which World Financial Group has selling
    agreements, other than Western Reserve and Western
    Reserves affiliates. Additionally, the agreement provides
    that World Financial Group will use commercially reasonable
    efforts to cooperate with us in our negotiations to establish
    reinsurance relationships with life insurance companies and
    provide benefits to the companies that reinsure their business
    through us not otherwise available to them, such as access to
    events and conferences sponsored by World Financial Group for
    its independent agents and the opportunity to participate in
    World Financial Group sponsored communications, which may
    include mailings, conference calls or televised broadcasts; and
|
| |  | An agreement (First Right Agreement)
    with Western Reserve that provides us a first right to reinsure
    certain business sold by agents associated with World Financial
    Group and underwritten by Western Reserve or its U.S.
    affiliates, as further described below in Reinsurance
    Relationships.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

Additionally, we intend to form new relationships
with other IMOs and ceding life companies by:



| |   |                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Marketing directly to IMOs, life insurance
    companies, and insurance company service organizations with
    which we do not currently have relationships;
|
| |  | Leveraging our existing relationships to
    establish reinsurance relationships with additional ceding life
    companies;                                 
|
| |  | Employing existing and new IMO relationships to
    establish relationships with other IMOs; and                                                            
|
| |  | Utilizing existing and new relationships with
    ceding life companies to establish relationships with additional
    IMOs.                                

From time to time, we may accept advisory and
consulting assignments away from our core business strategy to
extend our relationship to potential new business opportunities.
These opportunistic advisory and consulting assignments may
range from fixed flat fee business arrangements to
fee-for-service on billable hour schedules.

9



---



##### Table of Contents



Reinsurance Relationships



| |                             
| | ----------------------------
| | Current Reinsurance Business

We currently provide reinsurance for variable
universal life and variable annuity policies issued by four
large life insurance companies. Our reinsurance agreements with
these ceding life companies provide for our assumption of a
portion of defined risks associated with specified products sold
by agents of the IMO with which we have a relationship.
Reinsurance under these agreements is automatic, meaning we are
required to accept the business ceded to us so long as the
ceding life companies satisfy the terms of the reinsurance
agreements.

The following table indicates, by ceding life
company, the types of policies we are currently reinsuring and
the type of reinsurance applicable to each.

|                    |                         |                     |  |             |  |             |  |   |  |  |  |   | 
|------------------- | ----------------------- | ------------------- |  | ----------- |  | ----------- |  | - |  |  |  | - | 
|                    |                         |                    
|                    |                         | Type of Reinsurance
|                    |                         |                    
|                    |                         |                     |  | Modified   
|Ceding Life Company |                         | Renewable Term      |  | Coinsurance |  | Coinsurance
|                    |                         |                     |  |             |  |            
|Western Reserve     |                         |                     |  |             |  |             |  |   |  |  |  |  
|                    | Variable universal life |                     |  | X           |  |             |  | X |  |  |  | X | 
|                    | Variable annuity        |                     |  |             |  |             |  | X |  |  |  | X | 
|American Skandia    |                         |                     |  |             |  |             |  |   |  |  |  |  
|                    | Variable annuity        |                     |  |             |  |             |  |   |  |  |  | X | 
|Pacific Life        |                         |                     |  |             |  |             |  |   |  |  |  |  
|                    | Variable universal life |                     |  | X           |  |             |  |   |  |  |  |   | 
|Zurich Kemper       |                         |                     |  |             |  |             |  |   |  |  |  |  
|                    | Variable universal life |                     |  | X           |  |             |  |   |  |  |  |   | 

We have four separate reinsurance agreements with
Western Reserve that cover variable universal life insurance and
variable annuity policies issued by Western Reserve on or after
January 1, 1992 which are sold by the agents of World
Financial Group and its predecessor. These agreements were
entered into on July 1, 1996, January 1, 1998,
April 1, 1998, and October 1, 1999, respectively. The
agreement with American Skandia began on January 1, 1997
and covers policies on an American Skandia variable annuity
product issued between January 1, 1997 and
December 31, 2002 sold by those same agents. The Zurich
Kemper agreement was effective September 1, 1996 and covers
all policies on a Kemper variable universal life product issued
between September 1, 1996 and March 31, 2001 sold by
those agents. Our agreement with Pacific Life was signed on June
25, 2001 and covers policies on a variable universal life
product issued on or after January 1, 2001, sold by those
agents. We believe our relationship with Pacific Life is a
significant event in the growth of our business because this
reinsurance agreement was entered into after World Financial
Group purchased certain assets of WMA Agency.

We believe that the terms of our reinsurance
arrangements are favorable for our industry and that we were
able to obtain these terms in part because of our strong
relationship with the agents associated with World Financial
Group. Our right to reinsure new business under our reinsurance
agreements generally extends for an initial term of 3 to
5 years, with automatic renewals and one-year notices of
termination following the initial term. Termination of our right
to reinsure new business does not, however, affect our right to
continue to reinsure the policies reinsured at the time of
termination. Under our agreements, we have the right to continue
to reinsure a policy for as long as it remains in effect or
until the ceding life company otherwise recaptures it. A ceding
life company may have the right to recapture a reinsured policy
only upon certain defaults or after a period of 10 years or
longer, depending on the terms of the relevant reinsurance
agreement.



| |                                               
| | ----------------------------------------------
| | Increase Business under Existing
    Contracts

Reinsurance of In Force Business and New
Business with Western Reserve.Following World Financial Groups purchase of certain
assets of WMA Agency in June 2001, we entered into a First Right

10



---



##### Table of Contents



Agreement with Western Reserve that provides us a
first right to reinsure certain new products issued by Western
Reserve or its U.S. affiliates that are sold by agents
associated with World Financial Group, as follows:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have the contractual right, through
    December 31, 2003, to commence reinsurance of the Freedom
    Elite Builder variable universal life insurance polices and
    riders issued by Western Reserve from January 1, 2002
    through December 31, 2002, and, through March 31,
    2004, to commence reinsurance of the Freedom Elite Builder
    variable universal life insurance policies and riders issued by
    Western Reserve from January 1, 2003 through March 31,
    2004, on a coinsurance and modified coinsurance basis.         
|
| |  | We have the right, subject to minimum sales
    volume thresholds, to reinsure up to 20% of all new single life
    variable universal life insurance products introduced for sale
    after January 1, 2002, on a coinsurance and modified
    coinsurance basis for all policies issued through March 31,
    2004 and prospectively on a monthly renewable term basis for all
    policies issued through March 31, 2006.                                                                                                                          
|
| |  | We have the contractual right to prospectively
    increase our reinsurance quota share percentages, up to a
    maximum ranging from 40% and 50%, on certain new variable
    annuity products issued through December 31, 2003.                                                                                                                                                                                                                                                                                                                     
|
| |  | These rights automatically extend for one-year
    renewal periods unless either party gives notice of termination
    180 days prior to the expiration of the applicable term.
    Our decision to exercise these contractual rights will be made
    from time to time during the term of the First Right Agreement
    and such decisions will be based on a number of relevant
    factors, including the attractiveness of the reinsurance rates
    prescribed by the agreement, the volume of business, and our
    available capital capacity.

Expand Reinsurance of Our In Force Business by
Exercising Contractual Rights.We have
the contractual right to convert our monthly renewable term
reinsurance of the Financial Freedom Builder variable universal
life insurance policies and riders issued by Western Reserve
from January 1, 1999 through March 31, 2003 to
coinsurance and modified coinsurance. The right to convert the
monthly renewable term reinsurance on the remaining policies
reinsured on a monthly renewable term basis to coinsurance and
modified coinsurance expires on March 31, 2003.

Our decision to exercise these contractual rights
will be made from time to time during the term of the First
Right Agreement and such decisions will be based on a number of
relevant factors, including the attractiveness of the
reinsurance rates prescribed by the agreement, the volume of
business, and our available capital capacity.



| |                                                               
| | --------------------------------------------------------------
| | Reinsurance of New Business with Other
    Insurance Companies

We intend to enter into reinsurance agreements
with other insurance companies from time to time and such
decisions will be based on a number of relevant factors,
including the attractiveness of the reinsurance rates prescribed
by the agreement, the volume of business, our relationship with
the insurance company and/or the IMO, and our available capital
capacity.

We intend to enter into agreements with other
IMOs similar to our directed reinsurance agreement with World
Financial Group. Pursuant to that directed reinsurance
agreement, World Financial Group has agreed to use commercially
reasonable efforts to assist us in attaining the opportunity to
reinsure all insurance products sold by its agents for insurance
companies with which it has selling agreements, other than
Western Reserve and Western Reserves affiliates.
Additionally, the agreement provides that World Financial Group
will use commercially reasonable efforts to cooperate with us in
our negotiations to establish reinsurance relationships with
life insurance companies and provide certain benefits to the
companies that reinsure their business through us.

11



---



##### Table of Contents



Investments

Our investments are selected with the objective
of achieving favorable investment returns consistent with
appropriate credit, diversification, tax and regulatory
consideration, while providing sufficient liquidity to enable us
to meet our obligations as a reinsurance company on a timely
basis. We have developed specific investment guidelines that
stress diversification of risk, conservation of principal, and
liquidity. Our investments, however, will be subject to market
risks and fluctuations, as well as to the risks inherent in
particular securities. Our board of directors has established an
Investment Committee to periodically review the guidelines and
investment portfolio and to make recommendations to the board of
directors regarding any changes. The board of directors reviews
the guidelines annually.

We utilize an independent investment manager to
invest our assets in accordance with our investment guidelines.
Conning Asset Management Inc., a subsidiary of Swiss Reinsurance
Company, has been our investment manager since June 1998. The
Investment Committee of the board of directors periodically
reviews the performance of, and the fees paid to, Conning. We
are not aware of any affiliation by us with Conning or by
Conning with the ceding life companies. The fees paid to Conning
for services rendered during 2002 totaled $62,500.

As of December 31, 2002, we had invested
assets totaling $18.7 million with a net unrealized gain of
$82,125. The table below shows the aggregate amounts of fixed
maturity securities and cash and cash equivalents comprising our
portfolio of invested assets:

|                          |  |                 |            |      |  |      |            |  |  |   |            | 
|------------------------- |  | --------------- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | 
|                          |  |                
|                          |  | At December 31,
|                          |  |                
|                          |  | 2000            |            | 2001 |  | 2002
|                          |  |                 |            |      |  |     
|Fixed maturity securities |  | $               | 5,912,379  |      |  | $    | 12,214,279 |  |  | $ | 2,798,190  | 
|Cash and cash equivalents |  |                 | 4,259,153  |      |  |      | 8,062,110  |  |  |   | 15,858,256 | 
|                          |  |                 |            |      |  |      |            |  |  |   |            | 
|Total invested assets     |  | $               | 10,171,532 |      |  | $    | 20,276,389 |  |  | $ | 18,656,446 | 
|                          |  |                 |            |      |  |      |            |  |  |   |            | 

As of December 31, 2002, the fixed maturity
portion of our invested asset portfolio had a dollar weighted
average Moodys rating of Aa2, an average duration of
1.5 years and an average yield to maturity of 7.1% before
investment expenses.

The following table summarizes the fair value of
our invested assets at the dates indicated.

|                                |       |                 |           |            |  |      |            |            |  |   |            |            | 
|------------------------------- | ----- | --------------- | --------- | ---------- |  | ---- | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                |       |                
|                                |       | At December 31,
|                                |       |                
|                                |       | 2000            |           | 2001       |  | 2002
|                                |       |                 |           |            |  |     
|U.S. government agency          |       | $               |          |            |  | $    | 216,308    |            |  | $ |           |           
|Corporate                       |       |                 | 4,004,700 |            |  |      | 7,434,498  |            |  |   | 1,237,450  |           
|Asset-backed securities         |       |                 | 880,457   |            |  |      | 1,661,456  |            |  |   | 416,559    |           
|Mortgage-backed securities      |       |                 | 1,027,222 |            |  |      | 2,902,017  |            |  |   | 1,144,181  |           
|                                |       |                 |           |            |  |      |            |            |  |   |            |           
|Total fixed maturity securities |       | $               | 5,912,379 |            |  | $    | 12,214,279 |            |  | $ | 2,798,190  |           
|Cash and cash equivalents       |       |                 | 4,259,153 |            |  |      | 8,062,110  |            |  |   | 15,858,256 |           
|                                |       |                 |           |            |  |      |            |            |  |   |            |           
|                                | Total |                 | $         | 10,171,532 |  |      | $          | 20,276,389 |  |   | $          | 18,656,446 | 
|                                |       |                 |           |            |  |      |            |            |  |   |            |           

12



---



##### Table of Contents



The following table summarizes the fair value by
contractual maturities of our fixed maturity securities
portfolio at the dates indicated.

|                                 |       |                 |           |           |  |      |           |            |  |   |           |           | 
|-------------------------------- | ----- | --------------- | --------- | --------- |  | ---- | --------- | ---------- |  | - | --------- | --------- | 
|                                 |       |                
|                                 |       | At December 31,
|                                 |       |                
|                                 |       | 2000            |           | 2001      |  | 2002
|                                 |       |                 |           |           |  |     
|Due in less than one year        |       | $               |          |           |  | $    | 615,406   |            |  | $ | 611,784   |          
|Due after one through five years |       |                 | 3,613,946 |           |  |      | 6,825,383 |            |  |   | 625,666   |          
|Due after five through ten years |       |                 | 390,754   |           |  |      | 210,017   |            |  |   |          |          
|Asset-backed securities          |       |                 | 880,457   |           |  |      | 1,661,456 |            |  |   | 416,559   |          
|Mortgage-backed securities       |       |                 | 1,027,222 |           |  |      | 2,902,017 |            |  |   | 1,144,181 |          
|                                 |       |                 |           |           |  |      |           |            |  |   |           |          
|                                 | Total |                 | $         | 5,912,379 |  |      | $         | 12,214,279 |  |   | $         | 2,798,190 | 
|                                 |       |                 |           |           |  |      |           |            |  |   |           |          

Quality of Fixed Maturity Securities in
Portfolio.The following table
summarizes the composition of the fair value of our fixed
maturity securities portfolio at the dates indicated by rating
as assigned by S&P or Moodys, using the higher of
these ratings for any security where there is a split rating.

|                               |       |                 |    |      |   |      |    |     |   |  |    |     |  
|------------------------------ | ----- | --------------- | -- | ---- | - | ---- | -- | --- | - |  | -- | --- | -
|                               |       |                
|                               |       | At December 31,
|                               |       |                
|Rating                         |       | 2000            |    | 2001 |   | 2002
|                               |       |                 |    |      |   |     
|AAA/Aaa                        |       |                 | 33 | %    |   |      | 43 | %   |   |  | 56 | %  
|AA/Aa2                         |       |                 | 13 |      |   |      | 17 |     |   |  | 15 |    
|A/A2                           |       |                 | 51 |      |   |      | 39 |     |   |  | 29 |    
|BBB/Baa2                       |       |                 | 3  |      |   |      | 1  |     |   |  |   |    
|BB/Ba2.                        |       |                 |   |      |   |      |   |     |   |  |   |    
|B/B2.                          |       |                 |   |      |   |      |   |     |   |  |   |    
|CCC/Caa or lower, or not rated |       |                 |   |      |   |      |   |     |   |  |   |    
|                               |       |                 |    |      |   |      |    |     |   |  |    |    
|                               | Total |                 |    | 100  | % |      |    | 100 | % |  |    | 100 | %
|                               |       |                 |    |      |   |      |    |     |   |  |    |    

Underwriting and Policy
Administration

As an automatic reinsurer, we rely upon the
underwriting of the ceding life companies on policies we
reinsure. We review and monitor the underwriting standards and
procedures of the ceding life companies, including rules for
policy continuations, changes, re-entries, reinstatements, and
conversions.

In December 2002, we performed a review of the
reinsurance processes and procedures at Western Reserves
offices located in St. Petersburg, Florida. An external
underwriting consultant participated in the review. The review
included the following functional areas: new business,
underwriting, commissions, reinsurance, claims, data processing,
and internal audit. The results of the review did not indicate
any material control deficiencies or errors in reporting.

The ceding life companies administer policies we
reinsure and provide us with all information necessary for
processing the reinsurance. We have conducted only a limited
review of the administrative practices of our ceding life
companies. Therefore, we may not have sufficient information to
properly evaluate the administration of the business we reinsure
or the accuracy of the information provided by the ceding life
companies.

Our reinsurance agreements give us the right to
periodically audit the books and records of the ceding life
companies to ensure that all business is being properly ceded
and administered. Management also communicates frequently with
the ceding life companies regarding the administration of the
business, business policies and practices, underwriting
procedures, quality of business considerations, and reinsured
policy experience.

13



---



##### Table of Contents



Retention

Our profitability depends, in part, on the volume
and amount of death claims incurred. While death claims are
reasonably predictable over a period of many years, claims
become less predictable over shorter periods and are subject to
fluctuation from period to period. Actual mortality experience
in a particular period may be greater than expected mortality
experience and, consequently, may adversely affect our operating
results for such period.

As a partial hedge against the unpredictability
of claims experience, we have entered into a pool retrocession
agreement covering certain life insurance policies we reinsure.
Under the pool retrocession agreement, multiple reinsurers
participate in the risks ceded by us. Standard mortality risks
in excess of our life insurance retention limit of $100,000 per
life are retroceded to pool participants, which include: ERC
Life Reinsurance Corporation, Swiss Re Life & Health
America, Inc., The Lincoln National Life Insurance Company, and
Transamerica Occidental Life Insurance Company.

If equity markets decline sufficiently, we may
incur a claim expense on certain annuity policies in excess of
our life insurance retention limit of $100,000 per life.
Currently, sixteen annuity policies, or 0.03%, of our annuity
policies in force exceed our life insurance retention limit by
the aggregate exposure of approximately $661,000 with an average
excess exposure of approximately $41,000 per life. Increases in
the equity market may result in fewer annuity policies exceeding
our life insurance retention limit while decreases in the equity
market may result in more annuity policies exceeding our life
insurance retention limit.

Regulation of Global Preferred Re



| |        
| | -------
| | Bermuda

The Insurance Act 1978 and related regulations of
Bermuda (the Insurance Act), which regulates the
insurance business of Global Preferred Re, provides that no
person shall carry on any insurance business in or from within
Bermuda unless registered as an insurer under the Insurance Act
by the Bermuda Monetary Authority (the Authority).
Under the Insurance Act, insurance business includes reinsurance
business.

The Insurance Act imposes solvency and liquidity
standards and auditing and reporting requirements and grants to
the Authority powers to:



| |   |                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | grant and revoke registration;                                                                                                                                                                                                                                                 
| |  | require statutory financial statements;                                                                                                                                                                                                                                        
| |  | limit the amount of dividends and other payments;                                                                                                                                                                                                                              
| |  | regulate transfer of business and winding-up; and                                                                                                                                                                                                                              
| |  | supervise, investigate (as well as assist on
    investigations by certain foreign regulatory authorities),
    requisition information and intervene in the affairs of Bermuda
    insurance companies (including limitations on new business and
    regulating investments).

The Authority may appoint an inspector with
extensive powers to investigate the affairs of an insurer if the
Authority believes that an investigation is required in the
interest of the insurers policyholders or persons who may
become policyholders. Further, Global Preferred Re, as a
long-term insurer registered under the Insurance Act, may only
be wound-up or liquidated by order of the applicable Bermuda
court.

Independent Approved
Auditor.Every registered insurer must
appoint an independent auditor who will annually audit and
report on the statutory financial statements and the statutory
financial return of the insurer, both of which, in the case of
Global Preferred Re, are required to be filed annually with the
Authority. The independent auditor of the insurer must be
approved by the Authority and may be the same person or firm
that audits the insurers financial statements and reports
for presentation to its shareholders. Global Preferred Res
independent auditor is KPMG.

Statutory Financial
Statements.An insurer must prepare
annual statutory financial statements. The Insurance Act
prescribes rules for the preparation and substance of such
statutory financial statements,

14



---



##### Table of Contents



which include, in statutory form, a balance
sheet, an income statement, a statement of capital and surplus
and notes thereto. The insurer is required to give detailed
information and analyses regarding premiums, claims,
reinsurance, and investments. Global Preferred Re, as a
long-term insurer, is required to submit to the Authority the
annual statutory financial statements as part of its annual
statutory financial return.


Minimum Solvency Margin; Restrictions on
Dividends.Under the Insurance Act,
Global Preferred Re:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Must maintain the required minimum solvency
    margin (the value of its long-term business assets exceed the
    amount of its long-term business liabilities by at least
    $250,000) and is prohibited from declaring or paying any
    dividends during any financial year if it is in breach of its
    minimum solvency margin or if the declaration or payment of such
    dividends would cause it to fail to meet such margin;                                                                                                                                                                               
|
| |  | Is prohibited, without the approval of the
    Authority, from reducing its total statutory capital as set out
    in its previous years financial statements by 15% or more
    in a single financial year;                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Is required to establish and maintain a
    segregated long-term business fund; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Is prohibited from declaring or paying a dividend
    to any person other than a policyholder unless the value of the
    assets of its long-term business fund as certified by Global
    Preferred Res approved actuary, exceeds the extent (as so
    certified) of the liabilities of Global Preferred Res
    long-term business. The amount of any such dividend shall not
    exceed the aggregate of the excess referenced in the preceding
    sentence and other funds properly available for the payment of
    dividends, being funds arising out of its business, other than
    its long-term business.

Global Preferred Re must comply with the
provisions of the Companies Act 1981 (the Companies
Act) regulating the declaration and payment of dividends
and making distributions from contributed surplus and reductions
of capital. Global Preferred Re may not declare or pay a
dividend, or make a distribution out of contributed surplus, if
there are reasonable grounds for believing that: the company is,
or would after the payment be, unable to pay its liabilities as
they become due; or the realizable value of the companys
assets would thereby be less than the aggregate of its
liabilities and its issued share capital and share premium
accounts. The Companies Act further regulates the return of
capital, and repurchases and redemptions of shares by Global
Preferred Re.

Principal
Representative.An insurer is required
to maintain a principal office in Bermuda and to appoint and
maintain a principal representative in Bermuda. For the purpose
of the Insurance Act, Global Preferred Res principal
representative is CFM Insurance Manager, Ltd. and its principal
office is located at 44 Church Street, 3rd Floor,
Hamilton HM 12, Bermuda. Without a reason acceptable to the
Authority, Global Preferred Re may not terminate the appointment
of its principal representative, and the principal
representative may not cease to act as such, unless
30 days notice in writing to the Authority is given
of the intention to do so. It is the duty of CFM Insurance
Managers, Ltd., as Global Preferred Res principal
representative, within 30 days of reaching the view that
there is a likelihood of it becoming insolvent or that a
reportable event has, to the principal representatives
knowledge, occurred or is believed to have occurred, to make a
report in writing to the Authority setting out all the
particulars of the case that are available to the principal
representative.



| |              
| | -------------
| | United States

In general, reinsurers domiciled outside the
United States (referred to as alien reinsurers) are
not subject to substantial direct regulation in the United
States. The insurance laws of each state of the United States
generally do not regulate the sale of reinsurance within their
jurisdictions by non-U.S. insurers. However, alien reinsurers,
such as Global Preferred Re, that provide reinsurance to
insurance companies domiciled or licensed in United States
jurisdictions are indirectly regulated by state credit for
reinsurance laws. These laws operate to deny statutory
financial statement credit to ceding insurers unless the
unauthorized alien reinsurer posts acceptable security for ceded
liabilities and agrees to certain contract provisions.

15



---



##### Table of Contents



The state insurance laws in the United States
restricting the investments of insurance companies are not
applicable to Global Preferred Re. Unlike insurance regulations
in the United States, Bermuda law does not limit or regulate
investments of Global Preferred Re as a long-term insurer
provided that such investments are made for its potential
benefit and the minimum solvency ratios prescribed under the
Insurance Act are not breached.

Competition

Reinsurance and insurance companies compete based
on many factors, including:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | Premium charges;                                                                        
|
| |  | Ability to structure innovative terms and
    conditions in product offerings;          
|
| |  | The general reputation and perceived financial
    strength of the reinsurer or insurer;
|
| |  | Relationships with reinsurance and insurance
    intermediaries;                        
|
| |  | Ratings assigned by independent rating agencies;                                        
|
| |  | Speed of claims payment and administrative
    activities; and                          
|
| |  | Experience in the particular risk to be
    underwritten.                               

While we compete with numerous national and
international reinsurance companies, primary insurance
companies, underwriting syndicates and other financial services
providers, many of which are well established, have significant
operating histories and substantially greater underwriting,
marketing and administrative resources than we do, we believe
that our focus on building relationships with IMOs can be a
distinguishing feature.

Distinguishing us from other companies in our
industry, our growth strategy includes the expansion of our
relationships with IMOs through the formation of reinsurance
structures specific to their business or through the use of
financial incentives, which may include stock, warrants and
other forms of equity in our company. We believe our core
strengths and expertise will result in:



| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Fee income associated with administrative
    services and from actuarial and management advisory services;                                                                                       
|
| |  | Reinsurance revenues resulting from favorable
    agreements with IMO reinsurance structures; and                                                                                                 
|
| |  | Reinsurance revenues resulting from favorable
    agreements with ceding life companies, benefiting IMOs that are
    financially motivated to influence ceding company relationships
    with us.

Our ability to compete with other potential
reinsurers in this market will depend upon our ability to
successfully develop and maintain strong relationships with
IMOs. In addition to our continuing focus on our current
independent agent relationships, we commenced implementing
marketing programs in late 2002 to develop new IMO relationships.

Direct insurance companies who are licensed to
underwrite insurance are also licensed to underwrite
reinsurance, making commercial access into the reinsurance
business relatively uncomplicated. In addition, over the last
several years, capital markets participants, including exchanges
and financial intermediaries, have developed financial products
intended to compete with traditional reinsurance. We are unable
to predict the extent to which new, proposed or potential
initiatives may affect the demand for our products. Barriers to
entry to the reinsurance industry for non-insurers are chiefly
the time, capital, and talent necessary to attract, underwrite,
and manage the business.

We cannot assure you that we will be able to
compete successfully, and the inability to do so could have a
material adverse effect upon our ability to implement our
strategies.

16



---



##### Table of Contents



Employees

As of December 31, 2002, we had twelve
full-time employees. None of our employees are covered by a
collective bargaining agreement. We consider our relations with
our employees to be good.

We believe our future success will depend in
large part on our ability to recruit and retain qualified
employees experienced in insurance and underwriting. The
competition for such personnel is intense, and there can be no
assurance that we will be successful in retaining or recruiting
key personnel.




Item 2.     Properties

In October 2002, we entered into a lease
agreement with Metropolitan Life Insurance Company for 6,162
square feet of office space in Duluth, Georgia. The initial
lease term is twelve months, with the option to extend the term
to fifty-one months, expiring in January 2008. Payments under
this lease are $118,619 annually through October 2003. The lease
payments are subject to an annual increase of approximately 3%.
We do not own or lease any other properties.




Item 3.     Legal
Proceedings

We are not a party to any material legal
proceedings.




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

During the fourth quarter of 2002, no matters
were submitted to our security holders for a vote.




PART II




Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters

No public trading market existed for our common
stock during 2002.

At March 14, 2003, we had 4,141,684 shares
of common stock outstanding and approximately
800 stockholders.

We have not declared or paid any cash dividends
on our common stock during 2001 or 2002 and our board of
directors does not anticipate declaring or paying any cash
dividends in the foreseeable future. We anticipate that all of
our earnings and other cash resources, if any, will be retained
for the purpose of financing Global Preferred Res
reinsurance business and will be available for other strategic
opportunities that may develop. Future dividend policy will be
subject to the discretion of our board of directors, and will be
contingent upon our results of operations, financial position
and capital requirements, general business conditions,
restrictions imposed by financing arrangements, if any, legal
and regulatory restrictions on the payment of dividends and
other factors that our board of directors deems relevant.

As a holding company with no direct operations,
the payment of dividends by us in the future will be largely
dependent on our receipt of dividends from Global Preferred Re.
The payment of dividends by Global Preferred Re is restricted
under Bermuda law and regulations. Under the Insurance Act,
Global Preferred Re must maintain long-term assets with a value
of at least $250,000 more than its long-term liabilities. Global
Preferred Re is prohibited from declaring or paying dividends
unless the value of its long-term assets exceeds the amount of
its long-term liabilities, as certified by its approved actuary,
by the amount of the dividend and at least $250,000. Global
Preferred Re is also prohibited, without approval of the Bermuda
Monetary Authority, from reducing its total statutory capital by
15% or more in a single calendar year. In addition, under the
Bermuda Companies Act 1981, Global Preferred Re may only declare
or pay a dividend if, among other things, there are reasonable
grounds for believing that Global Preferred Re is, or would
after the payment, be able to pay its liabilities as they become
due.

17



---



##### Table of Contents






Item 6.     Selected
Financial Data

The following table sets forth selected financial
data and other operating information. The selected financial
data have been derived from our consolidated financial
statements and should be read in conjunction with our
consolidated financial statements and accompanying notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations including elsewhere
herein.

|                                            |                                                                |                                               |   |           |        |      |   |           |        |      |   |           |        |   |   |           |        |   |   |           |        |  
|------------------------------------------- | -------------------------------------------------------------- | --------------------------------------------- | - | --------- | ------ | ---- | - | --------- | ------ | ---- | - | --------- | ------ | - | - | --------- | ------ | - | - | --------- | ------ | -
|                                            |                                                                |                                              
|                                            |                                                                | Year Ended December 31,                      
|                                            |                                                                |                                              
|                                            |                                                                | 1998                                          |   | 1999      |        | 2000 |   | 2001      |        | 2002
|                                            |                                                                |                                               |   |           |        |      |   |           |        |     
|                                            |                                                                |                                              
|                                            |                                                                | (Dollars in thousands, except per share data)
|Consolidated Statements of Income
    Data: |                                                                |                                               |   |           |        |      |   |           |        |      |   |           |        |   |   |           |        |   |   |          
|                                            | Premiums                                                       |                                               | $ | 7,281     |        |      | $ | 9,692     |        |      | $ | 16,618    |        |   | $ | 19,240    |        |   | $ | 17,985    |       
|                                            | Reinsured policy revenues                                      |                                               |   | 4,098     |        |      |   | 13,506    |        |      |   | 12,894    |        |   |   | 11,238    |        |   |   | 13,859    |       
|                                            | Net investment income                                          |                                               |   | 951       |        |      |   | 350       |        |      |   | 528       |        |   |   | 811       |        |   |   | 742       |       
|                                            | Net realized gain (loss) on investments                        |                                               |   | 267       |        |      |   | (66       | )      |      |   | 3         |        |   |   | 45        |        |   |   | 428       |       
|                                            | Loss on recapture of business                                  |                                               |   |          |        |      |   | (823      | )      |      |   |          |        |   |   |          |        |   |   |          |       
|                                            |                                                                |                                               |   |           |        |      |   |           |        |      |   |           |        |   |   |           |        |   |   |          
|                                            |                                                                | Total revenues                                |   |           | 12,597 |      |   |           | 22,659 |      |   |           | 30,043 |   |   |           | 31,334 |   |   |           | 33,014 |  
|                                            |                                                                |                                               |   |           |        |      |   |           |        |      |   |           |        |   |   |           |        |   |   |          
|                                            | Total benefits and expenses                                    |                                               |   | 9,201     |        |      |   | 16,114    |        |      |   | 23,089    |        |   |   | 23,480    |        |   |   | 30,708    |       
|                                            |                                                                |                                               |   |           |        |      |   |           |        |      |   |           |        |   |   |           |        |   |   |          
|                                            |                                                                | Income before income tax                      |   |           | 3,396  |      |   |           | 6,545  |      |   |           | 6,954  |   |   |           | 7,854  |   |   |           | 2,306  |  
|                                            |                                                                | Income tax expense                            |   |           | (1,157 | )    |   |           | (2,225 | )    |   |           | (1,821 | ) |   |           | (2,392 | ) |   |           | (788   | )
|                                            |                                                                |                                               |   |           |        |      |   |           |        |      |   |           |        |   |   |           |        |   |   |          
|                                            |                                                                | Net income                                    |   |           | 2,239  |      |   |           | 4,320  |      |   |           | 5,133  |   |   |           | 5,462  |   |   |           | 1,518  |  
|                                            |                                                                | Preferred dividends                           |   |           |       |      |   |           |       |      |   |           | 155    |   |   |           | 267    |   |   |           |       |  
|                                            |                                                                |                                               |   |           |        |      |   |           |        |      |   |           |        |   |   |           |        |   |   |          
|                                            | Net income available to common stockholders                    |                                               | $ | 2,239     |        |      | $ | 4,320     |        |      | $ | 4,978     |        |   | $ | 5,195     |        |   | $ | 1,518     |       
|                                            |                                                                |                                               |   |           |        |      |   |           |        |      |   |           |        |   |   |           |        |   |   |          
|                                            | Basic earnings per share                                       |                                               | $ | 0.60      |        |      | $ | 1.15      |        |      | $ | 1.33      |        |   | $ | 1.39      |        |   | $ | 0.37      |       
|                                            | Diluted earnings per share                                     |                                               | $ | 0.60      |        |      | $ | 1.15      |        |      | $ | 1.30      |        |   | $ | 1.32      |        |   | $ | 0.37      |       
|                                            | Weighted-average common shares                                 |                                               |   | 3,743,649 |        |      |   | 3,742,610 |        |      |   | 3,742,610 |        |   |   | 3,742,610 |        |   |   | 4,141,684 |       
|                                            | Total weighted-average common and common
    equivalent shares |                                               |   | 3,743,649 |        |      |   | 3,742,610 |        |      |   | 3,943,897 |        |   |   | 4,141,684 |        |   |   | 4,141,684 |       

|                                 |                            |                         |   |        |  |      |   |        |  |      |   |        |  |  |   |        |  |  |   |        | 
|-------------------------------- | -------------------------- | ----------------------- | - | ------ |  | ---- | - | ------ |  | ---- | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                 |                            |                        
|                                 |                            | Year Ended December 31,
|                                 |                            |                        
|                                 |                            | 1998                    |   | 1999   |  | 2000 |   | 2001   |  | 2002
|                                 |                            |                         |   |        |  |      |   |        |  |     
|                                 |                            |                        
|                                 |                            | (Dollars in thousands) 
|Consolidated Balance Sheet Data: |                            |                         |   |        |  |      |   |        |  |      |   |        |  |  |   |        |  |  |   |       
|                                 | Cash and cash equivalents  |                         | $ | 6,618  |  |      | $ | 3,476  |  |      | $ | 4,259  |  |  | $ | 8,062  |  |  | $ | 15,858 | 
|                                 | Fixed maturity securities  |                         |   | 9,870  |  |      |   | 2,054  |  |      |   | 5,912  |  |  |   | 12,214 |  |  |   | 2,798  | 
|                                 | Deferred acquisition costs |                         |   | 27,538 |  |      |   | 39,750 |  |      |   | 42,752 |  |  |   | 42,800 |  |  |   | 49,850 | 
|                                 | Total assets               |                         |   | 44,881 |  |      |   | 49,008 |  |      |   | 56,617 |  |  |   | 67,853 |  |  |   | 74,274 | 
|                                 | Long-term debt             |                         |   |       |  |      |   | 9,179  |  |      |   | 5,000  |  |  |   | 5,000  |  |  |   | 5,000  | 
|                                 | Total liabilities          |                         |   | 20,508 |  |      |   | 20,600 |  |      |   | 20,028 |  |  |   | 25,884 |  |  |   | 30,952 | 
|                                 | Stockholders equity       |                         |   | 24,373 |  |      |   | 28,408 |  |      |   | 36,589 |  |  |   | 41,969 |  |  |   | 43,322 | 

18



---



##### Table of Contents



|                               |                                                            |                         |   |           |  |      |   |           |  |      |   |           |  |  |   |           |  |  |   |           | 
|------------------------------ | ---------------------------------------------------------- | ----------------------- | - | --------- |  | ---- | - | --------- |  | ---- | - | --------- |  |  | - | --------- |  |  | - | --------- | 
|                               |                                                            |                        
|                               |                                                            | Year Ended December 31,
|                               |                                                            |                        
|                               |                                                            | 1998                    |   | 1999      |  | 2000 |   | 2001      |  | 2002
|                               |                                                            |                         |   |           |  |      |   |           |  |     
|                               |                                                            |                        
|                               |                                                            | (Dollars in thousands) 
|Summary of Policies Reinsured: |                                                            |                         |   |           |  |      |   |           |  |      |   |           |  |  |   |           |  |  |   |          
|                               | Number of life insurance policies and riders
    reinsured |                         |   | 208,321   |  |      |   | 260,356   |  |      |   | 296,674   |  |  |   | 287,303   |  |  |   | 265,384   | 
|                               | Number of annuity policies reinsured                       |                         |   | 10,028    |  |      |   | 24,483    |  |      |   | 43,819    |  |  |   | 48,007    |  |  |   | 48,889    | 
|                               | Face value of life insurance reinsured                     |                         | $ | 6,117,000 |  |      | $ | 8,030,219 |  |      | $ | 9,378,075 |  |  | $ | 9,082,204 |  |  | $ | 8,451,310 | 
|                               | Annuity policy benefits reinsured                          |                         | $ | 157,695   |  |      | $ | 324,827   |  |      | $ | 310,063   |  |  | $ | 266,305   |  |  | $ | 224,710   | 




Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

Forward-Looking Statements

The following analysis of our consolidated
financial condition and results of operations should be read in
conjunction with Selected Financial Data and the
consolidated financial statements and accompanying notes
included elsewhere in this report. The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires the use of
estimates and assumptions developed by our management. Any
adjustments to reported bases of assets or liabilities resulting
from changes in estimates are reflected in earnings in the
period the estimates are revised.

Certain statements made in this report are
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 and are subject
to the safe-harbor provisions of that Act.
Additionally, any written or oral statements made by us or on
our behalf may include forward-looking statements that reflect
our current views with respect to future events and financial
performance. These statements may include, but are not limited
to statements relating to reinsurance revenues, gross profits,
cash flows, and net income in future periods. Such statements
often include the words believes,
expects, assumes, predicts,
continue, potential, should,
could, can, may,
will, proposes, anticipates,
intends, plans, estimates,
projects, and variations or negations of such
expressions or similar expressions. When we make forward-looking
statements, we are basing them on our managements beliefs
and assumptions, using information currently available to us.
Because such forward-looking statements involve risks, both
known and unknown, and uncertainties, there are important
factors that could cause actual results to differ materially
from those expressed or implied by such forward-looking
statements, including but not limited to:



| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The amount, timing, receipt, and cost of
    additional capital to fund our exercise of the rights to
    increase our reinsurance business with Western Reserve;
|
| |  | A decrease in the level of demand for our
    reinsurance business, or increased competition in the industry;                                                    
|
| |  | Extent to which we are able to develop new
    reinsurance programs;                                                                                             
|
| |  | Adverse reinsurance experience, including death
    claims and surrenders;                                                                                       
|
| |  | Estimates of reserves;                                                                                                                                           
|
| |  | Assumptions used in accounting for deferred
    acquisition costs;                                                                                               
|
| |  | Negotiation of reinsurance agreements;                                                                                                                           
|
| |  | Our cash requirements;                                                                                                                                           
|
| |  | Availability of capital on acceptable terms;                                                                                                                     

19



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The passage of federal or state legislation
    subjecting our business to additional supervision or regulation,
    including additional tax regulation, in the United States or
    other jurisdictions in which we operate; and
|
| |  | Changes in economic conditions, including
    interest rate and equity market conditions, which could affect
    our investment portfolio and reinsured policy revenues.                                                          

These forward-looking statements are subject to
change and uncertainty that are beyond our control and have been
made based upon our expectations and beliefs concerning future
developments and their potential effect on our business. We
cannot assure you that future developments will be in accordance
with our expectations or that the effect of future developments
will be those we anticipate. Actual results could differ
materially from those we expect, depending upon the outcome of
certain factors, including those described in the
forward-looking statements. We caution readers not to place
undue reliance on these forward-looking statements, which speak
only as of their dates. We have described some important factors
that could cause our actual results to differ materially from
our expectations in Factors That May Affect Future Results
of Operations included as Exhibit 99.3. You should
carefully review these risks and additional risks described in
other documents we file from time to time with the Securities
and Exchange Commission, including quarterly reports on the
Form 10-Q. Except as otherwise required by federal
securities laws, we undertake no obligation to publicly update
or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.

Overview

Global Preferred, through Global Preferred Re,
provides reinsurance for life insurance and annuity products.
Our principal business objective is to align the long-term
interests between independent marketing organizations and life
insurance companies. Through these collaborative relationships,
we believe both the IMOs and insurers benefit from mutually
rewarding relationships based on parallel interests, a
dedication to quality business, and a focus on managing
insurance and distribution risk for long-term economic rewards.

Although our reinsurance business is directed to
us through these independent agent relationships, the life
insurance and annuity policies that we currently reinsure are
underwritten and issued by various ceding life companies. In the
insurance industry, the term ceding refers to the
use of reinsurance to transfer from one insurance company to
another some or all of the risks associated with one or more
insurance policies. We often refer to a life insurance company
that reinsures life insurance and annuity policies through us as
a ceding life company. The strength of our current
reinsurance business is based on our historical relationship
with the independent agents of World Financial Group, which is
an indirect subsidiary of AEGON USA, Inc. and an IMO that
markets the products we currently reinsure.

Under a reinsurance agreement, the economic
consequences of certain insurance risks are transferred from the
ceding life company to the reinsurer. Depending upon the type of
reinsurance agreement, these risks may include mortality,
persistency, investment and expense. Key considerations in
evaluating the risks include industry experience, the ceding
life companys pricing and assumptions, the type of
product, the ceding life companys underwriting practices
and procedures, the type of distribution system, the ceding life
companys recent experience, and the market for the product.

The ceding life companies retain responsibility
for the payment of all claims, surrender values, commissions,
and expenses involved in issuing and maintaining the policies we
reinsure. In addition, the ceding life companies administer the
reinsurance contracts and, on a monthly and quarterly basis,
provide us with information regarding premiums, reserves and
benefits and the amounts we owe to the ceding life company for
claims and settlement expenses on the policies we reinsure.

Types of Reinsurance

We currently write three types of reinsurance on
a quota share basis: renewable term (consisting of monthly
renewable term and yearly renewable term), coinsurance and
modified coinsurance.

20



---



##### Table of Contents



Renewable Term.Renewable term, also referred to as risk premium reinsurance,
which includes monthly renewable term and yearly renewable term,
is a plan of reinsurance in which the premium rates are not
directly related to the premium rates on the original plan of
insurance. Under renewable term reinsurance, the ceding life
company reinsures a portion of the mortality risk with us. The
amount reinsured in any one period is not based on the face
amount of the policy, but rather on the portion of the net
amount of risk we reinsure. The net amount of risk is typically
defined as the difference between the death benefit and the cash
value of a policy. The ceding life company establishes the
policy reserves, which are reduced for the mortality risk
reinsured with us, and pays all policy benefits, commissions and
expenses involved in issuing and maintaining the business and,
correspondingly, we establish reserves specific to the mortality
risk reinsured.

Under renewable term reinsurance, we may also be
subject to risks as a result of persistency risk. Persistency
risk is the risk that a policyholder either stops paying
premiums, which would cause the policy to lapse, or chooses to
surrender the policy for the cash surrender value. The effect of
persistency risk on us is that possible future revenue will be
reduced, potentially reducing profits.

Coinsurance.Under a
coinsurance arrangement, the insured risks are ceded to us on
essentially the same basis as underwritten by the ceding life
company. The ceded risks include mortality, persistency,
investment, and expense. We share the risks pro rata with the
ceding life company. We receive a proportionate share of gross
premiums from the ceding life company and provide contractual
expense allowances to the ceding life company to pay for the
expenses associated with the reinsured policies. Expenses
include commissions and costs associated with underwriting,
marketing, policy issue, and maintenance. We also pay our
proportionate share of death benefits and other policy benefits
to the ceding life company. The reserves on the ceded portion of
the policy are held by us and are our obligations.
Correspondingly, we invest the assets related to the reserves
and receive investment income from those assets.

Modified
Coinsurance.Modified coinsurance is
similar to coinsurance except the ceding life company retains
the reserves and the assets related to the reserves. Modified
coinsurance is used primarily for products that develop cash
values and allows the ceding life company to retain the
associated assets for investment purposes.

Under coinsurance and modified coinsurance
agreements, our reinsurance premiums are materially higher than
premiums paid on the renewable term reinsurance since we are
reinsuring more risks. During the first year in which a policy
is reinsured on a coinsurance basis, we are required to
reimburse the ceding life company for our share of acquisition
costs, including first year commissions and issuance expenses.
Consequently, our net cash outlays could be as much as, or more
than, the first year life insurance premiums and as much as 10%
of annuity premiums. In year two and beyond, however, our cash
outlays for reinsurance allowances are significantly lower than
in the first year of a policy.

Financial Statement Impact of
Reinsurance

The Securities and Exchange Commissions
Financial Reporting Release No. 60 requires all companies
to include a discussion of critical accounting policies used in
the preparation of financial statements. Additional information
included elsewhere herein and in Note 2 to the consolidated
financial statements, includes a summary of the accounting
policies used in the preparation of our consolidated financial
statements.



| |                        
| | -----------------------
| | Income Statement Impact

Reinsurance
Revenues.For renewable term
reinsurance, we record as premiums the amount of
reinsurance premiums we receive over the payment periods of the
reinsured policies. For policies reinsured on a coinsurance or
modified coinsurance basis, we record as reinsured policy
revenues our proportionate share of the gross revenues
received by the ceding life company over the payment periods of
the reinsured policies. These revenues represent the policy
mortality and expense charges, asset-based allowances and
deferred sales charges that have been assessed against the
reinsured policy account balances.

21



---



##### Table of Contents



If we elect to convert coverage on certain
policies that we currently reinsure on a renewable term basis to
a coinsurance or modified coinsurance basis, the associated
premium revenues for those policies will discontinue, and our
proportionate share of the associated mortality and expense
charges, asset based allowances and deferred sales charges will
be recorded as reinsured policy revenues.

Reinsurance
Expenses.Regardless of the type of
reinsurance, our related expenses may include:
(1) benefits, claims and settlement expenses, which
represent our share of the payments made under the reinsured
policies during the period, the change in claims in course of
settlement, and the change in claims incurred but not reported;
(2) expense allowances paid to the ceding life company for
expenses associated with the reinsured policies, including
commissions and costs associated with underwriting, marketing,
policy issue and maintenance; and (3) amortization of
deferred acquisition costs, which are discussed in more detail
below.

Net Income.Our
profitability, in part, depends on the volume of policies
reinsured and experience of the reinsured policies. Factors that
affect the experience of the business include reinsured policy
persistency, death claims, and investment performance of the
separate account balances. While death claims are reasonably
predictable over a period of years, claims become less
predictable over shorter periods, and are subject to fluctuation
from quarter to quarter and year to year. Similarly, separate
account investment returns, upon which a significant portion of
our revenues depend, have relatively stable returns over a
period of years but can be volatile over shorter periods. A
considerable amount of separate account balances is invested in
equities; therefore prolonged deterioration in the equity
markets will result in a decrease in our current and future
income.



| |                     
| | --------------------
| | Balance Sheet Impact

Deferred Acquisition Costs.We capitalize and defer costs that
vary with and are primarily related to the acquisition of the
reinsured policies. These expenses are deferred to the extent
that such costs are deemed recoverable from future policy
revenues and are recorded as deferred acquisition costs on the
balance sheet. Such costs include reinsurance expense allowances
paid to ceding life companies, and may include other
underwriting costs such as actuarial, legal and accounting fees.

Deferred acquisition costs are amortized over the
lives of the underlying policies, in conformity with the terms
of the reinsurance agreement. Under the renewable term
agreements, the rate of amortization depends on the approach
utilized, static or dynamic, and is based upon assumptions
applicable at the time the policies are reinsured, such as
estimates of expected investment yields, mortality, persistency
and expenses. Under the static approach, the amortization is in
proportion to the ratio of premiums collected during the then
current period to total anticipated premiums. Often the static
approach is used in the first policy year or until the business
is sufficiently large to warrant the complexity of the dynamic
approach. Under the dynamic approach, the amortization under the
static approach is adjusted to reflect actual persistency of the
insurance in effect. To the extent fewer policies persist than
otherwise anticipated, the amortization will be greater under
the dynamic approach than under the static approach. Conversely,
to the extent more policies persist than otherwise anticipated,
the amortization will be smaller. Currently, we use the dynamic
amortization approach for all our policies reinsured under our
renewable term agreements.

Under the coinsurance and modified coinsurance
agreements, the amortization of the deferred acquisition costs
is in proportion to the ratio of gross profits recognized during
the then current period to total anticipated future gross
profits. During each accounting period, assumptions used in
calculating the amortization of the deferred acquisition expense
reflect actual experience for the then current accounting
period. We also review, on a periodic basis, our evolving
experience with regard to our assumptions concerning future
experience as to mortality, persistency, investment yields, and
expenses in determining our estimate of anticipated future gross
profits. This periodic review is commonly referred to as
unlocking. Our normal period of observation is from
October 1 of the previous calendar year through
September 30 of the current calendar year. If we believe
variances from expected assumptions are permanent, we will
change the assumptions we use with regard to future experience.
Upon adoption of any

22



---



##### Table of Contents



change in assumptions used with regard to future
experience, the amortization of the deferred acquisition cost
will be recalculated and reflected during the then current
accounting period.


A material component of variable life and annuity
product revenues is derived from the asset-based fees that have
been assessed against the policy account balances, of which a
considerable portion is invested in the equity markets. The
volatility of equity market returns over the short-term can be
significant without materially impacting long-term equity market
returns. Historical equity market performance shows equity
market volatility is much higher over short-term horizons as
compared to long-term horizons. The short-term volatility of the
policy fund value will result in the short-term volatility being
applied to all future expected gross profits if no adjustments
are made to account for the differences between long-term and
short-term volatility. We utilize a credibility approach
 to account for the differences between long-term and
short-term volatility. Under this approach, the estimates of
future expected gross profits are revised to recognize the
effects short-term volatility and market yields have upon
long-term yield expectations. We review our approach annually to
determine if additional adjustments to amortization are
necessary as a result of prolonged and/or severe negative or
positive equity market performance. In such instances, the
equity market performance must be sufficiently high or low to
justify a belief that the effect of current market conditions on
future expected gross profits should be more permanently
reflected.

In addition, certain variable annuity policies we
reinsure include a guaranteed minimum death benefit that will
guarantee a death benefit typically equal to a return of premium
or the highest level the fund values had accumulated over
certain prescribed periods under the annuity policy. Upon the
death of an annuity policyholder, we will incur a claims expense
equal to the excess of the amount guaranteed under this
provision over the then current policy fund value. This expense
increases when equity markets decline and decreases as equity
markets increase. We utilize an implicit approach to account for
guaranteed minimum death benefits. Under this approach, future
expected gross profits are decreased to account for future
expected claims expenses. The short-term volatility of the
policy fund value will result in significant volatility in the
expected claims expense if no recognition is made to acknowledge
differences between long-term yields and short-term volatility.
Our implicit approach recognizes the effect of long-term versus
short-term volatility when accounting for guaranteed minimum
death benefits.

Future Policy
Benefits.Liabilities for future
benefits on life insurance policies are established in an amount
we estimate is adequate to meet the estimated future obligations
on the policies in effect. Policy reserves are included in
future policy benefits on the consolidated balance
sheet.

Liabilities for future policy benefits under the
renewable term agreements include provisions for claims in the
course of settlement, claims incurred but not reported, and
expected future claims. The liability is estimated using
assumptions such as estimates of expected investment yields,
mortality, persistency and expenses applicable at the time the
reinsurance contracts are executed.

Liabilities for future policy benefits under
coinsurance and modified coinsurance agreements equal reinsured
policy account balances on the underlying life insurance and
annuity policies. With regard to the separate account benefits
reinsured on a modified coinsurance basis, we record the
liabilities as an offset to related assets as our intentions and
rights under the agreements with the ceding life companies meet
the appropriate conditions governing rights of setoff. The
nature of separate account benefits under variable life
insurance or variable annuity policies do not permit us to
reinsure those benefits on a coinsurance basis. We currently
reinsure the fixed account portion of life insurance and annuity
policies only on a coinsurance basis and, accordingly, the
liabilities for that portion of the reinsurance are recorded as
future policy benefits.

Liabilities for future policy benefits reflected
in the consolidated financial statements are based on
information provided to us by the ceding life companies.
Reserves established by us with respect to individual risks or
classes of business may not be the same as those established by
ceding life companies due to differing risks and assumptions
regarding mortality, persistency, investment, and expenses.

23



---



##### Table of Contents



Fair Value Disclosure

Investments.We
classify all fixed maturity securities and equity securities as
available for sale. Such securities are reported at
fair value. Fixed maturity securities available for sale are so
classified based upon the possibility that such securities could
be sold prior to maturity if that action enables us to execute
our investment philosophy and appropriately match investment
results to operating and liquidity needs. Unrealized gains and
losses on marketable equity securities and fixed maturity
securities available for sale, less applicable deferred income
taxes, are reported as a separate component of accumulated
other comprehensive income within stockholders
equity.

Investment income is recognized as it accrues or
becomes legally due. Realized gains or losses on sales of
investments are included in income, as are write-downs of
securities where declines in value are deemed to be other than
temporary. The cost of investment securities sold is determined
based upon the specific identification method.

Other Financial Assets and
Liabilities.The carrying value of
cash and cash equivalents, reinsurance receivables and payables,
short-term debt, accrued expenses and accounts payable
approximate their fair values due to the short-term nature of
these accounts. The carrying value of future policy benefits
approximates its fair value as credited interest approximates
current market rates.

Our Current Reinsurance Agreements

The life insurance and annuity policies that we
have reinsured to date are underwritten and issued by Western
Reserve, American Skandia, Zurich Life, and Pacific Life. The
following table indicates the percentage of our reinsurance
revenues derived from our ceding life companies:

|                 |       |              |    |      |   |      |    |     |   |  |    |     |  
|---------------- | ----- | ------------ | -- | ---- | - | ---- | -- | --- | - |  | -- | --- | -
|                 |       |             
|                 |       | Year Ended  
|                 |       | December 31,
|                 |       |             
|                 |       | 2000         |    | 2001 |   | 2002
|                 |       |              |    |      |   |     
|Western Reserve  |       |              | 88 | %    |   |      | 89 | %   |   |  | 91 | %  
|American Skandia |       |              | 10 | %    |   |      | 9  | %   |   |  | 8  | %  
|Zurich Life      |       |              | 2  | %    |   |      | 2  | %   |   |  | 1  | %  
|Pacific Life(1)  |       |              |   |      |   |      |   | (2) |   |  |   | (2)
|                 |       |              |    |      |   |      |    |     |   |  |    |    
|                 | Total |              |    | 100  | % |      |    | 100 | % |  |    | 100 | %
|                 |       |              |    |      |   |      |    |     |   |  |    |    



---



|    |                                                        
|--- | -------------------------------------------------------
|(1) | This agreement was effective as of
    January 1, 2001.
|   
|(2) | Less than 1%.                                          

24



---



##### Table of Contents



The following table indicates, by ceding life
company: (1) the names and types of insurance products we
currently reinsure; (2) the type of reinsurance agreement
applicable to each; (3) policy issue dates reinsured under
each agreement; and (4) the commencement date of the
reinsurance.

|                    |  |                           |  |                 |     |                     |  |              |          |              |  |                  |  |  |       | 
|------------------- |  | ------------------------- |  | --------------- | --- | ------------------- |  | ------------ | -------- | ------------ |  | ---------------- |  |  | ----- | 
|                    |  |                           |  |                 |     |                     |  |              |          | Reinsurance 
|                    |  |                           |  |                 |     |                     |  | Policy Issue |          | Commencement
|Ceding Life Company |  | Reinsured Product Name    |  | Product Type(1) |     | Reinsurance Type(2) |  | Dates        |          | Date        
|                    |  |                           |  |                 |     |                     |  |              |          |             
|Western Reserve     |  | Freedom Equity Protector  |  |                 | VUL |                     |  |              | MRT      |              |  | 1/92 to 12/99    |  |  | 7/96  | 
|Western Reserve     |  | Financial Freedom Builder |  |                 | VUL |                     |  |              | MRT      |              |  | 7/97 to  3/98    |  |  | 7/97  | 
|Western Reserve     |  | Financial Freedom Builder |  |                 | VUL |                     |  |              | Co/Modco |              |  | 4/98 to 12/98    |  |  | 4/98  | 
|Western Reserve     |  | Financial Freedom Builder |  |                 | VUL |                     |  |              | MRT      |              |  | 1/99 to  3/01    |  |  | 10/99 | 
|Western Reserve     |  | Financial Freedom Builder |  |                 | VUL |                     |  |              | Co/Modco |              |  | 4/01 to 12/01    |  |  | 01/02 | 
|Western Reserve     |  | Financial Freedom Builder |  |                 | VUL |                     |  |              | MRT      |              |  | 1/02 to 12/02    |  |  | 10/99 | 
|Western Reserve     |  | Freedom Elite Builder     |  |                 | VUL |                     |  |              | Co/Modco |              |  | 7/01 to 12/01    |  |  | 1/02  | 
|Zurich Life         |  | Power VUL                 |  |                 | VUL |                     |  |              | MRT      |              |  | 9/96 to  3/01    |  |  | 9/96  | 
|Pacific Life        |  | Select Exec II            |  |                 | VUL |                     |  |              | YRT      |              |  | 1/01 to present  |  |  | 1/01  | 
|American Skandia    |  | Imperium                  |  |                 | VA  |                     |  |              | Modco    |              |  | 1/97 to 12/02    |  |  | 1/97  | 
|Western Reserve     |  | Freedom Wealth Creator    |  |                 | VA  |                     |  |              | Co/Modco |              |  | 1/98 to 12/01    |  |  | 1/98  | 
|Western Reserve     |  | Freedom Premier           |  |                 | VA  |                     |  |              | Co/Modco |              |  | 10/00 to present |  |  | 10/00 | 



---



|    |                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------
|(1) | VUL means variable universal life
    product. VA means variable annuity product.                                                
|   
|(2) | MRT means monthly renewable term.
    YRT means yearly renewable term.
    Co/Modco means coinsurance and modified coinsurance.

Under our reinsurance agreements with the ceding
life companies, we currently reinsure variable life insurance
and variable annuity policies on either a renewable term basis
or a coinsurance and modified coinsurance basis. The policies we
reinsure on a renewable term basis represented 56% of our
reinsurance revenues for the year ended December 31, 2002.
The policies we reinsure on a coinsurance and modified
coinsurance basis represented 44% of our reinsurance revenues
for the same period. Of the 44%, 25% relates to variable life
insurance policies and 19% relates to variable annuity policies.

Recent Amendments to Our Reinsurance
Agreements



| |                           
| | --------------------------
| | Western Reserve Agreements

Consistent with our business plan, effective as
of January 1, 2002, we amended certain of our reinsurance
agreements with Western Reserve to:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Convert our reinsurance of the Financial Freedom
    Builder variable universal life policies and riders issued by
    Western Reserve from April 1, 2001 through
    December 31, 2001, to a coinsurance and modified
    coinsurance basis, under which we assumed a portion of all of
    the insured risks that the life insurance company has on the
    reinsured policies. We had been reinsuring these policies on a
    monthly renewable term basis, under which we assumed only
    mortality risks on the reinsured policies. The percentage of the
    risks assumed by us on policies reinsured after this conversion,
    which is referred to as the quota share rate, is 20%;
|
| |  | Begin reinsuring, on a coinsurance and modified
    coinsurance basis at a quota share rate of 20%, Western Reserve
    Freedom Elite Builder variable universal life policies sold by
    the agents associated with World Financial Group and issued from
    July 1, 2001 through December 31, 2001;                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Increase our reinsurance on a coinsurance and
    modified coinsurance basis, from a 10% quota share rate to a 14%
    quota share rate, of all Western Reserve variable annuity
    policies sold by those same agents and issued from
    January 1, 1999 through December 31, 2001;                                                                                                                                                                                                                                                                                                                                                                                                          

25



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Begin reinsuring, on a coinsurance and modified
    coinsurance basis at a quota share rate of 14%, certain new
    variable annuity policies sold by those agents and issued by
    Western Reserve from January 1, 2002 to present; and                                                                                                            
|
| |  | Cease our reinsurance of the Western Reserve
    Freedom Wealth Creator variable annuity products sold after
    January 1, 2002, due to the limited volume of new policies
    we anticipate to be written for this product; however, we will
    continue to reinsure all Freedom Wealth Creator policies we
    reinsured as of December 31, 2001.

Results of Operations

The following table sets forth certain operating
data as a percentage of total revenue for the periods indicated:

|                                            |                                            |                     |     |      |   |      |     |    |   |  |     |    |  
|------------------------------------------- | ------------------------------------------ | ------------------- | --- | ---- | - | ---- | --- | -- | - |  | --- | -- | -
|                                            |                                            |                    
|                                            |                                            | Year Ended         
|                                            |                                            | December 31,       
|                                            |                                            |                    
|                                            |                                            | 2000                |     | 2001 |   | 2002
|                                            |                                            |                     |     |      |   |     
|                                            |                                            |                    
|                                            |                                            | (As a percentage of
|                                            |                                            | total revenue)     
|Consolidated Statements of Income
    Data: |                                            |                     |     |      |   |      |     |    |   |  |     |   
|Revenues:                                   |                                            |                     |     |      |   |      |     |    |   |  |     |   
|                                            | Premiums                                   |                     |     | 55   | % |      |     | 61 | % |  |     | 55 | %
|                                            | Reinsured policy revenues                  |                     |     | 43   |   |      |     | 36 |   |  |     | 42 |  
|                                            | Net investment income                      |                     |     | 2    |   |      |     | 3  |   |  |     | 2  |  
|                                            | Net realized gain on investments           |                     |     |     |   |      |     |   |   |  |     | 1  |  
|                                            |                                            |                     |     |      |   |      |     |    |   |  |     |   
|Total revenues                              |                                            |                     | 100 | %    |   |      | 100 | %  |   |  | 100 | % 
|                                            |                                            |                     |     |      |   |      |     |    |   |  |     |   
|Benefits and expenses:                      |                                            |                     |     |      |   |      |     |    |   |  |     |   
|                                            | Benefits, claims and settlement expenses   |                     |     | 25   |   |      |     | 20 |   |  |     | 26 |  
|                                            | Change in future policy benefits           |                     |     | 7    |   |      |     | 8  |   |  |     | 5  |  
|                                            | Reinsurance expense allowances, net        |                     |     | 25   |   |      |     | 27 |   |  |     | 26 |  
|                                            | Amortization of deferred acquisition costs |                     |     | 14   |   |      |     | 13 |   |  |     | 21 |  
|                                            | Operating expenses                         |                     |     | 4    |   |      |     | 6  |   |  |     | 9  |  
|                                            | Interest expense                           |                     |     | 2    |   |      |     | 1  |   |  |     | 1  |  
|                                            | Costs of withdrawn offering                |                     |     |     |   |      |     |   |   |  |     | 5  |  
|                                            |                                            |                     |     |      |   |      |     |    |   |  |     |   
|Total benefits and expenses                 |                                            |                     | 77  |      |   |      | 75  |    |   |  | 93  |   
|                                            |                                            |                     |     |      |   |      |     |    |   |  |     |   
|Income before income tax                    |                                            |                     | 23  |      |   |      | 25  |    |   |  | 7   |   
|                                            | Income tax expense                         |                     |     | (6   | ) |      |     | (8 | ) |  |     | (2 | )
|                                            |                                            |                     |     |      |   |      |     |    |   |  |     |   
|Net income                                  |                                            |                     | 17  | %    |   |      | 17  | %  |   |  | 5   | % 
|                                            |                                            |                     |     |      |   |      |     |    |   |  |     |   



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2002 Compared
    to Year Ended December 31, 2001



| |         
| | --------
| | Revenues

Premiums.Premiums
decreased $1.2 million, or 6%, from $19.2 million for
the year ended December 31, 2001 to $18.0 million for
the comparable period in 2002. The majority of this decrease was
due to the conversion of all Western Reserve Financial Freedom
Builder variable universal life policies and riders, issued from
April 1, 2001 through December 31, 2001, which had
been reinsured by us on a monthly renewable term basis, to a
coinsurance and modified coinsurance basis, effective
January 1, 2002.

Reinsured Policy
Revenues.Reinsured policy revenues
increased $2.7 million, or 24%, from $11.2 million for the
year ended December 31, 2001 to $13.9 million for the
same period in 2002. This increase was due to: (1) the
conversion of certain Financial Freedom Builder variable
universal life

26



---



##### Table of Contents



policies and riders, as described above;
(2) the reinsurance, at a quota share rate of 20%, of the
Western Reserve Freedom Elite Builder variable universal life
policies sold by the agents associated with World Financial
Group and issued from July 1, 2001 through
December 31, 2001; (3) the increase in our reinsurance
on a coinsurance and modified coinsurance basis, from a 10%
quota share rate to a 14% quota share rate, of all Western
Reserve variable annuity policies sold by those agents and
issued from January 1, 1999 through December 31, 2001; and
(4) an increase in revenues from surrender charges in 2002
compared to 2001. These increases were partially offset by a
decrease in mortality and expense charges and asset-based
allowances resulting from the decline in variable annuity
separate account balances.


Net Investment Income and Net Realized Gain on
Investments.Net investment income
decreased $69,000, or 8%, from $811,000 for the year ended
December 31, 2001 to $742,000 for the same period in 2002,
primarily due to the decreased size of our investment portfolio.
The decrease in our investment portfolio resulted from the
$7.2 million reinsurance expense allowance payment to
Western Reserve in April 2002, relating to the amendments of our
reinsurance agreements effective January 1, 2002, and a
greater portion of our assets being invested in cash and cash
equivalents in 2002. Net realized gain on investments increased
$383,000, from $45,000 for the year ended December 31, 2001
to $428,000 for the same period in 2002. The increase was due to
the sale of fixed maturity securities during fourth quarter
2002. We sold $9.9 million of securities in 2002 compared
to $1.7 million of securities in 2001. These gains were
caused by a decline in market yields, which resulted in an
increase in the fair value of the fixed maturity securities in
our portfolio.



| |                      
| | ---------------------
| | Benefits and Expenses

Benefits, Claims and Settlement
Expenses.Benefits, claims, and
settlement expenses increased $2.1 million, or 33%, from
$6.3 million for the year ended December 31, 2001 to
$8.4 million for the same period in 2002. The increase was
primarily associated with a lower incidence of life insurance
death claims in 2001 compared to the incidence of death claims
in 2002, the increasing age of the policies reinsured and an
increase in variable annuity death claims. The aggregate face
value of insurance underlying the polices we reinsured at
December 31, 2001 was $9.1 billion compared to
$8.5 billion at December 31, 2002.

Change in Future Policy
Benefits.Change in future policy
benefits decreased $886,000, or 37%, from $2.4 million for
the year ended December 31, 2001 to $1.5 million for
the same period in 2002. The majority of this decrease was due
to the conversion of all Western Reserve Financial Freedom
Builder variable universal life policies and riders, issued from
April 1, 2001 through December 31, 2001, which had
been reinsured by us on a monthly renewable term basis, to a
coinsurance and modified coinsurance basis, effective
January 1, 2002.

Reinsurance Expense Allowances,
Net.Net reinsurance expense
allowances increased $17,000, or less than 1%, for the year
ended December 31, 2001 compared to the same period in
2002. These amounts are reflective of the increase in business
in force primarily attributable to the amendments to our
reinsurance agreements effective January 1, 2002, offset by
the decrease in business in force due to lapse and surrender
activity.

Amortization of Deferred Acquisition
Costs.Amortization of deferred
acquisition costs increased $3.1 million, or 79%, from
$3.9 million for the year ended December 31, 2001 to
$7.0 million for the same period in 2002. Higher than
expected surrender experience, including unlocking
our near term surrender assumptions to reflect the increase in
our surrender experience (akin to industry-wide surrender
experience), and lower than expected equity market performance
of the separate account balances contributed to
$2.8 million of the increase in amortization for the year
ended December 31, 2002, as compared to the same period in
2001. In addition, amortization increased due to new business
reinsured, including the amendments to our reinsurance
agreements with Western Reserve effective January 1, 2002.

Under current assumptions, and all else being
equal, if separate account fund yields exceed 5% for 2003, we do
not expect that there would be increased amortization in 2003
from unlocking due to lower than expected equity
market performance. If separate account fund yields are 0% for
2003 we would

27



---



##### Table of Contents



expect additional amortization of approximately
$500,000 for 2003 from unlocking due to lower than
expected equity market performance.


Operating Expenses.Operating expenses increased $1.1 million, or 60%, from
$2.0 million for the year ended December 31, 2001 to
$3.1 million for the same period in 2002. These expenses
include salaries and benefits, professional fees for legal,
actuarial and accounting expenses and other operating expenses.
The majority of the increase for the year ended
December 31, 2002 was attributable to a $752,000 increase
in salaries, bonuses, benefits and recruiting expenses due to
the employment of additional staff, a $221,000 increase in our
directors and officers insurance premiums, and a
$128,000 increase in legal fees.

Interest Expense.Interest expense increased $2,000, or less than 1%, from
$378,000, for the year ended December 31, 2001 to $380,000
for the comparable period in 2002. The increase was due to the
interest associated with the $7.2 million settlement paid
to Western Reserve on April 2, 2002 to fund the reinsurance
amendments that were effective January 1, 2002.

Costs of Withdrawn
Offering.During October 2002, we
withdrew the registration statement for our proposed initial
public offering of 9.5 million shares of common stock.
Offering costs related to our withdrawn offering were
$1.7 million for the year ended December 31, 2002.
These costs, which consisted primarily of legal, printing,
accounting, and actuarial fees, were expensed during the quarter
ended September 30, 2002. We did not incur any similar
expenses in 2001.

Income Taxes.Due to
lower levels of income before income taxes, income taxes
decreased $1.6 million, or 67%, from $2.4 million for
the year ended December 31, 2001 to $789,000 for the same
period in 2002. Income before income taxes is comprised of
income subject to taxes that is recognized and due in the
current period and income subject to taxes that is recognized
during the current period but is due in future periods. The
small life insurance company deduction available
under Section 806 of the Internal Revenue Code for
qualifying life insurance companies can reduce the effective
federal income tax rate from 34% to less than 20% depending upon
the amount of current taxable income. For the year ended
December 31, 2002, we had no current taxable income and, as
a result, we were unable to take advantage of any of the small
life insurance company deduction. During 2001 our effective tax
rate was 30%, as compared to 34% in 2002.

In accordance with SFAS No. 109,
Accounting for Income Taxes, we have $8.4 million of net
operating loss carryforwards, which begin to expire in 2018.
These net operating loss carryforwards at a 34% effective tax
rate are included as an offset to the deferred tax liability. It
is our belief that it is more likely than not that the deferred
tax assets will be realized as an offset against future taxable
income, however, if we do not have sufficient taxable income in
the future to utilize this asset, a write-off may result thereby
reducing our net income.

Year Ended
December 31, 2001 Compared to Year Ended December 31,
2000



| |         
| | --------
| | Revenues

Premiums.Premiums
increased $2.6 million, or 16%, from $16.6 million for
the year ended December 31, 2000 to $19.2 million for
the comparable period in 2001. The majority of this increase was
due to a rise in reinsured policies under the Western Reserve
Financial Freedom Builder Monthly Renewable Term Agreement. The
aggregate face value of reinsurance under the Financial Freedom
Builder Monthly Renewable Term Agreement increased
$246 million, or 6%, from $4.2 billion at
December 31, 2000 to $4.4 billion at December 31,
2001. The remaining increase in premiums was attributable to the
increasing duration of the policies, since reinsurance premiums
increase with the advancing age of the insureds.

Reinsured Policy
Revenues.Reinsured policy revenues
decreased $1.7 million, or 13%, from $12.9 million for the
year ended December 31, 2000 to $11.2 million for the
same period in 2001. This decrease was primarily attributable to
revenues associated with our variable annuity coinsurance and
modified coinsurance agreements, which declined from
$6.7 million for the year ended December 31, 2000

28



---



##### Table of Contents



to $5.5 million for the same period in 2001,
a decrease of $1.2 million, or 18%. Decreasing revenues for
both variable universal life and variable annuity business
resulted primarily from a decline in collected mortality and
expense charges associated with lower account values, due to the
decline in the equity markets. Further, the variable universal
life coinsurance and modified coinsurance business is a
closed block, meaning there are no new policies
being issued in this block of business, resulting in a declining
number of policies reinsured in the block, due to normal policy
lapses and surrenders. New variable universal life policies that
we reinsured in 2000 and 2001 were reinsured on a renewable term
basis. The capital requirements for reinsuring on a coinsurance
or modified coinsurance basis limited our ability to reinsure
any new variable universal life policies on that basis during
that period.


Net Investment Income and Net Realized Gain on
Investments.Net investment income
increased $283,000, or 54%, from $528,000 for the year ended
December 31, 2000 to $811,000 for the same period in 2001,
primarily due to the increased size of our portfolio from new
purchases of fixed maturity securities. The sale of fixed
maturity securities for the year ended December 31, 2000
resulted in a net realized gain on investments of $3,000
compared to a net realized gain on investments of $45,000 for
the same period in 2001. This shift was caused by a decline in
market yields, which resulted in an increase in the fair value
of the fixed maturity securities in our portfolio.



| |                      
| | ---------------------
| | Benefits and Expenses

Benefits, Claims and Settlement
Expenses.Benefits, claims, and
settlement expenses decreased $1.3 million, or 17%, from
$7.6 million for the year ended December 31, 2000 to
$6.3 million for the same period in 2001. The decrease was
primarily associated with better mortality experience in 2001,
which resulted in lower claims activity. We do not expect, nor
have we been advised by the ceding life companies of, any
material claims exposure related to the September 11, 2001
terrorist attacks. The aggregate face value of insurance
underlying the policies we reinsured at December 31, 2000
was $9.4 billion compared to $9.1 billion at
December 31, 2001.

Change in Future Policy
Benefits.Change in future policy
benefits increased $359,000, or 17%, from $2.1 million for
the year ended December 31, 2000 to $2.4 million in
the same period in 2001. $230,000 of the increase was tied to
the $2.4 million growth in premiums collected under the
Financial Freedom Builder Monthly Renewable Term Agreement.
Additionally, during the third quarter of 2001, we refined our
methodology for recognizing earned premiums under the Zurich
Life monthly renewable term agreement, which resulted in an
increase in future policy benefits of $152,000.

Reinsurance Expense Allowances,
Net.Net reinsurance expense
allowances increased $962,000, or 13%, from $7.5 million
for the year ended December 31, 2000 to $8.5 million
for the same period in 2001. Consistent with the increase in
premium revenues, the increase in net reinsurance expense
allowances was due primarily to an increase in the business
placed under the Financial Freedom Builder Monthly Renewable
Term Agreement.

Amortization of Deferred Acquisition
Costs.Amortization of deferred
acquisition costs decreased $72,000, or 2%, from
$4.0 million for the year ended December 31, 2000 to
$3.9 million for the same period in 2001. A majority of the
decrease in the amortization of deferred acquisition costs
resulted from the refinement of our methodology of recognizing
earned premiums under the Zurich Life monthly renewable term
agreement, which caused a $122,000 decrease. Offsetting this
decrease was a net increase of $50,000, arising from the
unlocking of historical realized experience and future
experience assumptions.

Operating Expenses.Operating expenses increased $696,000, or 55%, from
$1.3 million for the year ended December 31, 2000 to
$2.0 million for the same period in 2001. These expenses
include salaries and benefits, professional fees for legal,
actuarial and accounting expenses and other operating expenses.
The increase was associated with a $447,000 increase in
salaries, benefits and recruiting expenses, due to the
employment of additional staff, payment of a discretionary bonus
for the year 2000 and accrual of discretionary bonuses for 2001.
The remainder of the increase was primarily due to an increase
in directors and officers insurance expenses,
outside director fees, legal fees, and our franchise tax for the
State of Delaware.

29



---



##### Table of Contents



Interest Expense.Interest expense decreased $287,000, or 43%, from $665,000 for
the year ended December 31, 2000 to $378,000 for the
comparable period in 2001. The decrease was due to the repayment
of a $5.3 million debt on a line of credit. The final
payment of principal and interest in the amount of $283,566 was
paid in February 2001.

Income Taxes.Due to
higher levels of income before income taxes, income taxes
increased $571,000, or 31%, from $1.8 million for the year
ended December 31, 2000 to $2.4 million for the same period
in 2001. Income before income taxes is comprised of income
subject to taxes, which are both recognized and due in the
current period, and income subject to taxes, which are
recognized during the current period but are due in future
periods. The amount of income taxes, which was recognized and
due in the respective periods, was only $516,000 and $437,000 in
2000 and 2001, respectively, due to the small life
insurance company deduction which permanently reduces the
current income taxes due. The amount of income taxes that was
due in future periods in 2001 was $2.0 million, an increase
of $650,000 as compared to the amount in 2000, due to an
increase in timing differences with respect to reserves.

As a result of the small life insurance
company deduction, the combined effective tax rate will
fluctuate between 20% and 34%. During 2000, our effective tax
rate was 26%, as compared to 30% in 2001.

30



---



##### Table of Contents



Quarterly Results of Operations

The following table presents certain unaudited
quarterly consolidated statements of income data for the
eight-quarter period ending December 31, 2002, as well as
the percentage of total revenue represented by each item. The
information has been derived from the unaudited consolidated
financial statements. The unaudited consolidated financial
statements have been prepared on substantially the same basis as
the audited consolidated financial statements contained herein
and all adjustments, consisting only of normal recurring
adjustments, which we consider to be necessary to present fairly
this information when read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere
herein. The results of operations for any quarter are not
necessarily indicative of the results to be expected for any
future period.

|                             |                                            |                                 |       |         |       |          |       |         |       |         |       |         |       |          |       |         |       |   |       |       |       |   |       |       |       |   |        |       |        |   |       |       |     | 
|---------------------------- | ------------------------------------------ | ------------------------------- | ----- | ------- | ----- | -------- | ----- | ------- | ----- | ------- | ----- | ------- | ----- | -------- | ----- | ------- | ----- | - | ----- | ----- | ----- | - | ----- | ----- | ----- | - | ------ | ----- | ------ | - | ----- | ----- | --- | 
|                             |                                            |                                
|                             |                                            | Quarter Ended                  
|                             |                                            |                                
|                             |                                            | Mar. 31                         |       | June 30 |       | Sept. 30 |       | Dec. 31 |       | Mar. 31 |       | June 30 |       | Sept. 30 |       | Dec. 31
|                             |                                            | 2001                            |       | 2001    |       | 2001     |       | 2001    |       | 2002    |       | 2002    |       | 2002     |       | 2002   
|                             |                                            |                                 |       |         |       |          |       |         |       |         |       |         |       |          |       |        
|                             |                                            |                                
|                             |                                            | (Dollars in thousands)         
|Revenues:                    |                                            |                                 |       |         |       |          |       |         |       |         |       |         |       |          |       |         |       |   |       |       |       |   |       |       |       |   |        |       |        |   |       |      
|                             | Premiums                                   |                                 | $     | 4,656   |       |          | $     | 4,796   |       |         | $     | 4,908   |       |          | $     | 4,880   |       |   | $     | 4,557 |       |   | $     | 4,533 |       |   | $      | 4,485 |        |   | $     | 4,410 |    
|                             | Reinsurance policy revenues                |                                 |       | 2,940   |       |          |       | 2,806   |       |         |       | 2,728   |       |          |       | 2,762   |       |   |       | 3,596 |       |   |       | 3,559 |       |   |        | 3,442 |        |   |       | 3,263 |    
|                             | Net investment income                      |                                 |       | 161     |       |          |       | 206     |       |         |       | 221     |       |          |       | 223     |       |   |       | 214   |       |   |       | 188   |       |   |        | 168   |        |   |       | 172   |    
|                             | Net realized gain (loss) on investments    |                                 |       | 6       |       |          |       |        |       |         |       | (2      | )     |          |       | 41      |       |   |       | 8     |       |   |       | (1    | )     |   |        |      |        |   |       | 420   |    
|                             |                                            |                                 |       |         |       |          |       |         |       |         |       |         |       |          |       |         |       |   |       |       |       |   |       |       |       |   |        |       |        |   |       |      
|Total revenues               |                                            |                                 | 7,763 |         |       |          | 7,808 |         |       |         | 7,855 |         |       |          | 7,906 |         |       |   | 8,375 |       |       |   | 8,279 |       |       |   | 8,095  |       |        |   | 8,265 |      
|                             |                                            |                                 |       |         |       |          |       |         |       |         |       |         |       |          |       |         |       |   |       |       |       |   |       |       |       |   |        |       |        |   |       |      
|Benefits and expenses:       |                                            |                                 |       |         |       |          |       |         |       |         |       |         |       |          |       |         |       |   |       |       |       |   |       |       |       |   |        |       |        |   |       |      
|                             | Benefits, claims and settlement expenses   |                                 |       | 1,503   |       |          |       | 1,583   |       |         |       | 1,407   |       |          |       | 1,800   |       |   |       | 2,034 |       |   |       | 2,638 |       |   |        | 2,135 |        |   |       | 1,622 |    
|                             | Change in future policy benefits           |                                 |       | 644     |       |          |       | 548     |       |         |       | 742     |       |          |       | 477     |       |   |       | 447   |       |   |       | 411   |       |   |        | 353   |        |   |       | 315   |    
|                             | Reinsurance expense allowances, net        |                                 |       | 2,096   |       |          |       | 2,154   |       |         |       | 2,094   |       |          |       | 2,156   |       |   |       | 2,209 |       |   |       | 2,125 |       |   |        | 2,101 |        |   |       | 2,082 |    
|                             | Amortization of deferred acquisition costs |                                 |       | 1,002   |       |          |       | 877     |       |         |       | 741     |       |          |       | 1,325   |       |   |       | 1,119 |       |   |       | 1,072 |       |   |        | 2,484 |        |   |       | 2,349 |    
|                             | Operating expenses                         |                                 |       | 477     |       |          |       | 362     |       |         |       | 515     |       |          |       | 597     |       |   |       | 727   |       |   |       | 694   |       |   |        | 813   |        |   |       | 884   |    
|                             | Interest expense                           |                                 |       | 96      |       |          |       | 93      |       |         |       | 95      |       |          |       | 95      |       |   |       | 94    |       |   |       | 97    |       |   |        | 95    |        |   |       | 95    |    
|                             | Costs of withdrawn offering                |                                 |       |        |       |          |       |        |       |         |       |        |       |          |       |        |       |   |       |      |       |   |       |      |       |   |        | 1,712 |        |   |       |      |    
|                             |                                            |                                 |       |         |       |          |       |         |       |         |       |         |       |          |       |         |       |   |       |       |       |   |       |       |       |   |        |       |        |   |       |      
|Total benefits and expenses  |                                            |                                 | 5,818 |         |       |          | 5,617 |         |       |         | 5,594 |         |       |          | 6,450 |         |       |   | 6,630 |       |       |   | 7,037 |       |       |   | 9,693  |       |        |   | 7,347 |      
|                             |                                            |                                 |       |         |       |          |       |         |       |         |       |         |       |          |       |         |       |   |       |       |       |   |       |       |       |   |        |       |        |   |       |      
|                             |                                            | Income (loss) before income tax |       |         | 1,945 |          |       |         | 2,191 |         |       |         | 2,261 |          |       |         | 1,456 |   |       |       | 1,745 |   |       |       | 1,242 |   |        |       | (1,598 | ) |       |       | 918 | 
|Income tax (expense) benefit |                                            |                                 | (654  | )       |       |          | (743  | )       |       |         | (653  | )       |       |          | (341  | )       |       |   | (593  | )     |       |   | (419  | )     |       |   | 535    |       |        |   | (312  | )    
|                             |                                            |                                 |       |         |       |          |       |         |       |         |       |         |       |          |       |         |       |   |       |       |       |   |       |       |       |   |        |       |        |   |       |      
|Net income (loss)            |                                            | $                               | 1,291 |         |       | $        | 1,448 |         |       | $       | 1,608 |         |       | $        | 1,115 |         |       | $ | 1,152 |       |       | $ | 823   |       |       | $ | (1,063 | )     |        | $ | 606   |      
|                             |                                            |                                 |       |         |       |          |       |         |       |         |       |         |       |          |       |         |       |   |       |       |       |   |       |       |       |   |        |       |        |   |       |      

31



---



##### Table of Contents



The following table sets forth, as a percentage
of total revenue, certain line items in the consolidated
statements of income for the periods indicated:

|                             |                                            |                                    |     |         |   |          |     |         |   |         |     |         |   |          |     |         |   |  |     |    |   |  |     |    |   |  |     |     |   |  |     |    |  
|---------------------------- | ------------------------------------------ | ---------------------------------- | --- | ------- | - | -------- | --- | ------- | - | ------- | --- | ------- | - | -------- | --- | ------- | - |  | --- | -- | - |  | --- | -- | - |  | --- | --- | - |  | --- | -- | -
|                             |                                            |                                   
|                             |                                            | Quarter Ended                     
|                             |                                            |                                   
|                             |                                            | Mar. 31                            |     | June 30 |   | Sept. 30 |     | Dec. 31 |   | Mar. 31 |     | June 30 |   | Sept. 30 |     | Dec. 31
|                             |                                            | 2001                               |     | 2001    |   | 2001     |     | 2001    |   | 2002    |     | 2002    |   | 2002     |     | 2002   
|                             |                                            |                                    |     |         |   |          |     |         |   |         |     |         |   |          |     |        
|                             |                                            |                                   
|                             |                                            | (As a percentage of total revenue)
|Revenues:                    |                                            |                                    |     |         |   |          |     |         |   |         |     |         |   |          |     |         |   |  |     |    |   |  |     |    |   |  |     |     |   |  |     |   
|                             | Premiums                                   |                                    |     | 60      | % |          |     | 61      | % |         |     | 62      | % |          |     | 62      | % |  |     | 54 | % |  |     | 55 | % |  |     | 55  | % |  |     | 53 | %
|                             | Reinsurance policy revenues                |                                    |     | 38      |   |          |     | 36      |   |         |     | 35      |   |          |     | 35      |   |  |     | 43 |   |  |     | 43 |   |  |     | 43  |   |  |     | 40 |  
|                             | Net investment income                      |                                    |     | 2       |   |          |     | 3       |   |         |     | 3       |   |          |     | 3       |   |  |     | 3  |   |  |     | 2  |   |  |     | 2   |   |  |     | 2  |  
|                             | Net realized gain on investments           |                                    |     | 0       |   |          |     | 0       |   |         |     | 0       |   |          |     | 0       |   |  |     | 0  |   |  |     | 0  |   |  |     | 0   |   |  |     | 5  |  
|                             |                                            |                                    |     |         |   |          |     |         |   |         |     |         |   |          |     |         |   |  |     |    |   |  |     |    |   |  |     |     |   |  |     |   
|Total revenues               |                                            |                                    | 100 | %       |   |          | 100 | %       |   |         | 100 | %       |   |          | 100 | %       |   |  | 100 | %  |   |  | 100 | %  |   |  | 100 | %   |   |  | 100 | % 
|                             |                                            |                                    |     |         |   |          |     |         |   |         |     |         |   |          |     |         |   |  |     |    |   |  |     |    |   |  |     |     |   |  |     |   
|Benefits and expenses:       |                                            |                                    |     |         |   |          |     |         |   |         |     |         |   |          |     |         |   |  |     |    |   |  |     |    |   |  |     |     |   |  |     |   
|                             | Benefits, claims and settlement expenses   |                                    |     | 20      |   |          |     | 20      |   |         |     | 18      |   |          |     | 23      |   |  |     | 24 |   |  |     | 32 |   |  |     | 26  |   |  |     | 20 |  
|                             | Change in future policy benefits           |                                    |     | 8       |   |          |     | 7       |   |         |     | 9       |   |          |     | 6       |   |  |     | 5  |   |  |     | 5  |   |  |     | 5   |   |  |     | 4  |  
|                             | Reinsurance expense allowances, net        |                                    |     | 27      |   |          |     | 28      |   |         |     | 27      |   |          |     | 27      |   |  |     | 27 |   |  |     | 26 |   |  |     | 26  |   |  |     | 25 |  
|                             | Amortization of deferred acquisition costs |                                    |     | 13      |   |          |     | 11      |   |         |     | 9       |   |          |     | 17      |   |  |     | 13 |   |  |     | 13 |   |  |     | 31  |   |  |     | 28 |  
|                             | Operating expenses                         |                                    |     | 6       |   |          |     | 5       |   |         |     | 7       |   |          |     | 8       |   |  |     | 9  |   |  |     | 8  |   |  |     | 10  |   |  |     | 11 |  
|                             | Interest expense                           |                                    |     | 1       |   |          |     | 1       |   |         |     | 1       |   |          |     | 1       |   |  |     | 1  |   |  |     | 1  |   |  |     | 1   |   |  |     | 1  |  
|                             | Costs of withdrawn offering                |                                    |     | 0       |   |          |     | 0       |   |         |     | 0       |   |          |     | 0       |   |  |     | 0  |   |  |     | 0  |   |  |     | 21  |   |  |     | 0  |  
|                             |                                            |                                    |     |         |   |          |     |         |   |         |     |         |   |          |     |         |   |  |     |    |   |  |     |    |   |  |     |     |   |  |     |   
|Total benefits and expenses  |                                            |                                    | 75  | %       |   |          | 72  | %       |   |         | 71  | %       |   |          | 82  | %       |   |  | 79  | %  |   |  | 85  | %  |   |  | 120 | %   |   |  | 89  | % 
|                             |                                            |                                    |     |         |   |          |     |         |   |         |     |         |   |          |     |         |   |  |     |    |   |  |     |    |   |  |     |     |   |  |     |   
|                             | Income (loss) before income tax            |                                    |     | 25      |   |          |     | 28      |   |         |     | 29      |   |          |     | 18      |   |  |     | 21 |   |  |     | 15 |   |  |     | (20 | ) |  |     | 11 |  
|Income tax (expense) benefit |                                            |                                    | (8  | )       |   |          | (9  | )       |   |         | (8  | )       |   |          | (4  | )       |   |  | (7  | )  |   |  | (5  | )  |   |  | 7   |     |   |  | (4  | ) 
|                             |                                            |                                    |     |         |   |          |     |         |   |         |     |         |   |          |     |         |   |  |     |    |   |  |     |    |   |  |     |     |   |  |     |   
|Net income (loss)            |                                            |                                    | 17  | %       |   |          | 19  | %       |   |         | 21  | %       |   |          | 14  | %       |   |  | 14  | %  |   |  | 10  | %  |   |  | (13 | %)  |   |  | 7   | % 
|                             |                                            |                                    |     |         |   |          |     |         |   |         |     |         |   |          |     |         |   |  |     |    |   |  |     |    |   |  |     |     |   |  |     |   

Historically, our operations and related revenues
and operating results have varied substantially from quarter to
quarter, and we expect variations to continue. Our quarterly
operating results will continue to vary significantly depending
on a number of factors, including fluctuations in demand for
reinsurance products and variable life insurance and annuity
products, as well as the sales price and resulting gross margin
for specific reinsurance contracts. A high percentage of our
operating expenses, particularly personnel, marketing and rent
are relatively fixed in advance of any particular quarter.

Segment Reporting

We have defined our reportable segments based on
the nature of our reinsurance agreements and the accounting
treatment used for the various reinsurance agreements. Based on
this definition, we have identified two reportable segments:
non-universal life-type agreements and universal life-type
agreements (as each is referenced in SFAS No. 97,
Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from
the Sale of Investments,paragraphs 44 and 45).

Our first segment, reported as non-universal
life-type, relates to those variable universal life policies
that are reinsured on a renewable term basis. These policies are
accounted for under SFAS No. 60 accounting principles and,
as such, revenues therefrom are classified as premiums revenue.

Our second segment, reported as universal
life-type, relates to all variable annuity policies and those
variable universal life policies that are reinsured on a
coinsurance and modified coinsurance basis. The products
reinsured on a coinsurance and modified coinsurance basis are
accounted for under SFAS No. 97 accounting principles and,
as such, revenues therefrom are classified as reinsured policy
revenues.

Items not directly related to the business
segments and unallocated corporate items (i.e., other income,
interest expense on corporate debt and unallocated operating
expenses) are shown separately, consistent with our internal
measurement process. Segment assets reported include those
assets directly

32



---



##### Table of Contents



attributable to the reinsurance agreements such
as reinsurance balances receivable, deferred acquisition costs,
policy loans, prepaid expenses, invested assets and cash.
Invested assets are allocated to the agreements consistent with
our internal measurement process.


|                                                               |  |                         |        |           |  |       |        |               |  |           |        |           |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        | 
|-------------------------------------------------------------- |  | ----------------------- | ------ | --------- |  | ----- | ------ | ------------- |  | --------- | ------ | --------- |  | ----- | ------ | ----- |  | - | ------ |  |  | - | ------ |  |  | - | ------ | - |  | - | ------ | 
|                                                               |  |                        
|                                                               |  | Year Ended December 31,
|                                                               |  |                        
|                                                               |  |                         |        |          
|                                                               |  | 2001                    |        | 2002     
|                                                               |  |                         |        |          
|                                                               |  | Non-Universal           |        | Universal |  |       |        | Non-Universal |  | Universal |        |          
|                                                               |  | Life-type               |        | Life-type |  | Other |        | Total         |  | Life-type |        | Life-type |  | Other |        | Total
|                                                               |  |                         |        |           |  |       |        |               |  |           |        |           |  |       |        |      
|                                                               |  |                        
|                                                               |  | (Dollars in thousands) 
|Premiums                                                       |  | $                       | 19,240 |           |  | $     |       |               |  | $         |       |           |  | $     | 19,240 |       |  | $ | 17,985 |  |  | $ |       |  |  | $ |       |   |  | $ | 17,985 | 
|Reinsured policy revenues                                      |  |                         |       |           |  |       | 11,238 |               |  |           |       |           |  |       | 11,238 |       |  |   |       |  |  |   | 13,860 |  |  |   |       |   |  |   | 13,860 | 
|Benefits, claims and settlement expenses(1)                    |  |                         | 7,833  |           |  |       | 871    |               |  |           |       |           |  |       | 8,704  |       |  |   | 7,866  |  |  |   | 2,089  |  |  |   |       |   |  |   | 9,955  | 
|Reinsurance expense allowances, net                            |  |                         | 6,859  |           |  |       | 1,642  |               |  |           |       |           |  |       | 8,501  |       |  |   | 6,319  |  |  |   | 2,199  |  |  |   |       |   |  |   | 8,518  | 
|Amortization of deferred acquisition costs                     |  |                         | 197    |           |  |       | 3,748  |               |  |           |       |           |  |       | 3,945  |       |  |   | 232    |  |  |   | 6,792  |  |  |   |       |   |  |   | 7,024  | 
|                                                               |  |                         |        |           |  |       |        |               |  |           |        |           |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        | 
|Underwriting profit                                            |  |                         | 4,351  |           |  |       | 4,977  |               |  |           |       |           |  |       | 9,328  |       |  |   | 3,568  |  |  |   | 2,780  |  |  |   |       |   |  |   | 6,348  | 
|Net investment income                                          |  |                         | 215    |           |  |       | 230    |               |  |           | 366    |           |  |       | 811    |       |  |   | 124    |  |  |   | 276    |  |  |   | 342    |   |  |   | 742    | 
|Net realized gain on investment                                |  |                         |       |           |  |       |       |               |  |           | 45     |           |  |       | 45     |       |  |   |       |  |  |   |       |  |  |   | 428    |   |  |   | 428    | 
|Other expenses                                                 |  |                         | 123    |           |  |       | 216    |               |  |           | 1,991  |           |  |       | 2,330  |       |  |   | 142    |  |  |   | 280    |  |  |   | 4,790  |   |  |   | 5,212  | 
|                                                               |  |                         |        |           |  |       |        |               |  |           |        |           |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        | 
|Segment operating income (loss) before tax                     |  |                         | 4,443  |           |  |       | 4,991  |               |  |           | (1,580 | )         |  |       | 7,854  |       |  |   | 3,550  |  |  |   | 2,776  |  |  |   | (4,020 | ) |  |   | 2,306  | 
|Income tax expense (benefit)                                   |  |                         | 1,353  |           |  |       | 1,520  |               |  |           | (481   | )         |  |       | 2,392  |       |  |   | 1,213  |  |  |   | 949    |  |  |   | (1,374 | ) |  |   | 788    | 
|                                                               |  |                         |        |           |  |       |        |               |  |           |        |           |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        | 
|Segment net income (loss)                                      |  | $                       | 3,090  |           |  | $     | 3,471  |               |  | $         | (1,099 | )         |  | $     | 5,462  |       |  | $ | 2,337  |  |  | $ | 1,827  |  |  | $ | (2,646 | ) |  | $ | 1,518  | 
|                                                               |  |                         |        |           |  |       |        |               |  |           |        |           |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        | 
|Preferred dividends                                            |  |                         |       |           |  |       |       |               |  |           | 267    |           |  |       | 267    |       |  |   |       |  |  |   |       |  |  |   |       |   |  |   |       | 
|                                                               |  |                         |        |           |  |       |        |               |  |           |        |           |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        | 
|Segment net income (loss) available to common
    stockholders |  | $                       | 3,090  |           |  | $     | 3,471  |               |  | $         | (1,366 | )         |  | $     | 5,195  |       |  | $ | 2,337  |  |  | $ | 1,827  |  |  | $ | (2,646 | ) |  | $ | 1,518  | 
|                                                               |  |                         |        |           |  |       |        |               |  |           |        |           |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        | 
|Segment assets                                                 |  | $                       | 8,615  |           |  | $     | 46,748 |               |  | $         | 12,490 |           |  | $     | 67,853 |       |  | $ | 6,021  |  |  | $ | 52,248 |  |  | $ | 16,005 |   |  | $ | 74,274 | 
|                                                               |  |                         |        |           |  |       |        |               |  |           |        |           |  |       |        |       |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        | 



---



|    |                                                                                       
|--- | --------------------------------------------------------------------------------------
|(1) | Benefits, claims and settlement expenses include
    change in future policy benefits.

Of the total premiums and reinsured policy
revenues above, 89% and 91% relates to business issued by
Western Reserve for the years ended December 31, 2001 and
2002, respectively. Of the total underwriting profit above, 86%
and 96% relates to business issued by Western Reserve for the
year ended December 31, 2001 and 2002, respectively.

Liquidity and Capital Resources

To grow our life and annuity business, we use
cash to pay for the initial marketing and underwriting expenses
of the policies we reinsure. These same policies thereafter
provide cash from premiums, policy charges and policy fees over
their lifetime. We also use cash to pay for policy claims,
policy benefits and operating expenses which include: salaries
and benefits, and professional fees for management, legal,
investment, custodial, accounting, tax and consulting services.
In addition to operating cash flows, cash is provided by and
used in financing activities we undertake to increase our
capital position and through activities associated with our
invested assets.

Our primary source of liquidity was
$15.9 million in consolidated cash and cash equivalents at
December 31, 2002. The effective duration of our fixed
maturity portfolio is 1.5 years with 98% of the fixed
maturity securities having an effective maturity of less than
5 years. Our fixed maturity portfolio represents all of our
invested assets, and has an average Moodys quality rating
of Aa2.

33



---



##### Table of Contents



Our capital structure consists of long-term debt
and equity. Our long-term debt is comprised of a
$5 million, five-year convertible term note to Money
Services, Inc. due on July 29, 2004. Money Services is a
subsidiary of AEGON USA, Inc. Proceeds of this note were used to
reduce a portion of the outstanding principal balance on a line
of credit with Money Services from $10 million to
$5 million. Interest is payable on the note at 7.5% per
annum (except in the event of redemption), on the 29th of each
succeeding January and July through and including July 29,
2004. Money Services has the right to convert the outstanding
principal balance of this note into common stock at any time.
Upon conversion, Money Services would receive 6.255 shares of
common stock for each $100 of the outstanding principal amount
of the note, for a total of 312,750 shares, which reflects our
three-for-two stock split in 2001. We have the option to redeem
the note, in whole or in part, before maturity. To redeem the
note before maturity, we must pay all principal, plus interest
accrued from the date of the note through the redemption date at
a higher effective interest rate of 9% per annum. As of
December 31, 2002, we had an outstanding principal balance
on the term note of $5 million and accrued interest of
$158,219.

Operating Cash Flows.Under the renewable term reinsurance
agreements, premiums typically vary in proportion with the
expected mortality claims reinsured. Our cash inflows under the
renewable term agreements are premiums for the mortality risk
reinsured. Our cash outflows are reinsurance expense allowances
and death benefit claims. The reinsurance expense allowances
represent our share of acquisition and maintenance expenses
incurred by the ceding life company that are attributable to the
risks reinsured by us.

Under the coinsurance and modified coinsurance
agreements, since we are reinsuring risks on essentially the
same basis as that of the original policy, reinsurance premiums
are materially greater than premiums received on the renewable
term reinsurance. During the first year in which a policy is
reinsured on a coinsurance basis, we are required to reimburse
the ceding life company for our share of acquisition costs,
including first year commissions and issuance expenses.
Thereafter, we reimburse the ceding life company for our share
of renewal commissions and maintenance expenses. Further, under
modified coinsurance, we allow the ceding life company to retain
assets related to reserves in support of reinsured policy
benefits (e.g., cash values). Accordingly, because of the type
of reinsurance and the basis reinsured, the net first year cash
outlays could be as much as, or more than, that years
premiums paid for variable universal life insurance, and as much
as 10% of variable annuity premiums. In year two and beyond,
however, our cash outlays for reinsurance allowances are
significantly lower than in the first year of a policy.

Net cash flows provided by (used in) operating
activities were $6.6 million, $11.0 million and ($444,000)
for the years ended December 31, 2000, 2001 and 2002,
respectively. Cash flows used in operating activities in 2002
relating to new policies reinsured under coinsurance and
modified coinsurance were $10.2 million and were primarily
the result of the $7.2 million settlement paid to Western
Reserve in April 2002 to increase the amount of business we
reinsure as a result of the reinsurance amendments, settlements
paid to reinsure policies issued in 2002 as a result of those
amendments, and settlements paid to American Skandia to reinsure
policies issued in 2002. These were offset by $14.8 million
of cash flows provided by policies reinsured under coinsurance
and modified coinsurance prior to 2002 and by all policies
reinsured under renewable term reinsurance. Other cash flows
used in operating activities of $5.0 million in 2002 were
the result of cash payments for operating expenses, income taxes
and interest expenses. Cash flows provided by operations in 2000
and 2001 relating to new policies reinsured under coinsurance
and modified coinsurance reflected payments of $4.6 million
and $2.0 million to Western Reserve and American Skandia to
reinsure policies issued in 2000 and 2001, respectively, and
cash flows provided by operations for policies previously in
force under coinsurance and modified coinsurance and by all
policies reinsured under renewable term reinsurance of
$12.8 million and $15.1 million, respectively. Other
cash flows used in operating activities of $1.6 million and
$2.1 million in 2000 and 2001, respectively, were the

34



---



##### Table of Contents



result of cash payments for operating expenses,
income taxes and interest expenses. The following table
summarizes the components of operating cash flow.


|              |      |                           |  |              |       |             |  |            |     |            |  |   |     |  |  |   |      |   |  |   |      |  
|------------- | ---- | ------------------------- |  | ------------ | ----- | ----------- |  | ---------- | --- | ---------- |  | - | --- |  |  | - | ---- | - |  | - | ---- | -
|              |      |                           |  |              |       |            
|              |      | Operating Cash Flows from |  |              |       |            
|              |      |                           |  |              |       |            
|Calendar      |      | Co/ModCo                  |  | Co/ModCo     |       |             |  |            |     |           
|Year of       |      | Reinsurance               |  | Reinsurance  |       | Renewable   |  | Other      |     | Total     
|Reporting     |      | Assumed in                |  | Assumed      |       | Term        |  | Operating  |     | Operating 
|(CYR)         |      | CYR                       |  | Prior to CYR |       | Reinsurance |  | Cash Flows |     | Cash Flows
|              |      |                           |  |              |       |             |  |            |     |           
|             
|(In millions)
|              | 2002 |                           |  | $            | (10.2 | )           |  | $          | 9.5 |            |  | $ | 5.3 |  |  | $ | (5.0 | ) |  | $ | (0.4 | )
|              | 2001 |                           |  |              | (2.0  | )           |  |            | 8.7 |            |  |   | 6.4 |  |  |   | (2.1 | ) |  |   | 11.0 |  
|              | 2000 |                           |  |              | (4.6  | )           |  |            | 7.9 |            |  |   | 4.9 |  |  |   | (1.6 | ) |  |   | 6.6  |  

At this time we are exploring financing
strategies to fund transactions to assume new business. The
amount, timing, receipt and cost of additional capital will
determine the extent to which we will be able to take advantage
of the rights we have under our agreements with Western Reserve
to complete similar transactions. Certain of these rights began
expiring December 31, 2002.

Investment Cash Flows.We generally receive premiums in
advance of paying related benefits and claims. In addition, some
policies we reinsure require that we credit interest on funds
that are deposited with us. We invest these assets in securities
that will provide a return and cash flow stream that are
consistent with these benefits. Investment cash flows are the
result of buying, selling and holding these securities in
addition to activities relating to buying and selling fixed
assets.

Net cash flows provided by (used in) investing
activities were ($3.7 million), ($6.1 million) and
$9.4 million for the years ended December 31, 2000,
2001 and 2002, respectively. The cash flows used in investing
activities of $3.7 million and $6.1 million in 2000
and 2001, respectively, primarily related to our purchase of
fixed maturity securities. The cash flows provided by investing
activities of $9.4 million in 2002 were the result of
proceeds generated from the sale and maturity of available for
sale securities and from the principal payments on
mortgage-backed securities offset by the purchase of available
for sale securities. We have incurred no significant capital
expenditures during 2002.

Financing Cash Flows.Financing cash flows relate primarily
to activities associated with our capital position. Net cash
flows used in financing activities were $2.1 million,
$1.1 million, and $1.1 million for the years ended
December 31, 2000, 2001, and 2002, respectively. Cash flows
used in financing activities in 2002 related to the withdrawal
of the registration statement in October 2002 for our proposed
initial public offering of 9.5 million shares of common stock.
The registration statement was withdrawn due to unfavorable
market conditions. Cash flows used in financing activities
resulted in $1.7 million of deferred offering costs
expenses in 2002, offset by $577,000 of cash paid for deferred
offering costs in 2001, which had been previously recorded as
prepaid expenses on the consolidated balance sheet. Cash flows
used in financing activities in 2001 related to principal
payments on the Money Services line of credit, dividends paid on
our preferred stock and cash paid for deferred offering costs
which had been recorded as prepaid expenses. Cash flows used in
financing activities in 2000 related to the principal payments
on the Money Services line of credit and dividends paid on our
preferred stock, offset by the issuance of 266,047 shares of
preferred stock to accredited investors which resulted in net
proceeds of approximately $3.1 million.

Restrictions.Global
Preferred Holdings, Inc. is a holding company with no direct
operations, and whose principal assets are the capital stock of
Global Preferred Re and $2.5 million of cash and invested
assets, as of December 31, 2002. Global Preferred Holdings,
Inc. relies primarily on funds retained at the holding company
level, debt service on amounts loaned to Global Preferred Re,
service fees and potential dividends from Global Preferred Re to
meet ongoing cash requirements. The ability of Global Preferred
Re to pay dividends to Global Preferred Holdings, Inc. is
subject to, among other things, regulatory restrictions under
the insurance laws of Bermuda. During the year ended
December 31, 2002, Global Preferred Re paid no dividends to
Global Preferred Holdings, Inc.

35



---



##### Table of Contents



Under our reinsurance agreements, we are required
to provide security through a letter of credit for the benefit
of the ceding life companies. We have three letters of credit
issued by Comerica Bank, our custodian, for the benefit of
Western Reserve, Pacific Life and Zurich Life, in the amounts of
$8.5 million, $50,000 and $300,000, respectively. We assess
our letter of credit needs in support of each reinsurance
agreement. If determined to be necessary, we will undertake to
develop facilities for future letters of credit and trust
arrangements in support of additional reinsurance agreements.

Currency

At December 31, 2002, we had written all of
our reinsurance business in U.S. dollars. If, in the future, we
write business in currencies other than the U.S. dollar, we
intend to invest a portion of the premiums collected on the
reinsurance contract in securities denominated in the same
foreign currency as the premium received. We also intend to
consider and evaluate our foreign currency exchange risk and
hedge our exposure.

Inflation

The effects of inflation have not had a material
impact on our operations or the conduct of our business.
Inflationary trends are typically countered by a tightening
monetary policy by the U.S. Federal Reserve, resulting in
increases in interest rates. Rapid and severe interest rate
increases could have a significant and negative impact on the
value of our fixed income portfolio.

Off Balance Sheet Arrangements

We have no obligations, assets or liabilities
other than those disclosed in our financial statements, no
trading activities involving non-exchange traded contracts
accounted for at fair value, and no relationships and
transactions with persons or entities that derive benefits from
their non-independent relationship with us or our related
parties.

Recent Accounting Pronouncements

SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended and interpreted,establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either
assets or liabilities on the balance sheet and measure those
instruments at fair value. The accounting for changes in the
fair value of a derivative will be included in either earnings
or other comprehensive income depending on the intended use of
the derivative instrument. The provisions of SFAS No. 133
do not have an impact on Global Preferreds financial
statements.

In 2002, the Financial Accounting Standards Board
(FASB) issued SFAS No. 145, SFAS No. 146,
SFAS No. 147 and SFAS No. 148 dealing with
extinguishment of debt, exit and disposal activities,
acquisitions of financial institutions, and accounting for
stock-based compensation, respectively. The provisions of these
standards do not have a material impact on Global
Preferreds financial statements.

In November 2002, FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Othersand in January 2003, FASB issued
Interpretation No. 46, Consolidation of Variable
Interest Entities.The interpretations issued are not
expected to have a material impact on Global Preferreds
financial statements.




Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

We seek to earn a favorable risk-adjusted total
return on our assets by engaging in an investment strategy that
employs strategies to manage investment risk. We attempt to
maintain adequate liquidity in our fixed income portfolio to
fund operations and protect against unexpected events. We have
diversified our portfolio to reduce volatility. We seek to
manage our credit risk through industry and issuer
diversification, and interest rate risk by monitoring the
duration and structure of our investment portfolio

36



---



##### Table of Contents



relative to the duration and structure of our
liability portfolio. We are exposed to potential loss from
various market risks, primarily changes in interest rates and
equity prices. Accordingly, earnings would be affected by these
changes. We manage our market risk based on investment policies
approved by our board of directors.


We do not directly control the allocation of our
assets to strategies or underlying funds, nor do we control the
manner in which they are invested by underlying fund managers.
We utilize an independent investment manager to invest our
assets in accordance with our investment guidelines. Conning
Asset Management Inc., a subsidiary of Swiss Reinsurance
Company, has been our investment manager since June 1998.
Conning has discretionary authority to manage our non-cash
investment portfolio. As a result, the performance of our
aggregate investment portfolio depends largely on the ability of
Conning to select and manage appropriate investments. However,
we consistently and systematically monitor the strategies and
funds in which we are invested, and we believe our overall risk
is limited as a result of our selected strategy.

Our investment portfolio includes investments
that are subject to changes in market values with changes in
interest rates. The impact on our investment portfolio from an
immediate 100 basis point increase in market interest rates
would have resulted in an estimated decrease in fair value of
0.5%, or approximately $64,000, on a portfolio valued at
approximately $18.7 million at December 31, 2002. The
impact on our investment portfolio from an immediate 100 basis
point decrease in market interest rates would have resulted in
an estimated increase in fair value of 0.2%, or approximately
$21,000. The foregoing reflects the use of an immediate time
horizon. Credit spreads are assumed to remain constant in these
hypothetical examples.




Item 8.     Financial
Statements and Supplementary Data

The following financial statements are attached
hereto commencing on page F-1.



| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | Independent Auditors Report                                                                                                          
|
| |  | Consolidated Balance Sheets at December 31,
    2001 and 2002                                                                         
|
| |  | Consolidated Statements of Income for the years
    ended December 31, 2000, 2001, and 2002                                           
|
| |  | Consolidated Statements of Stockholders
    Equity and Comprehensive Income for the years ended
    December 31, 2000, 2001, and 2002
|
| |  | Consolidated Statements of Cash Flows for the
    years ended December 31, 2000, 2001, and 2002                                       
|
| |  | Notes to Consolidated Financial Statements for
    the years ended December 31, 2000, 2001, and 2002                                  




Item 9.     Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure

No change in or disagreement with accountants
occurred during 2002.




PART III

The information required by Items 10, 11, 12 and
13 of Part III is incorporated by reference to the information
contained in our Proxy Statement for the Annual Meeting of
Stockholders expected to be filed with the Commission on or
prior to April 30, 2003 or such information will be
included by amendment to this report to be filed within
30 days from the date hereof.




Item 14.     Controls
and Procedures

Within the 90-day period prior to the date of
this report, we carried out an evaluation of the effectiveness
of our disclosure controls and procedures (as defined by
Rule 13a-14(c) of the Securities Exchange Act of 1934)
under the supervision and with the participation of our chief
executive officer and

37



---



##### Table of Contents



chief financial officer. Based on and as of the
date of such evaluation, the aforementioned officers have
concluded that our disclosure controls and procedures were
effective, in all material aspects, to ensure that information
required to be disclosed in the reports we file with the
Commission is recorded, processed, summarized, and reported as
and when required.


There were no significant changes in our internal
controls or other factors that could significantly affect these
controls subsequent to the date our chief executive officer and
chief financial officer carried out their evaluation. There were
not significant deficiencies or material weaknesses identified
in the evaluation and, therefore, no corrective actions were
taken.




PART IV




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

(a) The following documents are filed or
incorporated by reference as part of this Form 10-K.



| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. The audited consolidated financial
    statements of Global Preferred Holdings, Inc. and the related
    auditors report listed in the Index to Financial
    Statements appearing on page F-1.
|
| | 2. The exhibits filed as part of this report
    as required by Item 601 of Regulation S-K are included
    in the Index to Exhibits appearing on page E-1.                                        

(b) Reports on Form 8-K.



| |                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A Current Report on Form 8-K was filed with
    the Securities and Exchange Commission on October 30, 2002
    to disclose our withdrawal of the registration statement for our
    proposed initial public offering and to disclose correspondence
    with our stockholders regarding such withdrawal.
|
| | A Current Report on Form 8-K was filed with
    the Securities and Exchange Commission on November 18, 2002
    to disclose our correspondence with our stockholders regarding
    our third quarter results.                                                                                           

38



---



##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) 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.



| |                                
| | -------------------------------
| | GLOBAL PREFERRED HOLDINGS, INC.



| |     |                       
| | --- | ----------------------
| | By: | /s/ EDWARD F. MCKERNAN

| |                                          
| | -----------------------------------------
| |                                          
| | Edward F. McKernan                       
| | Chief Executive Officer and
    President

Date: March 31, 2003


Pursuant to the requirements of the Securities
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.

|                                                 |  |                                                                                                                           |  |                |  | 
|------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                                 |  |                                                                                                                           |  |               
|Signature                                        |  | Title                                                                                                                     |  | Date          
|                                                 |  |                                                                                                                           |  |               
|/s/ EDWARD F. MCKERNANEdward F. McKernan         |  | Chief Executive Officer, President and
    Director
    (Principal Executive Officer)                                     |  | March 31, 2003
|                                                
|/s/ BRADLEY E. BARKSBradley E. Barks             |  | Chief Financial Officer and Senior Vice
    President  Finance
    (Principal Financial Officer)                         |  | March 31, 2003
|                                                
|/s/ CARYL P. SHEPHERDCaryl P. Shepherd           |  | Chief Accounting Officer, Treasurer, Controller,
    Secretary, and
    Vice President
    (Principal Accounting Officer) |  | March 31, 2003
|                                                
|/s/ JOSEPH F. BARONEJoseph F. Barone             |  | Chairman of the Board of Directors and Director                                                                           |  | March 31, 2003
|                                                
|/s/ MILAN M. RADONICHMilan M. Radonich           |  | Director                                                                                                                  |  | March 31, 2003
|                                                
|/s/ EUGENE M. HOWERDD, JR.Eugene M. Howerdd, Jr. |  | Director                                                                                                                  |  | March 31, 2003

39



---



##### Table of Contents



CERTIFICATION

Pursuant to 18 U.S.C.
Section 1350,


as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002


I, Edward F. McKernan, certify that:

1. I have reviewed this annual report on
Form 10-K of Global Preferred Holdings, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |     |                       
| | --- | ----------------------
| | By: | /s/ EDWARD F. MCKERNAN

| |                        
| | -----------------------
| |                        
| | Edward F. McKernan     
| | Chief Executive Officer

Date: March 31, 2003

40



---



##### Table of Contents



CERTIFICATION

Pursuant to 18 U.S.C.
Section 1350,


as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002


I, Bradley E. Barks, certify that:

1. I have reviewed this annual report on
Form 10-K of Global Preferred Holdings, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |     |                     
| | --- | --------------------
| | By: | /s/ BRADLEY E. BARKS

| |                        
| | -----------------------
| |                        
| | Bradley E. Barks       
| | Chief Financial Officer

Date: March 31, 2003

41



---



##### Table of Contents



INDEX TO EXHIBITS

|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                         
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1          |  | Certificate of Incorporation of the Registrant,
    as amended (incorporated by reference to Exhibit 3.1 to
    Registrants Registration Statement on Form SB-2 filed
    on June 28, 1995).                                                                                                                                                                           
|        | 3  | .1.1        |  | Amendment to Certificate of Incorporation of the
    Registrant, changing the name of the Company to The WMA
    Corporation (incorporated by reference to
    Exhibit 3.1.1 to Registrants Quarterly Report on
    Form 10-QSB for the quarter ended March 31, 1998,
    filed on May 15, 1998).                                                                    
|        | 3  | .1.2        |  | Amendment to Certificate of Incorporation of the
    Registrant, increasing the number of authorized shares of common
    stock and creating a new class of authorized shares of preferred
    stock (incorporated by reference to Exhibit 3.1.1 to
    Registrants Quarterly Report on Form 10-QSB for the
    quarter ended June 30, 1999, filed on August 16, 1999).
|        | 3  | .1.3        |  | Certificate of Amendment to Certificate of
    Incorporation of the Registrant, changing the name of the
    Company to Global Preferred Holdings, Inc.
    (incorporated by reference to Exhibit 3.1 to
    Registrants Quarterly Report on Form 10-QSB for the
    quarter ended September 30, 2001, filed on
    November 14, 2001).                              
|        | 3  | .2          |  | Amended and Restated Bylaws of the Registrant
    (incorporated by reference to Exhibit 3.2 to
    Registrants Registration Statement on Form S-1 filed
    on February 22, 2002).                                                                                                                                                                                     
|        | 4  | .1          |  | Revised Specimen Stock Certificate (incorporated
    by reference to Exhibit 4.1 to Registrants
    Registration Statement on Form S-1 filed on
    February 22, 2002).                                                                                                                                                                                                
|        | 10 | .1          |  | Reinsurance Agreement No. 1 with Western
    Reserve Life Assurance Co. of Ohio, dated July 9, 1996
    (incorporated by reference to Exhibit 10.4 to
    Registrants Quarterly Report on Form 10-QSB for the
    quarter ended March 31, 1998, filed on May 15, 1998).                                                                                                
|        | 10 | .2*         |  | Automatic Variable Annuity Reinsurance Agreement
    with Western Reserve Life Assurance Co. of Ohio, effective
    January 1, 1998 (incorporated by reference to
    Exhibit 10.5 to Registrants Quarterly Report on
    Form 10-QSB for the quarter ended June 30, 1998, filed
    on August 14, 1998).                                                              
|        | 10 | .3*         |  | Automatic Flexible Premium Variable Life
    Reinsurance Agreement Number 2 with Western Reserve Life
    Assurance Co. of Ohio, effective April 1, 1998
    (incorporated by reference to Exhibit 10.6 to
    Registrants Quarterly Report on Form 10-QSB for the
    quarter ended June 30, 1998, filed on August 14, 1998).                                         
|        | 10 | .4          |  | Management Agreement dated August 2, 1995
    with CFM Insurance Managers, Ltd. (incorporated by reference to
    Exhibit 10.7 to Registrants Annual Report on
    Form 10-KSB/A for the year ended December 31, 1997,
    filed on October 1, 1998).                                                                                                                  
|        | 10 | .5          |  | Revolving Line of Credit Loan Agreement with
    Money Services, Inc., dated September 30, 1998
    (incorporated by reference to Exhibit 10.1 to
    Registrants Quarterly Report on Form 10-QSB for the
    quarter ended September 30, 1998, filed on
    November 16, 1998).                                                                                       
|        | 10 | .6          |  | Revolving Line of Credit Promissory Note issued
    on September 30, 1998 to Money Services, Inc. in the
    principal sum of $10,000,000 (incorporated by reference to
    Exhibit 10.2 to Registrants Quarterly Report on
    Form 10-QSB for the quarter ended September 30, 1998,
    filed on November 16, 1998).                                                 
|        | 10 | .7          |  | Directed Reinsurance Agreement with WMA Agency,
    dated June 8, 1998 (incorporated by reference to
    Exhibit 10.3 to Registrants Quarterly Report on
    Form 10-QSB for the quarter ended September 30, 1998,
    filed on November 16, 1998).                                                                                                                    
|        | 10 | .8          |  | First Amendment of Revolving Line of Credit
    Promissory Note with Money Services, Inc., dated
    January 29, 1999 (incorporated by reference to
    Exhibit 10.5 to Registrants Quarterly Report on
    Form 10-QSB for the quarter ended March 31, 1999,
    filed on May 17, 1999).                                                                              
|        | 10 | .9          |  | Amendment Number 1 to the Automatic Flexible
    Premium Variable Life Reinsurance Agreement Number 2 with
    Western Reserve Life Assurance Co. of Ohio, effective
    January 1, 1999 (incorporated by reference to
    Exhibit 10.1 to Registrants Quarterly Report on
    Form 10-QSB for the quarter ended September 30, 1999,
    filed on November 15, 1999).  

42



---



##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .10         |  | Amendment Number 1 to the Automatic Variable
    Annuity Reinsurance Agreement with Western Reserve Life
    Assurance Co. of Ohio, effective January 1, 1999
    (incorporated by reference to Exhibit 10.1 to
    Registrants Quarterly Report on Form 10-QSB for the
    quarter ended September 30, 1999, filed on
    November 15, 1999).                
|        | 10 | .11         |  | Third Amendment of Revolving Line of Credit
    Promissory Note with Money Services, Inc., dated July 30,
    1999 (incorporated by reference to Exhibit 10.2 to
    Registrants Quarterly Report on Form 10-QSB for the
    quarter ended September 30, 1999, filed on
    November 15, 1999).                                                               
|        | 10 | .12         |  | Five Year Term Note issued to Money Services,
    Inc. on July 30, 1999 (incorporated by reference to
    Exhibit 10.3 to Registrants Quarterly Report on
    Form 10-QSB for the quarter ended September 30, 1999,
    filed on November 15, 1999).                                                                                                          
|        | 10 | .13         |  | Fourth Amendment of Revolving Line of Credit
    Promissory Note with Money Services, Inc., effective
    December 31, 1999 (incorporated by reference to
    Exhibit 10.1 to Registrants Annual Report on
    Form 10-KSB for the year ended December 31, 1999,
    filed on March 20, 2000).                                                                
|        | 10 | .14*        |  | Amendment Number 2 to the Automatic Flexible
    Premium Variable Life Reinsurance Agreement Number 2 with
    Western Reserve Life Assurance Co. of Ohio, effective
    October 1, 1999 (incorporated by reference to
    Exhibit 10.2 to Registrants Annual Report on
    Form 10-KSB/A for the year ended December 31, 1999,
    filed on March 30, 2000). 
|        | 10 | .15*        |  | Automatic Flexible Premium Variable Life
    Reinsurance Agreement Number 3 with Western Reserve Life
    Assurance Co. of Ohio, effective October 1, 1999
    (incorporated by reference to Exhibit 10.3 to
    Registrants Annual Report on Form 10-KSB/A for the
    year ended December 31, 1999, filed on March 30, 2000).                               
|        | 10 | .16*        |  | Amendment Number 2 to the Automatic Variable
    Annuity Reinsurance Agreement with Western Reserve Life
    Assurance Co. of Ohio, effective October 1, 1999
    (incorporated by reference to Exhibit 10.4 to
    Registrants Annual Report on Form 10-KSB/A for the
    year ended December 31, 1999, filed on March 30, 2000).                            
|        | 10 | .17         |  | Amendment Number 3 to the Automatic Flexible
    Premium Variable Life Reinsurance Agreement Number 2 with
    Western Reserve Life Assurance Co. of Ohio, effective
    February 1, 2000 (incorporated by reference to
    Exhibit 10.5 to Registrants Annual Report on
    Form 10-KSB/A for the year ended December 31, 1999,
    filed on March 30, 2000).
|        | 10 | .18         |  | Amendment Number 3 to the Automatic Variable
    Annuity Reinsurance Agreement with Western Reserve Life
    Assurance Co. of Ohio, effective February 1, 2000
    (incorporated by reference to Exhibit 10.6 to
    Registrants Annual Report on Form 10-KSB/A for the
    year ended December 31, 1999, filed on March 30, 2000).                           
|        | 10 | .19*        |  | Amendment Number 4 to the Automatic Flexible
    Premium Variable Life Reinsurance Agreement Number 2 with
    Western Reserve, effective January 1, 2000 (incorporated by
    reference to Exhibit 10.1 to Registrants Annual
    Report on Form 10-KSB for the year ended December 31,
    2000, filed on March 20, 2001).                                  
|        | 10 | .20*        |  | Amendment Number 5 to the Automatic Variable
    Annuity Reinsurance Agreement with Western Reserve, effective
    January 1, 2000 (incorporated by reference to
    Exhibit 10.2 to Registrants Annual Report on
    Form 10-KSB for the year ended December 31, 2000,
    filed on March 20, 2001).                                                         
|        | 10 | .21         |  | Third Amendment and Joinder to the Directed
    Reinsurance Agreement with World Marketing Alliance, Inc. and
    World Financial Group, Inc. dated July 12, 2001
    (incorporated by reference to Exhibit 10.1 to
    Registrants Quarterly Report on Form 10-QSB for the
    quarter ended June 30, 2001, filed on August 13, 2001).                       
|        | 10 | .22         |  | First Right Agreement with Western Reserve Life
    Assurance Co. of Ohio dated July 12, 2001 (incorporated by
    reference to Exhibit 10.2 to Registrants Quarterly
    Report on Form 10-QSB for the quarter ended June 30,
    2001, filed on August 13, 2001).                                                                                           

43



---



##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .23         |  | Amendment Number 3 to the Automatic
    Reinsurance Agreement with Western Reserve Life Assurance Co. of
    Ohio, effective as of September 18, 2001 (incorporated by
    reference to Exhibit 10.33 to Registrants
    Registration Statement on Form S-1, filed on
    February 22, 2002).                                                                                                          
|        | 10 | .24         |  | Amendment Number 5 to the Automatic Flexible
    Premium Variable Life Reinsurance Agreement Number 2 with
    Western Reserve, effective September 18, 2001 (incorporated
    by reference to Exhibit 10.34 to Registrants
    Registration Statement on Form S-1, filed on
    February 22, 2002).                                                                                                   
|        | 10 | .25*        |  | Amendment Number 6 to the Automatic Flexible
    Premium Variable Life Reinsurance Agreement with Western Reserve
    Life Assurance Co. of Ohio, effective September 18,
    2001(incorporated by reference to Exhibit 10.35 to
    Registrants Registration Statement on Form S-1/A,
    filed on May 8, 2002).                                                                                      
|        | 10 | .26         |  | Amendment Number 2 to the Automatic Flexible
    Premium Variable Life Reinsurance Agreement Number 3 with
    Western Reserve Life Assurance Co. of Ohio, effective
    September 18, 2001 (incorporated by reference to
    Exhibit 10.36 to Registrants Registration Statement
    on Form S-1, filed on February 22, 2002).                                                                        
|        | 10 | .27         |  | Amendment Number 6 to the Automatic Variable
    Annuity Reinsurance Agreement with Western Reserve Life
    Assurance Co. of Ohio, effective September 18,
    2001(incorporated by reference to Exhibit 10.37 to
    Registrants Registration Statement on Form S-1, filed
    on February 22, 2002).                                                                                                
|        | 10 | .28         |  | Global Preferred Holdings, Inc. Stock Incentive
    Plan and Form of Stock Option Grant Certificate (incorporated by
    reference to Exhibit 10.38 to Registrants
    Registration Statement on Form S-1, filed on
    February 22, 2002).                                                                                                                                                            
|        | 10 | .29         |  | Global Preferred Holdings, Inc. Directors Stock
    Option Plan and Form of Stock Option Grant Certificate
    (incorporated by reference to Exhibit 10.39 to Registrants
    Registration Statement on Form S-1, filed on
    February 22, 2002).                                                                                                                                                     
|        | 10 | .30         |  | Form of Officer and Director Indemnification
    Agreement (incorporated by reference to Exhibit 10.40 to
    Registrants Registration Statement on Form S-1, filed
    on February 22, 2002).                                                                                                                                                                                                         
|        | 10 | .31         |  | Employment Agreement by and between the
    Registrant and Edward F. McKernan, effective January 1,
    2002 (incorporated by reference to Exhibit 10.41 to
    Registrants Registration Statement on Form S-1, filed
    on February 22, 2002).                                                                                                                                                       
|        | 10 | .32         |  | Employment Agreement by and between the
    Registrant and Caryl P. Shepherd, effective February 1,
    2002 (incorporated by reference to Exhibit 10.42 to
    Registrants Registration Statement on Form S-1/A,
    filed on March 29, 2002).                                                                                                                                                        
|        | 10 | .33         |  | Resignation of S. Hubert Humphrey, Jr., dated
    December 28, 2001 (incorporated by reference to
    Exhibit 10.1 to Registrants Form 8-K, filed on
    February 22, 2002).                                                                                                                                                                                                                           
|        | 10 | .34         |  | Form of Stock Option Grant Certificate for S.
    Hubert Humphrey, Jr. (incorporated by reference to
    Exhibit 10.2 to Registrants Form 8-K, filed on
    February 22, 2002).                                                                                                                                                                                                                        
|        | 10 | .35         |  | Employment Agreement by and between the
    Registrant and Bradley E. Barks, effective March 4, 2002
    (incorporated by reference to Exhibit 10.45 to Registrants
    Registration Statement on Form S-1/A, filed on
    March 29, 2002).                                                                                                                                                            
|        | 10 | .36         |  | Employment Agreement by and between the
    Registrant and Thomas Bobowski, effective March 4, 2002
    (incorporated by reference to Exhibit 10.46 to
    Registrants Registration Statement on Form S-1/A,
    filed on March 29, 2002).                                                                                                                                                             
|        | 10 | .37*        |  | Automatic Pool Reinsurance Agreement, effective
    April 1, 1998, with American Phoenix Life and Reinsurance
    Company, Swiss Re Life & Health America, Inc., The Lincoln
    National Life Insurance Company and Transamerica Occidental Life
    Insurance Company (incorporated by reference to
    Exhibit 10.47 to Registrants Registration Statement
    on Form S-1/A, filed on May 8, 2002).
|        | 10 | .38         |  | Amendment Number 7 to the Automatic Flexible
    Premium Variable Life Reinsurance Agreement with Western Reserve
    Life Assurance Co. of Ohio, effective January 1, 2002
    (incorporated by reference to Exhibit 10.48 to
    Registrants Registration Statement on Form S-1/A,
    filed on April 19, 2002).                                                                                     

44



---



##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                                                                                             
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .39         |  | Amendment Number 3 to the Automatic Flexible
    Premium Variable Life Reinsurance Agreement Number 3 with
    Western Reserve Life Assurance Co. of Ohio, effective
    January 1, 2002 (incorporated by reference to
    Exhibit 10.49 to Registrants Registration Statement
    on Form S-1/A, filed on April 19, 2002).
|        | 10 | .40         |  | Amendment Number 7 to the Automatic Variable
    Annuity Reinsurance Agreement with Western Reserve Life
    Assurance Co. of Ohio, effective January 1, 2002
    (incorporated by reference to Exhibit 10.50 to
    Registrants Registration Statement on Form S-1/A,
    filed on April 19, 2002).                       
|        | 10 | .41         |  | First Amendment to Employment Agreement by and
    between the Registrant and Bradley E. Barks, effective
    July 30, 2002 (incorporated by reference to
    Exhibit 10.1 to Registrants Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2002,
    filed on November 14, 2002).                     
|        | 10 | .42         |  | Lease Agreement by and between the Registrant and
    Metropolitan Life Insurance Company effective September 12,
    2002 (incorporated by reference to Exhibit 10.2 to
    Registrants Quarterly Report on Form 10-Q/A for the
    quarter ended September 30, 2002, filed on
    November 20, 2002).                    
|        | 99 | .1          |  | Certification by Edward F. McKernan, Chief
    Executive Officer, Pursuant to 18 U.S.C. Section 1350,
    as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002.                                                                                                                                         
|        | 99 | .2          |  | Certification by Bradley E. Barks, Chief
    Financial Officer, Pursuant to 18 U.S.C. Section 1350,
    as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002.                                                                                                                                           
|        | 99 | .3          |  | Safe Harbor Compliance Statement For
    Forward-Looking Statements                                                                                                                                                                                                                                                         



---



|  |                                                                                                                                                                                                              
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Confidential Treatment has been requested with
    respect to portions of these documents. The omitted portions of
    these documents were filed separately with the Securities and
    Exchange Commission.

45



---



##### Table of Contents



GLOBAL PREFERRED HOLDINGS, INC.

INDEX TO FINANCIAL STATEMENTS

|                                                                                                                                      |  |      |  | 
|------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | 
|                                                                                                                                      |  | Page
|                                                                                                                                      |  |     
|Financial Statements:                                                                                                                 |  |      |  | 
|Independent Auditors Report                                                                                                          |  |      |  | 
|Consolidated Balance Sheets as of
    December 31, 2001 and 2002                                                                      |  |      |  | 
|Consolidated Statements of Income for the Years
    Ended December 31, 2000, 2001 and 2002                                            |  |      |  | 
|Consolidated Statements of Stockholders
    Equity and Comprehensive Income for the Years Ended
    December 31, 2000, 2001 and 2002 |  |      |  | 
|Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2000, 2001 and 2002                                        |  |      |  | 
|Notes to Consolidated Financial Statements                                                                                            |  |      |  | 

F-1



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors

Global Preferred Holdings, Inc.:


We have audited the accompanying consolidated
balance sheets of Global Preferred Holdings, Inc. and
subsidiaries as of December 31, 2001 and 2002, and the
related consolidated statements of income, stockholders
equity and comprehensive income and cash flows for each of the
years in the three-year period ended December 31, 2002.
These consolidated financial statements are the responsibility
of Global Preferreds management. Our responsibility is to
express an opinion on these consolidated 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
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Global Preferred Holdings,
Inc. and subsidiaries as of December 31, 2001 and 2002, and
the results of their operations and their cash flows, for each
of the years in the three-year period ended December 31,
2002 in conformity with accounting principles generally accepted
in the United States of America.

KPMG LLP

Atlanta, Georgia


March 14, 2003


F-2



---



##### Table of Contents



GLOBAL PREFERRED HOLDINGS, INC.

Consolidated Balance Sheets


|                                                                                                                                      |                                                                                                                                                   |                                                                                                                                  |                            |            |         |            |            |            |   |            | 
|------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ---------- | ------- | ---------- | ---------- | ---------- | - | ---------- | 
|                                                                                                                                      |                                                                                                                                                   |                                                                                                                                 
|                                                                                                                                      |                                                                                                                                                   | Years Ended December 31,                                                                                                        
|                                                                                                                                      |                                                                                                                                                   |                                                                                                                                 
|                                                                                                                                      |                                                                                                                                                   | 2001                                                                                                                             |                            | 2002      
|                                                                                                                                      |                                                                                                                                                   |                                                                                                                                  |                            |           
|Assets                                                                                                                                |                                                                                                                                                   |                                                                                                                                  |                            |            |         |            |            |           
|Fixed maturity securities  available
    for sale (amortized cost of $11,840,749 and $2,673,762 for 2001
    and 2002, respectively) |                                                                                                                                                   | $                                                                                                                                | 12,214,279                 |            |         | $          | 2,798,190  |           
|Cash and cash equivalents                                                                                                             |                                                                                                                                                   |                                                                                                                                  | 8,062,110                  |            |         |            | 15,858,256 |           
|Investment income due and accrued                                                                                                     |                                                                                                                                                   |                                                                                                                                  | 172,055                    |            |         |            | 80,882     |           
|Accounts receivable                                                                                                                   |                                                                                                                                                   |                                                                                                                                  |                           |            |         |            | 215,500    |           
|Reinsurance balances receivable                                                                                                       |                                                                                                                                                   |                                                                                                                                  | 2,842,908                  |            |         |            | 3,078,949  |           
|Reinsured policy loans                                                                                                                |                                                                                                                                                   |                                                                                                                                  | 1,013,629                  |            |         |            | 1,115,994  |           
|Deferred acquisition costs                                                                                                            |                                                                                                                                                   |                                                                                                                                  | 42,800,269                 |            |         |            | 49,850,309 |           
|Prepaid expenses                                                                                                                      |                                                                                                                                                   |                                                                                                                                  | 659,538                    |            |         |            | 888,662    |           
|Current income tax recoverable                                                                                                        |                                                                                                                                                   |                                                                                                                                  |                           |            |         |            | 172,500    |           
|Fixed assets (net of accumulated depreciation of
    $147,750 and $240,439 for 2001 and 2002, respectively)                           |                                                                                                                                                   |                                                                                                                                  | 88,114                     |            |         |            | 215,095    |           
|                                                                                                                                      |                                                                                                                                                   |                                                                                                                                  |                            |            |         |            |            |           
|                                                                                                                                      |                                                                                                                                                   |                                                                                                                                  | Total assets               |            | $       | 67,852,902 |            |            | $ | 74,274,337 | 
|                                                                                                                                      |                                                                                                                                                   |                                                                                                                                  |                            |            |         |            |            |           
|                                                                                                                                      | Liabilities and Stockholders Equity                                                                                                              |                                                                                                                                  |                            |            |         |            |            |            |  
|Liabilities:                                                                                                                          |                                                                                                                                                   |                                                                                                                                  |                            |            |         |            |            |           
|                                                                                                                                      | Future policy benefits                                                                                                                            |                                                                                                                                  | $                          | 11,911,532 |         |            | $          | 16,923,775 |  
|                                                                                                                                      | Reinsurance balances payable                                                                                                                      |                                                                                                                                  |                            | 188,818    |         |            |            | 42,130     |  
|                                                                                                                                      | Accrued expenses and accounts payable                                                                                                             |                                                                                                                                  |                            | 544,683    |         |            |            | 473,636    |  
|                                                                                                                                      | Accrued interest payable                                                                                                                          |                                                                                                                                  |                            | 158,219    |         |            |            | 158,219    |  
|                                                                                                                                      | Current income tax payable                                                                                                                        |                                                                                                                                  |                            | 413,299    |         |            |            |           |  
|                                                                                                                                      | Long term debt                                                                                                                                    |                                                                                                                                  |                            | 5,000,000  |         |            |            | 5,000,000  |  
|                                                                                                                                      | Deferred tax liability                                                                                                                            |                                                                                                                                  |                            | 7,667,767  |         |            |            | 8,354,722  |  
|                                                                                                                                      |                                                                                                                                                   |                                                                                                                                  |                            |            |         |            |            |           
|                                                                                                                                      |                                                                                                                                                   |                                                                                                                                  | Total liabilities          |            |         | 25,884,318 |            |            |   | 30,952,482 | 
|                                                                                                                                      |                                                                                                                                                   |                                                                                                                                  |                            |            |         |            |            |           
|Stockholders equity:                                                                                                                 |                                                                                                                                                   |                                                                                                                                  |                            |            |         |            |            |           
|                                                                                                                                      | Preferred stock, par value $2.00, 10,000,000
    shares authorized; Series A                                                                      |                                                                                                                                  |                            |            |         |            |            |            |  
|                                                                                                                                      |                                                                                                                                                   | Preferred Stock, 1,000,000 shares authorized;
    266,047 shares issued for 2001 and no shares issued for 2002,
    respectively |                            |            | 532,094 |            |            |            |  |           
|                                                                                                                                      | Common stock, par value $.001, 50,000,000 shares
    authorized; 3,750,000 shares and 4,149,074 shares issued for
    2001 and 2002, respectively |                                                                                                                                  |                            | 3,750      |         |            |            | 4,149      |  
|                                                                                                                                      | Additional paid-in capital                                                                                                                        |                                                                                                                                  |                            | 22,794,331 |         |            |            | 23,326,026 |  
|                                                                                                                                      | Accumulated other comprehensive income                                                                                                            |                                                                                                                                  |                            | 246,531    |         |            |            | 82,125     |  
|                                                                                                                                      | Retained earnings                                                                                                                                 |                                                                                                                                  |                            | 18,441,145 |         |            |            | 19,958,822 |  
|                                                                                                                                      | Treasury stock, at cost (7,390 shares for 2001
    and 2002, respectively)                                                                        |                                                                                                                                  |                            | (49,267    | )       |            |            | (49,267    | )
|                                                                                                                                      |                                                                                                                                                   |                                                                                                                                  |                            |            |         |            |            |           
|                                                                                                                                      |                                                                                                                                                   |                                                                                                                                  | Total stockholders equity |            |         | 41,968,584 |            |            |   | 43,321,855 | 
|                                                                                                                                      |                                                                                                                                                   |                                                                                                                                  |                            |            |         |            |            |           
|Total liabilities and stockholders equity                                                                                            |                                                                                                                                                   | $                                                                                                                                | 67,852,902                 |            |         | $          | 74,274,337 |           
|                                                                                                                                      |                                                                                                                                                   |                                                                                                                                  |                            |            |         |            |            |           

See accompanying notes to consolidated financial
statements.

F-3



---



##### Table of Contents



GLOBAL PREFERRED HOLDINGS, INC.

Consolidated Statements of Income


|                                                                           |                                            |                                             |           |            |            |      |           |            |            |   |           |            |            | 
|-------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------------- | --------- | ---------- | ---------- | ---- | --------- | ---------- | ---------- | - | --------- | ---------- | ---------- | 
|                                                                           |                                            |                                            
|                                                                           |                                            | Years Ended December 31,                   
|                                                                           |                                            |                                            
|                                                                           |                                            | 2000                                        |           | 2001       |            | 2002
|                                                                           |                                            |                                             |           |            |            |     
|Revenues:                                                                  |                                            |                                             |           |            |            |      |           |            |            |   |           |           
|                                                                           | Premiums                                   |                                             | $         | 16,618,927 |            |      | $         | 19,240,551 |            |   | $         | 17,984,990 |           
|                                                                           | Reinsured policy revenues                  |                                             |           | 12,893,664 |            |      |           | 11,237,610 |            |   |           | 13,859,540 |           
|                                                                           | Net investment income                      |                                             |           | 527,613    |            |      |           | 810,544    |            |   |           | 742,221    |           
|                                                                           | Net realized gain on investments           |                                             |           | 2,606      |            |      |           | 44,807     |            |   |           | 427,823    |           
|                                                                           |                                            |                                             |           |            |            |      |           |            |            |   |           |           
|                                                                           |                                            | Total revenues                              |           |            | 30,042,810 |      |           |            | 31,333,512 |   |           |            | 33,014,574 | 
|                                                                           |                                            |                                             |           |            |            |      |           |            |            |   |           |           
|Benefits and expenses:                                                     |                                            |                                             |           |            |            |      |           |            |            |   |           |           
|                                                                           | Benefits, claims and settlement expenses   |                                             |           | 7,559,164  |            |      |           | 6,292,392  |            |   |           | 8,428,898  |           
|                                                                           | Change in future policy benefits           |                                             |           | 2,052,733  |            |      |           | 2,411,335  |            |   |           | 1,525,570  |           
|                                                                           | Reinsurance expense allowances, net        |                                             |           | 7,539,492  |            |      |           | 8,501,197  |            |   |           | 8,517,836  |           
|                                                                           | Amortization of deferred acquisition costs |                                             |           | 4,016,629  |            |      |           | 3,944,660  |            |   |           | 7,023,815  |           
|                                                                           | Operating expenses                         |                                             |           | 1,256,080  |            |      |           | 1,951,634  |            |   |           | 3,119,932  |           
|                                                                           | Interest expense                           |                                             |           | 665,119    |            |      |           | 378,145    |            |   |           | 380,116    |           
|                                                                           | Costs of withdrawn offering                |                                             |           |           |            |      |           |           |            |   |           | 1,712,000  |           
|                                                                           |                                            |                                             |           |            |            |      |           |            |            |   |           |           
|                                                                           |                                            | Total benefits and expenses                 |           |            | 23,089,217 |      |           |            | 23,479,363 |   |           |            | 30,708,167 | 
|                                                                           |                                            |                                             |           |            |            |      |           |            |            |   |           |           
|                                                                           |                                            | Income before income tax                    |           |            | 6,953,593  |      |           |            | 7,854,149  |   |           |            | 2,306,407  | 
|                                                                           | Income tax expense                         |                                             |           | (1,820,717 | )          |      |           | (2,391,568 | )          |   |           | (788,730   | )         
|                                                                           |                                            |                                             |           |            |            |      |           |            |            |   |           |           
|                                                                           |                                            | Net income                                  |           | $          | 5,132,876  |      |           | $          | 5,462,581  |   |           | $          | 1,517,677  | 
|                                                                           |                                            |                                             |           |            |            |      |           |            |            |   |           |           
|                                                                           | Preferred dividends                        |                                             |           | 155,198    |            |      |           | 267,104    |            |   |           |           |           
|                                                                           |                                            |                                             |           |            |            |      |           |            |            |   |           |           
|                                                                           |                                            | Net income available to common stockholders |           | $          | 4,977,678  |      |           | $          | 5,195,477  |   |           | $          | 1,517,677  | 
|                                                                           |                                            |                                             |           |            |            |      |           |            |            |   |           |           
|Basic earnings per share                                                   |                                            | $                                           | 1.33      |            |            | $    | 1.39      |            |            | $ | 0.37      |           
|                                                                           |                                            |                                             |           |            |            |      |           |            |            |   |           |           
|Diluted earnings per share                                                 |                                            | $                                           | 1.30      |            |            | $    | 1.32      |            |            | $ | 0.37      |           
|                                                                           |                                            |                                             |           |            |            |      |           |            |            |   |           |           
|Weighted average common shares outstanding                                 |                                            |                                             | 3,742,610 |            |            |      | 3,742,610 |            |            |   | 4,141,684 |           
|                                                                           |                                            |                                             |           |            |            |      |           |            |            |   |           |           
|Total weighted average common and common
    equivalent shares outstanding |                                            |                                             | 3,943,897 |            |            |      | 4,141,684 |            |            |   | 4,141,684 |           
|                                                                           |                                            |                                             |           |            |            |      |           |            |            |   |           |           

See accompanying notes to consolidated financial
statements.

F-4



---



##### Table of Contents



GLOBAL PREFERRED HOLDINGS, INC.

Consolidated Statements of Stockholders
Equity and Comprehensive Income


Years ended December 31, 2000, 2001 and 2002


|                                       |                            |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  |          |           | 
|-------------------------------------- | -------------------------- | --------- | -------- | --------- |  | --------- | -------- | ------ |  | ---------- | --------- | ------------- |  | -------- | ----- | -------- |  | ------------- | ---------- | ------------- |  | - | -------- | - |  | - | ---------- | --------- |  | - | ------- | - |  | - | ---------- | --------- |  |  | -------- | --------- | 
|                                       |                            |           |          |           |  |           |          |        |  |            |           | Accumulated   |  |          |       |          |  |               |            |              
|                                       |                            | Number of |          |           |  | Number of |          |        |  | Additional |           | other         |  |          |       |          |  | Total         |            |              
|                                       |                            | preferred |          | Preferred |  | common    |          | Common |  | paid-in    |           | comprehensive |  | Retained |       | Treasury |  | stockholders |            | Comprehensive
|                                       |                            | shares    |          | Stock     |  | shares    |          | Stock  |  | capital    |           | income (loss) |  | earnings |       | stock    |  | equity        |            | income       
|                                       |                            |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |              
|Balance, January 1, 2000               |                            |           |         |           |  | $         |         |        |  |            | 2,500,000 |               |  | $        | 2,500 |          |  | $             | 20,228,973 |               |  | $ | (42,552  | ) |  | $ | 8,268,623  |           |  | $ | (49,900 | ) |  | $ | 28,407,644 |           |  |  |          |          
|                                       | Comprehensive income       |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  |          |           | 
|                                       | Net income                 |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            | 5,132,876 |  |   |         |   |  |   |            | 5,132,876 |  |  | $        | 5,132,876 | 
|Other comprehensive income, net of tax |                            |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   | 104,909  |   |  |   |            |           |  |   |         |   |  |   | 104,909    |           |  |  | 104,909  |          
|                                       |                            |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  |          |          
|                                       | Total comprehensive income |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  | $        | 5,237,785 | 
|                                       |                            |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  |          |          
|Preferred stock issued                 |                            |           | 266,047  |           |  |           | 532,094  |        |  |            |           |               |  |          |       |          |  |               | 2,566,608  |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   | 3,098,702  |           |  |  |          |          
|Preferred dividends                    |                            |           |         |           |  |           |         |        |  |            |          |               |  |          |      |          |  |               |           |               |  |   |         |   |  |   | (155,198   | )         |  |   |        |   |  |   | (155,198   | )         |  |  |          |          
|                                       |                            |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  |          |          
|Balance, December 31, 2000.            |                            |           | 266,047  |           |  |           | 532,094  |        |  |            | 2,500,000 |               |  |          | 2,500 |          |  |               | 22,795,581 |               |  |   | 62,357   |   |  |   | 13,246,301 |           |  |   | (49,900 | ) |  |   | 36,588,933 |           |  |  |          |          
|                                       | Comprehensive income       |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  |          |           | 
|                                       | Net income                 |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            | 5,462,581 |  |   |         |   |  |   |            | 5,462,581 |  |  | $        | 5,462,581 | 
|Other comprehensive income, net of tax |                            |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   | 184,174  |   |  |   |            |           |  |   |         |   |  |   | 184,174    |           |  |  | 184,174  |          
|                                       |                            |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  |          |          
|                                       | Total comprehensive income |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  | $        | 5,646,755 | 
|                                       |                            |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  |          |          
|Three-for-two stock split              |                            |           |          |           |  |           |          |        |  |            | 1,250,000 |               |  |          | 1,250 |          |  |               | (1,250     | )             |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  |          |          
|Preferred dividends                    |                            |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   | (267,104   | )         |  |   |         |   |  |   | (267,104   | )         |  |  |          |          
|Treasury stock reissued (95 shares)    |                            |           |         |           |  |           |         |        |  |            |          |               |  |          |      |          |  |               |           |               |  |   |         |   |  |   | (633       | )         |  |   | 633     |   |  |   |           |           |  |  |          |          
|                                       |                            |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  |          |          
|Balance, December 31, 2001             |                            |           | 266,047  |           |  |           | 532,094  |        |  |            | 3,750,000 |               |  |          | 3,750 |          |  |               | 22,794,331 |               |  |   | 246,531  |   |  |   | 18,441,145 |           |  |   | (49,267 | ) |  |   | 41,968,584 |           |  |  |          |          
|                                       | Comprehensive income       |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  |          |           | 
|                                       | Net income                 |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            | 1,517,677 |  |   |         |   |  |   |            | 1,517,677 |  |  | $        | 1,517,677 | 
|Other comprehensive income, net of tax |                            |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   | (164,406 | ) |  |   |            |           |  |   |         |   |  |   | (164,406   | )         |  |  | (164,406 | )        
|                                       |                            |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  |          |          
|                                       | Total comprehensive income |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  | $        | 1,353,271 | 
|                                       |                            |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  |          |          
|Preferred stock conversion             |                            |           | (266,047 | )         |  |           | (532,094 | )      |  |            | 399,074   |               |  |          | 399   |          |  |               | 531,695    |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  |          |          
|                                       |                            |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  |          |          
|Balance, December 31, 2002             |                            |           |         |           |  | $         |         |        |  |            | 4,149,074 |               |  | $        | 4,149 |          |  | $             | 23,326,026 |               |  | $ | 82,125   |   |  | $ | 19,958,822 |           |  | $ | (49,267 | ) |  | $ | 43,321,855 |           |  |  |          |          
|                                       |                            |           |          |           |  |           |          |        |  |            |           |               |  |          |       |          |  |               |            |               |  |   |          |   |  |   |            |           |  |   |         |   |  |   |            |           |  |  |          |          

See accompanying notes to consolidated financial
statements.

F-5



---



##### Table of Contents



GLOBAL PREFERRED HOLDINGS, INC.

Consolidated Statements of Cash Flows


Years ended December 31, 2000, 2001 and 2002


|                                                  |                                                                                                     |                                                              |                                                         |            |            |            |           |            |            |            |            |            |             |            |  
|------------------------------------------------- | --------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------------------- | ---------- | ---------- | ---------- | --------- | ---------- | ---------- | ---------- | ---------- | ---------- | ----------- | ---------- | -
|                                                  |                                                                                                     | 2000                                                         |                                                         | 2001       |            | 2002      
|                                                  |                                                                                                     |                                                              |                                                         |            |            |           
|Cash flows from operating activities:             |                                                                                                     |                                                              |                                                         |            |            |            |           |            |            |            |            |           
|                                                  | Net income                                                                                          |                                                              | $                                                       | 5,132,876  |            |            | $         | 5,462,581  |            |            | $          | 1,517,677  |            
|                                                  | Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:     |                                                              |                                                         |            |            |            |           |            |            |            |            |            |            
|                                                  |                                                                                                     | Amortization and depreciation                                |                                                         |            | 4,064,604  |            |           |            | 3,989,418  |            |            |            | 7,072,737   |           
|                                                  |                                                                                                     | Costs of withdrawn offering                                  |                                                         |            |           |            |           |            |           |            |            |            | 1,712,000   |           
|                                                  |                                                                                                     | Deferred tax expense                                         |                                                         |            | 1,304,642  |            |           |            | 1,954,605  |            |            |            | 771,649     |           
|                                                  |                                                                                                     | Net realized gain on investments                             |                                                         |            | (2,606     | )          |           |            | (44,807    | )          |            |            | (427,823    | )         
|                                                  | Change in:                                                                                          |                                                              |                                                         |            |            |            |           |            |            |            |            |            |            
|                                                  |                                                                                                     | Investment income due and accrued                            |                                                         |            | (94,115    | )          |           |            | (58,497    | )          |            |            | 91,173      |           
|                                                  |                                                                                                     | Accounts receivable                                          |                                                         |            |           |            |           |            |           |            |            |            | (215,500    | )         
|                                                  |                                                                                                     | Reinsurance balances receivable                              |                                                         |            | 352,989    |            |           |            | (209,959   | )          |            |            | (236,041    | )         
|                                                  |                                                                                                     | Reinsured policy loans                                       |                                                         |            | (580,060   | )          |           |            | (146,606   | )          |            |            | (102,365    | )         
|                                                  |                                                                                                     | Deferred acquisition costs                                   |                                                         |            | (7,018,868 | )          |           |            | (3,992,590 | )          |            |            | (14,073,855 | )         
|                                                  |                                                                                                     | Prepaid expenses                                             |                                                         |            | 315,684    |            |           |            | (51,216    | )          |            |            | (762,212    | )         
|                                                  |                                                                                                     | Current income tax recoverable                               |                                                         |            |           |            |           |            |           |            |            |            | (172,500    | )         
|                                                  |                                                                                                     | Future policy benefits                                       |                                                         |            | 3,530,962  |            |           |            | 3,885,784  |            |            |            | 5,012,243   |           
|                                                  |                                                                                                     | Reinsurance balances payable                                 |                                                         |            | (328,314   | )          |           |            | (199,198   | )          |            |            | (146,688    | )         
|                                                  |                                                                                                     | Accrued expenses and accounts payable                        |                                                         |            | (20,022    | )          |           |            | 404,565    |            |            |            | (71,047     | )         
|                                                  |                                                                                                     | Accrued interest payable                                     |                                                         |            | (504,433   | )          |           |            | (3,137     | )          |            |            |            |           
|                                                  |                                                                                                     | Current income tax payable                                   |                                                         |            | 405,431    |            |           |            | 7,868      |            |            |            | (413,299    | )         
|                                                  |                                                                                                     |                                                              |                                                         |            |            |            |           |            |            |            |            |           
|                                                  |                                                                                                     |                                                              | Net cash provided by (used in) operating
    activities |            |            | 6,558,770  |           |            |            | 10,998,811 |            |            |             | (443,851   | )
|                                                  |                                                                                                     |                                                              |                                                         |            |            |            |           |            |            |            |            |           
|Cash flows from investing activities:             |                                                                                                     |                                                              |                                                         |            |            |            |           |            |            |            |            |           
|                                                  | Proceeds from sale of available-for-sale
    securities                                             |                                                              |                                                         | 194,856    |            |            |           | 1,674,272  |            |            |            | 9,856,622  |            
|                                                  | Proceeds from principal payments on
    mortgage-backed securities of available-for-sale securities |                                                              |                                                         | 127,730    |            |            |           | 474,925    |            |            |            | 1,096,204  |            
|                                                  | Proceeds from maturity of available-for-sale
    securities                                         |                                                              |                                                         |           |            |            |           |           |            |            |            | 600,000    |            
|                                                  | Purchase of available-for-sale securities                                                           |                                                              |                                                         | (4,019,176 | )          |            |           | (8,127,239 | )          |            |            | (1,958,013 | )          
|                                                  | Purchase of fixed assets                                                                            |                                                              |                                                         | (8,449     | )          |            |           | (84,066    | )          |            |            | (219,928   | )          
|                                                  |                                                                                                     |                                                              |                                                         |            |            |            |           |            |            |            |            |           
|                                                  |                                                                                                     |                                                              | Net cash provided by (used in) investing
    activities |            |            | (3,705,039 | )         |            |            | (6,062,108 | )          |            |             | 9,374,885  |  
|                                                  |                                                                                                     |                                                              |                                                         |            |            |            |           |            |            |            |            |           
|Cash flows from financing activities:             |                                                                                                     |                                                              |                                                         |            |            |            |           |            |            |            |            |           
|                                                  | Issuance of preferred stock                                                                         |                                                              |                                                         | 3,098,702  |            |            |           |           |            |            |            |           |            
|                                                  | Preferred dividends                                                                                 |                                                              |                                                         | (142,953   | )          |            |           | (279,349   | )          |            |            |           |            
|                                                  | Proceeds from short term debt                                                                       |                                                              |                                                         |           |            |            |           | (277,285   | )          |            |            |           |            
|                                                  | Repayment of long term debt                                                                         |                                                              |                                                         | (5,026,277 | )          |            |           |           |            |            |            |           |            
|                                                  | Prepaid expenses  costs of withdrawn
    offering                                                  |                                                              |                                                         |           |            |            |           | (577,112   | )          |            |            | 577,112    |            
|                                                  | Costs of withdrawn offering                                                                         |                                                              |                                                         |           |            |            |           |           |            |            |            | (1,712,000 | )          
|                                                  |                                                                                                     |                                                              |                                                         |            |            |            |           |            |            |            |            |           
|                                                  |                                                                                                     |                                                              | Net cash used in financing activities                   |            |            | (2,070,528 | )         |            |            | (1,133,746 | )          |            |             | (1,134,888 | )
|                                                  |                                                                                                     |                                                              |                                                         |            |            |            |           |            |            |            |            |           
|                                                  |                                                                                                     |                                                              | Net increase in cash and cash equivalents               |            |            | 783,203    |           |            |            | 3,802,957  |            |            |             | 7,796,146  |  
|Cash and cash equivalents at beginning of period  |                                                                                                     |                                                              | 3,475,950                                               |            |            |            | 4,259,153 |            |            |            | 8,062,110  |           
|                                                  |                                                                                                     |                                                              |                                                         |            |            |            |           |            |            |            |            |           
|Cash and cash equivalents at end of period        |                                                                                                     | $                                                            | 4,259,153                                               |            |            | $          | 8,062,110 |            |            | $          | 15,858,256 |           
|                                                  |                                                                                                     |                                                              |                                                         |            |            |            |           |            |            |            |            |           
|Supplemental disclosure of cash flow information: |                                                                                                     |                                                              |                                                         |            |            |            |           |            |            |            |            |           
|                                                  | Interest paid                                                                                       |                                                              | $                                                       | 1,169,552  |            |            | $         | 381,282    |            |            | $          | 380,116    |            
|                                                  |                                                                                                     |                                                              |                                                         |            |            |            |           |            |            |            |            |           
|                                                  | Income taxes paid                                                                                   |                                                              | $                                                       | 110,644    |            |            | $         | 429,095    |            |            | $          | 602,880    |            
|                                                  |                                                                                                     |                                                              |                                                         |            |            |            |           |            |            |            |            |           
|                                                  | Change in preferred dividend accrual                                                                |                                                              | $                                                       | 12,245     |            |            | $         | (12,245    | )          |            | $          |           |            
|                                                  |                                                                                                     |                                                              |                                                         |            |            |            |           |            |            |            |            |           
|                                                  | Non-cash financing activities:                                                                      |                                                              |                                                         |            |            |            |           |            |            |            |            |            |            
|                                                  |                                                                                                     | Treasury shares issued for stock split fractional
    shares |                                                         |            |           |            |           |            | 95         |            |            |            |            |           
|                                                  |                                                                                                     |                                                              |                                                         |            |            |            |           |            |            |            |            |           

See accompanying notes to consolidated financial
statements.

F-6



---



##### Table of Contents



Global Preferred Holdings, Inc.

Notes to Consolidated Financial Statements


December 31, 2000, 2001 and 2002


1.     Organization

Global Preferred Holdings, Inc. was formed
March 9, 1995 as an insurance holding company.

The consolidated financial statements include the
assets, liabilities, and results of operations of Global
Preferred Holdings, Inc. (Global Preferred) and its
wholly-owned subsidiary, Global Preferred Re Limited, a Bermuda
company registered as a long-term insurer under the Bermuda
Insurance Act 1978 (Global Preferred Re together
with Global Preferred are referred to collectively as
Global Preferred unless the context otherwise
requires or otherwise as expressly stated).

Global Preferred provides reinsurance for life
insurance and annuity products. Global Preferred was formed
principally to provide an opportunity for independent agents
associated with an independent marketing organization to
participate indirectly in the reinsurance of the policies they
sell. An independent marketing organization (IMO) is
an independent organization that contracts with one or more
insurance companies to distribute and market securities and
insurance products. Many of the individual agents that purchased
equity in Global Preferred are currently associated with World
Financial Group, Inc., an affiliate of AEGON USA, Inc., and
collectively, own a significant portion of the outstanding
common stock of Global Preferred. To date, the agents associated
with World Financial Group, and its predecessor, have sold all
life insurance and annuity policies reinsured by Global
Preferred.

Reinsurance is an arrangement under which an
insurance company (the reinsurer) agrees to
indemnify another insurance company (the ceding life
company) for all or a portion of the insurance risks
underwritten by the ceding life company. The reinsurer assumes a
portion of the underwritten risk in exchange for a portion of
the premium collected. Global Preferred currently assumes
portions of mortality and other risks relating to life insurance
and annuity policies in order to share in the net profits
generated through the sale of such policies by the independent
agents associated with independent marketing organizations.

2.     Summary of
Significant Accounting Policies

Consolidation and Basis of
Presentation.The consolidated
financial statements of Global Preferred have been prepared in
accordance with accounting principles generally accepted in the
United States of America (GAAP). 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 the reported amounts of revenues and expenses
during the reporting period. Accounts that Global Preferred
deems to be sensitive to changes in estimates include deferred
acquisition costs and future policy benefits. In all instances,
actual results could differ from estimates.

The accompanying financial statements consolidate
the accounts of Global Preferred and its subsidiary. All
significant inter-company balances and transactions have been
eliminated.

Investments.Global
Preferred classifies all fixed maturity securities and equity
securities as available for sale. Such securities
are reported at fair value. Fixed maturity securities available
for sale are so classified based upon the possibility that such
securities could be sold prior to maturity if that action
enables Global Preferred to execute its investment philosophy
and appropriately match investment results to operating and
liquidity needs. Unrealized gains and losses on marketable
equity securities and fixed maturity securities available for
sale, less applicable deferred income taxes, are reported as a
separate component of accumulated other comprehensive income
within stockholders equity.

Global Preferreds policy is to reflect an
other-than-temporary impairment in securities when the fair
value of these securities is lower than the cost basis for an
extended period of time. Any such impairment identified would
result in a write-down of the cost basis of the individual
security to its fair value to

F-7



---



##### Table of Contents



establish a new cost basis and to reflect a
realized capital loss in the consolidated statements of income.
No impairments in value have occurred which would require Global
Preferred to make such an adjustment.


Investment income is recognized as it accrues or
is legally due. Income on mortgage-backed securities includes
amortization and accretion of purchase premiums and discounts
using a method that approximates a level yield, taking into
consideration assumed prepayment patterns. The retrospective
adjustment method is used to adjust for prepayment activity.
Realized gains and losses on investments using the specific
identification method are included in income.

Fair Value Disclosure.The carrying values of cash and cash
equivalents, reinsurance receivables and payables, short-term
debt, accrued expenses and accounts payable approximate their
fair values due to the short-term nature of these accounts.
Taking into consideration the basis of reinsurance under the
reinsurance agreements, the carrying value of future policy
benefits approximates its fair value. See Note 3 for fair
value information covering Global Preferreds investment
portfolio.

Cash and Cash Equivalents.Cash and cash equivalents include cash
on hand and on deposit purchased with an original maturity of
three months or less. Cash and cash equivalents also includes
cash in transit from the sale of securities at year-end.

Deferred Acquisition Costs.Costs of acquiring new business, which
vary with and are primarily related to the production of new
business, have been deferred to the extent that such costs are
deemed recoverable from future revenues. Such costs include
reinsurance expense allowances paid to ceding life companies,
and may include certain other underwriting costs, such as
actuarial, legal and accounting fees. Deferred acquisition costs
are amortized over the lives of the underlying policies with
regard to the terms of the reinsurance agreement.

On those policies reinsured under a renewable
term agreement, deferred acquisition costs are amortized in
proportion to the premium revenue related to the mortality risk
reinsured. Such premium revenue is estimated using the same
assumptions used for computing liabilities for future policy
benefits. Such assumptions include estimates of expected
investment yields, mortality, persistency and expenses
applicable at the time the policies are reinsured. Original
assumptions on renewable term business continue to be used in
subsequent accounting periods to determine changes in the
deferred acquisition costs unless a premium deficiency exists.
Under the renewable term agreements, the rate of amortization
depends on the approach utilized, static or dynamic. Under the
static approach, the amortization is in proportion to the ratio
of premiums collected during the then current period to total
anticipated premiums. Often the static approach is used in the
first policy year or until the business is sufficiently large to
warrant the complexity of the dynamic approach. Under the
dynamic approach, the amortization under the static approach is
adjusted to reflect actual persistency of the insurance in
force. Currently, Global Preferred uses the dynamic amortization
approach for all of the policies reinsured under its renewable
term agreements.

For policies reinsured under a coinsurance or
modified coinsurance agreement, deferred acquisition costs are
amortized in proportion to expected gross profits associated
with mortality margins, investment margins, surrender charges
and expense margins reinsured. Management periodically reviews
Global Preferreds assumptions concerning future experience
with regard to mortality, persistency, investment yields and
expenses in determining its estimates of future gross profits.
Upon adoption of any change in assumptions used with regard to
future experience, the amortization of Global Preferreds
deferred acquisition cost will be recalculated and will be
reflected during the then current accounting period.

Reinsurance Expense Allowances.Allowances generally represent a
percentage of each reinsurance premium that is paid or allowed
by Global Preferred to the ceding life company for each policy
reinsured in recognition of commissions and other expenses
associated with the reinsured policies. These other expenses
relate to costs associated with underwriting, marketing, policy
issue and maintenance. The reinsurance expense allowances
represent Global Preferreds share of acquisition and
maintenance expenses incurred by the ceding life company that
are attributable to the risks reinsured. Allowances are shown
net of amounts deferred as policy acquisition costs.

F-8



---



##### Table of Contents



Fixed Assets.Fixed
assets are stated at cost less accumulated depreciation.
Depreciation is calculated on the straight-line basis over the
estimated useful lives of the related assets, which range from
three to seven years.

Future Policy Benefits.Liabilities for future benefits on
life insurance policies are established in an amount believed to
be adequate to meet the estimated future obligations on policies
in force. Liabilities for future policy benefits under long-term
life insurance policies have been computed based on estimates of
investment yields, mortality and withdrawal rates expected at
the time the policies are reinsured, and other assumptions
including estimates for incurred but not reported claims. These
assumptions include a margin for adverse deviation and vary with
the characteristics of the plan of insurance, year of issue, age
of insured and other appropriate factors. The assumptions for
estimated investment yields are based upon various factors
including then current yields on Global Preferreds
investment portfolio and market rates for new investments.
Interest rates used in estimating future policy benefits ranged
from 5.5% to 7.0% at the time the policies in force were
reinsured. The mortality and withdrawal assumptions are based on
Global Preferreds experience, industry experience and
industry standards. Policy and contract reserves are included in
future policy benefits on the consolidated balance sheets.

Liabilities for future policy benefits under the
coinsurance and modified coinsurance agreements equal reinsured
policy account balances on the underlying life insurance
policies and annuity contracts. With regard to the separate
account benefits reinsured on a modified coinsurance basis,
Global Preferred records such liabilities as an offset to
related assets as its intentions and rights under the agreements
with the ceding life companies meet the appropriate conditions
governing rights of setoff. The nature of separate account
benefits under variable life insurance policies or variable
annuity contracts do not permit Global Preferred to reinsure
those benefits on a coinsurance basis. Global Preferred
reinsures the fixed account portion of annuity contracts and
life insurance policies only on a coinsurance basis and,
accordingly, the liabilities for that portion of the reinsurance
are recorded as future policy benefits.

Income Taxes.Global
Preferred uses the asset and liability method to record deferred
income taxes. Accordingly, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases,
using an effective federal tax rate of 34%. Statement of
Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxesspecifically excludes
recognition of the small life insurance company
deduction available under Section 806 of the Internal
Revenue Code for qualifying life insurance companies. This
special deduction can reduce the effective federal income tax
rate from 34% to less than 20% depending upon the amount of
taxable income. Consequently, the effective tax rate on Global
Preferreds earnings may ultimately prove to be less than
the deferred income tax liabilities and related expenses
determined under SFAS No. 109, at December 31, 2002.

Recognition of Revenues and Related
Expenses.Reinsurance premiums
received under the renewable term agreements are recognized as
revenue over the premium paying periods of the reinsured
policies. Benefits and expenses are associated with earned
premiums so that profits are recognized over the life of the
related contract. This association is accomplished through the
provision for future policy benefits and the amortization of
deferred acquisition costs. Other revenue consists of
non-recurring items other than reinsurance premiums or
investment earnings and is recognized upon completion of the
related earnings process.

Reinsured Policy Revenues.Reinsured policy revenues are
recognized as earned and represent the policy mortality and
expense charges, cost of insurance charges net of retrocession
reinsurance premiums, policy administration charges, asset-based
allowances and deferred sales charges that have been assessed
against the reinsured policy account balances under the
coinsurance and modified coinsurance agreements.

Earnings Per Share.Basic earnings per share is computed based on the
weighted-average number of common shares outstanding during the
period, in accordance with SFAS No. 128, Earnings Per
Share. Shares of convertible preferred stock issued in June
and July 2000 are included in the calculations of total
weighted-average common and common equivalent shares
outstanding. The dilution effect on earnings per

F-9



---



##### Table of Contents



share from the issuance of convertible preferred
stock is shown on the consolidated statements of income. The
preferred stock converted to common stock on January 1,
2002.


Common Stock.On
July 12, 2001, the board of directors declared a
three-for-two stock split in the form of a stock dividend,
consisting of 1.25 million shares, payable to stockholders of
record at the close of business on August 24, 2001. The
stock split was distributed on September 7, 2001.
Fractional shares were adjusted up to the next share using
shares of treasury stock. Ninety-five treasury shares were
issued for the fractional shares. Share and per-share amounts
have been retroactively adjusted to reflect the stock split on
the consolidated statements of income.

Stock Compensation
Plan.Global Preferred applies
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations,
in accounting for stock-based compensation plans. Global
Preferred has adopted the disclosure-only provisions of SFAS
No. 123, Accounting for Stock-Based Compensation.

Recent Accounting
Pronouncements.SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities,
as amended and interpreted, establishes accounting and
reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities on the balance sheet
and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative will be included in
either earnings or other comprehensive income depending on the
intended use of the derivative instrument. The provisions of
SFAS No. 133 do not have a material impact on Global
Preferreds financial statements.

In 2002, the Financial Accounting Standards Board
(FASB) issued SFAS No. 145, SFAS No. 146,
SFAS No. 147 and SFAS No. 148 dealing with
extinguishment of debt, exit and disposal activities,
acquisitions of financial institutions, and accounting for
stock-based compensation, respectively. The provisions of these
standards do not have a material impact on Global
Preferreds financial statements.

In November 2002, FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Othersand in January 2003, FASB issued
Interpretation No. 46, Consolidation of Variable
Interest Entities.The interpretations issued are not
expected to have a material impact on Global Preferreds
financial statements.

Reclassification.Global Preferred has reclassified the presentation of certain
2000 and 2001 information to conform to the 2002 presentation.

3.     Investments

Major categories of net investment income consist
of the following:

|                          |  |                          |         |      |  |      |         |   |  |   |         |  
|------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                          |  |                         
|                          |  | Years ended December 31,
|                          |  |                         
|                          |  | 2000                     |         | 2001 |  | 2002
|                          |  |                          |         |      |  |     
|Fixed maturity securities |  | $                        | 365,536 |      |  | $    | 718,583 |   |  | $ | 716,165 |  
|Cash and cash equivalents |  |                          | 230,200 |      |  |      | 147,447 |   |  |   | 93,655  |  
|                          |  |                          |         |      |  |      |         |   |  |   |         |  
|                          |  |                          | 595,736 |      |  |      | 866,030 |   |  |   | 809,820 |  
|Investment expenses       |  |                          | (68,123 | )    |  |      | (55,486 | ) |  |   | (67,599 | )
|                          |  |                          |         |      |  |      |         |   |  |   |         |  
|Net investment income     |  | $                        | 527,613 |      |  | $    | 810,544 |   |  | $ | 742,221 |  
|                          |  |                          |         |      |  |      |         |   |  |   |         |  

F-10



---



##### Table of Contents



The amortized cost, unrealized gains and losses,
and estimated fair values of fixed maturity securities at
December 31, 2001 and 2002 are as follows:

|                                               |       |           |           |            |  |            |         |            |  |   |       |       |  |   |           |            | 
|---------------------------------------------- | ----- | --------- | --------- | ---------- |  | ---------- | ------- | ---------- |  | - | ----- | ----- |  | - | --------- | ---------- | 
|                                               |       | Amortized |           | Unrealized |  | Unrealized |         |           
|                                               |       | cost      |           | gains      |  | losses     |         | Fair value
|                                               |       |           |           |            |  |            |         |           
|2001                                           |       |           |           |            |  |            |         |            |  |   |       |       |  |   |           |           
|Fixed maturity securities, available for sale: |       |           |           |            |  |            |         |            |  |   |       |       |  |   |           |           
|U.S. Government and government agencies        |       | $         | 209,704   |            |  | $          | 6,604   |            |  | $ |      |       |  | $ | 216,308   |           
|Corporate                                      |       |           | 7,158,877 |            |  |            | 279,551 |            |  |   | 3,930 |       |  |   | 7,434,498 |           
|Asset-backed securities                        |       |           | 1,611,012 |            |  |            | 50,444  |            |  |   |      |       |  |   | 1,661,456 |           
|Mortgage-backed securities                     |       |           | 2,861,156 |            |  |            | 41,194  |            |  |   | 333   |       |  |   | 2,902,017 |           
|                                               |       |           |           |            |  |            |         |            |  |   |       |       |  |   |           |           
|                                               | Total |           | $         | 11,840,749 |  |            | $       | 377,793    |  |   | $     | 4,263 |  |   | $         | 12,214,279 | 
|                                               |       |           |           |            |  |            |         |            |  |   |       |       |  |   |           |           
|2002                                           |       |           |           |            |  |            |         |            |  |   |       |       |  |   |           |           
|Fixed maturity securities, available for sale: |       |           |           |            |  |            |         |            |  |   |       |       |  |   |           |           
|Corporate                                      |       | $         | 1,191,270 |            |  | $          | 46,180  |            |  | $ |      |       |  | $ | 1,237,450 |           
|Asset-backed securities                        |       |           | 398,442   |            |  |            | 18,117  |            |  |   |      |       |  |   | 416,559   |           
|Mortgage-backed securities                     |       |           | 1,084,050 |            |  |            | 60,131  |            |  |   |      |       |  |   | 1,144,181 |           
|                                               |       |           |           |            |  |            |         |            |  |   |       |       |  |   |           |           
|                                               | Total |           | $         | 2,673,762  |  |            | $       | 124,428    |  |   | $     |      |  |   | $         | 2,798,190  | 
|                                               |       |           |           |            |  |            |         |            |  |   |       |       |  |   |           |           

There were no investments in any entity in excess
of 10% of stockholders equity at December 31, 2002.
Fixed maturity securities are valued based upon quoted market
prices.

At December 31, 2002, the contractual
maturities of investments in fixed maturity securities were as
follows:

|                                       |       |                |           |            |  |   |           |           | 
|-------------------------------------- | ----- | -------------- | --------- | ---------- |  | - | --------- | --------- | 
|                                       |       | Amortized cost |           | Fair value
|                                       |       |                |           |           
|Available for sale:                    |       |                |           |            |  |   |           |          
|Due in one year or less                |       | $              | 598,084   |            |  | $ | 611,784   |          
|Due after one year through five years  |       |                | 593,186   |            |  |   | 625,666   |          
|Due after five years through ten years |       |                |          |            |  |   |          |          
|Asset-backed securities                |       |                | 398,442   |            |  |   | 416,559   |          
|Mortgage-backed securities             |       |                | 1,084,050 |            |  |   | 1,144,181 |          
|                                       |       |                |           |            |  |   |           |          
|                                       | Total |                | $         | 2,673,762  |  |   | $         | 2,798,190 | 
|                                       |       |                |           |            |  |   |           |          

Expected maturities will differ from contractual
maturities because some issuers have the right to call or prepay
obligations with or without call or prepayment penalties.

Proceeds from sales of fixed maturity securities
available for sale for the years ended December 31, 2000,
2001 and 2002, were $194,856, $1,674,272 and $9,856,622,
respectively. Components of realized gains and losses are
summarized in the following table:

|                                              |                                  |      |       |       |  |      |        |        |  |   |         |         | 
|--------------------------------------------- | -------------------------------- | ---- | ----- | ----- |  | ---- | ------ | ------ |  | - | ------- | ------- | 
|                                              |                                  | 2000 |       | 2001  |  | 2002
|                                              |                                  |      |       |       |  |     
|Fixed maturity securities available for sale: |                                  |      |       |       |  |      |        |        |  |   |         |        
|Gross realized gains                          |                                  | $    | 2,606 |       |  | $    | 47,180 |        |  | $ | 450,724 |        
|Gross realized losses                         |                                  |      |      |       |  |      | (2,373 | )      |  |   | (22,901 | )      
|                                              |                                  |      |       |       |  |      |        |        |  |   |         |        
|                                              | Net realized gain on investments |      | $     | 2,606 |  |      | $      | 44,807 |  |   | $       | 427,823 | 
|                                              |                                  |      |       |       |  |      |        |        |  |   |         |        

Changes in net unrealized gains
(losses) were $158,953, $279,051 and ($249,100) for the
years ended December 31, 2000, 2001 and 2002, respectively.

F-11



---



##### Table of Contents





|   |                   
|-- | ------------------
|4. | Policy Liabilities

Changes in the liability for unpaid policy claims
are summarized as follows:

|                                                |                                        |                          |           |           |           |      |           |           |           |   |           |           |           | 
|----------------------------------------------- | -------------------------------------- | ------------------------ | --------- | --------- | --------- | ---- | --------- | --------- | --------- | - | --------- | --------- | --------- | 
|                                                |                                        |                         
|                                                |                                        | Years ended December 31,
|                                                |                                        |                         
|                                                |                                        | 2000                     |           | 2001      |           | 2002
|                                                |                                        |                          |           |           |           |     
|Unpaid life claims  January 1                  |                                        | $                        | 1,590,232 |           |           | $    | 2,119,151 |           |           | $ | 1,538,385 |          
|                                                |                                        |                          |           |           |           |      |           |           |           |   |           |          
|Add claims incurred during the year related to: |                                        |                          |           |           |           |      |           |           |           |   |           |          
|                                                | Current year                           |                          |           | 7,118,899 |           |      |           | 6,577,441 |           |   |           | 8,179,749 |          
|                                                | Prior years                            |                          |           | 290,248   |           |      |           | 32,000    |           |   |           | 249,149   |          
|                                                |                                        |                          |           |           |           |      |           |           |           |   |           |          
|                                                |                                        | Total incurred(1)        |           |           | 7,409,147 |      |           |           | 6,609,441 |   |           |           | 8,428,898 | 
|                                                |                                        |                          |           |           |           |      |           |           |           |   |           |          
|Less claims paid during the year:               |                                        |                          |           |           |           |      |           |           |           |   |           |          
|                                                | On claims incurred during current year |                          |           | 6,150,172 |           |      |           | 6,068,109 |           |   |           | 7,511,575 |          
|                                                | On claims incurred during prior years  |                          |           | 730,056   |           |      |           | 1,122,098 |           |   |           | 810,643   |          
|                                                |                                        |                          |           |           |           |      |           |           |           |   |           |          
|                                                |                                        | Total paid               |           |           | 6,880,228 |      |           |           | 7,190,207 |   |           |           | 8,322,218 | 
|                                                |                                        |                          |           |           |           |      |           |           |           |   |           |          
|Unpaid life claims  December 31                |                                        | $                        | 2,119,151 |           |           | $    | 1,538,385 |           |           | $ | 1,645,065 |          
|                                                |                                        |                          |           |           |           |      |           |           |           |   |           |          



---



|    |                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Total incurred plus the change in the experience
    refund for the year equals the amount shown on the consolidated
    statements of income on line titled Benefits, claims and
    settlement expenses. Change in the experience refund for
    the years ended December 31, 2000, 2001 and 2002, were
    $150,017, $317,049, and $0, respectively.

The amount of claims incurred during the year
related to the prior year are primarily the result of the number
of deaths that occur late in the prior year, usually December,
which are then reported early in the following year, usually
January. This represents the normal lag associated with when a
death occurs and when the company is notified of the death and
varies depending on the number of deaths occurring late in any
given year.



|   |            
|-- | -----------
|5. | Reinsurance

As of December 31, 2002, Global Preferred
has seven reinsurance contracts and one retrocession agreement.
All policies reinsured under the reinsurance agreements are
self-administered by the ceding life companies. The ceding life
companies provide Global Preferred with all information
necessary for processing the reinsurance, including claims.

In June 2001, Global Preferred and World
Financial Group entered into an amended directed reinsurance
agreement, whereby World Financial Group will, for a period
extending through June 8, 2008, use commercially reasonable
efforts to assist Global Preferred in attaining the opportunity
to reinsure all insurance products sold by its agents for
insurance companies with which World Financial Group has selling
agreements, other than Western Reserve Life Assurance Co. of
Ohio (Western Reserve) and Western Reserves
affiliates. Additionally, the agreement provides that World
Financial Group will use commercially reasonable efforts to
cooperate with Global Preferred in its negotiations to establish
reinsurance relationships with life insurance companies and
provide certain benefits to the companies that reinsure their
business through Global Preferred.

Also in June 2001, Global Preferred entered into
the First Right Agreement with Western Reserve that provides
Global Preferred Re a first right to reinsure certain new
products issued by Western Reserve or its U.S. affiliates that
are sold by agents associated with World Financial Group. These
rights automatically extend for one-year renewal periods unless
either party gives notice of termination 180 days prior to
the expiration of the applicable initial or renewal term. During
2002, these rights were extended in accordance with the terms of
the agreement.

F-12



---



##### Table of Contents



Pursuant to the First Right Agreement with
Western Reserve, Global Preferred has the contractual right to
prospectively increase the reinsurance quota share percentages,
up to a maximum ranging from 40% to 50%, on certain new variable
annuity policies issued through December 31, 2003 by
Western Reserve and sold by independent agents associated with
World Financial Group. Effective January 2002, Global Preferred
amended certain of its reinsurance agreements with Western
Reserve to increase its reinsurance quota share percentage on
variable annuity policies, which were issued from
January 1, 1999 through December 31, 2001, from 10% to
14%. The amendments also provided that Global Preferred reinsure
14% of certain new variable annuity policies issued from
January 1, 2002 through December 31, 2003.

Pursuant to its agreements with Western Reserve,
Global Preferred also had contractual rights to retrospectively
increase the reinsurance quota share percentages, up to a
maximum ranging from 40% to 50%, on Western Reserves
Freedom Wealth Creator and Freedom Premier variable annuity
policies, which were issued from January 1, 1999 through
December 31, 2002 and reinsured by Global Preferred.
Certain of Global Preferreds rights to increase its
reinsurance quota share percentages retrospectively, on policies
issued from January 1, 1999 through December 31, 2002,
were not exercised and expired on December 31, 2002.

Pursuant to its agreements with Western Reserve,
Global Preferred also has the contractual right to convert its
monthly renewable term reinsurance of the Financial Freedom
Builder variable universal life insurance policies and riders
issued by Western Reserve from January 1, 1999 through
March 31, 2003 to coinsurance and modified coinsurance.
Effective January 2002, Global Preferred amended certain of its
reinsurance agreements with Western Reserve to convert its
reinsurance of Financial Freedom Builder variable universal life
insurance policies, issued from April 1, 2001 through
December 31, 2001, from a monthly renewable term basis to a
coinsurance and modified coinsurance basis. The right to convert
the monthly renewable term reinsurance on the remaining policies
reinsured on a monthly renewable term basis to coinsurance and
modified coinsurance expires on March 31, 2003.

Effective January 2002, Global Preferred also
amended certain of its reinsurance agreements with Western
Reserve to begin reinsuring certain newly issued Freedom Elite
Builder variable universal life insurance policies issued from
July 1, 2001 through December 31, 2001 on a
coinsurance and modified coinsurance basis. Pursuant to its
agreements with Western Reserve, Global Preferred also has the
contractual right, through December 31, 2003, to commence
reinsurance of the Freedom Elite Builder variable universal life
insurance policies and riders issued by Western Reserve from
January 1, 2002 through December 31, 2002, and,
through March 31, 2004, to commence reinsurance of the
Freedom Elite Builder variable universal life insurance policies
and riders issued by Western Reserve from January 1, 2003
through March 31, 2004, on a coinsurance and modified
coinsurance basis.

Also pursuant to the First Right Agreement with
Western Reserve, Global Preferred has the right to reinsure up
to 20% of all new single life variable universal life products
introduced for sale through March 31, 2006 on a monthly
renewable term basis.

In order to exercise its contractual rights under
the Western Reserve agreements, (a) certain volumes of
direct written variable annuity premiums or variable universal
life premiums issued by Western Reserve or its U.S. affiliates
must be achieved in the previous calendar year and
(b) Global Preferred must demonstrate sufficient
capacity, which is defined as having unassigned invested
securities and anticipated cash flows in a sufficient amount to
meet expected reinsurance settlements for the ensuing two
calendar years with regard to the increased reinsurance. Global
Preferreds decisions to exercise its contractual rights
will be made from time to time during the term of the First
Right Agreement and such decisions will be based on a number of
relevant factors, including the attractiveness of the
reinsurance rates prescribed by the agreement, the volume of
business and Global Preferreds available capital capacity.

During the fourth quarter of 2002, American
Skandia Life Assurance Corporation withdrew further sales of the
Imperium variable annuity product, which resulted in a
discontinuation of reinsurance of new policies under Global
Preferreds current agreements with American Skandia.
Policies currently reinsured from American Skandia will continue
to remain in force in accordance with the terms of the
reinsurance agreements.

F-13



---



##### Table of Contents



The net effect of all reinsurance agreements on
premiums and policy revenues is as follows:

|                                 |  |                          |            |      |  |      |            |   |  |   |            |  
|-------------------------------- |  | ------------------------ | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                 |  |                         
|                                 |  | Years ended December 31,
|                                 |  |                         
|                                 |  | 2000                     |            | 2001 |  | 2002
|                                 |  |                          |            |      |  |     
|Reinsurance assumed              |  | $                        | 29,977,786 |      |  | $    | 30,993,041 |   |  | $ | 32,318,207 |  
|Reinsurance ceded                |  |                          | (465,195   | )    |  |      | (514,880   | ) |  |   | (473,677   | )
|                                 |  |                          |            |      |  |      |            |   |  |   |            |  
|Net premiums and policy revenues |  | $                        | 29,512,591 |      |  | $    | 30,478,161 |   |  | $ | 31,844,530 |  
|                                 |  |                          |            |      |  |      |            |   |  |   |            |  

The net effect of all reinsurance agreements on
benefits, claims and settlement expenses is as follows:

|                                             |  |                          |           |      |  |      |           |   |  |   |           | 
|-------------------------------------------- |  | ------------------------ | --------- | ---- |  | ---- | --------- | - |  | - | --------- | 
|                                             |  |                         
|                                             |  | Years ended December 31,
|                                             |  |                         
|                                             |  | 2000                     |           | 2001 |  | 2002
|                                             |  |                          |           |      |  |     
|Reinsurance assumed                          |  | $                        | 7,705,566 |      |  | $    | 6,299,510 |   |  | $ | 8,368,898 | 
|Reinsurance ceded                            |  |                          | (146,402  | )    |  |      | (7,118    | ) |  |   | 60,000    | 
|                                             |  |                          |           |      |  |      |           |   |  |   |           | 
|Net benefits, claims and settlement expenses |  | $                        | 7,559,164 |      |  | $    | 6,292,392 |   |  | $ | 8,428,898 | 
|                                             |  |                          |           |      |  |      |           |   |  |   |           | 

The impact of reinsurance on life insurance in
force is as follows (in millions):

|                        |  |        |   |         |  |       |       |     |  |   |     |  |  |   |       | 
|----------------------- |  | ------ | - | ------- |  | ----- | ----- | --- |  | - | --- |  |  | - | ----- | 
|Life insurance in force |  | Direct |   | Assumed |  | Ceded |       | Net
|                        |  |        |   |         |  |       |       |    
|December 31, 2000       |  |        |  |         |  | $     | 9,378 |     |  | $ | 169 |  |  | $ | 9,209 | 
|December 31, 2001       |  |        |  |         |  | $     | 9,082 |     |  | $ | 156 |  |  | $ | 8,926 | 
|December 31, 2002       |  |        |  |         |  | $     | 8,451 |     |  | $ | 155 |  |  | $ | 8,296 | 

6.     Deferred
Acquisition Costs

The amount of policy acquisition costs deferred
and amortized is as follows:

|                  |             |                          |            |            |   |      |            |            |   |   |            |            |  
|----------------- | ----------- | ------------------------ | ---------- | ---------- | - | ---- | ---------- | ---------- | - | - | ---------- | ---------- | -
|                  |             |                         
|                  |             | Years ended December 31,
|                  |             |                         
|                  |             | 2000                     |            | 2001       |   | 2002
|                  |             |                          |            |            |   |     
|Beginning of year |             | $                        | 39,750,100 |            |   | $    | 42,752,339 |            |   | $ | 42,800,269 |           
|                  | Capitalized |                          |            | 7,018,868  |   |      |            | 3,992,590  |   |   |            | 14,073,855 |  
|                  | Amortized   |                          |            | (4,016,629 | ) |      |            | (3,944,660 | ) |   |            | (7,023,815 | )
|                  |             |                          |            |            |   |      |            |            |   |   |            |           
|End of year       |             | $                        | 42,752,339 |            |   | $    | 42,800,269 |            |   | $ | 49,850,309 |           
|                  |             |                          |            |            |   |      |            |            |   |   |            |           

The amendment of certain reinsurance agreements
with Western Reserve effective January 1, 2002 resulted in
an increase in deferred acquisition costs capitalized of
$8,120,168 in 2002.

Retrocession premiums are offset against
reinsured policy revenues and premiums for the respective issue
years. Consequently, retrocession premiums, benefit claims and
allowances lose their identity in calculating estimated gross
profits as used in amortizing capitalized acquisition costs. As
such, there are no separate, reportable deferred acquisition
costs or associated amortization.

7.     Income
Tax

Under current Bermuda law, Global Preferred Re is
not required to pay any taxes in Bermuda on either income or
capital gains. Global Preferred Re has received an assurance
from the Minister of Finance in Bermuda under the Exempted
Undertaking Tax Protection Act 1966 of Bermuda that if any
legislation is enacted in Bermuda that would impose tax on
profits or income, or on any capital asset, gain or
appreciation, or any tax in the nature of estate duty or
inheritance tax, then the imposition of any such tax will not be
applicable to Global Preferred Re or to any of Global
Preferreds operations or shares, debentures or other
obligations until March 28, 2016.

Effective January 1, 1996, Global Preferred
Re made an irrevocable election to be treated as a domestic
insurance company for United States Federal income tax purposes
under section 953(d) of the

F-14



---



##### Table of Contents



Internal Revenue Code of 1986, as amended (the
Code). As a result of this domestic
election, Global Preferred Re is subject to U.S. taxation on its
worldwide income as if it were a U.S. corporation. Global
Preferred determines its income tax expense and liability in
accordance with SFAS No. 109, Accounting for Income
Taxes.


Total income taxes (benefit) for the years ended
December 31, 2000, 2001 and 2002 were allocated as follows:

|                     |                                                                |                          |   |           |  |      |   |           |  |  |   |         |  
|-------------------- | -------------------------------------------------------------- | ------------------------ | - | --------- |  | ---- | - | --------- |  |  | - | ------- | -
|                     |                                                                |                         
|                     |                                                                | Years ended December 31,
|                     |                                                                |                         
|                     |                                                                | 2000                     |   | 2001      |  | 2002
|                     |                                                                |                          |   |           |  |     
|Tax attributable to: |                                                                |                          |   |           |  |      |   |           |  |  |   |        
|                     | Income from continuing operations                              |                          | $ | 1,820,717 |  |      | $ | 2,391,568 |  |  | $ | 788,730 |  
|                     |                                                                |                          |   |           |  |      |   |           |  |  |   |        
|                     | Unrealized gains (losses) on securities available
    for sale |                          | $ | 54,044    |  |      | $ | 94,877    |  |  | $ | (84,694 | )
|                     |                                                                |                          |   |           |  |      |   |           |  |  |   |        

The federal income tax expense from continuing
operations for the years ended December 31, 2000, 2001, and
2002 is as follows:

|         |       |                          |           |           |  |      |           |           |  |   |         |         | 
|-------- | ----- | ------------------------ | --------- | --------- |  | ---- | --------- | --------- |  | - | ------- | ------- | 
|         |       |                         
|         |       | Years ended December 31,
|         |       |                         
|         |       | 2000                     |           | 2001      |  | 2002
|         |       |                          |           |           |  |     
|Current  |       | $                        | 516,075   |           |  | $    | 436,963   |           |  | $ | 17,081  |        
|Deferred |       |                          | 1,304,642 |           |  |      | 1,954,605 |           |  |   | 771,649 |        
|         |       |                          |           |           |  |      |           |           |  |   |         |        
|         | Total |                          | $         | 1,820,717 |  |      | $         | 2,391,568 |  |   | $       | 788,730 | 
|         |       |                          |           |           |  |      |           |           |  |   |         |        

The income tax expense from continuing operations
for the years ended December 31, 2000, 2001 and 2002
differed from the amounts computed by applying the U.S. federal
income tax rate of 34% to income before income taxes as a result
of the following:

|                                       |       |                          |           |           |  |      |           |           |  |   |         |         | 
|-------------------------------------- | ----- | ------------------------ | --------- | --------- |  | ---- | --------- | --------- |  | - | ------- | ------- | 
|                                       |       |                         
|                                       |       | Years ended December 31,
|                                       |       |                         
|                                       |       | 2000                     |           | 2001      |  | 2002
|                                       |       |                          |           |           |  |     
|Computed expected tax expense          |       | $                        | 2,364,222 |           |  | $    | 2,670,411 |           |  | $ | 784,178 |        
|Small life insurance company deduction |       |                          | (605,880  | )         |  |      | (269,976  | )         |  |   |        |        
|Other, net                             |       |                          | 62,375    |           |  |      | (8,867    | )         |  |   | 4,552   |        
|                                       |       |                          |           |           |  |      |           |           |  |   |         |        
|                                       | Total |                          | $         | 1,820,717 |  |      | $         | 2,391,568 |  |   | $       | 788,730 | 
|                                       |       |                          |           |           |  |      |           |           |  |   |         |        

During 2000 and 2001, Global Preferred was able
to benefit from the small life insurance company
deduction available under Section 806 of the Code at
rates less than 34%.

F-15



---



##### Table of Contents



Deferred income taxes reflect the net tax effects
of temporary differences between the carrying values of assets
and liabilities for financial reporting purposes and federal
income tax purposes. The net deferred tax liability at
December 31, 2001 and 2002 is composed of the following
amounts:

|                          |                                                  |                                |   |            |            |  |   |            |            | 
|------------------------- | ------------------------------------------------ | ------------------------------ | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                          |                                                  | 2001                           |   | 2002      
|                          |                                                  |                                |   |           
|Deferred tax assets:      |                                                  |                                |   |            |            |  |   |           
|                          | Alternative minimum tax credit                   |                                | $ | 8,597      |            |  | $ | 7,213      |           
|                          | Capital losses realized in excess of gains       |                                |   | 7,247      |            |  |   |           |           
|                          | Reserve differences                              |                                |   | 6,139,342  |            |  |   | 6,235,403  |           
|                          | Net operating loss carry-forward                 |                                |   | 1,030,018  |            |  |   | 2,867,333  |           
|                          | DAC tax capitalized                              |                                |   | 258,252    |            |  |   | 450,453    |           
|                          | Other                                            |                                |   | 29,216     |            |  |   | 33,795     |           
|                          |                                                  |                                |   |            |            |  |   |           
|                          |                                                  | Gross deferred tax assets      |   |            | 7,472,672  |  |   |            | 9,594,197  | 
|                          |                                                  |                                |   |            |            |  |   |           
|Deferred tax liabilities: |                                                  |                                |   |            |            |  |   |           
|                          | Policy benefit reserves                          |                                |   | 461,348    |            |  |   | 957,508    |           
|                          | Deferred acquisition costs                       |                                |   | 14,552,091 |            |  |   | 16,949,105 |           
|                          | Unrealized gain on securities available for sale |                                |   | 127,000    |            |  |   | 42,306     |           
|                          |                                                  |                                |   |            |            |  |   |           
|                          |                                                  | Gross deferred tax liabilities |   |            | 15,140,439 |  |   |            | 17,948,919 | 
|                          |                                                  |                                |   |            |            |  |   |           
|                          |                                                  | Net deferred tax liabilities   |   | $          | 7,667,767  |  |   | $          | 8,354,722  | 
|                          |                                                  |                                |   |            |            |  |   |           

There were no valuation allowances for deferred
tax assets as of December 31, 2001 and 2002 since it is
managements belief that it is more likely than not that
the deferred tax assets will be realized. This assessment is
made based on the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning
strategies. At December 31, 2002, Global Preferred has net
operating loss carry-forwards for income tax purposes of
$8.4 million, which begin to expire in 2018.

Global Preferred Re does not have a policyholder
surplus account. Therefore, Global Preferred Re is not subject
to the potential addition to federal income tax imposed by
Section 815 of the Code.

8.     Related Party
Transactions

Global Preferred issued a $5.0 million
convertible note, due July 29, 2004, to Money Services,
Inc., a subsidiary of AEGON USA, Inc. The note bears simple
interest at a rate of 7.5% per year and is currently convertible
into 312,750 shares of Global Preferred common stock. If
Money Services were to convert the note, it would own
approximately 7% of Global Preferreds outstanding common
stock as of December 31, 2002. World Financial Group and
Western Reserve are subsidiaries of AEGON USA, Inc. and
therefore are entities related to Money Services due to the
common ownership.

In June 2001, Global Preferred entered into an
agreement with World Financial Group, which requires that World
Financial Group will use its commercially reasonable efforts to
assist Global Preferred in attaining the opportunity to reinsure
all insurance products sold by its agents for insurance
companies with which World Financial Group has selling
agreements, other than Western Reserve and Western
Reserves affiliates.

Global Preferred has four separate reinsurance
agreements with Western Reserve that cover variable universal
life insurance and variable annuity policies issued by Western
Reserve on or after various dates after January 1, 1992
which were sold by the agents of World Financial Group and its
predecessor. Also in June 2001, Global Preferred entered into
the First Right Agreement with Western Reserve. The First Right
Agreement provides Global Preferred the right to reinsure
certain policies issued by Western Reserve or its U.S.
affiliates which agents associated with World Financial Group
sell.

Global Preferred occupied approximately
2,100 square feet of office space in Duluth, Georgia until
October 2002 when Global Preferred moved to its current
location. Western Reserve was the landlord on the space that
Global Preferred previously occupied. Global Preferreds
monthly rent was $3,482, plus its proportionate share of the
taxes.

F-16



---



##### Table of Contents



World Financial Group, and its predecessor,
provided corporate services to Global Preferred during 2000,
2001 and 2002. These services included computer network system
maintenance, facilities maintenance, security, mail services,
utilities, postage, telephone and copier service. Global
Preferred incurred $48,922, $46,498 and $108,158 of costs for
these services from World Financial Group, and its predecessor,
for the years ended December 31, 2000, 2001 and 2002,
respectively. The majority of the increase in these costs in
2002 reflected the set-up and maintenance of a stand-alone
computer network system for Global Preferred.

In 1995, Global Preferred Re entered into an
agreement with CFM Insurance Managers, Ltd. (CFM), a
member of the IAS Park Group of companies, which provides
professional insurance management services to international
companies operating in Bermuda. C. Simon Scupham, a
director of Global Preferred and of Global Preferred Re, is the
Chairman of CFM. Pursuant to this agreement, CFM acts as the
managing agent and the Principal Representative for Global
Preferred Re in Bermuda. This agreement is for an unlimited
duration, but may be terminated by either party upon three
months prior written notice or upon 30 days prior written
notice under specified circumstances. Global Preferred paid
$60,000 in fees during each of the years ended December 31,
2000, 2001 and 2002 pursuant to the agreement with CFM.

Prior to December 28, 2001, S. Hubert
Humphrey, Jr. served as a director, Chairman of the Board
and Chief Executive Officer of Global Preferred and of Global
Preferred Re. Effective December 28, 2001,
Mr. Humphrey retired from all of the positions he held with
Global Preferred and with Global Preferred Re. As of
December 31, 2002, Mr. Humphrey was the beneficial
owner of 20.5% of Global Preferreds outstanding common
stock. Global Preferred agreed to grant to Mr. Humphrey,
upon successful completion of a firm commitment, underwritten
registered public offering before December 31, 2003,
options to purchase 100,000 shares of Global Preferred
common stock. The options are exercisable for a period of five
years from the date of grant, at an exercise price equal to the
initial offering price of shares sold in the underwritten
offering. Compensation expense, if any, will be recognized at
the time the contingency is resolved.

Global Preferreds executive officers,
Edward F. McKernan, Bradley E. Barks, Caryl P. Shepherd and
Thomas J. Bobowski, are employed pursuant to written employment
agreements. Mr. McKernans employment agreement is for the
period from January 1, 2002 through December 31, 2004
and is automatically renewable for additional one-year periods
unless either party provides written notice of termination at
least 60 days prior to the expiration of the current term. Mr.
Barks and Mr. Bobowski have employment agreements for the period
from March 4, 2002 through February 28, 2003, which
are renewable by agreement of the parties for additional
one-year periods. Ms. Shepherds employment agreement is
for the period from February 1, 2002 through
January 31, 2003 and is renewable by agreement of the
parties for additional one-year periods. All of the executive
officers are eligible for an annual bonus in an amount to be
determined by the board of directors. Each of the executive
officers employment agreements includes post-employment
restrictive covenants not to solicit Global Preferreds
customers or recruit Global Preferreds employees.

9.     Statutory
Restrictions

Global Preferred Re is a Bermuda company
registered as a long-term insurer under the Bermuda Insurance
Act 1978 (the Insurance Act) and as such is subject
to the restrictions of the Insurance Act. The Insurance Act
requires that Global Preferred Re maintain a solvency margin,
defined as the excess of statutory assets over statutory
liabilities, of at least $250,000. Statutory assets and
liabilities refer to those assets and liabilities recorded on
the statutory balance sheet required by the Insurance Act.

Global Preferred relies, and will continue to
rely, primarily on funds retained at the holding company level,
dividends and other permitted payments, such as debt service
payments, from Global Preferred Re to meet ongoing cash
requirements. The payment of dividends by Global Preferred Re to
Global Preferred is subject to Bermuda law and regulations.
Under the Insurance Act, Global Preferred Re must maintain
long-term assets with a value of at least $250,000 more than its
long-term liabilities and is prohibited from

F-17



---



##### Table of Contents



declaring or paying dividends that would result
in noncompliance if, among other things, it has reasonable
grounds for believing that after making such a payment, it would
not be able to pay its liabilities as they become due. During
2002, Global Preferred Re paid no dividends to Global Preferred.


10.     Commitments
and Contingent Liabilities

From time to time Global Preferred may be subject
to litigation and arbitration in the normal course of business.
Management does not believe that Global Preferred is a party to
any such pending litigation or arbitration that would have a
material adverse effect on its financial position or future
operations.

Global Preferred has obtained letters of credit
in favor of unaffiliated insurance companies with whom Global
Preferred has reinsurance agreements. The posting of a letter of
credit allows the ceding life company to take statutory reserve
credit for reinsurance ceded, which would otherwise not be
available as Global Preferred Re is not a licensed reinsurer by
the ceding life companys state of domicile. At
December 31, 2002, the outstanding letters of credit
totaled $8.85 million. The letters of credit were issued by
Global Preferreds custodian and secured by Global
Preferreds investments held by the custodian.

In October 2002, Global Preferred entered into a
lease agreement with Metropolitan Life Insurance Company for
office space in Duluth, Georgia. The initial lease term is
twelve months, with the option to extend the term to fifty-one
months, expiring in January 2008. If Global Preferred exercises
the right to extend the lease, the first three months of the
extended term will be abated. Payments under this lease are
$118,619 annually through October 2003. The lease payments are
subject to an annual increase of approximately 3%. Total lease
expense for the office space for the year ended
December 31, 2002 was $27,205.

The following is a schedule of future minimum
lease payments as of December 31, 2002:

|                         |  |                |         | 
|------------------------ |  | -------------- | ------- | 
|Year ending December 31, |  | Lease Payments
|                         |  |               
|2003                     |  | $              | 126,503 | 
|2004                     |  |                | 126,503 | 
|2005                     |  |                | 126,503 | 
|2006                     |  |                | 126,503 | 
|2007                     |  |                | 126,503 | 
|Thereafter               |  |                | 4,420   | 

The monthly lease payments will be expensed on a
straight-line basis for the life of the lease in accordance with
SFAS No. 13, Accounting for Leases.

In October 2002, Global Preferred entered into an
operating lease with ePlus, Inc. The lease consists of three
schedules for the lease of office furniture, copier and computer
equipment, and telecommunication equipment. The term of each
schedule began either December 31, 2002 or January 31,
2003 and expires 36 months thereafter on either
December 31, 2005 or January 31, 2006. Payments under
this lease are $36,987 annually through the end of the lease.

The following is a schedule of future minimum
lease payments as of December 31, 2002:

|                         |  |                |        | 
|------------------------ |  | -------------- | ------ | 
|Year ending December 31, |  | Lease Payments
|                         |  |               
|2003                     |  | $              | 35,720 | 
|2004                     |  |                | 36,987 | 
|2005                     |  |                | 36,987 | 
|2006                     |  |                | 1,268  | 

Total lease expense for the operating lease for
year ended December 31, 2002 was $6,805. This expense was
not included in the lease schedules as it was incurred prior to
the commencement of the lease term in 2002. This lease expense
was prorated from October 2002 through December 2002 depending
upon the acceptance date of each item to be included in the
lease.

F-18



---



##### Table of Contents



11.     Long-Term
Debt

At December 31, 2001 and 2002, amounts
payable for long-term debt were as follows, in summary:

|                                                                                       |  |      |           |      |  |   |           | 
|-------------------------------------------------------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                                                                                       |  | 2001 |           | 2002
|                                                                                       |  |      |           |     
|Convertible Term Note  7.5% interest,
    principal and interest due at July 29, 2004 |  | $    | 5,000,000 |      |  | $ | 5,000,000 | 
|                                                                                       |  |      |           |      |  |   |           | 

In July 1999, Global Preferred issued a
$5 million, five-year convertible term note to Money
Services, Inc. due on July 29, 2004. Money Services is a
subsidiary of AEGON USA, Inc. Proceeds of this note were used to
reduce a portion of the outstanding principal balance on a line
of credit with Money Services from $10 million to
$5 million. Interest is payable at 7.5% per annum (except
in the event of redemption), on the 29th of each succeeding
January and July through and including July 29, 2004. Money
Services has the right to convert the outstanding principal
balance of this note into shares of Global Preferreds
common stock at any time. Upon conversion, Money Services will
receive 6.255 shares of common stock for each $100 of the
outstanding principal amount of the note, which reflects the
three-for-two stock split in 2001. Global Preferred has the
option to redeem the note, in whole or in part, between
July 29, 2002, and July 29, 2004. To redeem the note
before maturity, Global Preferred must pay all principal, plus
interest accrued from the date of the note through the
redemption date at a higher effective interest rate of 9% per
annum. As of December 31, 2002, Global Preferred had an
outstanding principal balance on the note of $5 million and
accrued interest of $158,219.

12.     Comprehensive
Income

The following table sets forth the amounts of
other comprehensive income (loss) along with the related
tax effects allocated to other comprehensive income
(loss) for the years ended December 31, 2000, 2001 and
2002:

|                                                                       |      |            |          |           |  |            |          |   |  |   |          |   | 
|---------------------------------------------------------------------- | ---- | ---------- | -------- | --------- |  | ---------- | -------- | - |  | - | -------- | - | 
|                                                                       |      |            |          | Tax       |  |           
|                                                                       |      | Before-Tax |          | (Expense) |  | Net-of-Tax
|                                                                       |      | Amount     |          | Benefit   |  | Amount    
|                                                                       |      |            |          |           |  |           
|2000                                                                   |      |            |          |           |  |            |          |   |  |   |          |  
|Net unrealized holding gains arising during period                     |      | $          | 161,559  |           |  | $          | (54,930  | ) |  | $ | 106,629  |  
|Less: reclassification adjustment for gains
    realized in net income |      |            | 2,606    |           |  |            | (886     | ) |  |   | 1,720    |  
|                                                                       |      |            |          |           |  |            |          |   |  |   |          |  
|Other comprehensive income                                             |      | $          | 158,953  |           |  | $          | (54,044  | ) |  | $ | 104,909  |  
|                                                                       |      |            |          |           |  |            |          |   |  |   |          |  
|                                                                       | 2001 |            |          |           |  |            |          |   |  |   |          |   | 
|Net unrealized holding gains arising during period                     |      | $          | 323,858  |           |  | $          | (110,111 | ) |  | $ | 213,747  |  
|Less: reclassification adjustment for gains
    realized in net income |      |            | 44,807   |           |  |            | (15,234  | ) |  |   | 29,573   |  
|                                                                       |      |            |          |           |  |            |          |   |  |   |          |  
|Other comprehensive income                                             |      | $          | 279,051  |           |  | $          | (94,877  | ) |  | $ | 184,174  |  
|                                                                       |      |            |          |           |  |            |          |   |  |   |          |  
|                                                                       | 2002 |            |          |           |  |            |          |   |  |   |          |   | 
|Net unrealized holding losses arising during
    period                |      | $          | (676,923 | )         |  | $          | 230,153  |   |  | $ | (446,770 | )
|Less: reclassification adjustment for gains
    realized in net income |      |            | 427,823  |           |  |            | (145,459 | ) |  |   | 282,364  |  
|                                                                       |      |            |          |           |  |            |          |   |  |   |          |  
|Other comprehensive loss                                               |      | $          | (249,100 | )         |  | $          | 84,694   |   |  | $ | (164,406 | )
|                                                                       |      |            |          |           |  |            |          |   |  |   |          |  

13.     Segment
Reporting

Global Preferred defines reportable segments
based on the nature of its reinsurance agreements and the
accounting treatment used for the various reinsurance
agreements. Based on this definition, two reportable segments
have been identified: non-universal life-type agreements and
universal life-type

F-19



---



##### Table of Contents



agreements (as each is referenced in SFAS
No. 97, Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized
Gains and Losses from the Sale of Investments,
paragraphs 44 and 45). Global Preferred reinsures certain
variable universal life insurance policies on a renewable term
basis, which are reported below as Non-Universal Life-Type
Agreements and, as such, these revenues are classified as
premium revenue. Renewable term reinsurance involves the
reinsurance of mortality risk whereby premiums are not directly
related to the premium rates on the original plan of insurance.
Global Preferreds renewable term agreements are accounted
for under SFAS No. 60 accounting principles. Global
Preferred reinsures variable annuity contracts and certain other
variable universal life insurance policies on a coinsurance and
modified coinsurance basis, which are reported below as
Universal Life-Type Agreements and, as such, these revenues are
classified as reinsured policy revenues. Coinsurance involves
the reinsurance of mortality and investment risks on the same
basis as that of the underlying policies. The ceding life
companies and Global Preferred share in these risks on a pro
rata basis. Global Preferreds existing coinsurance and
modified coinsurance agreements are accounted for under SFAS
No. 97 accounting principles.


Items not directly related to the business
segments and unallocated corporate items (i.e., other income,
interest expense on corporate debt and unallocated operating
expenses) are shown separately, consistent with Global
Preferreds internal measurement process. Segment assets
reported include those assets directly attributable to the
reinsurance agreements such as reinsurance balances receivable,
deferred acquisition costs, policy loans, prepaid expenses,
invested assets and cash. Cash and invested assets are allocated
to the agreements based upon statutory reserves, the letters of
credit posted in support of the statutory reserves held, and
allocated surplus, which is consistent with Global
Preferreds internal measurement process.

|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|-------------------------------------------------------------- |  | --------- | ------ | --------- |  | ----- | ------ | ----- |  | - | ------ | - |  | - | ------ | 
|Segment Reporting                                              |  |          
|Year Ended December 31                                         |  | 2000     
|                                                               |  |          
|                                                               |  | Non-      |        |          
|                                                               |  | Universal |        | Universal |  |      
|                                                               |  | Life-Type |        | Life-Type |  | Other |        | Total
|(Dollars in thousands)                                         |  |           |        |           |  |       |        |      
|                                                               |  |           |        |           |  |       |        |      
|Premiums                                                       |  | $         | 16,619 |           |  | $     |       |       |  | $ |       |   |  | $ | 16,619 | 
|Reinsured policy revenues                                      |  |           |       |           |  |       | 12,894 |       |  |   |       |   |  |   | 12,894 | 
|Benefits, claims and settlement expenses*                      |  |           | 8,658  |           |  |       | 954    |       |  |   |       |   |  |   | 9,612  | 
|Reinsurance expense allowances, net                            |  |           | 5,711  |           |  |       | 1,829  |       |  |   |       |   |  |   | 7,540  | 
|Amortization of deferred acquisition costs                     |  |           | 116    |           |  |       | 3,901  |       |  |   |       |   |  |   | 4,017  | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|Underwriting profit                                            |  |           | 2,134  |           |  |       | 6,210  |       |  |   |       |   |  |   | 8,344  | 
|Net investment income                                          |  |           | 213    |           |  |       | 171    |       |  |   | 144    |   |  |   | 528    | 
|Net realized gain on investments                               |  |           |       |           |  |       |       |       |  |   | 3      |   |  |   | 3      | 
|Other expenses                                                 |  |           | 150    |           |  |       | 184    |       |  |   | 1,588  |   |  |   | 1,922  | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|Segment operating income (loss) before income tax              |  |           | 2,197  |           |  |       | 6,197  |       |  |   | (1,441 | ) |  |   | 6,953  | 
|Income tax expense (benefit)                                   |  |           | 589    |           |  |       | 1,659  |       |  |   | (428   | ) |  |   | 1,820  | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|Segment net income (loss)                                      |  | $         | 1,608  |           |  | $     | 4,538  |       |  | $ | (1,013 | ) |  | $ | 5,133  | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|Preferred dividends                                            |  |           |       |           |  |       |       |       |  |   | 155    |   |  |   | 155    | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|Segment net income (loss) available to
    common stockholders |  | $         | 1,608  |           |  | $     | 4,538  |       |  | $ | (1,168 | ) |  | $ | 4,978  | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|Segment assets                                                 |  | $         | 9,279  |           |  | $     | 44,688 |       |  | $ | 2,650  |   |  | $ | 56,617 | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 



---



|  |                                                                                       
|- | --------------------------------------------------------------------------------------
|* | Benefits, claims and settlement expenses include
    change in future policy benefits.

F-20



---



##### Table of Contents



|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|-------------------------------------------------------------- |  | --------- | ------ | --------- |  | ----- | ------ | ----- |  | - | ------ | - |  | - | ------ | 
|Segment Reporting                                              |  |          
|Year Ended December 31                                         |  | 2001     
|                                                               |  |          
|                                                               |  | Non-      |        |          
|                                                               |  | Universal |        | Universal |  |      
|                                                               |  | Life-Type |        | Life-Type |  | Other |        | Total
|(Dollars in thousands)                                         |  |           |        |           |  |       |        |      
|                                                               |  |           |        |           |  |       |        |      
|Premiums                                                       |  | $         | 19,240 |           |  | $     |       |       |  | $ |       |   |  | $ | 19,240 | 
|Reinsured policy revenues                                      |  |           |       |           |  |       | 11,238 |       |  |   |       |   |  |   | 11,238 | 
|Benefits, claims and settlement expenses*                      |  |           | 7,833  |           |  |       | 871    |       |  |   |       |   |  |   | 8,704  | 
|Reinsurance expense allowances, net                            |  |           | 6,859  |           |  |       | 1,642  |       |  |   |       |   |  |   | 8,501  | 
|Amortization of deferred acquisition costs                     |  |           | 197    |           |  |       | 3,748  |       |  |   |       |   |  |   | 3,945  | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|Underwriting profit                                            |  |           | 4,351  |           |  |       | 4,977  |       |  |   |       |   |  |   | 9,328  | 
|Net investment income                                          |  |           | 215    |           |  |       | 230    |       |  |   | 366    |   |  |   | 811    | 
|Net realized gain on investments                               |  |           |       |           |  |       |       |       |  |   | 45     |   |  |   | 45     | 
|Other expenses                                                 |  |           | 123    |           |  |       | 216    |       |  |   | 1,991  |   |  |   | 2,330  | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|Segment operating income (loss) before income tax              |  |           | 4,443  |           |  |       | 4,991  |       |  |   | (1,580 | ) |  |   | 7,854  | 
|Income tax expense (benefit)                                   |  |           | 1,353  |           |  |       | 1,520  |       |  |   | (481   | ) |  |   | 2,392  | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|Segment net income (loss)                                      |  | $         | 3,090  |           |  | $     | 3,471  |       |  | $ | (1,099 | ) |  | $ | 5,462  | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|Preferred dividends                                            |  |           |       |           |  |       |       |       |  |   | 267    |   |  |   | 267    | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|Segment net income (loss) available to common
    stockholders |  | $         | 3,090  |           |  | $     | 3,471  |       |  | $ | (1,366 | ) |  | $ | 5,195  | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|Segment assets                                                 |  | $         | 8,615  |           |  | $     | 46,748 |       |  | $ | 12,490 |   |  | $ | 67,853 | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 



---



|  |                                                                                       
|- | --------------------------------------------------------------------------------------
|* | Benefits, claims and settlement expenses include
    change in future policy benefits.

|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|-------------------------------------------------------------- |  | --------- | ------ | --------- |  | ----- | ------ | ----- |  | - | ------ | - |  | - | ------ | 
|                                                               |  |           |        |           |  |      
|Segment Reporting                                              |  |          
|Year Ended December 31                                         |  | 2002     
|                                                               |  |          
|                                                               |  |          
|                                                               |  | Non-      |        |          
|                                                               |  | Universal |        | Universal |  |      
|                                                               |  | Life-Type |        | Life-Type |  | Other |        | Total
|(Dollars in thousands)                                         |  |           |        |           |  |       |        |      
|Premiums                                                       |  | $         | 17,985 |           |  | $     |       |       |  | $ |       |   |  | $ | 17,985 | 
|Reinsured policy revenues                                      |  |           |       |           |  |       | 13,860 |       |  |   |       |   |  |   | 13,860 | 
|Benefits, claims and settlement expenses*                      |  |           | 7,866  |           |  |       | 2,089  |       |  |   |       |   |  |   | 9,955  | 
|Reinsurance expense allowances, net                            |  |           | 6,319  |           |  |       | 2,199  |       |  |   |       |   |  |   | 8,518  | 
|Amortization of deferred acquisition costs                     |  |           | 232    |           |  |       | 6,792  |       |  |   |       |   |  |   | 7,024  | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|Underwriting profit                                            |  |           | 3,568  |           |  |       | 2,780  |       |  |   |       |   |  |   | 6,348  | 
|Net investment income                                          |  |           | 124    |           |  |       | 276    |       |  |   | 342    |   |  |   | 742    | 
|Net realized gain on investments                               |  |           |       |           |  |       |       |       |  |   | 428    |   |  |   | 428    | 
|Other expenses                                                 |  |           | 142    |           |  |       | 280    |       |  |   | 4,790  |   |  |   | 5,212  | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|Segment operating income (loss) before income tax              |  |           | 3,550  |           |  |       | 2,776  |       |  |   | (4,020 | ) |  |   | 2,306  | 
|Income tax expense (benefit)                                   |  |           | 1,213  |           |  |       | 949    |       |  |   | (1,374 | ) |  |   | 788    | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|Segment net income (loss)                                      |  | $         | 2,337  |           |  | $     | 1,827  |       |  | $ | (2,646 | ) |  | $ | 1,518  | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|Preferred dividends                                            |  |           |       |           |  |       |       |       |  |   |       |   |  |   |       | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|Segment net income (loss) available to
    common stockholders |  | $         | 2,337  |           |  | $     | 1,827  |       |  | $ | (2,646 | ) |  | $ | 1,518  | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 
|Segment assets                                                 |  | $         | 6,021  |           |  | $     | 52,248 |       |  | $ | 16,005 |   |  | $ | 74,274 | 
|                                                               |  |           |        |           |  |       |        |       |  |   |        |   |  |   |        | 



---



|  |                                                                                       
|- | --------------------------------------------------------------------------------------
|* | Benefits, claims and settlement expenses include
    change in future policy benefits.

During 2000, 2001 and 2002, the percentages of
total premiums and reinsured policy revenues that relate to
Western Reserve were 88%, 89% and 91%, respectively. The
percentages of the total underwriting profit that relates to
Western Reserve for 2000, 2001 and 2002 were 83%, 86% and 96%,
respectively.

Global Preferred estimates that approximately 44%
of variable universal life premiums and 28% of variable annuity
premiums, written through Western Reserve and sold by agents
associated with World Financial Group, originated in California.

F-21



---



##### Table of Contents



14.     Capital
Infusion

In August 2000, Global Preferred closed its
offering of Series A Preferred Stock, which resulted in
approximately $4 million of gross proceeds to Global
Preferred. Global Preferred issued 266,047 shares of
Series A Preferred Stock in this offering. The net proceeds
were loaned to Global Preferred Re, which were applied toward
repayment of the line of credit with Money Services. The terms
of the Series A Preferred Stock provided for automatic
conversion into common stock upon the earlier of (i) the
closing of any Qualifying Sale of shares of common stock or
(ii) January 1, 2002. A Qualifying Sale was defined as
net proceeds to Global Preferred of at least $10 million
from the sale of its shares of common stock. On January 1,
2002, 266,047 shares of Series A Preferred Stock issued
were automatically converted into 399,074 shares of common
stock. The conversion reflected the 3-for-2 stock split
effective in September 2001.

In October 2002, Global Preferred withdrew the
registration statement for its proposed initial public offering
of 9.5 million shares of common stock due to unfavorable
market conditions. During the quarter ended September 30,
2002, Global Preferred expensed $1.7 million of deferred
offering costs that were to be offset against the proceeds of
the offering. The deferred offering costs paid in prior periods
were previously reported as an asset under prepaid
expenses on the consolidated balance sheet and the
expensing of those costs is currently shown as costs of
withdrawn offering on the consolidated income statement.

15.     Stock
Options

Stock Incentive
Plan.Global Preferreds Stock
Incentive Plan became effective on January 9, 2002. The
aggregate number of shares of common stock reserved for issuance
under the Stock Incentive Plan is 1.5 million shares.
Awards granted under the Stock Incentive Plan may be stock
appreciation rights, restricted stock, options intended to
qualify as incentive stock options or nonqualified
stock options. No shares of common stock have been issued upon
exercise of options granted under the Stock Incentive Plan. The
Compensation Committee of the board of directors approved the
grant of options to purchase an aggregate of 215,000 shares of
common stock to certain employees to be granted upon completion
of an initial public offering, at an exercise price equal to the
initial public offering price. No options have been granted
under the Stock Incentive Plan due to the withdrawal of the
registration statement in October 2002 for the proposed public
offering.

Directors Stock Option
Plan.Global Preferreds
Directors Stock Option Plan became effective January 9,
2002. The aggregate number of shares of common stock reserved
for issuance under the Directors Stock Option Plan is 280,000
shares. Under the terms of the Directors Stock Option Plan, upon
completion of a firm commitment, underwritten registered public
offering of common stock by December 31, 2003, options to
purchase 105,000 shares of the common stock will be granted to
Global Preferreds non-employee directors at an exercise
price equal to the initial public offering price pursuant to the
Directors Stock Option Plan. No options have been granted under
the Directors Stock Option Plan due to the withdrawal of the
registration statement in October 2002 for the proposed public
offering.

Other Options.In
connection with S. Hubert Humphrey, Jr.s retirement in
December 2001, Global Preferred agreed to grant to
Mr. Humphrey options to purchase 100,000 shares of common
stock upon successful completion of a firm commitment,
underwritten registered public offering of common stock by
December 31, 2003. The options are exercisable for a period of
five years from the date of grant, at an exercise price equal to
the initial offering price of shares sold in the underwritten
offering. No options have been granted to Mr. Humphrey due
to the withdrawal of the registration statement in October 2002
for the proposed public offering.

16.     Subsequent
Events

On February 3, 2003, the FASB revised its
tentative guidance on SFAS No. 133 Issue No. B36,
Bifurcation of Embedded Credit Derivatives, to include
modified coinsurance arrangements involving fixed

F-22



---



##### Table of Contents



account products. Global Preferred does not have
any modified coinsurance reinsurance treaties involving fixed
account products and therefore this issue does not effect Global
Preferreds financial statements.


On February 25, 2003, Global Preferred
formed two wholly owned subsidiaries: Global Preferred
Solutions, Inc. and Global Preferred Resources, Inc. Global
Preferred Solutions will provide actuarial and management
advisory services to marketing organizations and life insurers.
Global Preferred Resources will offer its management support
structure to marketing organizations, banks, broker/dealers and
insurance companies who are considering the formation of, or
have formed, a producer-owned reinsurance enterprise.

F-23



---



##### Table of Contents



17.     Parent
Company Financial Information

Balance Sheets

(Parent Company)


December 31, 2001 and 2002


|                                                                                                                                  |                                                                                                                                                                                                               |                            |            |            |            |   |            |            |            | 
|--------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                                                                                                  |                                                                                                                                                                                                               | 2001                       |            | 2002      
|                                                                                                                                  |                                                                                                                                                                                                               |                            |            |           
|Assets                                                                                                                            |                                                                                                                                                                                                               |                            |            |            |            |   |            |           
|Investment in common stock of subsidiary(1)                                                                                       |                                                                                                                                                                                                               | $                          | 35,708,600 |            |            | $ | 36,859,470 |           
|Fixed maturity securities  available
    for sale (amortized cost of $2,241,534 and $12,523 for 2001 and
    2002, respectively) |                                                                                                                                                                                                               |                            | 2,296,563  |            |            |   | 12,927     |           
|Cash and cash equivalents                                                                                                         |                                                                                                                                                                                                               |                            | 1,374,016  |            |            |   | 2,475,098  |           
|Investment income due and accrued                                                                                                 |                                                                                                                                                                                                               |                            | 42,192     |            |            |   | 1,319      |           
|Investment income due and accrued 
    intercompany(1)                                                                           |                                                                                                                                                                                                               |                            | 201,219    |            |            |   | 189,344    |           
|Accounts receivable                                                                                                               |                                                                                                                                                                                                               |                            |           |            |            |   | 215,500    |           
|Intercompany receivables(1)                                                                                                       |                                                                                                                                                                                                               |                            | 155,118    |            |            |   | 2,152,529  |           
|Note receivable  intercompany(1)                                                                                                 |                                                                                                                                                                                                               |                            | 6,087,550  |            |            |   | 5,000,000  |           
|Prepaid expenses                                                                                                                  |                                                                                                                                                                                                               |                            | 654,699    |            |            |   | 872,648    |           
|Current income tax recoverable                                                                                                    |                                                                                                                                                                                                               |                            | 1,875      |            |            |   |           |           
|Fixed assets (net of accumulated depreciation of
    $147,750 and $240,439 for 2001 and 2002, respectively)                       |                                                                                                                                                                                                               |                            | 88,114     |            |            |   | 215,095    |           
|Deferred tax benefit                                                                                                              |                                                                                                                                                                                                               |                            | 1,047,737  |            |            |   | 940,433    |           
|                                                                                                                                  |                                                                                                                                                                                                               |                            |            |            |            |   |            |           
|                                                                                                                                  |                                                                                                                                                                                                               | Total assets               |            | $          | 47,657,683 |   |            | $          | 48,934,363 | 
|                                                                                                                                  |                                                                                                                                                                                                               |                            |            |            |            |   |            |           
|Liabilities and Stockholders Equity                                                                                              |                                                                                                                                                                                                               |                            |            |            |            |   |            |           
|Liabilities:                                                                                                                      |                                                                                                                                                                                                               |                            |            |            |            |   |            |           
|                                                                                                                                  | Accrued expenses and accounts payable                                                                                                                                                                         |                            | $          | 530,880    |            |   | $          | 454,289    |           
|                                                                                                                                  | Accrued interest payable                                                                                                                                                                                      |                            |            | 158,219    |            |   |            | 158,219    |           
|                                                                                                                                  | Long term debt                                                                                                                                                                                                |                            |            | 5,000,000  |            |   |            | 5,000,000  |           
|                                                                                                                                  |                                                                                                                                                                                                               |                            |            |            |            |   |            |           
|                                                                                                                                  |                                                                                                                                                                                                               | Total liabilities          |            |            | 5,689,099  |   |            |            | 5,612,508  | 
|                                                                                                                                  |                                                                                                                                                                                                               |                            |            |            |            |   |            |           
|Stockholders equity:                                                                                                             |                                                                                                                                                                                                               |                            |            |            |            |   |            |           
|                                                                                                                                  | Preferred stock, par value $2.00, 10,000,000
    shares authorized; Series A Preferred Stock, 1,000,000
    shares authorized; 266,047 shares issued for 2001 and no shares
    issued for 2002, respectively |                            |            | 532,094    |            |   |            |           |           
|                                                                                                                                  | Common stock, par value $.001, 50,000,000 shares
    authorized; 3,750,000 shares and 4,149,074 shares issued for
    2001 and 2002, respectively                                                             |                            |            | 3,750      |            |   |            | 4,149      |           
|                                                                                                                                  | Additional paid-in capital                                                                                                                                                                                    |                            |            | 22,794,331 |            |   |            | 23,326,026 |           
|                                                                                                                                  | Accumulated other comprehensive income                                                                                                                                                                        |                            |            | 246,531    |            |   |            | 82,125     |           
|                                                                                                                                  | Retained earnings                                                                                                                                                                                             |                            |            | 18,441,145 |            |   |            | 19,958,822 |           
|                                                                                                                                  | Treasury stock, at cost (7,390 shares for 2001
    and 2002, respectively)                                                                                                                                    |                            |            | (49,267    | )          |   |            | (49,267    | )         
|                                                                                                                                  |                                                                                                                                                                                                               |                            |            |            |            |   |            |           
|                                                                                                                                  |                                                                                                                                                                                                               | Total stockholders equity |            |            | 41,968,584 |   |            |            | 43,321,855 | 
|                                                                                                                                  |                                                                                                                                                                                                               |                            |            |            |            |   |            |           
|Total liabilities and stockholders equity                                                                                        |                                                                                                                                                                                                               | $                          | 47,657,683 |            |            | $ | 48,934,363 |           
|                                                                                                                                  |                                                                                                                                                                                                               |                            |            |            |            |   |            |           



---



|    |                            
|--- | ---------------------------
|(1) | Eliminated on consolidation

F-24



---



##### Table of Contents



Statements of Income

(Parent Company Only)


Years ended December 31, 2000, 2001 and
2002


|                       |                                             |                                                                                     |               |           |         |         |   |           |           |         |   |           |         |         | 
|---------------------- | ------------------------------------------- | ----------------------------------------------------------------------------------- | ------------- | --------- | ------- | ------- | - | --------- | --------- | ------- | - | --------- | ------- | ------- | 
|                       |                                             | 2000                                                                                |               | 2001      |         | 2002   
|                       |                                             |                                                                                     |               |           |         |        
|Revenues:              |                                             |                                                                                     |               |           |         |         |   |           |           |         |   |          
|                       | Net investment income                       |                                                                                     | $             | 85,053    |         |         | $ | 133,575   |           |         | $ | 100,339   |        
|                       | Net realized gain (loss) on investments     |                                                                                     |               |          |         |         |   | 4,904     |           |         |   | 56,088    |        
|                       | Intercompany interest income(1)             |                                                                                     |               | 613,298   |         |         |   | 674,298   |           |         |   | 473,822   |        
|                       |                                             |                                                                                     |               |           |         |         |   |           |           |         |   |          
|                       |                                             |                                                                                     | Total revenue |           |         | 698,351 |   |           |           | 812,777 |   |           |         | 630,249 | 
|                       |                                             |                                                                                     |               |           |         |         |   |           |           |         |   |          
|Benefits and expenses: |                                             |                                                                                     |               |           |         |         |   |           |           |         |   |          
|                       | Operating expenses                          |                                                                                     |               | 99,752    |         |         |   | 1,259,273 |           |         |   | (548,568  | )      
|                       | Costs of withdrawn offering                 |                                                                                     |               |          |         |         |   |          |           |         |   | 439,487   |        
|                       | Interest expense                            |                                                                                     |               | 375,000   |         |         |   | 375,000   |           |         |   | 375,000   |        
|                       |                                             |                                                                                     |               |           |         |         |   |           |           |         |   |          
|                       |                                             | Total benefits and expenses                                                         |               |           | 474,752 |         |   |           | 1,634,273 |         |   |           | 265,919 |        
|                       |                                             |                                                                                     |               |           |         |         |   |           |           |         |   |          
|                       |                                             | Income before income tax and equity in
    undistributed net income of subsidiaries |               |           | 223,599 |         |   |           | (821,496  | )       |   |           | 364,330 |        
|                       | Income tax benefit (expense)                |                                                                                     |               | (120,224  | )       |         |   | 274,269   |           |         |   | (125,877  | )      
|                       |                                             |                                                                                     |               |           |         |         |   |           |           |         |   |          
|                       |                                             | Income before equity in undistributed net income
    of subsidiaries                |               |           | 103,375 |         |   |           | (547,227  | )       |   |           | 238,453 |        
|                       | Equity in earnings of subsidiaries          |                                                                                     |               | 5,029,501 |         |         |   | 6,009,808 |           |         |   | 1,279,224 |        
|                       |                                             |                                                                                     |               |           |         |         |   |           |           |         |   |          
|                       | Net income                                  |                                                                                     | $             | 5,132,876 |         |         | $ | 5,462,581 |           |         | $ | 1,517,677 |        
|                       | Preferred dividends                         |                                                                                     |               | 155,198   |         |         |   | 267,104   |           |         |   |          |        
|                       |                                             |                                                                                     |               |           |         |         |   |           |           |         |   |          
|                       | Net income available to common stockholders |                                                                                     | $             | 4,977,678 |         |         | $ | 5,195,477 |           |         | $ | 1,517,677 |        
|                       |                                             |                                                                                     |               |           |         |         |   |           |           |         |   |          



---



|    |                            
|--- | ---------------------------
|(1) | Eliminated on consolidation

F-25



---



##### Table of Contents



Statements of Cash Flows

(Parent Company Only)


Years ended December 31, 2000, 2001 and
2002


|                                                 |                                                                                                     |                                                         |                                                         |            |            |             |           |            |           |            |           |            |            |            |  
|------------------------------------------------ | --------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------------------------- | ---------- | ---------- | ----------- | --------- | ---------- | --------- | ---------- | --------- | ---------- | ---------- | ---------- | -
|                                                 |                                                                                                     | 2000                                                    |                                                         | 2001       |            | 2002       
|                                                 |                                                                                                     |                                                         |                                                         |            |            |            
|Cash flows from operating activities:            |                                                                                                     |                                                         |                                                         |            |            |             |           |            |           |            |           |           
|                                                 | Net income                                                                                          |                                                         | $                                                       | 5,132,876  |            |             | $         | 5,462,581  |           |            | $         | 1,517,677  |           
|                                                 | Less equity in earnings of subsidiaries                                                             |                                                         |                                                         | (5,029,501 | )          |             |           | (6,009,808 | )         |            |           | (1,279,224 | )         
|                                                 |                                                                                                     |                                                         |                                                         |            |            |             |           |            |           |            |           |           
|                                                 | Income before equity in undistributed net income
    of subsidiaries                                |                                                         | $                                                       | 103,375    |            |             | $         | (547,227   | )         |            | $         | 238,453    |           
|                                                 | Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:     |                                                         |                                                         |            |            |             |           |            |           |            |           |            |           
|                                                 |                                                                                                     | Amortization and depreciation                           |                                                         |            | 47,975     |             |           |            | 44,758    |            |           |            | 48,922     |           
|                                                 |                                                                                                     | Costs of withdrawn offering                             |                                                         |            |           |             |           |            |          |            |           |            | 439,487    |           
|                                                 |                                                                                                     | Deferred tax expense (benefit)                          |                                                         |            | 112,918    |             |           |            | (274,176  | )          |           |            | 125,877    |           
|                                                 |                                                                                                     | Net realized (gain) loss on investments                 |                                                         |            |           |             |           |            | (4,905    | )          |           |            | (56,088    | )         
|                                                 | Change in:                                                                                          |                                                         |                                                         |            |            |             |           |            |           |            |           |            |           
|                                                 |                                                                                                     | Investment income due and accrued                       |                                                         |            | (2,876     | )           |           |            | (39,316   | )          |           |            | 40,873     |           
|                                                 |                                                                                                     | Investment income due and accrued 
    intercompany(1) |                                                         |            | (305,330   | )           |           |            | 104,111   |            |           |            | 11,875     |           
|                                                 |                                                                                                     | Accounts receivable                                     |                                                         |            |           |             |           |            |          |            |           |            | (215,500   | )         
|                                                 |                                                                                                     | Intercompany receivables(1)                             |                                                         |            | (2,563,711 | )           |           |            | 2,418,689 |            |           |            | (1,997,411 | )         
|                                                 |                                                                                                     | Prepaid expenses                                        |                                                         |            | 317,297    |             |           |            | (49,115   | )          |           |            | (751,036   | )         
|                                                 |                                                                                                     | Current income tax recoverable                          |                                                         |            |           |             |           |            | (1,875    | )          |           |            | 1,875      |           
|                                                 |                                                                                                     | Accrued expenses and accounts payable                   |                                                         |            | (22,574    | )           |           |            | 451,778   |            |           |            | (76,591    | )         
|                                                 |                                                                                                     | Accrued interest payable                                |                                                         |            | (507,570   | )           |           |            |          |            |           |            |           |           
|                                                 |                                                                                                     | Current income tax payable                              |                                                         |            | 7,306      |             |           |            | (7,306    | )          |           |            |           |           
|                                                 |                                                                                                     |                                                         |                                                         |            |            |             |           |            |           |            |           |           
|                                                 |                                                                                                     |                                                         | Net cash provided by (used in) operating
    activities |            |            | (2,813,190  | )         |            |           | 2,095,416  |           |            |            | (2,189,264 | )
|                                                 |                                                                                                     |                                                         |                                                         |            |            |             |           |            |           |            |           |           
|Cash flows from investing activities:            |                                                                                                     |                                                         |                                                         |            |            |             |           |            |           |            |           |           
|                                                 | Dividend received from subsidiary(1)                                                                |                                                         |                                                         | 3,400,000  |            |             |           |           |           |            |           |           |           
|                                                 | Return of capital from subsidiary(1)                                                                |                                                         |                                                         | 10,000,000 |            |             |           |           |           |            |           |           |           
|                                                 | Investment in subsidiary(1)                                                                         |                                                         |                                                         |           |            |             |           |           |           |            |           |           |           
|                                                 | Proceeds from sale of available-for-sale
    securities                                             |                                                         |                                                         |           |            |             |           | 411,138    |           |            |           | 2,174,208  |           
|                                                 | Proceeds from principal payments on
    mortgage-backed securities of available-for-sale securities |                                                         |                                                         |           |            |             |           | 28,817     |           |            |           | 110,891    |           
|                                                 | Purchase of available-for-sale securities                                                           |                                                         |                                                         |           |            |             |           | (2,676,584 | )         |            |           |           |           
|                                                 | Purchase of fixed assets                                                                            |                                                         |                                                         | (8,449     | )          |             |           | (84,066    | )         |            |           | (219,928   | )         
|                                                 |                                                                                                     |                                                         |                                                         |            |            |             |           |            |           |            |           |           
|                                                 |                                                                                                     |                                                         | Net cash provided by (used in) investing
    activities |            |            | 13,391,551  |           |            |           | (2,320,695 | )         |            |            | 2,065,171  |  
|                                                 |                                                                                                     |                                                         |                                                         |            |            |             |           |            |           |            |           |           
|Cash flows from financing activities:            |                                                                                                     |                                                         |                                                         |            |            |             |           |            |           |            |           |           
|                                                 | Issuance of preferred stock                                                                         |                                                         |                                                         | 3,098,702  |            |             |           |           |           |            |           |           |           
|                                                 | Preferred dividends                                                                                 |                                                         |                                                         | (142,953   | )          |             |           | (279,349   | )         |            |           |           |           
|                                                 | Proceeds repayment of long term debt                                                                |                                                         |                                                         | (5,303,562 | )          |             |           |           |           |            |           |           |           
|                                                 | Issuance (repayment) of notes
    receivable  intercompany(1)                                      |                                                         |                                                         | (8,100,029 | )          |             |           | 2,012,479  |           |            |           | 1,087,550  |           
|                                                 | Prepaid expenses  costs of withdrawn
    offering                                                  |                                                         |                                                         |           |            |             |           | (577,112   | )         |            |           | 577,112    |           
|                                                 | Costs of withdrawn offering                                                                         |                                                         |                                                         |           |            |             |           |           |           |            |           | (439,487   | )         
|                                                 |                                                                                                     |                                                         |                                                         |            |            |             |           |            |           |            |           |           
|                                                 |                                                                                                     |                                                         | Net cash provided by (used in) financing
    activities |            |            | (10,447,842 | )         |            |           | 1,156,018  |           |            |            | 1,225,175  |  
|                                                 |                                                                                                     |                                                         |                                                         |            |            |             |           |            |           |            |           |           
|                                                 |                                                                                                     |                                                         | Net increase in cash and cash equivalents               |            |            | 130,519     |           |            |           | 930,739    |           |            |            | 1,101,082  |  
|Cash and cash equivalents at beginning of period |                                                                                                     |                                                         | 312,758                                                 |            |            |             | 443,277   |            |           |            | 1,374,016 |           
|                                                 |                                                                                                     |                                                         |                                                         |            |            |             |           |            |           |            |           |           
|Cash and cash equivalents at end of period       |                                                                                                     | $                                                       | 443,277                                                 |            |            | $           | 1,374,016 |            |           | $          | 2,475,098 |           
|                                                 |                                                                                                     |                                                         |                                                         |            |            |             |           |            |           |            |           |           



---



|    |                            
|--- | ---------------------------
|(1) | Eliminated on consolidation

F-26