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United States


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K



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|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|x          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|           |  | For the fiscal year ended September 30,
    2002                                                
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

For the transition period
fromto

Commission file number 1-31576

WESTERN UNITED HOLDING COMPANY

(Exact name of registrant as specified in its
charter)


|                                                                               |  |                                                        
|------------------------------------------------------------------------------ |  | -------------------------------------------------------
|Washington
    (State of incorporation)                                        |  | 73-1642091
    (I.R.S. Employer
    Identification No.)
|601 West First Avenue Spokane, WA
    (Address of Principal executive offices) |  | 99201-5015
    (Zip Code)                              

Registrants telephone number, including
area code: (509) 838-2500

Securities Registered Pursuant to
Section 12(b) of the Act:

|                                                       |  |                                          
|------------------------------------------------------ |  | -----------------------------------------
|Title of Each Class                                    |  | Name of each exchange on which registered
|                                                       |  |                                          
|Variable Rate Cumulative Preferred Stock,
    Series A |  | American Stock Exchange, LLC             

Securities Registered Pursuant to
Section 12(g) of the Act:

None.

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

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

Neither the voting nor non-voting common stock of
the registrant is traded on any exchange; therefore there is no
established market value. All of the common stock is held by an
affiliate of the registrant.

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

The number of shares outstanding of the
Registrants common stock, as of December 15, 2002,
was 100.

Documents incorporated by reference:
None



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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 The Registrants Common Equity And Related Stockholder Matters            
|                                                                                      | Item 6. Selected Financial Data                                                              
|SELECTED CONSOLIDATED FINANCIAL DATA                                                 
|                                                                                      | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|LOANS ON REAL ESTATE SEPTEMBER 30, 2002                                              
|                                                                                      | 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                                                                             
|Committees of the Board                                                              
|                                                                                      | Item 11. Executive Compensation                                                              
|Compensation of Directors                                                            
|Option Grants                                                                        
|                                                                                      | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                                                      | Item 13. Certain Relationships and Related Transactions                                      
|                                                                                      | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.                    
|SIGNATURES                                                                           
|EX-12.1 Statement Regarding Computation of Ratios                                    
|EX-16.1 Letter Re:Change in Certifying Accountant                                    
|EX-21.1 Subsidiaries of the Registrant                                               



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PART I






Item 1. Business


ORGANIZATIONAL CHARTS

(as of September 30, 2002)


The chart below lists Western United Holding
Companys (Western Holding) principal operating
subsidiary, parent company and affiliates and their ownership.
Western Holding, together with its single subsidiary, Western
United Life Insurance (Western Life), is referred to
in this report as the Consolidated Group.

(ORG. CHART)

Metropolitan Mortgage & Securities
Co., Inc.(Metropolitan):
Metropolitan is the parent organization of Western Holding.
Metropolitan invests in Receivables and other investments,
including real estate development, which are principally funded
by proceeds from Receivable investments, other investments and
securities offerings.

Western United Holding Company(Western Holding): A
holding company, with its primary business activity currently
being a shareholder of Western Life.

Western United Life Assurance Company(Western Life): Western
Life is the only operating subsidiary of Western Holding.
Western Life is engaged primarily in the sale of annuity
contracts and investing in Receivables. Western Life is licensed
to sell insurance in 16 states, but its sales are primarily
concentrated in the western half of the United States.

Consumers Group Holding Co.,
Inc.: A holding company and an
affiliate of the Consolidated Group due to the common control by
Metropolitan, with its sole business activity currently being
that of a shareholder of Consumers Insurance Company.

Consumers Insurance
Company: An inactive property and
casualty insurer and an affiliate of the Consolidated Group due
to the common control by Metropolitan.

Metwest Mortgage Services,
Inc.: Metwest, an affiliate of the
Consolidated Group due to the common control by Metropolitan,
primarily performs collection and servicing functions for the
Consolidated Group and its other affiliates. It is a Federal
Housing Administration and U.S. Department of Housing and Urban
Development licensed servicer and lender and is licensed as a
Federal National Mortgage Association (Fannie Mae)
seller/ servicer.

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The chart below lists Summit Securities,
Inc.s (Summit) principal operating
subsidiaries and their ownership. Summit Securities, Inc., is
one of the Consolidated Groups affiliates.

(ORGANIZATIONAL CHART)

National Summit
Corp.: Parent company, inactive except
as owner of Summit. C. Paul Sandifur, Jr., President
of Metropolitan, is the controlling shareholder of National
Summit Corp.

Summit Securities,
Inc.: Invests in Receivables (as
defined herein) principally funded by proceeds from Receivable
investments, other investments and securities offerings.

Metropolitan Investment Securities, Inc.(MIS): Broker/ dealer in
the business of marketing securities offered by Summit,
Metropolitan and Western Holding, mutual funds, and general
securities.

Summit Property Development,
Inc.: Provides real estate development
services to others, principally to Metropolitan and its
subsidiaries.

Summit Group Holding
Company: Inactive except as owner of
Old Standard Life Insurance Company.

Old Standard Life Insurance Company(Old Standard): Invests in
Receivables and other investments principally funded by proceeds
from Receivable investments and from annuity sales. Old Standard
is licensed to sell insurance products in eight states, but its
sales are primarily concentrated in the states of Idaho and
Oregon.

Old West Annuity & Life Insurance Company(Old West): Invests in
Receivables and other investments principally funded by proceeds
from Receivable investments and from annuity sales. Old West is
licensed to sell insurance products in seven states, but its
sales are primarily concentrated in the states of Arizona,
California, Idaho, Utah and Texas.

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BUSINESS OVERVIEW

General

Western Holding is a holding company with only
one wholly owned operating subsidiary, Western Life. Western
Holding is a wholly owned subsidiary of Metropolitan.
Substantially all of the Consolidated Groups operations
are conducted through Western Life. Western Life was established
in 1963. Western Holding was formed on May 3, 2002.

Western Life is an insurance company that sells
annuity and life insurance products. It is domiciled in the
state of Washington and sells these products through over 1,700
independent sales representatives in 16 states, primarily in the
western half of the United States. Western Life currently has an
insurance license application pending in the state of New
Mexico. Western Life also intends to expand its operations in
other states as opportunities arise.

Western Life has been assigned an A.M. Best
rating of B- (Fair), which is the 8th highest rating.
A.M. Best publishes both a financial strength rating and a
financial performance rating on almost 6,000 life, health,
property and casualty insurance companies. A.M. Bests
financial strength ratings range from A++ (Superior) to F (In
Liquidation) and include 15 separate ratings (not including the
S rating for Suspended). A.M. Best bases
its ratings on a number of complex financial ratios, the length
of time a company has been in business, the nature and quality
of investments in its portfolio, depth and experience of
management and various other factors. A.M. Bests
ratings are supplied primarily for the benefit of the
policyholders and insurance agents.

A.M. Best defines both the ratings of B and
B- as fair. B (Fair) and B- (Fair) ratings
are assigned to companies that have, on balance, fair balance
sheet strength, operating performance and market profile when
compared to the standards established by the A.M. Best
Company. In A.M. Bests opinion, these companies have
an ability to meet their current obligations to policyholders,
but their financial strength is vulnerable to adverse changes in
underwriting and economic conditions.

On November 14, 2002, A.M. Best
informed Western Life of its decision to assign a 2002 rating of
B- (Fair) with a stable outlook, revised from the 2001 rating of
B (Fair). The 2001 rating of B (Fair) had been revised from the
2000 rating of B+ (Very Good). According to A.M. Best, the
ratings action reflected Western Lifes significant
investment in mortgages, mortgage backed bonds and real estate
relative to capital and surplus and the associated potential
adverse impact on liquidity. A.M. Best also considered the
increased debt levels and operating performance of its parent
organization. Partially offsetting these items were Western
Lifes historic profitability, increase in statutory
capital, positive premium growth pattern and the ability to
retain its core individual annuity line of business, which has
adequate surrender charge protection.

The Consolidated Group anticipates that the
changes in ratings may result in a slight increase in its cost
of funds in addition to a slight increase in surrender rates as
current policies enter their surrender periods. Before the 2001
change in rating, the Consolidated Group changed the focus of
its investment strategy away from acquiring residential real
estate loans for securitization purposes, as it does not intend
to participate in any real estate backed securitizations in the
near future. The Consolidated Group refocused its investment
activity on acquiring and holding both residential and
commercial real estate loans. The change in focus has resulted
in higher yields on the Consolidated Groups investments.
Therefore, the Consolidated Group expects the slight increase in
its cost of funds will be offset by the higher yields expected
to be obtained through its new investment strategy.

To support this change in investment strategy and
in response to the rating changes, Metropolitan increased its
capital contributions to Western Life during the fiscal year
ended September 30, 2002 through a $27.6 million
purchase of common and preferred stock. Additionally, to further
increase the capital of Western Life, Western Holding has
registered for sale up to $50.0 million of its
Series A preferred stock at September 30, 2002.
However, Western Holding must sell at least 400,000 shares of
the preferred stock to at least 800 qualifying investors before
the offering can be completed. Western Life is also focusing on
issuing liabilities with greater surrender charge protection.
Western Life does not anticipate any further change to its
A.M. Best rating in the coming year.

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Proceeds from the sales of annuity and life
products by the Consolidated Group are invested (1) in cash
flowing assets, consisting of obligations collateralized by real
estate, structured settlements, annuities, lottery prizes and
other investments (Receivables) and (2) in
securities, which consist primarily of U.S. Treasury and
government agency obligations and investment grade bonds
(Securities Investments).

The following depicts the distribution of the
Consolidated Groups assets as a percentage of total assets
at September 30,2002:

Assets as a Percentage of Total
Assets

(PIE CHART)

[PIE CHART]

|                                                                                                  |  |  |                                                        | 
|------------------------------------------------------------------------------------------------- |  |  | ------------------------------------------------------ | 
|                                                                                                  |  |  | Distribution of Assets as a Percentage of Total Assets | 
|Receivables Collateralized by Real Estate                                                         |  |  | 37.00                                                  | 
|Securities Investments                                                                            |  |  | 32.00                                                  | 
|Reinsurance Receivable                                                                            |  |  | 9.00                                                   | 
|Other Receivables(Structured Settlements,
    Lotteriesand Annuities and Direct Financing Leases) |  |  | 7.00                                                   | 
|Other                                                                                             |  |  | 7.00                                                   | 
|Deferred Costs                                                                                    |  |  | 5.00                                                   | 
|Real Estate Held for Sale and Development                                                         |  |  | 3.00                                                   | 



The real estate Receivables primarily consist of
commercial and residential loans collateralized by first
position liens on real estate. The Consolidated Group
predominantly invests in Receivables where the borrower or the
collateral does not qualify for conventional financing or the
seller or the buyer chooses to use non-conventional financing.
This market is commonly referred to as the non-conventional
market. Obligors on the Consolidated Groups real estate
Receivables include A-, B and C credit quality obligors. The
evaluation, underwriting and closing operations for the
residential and other non-commercial real estate Receivables are
performed by Metropolitan at Metropolitans headquarters in
Spokane, Washington, in accordance with management and
acquisition service agreements the Consolidated Group has with
Metropolitan.

The Consolidated Group expanded the origination
of commercial real estate loans (Commercial Loans)
during the fiscal years ended September 30, 2002 and 2001,
such that approximately 58% of the face value of the real estate
backed Receivables as of September 30, 2002 is of this type
compared to 30% at September 30, 2001. These loans are
evaluated, underwritten and closed by an affiliate, Old
Standard, in accordance with the Consolidated Groups
predefined criteria.

The Consolidated Group is wholly owned by
Metropolitan, and is, therefore, affiliated with Metropolitan
and its other subsidiaries. The Consolidated Group is also
affiliated with Summit and its subsidiaries through the common
control by C. Paul Sandifur, Jr., the controlling shareholder of
Metropolitan. The Consolidated group receives services from both
the Metropolitan and Summit groups of companies, and engages in
business transactions with those companies. As a result of these
relationships, conflicts of interests may arise between the
Consolidated Group and its affiliates, including conflicts
relating to the allocation of investments and other business
opportunities among the affiliated companies. When allocating
investment opportunities among the Consolidated Group and its
affiliates, Metropolitan considers several factors including
each companys availability of cash, regulatory constraints
related to the particular investment, the size of the investment
relative to each companys asset size and other
diversification and asset/liability management issues. Although
Metropolitan attempts to maximize the profitability of each
company, the actual allocation of investments

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may at times be subject to Metropolitans
discretion and the actual allocation may not prove to be in the
best interests of the Consolidated Group.


In addition to Receivable investments, the
Consolidated Group invests funds in securities that
predominantly consist of corporate bonds, U.S. Treasury and
Government agency obligations, mortgage- and asset-backed
securities and other securities. These investments also include
some subordinate certificates created out of Receivable
securitization transactions that were entered into in
conjunction with Metropolitan and other affiliates.

From time to time, the Consolidated Group may
acquire development properties through a purchase from
Metropolitan or other third parties. The Consolidated Group
develops or improves properties for the purpose of enhancing
values to increase marketability and to maximize profit
potential.

The principal offices of the Consolidated Group
are located at 601 West 1st Avenue,
Spokane, Washington 99201, and its telephone number is
(509) 227-7500.

Factors Affecting Future Operating
Results

The Private Securities Litigation Reform Act of
1995 (the Act) provides a safe harbor
for companies which make forward-looking statements providing
prospective information. The safe harbor under the
Act relates to protection for companies with respect to
litigation filed on the basis of such forward-looking statements.

Western Holding wishes to take advantage of the
safe harbor provisions of the Act and is therefore
including this section in its Annual Report on Form 10-K. The
statements contained in this Annual Report, if not historical,
are forward-looking statements and involve risks and
uncertainties which are described below and elsewhere herein
that could cause actual results to differ materially from the
results, financial or otherwise, or other expectations described
in such forward-looking statements. These statements are
identified with the words such as may,
will, expect, intend,
anticipate, believe,
continue, seeks, plans,
variations of those terms or the negative of those terms, or
words of similar meaning. Therefore, forward-looking statements
should not be relied upon as a prediction of actual future
results or occurrences.

Western Holdings future results may be
affected by certain risks and uncertainties including, but not
limited to, the following:

If
insurance subsidiary earnings are unavailable for dividends and
fees, Western Holding could be adversely affected.

At September 30, 2002, all of the
Consolidated Groups assets were held by its insurance
subsidiary, Western Life. Western Holding primarily depends on
its subsidiary to make cash payments to Western Holding to meet
Western Holdings payment obligations. Regulations in the
State of Washington define the way in which an insurance
company, such as Western Life, can transfer assets and the
amount of money that can be paid out in dividends by the
insurance company. These regulations restrict the payment of
cash dividends to the insurance companys portion of
available surplus funds derived from any realized net profits as
computed in accordance with statutory accounting principles.
Furthermore, the payment of extraordinary dividends, as
statutorily defined, is subject to prior notice to, and review
and approval by, the Washington State Insurance Commissioner.
The amount of surplus funds available for dividends at
September 30, 2002 was approximately $5.6 million.
Restrictions on Western Lifes ability to declare dividends
and transfer of assets could have an adverse effect on Western
Holdings financial performance and ability to meet its
debt obligations and preferred stock dividend payments when due.

Insufficient
Risk-Based Capital of Western Life may adversely affect the
Consolidated Groups business.

Washington States Risk-Based Capital Model
law requires an insurance company to maintain specified amounts
of capital and surplus based on complex calculations of risk
factors that encompass the invested assets and business
activities of the insurance company. If our insurance company
subsidiary, Western Life, is

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unable to maintain adequate capital, it may be
prevented from making further investments in higher
risk-adjusted assets such as Commercial Loans, real estate and
equity investments. Compliance with the Risk-Based Capital Model
Law requirements is tested annually at calendar year-end. At the
last annual review at its statutory reporting period ended
December 31, 2001, Western Lifes capital and surplus
levels exceeded the calculated specified requirements. Recently,
Western Life has maintained adequate levels of capital through
the sale of common stock and preferred stock to Metropolitan. To
the extent that Metropolitan does not maintain adequate levels
of liquidity permitting it to make additional capital
investments in Western Life, or to the extent that Western
Holding cannot complete its Series A preferred stock
offering, Western Lifes ability to maintain specified
amounts of capital could be adversely affected.


The
current focus of the Consolidated Groups resources being
allocated to originating Commercial Loans could lead to
losses.

The Consolidated Group focuses its loan
originations on Commercial Loans. Commercial Loans accounted for
approximately $270.6 million, or 83%, and
$125.8 million, or 87%, of the real estate Receivables
purchased or originated by the Consolidated Group in the fiscal
year ended September 30, 2002 and 2001, respectively. The
Consolidated Group expects the percentage of its Receivables
that are Commercial Loans to increase in the near future, but
cannot predict whether it will have the ability or the desire to
originate Commercial Loans in the future, whether such loans
will achieve desirable yields or whether it will be able to
accurately predict Commercial Loan default rates. This potential
decrease in the diversification of the Consolidated Groups
Receivables could lead to losses if the Consolidated
Groups Commercial Loan business is not profitable.

If
existing underwriting standards insufficiently evaluate the risk
of losses on Receivables, it could lead to losses.

Many of the Receivables purchased by the
Consolidated Group were originated by sellers and other
non-institutional lenders. Therefore, the underwriting standards
used to originate these loans may have been less strict than the
standards typically used by conventional institutional lenders.
Metropolitan uses a variety of procedures to evaluate
Receivables depending on the type of investment. While
Metropolitan tries to minimize the risk of default and the risk
of losses if there is a default, Metropolitans
underwriting procedures may not effective. If the underwriting
standards incorrectly assess the risk of an investment, actual
losses could be higher than anticipated.

Real
estate used as collateral on Receivables may be inadequate to
recover all amounts owed in the event of default, which could
lead to losses for the Consolidated Group.

Most of the Receivables purchased by the
Consolidated Group are collateralized by real estate to provide
security if a borrower defaults on the borrowers mortgage.
Several factors influence whether the value of the real estate
will be sufficient to cover the value of the Receivables,
including changes in economic conditions, property condition,
property values, zoning, land use, environmental laws and other
legal restrictions, including changes in and restrictions on the
timing and methods of foreclosure. If the market value of the
real estate used as collateral is insufficient to cover any
deficiency owed on a Receivable, the Consolidated Groups
business could be harmed.

Falling
interest rates could negatively affect the profitability of the
Consolidated Group.

In the next 12 months, the Consolidated
Groups gap analysis indicates a positive gap, meaning that
its interest-sensitive assets are expected to reprice before its
interest sensitive liabilities. In a falling interest rate
environment, the net interest income will tend to decrease which
could have a negative impact on the profitability of the
Consolidated Group

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Foreclosure
on mortgages could delay or reduce payments on Receivables,
adversely affecting the liquidity and profitability of the
Consolidated Group.

Foreclosure and other similar proceedings used to
enforce payment of mortgage loans are generally subject to
principles of equity which are designed to relieve the indebted
party from the legal effect of that partys default.
Statutes may limit the right of the Consolidated Group to obtain
a deficiency judgment against the defaulting party after a
foreclosure or sale. The application of any such principle may
lead to a loss or delay in the payment on a certificate in a
securitization in which the Consolidated Group is involved or in
loans held by the Consolidated Group.

Higher
than anticipated life insurance and annuity termination rates
may decrease earnings.

Higher than anticipated termination rate of
annuity contracts and life insurance policies would tend to
decrease the earnings of Western Life because the insurance
subsidiaries would have to immediately expense the unamortized
deferred policy acquisition costs on those surrendered policies
instead of continuing to amortize those costs over time. The
rate at which annuity contracts and life insurance policies
terminate is affected by several factors, including changes in
interest rates, competition and changes in tax and other
regulations.

Real
estate held for development may not be able to be sold, or may
not be able to be sold profitably.

The Consolidated Group is engaged in the
development of various real estate properties, including
substantially undeveloped properties. It is possible that one or
more of these properties will not be able to be sold, or will
not be able to be sold at a price exceeding the carrying value
of the property. Factors such as local and national trends in
commercial property values as well as local, state and national
economic and regulatory trends may impact the potential sales
price for these properties.

The
Consolidated Group may be negatively impacted by some of its
equity investments.

The Consolidated Group invests in venture
capital, joint ventures and other related equity investments.
The market price and valuations of these investments may
fluctuate due to market conditions and other conditions over
which the Consolidated Group has no control. If these equity
investments decline in value, the earnings of the Consolidated
Group could be negatively affected. Additionally, these
investments may not have an active trading market and, as a
result, the Consolidated Group may not be able to easily sell
these investments and, if sold, they may not be sold at
favorable prices.

The
Consolidated Group purchases some Receivables that are not
secured by tangible assets, which could lead to losses if
borrowers default on those Receivables.

The Consolidated Group purchases some Receivables
that are not secured by tangible assets, such as annuities,
lottery prizes, structured settlements or other investments. In
these cases, the Consolidated Group does not have a security
interest in a specific asset. It relies instead on a promise to
pay from an insurance company, a state government or other
entity. If the payor does not keep its promise to pay and
defaults, the Consolidated Group will not have the benefit of a
lien on any specific asset on which to foreclose to collect the
Receivable, which could lead to losses.

Environmental
conditions and regulation of property acquired by the
Consolidated Group may lead to losses.

The Consolidated Group acquires properties in the
course of its business, some of which may contain hazardous
waste or other toxic materials. Various federal, state and local
environmental laws, ordinances and regulations hold the owner,
operator or the previous owner of the property liable for the
costs of removal or remediation of hazardous or toxic substances
on, under, in or near the affected property. Historically, the
Consolidated Group has tried to avoid acquiring properties or
Receivables collateralized by properties of the types of
properties likely to be contaminated. As a result of its current
business, the Consolidated Group may sustain significant losses
due to environmental liability.

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In addition, the government can place a lien on
environmentally contaminated property to guarantee that the
clean-up costs for that property are paid. In many states, these
liens have priority over the existing mortgage on the property.
The Consolidated Group may be directly subject to these liens,
or indirectly, if it participate in a securitization of
property, or a loan held by the Consolidated Group is securing
the property, or the Consolidated Group has a role in the
day-to-day management of the facility or property. Environmental
assessments to determine whether certain properties are
contaminated are performed by the Consolidated Group when deemed
necessary. Even where they are performed, there is no guarantee
that the Consolidated Group will be insulated from liability for
an environmental condition. If the Consolidated Group is held
liable for environmental clean-up costs, its business could be
harmed.

The
Consolidated Group may be adversely affected by competition and
conflicts of interests with its affiliates.

Several companies are affiliated with the
Consolidated Group through common control by C. Paul
Sandifur, Jr. Certain officers and directors of these
affiliated companies are also employees of the Consolidated
Group. In addition, the Consolidated Group provides services to
affiliated companies, buys and sells Receivables to and from
affiliated companies and makes loans to or borrows money from
affiliated companies. These factors may lead to conflicts of
interests such as which company receives a particular securities
sale, how Receivables are distributed among or between separate
companies, how fees for services are established and charged,
how intercompany sales and purchases of Receivables are priced
and the terms of any intercompany loan. Old Standard and Old
West may compete with the Consolidated Group for the sale of
annuities. Also, the Consolidated Group may compete with Summit
and Metropolitan for the sale of securities. If these conflicts
are not resolved favorably to the Consolidated Group, the
performance of the Consolidated Group could be adversely
affected.

LIFE INSURANCE AND ANNUITY
OPERATIONS

Introduction

Western Life markets its annuity and life
insurance products through over 1,700 independent sales
representatives under contract. Based on first year and single
annuity premiums received in calendar year 2001, approximately
23% of sales were generated by ten brokers or groups of brokers,
with the highest single broker accounting for approximately 5%
of sales. These representatives may also sell life insurance
and/or annuity products for other companies. Western Life is
licensed as an insurer in the states of Alaska, Arizona, Hawaii,
Idaho, Indiana, Montana, Nebraska, Nevada, North Dakota,
Oklahoma, Oregon, South Dakota, Texas, Utah, Washington, and
Wyoming. During the calendar year ended December 31, 2001,
approximately 91% of Western Lifes deferred annuity
business was produced in the states of Idaho, Montana, Oregon,
Texas, Utah and Washington.

Insurance policy and annuity benefits primarily
consist of interest that is credited on outstanding policies at
the rates of return specified in the policy. Upon the issuance
of an annuity or an insurance policy, these rates of return are
guaranteed for a limited number of years. Thereafter, subject to
any guaranteed rate of return specified in the insurance policy
or annuity, these rates of return may be adjusted in Western
Lifes discretion. Additionally, insurance and annuity
policy benefits also include payments of death claims on
mortality contracts. These mortality contracts account for less
than 2% of Western Lifes direct premiums with a portion of
the life risk being offset by certain reinsurance treaties
during the last three fiscal years.

Annuities

Western Life has actively marketed single and
flexible premium deferred annuities since 1980. Western Life
offers flexible and single premium annuities with surrender
charges for periods varying from one year to ten years. During
the past three calendar years, nearly 99% of its direct premiums
were derived from annuity sales. Western Life prices its new
annuity products and renewals in order to achieve a positive
spread between

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its annuity costs and available investments,
while also considering current annuity market rates of interest
and competitive pressures.


A deferred annuity is a contract that allows an
investor to accumulate payments to the issuing company and have
them grow with interest on a tax-deferred basis. That
accumulation is then used to provide periodic payments at some
future date. In a single premium deferred annuity, the annuity
contract is purchased with the payment of one lump sum when the
contract is issued. A flexible premium deferred annuity allows
the owner to make continual payments into the contract. Under
both types of contracts, interest on each payment is accumulated
from the date the payment is received.

Western Lifes annuity products are targeted
primarily toward todays senior population. Fixed annuities
are designed for older consumers looking for a predictable
payment structure that combines insurance and accumulation
attributes in a single product. As of September 30, 2002,
policyholders aged 61 or older accounted for approximately 80%
of Western Lifes annuity account values.

The following products individually accounted for
10% or more of Western Lifes direct annuity premiums in
the fiscal years ended September 30, 2002, 2001 and 2000.

TD-Max
Seriessingle premium deferred
annuities with varying lengths of cliff (i.e., fixed) surrender
fee periods. The initial interest rate is guaranteed over the
term of the surrender fee period and then re-determined annually
thereafter, subject to a contractual minimum. Policyholders may
withdraw a portion of their account values annually without
surrender fees. These products have been Western Lifes
largest seller, accounting for approximately 36.9%, 34.4% and
35.6% of direct annuity premiums in the fiscal years ended
September 30, 2002, 2001 and 2000, respectively.

TD-Max Bailout
Seriessingle premium deferred
annuities with varying lengths of surrender fee periods. The
initial interest rate is guaranteed for one year and then
re-determined annually thereafter, subject to a contractual
minimum. Policyholders may withdraw funds without surrender
penalty for 60 days if the crediting interest rate falls
below the bailout interest rate determined issuance.
Policyholders may also withdraw a portion of their account
values annually without surrender fees. These products accounted
for approximately 12.0%, 11.6% and 15.8% of direct annuity
premiums in the fiscal years ended September 30, 2002, 2001
and 2000, respectively.

DiscoverMax
Seriessingle premium deferred
annuities with varying levels of declining surrender charges
over a six-year term. The initial interest rate is guaranteed
for one year and then re-determined annually thereafter, subject
to a contractual minimum. The initial interest rate includes a
bonus of one to three percent, depending on the surrender fee
structure selected. Policyholders may withdraw funds without
surrender penalty for 60 days if the crediting interest
rate falls below the bailout interest rate determined at issue.
Policyholders may also withdraw a portion of their account
values annually without surrender fees. These products accounted
for approximately 23.2%, 30.0% and 27.2% of direct annuity
premiums in the fiscal years ended September 30, 2002, 2001
and 2000, respectively.

Liquid Flexible Premium
Annuitiesdeferred annuities with
no surrender fees. Premium deposits may be made at any time in
amounts as low as $100. Interest rates are guaranteed at
issuance and then re-determined annually subject to a 3% minimum
guarantee. These products accounted for approximately 14.4%,
10.1% and 7.6% of direct annuity premiums for the fiscal years
ended September 30, 2002, 2001 and 2000, respectively.

Life Insurance

In addition to the sales of annuities, Western
Life also receives premiums from the sale and renewal of whole
life and term life insurance policies. In fiscal year 2002, less
than 1% of Western Lifes premiums were derived from
interest sensitive whole life insurance and term life insurance
policies. At September 30, 2002, the face amount of life
insurance policies written and outstanding totaled
$203.4 million, net of $31.3 million ceded to
reinsurers. As with annuities, gross profits are determined by
the difference between interest rates credited on outstanding
policies and interest earned on investment of premiums. In
addition, profitability is affected by mortality experience.

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Reinsurance

Reinsurance is the practice whereby an insurance
company enters into agreements called treaties with other
insurance companies in order to assign some of its insured risk,
for which a premium is paid, while retaining the remaining risk.
Although reinsurance treaties provide a contractual basis for
shifting a portion of the insured risk to other insurers, the
primary liability for payment of claims remains with the
original insurer. Life insurers commonly obtain reinsurance on a
portion of their risks in the ordinary course of business. The
amount of risk that a company is willing to retain is based
primarily on considerations of the amount of insurance, the
level of its capital and surplus and upon its ability to sustain
mortality fluctuations.

Annuity Reinsurance

Western Life entered into an annuity reinsurance
agreement with Old Standard, an affiliate, which became
effective July 1, 1998. This agreement allows Western Life
to continue its market presence and relationship with its
insurance agents while moderating its rate of growth. Under its
contractual terms, this agreement is an ongoing arrangement with
no stated expiration or termination date, although either party
may stop and restart at their discretion upon providing a 30-day
advance written notice. At September 30, 2002 and 2001,
Western Life had recorded a receivable from Old Standard of
$148.3 million and $109.5 million, respectively,
related to this reinsurance agreement. Old Standard has been
assigned a rating of B-(Fair) by A.M. Best.

Under this agreement, Western Life may reinsure
with Old Standard 75% of the risk on 15 different annuity
products. The premiums ceded to Old Standard during the fiscal
years ended September 30, 2002, 2001 and 2000 were
approximately $56.5 million, $0.7 million and
$27.4 million, respectively. Western Life received ceding
allowances equal to actual commission plus 1.5% of premium,
which was approximately $3.3 million, $0.1 million and
$1.5 million during the fiscal years ended
September 30, 2002, 2001 and 2000, respectively. These
ceding allowances are paid by Old Standard to compensate Western
Life for its annuity issuance costs. Western Life also receives
a fee from Old Standard for servicing the reinsured policies,
which is 0.40% annually on the cash value of the reinsured
policies.

Life Policy Reinsurance

Western Life had reinsured $31.3 million of
its life insurance risk at September 30, 2002, which
equaled all risk in excess of $100,000 on each whole life policy
and all risk in excess of $50,000 on each term life policy. Life
insurance in force at that time was $234.6 million. Western
Life is a party to 20 separate life reinsurance treaties with
ten reinsurance companies. The largest treaty is with Optimum
Reinsurance Company that provided approximately
$15.3 million of reinsurance coverage at September 30,
2002. The majority of the remaining coverage is with Business
Mens Assurance Company of America and ERC Life
Reinsurance. Total life policy reinsurance premiums paid by
Western Life during the fiscal year ended September 30,
2002 were approximately $0.2 million.

Reserves

Western Lifes reserves for both annuities
and life insurance are actuarially determined and prescribed by
Western Lifes state of domicile and other states in which
it does business through laws that are designed to protect
annuity contract owners and policy owners. An actuary reviews
the amount of these reserves required for compliance with state
law. These reserves are amounts, which at assumed rates, are
calculated to be sufficient to meet Western Lifes future
obligations under annuity contracts and life insurance policies
currently in force. Reserves are recalculated each year to
reflect amounts of reinsurance in force, issue ages of new
policyholders, duration of policies and variations in policy
terms. Since these reserves are based on actuarial assumptions,
Western Lifes ultimate liability could exceed these
reserves.

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RECEIVABLE INVESTMENTS

Real Estate Receivables

Non-Commercial Real Estate Receivable
Acquisition

In conjunction with Metropolitan, Western Life
has been investing in Receivables for its own account for
28 years. In general, the non-commercial real estate
Receivables acquired or originated by Western Life consist of
non-conventional loans. This type of Receivable possesses
characteristics that differ from Receivables originated in the
conventional lending market in that either the borrower or the
property would not qualify for A credit grade
lending or the seller or borrower chose to use non-conventional
financing. For non-conventional loans, generally the lender
(often the seller of the property) will focus more on the
quality of the collateral as the ultimate recourse in the event
of the borrowers default and depend less on the ability of
the borrower to repay the loan. Historically, the majority of
Western Lifes real estate Receivables were acquired from
lenders as individual Receivable acquisitions. See
Current Mix of Receivable Investment Holdings.
The Consolidated Groups principal source for private
market Receivables is independent brokers located throughout the
United States. These independent brokers typically deal directly
with private individuals or organizations that own and wish to
sell a Receivable.

The evaluation, underwriting and closing
operations for Western Lifes non-commercial real estate
Receivables are performed by Metropolitan at Metropolitans
headquarters in Spokane, Washington, in accordance with
management and acquisition service agreements.
Metropolitans acquisition strategy is designed to provide
flexible structuring and pricing alternatives to the real estate
Receivable seller, and quick closing times. Metropolitan
believes these factors are key to Metropolitans ability to
attract and purchase Receivables. In order to enhance its
position in this market, Metropolitan has improved its
acquisition strategies and has implemented flexible and
strategic pricing and closing programs. Metropolitan is
exploring other methods and sources for Receivable acquisitions
in order to increase volume, decrease cost, and enhance its
competitive position. There can be no assurance that any new
strategies or programs developed will achieve these goals.

Metropolitan has established underwriting
criteria for the acquisition of real estate Receivables. The
underwriting guidelines are based on Metropolitans past
experience and are intended to reflect some aspects of
conventional underwriting standards while still allowing for
flexibility to fit the specific characteristics of each
individual transaction. As part of the underwriting process,
Metropolitan considers the borrowers credit profile, the
market value of the collateral, demographic reports and property
profiles. Metropolitans underwriting involves a thorough
understanding of the different types of risk factors and how
those factors relate to the various strengths and weaknesses in
a transaction. There is no predetermined methodology to arrive
at a decision; each transaction stands on its own merits.

Commercial Loan Originations

In conjunction with Old Standard, Western Life
originates Commercial Loans collateralized by various types of
commercial properties including income producing properties,
fully developed lots and land held primarily for residential
development. These Commercial Loans are generally small to
mid-sized loans that are originated for less than
$15 million and generally have short-term balloon payments
(approximately 2 years to 5 years). Western Life
typically lends at 50-75% loan-to-value ratios, and may require
multiple pieces of collateral and personal guarantees to secure
a particular loan.

Western Life obtains leads for loans through
independent mortgage brokers. While these independent mortgage
brokers may be involved with the negotiation of terms on behalf
of the borrower, all applications, commitments and documentation
are drafted by Western Lifes counsel and executed directly
with the borrower and guarantor.

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Commercial loans originated by Western Life are
evaluated, underwritten and closed by Old Standard in accordance
with the Consolidated Groups predefined standards. The
Commercial Loans are underwritten by applying criteria that
generally include the following:



| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | evaluating the borrowers and
    guarantors financial statements/information and credit;                                                                
|
| |  | obtaining a current, satisfactory appraisal of
    the collateral;                                                                                        
|
| |  | making a physical inspection of the property;                                                                                                             
|
| |  | obtaining title insurance;                                                                                                                                
|
| |  | reviewing other factors that affect collateral
    valuation such as environmental reports, structural inspections,
    zoning and entitlement status; and
|
| |  | an analysis of demographic factors.                                                                                                                       

The sum of the underwriting evaluation and the
borrowers alternative financing options affect the
interest rate and loan-to-value ratio that Western Life will
require. In a circumstance where the borrower has limited
financing options due primarily to time constraints, Western
Life has the opportunity to charge higher rates at lower
loan-to-values than the risk might otherwise require. The
ability to be more responsive than the competition to
time-sensitive opportunities has been key to Western Lifes
ability to capitalize on these circumstances that provide higher
returns for lower risk on some loans.

During fiscal years 2002 and 2001, Commercial
Loans accounted for approximately 83% and 87%, respectively, of
new real estate Receivable acquisitions and originations. The
focus on Commercial Loans was in part due to managements
perception that this market may be inadequately served by
current lenders, who management believes are not flexible in
their underwriting and pricing policies and who are not able to
quickly underwrite and close such loans, particularly in the
temporary, bridge and development Commercial Loan markets.

Other Receivables

In conjunction with Metropolitan, Western Life
also negotiates the purchase of Receivables that are not
collateralized by real estate, including structured settlements,
annuities and lottery prizes. The lottery prizes generally arise
out of state operated lottery games that are typically paid in
annual installments to the prizewinner. The structured
settlements generally arise out of the settlement of legal
disputes where the prevailing party is awarded a sum of money,
payable over a period of time, generally through the creation of
an annuity. Other annuities generally consist of investments
that cannot be immediately converted to cash directly with the
issuing insurance company. Metropolitans source for these
investments is generally private brokers who specialize in these
types of Receivables.

In the case of lottery prizes, the underwriting
guidelines generally include a review of the documents providing
proof of the prize and a review of the credit rating of the
state lottery commission, insurance company or other entity
making the lottery prize payments. Where the lottery prize is
from a state run lottery, the underwriting guidelines generally
include a confirmation with the respective lottery commission of
the prizewinners right to sell the prize and
acknowledgment from the lottery commission of their receipt of
notice of the sale. In many states, the sale of a state lottery
prize requires that the winner obtain a court order permitting
the sale. In those states, a certified copy of the court order
is required.

In the case of annuity purchases,
Metropolitans underwriting guidelines generally include a
review of the annuity policy and review of the sellers
credit report. Upon submission of the file, the most current
credit rating of the annuity issuer will be obtained.
Furthermore, Metropolitan will conduct a Uniform Commercial Code
(UCC) search on the annuitant in each state or
county, as applicable, where the annuitant resided over the last
five years and where the annuity issuer is located in order to
ensure that no prior liens exist on the structured settlement
payments.

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Yield and Discount Considerations

Metropolitan negotiates all Receivable
acquisitions at prices calculated to provide a desired yield.
Often, the negotiations result in a purchase price less than the
Receivables unpaid balance. The difference between the
unpaid balance and the purchase price is the
discount. The amount of the discount will vary in
any given transaction depending on Western Lifes yield
requirements and the existing note rate of the Receivable at the
time of the purchase. Yield requirements are established in
light of capital costs, market conditions, the characteristics
of particular classes or types of Receivables and the risk of
default by the Receivable payor.

A greater effective yield can also be achieved
through negotiating amendments to Receivable agreements. These
amendments may involve adjusting the interest rate and/or
monthly payments, extension of financing in lieu of a required
balloon payment or other adjustments. As a result of these
amendments, the cash flow may be extended, maintained or
accelerated. Acceleration increases the yield realized on a
Receivable purchased at a discount from its face value through
accelerating recognition of the discount.

For commercial development loans, Western Life
occasionally negotiates exit fee agreements with the borrower.
To the extent the exit fees do not result in an overall yield to
Western Life that is greater than prevailing market rates after
adjusting for the risk, the transaction is accounted for as a
loan. If the transaction results in a yield that is greater than
the prevailing market rates after adjusting for the risk, the
transaction is treated as a loan if the exit fee is less than
50% of the expected residual profits from the development and if
the borrower has an equity investment, substantial to the
project, that is not funded by Western Life. If the transaction
meets the requirements to be accounted for as a loan, the exit
fee is amortized into income over the estimated life of the loan
using the level yield method.

Beginning October 1, 1993 and ending
March 31, 1998, Western Life entered into an agreement with
Metropolitan to purchase real estate contracts and mortgage
notes receivables at guaranteed yields that ranged from 8.0% to
9.7%. As part of the agreement, Western Life agreed to pay
Metropolitan the difference between the guaranteed yield and the
yield at which Metropolitan acquired the loan. In exchange,
Metropolitan agreed to reimburse Western Life for any losses
incurred on the loans. In the event of foreclosure, Metropolitan
also agreed to pay Western Life the guaranteed yield while the
property is held for sale. An inter-company holdback of
approximately $1.8 million, $2.7 million and
$1.4 million at September 30, 2002, 2001 and 2000,
respectively, supports the guarantee.

COMPETITION

Competition for Annuity and Life Insurance
Sales

The annuity and life insurance business is highly
competitive. Western Life competes with other financial
institutions including ones with greater resources and greater
name recognition than Western Life. Premium rates, annuity
yields and commissions to agents are particularly sensitive to
competitive forces. Additionally, Western Life believes the
primary competitive factors among life insurance companies for
investment-oriented insurance products, like annuities, include
product flexibility, net return after fees, innovative product
design, the claims-paying ability rating and the name
recognition of the issuing company, the availability of
distribution channels and service rendered to the customer
before and after a policy or contract is issued. Other factors
affecting the annuity business include the benefits, including
before-tax and after tax investment returns, guarantees provided
to the customer and the commissions paid to the agent.

Competition for Receivable
Acquisition

The Consolidated Group competes with other
financial institutions including various real estate financing
firms, real estate brokers, banks and individual investors for
the Receivables it acquires. This competition includes financial
institutions, many of which are larger, have access to more
resources and have greater name recognition than the
Consolidated Group. The Consolidated Group believes the primary
competitive factors

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are the amounts offered and paid to Receivable
sellers and the speed at which the processing and funding of the
transaction can be completed. Competitive advantages enjoyed by
the Consolidated Group include:




| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | its access to markets throughout the United
    States;               
|
| |  | its flexibility in structuring Receivable
    acquisitions;           
|
| |  | its long history in the business; and                                 
|
| |  | its in-house capabilities for processing and
    funding transactions.

Western Life competes with many other lending
institutions in its Commercial Loan origination program. The
commercial lending market is a multi-billion dollar market
including competitors with greater resources, economies of scale
and name recognition than Western Life. Western Life believes
that its flexible underwriting, pricing guidelines and closing
speed enhance its ability to compete in this market. To the
extent other competing Receivable investors may develop faster
closing procedures, more flexible investment policies, or other
attributes that are more desirable to Receivable sellers, they
may experience a competitive advantage over the Consolidated
Group.

Western Life competes with other investors in its
lottery prize, structured settlement and annuity acquisitions.

REGULATION

Western Life is subject to the Insurance Holding
Company Act as administered by the Office of the Insurance
Commissioner of the State of Washington (the OIC).
This act regulates transactions between insurance companies and
their affiliates. It requires that Western Life provide
notification to the Insurance Commissioner of various
transactions between its affiliates and Western Life. In some
instances, the Commissioners approval is required before a
transaction with an affiliate can be consummated.

Western Life is also subject to extensive
regulation and supervision by the OIC as a Washington-domiciled
insurer, and to a lesser extent, by all of the other states in
which it operates. These regulations are directed toward
supervision of matters like the granting and revoking licenses
to transact business on both the insurance company and agency
levels, approving policy forms, setting dividend levels,
prescribing the nature and amount of permitted investments,
establishing solvency standards and conducting extensive
periodic examinations of insurance company records. These
regulations are primarily intended to protect annuity contract
holders and insurance policy owners.

All states in which Western Life operates have
laws requiring solvent life insurance companies to pay
assessments to a guaranty fund to protect the interests of
policyholders of insolvent life insurance companies. Assessments
are levied on all member insurers in each state based on a
proportionate share of premiums written by member insurers in
the lines of business in which the insolvent insurer engaged. A
portion of these assessments can be offset against the payment
of future premium taxes. However, future changes in state laws
could decrease the amount available for offset.

Dividend restrictions are imposed on Western Life
by regulatory authorities. These restrictions limit dividends
that Western Life can pay to unassigned statutory surplus,
reduced by any unrealized capital gains, which netted to
approximately $5.6 million at September 30, 2002.

Washington States Risk-Based Capital Model
law requires an insurance company to maintain specified amounts
of capital and surplus based on complex calculations of risk
factors that encompass the invested assets and business
activities of the insurance company. Compliance with the
Risk-Based Capital Model Law requirements is tested annually at
calendar year-end. At the last annual review, Western
Lifes capital and surplus levels exceeded the calculated
minimum requirements at its statutory reporting period ended
December 31, 2001.

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Employees

At September 30, 2002, Western Life had a
total of 63 full-time employees. None of its employees are
covered by a collective bargaining agreement, and Western Life
believes that its relations with its employees are good. In
addition to employees that work solely for Western Life, from
time to time, it uses the services of some of the employees of
Metropolitan, the Consolidated Groups parent entity, and
reimburses Metropolitan for the cost of those services under an
inter-company cost sharing agreement.




Item 2. Properties

The Consolidated Groups principal offices
are located in Spokane, Washington at 601 West 1st Avenue,
in an office building owned by Metropolitan where the
Consolidated Group leases approximately 9,200 square feet of
office space. The Consolidated Group also maintains regional
offices in Boise, Idaho and Vancouver, Washington. The
Consolidated Group believes that its facilities will be adequate
to meet its requirements for the foreseeable future and that
suitable additional space will be available if needed.




Item 3. Legal Proceedings

The Consolidated Group is not currently subject
to any material legal proceedings outside of the ordinary course
of its business. The Consolidated Group may, from time to time,
become a party to various legal proceedings arising in the
ordinary course of its business.




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

None.




PART II




Item 5. Market For The
Registrants Common Equity And Related Stockholder
Matters

1. (a) Market Information:There
is no market for Western Holdings common stock.

(b) Holders:There was one
holder of Western Holdings common stock as of
December 15, 2002.

(c) Dividends:Western Holding
declared no dividends on its common stock since inception
through September 30, 2002.

At the date of this Form 10-K, Western
Holding had made no determination as to the likelihood that it
will or will not pay dividends on its common stock in the future.



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Recent Sales of Unregistered Securities:The information regarding sales of
    unregistered securities required by this Item has been
    previously reported by Western Holding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | 3. | On August 12, 2002, the Securities and
    Exchange Commission declared Western Holdings Registration
    Statement on Form S-1, File No. 333-72346-01,
    effective. Shortly thereafter, MIS commenced the public offering
    of Western Holdings Variable Rate Cumulative Preferred
    Stock, Series A (the Preferred Stock) on a best
    efforts basis with conditions. Western Holding has registered
    for sale up to 2,000,000 shares of Preferred Stock at
    $25.00 per share, for a total offering amount of up to
    $50.0 million. As of September 30, 2002, Western
    Holding had not yet met the minimum sales contingency for
    completion of the offering, and had therefore received no
    proceeds from the offering of the Preferred Stock. From
    August 12, 2002, through September 30, 2002, Western
    Holding had not paid any commissions or other expenses to MIS in
    connection with the offering. As of September 30, 2002,
    Western Holdings offering of Preferred Stock was currently
    ongoing.

15



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Item 6. Selected Financial
Data




SELECTED CONSOLIDATED FINANCIAL DATA

The summary consolidated financial data shown
below as of September 30, 2002 and 2001 and for the years
ended September 30, 2002, 2001 and 2000, other than the
ratio of earnings to fixed charges and preferred stock
dividends, have been derived from, and should be read in
conjunction with, the Western Holdings consolidated
financial statements and related notes, and Managements
Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere herein. The consolidated
financial data shown below as of September 30, 2000, 1999
and 1998 and for the years ended September 30, 1999 and
1998, other than the ratio of earnings to fixed charges and
preferred stock dividends, have been derived from audited
consolidated financial statements not included herein. In May
2002, Western Holding was formed and subsequently was
transferred 100% of the outstanding common stock of Western
Life. In accordance with SFAS No. 141, the exchange of
shares has been accounted for similar to that of a pooling of
interests. As a result of a pooling of interests, the Summary
Consolidated Financial data shown below has been restated as of
the earliest period presented as though the ownership exchange
had occurred at that date. See Note 1 to the consolidated
financial statements.

|                                            |  |                                                 |           |      |  |      |           |      |  |      |           |  |  |   |           |     |  |   |           | 
|------------------------------------------- |  | ----------------------------------------------- | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | --- |  | - | --------- | 
|                                            |  |                                                
|                                            |  | Year Ended or at September 30,                 
|                                            |  |                                                
|                                            |  | 2002                                            |           | 2001 |  | 2000 |           | 1999 |  | 1998
|                                            |  |                                                 |           |      |  |      |           |      |  |     
|                                            |  |                                                
|                                            |  | (Dollars in thousands except per share amounts)
|Consolidated Statements of Income
    Data: |  |                                                 |           |      |  |      |           |      |  |      |           |  |  |   |           |     |  |   |           | 
|Revenues                                    |  | $                                               | 99,328    |      |  | $    | 68,503    |      |  | $    | 68,419    |  |  | $ | 57,278    |     |  | $ | 63,438    | 
|                                            |  |                                                 |           |      |  |      |           |      |  |      |           |  |  |   |           |     |  |   |           | 
|Net income                                  |  | $                                               | 27,937    |      |  | $    | 12,421    |      |  | $    | 1,372     |  |  | $ | 11,128    |     |  | $ | 3,753     | 
|                                            |  |                                                 |           |      |  |      |           |      |  |      |           |  |  |   |           |     |  |   |           | 
|Ratio of earnings to fixed charges          |  |                                                 | 1.78      |      |  |      | 1.07      |      |  |      | 1.06      |  |  |   |           | (1) |  |   | 1.11      | 
|Per Common Share Data:                      |  |                                                 |           |      |  |      |           |      |  |      |           |  |  |   |           |     |  |   |           | 
|Cash dividends per common share             |  | $                                               | 0.00      |      |  | $    | 0.00      |      |  | $    | 0.00      |  |  | $ | 0.00      |     |  | $ | 0.00      | 
|                                            |  |                                                 |           |      |  |      |           |      |  |      |           |  |  |   |           |     |  |   |           | 
|Consolidated Balance Sheet Data:            |  |                                                 |           |      |  |      |           |      |  |      |           |  |  |   |           |     |  |   |           | 
|Total assets                                |  | $                                               | 1,563,991 |      |  | $    | 1,176,668 |      |  | $    | 1,045,025 |  |  | $ | 1,075,222 |     |  | $ | 1,041,750 | 
|Debt payable                                |  | $                                               | 104,223   |      |  | $    | 23,255    |      |  | $    | 24,983    |  |  | $ | 44,431    |     |  | $ | 1,157     | 
|Surplus notes                               |  |                                                 |          |      |  |      |          |      |  | $    |          |  |  | $ | 9,450     |     |  | $ | 30,800    | 
|Stockholders equity                        |  | $                                               | 147,993   |      |  | $    | 96,450    |      |  | $    | 64,939    |  |  | $ | 68,231    |     |  | $ | 60,628    | 



---



|    |                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Earnings were insufficient to meet fixed charges
    and preferred stock dividends for the fiscal year ended
    September 30, 1999 by approximately $0.1 million.




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

The following should be read in conjunction with
the attached audited consolidated financial statements and the
notes attached thereto for the three years ended
September 30, 2002.

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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION

AND RESULTS OF OPERATIONS


Critical Accounting Policies

The accounting policies described below are those
that the Consolidated Group considers critical in preparing its
consolidated financial statements. These policies include
significant estimates the Consolidated Group makes using
information available at the time the estimates are made.
However, the estimates could change materially if different
information or assumptions are used. The descriptions below are
summarized and have been simplified for clarity. A more detailed
description of the significant accounting policies used by the
Consolidated Group in preparing its consolidated financial
statements is included in the Consolidated Groups audited
financial statements for the year ended September 30, 2002.

Investments

Available-for-Sale Securities.Available-for-sale securities,
consisting primarily of mortgage- and asset-backed securities,
government-backed bonds, corporate bonds, equity securities and
venture capital investments, are carried at quoted and estimated
fair values. Unrealized gains and losses on available-for-sale
securities are excluded from earnings and presented as
accumulated other comprehensive income or loss, net of related
deferred income taxes. The Consolidated Group continually
monitors its investment portfolio for other than temporary
impairment of securities. When an other than a temporary decline
in the value below cost or amortized cost is identified, the
investment is reduced to its fair value, which becomes the new
cost basis of the investment. The amount of the reduction is
reported as a realized loss in the statement of operations. Any
recovery of value in excess of the investments new cost
basis is recognized as a realized gain only on sale, maturity or
other disposition of the investment. Factors that the
Consolidated Group evaluates in determining the existence of an
other than temporary decline in value include (1) the
length of time and extent to which the fair value has been less
than cost or carrying value, (2) the circumstances
contributing to the decline in fair value (including a change in
interest rates or spreads to benchmarks), (3) recent
performance of the security, (4) the financial strength of
the issuer, and (5) the intent and ability of the
Consolidated Group to retain the investment for a period of time
sufficient to allow for anticipated recovery. Additionally, for
asset-backed securities, the Consolidated Group considers the
security rating and the amount of credit support available for
the security.

The Consolidated Group holds debt securities
generated from its own securitization transactions. For these
securities, estimated fair market value is derived from expected
discounted future cash flows. When determining expected future
cash flows, the Consolidated Group considers interest rates,
estimated prepayment rates, collateral value and historical
default rates experienced by the securities. To the extent that
actual experience is less favorable than the assumptions,
impairment in the debt securities could result. The Consolidated
Group periodically assesses the assumptions used in valuing the
cash flows and the related carrying value of these securities.

Deferred Policy Acquisition Costs

Deferred policy acquisition costs, consisting of
commissions and other insurance underwriting and annuity policy
costs, are deferred, and amortized over the lives of the
contracts or policies in proportion to the present value of
estimated future gross profits. To the extent actual experience
differs from assumptions, and to the extent estimates of future
gross profits require revision, the unamortized balance of
deferred policy acquisition costs is adjusted accordingly; these
adjustments would be included in current operations.

Allowances for Losses

Allowance for Losses on Receivables.Commercial Loans are individually
monitored for impairment in accordance with SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, as
amended by SFAS No. 118, Accounting by Creditors for
Impairment of a LoanIncome Recognition and
Disclosure. SFAS No. 114 addresses the accounting by
creditors for impairments of a loan by specifying how allowances
for

17



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credit losses related to certain loans should be
determined. According to SFAS No. 114, a loan is impaired
when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement.
Probable is defined as future events are likely to
occur. When a loan has been identified as impaired, the
Consolidated Group determines the allowance for loss based on
the estimated fair market value, less estimated liquidation
expenses, of the collateral compared to the carrying value of
the Receivable. The estimated fair market value is based on the
most recent appraisal of the collateral. If the most recent
appraisal is more than one year old, a new appraisal is ordered.
In the interim, estimated fair market value is established
through a review of the appraisal in addition to a review of
other relevant market information. When reviewing the most
recent appraisal, the Consolidated Group considers the type of
property, changes in the economic factors of the region and the
underlying appraisal assumptions. If the estimated fair market
value of the collateral is less than the carrying value, an
allowance for loss is recognized.


The remaining real estate contracts and mortgage
notes receivable portfolio is made up of a large group of
smaller-balance homogenous loans that are collectively evaluated
for impairment. The Consolidated Group establishes an allowance
for inherent losses on the Receivables based primarily on
current delinquencies and historical foreclosure and loss
experience. To the extent actual experience differs from
assumptions, such adjustments would be included in the statement
of operations.

Allowances for losses on real estate contracts
and mortgage notes receivable are based on the carrying value of
the Receivable, including accrued interest. Accordingly, the
Consolidated Group accrues interest on delinquent Receivables
until foreclosure.

Allowance for Losses on Real Estate Held for
Sale and Development.The allowance
for losses on real estate held for sale and development includes
amounts for estimated losses as a result of impairment in value.
The Consolidated Group reviews its real estate properties for
impairment in value whenever events or circumstances indicate
that the carrying value of the asset may exceed its fair market
value. The carrying value of a repossessed property is
determined as of the date of repossession of the property and is
based on the lower of fair market value less selling costs or
carrying value at the time the property was repossessed. For
non-commercial properties, an appraisal is obtained on the
foreclosed property to determine its fair market value at time
of repossession. For commercial properties, an appraisal is
obtained on the foreclosed property to determine the fair market
value only if the most recent appraisal is more than one year
old, otherwise the existing appraisal is used. Periodically, the
Consolidated Group may not order an updated appraisal in
accordance with its established policies if current negotiations
with a potential purchaser can establish an indication of value.

Subsequent to repossession (or acquisition in the
case of development properties), if the value of the property
declines such that the fair market value, less selling costs,
from the disposition of the asset is less than its carrying
value, an impairment is recognized in the statement of
operations.

Life Insurance and Annuity Reserves

Premiums for annuities and universal life
insurance contracts are reported as life insurance and annuity
reserves under the deposit method of accounting. Reserves for
annuities and universal life insurance are equal to the sum of
the account balances, including credited interest and deferred
service charges. Based on past experience, consideration is
given in actuarial calculations to the number of policyholder
and annuitant deaths that might be expected, policy lapses,
surrenders and terminations. As a result of changes in the
factors considered in the actuarial calculations, it is
reasonably possible that the reserves for insurance and
annuities could change in the near future.

18



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##### Table of Contents



Results of Operations

The following table presents the components of
the results of operations for the years ended September 30,
2002, 2001 and 2000:

|                                                                         |  |      |             |      |  |      |             |   |  |   |            |  
|------------------------------------------------------------------------ |  | ---- | ----------- | ---- |  | ---- | ----------- | - |  | - | ---------- | -
|                                                                         |  | 2002 |             | 2001 |  | 2000
|                                                                         |  |      |             |      |  |     
|Net investment spread                                                    |  | $    | 47,920,814  |      |  | $    | 24,888,859  |   |  | $ | 19,835,767 |  
|Net non-investment expense                                               |  |      | (13,071,238 | )    |  |      | (12,406,632 | ) |  |   | (9,908,555 | )
|Capitalized deferred costs, net of amortization                          |  |      | 15,848,475  |      |  |      | 1,297,269   |   |  |   | (3,236,569 | )
|                                                                         |  |      |             |      |  |      |             |   |  |   |            |  
|Income before gains (losses) on investments                              |  |      | 50,698,051  |      |  |      | 13,779,496  |   |  |   | 6,690,643  |  
|Net gains (losses) on investments                                        |  |      | (3,491,126  | )    |  |      | (5,829,983  | ) |  |   | 53,831     |  
|                                                                         |  |      |             |      |  |      |             |   |  |   |            |  
|Income before income taxes and minority interest                         |  |      | 47,206,925  |      |  |      | 7,949,513   |   |  |   | 6,744,474  |  
|Income taxes benefit (provision)                                         |  |      | (16,522,379 | )    |  |      | 8,412,214   |   |  |   | (2,357,015 | )
|                                                                         |  |      |             |      |  |      |             |   |  |   |            |  
|Net income before minority interest                                      |  |      | 30,684,546  |      |  |      | 16,361,727  |   |  |   | 4,387,459  |  
|Income of consolidated subsidiary allocated to
    minority stockholders |  |      | (2,747,250  | )    |  |      | (3,940,250  | ) |  |   | (3,015,406 | )
|                                                                         |  |      |             |      |  |      |             |   |  |   |            |  
|Net income                                                               |  | $    | 27,937,296  |      |  | $    | 12,421,477  |   |  | $ | 1,372,053  |  
|                                                                         |  |      |             |      |  |      |             |   |  |   |            |  

Net Investment Spread

Net investment spread consists of interest and
earned discounts on Receivables and other investments, net of
interest expense, insurance policy and annuity benefits, and
salaries, commissions and other expenses incurred as a result of
owning the investments.

Insurance policy and annuity benefits primarily
consist of interest credited on outstanding policies at the
rates of return specified in the policy. When an annuity or an
insurance policy is issued, these rates of return are guaranteed
for a limited number of years. After that, subject to any
guaranteed rate of return specified in the insurance policy or
annuity, these rates of return may be adjusted in the
Consolidated Groups discretion. Additionally, insurance
and annuity policy benefits also include payments of death
claims on mortality contracts. These mortality contracts account
for approximately 2% of direct premiums with a portion of the
life risk being offset by reinsurance treaties during the last
three fiscal years.

The following table presents the components of
net investment spread during the years ended September 30,
2002, 2001 and 2000:

|                       |                                       |                       |   |             |            |      |   |             |            |  |   |             |            | 
|---------------------- | ------------------------------------- | --------------------- | - | ----------- | ---------- | ---- | - | ----------- | ---------- |  | - | ----------- | ---------- | 
|                       |                                       | 2002                  |   | 2001        |            | 2000
|                       |                                       |                       |   |             |            |     
|Net investment spread: |                                       |                       |   |             |            |      |   |             |            |  |   |            
|                       | Gross investment income               |                       | $ | 113,501,473 |            |      | $ | 84,842,764  |            |  | $ | 75,949,786  |           
|                       | Investment expenses                   |                       |   | (12,449,034 | )          |      |   | (12,480,566 | )          |  |   | (9,991,156  | )         
|                       | Insurance policy and annuity benefits |                       |   | (53,131,625 | )          |      |   | (47,473,339 | )          |  |   | (46,122,863 | )         
|                       |                                       |                       |   |             |            |      |   |             |            |  |   |            
|                       |                                       | Net investment spread |   | $           | 47,920,814 |      |   | $           | 24,888,859 |  |   | $           | 19,835,767 | 
|                       |                                       |                       |   |             |            |      |   |             |            |  |   |            

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The following table presents the net average
yields realized by the Consolidated Group on interest sensitive
assets and liabilities during the three years ended
September 30, 2002, 2001 and 2000 based on average monthly
ending asset/liability balances:

|                                                                       |       |         |             |         |   |         |             |       |   |   |             |      |  
|---------------------------------------------------------------------- | ----- | ------- | ----------- | ------- | - | ------- | ----------- | ----- | - | - | ----------- | ---- | -
|                                                                       |       | 2002    |             | 2001    |   | 2000   
|                                                                       |       | Average |             | Average |   | Average
|                                                                       |       |         |             |         |   |        
|Interest sensitive assets:                                             |       |         |             |         |   |         |             |       |   |   |             |     
|Securities Investments (including cash)                                |       | $       | 416,288,970 |         |   | $       | 333,155,576 |       |   | $ | 278,483,111 |     
|                                                                       | Yield |         |             | 6.28    | % |         |             | 7.50  | % |   |             | 8.22 | %
|Real estate contracts and mortgage notes
    receivable                |       | $       | 453,439,294 |         |   | $       | 352,747,729 |       |   | $ | 342,389,304 |     
|                                                                       | Yield |         |             | 15.32   | % |         |             | 11.67 | % |   |             | 9.89 | %
|Other receivable investments                                           |       | $       | 140,384,576 |         |   | $       | 149,963,604 |       |   | $ | 154,361,287 |     
|                                                                       | Yield |         |             | 8.45    | % |         |             | 8.92  | % |   |             | 8.93 | %
|Policy loans                                                           |       | $       | 19,578,764  |         |   | $       | 19,356,077  |       |   | $ | 19,074,783  |     
|                                                                       | Yield |         |             | 7.43    | % |         |             | 7.37  | % |   |             | 7.24 | %
|Indebtedness of related parties                                        |       | $       | 19,420,121  |         |   | $       | 20,226,255  |       |   | $ | 21,731,591  |     
|                                                                       | Yield |         |             | 8.69    | % |         |             | 10.24 | % |   |             | 9.87 | %
|Interest sensitive liabilities:                                        |       |         |             |         |   |         |             |       |   |   |             |     
|Life insurance and annuity reserves, net of
    reinsurance receivable |       | $       | 936,990,690 |         |   | $       | 815,417,282 |       |   | $ | 794,005,601 |     
|                                                                       | Yield |         |             | 5.67    | % |         |             | 5.82  | % |   |             | 5.81 | %
|Debt payable and Surplus notes                                         |       | $       | 47,167,977  |         |   | $       | 23,519,761  |       |   | $ | 27,746,041  |     
|                                                                       | Yield |         |             | 4.38    | % |         |             | 7.37  | % |   |             | 7.34 | %

The increase in gross investment income from 2000
to 2002 was primarily due to an increase in annuity products
sold by Western Life, which resulted in an increase in the
commercial lending activities of Western Life. Commercial Loans,
which have higher stated yields than Western Lifes
residential portfolio, accounted for 58.1% of the outstanding
principal balance of real estate contracts and mortgage notes
receivable at September 30, 2002, compared to 1.4% at
September 30, 2000. Additionally, for commercial
development loans, the Consolidated Group occasionally
negotiates exit fee agreements with the borrower. If the
transaction meets the requirements to be accounted for as a
loan, the exit fee is amortized into income over the estimated
life of the loan using the level yield method. The amortization
of exit fees accounted for 2.45% of the increase in yield on
real estate contracts and mortgage notes receivable in 2002.

The increase in yields on the real estate
contracts and mortgage notes receivable portfolio were partially
offset by lower yields on the investment portfolio as the 5-year
constant maturity Treasury rate, which is similar to the average
maturity of the Consolidated Groups fixed income
portfolio, decreased from 5.95% on September 30, 2000 to
2.65% on September 30, 2002. During the fiscal year ended
September 30, 2002, Western Life sold approximately
$320.2 million in available-for-sale investments for gains
of approximately $6.7 million. As proceeds from the sales
and maturities were reinvested back into a lower interest rate
market, the overall portfolio yield was reduced. Additionally,
the Consolidated Groups recent focus on improving the
average credit rating of the investment portfolio has also
contributed to a reduction in the investment yields. At
September 30, 2002, approximately 81.1% of the Consolidated
Groups fixed income portfolio was rated either AAA or AA
compared to approximately 46.8% at September 30, 2001.
Generally, the higher the credit rating, the lower the effective
yield.

Metropolitan and its subsidiary, Metwest, provide
servicing for certain invested assets of the Consolidated Group.
The cost of these services is included in investment expense.
The Consolidated Groups inter-company agreements are
regulated by the OIC. As a result of the OICs requirement
that services be provided at cost, the inter-company agreements
were redrafted and the Consolidated Group received a
$2.1 million refund during the year ended
September 30, 2000 on charges paid in 1998 and 1999.

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Gains (Losses) on Investments

The components of gains (losses) on
investments for the fiscal years ended September 30, 2002,
2001 and 2000 are as follows:

|                                                   |  |      |             |      |  |      |            |   |  |   |            |  
|-------------------------------------------------- |  | ---- | ----------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                   |  | 2002 |             | 2001 |  | 2000
|                                                   |  |      |             |      |  |     
|Net gains on sale of real estate                   |  | $    | 11,161,985  |      |  | $    | 237,312    |   |  | $ | 2,733,749  |  
|Net investment securities losses                   |  |      | (12,416,838 | )    |  |      | (1,419,012 | ) |  |   | (619,677   | )
|Realized gains on sale of receivables              |  |      | 3,313,998   |      |  |      | 1,203,092  |   |  |   | 3,141,145  |  
|Provision for loss on real estate loans and assets |  |      | (5,550,271  | )    |  |      | (5,851,375 | ) |  |   | (5,201,386 | )
|                                                   |  |      |             |      |  |      |            |   |  |   |            |  
|Net gains (losses) on investments                  |  | $    | (3,491,126  | )    |  | $    | (5,829,983 | ) |  | $ | 53,831     |  
|                                                   |  |      |             |      |  |      |            |   |  |   |            |  

Net Gains on Sale of Real Estate

Western Life is in the real estate market due
primarily to its repossession of properties following Receivable
defaults. Additionally, Western Life will occasionally acquire
property for the purpose of development and sale. The
development or improvement of properties is undertaken for the
purpose of enhancing values to increase marketability and to
maximize profit potential. During the fiscal years ended
September 30, 2002, 2001 and 2000, the Consolidated Group
realized gains of approximately $11.2 million,
$0.2 million, and $2.7 million, respectively, on sales
of $32.2 million, $14.5 million and
$28.2 million, respectively.

Net Investment Securities Losses

The components of net investment securities
losses for the fiscal years ended September 30, 2002, 2001
and 2000 are as follows:

|                                        |                            |      |             |            |   |      |            |            |   |   |          |            |  
|--------------------------------------- | -------------------------- | ---- | ----------- | ---------- | - | ---- | ---------- | ---------- | - | - | -------- | ---------- | -
|                                        |                            | 2002 |             | 2001       |   | 2000
|                                        |                            |      |             |            |   |     
|Other than temporary declines in value: |                            |      |             |            |   |      |            |            |   |   |          |           
|                                        | Interest only certificates |      | $           | (2,592,782 | ) |      | $          |           |   |   | $        |           |  
|                                        | Equity securities          |      |             | (7,026,264 | ) |      |            | (140,000   | ) |   |          |           |  
|                                        | Other securities           |      |             | (8,327,453 | ) |      |            | (4,256,124 | ) |   |          |           |  
|Realized gains (losses):                |                            |      |             |            |   |      |            |            |   |   |          |           
|                                        | Securities investments     |      |             | 5,428,268  |   |      |            | 2,379,699  |   |   |          | (1,232,811 | )
|Realized gains on trading securities    |                            |      | 101,393     |            |   |      | 597,413    |            |   |   | 613,134  |           
|                                        |                            |      |             |            |   |      |            |            |   |   |          |           
|Net investment securities losses        |                            | $    | (12,416,838 | )          |   | $    | (1,419,012 | )          |   | $ | (619,677 | )         
|                                        |                            |      |             |            |   |      |            |            |   |   |          |           

Western Life holds interest only securities
created out of Receivable securitization transactions that were
entered into in conjunction with Metropolitan and other
affiliates. The fair market value of these securities, which do
not have established market prices, are estimated using expected
discounted future cash flows. When determining expected future
cash flows, management considers interest rates, estimated
prepayment rates, and historical default rates. During the last
two fiscal years, the 10-year constant maturity Treasury rate,
which is a widely accepted benchmark for mortgage prepayments
and pricing, decreased from approximately 5.9% at
September 30, 2000 to approximately 3.6% at
September 30, 2002. The reduction in the interest rate
environment has resulted in higher than expected prepayment
rates as borrowers refinanced their mortgages at lower interest
rates. In response to the sustained prepayment rates, Western
Life revised its assumptions of future prepayment rates during
the fiscal year ended September 30, 2002. As a result, the
carrying values of the investments were decreased by
approximately $2.6 million, representing the amount
impaired.

During the fiscal year ended September 30,
2002, approximately $7.0 million of declines in various
equity securities were determined to be other than temporary due
to the length of time and extent that the investments had traded
below cost or carrying value. The decline in value was primarily
the result of an overall

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decline in the value of stocks traded on the
NASDAQ. At September 30, 2002, the Consolidated Group had
an equity investment portfolio (including venture capital
investments) of approximately $40.0 million.


During the fiscal years ended September 30,
2002 and 2001, the Consolidated Group reported approximately
$8.3 million and $4.3 million, respectively, in other
than temporary impairments on certain fixed income securities.
The impairments were primarily due to deterioration in the
underlying collateral of certain asset-backed securities in
addition to credit deterioration in some higher yielding
corporate bond investments.

In 2002 and as a result of the impairment
experience of the Consolidated Groups portfolio,
management changed the investment strategy to move away from
lower credit rating exposure. At September 30, 2002, 81.1%
of the Consolidated Groups fixed income portfolio was
rated either AAA or AA compared to 46.8% at September 30,
2001.

The increase in securities investment gains was
primarily due to sales of fixed income securities that increased
in value as a result of a change in the 5-year constant maturity
Treasury rate. The 5-year constant maturity Treasury rate, which
is similar to the average maturity of the Consolidated
Groups fixed income portfolio, decreased from 5.95% on
September 30, 2000 to 2.65% on September 30, 2002.
Generally, as the Treasury yields decrease, the value of the
Consolidated Groups fixed income securities portfolio
increases.

Realized Gains on Sales of
Receivables

The Consolidated Group sells pools of Receivables
when it considers it profitable to do so. Historically, the
majority of the Consolidated Groups Receivable sales have
been through securitizations. In January 2001, the Consolidated
Group changed the focus of its investment strategy away from
acquiring residential real estate loans for securitization
purposes, as it does not intend to participate in any real
estate-backed securitizations in the near future. The
Consolidated Group has refocused its investment activity on
acquiring and holding both residential real estate loans and
Commercial Loans.

Additionally, the Consolidated Group may sell
pools of Receivables directly to purchasers, including its
affiliates. These sales are typically without recourse, except
for a period of time during which the Consolidated Group is
generally required to repurchase or replace any Receivables that
do not conform to the representations and warranties made at the
time of sale.

On March 28, 2002, Western Life agreed to
sell to Old Standard and Old West a 69.20% undivided beneficial
interest in a certain Lottery Trust owned by Western Life. The
purchase price of $11.2 million, which was derived from
expected future cash flows discounted at a 6.957% market rate,
resulted in a gain of approximately $0.6 million.

On August 15, 2002, Western Life agreed to
sell to Old Standard and Old West the remaining interest in a
certain Lottery Trust owned by Western Life. The purchase price
of $6.2 million, which was derived from expected future
cash flows discounted at a 5.527% market rate, resulted in a
gain of approximately $0.7 million. Additionally, on
August 15, 2002, Western Life agreed to sell to Old
Standard and Old West 95.83% undivided beneficial interest in a
certain Lottery Trust owned by Western Life. The purchase price
of approximately $29.1 million, which was derived from
expected future cash flows discounted at a 5.888% market rate,
resulted in a gain of approximately $2.0 million.

The market rates on the above lottery trust sales
were calculated at 2.0% over the Treasury benchmark on the date
of the sale, which is consistent with corporate bonds with
similar credit profiles along with recent transactions involving
large blocks of lottery Receivables.

During the year ended September 30, 2001,
the Consolidated Group sold portfolios of real estate
Receivables through both direct sales and the fulfillment of a
September 30, 2000 securitization pre-funding balance for
proceeds of approximately $89.3 million and gains of
$0.9 million. During that same period, the Consolidated
Group sold other Receivables through direct sales for proceeds
of approximately $3.8 million and gains of
$0.3 million.

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During the year ended September 30, 2000,
the Consolidated Group sold portfolios of real estate
Receivables through both direct sales and securitizations for
proceeds of approximately $375.8 million and gains of
$3.2 million. During that same period, the Consolidated
Group sold other Receivables through direct sales for proceeds
of approximately $23.8 million and losses of
$0.1 million.

Net Non-Investment Expense

The following table presents the components of
net non-investment expense during the years ended
September 30, 2002, 2001 and 2000:

|                        |                                     |                              |   |            |            |      |   |            |            |  |   |           |            | 
|----------------------- | ----------------------------------- | ---------------------------- | - | ---------- | ---------- | ---- | - | ---------- | ---------- |  | - | --------- | ---------- | 
|                        |                                     | 2002                         |   | 2001       |            | 2000
|                        |                                     |                              |   |            |            |     
|Non-investment income:  |                                     |                              |   |            |            |      |   |            |            |  |   |          
|                        | Premiums and annuity considerations |                              | $ | 1,766,851  |            |      | $ | 1,971,123  |            |  | $ | 2,406,532 |           
|                        |                                     |                              |   |            |            |      |   |            |            |  |   |          
|                        |                                     | Total non-investment income  |   |            | 1,766,851  |      |   |            | 1,971,123  |  |   |           | 2,406,532  | 
|                        |                                     |                              |   |            |            |      |   |            |            |  |   |          
|Non-investment expense: |                                     |                              |   |            |            |      |   |            |            |  |   |          
|                        | Commissions to agents               |                              | $ | 9,495,911  |            |      | $ | 8,797,176  |            |  | $ | 5,844,979 |           
|                        | Administrative and other expenses   |                              |   | 5,342,178  |            |      |   | 5,580,579  |            |  |   | 6,470,108 |           
|                        |                                     |                              |   |            |            |      |   |            |            |  |   |          
|                        |                                     | Total non-investment expense |   |            | 14,838,089 |      |   |            | 14,377,755 |  |   |           | 12,315,087 | 
|                        |                                     |                              |   |            |            |      |   |            |            |  |   |          
|                        | Net non-investment expense          |                              | $ | 13,071,238 |            |      | $ | 12,406,632 |            |  | $ | 9,908,555 |           
|                        |                                     |                              |   |            |            |      |   |            |            |  |   |          

Capitalized Deferred Costs, Net of
Amortization (DPAC)

Capitalized deferred costs, net of amortization
is comprised of the capitalization of expenses incurred to sell
and underwrite life and annuity policies, offset by the
amortization of previously capitalized expenses. The following
table reflects the components of the net change in deferred
acquisition costs reported by the Consolidated Group for fiscal
years ended September 30, 2002, 2001 and 2000:

|                                     |  |      |             |      |  |      |            |   |  |   |            | 
|------------------------------------ |  | ---- | ----------- | ---- |  | ---- | ---------- | - |  | - | ---------- | 
|                                     |  | 2002 |             | 2001 |  | 2000
|                                     |  |      |             |      |  |     
|Current year costs capitalized       |  | $    | 10,832,303  |      |  | $    | 9,947,269  |   |  | $ | 9,063,431  | 
|Amortization of capitalized expenses |  |      | (5,016,172  | )    |  |      | 8,650,000  |   |  |   | 12,300,000 | 
|                                     |  |      |             |      |  |      |            |   |  |   |            | 
|Net expense                          |  | $    | (15,848,475 | )    |  | $    | (1,297,269 | ) |  | $ | 3,236,569  | 
|                                     |  |      |             |      |  |      |            |   |  |   |            | 

While the capitalization of current year costs is
dependent upon actual expenses (commissions and other) incurred,
the amortization of capitalized costs is dependent upon the net
investment yields (after default costs and related investment
expenses) obtained by Western Life, policy crediting rates, and
the policy termination experience, which is actuarially
determined. DPAC is also impacted by the assumptions for these
variables expected in future years.

During the fiscal years ended September 30,
2002 and 2001, Western Life revised its amortization assumptions
on the DPAC related to its deferred annuity business (92% of the
total DPAC as of September 30, 2002) to reflect the higher
yields it expected to be earned on its commercial real estate
loan portfolio and the expected future crediting rates on the
annuity business which the investments support. The earnings
rate for 2003 assumes that Western Life will generate, on a
monthly basis, approximately $37.0 million in Commercial
Loans with an average yield of 15.0%. The monthly average
production for Western Life during the last quarter of fiscal
2002 was $38.2 million in Commercial Loans with an average
yield of 16.1%. The expected future crediting rates are based
primarily on Western Lifes current policy for re-pricing
its existing annuity products assuming a level interest rate
environment. Since the amortization of deferred acquisition
costs is based on the estimated gross profits of the underlying
life and annuity products using current effective crediting
rates, increases in the crediting rate environment may
accelerate the amortization of these costs in the future.

During the years ended September 30, 2002
and 2001, these revised assumptions resulted in an increase of
approximately $11.7 million and $4.3 million,
respectively, in deferred costs with a corresponding decrease in
the amortization of deferred acquisition costs. There were no
significant adjustments to the gross profit

23



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##### Table of Contents



estimates in 2000. The following table reflects
the future assumptions about and actual earnings rates,
crediting rates and lapse rates for the deferred annuity
business line at September 30:


|                               |  |             |       |        |  |      |       |      |  |  |       |   |  |  |       |  
|------------------------------ |  | ----------- | ----- | ------ |  | ---- | ----- | ---- |  |  | ----- | - |  |  | ----- | -
|                               |  |             |       |       
|                               |  |             |       | Actual
|                               |  | Future      |       |       
|                               |  | Assumptions |       | 2002   |  | 2001 |       | 2000
|                               |  |             |       |        |  |      |       |     
|Net investment earnings rate   |  |             | 10.80 | %      |  |      | 9.34  | %    |  |  | 7.33  | % |  |  | 7.03  | %
|Average credited interest rate |  |             | 5.05  | %      |  |      | 5.67  | %    |  |  | 5.82  | % |  |  | 5.81  | %
|Lapse rates                    |  |             | 15.90 |        |  |      | 13.27 |      |  |  | 19.85 |   |  |  | 30.23 |  

Income Taxes

The Consolidated Groups $8.4 million
tax benefit recorded during the fiscal year ended
September 30, 2001, includes an $11.2 million tax
benefit relating to an investment that was entered into in
conjunction with Metropolitan in 1999. In total, the investment
resulted in Western Life recording a $22.4 million tax
benefit, of which $11.2 million was also recorded as an
income tax benefit during the fiscal year ended
September 30, 1999. The objectives for the investment were
to produce economic gains combined with favorable tax benefits.
Similar investments were presented throughout the United States
to numerous individuals and companies (the
Participants) as an investment and tax strategy.
Prior to, and in conjunction with the investment, Metropolitan
received two independent tax opinions relating to the
investment. Additionally, Western Life and Metropolitan executed
a supplement to their Federal Tax Sharing Agreement allowing
Western Life to recover from Metropolitan up to
$11.2 million, plus applicable interest on the
$11.2 million, in federal income tax benefits derived from
this investment that are not otherwise utilized by Western Life.
The non-utilization of the income tax benefits could result from
the expiration of the net operating loss carry forward limit of
20 years, disallowance on audit, or any enactment of law
that may affect the utilization of the benefits.

The Internal Revenue Service (IRS) has
notified the Participants by general public notice that they
have taken the position that the tax benefits relative to the
investment would be disallowed. Western Life has received an
audit notice from the IRS for the tax year in which the benefit
attributable to the investment was claimed. However, a specific
review of Western Lifes investment and related activity
has not yet taken place. At September 30, 2002, the
Consolidated Group cannot reasonably estimate a loss, if any,
associated with this transaction. In the event of an unfavorable
determination relative to the investment, the earnings of the
Consolidated Group would be adversely affected by amounts
disallowed in excess of $11.2 million, including interest
if applicable. Any amounts that may be disallowed, up to
$11.2 million including any applicable interest, as a
result of an unfavorable determination are recoverable from
Metropolitan under the terms of the supplement to the Federal
Tax Sharing Agreement.

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##### Table of Contents



Financial Condition

The following depicts the distribution of the
Consolidated Groups assets as a percentage of total assets
as of September 30, 2002:

Assets as a Percentage of Total
Assets

(PIE CHART)

[PIE CHART]

|                                                                                                  |  |  |                                                        | 
|------------------------------------------------------------------------------------------------- |  |  | ------------------------------------------------------ | 
|                                                                                                  |  |  | Distribution of Assets as a Percentage of Total Assets | 
|Receivables Collateralized by Real Estate                                                         |  |  | 37.00                                                  | 
|Securities Investments                                                                            |  |  | 32.00                                                  | 
|Reinsurance Receivable                                                                            |  |  | 9.00                                                   | 
|Other Receivables(Structured Settlements,
    Lotteriesand Annuities and Direct Financing Leases) |  |  | 7.00                                                   | 
|Other                                                                                             |  |  | 7.00                                                   | 
|Deferred Costs                                                                                    |  |  | 5.00                                                   | 
|Real Estate Held for Sale and Development                                                         |  |  | 3.00                                                   | 



Receivables Collateralized by Real
Estate



| |                                                  
| | -------------------------------------------------
| | Current Mix of Receivable Investment
    Holdings

The Consolidated Groups investments in
Receivables include Receivables collateralized primarily by
first position single-family residential property and commercial
properties. At September 30, 2002, all of the Consolidated
Groups Receivables were held with first priority real
estate liens.

During the fiscal years ended September 30,
2002 and 2001, the Consolidated Group expanded the origination
of Commercial Loans. The expansion was due to the Consolidated
Groups current perception that this market may be
inadequately served by current lenders, who it believes are
inflexible in their underwriting and pricing policies and who
are not able to quickly underwrite and close these loans,
particularly in the temporary, bridge and development Commercial
Loan markets.

The stated yields of the mortgages collateralized
by commercial property are higher than the yield on Receivables
collateralized by single family residential property because the
market and credit risks are lower for the mortgages
collateralized by single family residential property and there
are less competitors with commercial real estate financing
capabilities. However, investments in Commercial Loans are less
diversified because the principal amount of a Commercial Loan is
generally greater than the principal amount of a residential
mortgage or other Receivable.

Management continually monitors economic and
demographic conditions throughout the country in an effort to
avoid a concentration of its acquired real estate Receivables in
those areas experiencing economic decline, which could result in
higher than anticipated default rates and subsequent investment
losses.

25



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##### Table of Contents



The following charts present information
regarding type of real estate collateral, lien priority and
geographical distribution of the Consolidated Groups
portfolio of outstanding real estate Receivables as of
September 30, 2002.

Receivables by Collateral Type

(PIE CHART)

[PIE CHART]

|            |  |  |                                                | 
|----------- |  |  | ---------------------------------------------- | 
|            |  |  | Distribution of Receivables by Collateral Type | 
|Commercial  |  |  | 58.00                                          | 
|Residential |  |  | 27.00                                          | 
|Other       |  |  | 15.00                                          | 



The Consolidated Groups real estate
Receivables at September 30, 2002 were collateralized by
properties located throughout the United States as follows:

|                  |  |            |       |             |  |  |       |  
|----------------- |  | ---------- | ----- | ----------- |  |  | ----- | -
|                  |  | Commercial |       | Residential
|                  |  | Originated |       | and Other  
|                  |  |            |       |            
|Pacific Southwest |  |            | 49.7  | %           |  |  | 25.9  | %
|Southeast         |  |            | 18.0  | %           |  |  | 11.8  | %
|Southwest         |  |            | 15.6  | %           |  |  | 18.1  | %
|Midwest           |  |            | 10.4  | %           |  |  | 4.7   | %
|Pacific Northwest |  |            | 6.3   | %           |  |  | 33.0  | %
|Northeast         |  |            |      |             |  |  | 6.5   | %
|                  |  |            |       |             |  |  |       |  
|                  |  |            | 100.0 | %           |  |  | 100.0 | %
|                  |  |            |       |             |  |  |       |  

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LOANS ON REAL ESTATE

SEPTEMBER 30, 2002


At September 30, 2002, the Consolidated
Group held contracts and mortgage notes Receivables with face
values as follows:

|                                                                                                      |  |             |             |            |  |          |            |          |  |  |      |   |  |  |      |  
|----------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | ---------- |  | -------- | ---------- | -------- |  |  | ---- | - |  |  | ---- | -
|                                                                                                      |  |             |             |            |  | Weighted |            |         
|                                                                                                      |  | Carrying    |             | Delinquent |  | Average  |            | Weighted
|                                                                                                      |  | Amount of   |             | Principal  |  | Coupon   |            | Average 
|Description                                                                                           |  | Receivables |             | Amount(2)  |  | Rate(3)  |            | Yield(4)
|                                                                                                      |  |             |             |            |  |          |            |         
|Commercial(1)                                                                                         |  | $           | 342,632,510 |            |  | $        | 25,240,264 |          |  |  | 13.1 | % |  |  | 15.8 | %
|Residential                                                                                           |  |             | 158,265,860 |            |  |          | 15,072,032 |          |  |  | 9.0  | % |  |  | 10.5 | %
|Other                                                                                                 |  |             | 88,862,967  |            |  |          | 5,668,721  |          |  |  | 9.6  | % |  |  | 12.0 | %
|Unrealized discounts, net of unamortized
    acquisition cost, on Receivables purchased at a discount |  |             | (11,882,827 | )          |  |          |            |          |  |  |      |   |  |  |      |  
|                                                                                                      |  |             |             |            |  |          |            |          |  |  |      |   |  |  |      |  
|CARRYING VALUE                                                                                        |  | $           | 577,878,510 |            |  | $        | 45,981,017 |          |  |  |      |   |  |  |      |  
|                                                                                                      |  |             |             |            |  |          |            |          |  |  |      |   |  |  |      |  



---



|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The commercial real estate Receivables are
    defined as those generated through the Consolidated Groups
    commercial lending source.                 
|   
|(2) | The principal amounts of real estate Receivables
    subject to delinquent principal or interest is defined as being
    in arrears for more than 90 days.
|   
|(3) | Less than 1% of the real estate Receivables are
    subject to variable interest rates.                                                                   
|   
|(4) | See RECEIVABLE INVESTMENTSYield and
    Discount Considerations under Item 1.                                                                          

The future maturities of the aggregate amounts of
Commercial Loans (face amount) at September 30, 2002 are as
follows:

|                                      |  |            |             | 
|------------------------------------- |  | ---------- | ----------- | 
|                                      |  | Commercial
|                                      |  | Principal 
|                                      |  |           
|Due in one year or less               |  | $          | 101,140,252 | 
|Due after one year through five years |  |            | 177,884,387 | 
|Due after five years                  |  |            | 63,607,871  | 
|                                      |  |            |             | 
|                                      |  | $          | 342,632,510 | 
|                                      |  |            |             | 

At September 30, 2001, the Consolidated
Group held contracts and mortgage notes Receivables with face
values as follows:

|                                                                                                      |  |             |             |            |  |          |            |          |  |  |      |   |  |  |      |  
|----------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | ---------- |  | -------- | ---------- | -------- |  |  | ---- | - |  |  | ---- | -
|                                                                                                      |  |             |             |            |  | Weighted |            |         
|                                                                                                      |  | Carrying    |             | Delinquent |  | Average  |            | Weighted
|                                                                                                      |  | Amount of   |             | Principal  |  | Coupon   |            | Average 
|Description                                                                                           |  | Receivables |             | Amount(2)  |  | Rate(3)  |            | Yield(4)
|                                                                                                      |  |             |             |            |  |          |            |         
|Commercial(1)                                                                                         |  | $           | 123,259,529 |            |  | $        | 5,742,560  |          |  |  | 13.3 | % |  |  | 14.3 | %
|Residential                                                                                           |  |             | 167,219,530 |            |  |          | 12,545,448 |          |  |  | 9.1  | % |  |  | 10.5 | %
|Other                                                                                                 |  |             | 115,995,207 |            |  |          | 12,113,412 |          |  |  | 9.7  | % |  |  | 13.9 | %
|Unrealized discounts, net of unamortized
    acquisition cost, on Receivables purchased at a discount |  |             | (16,216,404 | )          |  |          |            |          |  |  |      |   |  |  |      |  
|                                                                                                      |  |             |             |            |  |          |            |          |  |  |      |   |  |  |      |  
|CARRYING VALUE                                                                                        |  | $           | 390,257,862 |            |  | $        | 30,401,420 |          |  |  |      |   |  |  |      |  
|                                                                                                      |  |             |             |            |  |          |            |          |  |  |      |   |  |  |      |  



---



|    |                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------
|(1) | The commercial real estate Receivables are
    defined as those generated through the Consolidated Groups
    commercial lending source.

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|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The principal amounts of real estate Receivables
    subject to delinquent principal or interest is defined as being
    in arrears for more than 90 days.
|   
|(3) | Less than 1% of the real estate Receivables are
    subject to variable interest rates.                                                                   
|   
|(4) | See RECEIVABLE INVESTMENTSYield and
    Discount Considerations under Item 1.                                                                          

The future maturities of the aggregate amounts of
Commercial Loans (face amount) at September 30, 2001 are as
follows:

|                                      |  |            |             | 
|------------------------------------- |  | ---------- | ----------- | 
|                                      |  | Commercial
|                                      |  | Principal 
|                                      |  |           
|Due in one year or less               |  | $          | 35,336,935  | 
|Due after one year through five years |  |            | 81,150,290  | 
|Due after five years                  |  |            | 6,772,304   | 
|                                      |  |            |             | 
|                                      |  | $          | 123,259,529 | 
|                                      |  |            |             | 

Securities Investments

The following table outlines the nature and
carrying value of securities investments held by the
Consolidated Group at September 30, 2002:

|                              |                                      |            |             |             |  |       |            |            |  |   |             |             |  |  |        |       |  
|----------------------------- | ------------------------------------ | ---------- | ----------- | ----------- |  | ----- | ---------- | ---------- |  | - | ----------- | ----------- |  |  | ------ | ----- | -
|                              |                                      | Available- |             |             |  |       |            |           
|                              |                                      | For-Sale   |             | Held-To-    |  |       |            |           
|                              |                                      | Portfolio  |             | Maturity    |  | Total |            | Percentage
|                              |                                      |            |             |             |  |       |            |           
|Total Amount                  |                                      | $          | 458,488,402 |             |  | $     | 39,223,983 |            |  | $ | 497,712,385 |             |  |  | 100.00 | %    
|                              |                                      |            |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|Invested in:                  |                                      |            |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|                              | Fixed Income                         |            | $           | 418,469,662 |  |       | $          | 39,223,983 |  |   | $           | 457,693,645 |  |  |        | 91.96 | %
|                              | Equities                             |            |             | 36,974,929  |  |       |            |           |  |   |             | 36,974,929  |  |  |        | 7.43  |  
|                              | Venture Capital/ Limited Partnership |            |             | 3,043,811   |  |       |            |           |  |   |             | 3,043,811   |  |  |        | 0.61  |  
|                              |                                      |            |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|                              |                                      | $          | 458,488,402 |             |  | $     | 39,223,983 |            |  | $ | 497,712,385 |             |  |  | 100.00 | %    
|                              |                                      |            |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|Fixed Income:                 |                                      |            |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|                              | U.S. Government                      |            | $           | 110,297     |  |       | $          |           |  |   | $           | 110,297     |  |  |        | 0.02  | %
|                              | Other                                |            |             | 418,359,365 |  |       |            | 39,223,983 |  |   |             | 457,583,348 |  |  |        | 99.98 |  
|                              |                                      |            |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|                              |                                      | $          | 418,469,662 |             |  | $     | 39,223,983 |            |  | $ | 457,693,645 |             |  |  | 100.00 | %    
|                              |                                      |            |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|Other Fixed Income by Rating: |                                      |            |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|                              | AAA                                  |            | $           | 320,027,078 |  |       | $          | 39,223,983 |  |   | $           | 359,251,061 |  |  |        | 78.50 | %
|                              | AA                                   |            |             | 11,812,356  |  |       |            |           |  |   |             | 11,812,356  |  |  |        | 2.58  |  
|                              | A                                    |            |             | 4,785,648   |  |       |            |           |  |   |             | 4,785,648   |  |  |        | 1.05  |  
|                              | BBB                                  |            |             | 35,309,413  |  |       |            |           |  |   |             | 35,309,413  |  |  |        | 7.72  |  
|                              | BB                                   |            |             | 33,846,902  |  |       |            |           |  |   |             | 33,846,902  |  |  |        | 7.40  |  
|                              | B                                    |            |             | 8,144,792   |  |       |            |           |  |   |             | 8,144,792   |  |  |        | 1.78  |  
|                              | Other                                |            |             | 4,433,176   |  |       |            |           |  |   |             | 4,433,176   |  |  |        | 0.97  |  
|                              |                                      |            |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|                              |                                      | $          | 418,359,365 |             |  | $     | 39,223,983 |            |  | $ | 457,583,348 |             |  |  | 100.00 | %    

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|                                     |                            |            |             |             |  |       |            |            |  |   |             |             |  |  |        |       |  
|------------------------------------ | -------------------------- | ---------- | ----------- | ----------- |  | ----- | ---------- | ---------- |  | - | ----------- | ----------- |  |  | ------ | ----- | -
|                                     |                            | Available- |             |             |  |       |            |           
|                                     |                            | For-Sale   |             | Held-To-    |  |       |            |           
|                                     |                            | Portfolio  |             | Maturity    |  | Total |            | Percentage
|                                     |                            |            |             |             |  |       |            |           
|                                     |                            |            |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|Other Fixed Income by Market Sector: |                            |            |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|                                     | Mortgage- and asset-backed |            | $           | 398,448,318 |  |       | $          | 39,223,983 |  |   | $           | 437,672,301 |  |  |        | 95.64 | %
|                                     | Finance                    |            |             | 161,500     |  |       |            |           |  |   |             | 161,500     |  |  |        | 0.04  |  
|                                     | Industrial                 |            |             | 17,428,147  |  |       |            |           |  |   |             | 17,428,147  |  |  |        | 3.81  |  
|                                     | Utilities                  |            |             | 2,321,400   |  |       |            |           |  |   |             | 2,321,400   |  |  |        | 0.51  |  
|                                     |                            |            |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|                                     |                            | $          | 418,359,365 |             |  | $     | 39,223,983 |            |  | $ | 457,583,348 |             |  |  | 100.00 | %    
|                                     |                            |            |             |             |  |       |            |            |  |   |             |             |  |  |        |      



| |                                 
| | --------------------------------
| | Unrealized Losses on Investments

Temporary declines in the fair market value of
investments that are available-for-sale are excluded
from earnings and presented as accumulated other comprehensive
income or loss, net of related income taxes. The Consolidated
Group continually monitors its investment portfolio for other
than temporary impairments of its securities. When an other than
temporary decline in value below cost or amortized cost is
identified, the investment is reduced to its fair market value,
which becomes the new cost basis of the investment. The amount
of reduction is reported as a realized loss in the statement of
operations. In determining whether the losses are temporary or
other than temporary, the Consolidated Group considers
(1) the length of time and extent to which the fair market
value has been less than cost, (2) the circumstances
contributing to the decline in fair market value (including a
change in interest rates or spreads to benchmarks),
(3) recent performance of the security, (4) the
financial strength of the issuer, and (5) the intent and
ability of the Consolidated Group to retain the investment for a
period of time sufficient to allow for anticipated recovery.
Additionally, for asset-backed investments, the Consolidated
Group also considers the credit rating and determines the amount
of credit support available for the security. At
September 30, 2002, the Consolidated Groups
investment portfolio had approximately $3.4 million in
unrealized losses that were deemed to be temporary. To the
extent that any losses currently deemed as temporary are
determined to be other than temporary in the future, the
unrealized losses will be reported as realized losses in future
statements of operations.

The following table stratifies the unrealized
losses as of September 30, 2002 by investment category:

|                                      |                               |                |            |                   |  |   |            |            |  
|------------------------------------- | ----------------------------- | -------------- | ---------- | ----------------- |  | - | ---------- | ---------- | -
|                                      |                               | Carrying Value |            | Unrealized Losses
|                                      |                               |                |            |                  
|Corporate bonds                       |                               | $              | 9,916,310  |                   |  | $ | (365,764   | )         
|Mortgage- and asset-backed securities |                               |                | 79,208,456 |                   |  |   | (2,306,998 | )         
|                                      |                               |                |            |                   |  |   |            |           
|                                      | Total fixed income securities |                |            | 89,124,766        |  |   |            | (2,672,762 | )
|                                      |                               |                |            |                   |  |   |            |           
|Common stock                          |                               |                | 2,420,502  |                   |  |   | (427,147   | )         
|Preferred stock                       |                               |                | 8,902,959  |                   |  |   | (266,625   | )         
|                                      |                               |                |            |                   |  |   |            |           
|                                      | Totals                        |                | $          | 100,448,227       |  |   | $          | (3,366,534 | )
|                                      |                               |                |            |                   |  |   |            |           

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The following table stratifies the unrealized
losses as of September 30, 2002 by market sector:

|                                   |                               |                |            |                   |  |   |            |            |  
|---------------------------------- | ----------------------------- | -------------- | ---------- | ----------------- |  | - | ---------- | ---------- | -
|                                   |                               | Carrying Value |            | Unrealized Losses
|                                   |                               |                |            |                  
|Corporate bonds                    |                               | $              | 9,916,310  |                   |  | $ | (365,764   | )         
|Collateralized mortgage obligation |                               |                | 43,109,358 |                   |  |   | (548,976   | )         
|Other asset-backed                 |                               |                | 30,789,919 |                   |  |   | (1,757,131 | )         
|Home equity                        |                               |                | 5,309,179  |                   |  |   | (891       | )         
|                                   |                               |                |            |                   |  |   |            |           
|                                   | Total fixed income securities |                |            | 89,124,766        |  |   |            | (2,672,762 | )
|                                   |                               |                |            |                   |  |   |            |           
|Common stock                       |                               |                | 2,420,502  |                   |  |   | (427,147   | )         
|Preferred stock                    |                               |                | 8,902,959  |                   |  |   | (266,625   | )         
|                                   |                               |                |            |                   |  |   |            |           
|                                   | Totals                        |                | $          | 100,448,227       |  |   | $          | (3,366,534 | )
|                                   |                               |                |            |                   |  |   |            |           

The following table stratifies the unrealized
losses as of September 30, 2002 by credit rating:

|             |        |                |            |                   |  |   |          |            |  
|------------ | ------ | -------------- | ---------- | ----------------- |  | - | -------- | ---------- | -
|             |        | Carrying Value |            | Unrealized Losses
|             |        |                |            |                  
|AAA          |        | $              | 49,544,782 |                   |  | $ | (887,956 | )         
|AA           |        |                | 3,658,679  |                   |  |   | (215,905 | )         
|A            |        |                | 7,565,285  |                   |  |   | (507,286 | )         
|BBB          |        |                | 7,353,817  |                   |  |   | (310,155 | )         
|BB           |        |                | 24,130,531 |                   |  |   | (895,440 | )         
|B            |        |                | 4,130,918  |                   |  |   | (122,372 | )         
|Other        |        |                | 1,643,713  |                   |  |   | (272     | )         
|Common stock |        |                | 2,420,502  |                   |  |   | (427,147 | )         
|             |        |                |            |                   |  |   |          |           
|             | Totals |                | $          | 100,448,227       |  |   | $        | (3,366,533 | )
|             |        |                |            |                   |  |   |          |           

Unrealized losses relating to the investment
grade assets (BBB and higher) are generally due to changes in
interest rates that may include changes in spreads to benchmarks
for a particular sector of the market. To the extent that
unrealized losses in the Consolidated Groups investment
grade portfolio are the result of issues other than interest
rate changes, the investments are evaluated for other than
temporary impairment. At September 30, 2002, approximately
$1.7 million in unrealized losses in the Consolidated
Groups investment grade assets and approximately $34,000
in non-investment grade assets were due to investments in
airline-related asset-backed securities. In determining whether
these losses were temporary or other than temporary, the
Consolidated Group considered (1) recent performance of the
security, (2) the credit rating of the security,
(3) the amount of credit support available for the
security, (4) circumstances contributing to the decline in
value, (5) the length of time and extent to which the fair
value has been less than cost, and (6) the intent and
ability of the Consolidated Group to retain the investment for a
period of time sufficient to allow for anticipated recovery.

The following table stratifies the unrealized
losses as of September 30, 2002 by trading class:

|           |        |                |             |                   |  |   |            |            |  
|---------- | ------ | -------------- | ----------- | ----------------- |  | - | ---------- | ---------- | -
|           |        | Carrying Value |             | Unrealized Losses
|           |        |                |             |                  
|Traded     |        | $              | 100,448,227 |                   |  | $ | (3,366,533 | )         
|Non-Traded |        |                |            |                   |  |   |           |           
|           |        |                |             |                   |  |   |            |           
|           | Totals |                | $           | 100,448,227       |  |   | $          | (3,366,533 | )
|           |        |                |             |                   |  |   |            |           

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The following table stratifies the unrealized
losses as of September 30, 2002 by length of time the
securities have continuously been in an unrealized loss position:

|                         |                      |                |  |                   |             |  |  |          |            |  
|------------------------ | -------------------- | -------------- |  | ----------------- | ----------- |  |  | -------- | ---------- | -
|                         |                      | Carrying Value |  | Unrealized Losses
|                         |                      |                |  |                  
|Fixed Income Securities: |                      |                |  |                   |             |  |  |         
|                         | Investment Grade     |                |  |                   |             |  |  |          |           
|                         |                      | 0-6 months     |  | $                 | 47,792,042  |  |  | $        | (633,420   | )
|                         |                      | 7-12 months    |  |                   |            |  |  |          |           |  
|                         |                      | 13-18 months   |  |                   | 20,365,693  |  |  |          | (1,736,406 | )
|                         | Non-Investment Grade |                |  |                   |             |  |  |          |           
|                         |                      | 0-6 months     |  |                   | 20,967,031  |  |  |          | (302,935   | )
|Preferred Stock:         |                      |                |  |                   |             |  |  |         
|                         | 0-6 months           |                |  | 8,902,959         |             |  |  | (266,625 | )         
|Common Stock:            |                      |                |  |                   |             |  |  |         
|                         | 0-6 months           |                |  | 2,420,502         |             |  |  | (427,147 | )         
|                         |                      |                |  |                   |             |  |  |         
|                         |                      | Total          |  | $                 | 100,448,227 |  |  | $        | (3,366,533 | )
|                         |                      |                |  |                   |             |  |  |         

The maturities of fixed income investments that
are in an unrealized loss position at September 30, 2002
are as follows:

|                                       |                                                 |                |            |                   |  |   |            |            |  
|-------------------------------------- | ----------------------------------------------- | -------------- | ---------- | ----------------- |  | - | ---------- | ---------- | -
|                                       |                                                 | Carrying Value |            | Unrealized Losses
|                                       |                                                 |                |            |                  
|Due in one year through five years     |                                                 | $              | 2,120,885  |                   |  | $ | (99,292    | )         
|Due after five years through ten years |                                                 |                | 7,295,425  |                   |  |   | (266,468   | )         
|Due thereafter                         |                                                 |                | 500,000    |                   |  |   | (4         | )         
|                                       |                                                 |                |            |                   |  |   |            |           
|                                       | Total non-mortgage- and asset-backed securities |                |            | 9,916,310         |  |   |            | (365,764   | )
|Mortgage- and asset-backed securities  |                                                 |                | 79,208,456 |                   |  |   | (2,306,998 | )         
|                                       |                                                 |                |            |                   |  |   |            |           
|                                       | Total fixed income securities                   |                | $          | 89,124,766        |  |   | $          | (2,672,762 | )
|                                       |                                                 |                |            |                   |  |   |            |           

The Consolidated Group is authorized by its
investment policies to use financial futures instruments for the
purpose of hedging interest rate risk relative to the securities
portfolio or potential trading situations. In both cases, the
futures transactions are intended to reduce the risk associated
with price movements for a balance sheet asset. Securities may
be sold short, the sale of securities that are not
currently in the portfolio and therefore must be purchased to
close out the sale agreement, as another means of hedging
interest rate risk to benefit from an anticipated movement in
the financial markets. At September 30, 2002 and 2001, the
Consolidated Group had no open hedging positions relative to
hedging its securities portfolio.

Other Receivables

On behalf of the Consolidated Group, Metropolitan
also negotiates the purchase of Receivables that are not
collateralized by real estate, such as structured settlements,
annuities and lottery prizes. The lottery prizes generally arise
out of state operated lottery games that are typically paid in
annual installments to the prizewinner. The structured
settlements generally arise out of the settlement of legal
disputes whereby the prevailing party is awarded a sum of money,
payable over a period of time, generally through the creation of
an annuity. Other annuities generally consist of investments
that cannot be immediately converted to cash directly with the
issuing insurance company.

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The following table outlines the nature and
carrying value of other Receivables held by the Consolidated
Group at September 30, 2002:

|             |                                   |                |             |            |  |  |        |       |  
|------------ | --------------------------------- | -------------- | ----------- | ---------- |  |  | ------ | ----- | -
|             |                                   | Carrying Value |             | Percentage
|             |                                   |                |             |           
|Invested in: |                                   |                |             |            |  |  |        |      
|             | Lotteries                         |                | $           | 89,836,442 |  |  |        | 84.72 | %
|             | Annuities/ Structured settlements |                |             | 13,516,227 |  |  |        | 12.75 |  
|             | Other                             |                |             | 2,687,699  |  |  |        | 2.53  |  
|             |                                   |                |             |            |  |  |        |      
|             |                                   | $              | 106,040,368 |            |  |  | 100.00 | %    
|             |                                   |                |             |            |  |  |        |      

Real Estate Held for Sale and
Development

From time to time, Western Life may acquire
development properties through a purchase from Metropolitan or
other third parties. The development or improvement of
properties is undertaken for the purpose of enhancing values to
increase marketability and to maximize profit potential.

The following development properties exceeded 5%
of the Consolidated Groups stockholders equity at
September 30, 2002.

|                     |  |          |            | 
|-------------------- |  | -------- | ---------- | 
|                     |  | Carrying
|Property Description |  | Value   
|                     |  |         
|Spokane Valley Plaza |  | $        | 12,307,980 | 
|Sunset Beach         |  |          | 10,132,174 | 

Spokane Valley Plaza

This property is located near the Sullivan Road
and Interstate 90 freeway interchange just east of Spokane,
Washington and consists of 28.15 acres of land zoned for
regional commercial use. Currently, the property has 84,000
square feet of leasable space with 83,015 square feet occupied.
Additionally, there is capacity for an additional 59,509 square
feet of leasable space available for development.

Sunset Beach

This property is 19.1 acres of development
property on the North Shore of Oahu, Hawaii. During fiscal 2002,
the Consolidated Group finalized the necessary entitlements to
develop the property into a 29-lot residential subdivision in
order to begin to sell the residential lots.

Repossessions

In the course of its real estate Receivable
investment activity, the Consolidated Group acquires various
parcels of real estate as a result of foreclosures and/or
voluntary repossessions. It is the Consolidated Groups
general policy to attempt to resell these properties at the
earliest possible time following acquisition. Improvements are
made to some properties for the purpose of preservation or
restoration to maximize the resale price. A committee that
includes sales and management personnel reviews the marketing
status of all properties at least monthly. Generally,
repossessed properties are resold within one year from the date
of repossession. There were no repossessed properties with net
realizable values greater than 5% of stockholders equity
at September 30, 2002.

Asset Quality

Servicing and Delinquency Experience

Prior to April 2001, Metwest performed the
servicing and collection functions related to the Consolidated
Groups Receivable portfolio in accordance with an
established servicing agreement. In April 2001, as a result of
Metropolitans decision to stop performing loan servicing
operations, the Consolidated Group participated with some of its
affiliates in a transaction with a wholly owned subsidiary of
Ocwen Financial Corporation

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(NYSE: OCN), whereby the servicing rights to
Receivables and foreclosed properties held for sale were
transferred to Ocwen. In October 2001, the Consolidated Group
entered into a sub-servicing agreement, where Ocwen will provide
servicing for the majority of the remaining Receivable portfolio
in addition to its future acquisitions of new Receivables. As
the Consolidated Groups servicer, Ocwen is responsible for
all servicing related functions ranging from payment processing
to the liquidation of property acquired as a result of
foreclosure. Moodys Investor Service, Inc.
(Moodys) assigned its highest rating, SQ1, to
Ocwen as a Primary Servicer of subprime loans and as a Specialty
Servicer. Ocwen carries a level 2 Fitch servicer rating.
According to Fitch, level 2 servicers have demonstrated
high performance in all relevant categories. Ocwens
primary business is the servicing and special servicing of
nonconforming and sub-prime residential and commercial mortgage
loans. Ocwen also specializes in the related development of loan
servicing technology and software for the mortgage and real
estate industries. As of September 30, 2002, Ocwen serviced
approximately 64% of the Consolidated Groups Receivable
portfolio. Metwest serviced the remaining 36%.


The principal amount of the Consolidated
Groups Commercial Loans (as a percentage of total
outstanding Commercial Loans) that were in arrears for more than
90 days as of the following dates were as follows:

|                   |  |            |             |            |  |            |            |  |  |  |      |  
|------------------ |  | ---------- | ----------- | ---------- |  | ---------- | ---------- |  |  |  | ---- | -
|                   |  | Total      |             | Commercial |  |           
|                   |  | Commercial |             | Loans in   |  | Percentage
|                   |  | Loans      |             | Arrears    |  | in Arrears
|                   |  |            |             |            |  |           
|September 30, 2002 |  | $          | 342,632,510 |            |  | $          | 25,240,264 |  |  |  | 7.37 | %
|September 30, 2001 |  | $          | 123,259,529 |            |  | $          | 5,742,560  |  |  |  | 4.66 | %
|September 30, 2000 |  | $          | 4,716,983   |            |  | $          |           |  |  |  | 0.00 | %

In addition to the amounts included in the table
above at September 30, 2002, there were approximately
$23.9 million in additional delinquent loans that the
Consolidated Group had serious doubts that the borrowers had the
ability to comply with present loan repayment terms, and
therefore may become 90 days delinquent. As of
September 30, 2002, these loans accounted for 7.0% of the
total outstanding commercial Receivables collateralized by real
estate, but were not included in the table above because they
were less than 90 days delinquent.

When a payment becomes delinquent on a Commercial
Loan, either Ocwens or Metropolitans collection unit
will begin making the collection calls immediately. If the
defaulted payment is not received by the next payment due date,
a notice of default is sent to the borrower and the account is
assigned to one of Metropolitans workout managers
according to the property type, size of loan and complexity of
transaction. The workout manager will review the file and
related documentation and attempt to contact the borrower to
negotiate with the borrower to cure the default. If after the
expiration of the notice of default, the default is not cured,
counsel begins foreclosure immediately. Concurrent with the
notice of default period and the foreclosure process, the
assigned workout manager will continue to contact and attempt to
negotiate a full reinstatement with the borrower. During this
same period, the workout manager will also develop a workout
program and make recommendations to Metropolitans problem
loan review committee for approval. As a part of formulating
this workout plan, the workout manager will typically visit the
collateral property, talk with local experts and make an
assessment of the condition of the collateral and its
marketability in the event of a potential foreclosure. The final
workout plan is presented to the problem loan review committee
with all relevant information regarding contact with the
borrower, condition and marketability of collateral and an
assessment of the likelihood of default cure or recovery of the
loan balance if the default continues through foreclosure. Any
actions undertaken by the workout manager with the borrower that
would result in other than full reinstatement are subject to
prior approval by the problem loan review committee.

The problem loan review committee is composed of
representatives from Metropolitans underwriting, risk
management, operations, commercial lending, legal and property
development departments. The committee meets weekly and reviews
all newly defaulted loans, continuing defaulted loans, loans in
foreclosure, loans in bankruptcy and all repossessed properties
for developments and progress on approved workout plans.

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The principal amount of the Consolidated
Groups residential and other Receivables collateralized by
real estate (as a percentage of total residential and other
Receivables collateralized by real estate) that were in arrears
for more than 90 days as of the following dates were as
follows:

|                   |  |             |             |                |  |            |            |  |  |  |      |  
|------------------ |  | ----------- | ----------- | -------------- |  | ---------- | ---------- |  |  |  | ---- | -
|                   |  | Total       |             | Residential    |  |           
|                   |  | Residential |             | and Other      |  |           
|                   |  | and Other   |             | Real Estate    |  |           
|                   |  | Real Estate |             | Receivables in |  | Percentage
|                   |  | Receivables |             | Arrears        |  | in Arrears
|                   |  |             |             |                |  |           
|September 30, 2002 |  | $           | 247,128,827 |                |  | $          | 20,740,753 |  |  |  | 8.39 | %
|September 30, 2001 |  | $           | 283,214,737 |                |  | $          | 24,658,860 |  |  |  | 8.71 | %
|September 30, 2000 |  | $           | 330,264,228 |                |  | $          | 19,656,652 |  |  |  | 5.95 | %

The real estate Receivables acquired by the
Consolidated Group are generally A-, B and C credit Receivables.
Management expects higher delinquency rates than those expected
on conventional loans because Receivables purchased or
originated by the Consolidated Group are typically not of the
same quality as mortgages that are originated for sale to
agencies such as Fannie Mae. Management believes that the
economic effects of these higher delinquency rates will be
generally offset by the higher yields expected to be received on
these Receivables than those typically received on the
conventional A credit lending markets and the value
of the underlying collateral.

The carrying amount of the Consolidated
Groups other Receivable investments not collateralized by
real estate (as a percentage of total other Receivable
investments) that were in arrears for more than 90 days as
of the following dates were as follows:

|                   |  |             |             |             |  |            |           |  |  |  |      |  
|------------------ |  | ----------- | ----------- | ----------- |  | ---------- | --------- |  |  |  | ---- | -
|                   |  |             |             | Other       |  |           
|                   |  | Total Other |             | Receivables |  | Percentage
|                   |  | Receivables |             | in Arrears  |  | in Arrears
|                   |  |             |             |             |  |           
|September 30, 2002 |  | $           | 106,040,368 |             |  | $          | 2,938,657 |  |  |  | 2.77 | %
|September 30, 2001 |  | $           | 149,852,082 |             |  | $          | 2,525,875 |  |  |  | 1.69 | %
|September 30, 2000 |  | $           | 154,059,023 |             |  | $          | 2,027,663 |  |  |  | 1.32 | %

Provision and Allowance for Losses on
Receivables

Changes in the allowance for losses on
Receivables were as follows:

|                                                |                                         |      |           |            |   |      |           |            |   |   |           |            |  
|----------------------------------------------- | --------------------------------------- | ---- | --------- | ---------- | - | ---- | --------- | ---------- | - | - | --------- | ---------- | -
|                                                |                                         | 2002 |           | 2001       |   | 2000
|                                                |                                         |      |           |            |   |     
|Beginning balance                               |                                         | $    | 9,166,763 |            |   | $    | 6,275,101 |            |   | $ | 3,037,582 |           
|Provisions                                      |                                         |      | 4,536,451 |            |   |      | 4,175,344 |            |   |   | 4,792,818 |           
|Charge offs:                                    |                                         |      |           |            |   |      |           |            |   |   |           |           
|                                                | Commercial Loans                        |      |           | (1,960,777 | ) |      |           |           |   |   |           |           |  
|                                                | Residential and other real estate loans |      |           | (3,044,659 | ) |      |           | (1,261,454 | ) |   |           | (1,555,299 | )
|                                                | Other receivable investments            |      |           |           |   |      |           | (22,228    | ) |   |           |           |  
|                                                |                                         |      |           |            |   |      |           |            |   |   |           |           
|Ending balance                                  |                                         | $    | 8,697,778 |            |   | $    | 9,166,763 |            |   | $ | 6,275,101 |           
|                                                |                                         |      |           |            |   |      |           |            |   |   |           |           
|Charge offs as a percent of average Receivables |                                         |      | 0.80      | %          |   |      | 0.25      | %          |   |   | 0.29      | %         
|Allowance as a percentage of total Receivables  |                                         |      | 1.25      | %          |   |      | 1.65      | %          |   |   | 1.28      | %         

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An analysis of the allowance for losses on
Receivables was as follows:

|                                        |  |            |           |            |  |             |      |   |  |  |        |  
|--------------------------------------- |  | ---------- | --------- | ---------- |  | ----------- | ---- | - |  |  | ------ | -
|                                        |  | Allocated  |           | Allocated  |  | Loan       
|                                        |  | Allowance  |           | Allowance  |  | Category   
|                                        |  | for        |           | as a % of  |  | as a % of  
|                                        |  | Receivable |           | Receivable |  | Total      
|                                        |  | Losses     |           | Category   |  | Receivables
|                                        |  |            |           |            |  |            
|2002                                    |  |            |           |            |  |             |      |   |  |  |        |  
|Commercial Loans                        |  | $          | 3,005,873 |            |  |             | 0.88 | % |  |  | 49.24  | %
|Residential and other real estate loans |  |            | 4,033,621 |            |  |             | 1.63 | % |  |  | 35.52  | %
|Other receivable investments            |  |            | 383,932   |            |  |             | 0.36 | % |  |  | 15.24  | %
|Unallocated                             |  |            | 1,274,352 |            |  |             | 0.22 | % |  |  | 0.00   | %
|                                        |  |            |           |            |  |             |      |   |  |  |        |  
|                                        |  | $          | 8,697,778 |            |  |             | 1.25 | % |  |  | 100.00 | %
|                                        |  |            |           |            |  |             |      |   |  |  |        |  
|2001                                    |  |            |           |            |  |             |      |   |  |  |        |  
|Commercial Loans                        |  | $          | 1,960,408 |            |  |             | 1.59 | % |  |  | 22.16  | %
|Residential and other real estate loans |  |            | 5,247,681 |            |  |             | 1.85 | % |  |  | 50.91  | %
|Other receivable investments            |  |            | 1,088,347 |            |  |             | 0.73 | % |  |  | 26.93  | %
|Unallocated                             |  |            | 870,327   |            |  |             | 0.21 | % |  |  | 0.00   | %
|                                        |  |            |           |            |  |             |      |   |  |  |        |  
|                                        |  | $          | 9,166,763 |            |  |             | 1.65 | % |  |  | 100.00 | %
|                                        |  |            |           |            |  |             |      |   |  |  |        |  
|2000                                    |  |            |           |            |  |             |      |   |  |  |        |  
|Commercial Loans                        |  | $          | 115,258   |            |  |             | 2.44 | % |  |  | 0.96   | %
|Residential and other real estate loans |  |            | 4,597,590 |            |  |             | 1.39 | % |  |  | 67.53  | %
|Other receivable investments            |  |            | 894,889   |            |  |             | 0.58 | % |  |  | 31.51  | %
|Unallocated                             |  |            | 667,364   |            |  |             | 0.20 | % |  |  | 0.00   | %
|                                        |  |            |           |            |  |             |      |   |  |  |        |  
|                                        |  | $          | 6,275,101 |            |  |             | 1.28 | % |  |  | 100.00 | %
|                                        |  |            |           |            |  |             |      |   |  |  |        |  

The allowance for losses on Receivables
represents managements estimate of credit losses inherent
in the portfolios as of the balance sheet dates. Management
performs regular reviews in order to identify these inherent
losses and to assess the overall collection probability of the
portfolios. This process provides an allowance that consists of
two components: allocated and unallocated. To arrive at the
allocated component, the Consolidated Group combines estimates
of the allowance needed for loans that are evaluated
collectively and those that are evaluated individually.

Commercial Loans are individually monitored for
impairment. When a loan has been identified as impaired, the
Consolidated Group determines the allowance for loss based on
the estimated fair market value, less estimated liquidation
expenses, of the collateral compared to the carrying value of
the Receivable, including accrued interest. The estimated fair
value is based on the most recent appraisal of the collateral.
If the most recent appraisal is more than one year old, a new
appraisal is ordered. In the interim, estimated fair value is
established through a review of the most recent appraisal in
addition to a review of other relevant market information. When
reviewing the most recent appraisal, management considers
several factors. Some of those factors include the type of
property, changes in regional economic factors, the underlying
appraisal assumptions, and any recent communication with local
real estate brokers. If the estimated fair market value of the
collateral is less than the carrying value, including accrued
interest, an allowance for loss is recorded. The increase in the
allowance for losses on Commercial Loans in fiscal 2002 was due
to an increase in the Consolidated Groups commercial
lending activities. Fluctuations in the provision for losses
and/or percentage of allowance to outstanding principal result
from using the specific impairment methodology.

The Consolidated Group establishes an allowance
for losses on residential and other real estate Receivables,
including accrued interest, inherent in the portfolio at the
balance sheet date based primarily on current delinquencies and
historical foreclosure and loss experience. The residential and
other Receivable portfolio is comprised of a large group of
smaller-balance homogeneous loans that are collectively evaluated

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for impairment. During the fiscal year ended
September 30, 2000, the Consolidated Group revised its
expected foreclosure and loss severity assumptions for the
sub-prime loans that were previously acquired by the
Consolidated Group. Originally, the assumptions used for the
sub-prime loans were based on the historical performance of the
Consolidated Groups Receivable portfolio, which were
primarily seller-financed Receivables. The Consolidated Group
used the seller-financed based assumptions because they
anticipated that the sub-prime loans that were being acquired
would perform the same as the seller-financed loans. When the
Consolidated Group determined that the expected performance of
the sub-prime loans differed from its initial assumptions, and
such actual performance is not generally known until
12-24 months after origination, it revised the expected
future loss rate accordingly. The Consolidated Group
discontinued its acquisitions of sub-prime loans in January 2001.


The reduction in the ending reserve balance on
residential and other real estate loans during the fiscal year
ended September 30, 2002 was primarily due to the overall
seasoning of the loan portfolio. As the Consolidated Group has
recently focused on Commercial Loan originations, the remaining
real estate Receivable portfolio has been decreasing in size due
to payoffs and maturities. The remaining portfolio, which is
comprised of production from previous years, contains different
loss potential characteristics depending upon the year the loans
were produced (production pool years). Not all production pool
years will experience the same rate of loss over their
respective remaining lives. Pools that have seasoned beyond the
four-year mark generally experience lower future losses than
pools that are less seasoned.

During the fiscal year ended September 30,
2000, the Consolidated Group established an allowance for loss
on its investments in annuity and structured settlements as the
industry began to focus on state and federal collection laws and
their applicability to annuity and structured settlement
payments.

The reduction in ending allocated allowance
balances for other Receivable investments during the fiscal year
ended September 30, 2002 was due to a positive change in
the federal tax law effecting structured settlement transfers
and the consequential cooperation by certain annuity issuers
with respect to the payment of defaulted, and in some cases
current, structured settlements.

In estimating the amount of credit losses
inherent in the Receivable portfolios, management utilizes
various judgments and assumptions. For Receivables that are
collateral-dependent, the estimated fair market value of the
collateral may deviate significantly from the proceeds received
when the collateral is sold. To mitigate the imprecision
inherent in most estimates of expected credit losses, the
allocated component of the allowance is supplemented by an
unallocated component. The unallocated component reflects
managements judgmental assessment of the impact that
various quantitative factors have on the overall measurement of
credit losses.

Allowance for Losses on Real Estate Held for
Sale

The following table summarizes changes in the
Consolidated Groups allowance for losses on real estate
held for sale:

|                  |  |      |            |      |  |      |           |   |  |   |           |  
|----------------- |  | ---- | ---------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                  |  | 2002 |            | 2001 |  | 2000
|                  |  |      |            |      |  |     
|Beginning Balance |  | $    | 2,448,670  |      |  | $    | 1,442,424 |   |  | $ | 1,383,575 |  
|Provisions        |  |      | 1,013,820  |      |  |      | 1,676,031 |   |  |   | 408,568   |  
|Charge-Offs       |  |      | (1,999,524 | )    |  |      | (669,785  | ) |  |   | (349,719  | )
|                  |  |      |            |      |  |      |           |   |  |   |           |  
|Ending Balance    |  | $    | 1,462,966  |      |  | $    | 2,448,670 |   |  | $ | 1,442,424 |  
|                  |  |      |            |      |  |      |           |   |  |   |           |  

Real estate held for sale is periodically
evaluated for impairment. Loss provisions for real estate held
for sale are calculated as the difference between the estimated
net realizable value and the carrying value at the measurement
date. Any loss on liquidation or subsequent reduction in the
carrying value is charged to operations through provision for
losses.

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Market Risk Management

Market risk is defined as the sensitivity of
income and capital to changes in interest rates, equity prices
and other market variables. Market risk is managed within an
overall asset/ liability management framework. The Consolidated
Groups Asset/ Liability Committee is responsible for
reviewing and administering its asset/ liability management
positions.

Interest rates.Management continually monitors the
interest sensitive income and expense of the Consolidated Group.
Interest sensitive expense is predominantly related to annuity
benefits, and the interest costs of collateralized borrowings,
while interest sensitive income includes interest, earned
discounts and other income from the Receivable and investment
portfolio. Substantially all of the Consolidated Groups
interest rate risk arises from instruments, positions and
transactions entered into for purposes other than trading, which
includes loans, securities, annuity deposits and long-term debt.
Increases or decreases in interest rates can cause changes in
net income and fluctuations in the fair market value of interest
sensitive assets and liabilities.

Equity prices.The
Consolidated Groups investments in equity securities
expose it to changes in equity prices. The Consolidated Group
manages this risk on an integrated basis with other risks
through its asset/ liability management strategies. The
Consolidated Group also manages equity price risk through
industry and issuer diversification and asset allocation
techniques.

Fair value analysis.As with the impact on operations from changes in interest rates,
the Consolidated Groups fair market value of financial
assets and liabilities is subject to fluctuations in interest
rates. The Consolidated Group monitors the sensitivity of net
interest income and fair market value to changes in interest
rates.

The following table presents, as of
September 30, 2002, the Consolidated Groups estimated
effects of hypothetical increases and decreases in interest
rates on assets and liabilities that are subject to interest
rate risk. It is assumed that the changes occur immediately and
uniformly to each category of instrument containing interest
rate risks. The hypothetical changes in market interest rates do
not reflect what could be deemed best or worst case scenarios.
Variations in market interest rates could produce significant
changes in the timing of repayments due to prepayment options
available. For these reasons, actual results will most likely
differ from those reflected in the table that follows.

|                       |                           |                                          |           |             |         |                                             |           |             |         |             |           |             |         |   |           |           |         |   |           |           |         |   |           |           |         | 
|---------------------- | ------------------------- | ---------------------------------------- | --------- | ----------- | ------- | ------------------------------------------- | --------- | ----------- | ------- | ----------- | --------- | ----------- | ------- | - | --------- | --------- | ------- | - | --------- | --------- | ------- | - | --------- | --------- | ------- | 
|                       |                           |                                          |           |             |         |                                            
|                       |                           |                                          |           |             |         | Fair Market Value With Interest Rate Change
|                       |                           | Carrying                                 |           | Fair Market |         |                                            
|                       |                           | Amounts                                  |           | Value       |         | Decrease 1%                                 |           | Decrease 2% |         | Increase 1% |           | Increase 2%
|                       |                           |                                          |           |             |         |                                             |           |             |         |             |           |            
|                       |                           |                                         
|                       |                           | (Dollars in Thousands)                  
|Financial Assets:      |                           |                                          |           |             |         |                                             |           |             |         |             |           |             |         |   |           |           |         |   |           |           |         |   |           |          
|                       | Cash and cash equivalents |                                          | $         | 44,036      |         |                                             | $         | 44,036      |         |             | $         | 44,036      |         |   | $         | 44,036    |         |   | $         | 44,036    |         |   | $         | 44,036    |        
|                       | Investments:              |                                          |           |             |         |                                             |           |             |         |             |           |             |         |   |           |           |         |   |           |           |         |   |           |           |        
|                       |                           | Available-for-sale                       |           |             | 458,488 |                                             |           |             | 458,488 |             |           |             | 469,936 |   |           |           | 474,834 |   |           |           | 441,744 |   |           |           | 431,766 | 
|                       |                           | Held-to-maturity                         |           |             | 39,224  |                                             |           |             | 40,333  |             |           |             | 39,977  |   |           |           | 41,506  |   |           |           | 36,882  |   |           |           | 35,949  | 
|                       |                           | Real estate contracts and mortgage notes |           |             | 577,879 |                                             |           |             | 596,074 |             |           |             | 597,278 |   |           |           | 598,495 |   |           |           | 594,879 |   |           |           | 593,695 | 
|                       |                           | Indebtedness of related party            |           |             | 18,922  |                                             |           |             | 20,230  |             |           |             | 20,804  |   |           |           | 21,416  |   |           |           | 19,693  |   |           |           | 19,190  | 
|                       |                           | Other receivable investments             |           |             | 106,040 |                                             |           |             | 121,251 |             |           |             | 125,919 |   |           |           | 130,863 |   |           |           | 116,838 |   |           |           | 112,666 | 
|                       |                           | Reinsurance receivable                   |           |             | 148,392 |                                             |           |             | 150,309 |             |           |             | 153,835 |   |           |           | 157,493 |   |           |           | 146,908 |   |           |           | 143,628 | 
|                       |                           | Policy loans                             |           |             | 20,239  |                                             |           |             | 21,000  |             |           |             | 21,516  |   |           |           | 22,054  |   |           |           | 20,506  |   |           |           | 20,031  | 
|                       |                           |                                          |           |             |         |                                             |           |             |         |             |           |             |         |   |           |           |         |   |           |           |         |   |           |          
|                       |                           | $                                        | 1,413,220 |             |         | $                                           | 1,451,721 |             |         | $           | 1,474,830 |             |         | $ | 1,489,168 |           |         | $ | 1,421,486 |           |         | $ | 1,400,961 |          
|                       |                           |                                          |           |             |         |                                             |           |             |         |             |           |             |         |   |           |           |         |   |           |           |         |   |           |          
|Financial Liabilities: |                           |                                          |           |             |         |                                             |           |             |         |             |           |             |         |   |           |           |         |   |           |           |         |   |           |          
|                       | Annuity reserves          |                                          | $         | 1,225,660   |         |                                             | $         | 1,217,827   |         |             | $         | 1,270,614   |         |   | $         | 1,300,830 |         |   | $         | 1,213,402 |         |   | $         | 1,186,311 |        
|                       | Debt payable              |                                          |           | 103,847     |         |                                             |           | 109,092     |         |             |           | 113,024     |         |   |           | 117,220   |         |   |           | 105,402   |         |   |           | 101,936   |        
|                       |                           |                                          |           |             |         |                                             |           |             |         |             |           |             |         |   |           |           |         |   |           |           |         |   |           |          
|                       |                           | $                                        | 1,329,507 |             |         | $                                           | 1,326,919 |             |         | $           | 1,383,638 |             |         | $ | 1,418,050 |           |         | $ | 1,318,804 |           |         | $ | 1,288,247 |          
|                       |                           |                                          |           |             |         |                                             |           |             |         |             |           |             |         |   |           |           |         |   |           |           |         |   |           |          

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Gap analysis.A
conventional view of interest rate sensitivity for financial
institutions is the gap report, which indicates the difference
between assets maturing or re-pricing within a period and total
liabilities maturing or re-pricing within the same period. In
assigning assets to maturity and re-pricing categories, the
Consolidated Group takes into consideration expected prepayment
speeds and contractual maturities. The balances reflect expected
amortization of principal and do not take into consideration
reinvestment of cash. Principal prepayments are the amounts of
principal reduction over and above normal amortization. The
Consolidated Group has used prepayment assumptions based on
market estimates and past experience with its current portfolio.
In assigning liabilities to maturity and re-pricing categories,
the Consolidated Group takes into consideration expected annuity
policy lapse rates based on past experience. Non-rate sensitive
items such as the allowance for loan losses and deferred loan
fees/costs are not included in the table.

The gap information is limited by the fact that
it is a point-in-time analysis. The data reflects conditions and
assumptions as of September 30, 2002. These conditions and
assumptions may not be appropriate at another point in time.
Consequently, the interpretation of the gap information is
subjective.

|                                                                      |                                                         |                       |      |             |  |           |       |            |  |       |       |       |  |   |        |       |  |   |       |         | 
|--------------------------------------------------------------------- | ------------------------------------------------------- | --------------------- | ---- | ----------- |  | --------- | ----- | ---------- |  | ----- | ----- | ----- |  | - | ------ | ----- |  | - | ----- | ------- | 
|                                                                      |                                                         |                      
|                                                                      |                                                         | September 30, 2002   
|                                                                      |                                                         |                      
|                                                                      |                                                         |                      
|                                                                      |                                                         | Projected Repricing  
|                                                                      |                                                         |                      
|                                                                      |                                                         | 0-3 Months            |      | 4-12 Months |  | 1-5 Years |       | Thereafter |  | Total
|                                                                      |                                                         |                       |      |             |  |           |       |            |  |      
|                                                                      |                                                         |                      
|                                                                      |                                                         | (Dollars in millions)
|Interest-Sensitive Assets                                             |                                                         |                       |      |             |  |           |       |            |  |       |       |       |  |   |        |       |  |   |       |        
|                                                                      | Cash                                                    |                       | $    | 43.0        |  |           | $     |           |  |       | $     |      |  |   | $      |      |  |   | $     | 43.0    | 
|                                                                      | Real estate contracts and mortgage notes
    receivable |                       |      | 41.1        |  |           |       | 137.1      |  |       |       | 306.7 |  |   |        | 93.0  |  |   |       | 577.9   | 
|                                                                      | Securities investments                                  |                       |      | 24.2        |  |           |       | 60.5       |  |       |       | 206.5 |  |   |        | 180.0 |  |   |       | 471.2   | 
|                                                                      | Other                                                   |                       |      | 7.7         |  |           |       | 22.1       |  |       |       | 107.7 |  |   |        | 59.7  |  |   |       | 197.2   | 
|                                                                      |                                                         |                       |      |             |  |           |       |            |  |       |       |       |  |   |        |       |  |   |       |        
|                                                                      | Total interest-sensitive assets                         |                       |      | 116.0       |  |           |       | 219.7      |  |       |       | 620.9 |  |   |        | 332.7 |  |   |       | 1,289.3 | 
|                                                                      |                                                         |                       |      |             |  |           |       |            |  |       |       |       |  |   |        |       |  |   |       |        
|Interest-Sensitive Liabilities                                        |                                                         |                       |      |             |  |           |       |            |  |       |       |       |  |   |        |       |  |   |       |        
|                                                                      | Life and annuity reserves                               |                       |      | 28.5        |  |           |       | 90.9       |  |       |       | 549.5 |  |   |        | 408.4 |  |   |       | 1,077.3 | 
|                                                                      | Debt payable                                            |                       |      | 10.1        |  |           |       | 10.4       |  |       |       | 43.7  |  |   |        | 40.0  |  |   |       | 104.2   | 
|                                                                      |                                                         |                       |      |             |  |           |       |            |  |       |       |       |  |   |        |       |  |   |       |        
|                                                                      | Total interest-sensitive liabilities                    |                       |      | 38.6        |  |           |       | 101.3      |  |       |       | 593.2 |  |   |        | 448.4 |  |   |       | 1,181.5 | 
|                                                                      |                                                         |                       |      |             |  |           |       |            |  |       |       |       |  |   |        |       |  |   |       |        
|Repricing gap                                                         |                                                         | $                     | 77.4 |             |  | $         | 118.4 |            |  | $     | 27.7  |       |  | $ | (115.7 | )     |  | $ | 107.8 |        
|                                                                      |                                                         |                       |      |             |  |           |       |            |  |       |       |       |  |   |        |       |  |   |       |        
|Cumulative gap                                                        |                                                         | $                     | 77.4 |             |  | $         | 195.8 |            |  | $     | 223.5 |       |  | $ | 107.8  |       |  | $ | 107.8 |        
|                                                                      |                                                         |                       |      |             |  |           |       |            |  |       |       |       |  |   |        |       |  |   |       |        
|Cumulative gap as a percentage of total interest
    sensitive assets |                                                         |                       | 6.00 | %           |  |           | 15.19 | %          |  |       | 17.33 | %     |  |   | 8.36   | %     |  |   | 8.36  | %      
|                                                                      | Total interest sensitive assets                         |                       |      |             |  |           |       |            |  |       |       |       |  |   |        |       |  |   | $     | 1,289.3 | 
|                                                                      |                                                         |                       |      |             |  |           |       |            |  |       |       |       |  |   |        |       |  |   |       |        

In the next 12 months, the Consolidated
Groups Gap Analysis indicates a positive gap, meaning that
its interest-sensitive assets are expected to reprice before its
interest sensitive liabilities. In a rising interest rate
environment, the net interest income will tend to increase which
will have a positive impact on results of operations.
Conversely, in a falling interest rate environment, the net
interest income will tend to decrease which will have a negative
impact on results of operations.

In the 1-5 years time period, the
Consolidated Groups Gap Analysis indicates a positive gap.
However, all items in the Gap Analysis may not be equally
sensitive to market rate changes. Specifically, the Consolidated
Groups real estate contracts and mortgage notes receivable
are not expected to be as sensitive to market rate changes as
the other items on the Gap Analysis. For this reason, the
Consolidated Group expects the impact on results of operations
to be more in line with that of a negative gap position.

A negative gap means that the net interest income
will tend to decrease which will have a negative impact on
results of operations in a rising interest rate environment.
Conversely, in a falling interest rate environment, the net
interest income will tend to increase which will have a positive
impact on results of operations.

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The Consolidated Groups asset base is
comprised partially of Commercial Loans. Commercial Loans make
up approximately 24% of the interest-sensitive assets as of
September 30, 2002. These assets tend to be short-term in
nature (weighted average maturity is approximately
26 months). The Consolidated Group intends to continue to
expand its investments in Commercial Loans. This, along with the
management of the interest sensitive liability portfolio, should
enable the Consolidated Group to effectively monitor and control
its interest-rate sensitivity over time.

Liquidity and Capital Resources

The objective of liquidity management is to
provide funds at an acceptable cost to service liabilities as
they become due and to meet demands for additional Commercial
Loans and Receivable purchases. Managing liquidity also enables
the Consolidated Group to take advantage of opportunities for
business expansion. The Consolidated Group finances its business
operations and growth with the proceeds from the sale of annuity
and life insurance products, the sale of equity securities to
affiliates, a secured line of credit agreement, reverse
repurchase agreements, Receivable cash flows, the sale of real
estate and securities portfolio earnings.

In January 2001, the Consolidated Group changed
the focus of its investment strategy away from acquiring
residential real estate loans for securitization purposes as it
does not intend to participate in any real estate-backed
securitizations in the near future, and began focusing its
investment activity on acquiring and holding both residential
real estate loans and Commercial Loans. Historically, proceeds
from securitizations were primarily reinvested in additional
securitizable products. Because securitization proceeds were not
primarily used to acquire and hold residential or Commercial
Loans, the Consolidated Group does not anticipate that the
change in investment strategy away from securitizations will
have a negative effect on its ability to acquire and hold
residential and Commercial Loans.

The annuity and life insurance business is highly
competitive. The Consolidated Group competes with other
financial institutions, including ones with greater resources
and greater name recognition than the Consolidated Group.
Premium rates, annuity yields and commissions to agents are
particularly sensitive to competitive forces. The Consolidated
Group believes the primary competitive factors among life
insurance companies for investment-oriented insurance products,
like annuities, include product flexibility, net return after
fees, innovation in product design, the claims-paying ability
rating and the name recognition of the issuing company, the
availability of distribution channels, service rendered to the
customer before and after a policy or contract is issued, and
service provided to agents. Other factors affecting the annuity
business include the benefits, including before tax and after
tax investment returns, and guarantees provided to the customer
and the commissions paid to the agent. If the Consolidated Group
is unable to effectively price its annuities, offer competitive
commissions and effectively compete in general for the sale of
its annuity products, its liquidity could be adversely affected.

The Consolidated Group anticipates that the
recent changes in Western Lifes A.M. Best assigned rating
may result in a slight increase in its cost of funds in addition
to a slight increase in surrender rates as current policies
enter their surrender periods. Before the initial change in
rating, the Consolidated Group changed the focus of its
investment strategy away from acquiring residential real estate
loans for securitization purposes and refocused its investment
activity on acquiring and holding both residential and
commercial real estate loans. The change in focus has resulted
in higher yields on the Consolidated Groups investments.
Therefore, the Consolidated Group expects the slight increase in
its cost of funds will be more than offset by the higher yields
expected through its new investment strategy.

To support this change in investment strategy and
in response to its rating change, Metropolitan increased its
capital contributions to Western Life during the fiscal year
ended September 30, 2002 through a $27.6 million
purchase of common and preferred stock. Additionally, to further
increase the capital of Western Life, Western Holding has
registered for sale up to $50.0 million of Series A
preferred stock at September 30, 2002. However, Western
Holding must sell at least 400,000 shares of the preferred stock
to at least 800 qualifying investors before the offering can be
completed. The Consolidated Group does not anticipate any
further change to its A.M. Best rating in the coming year.

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##### Table of Contents



The state of Washingtons Risk-Based Capital
Model law requires an insurance company to maintain specified
amounts of capital and surplus based on complex calculations of
risk factors that encompass the invested assets and business
activities of the insurance company. Compliance with the
Risk-Based Capital Model Law requirements is tested annually as
of a calendar year-end. At the last annual review at its
statutory reporting period ended December 31, 2001, Western
Lifes capital and surplus levels exceeded the calculated
specified requirements. Recently, Western Life has maintained
adequate levels of capital through the sale of common stock and
preferred stock to Metropolitan. To the extent that Metropolitan
does not maintain adequate levels of liquidity permitting it to
make further capital investments in Western Life, or to the
extent that Western Holding cannot complete its Series A
preferred stock offering, Westerns ability to generate
capital could be adversely affected, which in turn could
negatively affect its ability to increase its investments in
higher risk-adjusted assets such as Commercial Loans, real
estate and equity investments.

Western Life has a secured line of credit
agreement with the Federal Home Loan Bank of Seattle
(FHLB). When an institution becomes a stockholder in
the FHLB, it can borrow from the FHLB at a stock to borrowing
ratio of 1 to 20. At September 30, 2002, Western Life had a
stock investment in the FHLB of approximately $5.1 million.
The collateral used to secure the borrowing is predefined by the
FHLB and generally consists of high quality collateralized
mortgage obligations. Each type of collateral has a minimum
requirement that ranges from 100% to 125% of borrowings. At
September 30, 2002, Western Life had $288.3 million in
eligible collateral with a market value of $296.9 million
resulting in a borrowing potential of $210.1 million,
subject to the purchase of additional stock. Approximately
$141.4 million in securities having a market value of
$145.6 million were pledged to collateralize the
outstanding borrowings to FHLB at September 30, 2002. At
September 30, 2002, Western Life had approximately
$103.0 million in outstanding borrowings leaving an unused
borrowing potential of approximately $107.1 million,
subject to the purchase of additional stock. In order to
increase the unused borrowing potential to match the amount of
collateral pledged, Western Life would be required to purchase
approximately $2.8 million in additional FHLB stock.

Historically, Western Life has issued preferred
stock and surplus notes only to its affiliates. Proceeds of
preferred stock issuances less repayment of surplus notes were
$10.4 million, $5.0 million and $9.5 during the fiscal
years ended September 30, 2002, 2001 and 2000,
respectively. The liquidation preference of outstanding
preferred stock at September 30, 2002 was
$50.0 million. The affiliates that hold the preferred stock
are entitled to receive dividends when and as declared by
Western Lifes Board of Directors, out of the net earnings
available for dividends. The base dividend rate (prime plus 1%)
is determined annually by Western Lifes Board of Directors
and dividends payable on the preferred stock have priority to
the payment of common stock dividends. The preferred stock may
be redeemed in whole or in part at Western Lifes option at
a redemption price of not less than par value. Western Life paid
$2.7 million, $3.9 million and $3.0 million in
preferred stock dividends during the fiscal years ended
September 30, 2002, 2001 and 2000, respectively. The
average monthly dividend rate during the fiscal year ended
September 30, 2002 was 6.94%.

Metropolitan owned all of Western Lifes
outstanding preferred stock at September 30, 2002. At
September 30, 2001, Metropolitan owned 88.6% of Western
Lifes preferred stock and Consumers Insurance Company
(Consumers) owned the remaining 11.4%. The
outstanding preferred stock of Western Life is presented as a
minority interest on the Consolidated Groups balance
sheet. In addition, both Metropolitan and Consumers previously
held Western Lifes surplus notes before they were
converted to preferred stock. The following table reflects the
payments made to Metropolitan and Consumers for their
investments in Western Lifes preferred stock and surplus
notes during fiscal years ended September 30, 2002, 2001
and 2000.

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##### Table of Contents



Western Life paid no dividends on its common
stock during the three fiscal years ended September 30,
2002, 2001 and 2000:


|             |  |                 |  |      |           |      |  |      |           |  |  |   |           | 
|------------ |  | --------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|             |  | Investment      |  | 2002 |           | 2001 |  | 2000
|             |  |                 |  |      |           |      |  |     
|Metropolitan |  | Common Stock    |  | $    |          |      |  | $    |          |  |  | $ |          | 
|             |  | Preferred Stock |  |      | 2,435,062 |      |  |      | 3,502,750 |  |  |   | 2,766,031 | 
|             |  | Surplus Notes   |  |      |          |      |  |      |          |  |  |   | 167,343   | 
|             |  |                 |  |      |           |      |  |      |           |  |  |   |           | 
|             |  | Total           |  | $    | 2,435,062 |      |  | $    | 3,502,750 |  |  | $ | 2,933,374 | 
|             |  |                 |  |      |           |      |  |      |           |  |  |   |           | 
|Consumers    |  | Common Stock    |  | $    |          |      |  | $    |          |  |  | $ |          | 
|             |  | Preferred Stock |  |      | 312,188   |      |  |      | 437,500   |  |  |   | 249,375   | 
|             |  | Surplus Notes   |  |      |          |      |  |      |          |  |  |   | 100,594   | 
|             |  |                 |  |      |           |      |  |      |           |  |  |   |           | 
|             |  | Total           |  | $    | 312,188   |      |  | $    | 437,500   |  |  | $ | 349,969   | 
|             |  |                 |  |      |           |      |  |      |           |  |  |   |           | 

Western Lifes payments to Metropolitan
accounted for approximately 0.2%, 0.5% and 0.5% of
Metropolitans total liquidity sources during the fiscal
years ended September 30, 2002, 2001 and 2000, respectively.

Western Life has entered into a reinsurance
agreement with Old Standard, which became effective July 1,
1998. Under this agreement, Western Life can reinsure with Old
Standard 75% of the risk on various annuity products. The
reinsurance agreement is an ongoing arrangement with no stated
expiration or termination date, although either party may stop
and restart at their discretion by providing a 30-day advance
written notice.

Another source of liquidity is derived from
payments received on Receivables and the sale of real estate. A
decrease in the prepayment rate on Receivables or in the ability
to sell real estate would reduce future cash flows from
Receivables.

Additionally, to increase liquidity, the
Consolidated Group may occasionally sell securities to a
broker-dealer under the provision that the Consolidated Group
will buy them back by a predetermined date for a specific price,
often called a reverse repurchase agreement. At
September 30, 2002, the Consolidated Group did not have any
reverse repurchase agreements outstanding.

Western Lifes ability to sell
available-for-sale investments for liquidity purposes is
partially affected by the laws of the state of Washington that
limit its investments in real estate related assets to 65% of
its statutory assets. Western Life is restricted from selling
non-real estate related assets if, after the sale, its real
estate assets would exceed 65% of its statutory assets. However,
occasionally Western Life may acquire real estate related
Receivables that qualify as mortgage-related securities under
the Secondary Mortgage Market Enhancement Act, or SMMEA. SMMEA
generally provides that qualifying loans may be acquired to the
same extent that obligations that are issued by or guaranteed as
to principal and interest by the United States Government, its
agencies and the instrumentalities can be acquired. As a result,
Western Life can acquire qualifying real estate loans in amounts
in excess of the 65% limitation. At September 30, 2002,
Western Life had 46% of its statutory admitted assets invested
in real estate related assets that did not qualify as SMMEA
investments.

For statutory purposes, Western Life performs
cash flow testing using seven different rate scenarios. An
annual opinion regarding the adequacy of the cash flow testing
is filed with the insurance departments in the states where
Western Life is licensed as an insurance company. At the end of
calendar year 2001, the results of this cash flow testing
process were satisfactory.

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The following table summarizes, as of
September 30, 2002, the Consolidated Groups
anticipated annual cash principal and interest obligations on
secured credit lines and the anticipated annual cash dividend
requirements on the Consolidated Groups outstanding
preferred stock for the indicated periods:

|                                 |  |         |        |              |  |       |        |  |  |   |        | 
|-------------------------------- |  | ------- | ------ | ------------ |  | ----- | ------ |  |  | - | ------ | 
|                                 |  | Secured |        | Preferred    |  |      
|                                 |  | Credit  |        | Stock        |  |      
|Fiscal Year Ending September 30, |  | Lines   |        | Dividends(1) |  | Total
|                                 |  |         |        |              |  |      
|2003                             |  | $       | 24,794 |              |  | $     | 2,875  |  |  | $ | 27,669 | 
|2004                             |  |         | 23,969 |              |  |       | 2,875  |  |  |   | 26,844 | 
|2005                             |  |         | 12,322 |              |  |       | 2,875  |  |  |   | 15,197 | 
|2006                             |  |         | 12,924 |              |  |       | 2,875  |  |  |   | 15,799 | 
|2007                             |  |         | 6,414  |              |  |       | 2,875  |  |  |   | 9,289  | 
|                                 |  |         |        |              |  |       |        |  |  |   |        | 
|                                 |  | $       | 80,423 |              |  | $     | 14,375 |  |  | $ | 94,798 | 
|                                 |  |         |        |              |  |       |        |  |  |   |        | 



---



|    |                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on September 30, 2002 dividend rate of
    5.75% on Western Lifes outstanding preferred stock and
    does not include dividend payments on Western Holdings
    preferred stock it is currently offering.

Additionally, a portion of the Consolidated
Groups annuities may re-price annually, which could cause
termination of annuities subject to a surrender charge. In the
event of termination, the Consolidated Groups expected
cash outlays will increase.

The Consolidated Group had approximately
$88.4 million and $17.0 million of outstanding
commitments to extend credit to commercial borrowers at
September 30, 2002 and 2001, respectively.

During 2002, $1,070.7 million in funds
provided by the Consolidated Groups various liquidity
sources were used to (1) invest $933.2 million
primarily in Receivables and investments and (2) fund
$147.8 million in debt maturities, annuity product
surrenders and the payment of dividends.

During 2001, $636.7 million in funds
provided by the Consolidated Groups various liquidity
sources were used to (1) invest $459.4 million
primarily in Receivables and investments and (2) fund
$124.4 million in debt maturities, annuity product
surrenders and the payment of dividends.

During 2000, $781.2 million in funds
provided by the Consolidated Groups various liquidity
sources were used to (1) invest $574.9 million
primarily in Receivables and investments and (2) fund
$214.7 million in debt maturities, annuity product
surrenders and the payment of dividends.

New Accounting Rules

In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting
for Derivative Instruments and Hedging Activities. SFAS
No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those
instruments at fair value. In June 1999 and 2000, SFAS
No. 137, Accounting for Derivative Instruments and
Hedging ActivitiesDeferral of Effective Date of
SFAS 133 and SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities,
an Amendment of SFAS 133, were issued. SFAS
No. 137 amended SFAS No. 133 to become effective for
all quarters of fiscal years beginning after June 15, 2000.
The implementation of SFAS No. 133, as amended, did not
have a material effect on the Consolidated Groups
financial statements. As part of implementing SFAS No. 133
on October 1, 2000, the Consolidated Group reclassified
approximately $58.5 million of investments from
held-to-maturity to available-for-sale. The unrealized gain on
the date of transfer was $0.4 million.

In December 1999, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in
Financial Statements. SAB No. 101 summarizes some of
the SECs views on applying generally accepted accounting
principles to revenue recognition in financial

42



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##### Table of Contents



statements. The implementation of SAB
No. 101 on July 1, 2001 did not have a material impact
on the Consolidated Groups financial statements.


In September 2000, the FASB issued SFAS
No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of LiabilitiesA
Replacement of FASB Statement No. 125. This statement
essentially further restricts the rules as to when a transfer of
financial assets should be accounted for as a sale rather than a
financing. The implementation of SFAS No. 140 on
April 1, 2001 did not have a material impact on the
Consolidated Groups financial statements.

In July 2001, the FASB issued SFAS No. 141,
Business Combinations. The statement discontinues
the use of the pooling of interests method of accounting for
business combinations and was effective for all business
combinations after June 30, 2001. The implementation of
this statement did not have a material impact on the
Consolidated Groups financial statements.

In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. The statement
will require discontinuing the amortization of goodwill and
other intangible assets with indefinite useful lives. Instead,
these assets will be tested periodically for impairment and
written down to their fair market values as necessary. This
statement is effective for fiscal years beginning after
December 15, 2001. The implementation of this statement on
October 1, 2002 did not have a material impact on the
Consolidated Groups financial statements.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which is effective for fiscal years
beginning after December 15, 2001. This statement addresses
accounting and reporting of long-lived assets, except goodwill,
that are either held and used or disposed of through sale or
other means. Implementation of this new standard on
October 1,2002 did not have a material impact on the
Consolidated Groups financial statements.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections. This
statement amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This
statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed
conditions. The provisions of this statement are effective for
financial statements issued on or after May 15, 2002.
Implementation of this statement did not have a material impact
on the Consolidated Groups financial statements.

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which is effective for exit or disposal activities
initiated after December 31, 2002. This statement requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. The provisions of this
statement are effective for exit or disposal activities that are
initiated after December 31, 2002 with early application
encouraged. The Consolidated Group has completed an evaluation
of the effects of this statement and does not believe it will
have a material impact on the Consolidated Groups
financial statements.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About
    Market Risk

For qualitative information about market risk of
Western Holding, see MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Market Risk Management under Item 7.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

The consolidated financial statements and related
financial information required to be filed are attached to this
Report. Reference is made to page F-1 of this Annual Report
for an index to the consolidated financial statements.

43



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##### Table of Contents








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

On June 12, 2001, Western Life dismissed
PricewaterhouseCoopers LLP as its independent accountants (the
Former Accountants). Western Life engaged Ernst
& Young LLP (EY) as its new principal
independent accountants effective June 12, 2001.

The Former Accountants did not report on Western
Lifes financial statements for the fiscal years ended
September 30, 2001 and 2000 or on its statutory financial
statements for the annual statutory reporting periods ended
December 31, 2001 and 2000. The decision to engage EY as
the principal independent accountant for Western Life was
approved by the Board of Directors of Western Life.

In connection with its audits for the annual
statutory reporting periods ended December 31, 2000 and
1999, and through the period ended June 12, 2001, there
have been no disagreements with the Former Accountants on any
matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of the Former
Accountants, would have caused them to make reference thereto in
connection with their report on the statutory financial
statements for such years. During the statutory reporting
periods ended December 31, 2000 and 1999, and through the
period ended June 12, 2001, there were no reportable
events as defined by Item 304(a)(1)(v) of
Regulation S-K.

Western Life has requested that the Former
Accountants furnish it with a letter addressed to the U.S.
Securities and Exchange Commission stating whether or not it
agrees with the above statements. A copy of such letter, dated
December 30, 2002, is filed as Exhibit 16.1 to this
Form 10-K.

Neither the Consolidated Group nor anyone on its
behalf consulted EY during the Consolidated Groups two
fiscal years, or any subsequent interim period, that immediately
preceded the engagement of EY.




PART III



|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

MANAGEMENT

Directors, Executive Officers and Key
Employees

Western Holdings directors, executive
officers and key employees and their respective ages as of
September 30, 2002 are as follows:

|                      |  |     |    |          |  |                                   
|--------------------- |  | --- | -- | -------- |  | ----------------------------------
|Name                  |  | Age |    | Position
|                      |  |     |    |         
|C. Paul Sandifur, Jr. |  |     | 60 |          |  | President and Director            
|John Van Engelen      |  |     | 49 |          |  | Senior Vice President and Director
|Reuel Swanson         |  |     | 63 |          |  | Secretary and Director            
|Joseph Christensen    |  |     | 35 |          |  | Treasurer                         
|Gary D. Brajcich      |  |     | 51 |          |  | Director                          
|Robert Stephen Corker |  |     | 61 |          |  | Director                          
|Irv Marcus            |  |     | 77 |          |  | Director                          
|Bradley M. Marten     |  |     | 49 |          |  | Director                          
|Samuel H. Smith       |  |     | 62 |          |  | Director                          
|William D. Snider     |  |     | 60 |          |  | Director                          
|John Trimble          |  |     | 72 |          |  | Director                          

All directors currently hold office until the
next annual meeting of shareholders or until their successors
have been elected and qualified. All executive officers are
elected annually by the board of directors and serve at the
discretion of the board of directors and until their successors
are elected and qualified. There are no family relationships
between any of the Consolidated Groups directors or
executive officers.

44



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##### Table of Contents



C. Paul Sandifur, Jr.,President and Director.
Mr. Sandifur has been Vice President and Director of
Western Life since 1980. Mr. Sandifur is also the
President, Chief Executive Officer and Chairman of the Board of
Metropolitan Mortgage & Securities Co., Inc., Western
Holdings parent entity. Mr. Sandifur is also a
director and officer of most of Metropolitans other
subsidiary companies. Mr. Sandifur spends, on average,
approximately 30% of his time working on Western Lifes
business and approximately 70% of his time working on the
business of Metropolitan and other affiliates. Metropolitan
invests in Receivables and other investments, including real
estate development, which are principally funded by proceeds
from Receivable investments, other investments and securities
offerings. Mr. Sandifur was a real estate salesman with
Diversified Properties in Kennewick, Washington during 1977 and
1978, and then with Century 21 Real Estate in Kennewick. In
June 1979, he became an associate broker with Red Carpet Realty
in Kennewick before rejoining Metropolitan in 1980.
Mr. Sandifur was born in Spokane, Washington, and received
his baccalaureate degree in Psychology from Whitman College in
Walla Walla, Washington. He pursued graduate studies at the
University of California, Berkeley, San Jose State University
and San Francisco State University.

John Van Engelen,Senior Vice President and Director.
Mr. Van Engelen joined Western Life in 1984 as its
underwriting manager, and was appointed Vice
PresidentUnderwriting shortly after that. From 1987 to
1994, he was Vice President of sales. During 1994 he was
appointed president of Western Life. Before joining Western
Life, Mr. Van Engelen worked in the insurance industry and
in corporate and public accounting. He holds the following
certifications: CPA, CFP, CLU, CHFC and FLMI. He is a member of
the American Institute of Certified Public Accountants, Society
of Financial Service Professionals, National Association of
Insurance and Financial Advisors and a board member of the New
Mexico Life and Health Guaranty Fund. Mr. Van Engelen holds
a BBA in Accounting from Boise State University.

Reuel Swanson,Secretary and Director.
Mr. Swanson has been the Secretary and a Director of
Western Life since 1972. Mr. Swanson is also a Director and
Secretary of various affiliated companies of Western Life.
Mr. Swanson received his Master of Accounts degree in 1962
from Kinman Business University and his Masters in Business
Administration from City University located in Seattle in 1984.

Joseph Christensen,Treasurer. Mr. Christensen joined
Metropolitan in October 2000 as Chief Investment Officer and in
April of 2001, he was elected Treasurer of Western Life. From
1997 through 2000 he was with SAFECO Asset Management Company in
Seattle, Washington, as Portfolio Manager, administering their
intermediate portfolio of structured securities, comprising
approximately $4 billion of a $16 billion taxable
fixed income portfolio. He was also co-manager of the SAFECO
GNMA Mutual Fund. Before that, he worked at Wells Fargo Bank,
N.A., where he was Vice President of Treasury/Global Funding,
investing for the banks $13 billion fixed income
portfolio. Mr. Christensen holds a Master of Business
Administration from the William E. Simon Graduate School of
Business Administration in Rochester, New York and a Bachelor of
Science in Business Administration from California State
University in Chico, California.

Gary D. Brajcich,Director. Mr. Brajcich was elected as a Director in
connection with the formation of Western Holding in May 2002.
Mr. Brajcich is an attorney admitted to practice law in the
State of Washington. He is a member of Workland, Witherspoon,
PLLC, where he has been practicing since 1992. Mr. Brajcich
has also served as a director of the Consolidated Groups
parent company, Metropolitan since 2000.

Robert Stephen
Corker,Director. Mr. Corker was
elected as a Director in connection with the formation of
Western Holding in May 2002. Mr. Corker has also served as
a director of Western Life since October of 2001.
Mr. Corker is currently an Adjunct Assistant Professor at
Gonzaga Universitys School of Business and an instructor
at Fairchild AFBs Park College. He serves as Vice
President of Futurepast, Inc., an Arlington, Virginia adjunct
based management consulting firm. Washington State Governors
Mike Lowry and Gary Locke appointed Mr. Corker to the
Washington State Council for the Prevention of Child Abuse and
Oregons Governor Mark O. Hatfield appointed
Mr. Corker to the Oregon Governors Youth Committee.
He was a Washington Humanities Commission Grantee for his
project, The Columbia River Watch. Mr. Corker
has served as Vice President for the Inland Northwest Chapter of
the American Red Cross and for Century 2 of Spokane. He
also served at President-Elect, Vice President of the American
Heart Association

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##### Table of Contents



of Eastern Washington. Mr. Corker has been a
director and volunteer for SCAN, Daybreak, Project Joy, American
Cancer Society, Cheney Cowles Art Museum, and Riverfront
Festival of the Arts. In 1977, Mr. Corker began Coons,
Corker & Associates, Inc., a Spokane advertising, public
relations and marketing firm, where he was president until 1998.
Prior to this, he was Vice President of the People to People
Student Ambassador Program, President of a New York based
marketing firm, President of an Oakland, California travel
agency and a Vice President of Security National Bank in
Oakland. Mr. Corker graduated from Stanford University,
where he served as Freshman Class President and President
of the Stanford Chapter of Pi Sigma Alpha, the National
Political Science Honor Society.


Irv Marcus,Director. Mr. Marcus has been a
Director of Western Life since 1995. Mr. Marcus had been an
officer of Metropolitan from 1974 until his retirement in 1995.
At retirement, he was Senior Vice President, a title that he had
held since 1990, and during which time he supervised
Metropolitans Receivable investing operations. He had
previously been a loan officer with Metropolitan and has over
25 years experience in the consumer finance business.
He continues as a Director following his retirement with both
Metropolitan and Western Life.

Bradley M. Marten,Director. Mr. Marten was elected as a Director in
connection with the formation of Western Holding in May 2002.
Mr. Marten has also served as a director of Western Life
since October of 2001. Mr. Marten is a principal in the law
firm of Marten Brown, Inc. where his practice is primarily
focused in the environmental and land use area and where he has
practiced since 1996. Prior to forming Marten Brown, he was a
partner in the law firm of Morrison & Foerster from 1992
until 1996 where he was co-founder of their Seattle office and a
member of the firms wide Land Use and Environmental Law
Group. From 1983 until 1992, Mr. Marten was a partner with
Preston, Gates & Ellis where he served as the firms
Chair for their Environmental and Land Use Group.
Mr. Marten also served as a law clerk to the Honorable
Donald S. Voorhees, United States District Court, for the
Western District of Washington from 1981 until 1983.
Mr. Marten received his Bachelor of Arts from Cornell
University in 1975, his Master of Arts from Yale University in
1977, and his Juris Doctorate from Harvard Law School in 1981.
Mr. Marten is extensively involved in various civic and bar
activities, and has multiple publications in the environmental
and land use area.

Samuel H. Smith,Ph.D., Director. Dr. Smith was elected as a Director in
connection with the formation of Western Holding in May 2002.
Dr. Smith served as President of Washington State
University from 1985-2000 and is currently President Emeritus.
Dr. Smith was Dean of the College of Agriculture at Penn
State University before his association with Washington State
University. Dr. Smith has also served as a director of the
Consolidated Groups parent company, Metropolitan since
2000.

William D. Snider,Director. Mr. Snider was elected as a Director in
connection with the formation of Western Holding in May 2002.
Mr. Snider was elected as Director for Metropolitan in June
2001. He served as Metropolitans Chief Financial Officer
from May 1999 until August 2001. Mr. Snider was the
Chairman of Snider Financial Partners, a financial consulting
firm, from June of 1997 through December of 1998. From March
1992 until June of 1997, he was the Executive Vice President and
Chief Financial Officer of Finance and Operations of CoBank in
Denver, Colorado. Before that, Mr. Snider was Senior Vice
President and Treasury Group Head for Continental Bank
Corporation in Chicago, Illinois. Currently, Mr. Snider is
President of Snider Financial Partners. Mr. Snider received
his Bachelor of Science and his Masters of Business
Administration from the University of Illinois.

John Trimble,Director. Mr. Trimble was elected as a Director in
connection with the formation of Western Holding in May 2002.
Mr. Trimble was employed by Metropolitan from 1980 until
his retirement in 1995. His principal area of responsibility was
Receivables underwriting. At retirement he was Vice President.
He has served as a director of Metropolitan since 1996.




Committees of the Board

Audit Committee.The
current members of the Consolidated Groups audit committee
are Messrs. Irv Marcus, Chairman, Gary D. Brajcich, Robert
Stephen Corker, Bradley M. Marten and John Trimble. The audit
committee makes recommendations concerning the engagement of the
Consolidated Groups independent public

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##### Table of Contents



accountants, reviews with the independent public
accountants the plans and results of the audit engagement,
approves professional services provided by the independent
public accountants, reviews the independence of the independent
public accountants, considers the range of audit and non-audit
fees, reviews the Consolidated Groups corporate compliance
procedures and reviews the adequacy of the Consolidated
Groups internal accounting controls.





Item 11. Executive
Compensation

The following table sets forth the aggregate
compensation awarded to, earned by, or paid to (1) Western
Holdings Chief Executive Officer, and (2) Western
Holdings other four most highly compensated executive
officers during 2002 whose total annual compensation exceeded
$100,000 in 2002 (the Named Executive Officers), all
during the fiscal years specified. No executive officer is a
party to, or a participant in, any pension plan, contract or
other arrangement providing for cash or non-cash forms of
remuneration except Metropolitans 401(k) qualified
retirement plan adopted as of January 1, 1992, which is
available generally to all employees of Metropolitan, except as
described below. The 401(k) Plan provides for maximum annual
company matching contributions equal to 3% of each
participants salary. As of September 30, 2002,
Western Holding had no stock option plans in effect.

|                                              |                |        |      |        |  |             |         |              |  |   |        |        |  |  |   |   |  |  | 
|--------------------------------------------- | -------------- | ------ | ---- | ------ |  | ----------- | ------- | ------------ |  | - | ------ | ------ |  |  | - | - |  |  | 
|                                             
|                                             
|                                             
|SUMMARY COMPENSATION TABLE                   
|                                             
|                                              |                | Bonus/ |      | Other  |  |            
|Name and Principal Position with Western Life |                | Year   |      | Salary |  | Commissions |         | Compensation |  |  
|                                             
|John Van Engelen                              |                |        | 2002 |        |  | $           | 172,000 |              |  |   |       |        |  |  |  |   |  | 
|                                              | President      |        |      | 2001   |  |             | $       | 165,323      |  |   |        |       |  |  |   |  |  |  | 
|                                              |                |        | 2000 |        |  | $           | 164,521 |              |  |   |       |        |  |  |  |   |  | 
|                                             
|C. Paul Sandifur, Jr.                         |                |        | 2002 |        |  | $           | 500,016 |              |  |   | 250    |        |  |  |  |   |  | 
|                                              | Vice President |        |      | 2001   |  |             | $       | 500,016      |  |   |        |       |  |  |   |  |  |  | 
|                                              |                |        | 2000 |        |  | $           | 500,088 |              |  | $ | 4,500  |        |  |  |  |   |  | 
|                                             
|William Zehner                                |                |        | 2002 |        |  | $           | 142,125 |              |  |   |       |        |  |  |  |   |  | 
|                                              | Vice President |        |      | 2001   |  |             | $       | 136,607      |  |   | $      | 200    |  |  |   |  |  |  | 
|                                              |                |        | 2000 |        |  | $           | 131,502 |              |  |   |       |        |  |  |  |   |  | 
|                                             
|Dale Whitney                                  |                |        | 2002 |        |  | $           | 86,400  |              |  | $ | 85,765 |        |  |  |  |   |  | 
|                                              | Vice President |        |      | 2001   |  |             | $       | 128,739      |  |   | $      | 91,963 |  |  |   |  |  |  | 
|                                              |                |        | 2000 |        |  | $           | 189,218 |              |  |   |       |        |  |  |  |   |  | 
|                                             
|Scott Cordell                                 |                |        | 2002 |        |  | $           | 85,032  |              |  | $ | 49,676 |        |  |  |  |   |  | 
|                                              | Vice President |        |      | 2001   |  |             | $       | 81,761       |  |   | $      | 47,867 |  |  |   |  |  |  | 
|                                              |                |        | 2000 |        |  | $           | 115,730 |              |  |   |       |        |  |  |  |   |  | 
|                                             

The executive officer aggregate compensation is
paid by Metropolitan during the fiscal years specified in the
above table. Metropolitan charges the Consolidated Group for
executive officer management services in accordance with a
General Support Services and Rental Agreement. The foregoing
compensation table does not include certain fringe benefits made
available on a nondiscriminatory basis to all Metropolitan
employees like group health insurance, dental insurance,
long-term disability insurance, vacation and sick-leave. In
addition, Metropolitan makes available certain non-monetary
benefits to certain of its executive officers, with the
aggregate value of these benefits in the case of each executive
officer listed in the above table being less than the lesser of
(1) ten percent of the cash compensation paid to each such
executive officer, or (2) $50,000, and is not included in the
above table.




Compensation of Directors

All of the Consolidated Groups directors,
including employee directors, are paid $500 per meeting
attended. There was five meeting of Western Lifes board of
directors in person during fiscal 2002. Western

47



---



##### Table of Contents



Lifes board also took action 14 times by
written consent instead of a meeting during fiscal 2002. In
addition, non-employee directors are reimbursed for travel
expenses.





Option Grants

There are currently no outstanding options to
acquire the Consolidated Groups common stock and no
options have been granted to any of the Consolidated
Groups directors or executive officers during the last
three fiscal years.




Item 12. Security Ownership of
Certain Beneficial Owners and Management

The following table sets forth information as to
each class of equity securities of Western Holding beneficially
owned by (1) each director of Western Holding,
(2) Western Holdings Chief Executive Officer and the
Named Executive Officers, (3) all directors and executive
officers of Western Holding as a group, and (4) all persons
known to Western Holding to be the beneficial owner of 5% or
more of the outstanding shares of voting securities of Western
Holding as of December 16, 2002. As of December 16,
2002, Western Holding had 100 shares of its common stock issued
and outstanding.

|                                                               |  |           |     |              |  |  |     |  
|-------------------------------------------------------------- |  | --------- | --- | ------------ |  |  | --- | -
|                                                              
|                                                              
|                                                               |  | Shares of |     | Percentage  
|                                                               |  | Common    |     | Beneficially
|Name                                                           |  | Stock(2)  |     | Owned       
|                                                              
|                                                              
|C. Paul Sandifur, Jr.(1)                                       |  |           | 100 |              |  |  | 100 | %
|                                                              
|John Van Engelen                                               |  |           |    |              |  |  |    |  
|                                                              
|Reuel Swanson                                                  |  |           |    |              |  |  |    |  
|                                                              
|Joseph Christensen                                             |  |           |    |              |  |  |    |  
|                                                              
|Gary D. Brajcich                                               |  |           |    |              |  |  |    |  
|                                                              
|Robert Stephen Corker                                          |  |           |    |              |  |  |    |  
|                                                              
|Irv Marcus                                                     |  |           |    |              |  |  |    |  
|                                                              
|Bradley M. Marten                                              |  |           |    |              |  |  |    |  
|                                                              
|Samuel H. Smith                                                |  |           |    |              |  |  |    |  
|                                                              
|William D. Snider                                              |  |           |    |              |  |  |    |  
|                                                              
|John Trimble                                                   |  |           |    |              |  |  |    |  
|                                                              
|Metropolitan Mortgage & Securities Co.,
    Inc.(1)            |  |           | 100 |              |  |  | 100 | %
|                                                              
|Directors and Executive Officers as a
    group(1)(11 persons) |  |           | 100 |              |  |  | 100 | %
|                                                              



---



|    |                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The shares beneficially owned by
    Mr. Sandifur are owned through his ownership of
    Metropolitan Mortgage & Securities Co., Inc.
    Metropolitan Mortgage directly owns 100%, or 100 shares, of
    Western Holdings common stock.
|   
|(2) | None of Western Holdings directors or
    executive officers owns any class of Western Holdings
    equity securities other than Western Holding common stock.                                                                         




Item 13. Certain Relationships and
Related Transactions

During the fiscal year ended September 30,
2002, the Consolidated Group had the following related-party
transactions with its parent, Metropolitan, and other affiliates.

48



---



##### Table of Contents



|                                                                                                                                                                       |  |      |            |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | -
|                                                                                                                                                                       |  | 2002
|                                                                                                                                                                       |  |     
|Real estate contracts and mortgage notes
    receivable and other receivables sold to affiliates                                                                       |  | $    | 46,538,090 |  
|Gains on real estate contracts and mortgage notes
    receivable and other receivable instruments sold to
    Metropolitan, Summit, Old Standard, Old West and Metwest |  |      | 3,313,998  |  
|Real estate contracts and mortgage notes
    receivable and other receivable investments purchased from
    affiliates                                                 |  |      | 7,146,951  |  
|Ceding of annuity premiums to Old Standard                                                                                                                             |  |      | 56,527,704 |  
|Policyholder benefits recovered from Old Standard                                                                                                                      |  |      | 24,884,602 |  
|Annuity servicing fees charged to Old Standard                                                                                                                         |  |      | 486,541    |  
|Ceding commissions charged to Old Standard                                                                                                                             |  |      | 3,324,726  |  
|Service fees paid to Summit Property Development                                                                                                                       |  |      | 841,377    |  
|Dividends paid on preferred stock                                                                                                                                      |  |      | 2,747,250  |  
|Real estate contract acquisitions, investment
    servicing and other administrative overhead                                                                          |  |      | 8,485,904  |  
|Net change in indebtedness of affiliates                                                                                                                               |  |      | (957,697   | )
|Interest received on indebtedness of affiliates                                                                                                                        |  |      | 1,687,673  |  
|Issuance of preferred stock of Western Life                                                                                                                            |  |      | 10,400,000 |  
|Issuance of common stock of Western Life                                                                                                                               |  |      | 17,372,674 |  

At September 30, 2002, the Consolidated
Group had non-secured Receivables due from affiliates of
approximately $6.3 million.

Several companies are affiliated with the
Consolidated Group through common control by C. Paul
Sandifur, Jr. As a result of these relationships, conflicts
of interests may arise between the Consolidated Group and its
affiliates relating to the allocation of investments and other
business opportunities among the affiliated companies. When
allocating investment opportunities among the Consolidated Group
and its affiliates, Metropolitan considers several factors
including each companys availability of cash, regulatory
constraints related to the particular investment, the size of
the investment relative to each companys asset size and
other asset/ liability management issues. The final allocation
may at times be subject to management discretion. Although
management attempts to maximize the profitability of each
entity, there is no guarantee that the actual allocation of
investments and other business opportunities among the
Consolidated Group and its affiliates will prove to be in the
best interests of all of the affiliated companies. If the
allocation of investments to the Consolidated Group fails to be
in its best interests relative to those of its affiliates, the
Consolidated Groups business could be adversely affected.

When an investment opportunity is presented, the
investment is evaluated and underwritten by Metropolitan. After
successful evaluation and underwriting, the Consolidated Group
purchases the investment in its name. In return for services
provided by its parent company, the Consolidated Group pays a
fee that it believes is reasonable which results in the payment
to Metropolitan of all significant direct expenses incurred on
its behalf.

During the fiscal year ended September 30,
2002, the Consolidated Group purchased pools of loans from
Metwest, an affiliate. Occasionally, Metwest originates loans at
market rates and subsequently sells them to the Consolidated
Group. The sale to the Consolidated Group generally occurs
within 90 days of origination. Due to the short time period
between origination and subsequent purchase, the carrying value
approximated fair value at the time of sale. As a result of the
Consolidated Groups relationship with Metwest, acquisition
of these Receivables are reported as Receivable investments
purchased from affiliates.

The Consolidated Group entered into the following
purchase and sale agreements during the fiscal year ended
September 30, 2002.

On March 28, 2002, Western Life agreed to
sell to Old Standard and Old West a 69.20% undivided beneficial
interest in a lottery trust owned by Western Life. The purchase
price of $11.2 million, which was

49



---



##### Table of Contents



derived from future expected cash flows
discounted at a 6.957% market rate, resulted in a gain of
approximately $0.6 million.


On August 15, 2002, Western Life agreed to
sell to Old Standard and Old West the remaining interest in a
certain Lottery Trust owned by Western Life. The purchase price
of $6.2 million, which was derived from future expected
cash flows discounted at a 5.527% market rate, resulted in a
gain of approximately $0.7 million. Additionally, on
August 15, 2002, Western Life agreed to sell to Old
Standard and Old West a 95.83% undivided beneficial interest in
a certain Lottery Trust owned by Western Life. The purchase
price of $29.1 million, which was derived from future
expected cash flows discounted at a 5.888% market rate, resulted
in a gain of approximately $2.0 million.

The market rates on the above lottery trust sales
were calculated as 2.0% over the Treasury benchmark as of the
date of the sale, which is consistent with corporate bonds with
similar credit profiles along with recent transactions involving
large blocks of lottery Receivables.

Western Life entered into a reinsurance agreement
with Old Standard, which became effective July 1, 1998.
Under this agreement, Western Life reinsured with Old Standard
75% of the risk on various annuity products. The reinsurance
agreement is an ongoing arrangement with no stated expiration or
termination date, although either party may stop and restart at
their discretion upon providing a 30-day advance written notice.
Western Life receives ceding allowances equal to the actual
commission plus 1.5% of the premium from Old Standard to
compensate Western Life for its annuity issuance costs.
Additionally, Western Life receives a fee from Old Standard for
servicing the reinsured policies of approximately 0.40% annually
on the cash value of the reinsured policies in addition to
ceding allowances equal to the actual commission plus 1.5% of
the premium. As of September 30, 2002, Western Life had
$148.3 million of its annuity policies reinsured with Old
Standard.

Summit Property Development, Inc., a wholly owned
subsidiary of Summit Securities, Inc., one of the Consolidated
Groups affiliates, provides real estate development
services to the Consolidated Group for a fee. These services
include sales, marketing, market analysis, architectural
services, design services, subdividing properties and
coordination with regulatory groups to obtain the approvals that
are necessary to develop a particular property.

Real estate contract acquisitions, investment
servicing and other administrative services are governed by two
separate inter-company agreements executed between Western Life
and Metropolitan. The Consolidated Group believes that the
charges incurred are reasonable and result in the payment to
Metropolitan of all significant direct expenses incurred on the
Consolidated Groups behalf.

Western Life issued 531,603 shares of common
stock to Metropolitan during the year ended September 30,
2002. Additionally, Western Life issued 1,040,000 shares of
preferred stock to Metropolitan during the year ended
September 30, 2002.

Indebtedness of related parties consisted of the
following:

|                                                                                                                                                                                                           |  |               |            |      |  |      |            |  |  |   |            | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | 
|                                                                                                                                                                                                           |  |              
|                                                                                                                                                                                                           |  | September 30,
|                                                                                                                                                                                                           |  |              
|                                                                                                                                                                                                           |  | 2002          |            | 2001 |  | 2000
|                                                                                                                                                                                                           |  |               |            |      |  |     
|Note receivable from Metropolitan Mortgage,
    interest at prime plus 1% (5.75% at September 30, 2002),
    due December 27, 2015; collateralized by commercial
    property located in Pasco, Washington |  | $             | 7,968,092  |      |  | $    | 8,507,426  |  |  | $ | 8,784,393  | 
|Note receivable from Metropolitan Mortgage,
    interest at 10.5% per annum, due January 1, 2010;
    collateralized by commercial property located in Spokane,
    Washington                             |  |               | 10,953,838 |      |  |      | 11,372,201 |  |  |   | 11,749,036 | 
|                                                                                                                                                                                                           |  |               |            |      |  |      |            |  |  |   |            | 
|                                                                                                                                                                                                           |  | $             | 18,921,930 |      |  | $    | 19,879,627 |  |  | $ | 20,533,429 | 
|                                                                                                                                                                                                           |  |               |            |      |  |      |            |  |  |   |            | 

Gary D. Brajcich, Esq.s law firm,
Workland & Witherspoon, provided legal services to the
Consolidated Group and its affiliates in the amount of $126,834
for the fiscal year ended September 30, 2002.

50



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##### Table of Contents



Bradley M. Marten, Esq.s law firm, Marten
Brown Inc., provided legal services to affiliates of the
Consolidated Group in the amount of $280,428 for the fiscal year
ended September 30, 2002.

PART IV



|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Our principal executive officer and principal
financial officer have evaluated the effectiveness of our
disclosure controls and procedures, as that term is
defined in Rule 15d-14(c) of the Securities Exchange Act of
1934 (the Exchange Act), within 90 days of the
filing date of this Annual Report on Form 10-K. Based on
their evaluation, the principal executive officer and principal
financial officer concluded that our disclosure controls and
procedures are effective to ensure that information we are
required to disclose in the reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and
forms, and include controls and procedures designed to ensure
that information required to be disclosed by us in those reports
is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure.

There were no significant changes in our internal
controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation.






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

(a) The following documents are filed as
part of this Report:

1. Financial Statements.



| |                                                
| | -----------------------------------------------
| | Included in Part II, Item 8 of this
    report:

|                                                                                                                     |  |  |  | 
|-------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Report of
    Independent Auditors                                                                                   |  |  |  | 
|Consolidated
    Balance Sheets at September 30, 2002 and 2001                                                       |  |  |  | 
|Consolidated
    Statements of Operations for the Years Ended September 30,
    2002, 2001 and 2000                  |  |  |  | 
|Consolidated
    Statements of Comprehensive Income (Loss) for the Years Ended
    September 30, 2002, 2001 and 2000 |  |  |  | 
|Consolidated
    Statements of Stockholders Equity for the Years Ended
    September 30, 2002, 2001 and 2000        |  |  |  | 
|Consolidated
    Statements of Cash Flows for the Years Ended September 30,
    2002, 2001 and 2000                  |  |  |  | 
|Notes to
    Consolidated Financial Statements                                                                       |  |  |  | 

2. Financial Statement
Schedules.

Included in Part IV of this report:

Schedules Required by Article 7

Schedule I Summary of Investments
other than Investments in Related Parties

Schedule III Supplementary Insurance
Information


Schedule IV Supplementary Reinsurance
Information


Schedules Required by Article 5

Schedule V Valuation and Qualifying
Accounts and Reserves



| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Other schedules are omitted because of the
    absence of conditions under which they are required or because
    the required information is given in the financial statements or
    notes thereto.

51



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##### Table of Contents



3. Exhibits.

The following is a complete list of exhibits
filed as part of this Form 10-K.

|        |      |             |  |                                                                                                                                                                                  
|------- | ---- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 3.1  |             |  | Articles of Incorporation of Western United
    Holding Company.(1)                                                                                                              
|        | 3.2  |             |  | Bylaws of Western United Holding
    Company.(1)                                                                                                                                 
|        | 4.1  |             |  | Statement of Rights, Designations and Preferences
    of Variable Rate Cumulative Preferred Stock,
    Series A.(1)                                                              
|        | 10.1 |             |  | Receivable Acquisition and Underwriting Agreement
    between Western United Life Assurance Company and Metropolitan
    Mortgage & Securities Co., Inc.(1)                      
|        | 10.2 |             |  | Form of General Support Services and Rental
    Agreement between Western United Life Assurance Company and
    Metropolitan Mortgage & Securities Co., Inc., as
    amended. (1)
|        | 10.3 |             |  | First Amendment to General Support Services and
    Rental Agreement between Western United Life Assurance Company
    and Metropolitan Mortgage & Securities Co.,
    Inc.(1)   
|        | 12.1 |             |  | Statement regarding computation of ratios.                                                                                                                                       
|        | 16.1 |             |  | Letter regarding change in certifying accountant.                                                                                                                                
|        | 21.1 |             |  | Subsidiaries of the Registrant.                                                                                                                                                  



---



|    |                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the Registrants
    Registration Statement on Form S-1, Registration
    No. 333-72346-01.

(b) Reports on
Form 8-K.

Western Holding did not file any reports on
Form 8-K during the fourth quarter of 2002.

52



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##### 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



| |                                
| | -------------------------------
| | WESTERN UNITED HOLDING COMPANY,
| | a Washington corporation       



| |    |                          
| | -- | -------------------------
| | By | /s/ C. PAUL SANDIFUR, JR.

| |                                              
| | ---------------------------------------------
| |                                              
| | C. Paul Sandifur, Jr., President and Director

Date: December 26, 2002

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/ C. PAUL SANDIFUR, JR.C. Paul Sandifur, Jr. |  | President and Director
    (Principal Executive Officer) |  | December 26, 2002
|                                              
|/s/ JOSEPH CHRISTENSENJoseph Christensen       |  | Treasurer
    (Principal Financial Officer)              |  | December 26, 2002
|                                              
|/s/ JOHN VAN ENGELENJohn Van Engelen           |  | Senior Vice President and Director                       |  | December 26, 2002
|                                              
|/s/ REUEL SWANSONReuel Swanson                 |  | Secretary and Director                                   |  | December 26, 2002
|                                              
|/s/ GARY D. BRAJCICHGary D. Brajcich           |  | Director                                                 |  | December 26, 2002
|                                              
|Robert Stephen Corker                          |  | Director                                                 |  | December 26, 2002
|                                              
|/s/ IRV MARCUSIrv Marcus                       |  | Director                                                 |  | December 26, 2002
|                                              
|Bradley M. Marten                              |  | Director                                                 |  | December 26, 2002
|                                              
|/s/ SAMUEL H. SMITHSamuel H. Smith             |  | Director                                                 |  | December 26, 2002

53



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##### Table of Contents



|                                       |  |          |  |                  
|-------------------------------------- |  | -------- |  | -----------------
|Signature                              |  | Title    |  | Date             
|                                       |  |          |  |                  
|                                      
|/s/ WILLIAM D. SNIDERWilliam D. Snider |  | Director |  | December 26, 2002
|                                      
|John Trimble                           |  | Director |  | December 26, 2002

54



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##### Table of Contents



CERTIFICATIONS

I, C. Paul Sandifur, Jr., Chief Executive Officer
of Western United Holding Company, certify that:

1. I have reviewed this annual report on
Form 10-K of Western United Holding Company;

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 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 functions):



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



| |                          
| | -------------------------
| | /s/ C. PAUL SANDIFUR, JR.
| |                          
| | C. Paul Sandifur, Jr.    
| | Chief Executive Officer  

Date: December 30, 2002

55



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##### Table of Contents



I, Robert A. Ness, (Principal Financial Officer)
of Western United Holding Company, certify that:

1. I have reviewed this annual report on
Form 10-K of Western United Holding Company;

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 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 functions):



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



| |                              
| | -----------------------------
| | /s/ ROBERT A. NESS           
| |                              
| | Robert A. Ness               
| | (Principal Financial Officer)

Date: December 30, 2002

56



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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS

Years Ended September 30, 2002, 2001 and
2000

|                                                               |  |      |     | 
|-------------------------------------------------------------- |  | ---- | --- | 
|                                                               |  | Page
|                                                               |  |     
|Report of Ernst & Young LLP, Independent
    Auditors          |  |      | F-2 | 
|Consolidated Balance Sheets                                    |  |      | F-3 | 
|Consolidated Statements of Income                              |  |      | F-4 | 
|Consolidated Statements of Comprehensive Income
    (Loss)     |  |      | F-5 | 
|Consolidated Statements of Changes in
    Stockholders Equity |  |      | F-6 | 
|Consolidated Statements of Cash Flows                          |  |      | F-7 | 
|Notes to Consolidated Financial Statements                     |  |      | F-8 | 

F-1



---



##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

To the Board of Directors

Western United Holding Company


We have audited the accompanying consolidated
balance sheets of Western United Holding Company and subsidiary
as of September 30, 2002 and 2001, and the related
consolidated statements of income, comprehensive income (loss),
changes in stockholders equity, and cash flows for each of
the three years in the period ended September 30, 2002. Our
audits also included the financial statement schedules as of
September 30, 2002 and 2001 and for each of the three years
in the period ended September 30, 2002 listed in the index
at Item 15(A). These consolidated financial statements and
schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and schedules based on our
audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Western United
Holding Company and subsidiary at September 30, 2002 and
2001, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
September 30, 2002, in conformity with accounting
principles generally accepted in the United States. Also in our
opinion, the related Consolidated Financial Statement schedules
referred to above, when considered in relation to the basic 2002
and 2001 financial statements taken as a whole, present fairly
in all material respects the information set forth therein.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

Seattle, Washington

December 13, 2002


F-2



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

September 30, 2002 and 2001


|                                             |                                                                                                                                                                             |                                                  |             |               |               |  |             |             |               | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------ | ----------- | ------------- | ------------- |  | ----------- | ----------- | ------------- | 
|                                             |                                                                                                                                                                             | 2002                                             |             | 2001         
|                                             |                                                                                                                                                                             |                                                  |             |              
|ASSETS:                                     
|Investments:                                 |                                                                                                                                                                             |                                                  |             |               |               |  |             |            
|                                             | Trading securities, at fair value ($0 and
    $47,436,606 at cost or amortized cost)                                                                                        |                                                  | $           |              |               |  | $           | 48,818,530  |              
|                                             | Available-for-sale securities, at fair value
    ($454,044,108 and $271,473,835 at cost or amortized cost),
    includes pledged securities of $113,002,984 and $29,721,472 |                                                  |             | 458,488,402   |               |  |             | 267,833,620 |              
|                                             | Held-to-maturity securities, at amortized cost
    ($40,333,356 and $0 at fair value), pledged                                                                              |                                                  |             | 39,223,983    |               |  |             |            |              
|                                             | Real estate contracts and mortgage notes and
    other receivable investments, at net realizable value, net of
    discounts and contract origination fees                  |                                                  |             | 683,918,878   |               |  |             | 540,109,944 |              
|                                             | Allowance for losses on receivables                                                                                                                                         |                                                  |             | (8,697,778    | )             |  |             | (9,166,763  | )            
|                                             | Policy loans                                                                                                                                                                |                                                  |             | 20,238,963    |               |  |             | 19,381,119  |              
|                                             | Real estate held for sale and development, at the
    lower of cost or market, net of allowances of $1,462,966 and
    $2,448,670                                           |                                                  |             | 51,208,831    |               |  |             | 39,121,577  |              
|                                             |                                                                                                                                                                             |                                                  |             |               |               |  |             |            
|                                             |                                                                                                                                                                             | Total investments                                |             |               | 1,244,381,279 |  |             |             | 906,098,027   | 
|                                             |                                                                                                                                                                             |                                                  |             |               |               |  |             |            
|Cash and cash equivalents                    |                                                                                                                                                                             |                                                  | 44,035,987  |               |               |  | 53,296,888  |            
|Accrued interest on investments              |                                                                                                                                                                             |                                                  | 14,464,644  |               |               |  | 9,254,198   |            
|Reinsurance receivable                       |                                                                                                                                                                             |                                                  | 148,392,448 |               |               |  | 109,608,025 |            
|Deferred policy acquisition costs            |                                                                                                                                                                             |                                                  | 72,257,621  |               |               |  | 56,356,646  |            
|Due from affiliate                           |                                                                                                                                                                             |                                                  | 6,276,448   |               |               |  |            |            
|Indebtedness of related parties              |                                                                                                                                                                             |                                                  | 18,921,930  |               |               |  | 19,879,627  |            
|Land, buildings and equipment, net           |                                                                                                                                                                             |                                                  | 4,282,048   |               |               |  | 4,609,295   |            
|Current income taxes receivable              |                                                                                                                                                                             |                                                  |            |               |               |  | 3,540,607   |            
|Other assets                                 |                                                                                                                                                                             |                                                  | 10,978,546  |               |               |  | 14,024,375  |            
|                                             |                                                                                                                                                                             |                                                  |             |               |               |  |             |            
|                                             |                                                                                                                                                                             | Total other assets                               |             |               | 319,609,672   |  |             |             | 270,569,661   | 
|                                             |                                                                                                                                                                             |                                                  |             |               |               |  |             |            
|                                             |                                                                                                                                                                             | Total assets                                     |             | $             | 1,563,990,951 |  |             | $           | 1,176,667,688 | 
|                                             |                                                                                                                                                                             |                                                  |             |               |               |  |             |            
|LIABILITIES:                                
|Reserves, payables, and accrued liabilities: |                                                                                                                                                                             |                                                  |             |               |               |  |             |            
|                                             | Life insurance and annuity reserves                                                                                                                                         |                                                  | $           | 1,224,344,910 |               |  | $           | 973,139,567 |              
|                                             | Policyholder funds on deposit                                                                                                                                               |                                                  |             | 1,315,343     |               |  |             | 1,121,950   |              
|                                             | Accounts payable and accrued expenses                                                                                                                                       |                                                  |             | 4,556,963     |               |  |             | 24,161,863  |              
|                                             | Due to affiliate                                                                                                                                                            |                                                  |             |              |               |  |             | 2,092,651   |              
|                                             |                                                                                                                                                                             |                                                  |             |               |               |  |             |            
|                                             |                                                                                                                                                                             | Total reserves, payables and accrued liabilities |             |               | 1,230,217,216 |  |             |             | 1,000,516,031 | 
|                                             |                                                                                                                                                                             |                                                  |             |               |               |  |             |            
|Debt payable, including accrued interest     |                                                                                                                                                                             |                                                  | 104,222,683 |               |               |  | 23,254,909  |            
|Current income taxes payable                 |                                                                                                                                                                             |                                                  | 12,326,770  |               |               |  |            |            
|Deferred income taxes, net                   |                                                                                                                                                                             |                                                  | 19,231,189  |               |               |  | 16,847,210  |            
|Minority interest                            |                                                                                                                                                                             |                                                  | 50,000,000  |               |               |  | 39,600,000  |            
|                                             |                                                                                                                                                                             |                                                  |             |               |               |  |             |            
|                                             |                                                                                                                                                                             | Total liabilities                                |             |               | 1,415,997,858 |  |             |             | 1,080,218,150 | 
|                                             |                                                                                                                                                                             |                                                  |             |               |               |  |             |            
|STOCKHOLDERS EQUITY:                       
|                                             | Preferred Stock, Series A, $2.50 par,
    6,000,000 shares authorized, no shares issued or outstanding                                                                      |                                                  |             |              |               |  |             |            |              
|                                             | Common stock, $0.01 par, 5,000,000 shares
    authorized, 100 shares issued and outstanding                                                                                 |                                                  |             | 1             |               |  |             | 1           |              
|                                             | Paid-in and contributed capital                                                                                                                                             |                                                  |             | 43,297,238    |               |  |             | 24,924,564  |              
|                                             | Accumulated other comprehensive income (loss)                                                                                                                               |                                                  |             | 2,888,792     |               |  |             | (2,344,793  | )            
|                                             | Retained earnings                                                                                                                                                           |                                                  |             | 101,807,062   |               |  |             | 73,869,766  |              
|                                             |                                                                                                                                                                             |                                                  |             |               |               |  |             |            
|                                             |                                                                                                                                                                             | Total stockholders equity                       |             |               | 147,993,093   |  |             |             | 96,449,538    | 
|                                             |                                                                                                                                                                             |                                                  |             |               |               |  |             |            
|                                             |                                                                                                                                                                             | Total liabilities and stockholders equity       |             | $             | 1,563,990,951 |  |             | $           | 1,176,667,688 | 
|                                             |                                                                                                                                                                             |                                                  |             |               |               |  |             |            

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

F-3



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

For the Years Ended September 30, 2002,
2001, and 2000


|                                                                         |                                                         |                             |             |             |            |      |            |            |            |   |            |            |            | 
|------------------------------------------------------------------------ | ------------------------------------------------------- | --------------------------- | ----------- | ----------- | ---------- | ---- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                                         |                                                         | 2002                        |             | 2001        |            | 2000
|                                                                         |                                                         |                             |             |             |            |     
|Revenues:                                                                |                                                         |                             |             |             |            |      |            |            |            |   |            |           
|                                                                         | Insurance premiums and annuity considerations           |                             | $           | 1,766,851   |            |      | $          | 1,971,123  |            |   | $          | 2,406,532  |           
|                                                                         | Net investment income                                   |                             |             | 101,052,439 |            |      |            | 72,362,198 |            |   |            | 65,958,630 |           
|                                                                         | Net gains (losses) on investments                       |                             |             | (3,491,126  | )          |      |            | (5,829,983 | )          |   |            | 53,831     |           
|                                                                         |                                                         |                             |             |             |            |      |            |            |            |   |            |           
|                                                                         |                                                         | Total revenues              |             |             | 99,328,164 |      |            |            | 68,503,338 |   |            |            | 68,418,993 | 
|                                                                         |                                                         |                             |             |             |            |      |            |            |            |   |            |           
|Benefits and expenses:                                                   |                                                         |                             |             |             |            |      |            |            |            |   |            |           
|                                                                         | Insurance policy and annuity benefits                   |                             |             | 53,131,625  |            |      |            | 47,473,339 |            |   |            | 46,122,863 |           
|                                                                         | Commissions to agents                                   |                             |             | 9,495,911   |            |      |            | 8,797,176  |            |   |            | 5,844,979  |           
|                                                                         | Administrative and other expenses                       |                             |             | 5,342,178   |            |      |            | 5,580,579  |            |   |            | 6,470,108  |           
|                                                                         | Capitalization of deferred policy acquisition
    costs |                             |             | (10,832,303 | )          |      |            | (9,947,269 | )          |   |            | (9,063,431 | )         
|                                                                         | Amortization of deferred policy acquisition costs       |                             |             | (5,016,172  | )          |      |            | 8,650,000  |            |   |            | 12,300,000 |           
|                                                                         |                                                         |                             |             |             |            |      |            |            |            |   |            |           
|                                                                         |                                                         | Total benefits and expenses |             |             | 52,121,239 |      |            |            | 60,553,825 |   |            |            | 61,674,519 | 
|                                                                         |                                                         |                             |             |             |            |      |            |            |            |   |            |           
|Income before income taxes and minority interest                         |                                                         |                             | 47,206,925  |             |            |      | 7,949,513  |            |            |   | 6,744,474  |           
|Income taxes benefit (provision)                                         |                                                         |                             | (16,522,379 | )           |            |      | 8,412,214  |            |            |   | (2,357,015 | )         
|                                                                         |                                                         |                             |             |             |            |      |            |            |            |   |            |           
|Net income before minority interest                                      |                                                         |                             | 30,684,546  |             |            |      | 16,361,727 |            |            |   | 4,387,459  |           
|Income of consolidated subsidiary allocated to
    minority stockholders |                                                         |                             | (2,747,250  | )           |            |      | (3,940,250 | )          |            |   | (3,015,406 | )         
|                                                                         |                                                         |                             |             |             |            |      |            |            |            |   |            |           
|Net income                                                               |                                                         | $                           | 27,937,296  |             |            | $    | 12,421,477 |            |            | $ | 1,372,053  |           
|                                                                         |                                                         |                             |             |             |            |      |            |            |            |   |            |           

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

F-4



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)

For the Years Ended September 30, 2002,
2001, and 2000


|                                                          |                                           |                                                                                   |            |           |            |      |            |           |            |   |            |            |            |  
|--------------------------------------------------------- | ----------------------------------------- | --------------------------------------------------------------------------------- | ---------- | --------- | ---------- | ---- | ---------- | --------- | ---------- | - | ---------- | ---------- | ---------- | -
|                                                          |                                           | 2002                                                                              |            | 2001      |            | 2000
|                                                          |                                           |                                                                                   |            |           |            |     
|Net income                                                |                                           | $                                                                                 | 27,937,296 |           |            | $    | 12,421,477 |           |            | $ | 1,372,053  |           
|Other comprehensive income (loss), net of
    income tax: |                                           |                                                                                   |            |           |            |      |            |           |            |   |            |           
|                                                          | Unrealized gains (losses) on investments: |                                                                                   |            |           |            |      |            |           |            |   |            |            |           
|                                                          |                                           | Unrealized holding gains (losses) arising
    during period(1)                    |            |           | 8,736,429  |      |            |           | 7,653,010  |   |            |            | (4,080,507 | )
|                                                          |                                           | Less reclassification adjustment for gains
    (losses) included in net income(2) |            |           | (3,502,844 | )    |            |           | (1,123,162 | ) |            |            | (583,839   | )
|                                                          |                                           |                                                                                   |            |           |            |      |            |           |            |   |            |           
|                                                          | Net other comprehensive income (loss)     |                                                                                   |            | 5,233,585 |            |      |            | 6,529,848 |            |   |            | (4,664,346 | )         
|                                                          |                                           |                                                                                   |            |           |            |      |            |           |            |   |            |           
|Comprehensive income (loss)                               |                                           | $                                                                                 | 33,170,881 |           |            | $    | 18,951,052 |           |            | $ | (3,292,293 | )         
|                                                          |                                           |                                                                                   |            |           |            |      |            |           |            |   |            |           



---



|    |                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------
|(1) | Net of related tax of $4,737,070, $4,097,450 and
    $(2,242,166) in 2002, 2001 and 2000, respectively.
|   
|(2) | Net of related tax of $1,886,146, $601,331 and
    $320,777 in 2002, 2001 and 2000, respectively.      

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

F-5



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

For the Years Ended September 30, 2002,
2001, and 2000


|                                                                                                     |  |        |   |             |  |               |            |          |  |               |            |   |  |   |             |  |  |   |             |  
|---------------------------------------------------------------------------------------------------- |  | ------ | - | ----------- |  | ------------- | ---------- | -------- |  | ------------- | ---------- | - |  | - | ----------- |  |  | - | ----------- | -
|                                                                                                     |  |        |   |             |  | Accumulated   |            |          |  |              
|                                                                                                     |  |        |   |             |  | Other         |            |          |  |              
|                                                                                                     |  |        |   | Paid-in and |  | Comprehensive |            |          |  | Total        
|                                                                                                     |  | Common |   | Contributed |  | Income        |            | Retained |  | Stockholders
|                                                                                                     |  | Stock  |   | Capital     |  | (Loss)        |            | Earnings |  | Equity       
|                                                                                                     |  |        |   |             |  |               |            |          |  |              
|Balance, October 1, 1999                                                                             |  | $      | 1 |             |  | $             | 12,364,999 |          |  | $             | (4,210,295 | ) |  | $ | 60,076,236  |  |  | $ | 68,230,941  |  
|Net income                                                                                           |  |        |   |             |  |               |            |          |  |               |            |   |  |   | 1,372,053   |  |  |   | 1,372,053   |  
|Net unrealized losses on available-for-sale
    securities, net of income tax benefit of $2,562,943  |  |        |   |             |  |               |            |          |  |               | (4,664,346 | ) |  |   |             |  |  |   | (4,664,346  | )
|                                                                                                     |  |        |   |             |  |               |            |          |  |               |            |   |  |   |             |  |  |   |             |  
|Balance, September 30, 2000                                                                          |  |        | 1 |             |  |               | 12,364,999 |          |  |               | (8,874,641 | ) |  |   | 61,448,289  |  |  |   | 64,938,648  |  
|Net income                                                                                           |  |        |   |             |  |               |            |          |  |               |            |   |  |   | 12,421,477  |  |  |   | 12,421,477  |  
|Issuance of common stock (481,745 shares)                                                            |  |        |   |             |  |               | 12,559,565 |          |  |               |            |   |  |   |             |  |  |   | 12,559,565  |  
|Net unrealized gains on available-for-sale
    securities, net of income tax provision of $3,496,119 |  |        |   |             |  |               |            |          |  |               | 6,529,848  |   |  |   |             |  |  |   | 6,529,848   |  
|                                                                                                     |  |        |   |             |  |               |            |          |  |               |            |   |  |   |             |  |  |   |             |  
|Balance, September 30, 2001                                                                          |  |        | 1 |             |  |               | 24,924,564 |          |  |               | (2,344,793 | ) |  |   | 73,869,766  |  |  |   | 96,449,538  |  
|Net income                                                                                           |  |        |   |             |  |               |            |          |  |               |            |   |  |   | 27,937,296  |  |  |   | 27,937,296  |  
|Issuance of common stock (531,603 shares)                                                            |  |        |   |             |  |               | 17,372,674 |          |  |               |            |   |  |   |             |  |  |   | 17,372,674  |  
|Net unrealized gains on available-for-sale
    securities, net of income tax provision of $2,850,924 |  |        |   |             |  |               |            |          |  |               | 5,233,585  |   |  |   |             |  |  |   | 5,233,585   |  
|Contributed capital                                                                                  |  |        |   |             |  |               | 1,000,000  |          |  |               |            |   |  |   |             |  |  |   | 1,000,000   |  
|                                                                                                     |  |        |   |             |  |               |            |          |  |               |            |   |  |   |             |  |  |   |             |  
|Balance, September 30, 2002                                                                          |  | $      | 1 |             |  | $             | 43,297,238 |          |  | $             | 2,888,792  |   |  | $ | 101,807,062 |  |  | $ | 147,993,093 |  
|                                                                                                     |  |        |   |             |  |               |            |          |  |               |            |   |  |   |             |  |  |   |             |  

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

F-6



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH
FLOWS

For the Years Ended September 30, 2002,
2001, and 2000


|                                          |                                                                                                                 |                                                    |                                                         |                                                         |             |             |              |              |             |            |             |              |             |             |            | 
|----------------------------------------- | --------------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------------------------- | ------------------------------------------------------- | ----------- | ----------- | ------------ | ------------ | ----------- | ---------- | ----------- | ------------ | ----------- | ----------- | ---------- | 
|                                          |                                                                                                                 | 2002                                               |                                                         | 2001                                                    |             | 2000       
|                                          |                                                                                                                 |                                                    |                                                         |                                                         |             |            
|Cash flows from operating
    activities: |                                                                                                                 |                                                    |                                                         |                                                         |             |             |              |              |             |            |             |             
|                                          | Net income                                                                                                      |                                                    | $                                                       | 27,937,296                                              |             |             | $            | 12,421,477   |             |            | $           | 1,372,053    |            
|                                          | Adjustments to reconcile net income to net cash
    provided by operating activities:                           |                                                    |                                                         |                                                         |             |             |              |              |             |            |             |              |            
|                                          |                                                                                                                 | Proceeds from sales of trading securities          |                                                         |                                                         | 13,590,118  |             |              |              | 43,647,548  |            |             |              | 33,240,026  |            
|                                          |                                                                                                                 | Proceeds from maturities of trading securities     |                                                         |                                                         | 1,020,171   |             |              |              | 6,425,271   |            |             |              | 1,063,590   |            
|                                          |                                                                                                                 | Acquisition of trading securities                  |                                                         |                                                         | (4,669,460  | )           |              |              | (54,088,221 | )          |             |              | (17,796,655 | )          
|                                          |                                                                                                                 | Earned discounts on receivables                    |                                                         |                                                         | (30,937,020 | )           |              |              | (18,674,479 | )          |             |              | (17,523,001 | )          
|                                          |                                                                                                                 | (Gains) losses on investments and receivables, net |                                                         |                                                         | 9,102,840   |             |              |              | 215,920     |            |             |              | (2,521,468  | )          
|                                          |                                                                                                                 | Net gains on sales of real estate                  |                                                         |                                                         | (11,161,985 | )           |              |              | (237,312    | )          |             |              | (2,733,749  | )          
|                                          |                                                                                                                 | Provision for losses                               |                                                         |                                                         | 5,550,271   |             |              |              | 5,851,375   |            |             |              | 5,201,386   |            
|                                          |                                                                                                                 | Depreciation and amortization                      |                                                         |                                                         | 843,103     |             |              |              | 792,000     |            |             |              | 842,376     |            
|                                          |                                                                                                                 | Deferred income tax provision (benefit)            |                                                         |                                                         | 2,850,924   |             |              |              | (14,571,784 | )          |             |              | 2,298,233   |            
|                                          |                                                                                                                 | Changes in assets and liabilities:                 |                                                         |                                                         |             |             |              |              |             |            |             |              |             |            
|                                          |                                                                                                                 |                                                    | Deferred acquisition costs, net                         |                                                         |             | (15,900,975 | )            |              |             | (1,297,269 | )           |              |             | 3,236,569   |           
|                                          |                                                                                                                 |                                                    | Life insurance and annuity reserves                     |                                                         |             | 60,017,561  |              |              |             | 47,276,004 |             |              |             | 43,325,248  |           
|                                          |                                                                                                                 |                                                    | Accrued interest on receivables and investments         |                                                         |             | (6,978,673  | )            |              |             | (3,804,437 | )           |              |             | (1,100,931  | )         
|                                          |                                                                                                                 |                                                    | Accrued interest on debt                                |                                                         |             | 302,884     |              |              |             | 74,123     |             |              |             | 215,855     |           
|                                          |                                                                                                                 |                                                    | Other assets                                            |                                                         |             | 6,666,289   |              |              |             | 14,551,287 |             |              |             | (10,063,057 | )         
|                                          |                                                                                                                 |                                                    | Accounts payable and accrued expenses                   |                                                         |             | (2,974,721  | )            |              |             | 1,451,295  |             |              |             | (558,520    | )         
|                                          |                                                                                                                 |                                                    | Amounts due to/from affiliates                          |                                                         |             | (8,369,099  | )            |              |             | 10,725,369 |             |              |             | 755,840     |           
|                                          |                                                                                                                 |                                                    |                                                         |                                                         |             |             |              |              |             |            |             |             
|                                          |                                                                                                                 |                                                    |                                                         | Net cash provided by operating activities               |             |             | 46,889,524   |              |             |            | 50,758,167  |              |             |             | 39,253,795 | 
|                                          |                                                                                                                 |                                                    |                                                         |                                                         |             |             |              |              |             |            |             |             
|Cash flows from investing
    activities: |                                                                                                                 |                                                    |                                                         |                                                         |             |             |              |              |             |            |             |             
|                                          | Principal payments on real estate contracts and
    mortgage notes receivable and other receivable investments  |                                                    |                                                         | 170,184,410                                             |             |             |              | 112,586,504  |             |            |             | 155,660,923  |            
|                                          | Proceeds from sales of real estate contracts and
    mortgage notes receivable and other receivable investments |                                                    |                                                         | 48,223,643                                              |             |             |              | 93,129,189   |             |            |             | 399,572,727  |            
|                                          | Acquisition of real estate contracts and mortgage
    notes receivable                                          |                                                    |                                                         | (311,871,483                                            | )           |             |              | (242,062,586 | )           |            |             | (465,274,629 | )          
|                                          | Acquisition of other receivable investments                                                                     |                                                    |                                                         | (20,534,592                                             | )           |             |              | (11,755,271  | )           |            |             | (37,172,277  | )          
|                                          | Proceeds from sales of real estate                                                                              |                                                    |                                                         | 13,239,908                                              |             |             |              | 13,917,698   |             |            |             | 22,410,650   |            
|                                          | Proceeds from maturities of held-to-maturity
    securities                                                     |                                                    |                                                         | 273,832                                                 |             |             |              |             |             |            |             | 7,198,318    |            
|                                          | Proceeds from maturities of available-for-sale
    securities                                                   |                                                    |                                                         | 50,707,476                                              |             |             |              | 15,185,841   |             |            |             | 6,238,689    |            
|                                          | Proceeds from sales of available-for-sale
    securities                                                        |                                                    |                                                         | 328,041,780                                             |             |             |              | 171,480,544  |             |            |             | 15,436,315   |            
|                                          | Purchases of available-for-sale securities                                                                      |                                                    |                                                         | (548,860,160                                            | )           |             |              | (194,351,502 | )           |            |             | (68,931,378  | )          
|                                          | Purchases of held-to-maturity securities                                                                        |                                                    |                                                         | (39,515,691                                             | )           |             |              |             |             |            |             |             |            
|                                          | Purchases of and costs associated with real
    estate held for sale and development                            |                                                    |                                                         | (12,457,131                                             | )           |             |              | (9,986,539   | )           |            |             | (3,300,904   | )          
|                                          | Other capital expenditures                                                                                      |                                                    |                                                         | (166,601                                                | )           |             |              | (1,239,172   | )           |            |             | (198,611     | )          
|                                          |                                                                                                                 |                                                    |                                                         |                                                         |             |             |              |              |             |            |             |             
|                                          |                                                                                                                 |                                                    |                                                         | Net cash provided by (used in) investing
    activities |             |             | (322,734,609 | )            |             |            | (53,095,294 | )            |             |             | 31,639,823 | 
|                                          |                                                                                                                 |                                                    |                                                         |                                                         |             |             |              |              |             |            |             |             
|Cash flows from financing
    activities: |                                                                                                                 |                                                    |                                                         |                                                         |             |             |              |              |             |            |             |             
|                                          | Receipts from life and annuity products                                                                         |                                                    |                                                         | 300,861,033                                             |             |             |              | 149,442,699  |             |            |             | 118,448,928  |            
|                                          | Withdrawals of life and annuity products                                                                        |                                                    |                                                         | (113,029,008                                            | )           |             |              | (118,301,729 | )           |            |             | (173,791,925 | )          
|                                          | Ceding of life and annuity products to reinsurers                                                               |                                                    |                                                         | 24,884,602                                              |             |             |              | 9,115,927    |             |            |             | 18,840,441   |            
|                                          | Ceding of life and annuity products from
    reinsurers                                                         |                                                    |                                                         | (56,527,704                                             | )           |             |              | (1,056,539   | )           |            |             | (27,434,956  | )          
|                                          | Issuance of preferred stock of subsidiary to
    minority shareholder                                           |                                                    |                                                         | 10,400,000                                              |             |             |              | 5,000,000    |             |            |             | 9,450,000    |            
|                                          | Issuance of common stock to Parent                                                                              |                                                    |                                                         | 17,372,674                                              |             |             |              | 12,559,565   |             |            |             |             |            
|                                          | Contributed Capital from Parent                                                                                 |                                                    |                                                         | 1,000,000                                               |             |             |              |             |             |            |             |             |            
|                                          | Redemption of surplus certificates                                                                              |                                                    |                                                         |                                                        |             |             |              |             |             |            |             | (9,450,000   | )          
|                                          | Increase (decrease) in notes payable                                                                            |                                                    |                                                         | 81,000,000                                              |             |             |              | (1,500,000   | )           |            |             | (19,500,000  | )          
|                                          | Increase (decrease) in related party
    indebtedness                                                           |                                                    |                                                         | 957,697                                                 |             |             |              | 653,802      |             |            |             | 4,483,632    |            
|                                          | Repayments of other debt payable                                                                                |                                                    |                                                         | (335,110                                                | )           |             |              | (679,952     | )           |            |             | (369,832     | )          
|                                          |                                                                                                                 |                                                    |                                                         |                                                         |             |             |              |              |             |            |             |             
|                                          |                                                                                                                 |                                                    | Net cash provided by (used in) financing
    activities |                                                         |             | 266,584,184 |              |              |             | 55,233,773 |             |              |             | (79,323,712 | )         
|                                          |                                                                                                                 |                                                    |                                                         |                                                         |             |             |              |              |             |            |             |             
|Net change in cash and cash equivalents   |                                                                                                                 |                                                    | (9,260,901                                              | )                                                       |             |             | 52,896,646   |              |             |            | (8,430,094  | )           
|Cash and cash equivalents:                |                                                                                                                 |                                                    |                                                         |                                                         |             |             |              |              |             |            |             |             
|                                          | Beginning of year                                                                                               |                                                    |                                                         | 53,296,888                                              |             |             |              | 400,242      |             |            |             | 8,830,336    |            
|                                          |                                                                                                                 |                                                    |                                                         |                                                         |             |             |              |              |             |            |             |             
|                                          | End of year                                                                                                     |                                                    | $                                                       | 44,035,987                                              |             |             | $            | 53,296,888   |             |            | $           | 400,242      |            
|                                          |                                                                                                                 |                                                    |                                                         |                                                         |             |             |              |              |             |            |             |             

See Note 13 for supplemental cash flow
information.

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

F-7



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##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                                                
|-- | -----------------------------------------------
|1. | Summary of Significant Accounting
    Policies:



| |                          
| | -------------------------
| | Business and Organization

Western United Holding Company (Western
Holding or the Company), a wholly owned
subsidiary of Metropolitan Mortgage & Securities Co., Inc.
(Metropolitan), is a holding company for Western
United Life Assurance Company (Western Life).
Metropolitan is effectively controlled by C. Paul Sandifur, Jr.
through common stock ownership and voting control. Western Life
is engaged in the offering, issuance and sale of annuity and
life insurance policies. Western Life is licensed to sell
insurance in sixteen states, but its business is primarily
concentrated in the states of Idaho, Montana, Oregon, Texas,
Utah and Washington.

In May 2002, Metropolitan formed the Company as a
wholly owned subsidiary, and subsequently transferred its 46.3%
ownership of Western Life to the Company. In connection with the
formation of the Company, Consumers Group Holding Company
(CGHC), a subsidiary of Metropolitan, also transferred its 53.7%
ownership of Western Life to the Company. As a result of the
transfers, the Company owned 100% of the outstanding common
stock of Western Life at September 30, 2002. Metropolitan
owned 100% of Western Lifes preferred stock outstanding at
September 30, 2002.

In accordance with Statement of Financial
Accounting Standards (SFAS) No. 141, Business
Combinations,the exchange of shares between a parent and
its subsidiaries and between subsidiaries of a common parent
have been accounted for similar to those of a pooling of
interests. Accordingly, the Companys consolidated balance
sheets, and the related consolidated statements of income,
comprehensive income (loss), changes in stockholders
equity, and cash flows as presented herein have been restated as
of the earliest period presented as though ownership exchange
had occurred at that date. Ownership in Western Lifes
preferred stock has been reclassified as minority interests.
Related financial information presented in the notes to
consolidated financial statements for prior years has also been
restated to furnish comparative information.



| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements include the
accounts of Western Holding and its majority-owned subsidiary,
Western Life. All significant intercompany transactions and
balances have been eliminated in consolidation.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Cash includes all balances on deposit in banks
and financial institutions. The Company considers all highly
liquid debt instruments purchased with a remaining maturity of
three months or less to be cash equivalents. Substantially all
cash and cash equivalents are on deposit with one financial
institution and balances often exceed the federal insurance
limit. The Company periodically evaluates the credit quality of
these banks and financial institutions.



| |            
| | -----------
| | Investments

The Company has classified its investments in
fixed maturity and equity securities as trading,
available-for-sale, or held-to-maturity.
The accounting policies related to these investment
classifications are as follows:



| |                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Trading Securities:Trading securities, consisting
    primarily of mortgage-and asset-backed securities and equity
    securities, are recorded at fair value. Realized and unrealized
    gains and losses on these securities are included in the
    statements of income.
|
| | Available-for-Sale Securities:Available-for-sale securities,
    consisting primarily of mortgage- and asset-backed securities,
    government-backed bonds, corporate bonds, equity securities and
    venture capital                                                      

F-8



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##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                       
|-- | ------------------------------------------------------
|1. | Summary of Significant Accounting Policies (continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | investments, are carried at quoted and estimated
    fair values. Unrealized gains and losses on available-for-sale
    securities are excluded from earnings and presented as
    accumulated other comprehensive income or loss, net of related
    deferred income taxes. The Company continually monitors its
    investment portfolio for other than temporary impairment of
    securities. When an other than a temporary decline in the value
    below cost or amortized cost is identified, the investment is
    reduced to its fair value, which becomes the new cost basis of
    the investment. The amount of the reduction is reported as a
    realized loss in the statement of income. Any recovery of value
    in excess of the investments new cost basis is recognized
    as a realized gain only on sale, maturity or other disposition
    of the investment. Factors that the Company evaluates in
    determining the existence of an other than temporary decline in
    value include (1) the length of time and extent to which
    the fair value has been less than cost or carrying value,
    (2) the circumstances contributing to the decline in fair
    value (including a change in interest rates or spreads to
    benchmarks), (3) recent performance of the security,
    (4) the financial strength of the issuer, and (5) the
    intent and ability of the Company to retain the investment for a
    period of time sufficient to allow for anticipated recovery.
    Additionally, for asset-backed securities, the Company considers
    the security rating and the amount of credit support available
    for the security.
|
| | The Company holds debt securities generated from
    its own securitization transactions. For these securities,
    estimated fair value is derived from expected discounted future
    cash flows. When determining expected future cash flows, the
    Company considers interest rates, estimated prepayment rates,
    collateral value and historical default rates experienced by the
    securities. To the extent that actual experience is less
    favorable than the assumptions, impairment in the debt
    securities could result. The Company periodically assesses the
    assumptions used in valuing the cash flows and the related
    carrying value of these securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Restricted equity securities represent the
    Companys investment in the common stock of the Federal
    Home Loan Bank of Seattle (FHLB Seattle). This stock
    may only be sold to FHLB Seattle or to another member
    institution; therefore, it is restricted and is carried at cost.
    The carrying value of the restricted stock was approximately
    $5.1 million and $2.7 million at September 30, 2002
    and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | Held-to-Maturity Securities:Held-to-maturity securities are
    carried at amortized cost. Premiums and discounts on these
    securities are amortized on a specific-identification basis
    using the interest method. The Company has the ability and
    intent to hold these investments until maturity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Realized gains and losses on investments are
calculated on the specific-identification method and are
recognized in the statement of income in the period in which the
investment is sold.



| |                                                        
| | -------------------------------------------------------
| | Real Estate Contracts and Mortgage Notes
    Receivable

Real estate contracts and mortgage notes
receivable are carried at amortized cost. Discounts originating
at the time of purchase, net of capitalized acquisition costs,
are amortized on an individual contract basis using the level
yield (interest) method over the remaining contractual
terms of the receivables. Origination fees, net of direct
origination costs, are deferred and recognized as interest
income using the level yield (interest) method over the
contractual term of the receivable.

For commercial development loans, the Company
occasionally negotiates exit fee agreements with the borrower.
To the extent the exit fees do not result in an overall yield to
the Company that is greater than prevailing market rates after
adjusting for the risk, the transaction is accounted for as a
loan. If the transaction results in a yield that is greater than
the prevailing market rates after adjusting for the risk, the
transaction is treated as a loan if the exit fee is less than
50% of the expected residual profits from the development and if
the borrower has an equity investment, substantial to the
project, that is not funded by the Company. If the transaction
meets the requirements to be accounted for as a loan, the exit
fee is amortized into income over

F-9



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##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                       
|-- | ------------------------------------------------------
|1. | Summary of Significant Accounting Policies (continued)

the estimated life of the loan using the level
yield method. If the transaction does not meet the requirements
to be treated as a loan, it is accounted for as an investment in
real estate.

Additionally, beginning October 1, 1993 and
ending March 31, 1998, the Company entered into an
agreement with Metropolitan to purchase real estate contracts
and mortgage notes receivables at guaranteed yields that ranged
from 8.0% to 9.79%. As part of the agreement, the Company agreed
to pay Metropolitan the difference between the guaranteed yield
and the yield at which Metropolitan acquired the loan. In
exchange, Metropolitan also agreed to pay the Company the
guaranteed yield while the property is held for sale. An
inter-company holdback balance of approximately
$1.8 million and $2.7 million at September 30,
2002 and 2001, respectively, supports the guarantee,
respectively.



| |                             
| | ----------------------------
| | Other Receivable Investments

Other receivable investments (primarily lottery
prizes, annuities and structured settlements) are carried at the
lower of amortized cost or net realizable value. Discounts
originating at the time of purchase, net of capitalized
acquisition costs, are amortized using the level yield
(interest) method on an individual receivable basis over the
remaining contractual term of the receivable.



| |                                              
| | ---------------------------------------------
| | Real Estate Held for Sale and
    Development

Real estate held for sale and development is
stated at the lower of cost or fair value less estimated costs
to sell. The Company principally acquires real estate through
acquisition and foreclosure. Cost is determined by the purchase
price of the real estate or, for real estate acquired by
foreclosure, at the lower of the fair value of the property at
the date of foreclosure less estimated selling costs, or
carrying value at the date of foreclosure.

Project costs, including interest, associated
with the development of real estate are capitalized and included
in the cost basis of the real estate. During the years ended
September 30, 2002, 2001 and 2000, the Company capitalized
project interest costs of $1.2 million, $0.6 million
and $0.7 million, respectively.

Occasionally, real estate properties are rented,
with the revenue being included in other income and related
costs being charged to expense.

Profit on sales of real estate is recognized when
the buyers initial and continuing investment is adequate
to demonstrate (1) a commitment to fulfill the terms of the
transaction, (2) that collectibility of the remaining sales
price due is reasonably assured, and (3) the Company
maintains no continuing involvement or obligation in relation to
the property sold and has transferred all the risks and rewards
of ownership to the buyer.



| |                                               
| | ----------------------------------------------
| | Allowance for Losses on Real Estate
    Assets

Allowance for Losses on Receivables.Commercial Loans are individually
monitored for impairment. A loan is impaired when, based on
current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Probable is defined as
future events are likely to occur. When a loan has
been identified as impaired, the Company determines the
allowance for loss based on the estimated fair value, less
estimated liquidation expenses, of the collateral compared to
the carrying value of the receivable. The estimated fair value
is based on the most recent appraisal of the collateral. If the
most recent appraisal is more than one year old, a new appraisal
is ordered. In the interim, estimated fair value is established
through a review of the appraisal in addition to a review of
other relevant market information. When reviewing the most
recent appraisal, the Company considers the type of property,
changes in the economic factors of the region and the underlying
appraisal assumptions. If the estimated fair value of the
collateral is less than the carrying value, an allowance for
loss is recognized.

F-10



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                       
|-- | ------------------------------------------------------
|1. | Summary of Significant Accounting Policies (continued)

The remaining real estate contracts and mortgage
notes receivable portfolio is made up of a large group of
smaller-balance homogenous loans that are collectively evaluated
for impairment. The Company establishes an allowance for
inherent losses on the receivables based primarily on current
delinquencies and historical foreclosure and loss experience. To
the extent actual experience differs from assumptions, such
adjustments would be included in the statement of income.

Allowances for losses on real estate contracts
and mortgage notes receivable are based on the carrying value of
the receivable, including accrued interest. Accordingly, the
Company accrues interest on delinquent receivables until
foreclosure.

Allowance for Losses on Real Estate Held for
Sale and Development.The
allowance for losses on real estate held for sale and
development includes amounts for estimated losses as a result of
impairment in value. The Company reviews its real estate
properties for impairment in value whenever events or
circumstances indicate that the carrying value of the asset may
exceed its fair value. The carrying value of a repossessed
property is determined as of the date of repossession of the
property and is based on the lower of fair value or carrying
value at the time the property was repossessed. For
non-commercial properties, an appraisal is obtained on the
foreclosed property to determine its fair value at time of
repossession. For commercial properties, an appraisal is
obtained on the foreclosed property to determine the fair value
only if the most recent appraisal is more than one year old,
otherwise the existing appraisal is used. From time to time, the
Company may not order an updated appraisal in accordance with
its established policies if current negotiations with a
potential purchaser can establish an indication of value.

Subsequent to repossession (or acquisition in the
case of development properties), if the value of the property
declines such that the fair value, less selling costs, from the
disposition of the asset is less than its carrying value, an
impairment is recognized in the statement of income.



| |                       
| | ----------------------
| | Reinsurance Receivable

The Companys life insurance subsidiary has
ceded a portion of certain life insurance annuity reserves and
the related premiums to other companies, including Old Standard
Life Insurance Company (Old Standard), an affiliate.
Such reinsurance permits recovery of losses from reinsurers,
although it does not discharge the primary liability of the
Company as direct insurer of the risk reinsured. Accordingly,
the Company has not removed the related assets and liabilities
from the consolidated balance sheets.



| |                                      
| | -------------------------------------
| | Deferred Policy Acquisition
    Costs

Deferred policy acquisition costs, consisting of
commissions and other insurance underwriting and annuity policy
costs, are deferred and amortized over the lives of the
contracts or policies in proportion to the present value of
estimated future gross profits. To the extent actual experience
differs from assumptions, and to the extent estimates of future
gross profits require revision, the unamortized balance of
deferred acquisition costs is adjusted accordingly; such
adjustments would be included in current operations. During the
years ended September 30, 2002 and 2001, the Company
revised its amortization assumptions on the DPAC related to its
deferred annuity business (92% of the total DPAC as of
September 30, 2002) to reflect the higher yields the
Company expects to be earned on its commercial real estate loan
portfolio and the expected future crediting rates on the annuity
business which the investments support. The expected future
crediting rates are based primarily on the Companys
current policy for re-pricing its existing annuity products
assuming a level interest rate environment. During the years
ended September 30, 2002 and 2001, these revised
assumptions resulted in an increase of approximately
$11.7 million and $4.3 million, respectively, in
deferred costs with a corresponding decrease in the amortization
of deferred acquisition costs. There were no significant
adjustments to the gross profit estimates in 2000.

F-11



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                       
|-- | ------------------------------------------------------
|1. | Summary of Significant Accounting Policies (continued)

The amortization of deferred policy acquisition
costs, which is based on the estimated gross profits of the
underlying life and annuity products, could be revised in the
near term due to changes in the crediting rate environment. As a
result, the recoverability of these costs may be adversely
affected in the near term.



| |                              
| | -----------------------------
| | Land, Buildings and Equipment

Land, buildings and equipment are stated at
depreciated cost. Buildings, improvements, furniture and
equipment are depreciated using both straight-line and
accelerated methods over their estimated useful lives, which,
for buildings and improvements, range from 5 to 40 years,
and for furniture and equipment, range from three to ten years.
Repairs, maintenance and minor renewals are expensed as
incurred. Upon sale or retirement, the costs and related
accumulated depreciation are eliminated from the accounts and
any resulting gain or loss is reflected in operations.
Depreciation expense for the years ended September 30,
2002, 2001 and 2000 was approximately $0.4 million, $0.5
million and $0.5 million, respectively.



| |                        
| | -----------------------
| | Computer Software Costs

The Company capitalizes direct costs of
enhancements to computer software operating systems acquired and
modified for internal use to the extent that the functionality
of the software is improved. Total capitalized enhancement costs
net of related amortization were approximately $0.2 million
and $0.5 million at September 30, 2002 and 2001,
respectively. These costs are being amortized over 3- and
10-year periods, depending on the estimated useful life of the
enhancement, using the straight-line method. Due to
technological advancements, it is reasonably possible that the
remaining estimated useful lives could change in the near term.



| |             
| | ------------
| | Policy Loans

Policy loans are carried at the unpaid principal
balance of the loans, and represent borrowings against the cash
surrender value of in force life insurance policies and annuity
contracts. Policy loans bear interest at rates ranging from
6.00% to 8.00%. Life insurance policy loans may remain
outstanding until the policy is surrendered. Annuity policy
loans are generally due over terms ranging from five to fifteen
years.



| |                                        
| | ---------------------------------------
| | Life Insurance and Annuity
    Reserves

Premiums for annuities and universal life
insurance contracts are reported as life insurance and annuity
reserves under the deposit method of accounting. Reserves for
annuities and universal life insurance are equal to the sum of
the account balances including credited interest and deferred
service charges. Based on past experience, consideration is
given in actuarial calculations to the number of policyholder
and annuitant deaths that might be expected, policy lapses,
surrenders and terminations. As a result of changes in the
factors considered in the actuarial calculations, it is
reasonably possible that the reserves for insurance and
annuities could change in the near term.



| |                                                       
| | ------------------------------------------------------
| | Recognition of Life Insurance and Annuity
    Revenues

Revenues from universal life contracts consist of
amounts assessed during the period against policyholders
account balances, primarily for mortality expenses, policy
administration charges and surrender charges. Revenues related
to annuity contracts are recognized over the estimated policy
term. Annuity revenues consist of the charges assessed against
the annuity account balance for services and surrender charges.
Charges for future services are assessed; however, the related
revenue is deferred and recognized in income over the period
benefited using the same assumptions as are used to amortize
deferred policy acquisition costs.

F-12



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                       
|-- | ------------------------------------------------------
|1. | Summary of Significant Accounting Policies (continued)



| |                          
| | -------------------------
| | Guaranty Fund Assessments

The Company is subject to insurance guaranty laws
in the states in which it writes premiums. These laws provide
for assessments against insurance companies for the benefit of
policyholders and claimants of insolvent life insurance
companies. A portion of these assessments can be offset against
the payment of future premium taxes. However, future changes in
state laws could decrease the amount available for offset. At
September 30, 2002 and 2001, the Company accrued an
estimated liability of approximately $2.0 million and $2.1
million, respectively, for guaranty fund assessments for known
or anticipated insolvencies. As a result of future insolvencies
or changes in the assessment of known insolvencies, the guaranty
fund liability could change in the near term.



| |             
| | ------------
| | Income Taxes

The Company accounts for income taxes using the
liability method, which requires that deferred tax assets and
liabilities be determined based on the expected future income
tax consequences of events that have been recognized in the
financial statements. Deferred tax assets and liabilities are
recognized based on the temporary differences between the
financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in
which the temporary differences are expected to reverse.

The Company is included in a consolidated federal
income tax return with certain of its affiliates. The
consolidating companies have executed a tax allocation
agreement. Under the agreement, the consolidating
companies income tax provisions are computed on a separate
return basis and consolidated affiliates receive a reimbursement
to the extent that their losses and other credits result in a
reduction of the consolidated tax liability.



| |                   
| | ------------------
| | Hedging Activities

The Company is authorized by its investment
policies to use financial futures instruments for the purpose of
hedging interest rate risk relative to its securities portfolio,
potential trading situations and in anticipation of sales of
real estate contracts and other receivable investments. Futures
transactions are intended to reduce the risk associated with
price movements for a balance sheet asset. Securities may be
sold short (i.e., the sale of securities that are
not currently in the portfolio and therefore must be purchased
to close out the sale agreement) as another means of hedging
interest rate risk to benefit from an anticipated movement in
the financial markets. At September 30, 2002 and
September 30, 2001, the Company had no open hedging
positions.



| |                              
| | -----------------------------
| | Off-Balance-Sheet Instruments

The Company has outstanding commitments to extend
credit to commercial borrowers. Such financial instruments are
recorded in the financial statements when they are funded or
related fees are incurred. Outstanding commitments to extend
credit to commercial borrowers were approximately
$84.1 million and $17.0 million at September 30,
2002 and 2001, respectively.



| |          
| | ---------
| | Estimates

The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States (GAAP) requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from
those estimates.

F-13



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                       
|-- | ------------------------------------------------------
|1. | Summary of Significant Accounting Policies (continued)



| |                  
| | -----------------
| | Reclassifications

Certain amounts in the prior years
consolidated financial statements have been reclassified to
conform to the current years presentation. These
reclassifications had no effect on net income or retained
earnings as previously reported.



| |                                           
| | ------------------------------------------
| | Other Recent Accounting
    Pronouncements

In July 2001, the Financial Accounting Standards
Board (the FASB) issued SFAS No. 142,
Goodwill and Other Intangible Assets.This Statement
requires discontinuing the amortization of goodwill and other
intangible assets with indefinite useful lives. Instead, these
assets will be tested periodically for impairment and written
down to their fair market values as necessary. This Statement is
effective for fiscal years beginning after December 15,
2001. The implementation of this Statement on October 1,
2002 did not have a material impact on the Companys
consolidated financial statements.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets,which is effective for fiscal years
beginning after December 15, 2001. SFAS No. 144
addresses accounting and reporting of long-lived assets, except
goodwill, that are either held and used or disposed of through
sale or other means. The implementation of this Statement on
October 1, 2002 did not have a material impact on the
Companys consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections. This Statement amends FASB Statement
No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
under changed conditions. The provisions of this statement are
effective for financial statements issued on or after
May 15, 2002. Implementation of this statement did not have
a material impact on the Companys consolidated financial
statements.

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which is effective for exit or disposal
activities initiated after December 31, 2002. This
Statement requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. The
provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002 with
early application encouraged. The Company has completed an
evaluation of the effects of this statement and does not believe
it will have a material impact on the Companys
consolidated financial statements.

F-14



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |             
|-- | ------------
|2. | Investments:

A summary of the cost or amortized cost and
estimated fair value of investments at September 30, 2002
and 2001 is as follows:

|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|------------------------------------- |  | -------------- | ----------- | ---------- |  | ---------- | --------- | -------------- |  | - | ---------- | - |  | - | ----------- | 
|                                      |  |               
|                                      |  | 2002          
|                                      |  |               
|                                      |  |                |             | Gross      |  | Gross      |           |               
|                                      |  | Cost or        |             | Unrealized |  | Unrealized |           | Estimated Fair
|                                      |  | Amortized Cost |             | Gains      |  | Losses     |           | Value         
|                                      |  |                |             |            |  |            |           |               
|Available-for-Sale                    |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Government-backed bonds               |  | $              | 43,915,471  |            |  | $          | 496,996   |                |  | $ |           |   |  | $ | 44,412,467  | 
|Corporate bonds                       |  |                | 20,030,550  |            |  |            | 246,261   |                |  |   | (365,764   | ) |  |   | 19,911,047  | 
|Mortgage- and asset-backed securities |  |                | 349,968,503 |            |  |            | 6,484,643 |                |  |   | (2,306,998 | ) |  |   | 354,146,148 | 
|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Total fixed maturities                |  |                | 413,914,524 |            |  |            | 7,227,900 |                |  |   | (2,672,762 | ) |  |   | 418,469,662 | 
|Equity securities                     |  |                | 37,085,773  |            |  |            | 582,928   |                |  |   | (693,772   | ) |  |   | 36,974,929  | 
|Venture Capital/ Limited Partnership  |  |                | 3,043,811   |            |  |            |          |                |  |   |           |   |  |   | 3,043,811   | 
|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Totals                                |  | $              | 454,044,108 |            |  | $          | 7,810,828 |                |  | $ | (3,366,534 | ) |  | $ | 458,488,402 | 
|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Held-to-Maturity                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Government-backed bonds               |  | $              | 15,970,154  |            |  | $          | 283,564   |                |  | $ |           |   |  | $ | 16,253,718  | 
|Mortgage- and asset-backed securities |  |                | 23,253,829  |            |  |            | 825,809   |                |  |   |           |   |  |   | 24,079,638  | 
|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Total fixed maturities                |  |                | 39,223,983  |            |  |            | 1,109,373 |                |  |   |           |   |  |   | 40,333,356  | 
|Equity securities                     |  |                |            |            |  |            |          |                |  |   |           |   |  |   |            | 
|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Totals                                |  | $              | 39,223,983  |            |  | $          | 1,109,373 |                |  | $ |           |   |  | $ | 40,333,356  | 
|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 

|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|------------------------------------- |  | -------------- | ----------- | ---------- |  | ---------- | --------- | -------------- |  | - | ---------- | - |  | - | ----------- | 
|                                      |  |               
|                                      |  | 2001          
|                                      |  |               
|                                      |  |                |             | Gross      |  | Gross      |           |               
|                                      |  | Cost or        |             | Unrealized |  | Unrealized |           | Estimated Fair
|                                      |  | Amortized Cost |             | Gains      |  | Losses     |           | Value         
|                                      |  |                |             |            |  |            |           |               
|Trading                               |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Mortgage- and asset-backed securities |  | $              | 38,105,105  |            |  | $          | 2,502,149 |                |  | $ | (2,006,544 | ) |  | $ | 38,600,710  | 
|Equity securities                     |  |                | 9,331,501   |            |  |            | 886,319   |                |  |   |           |   |  |   | 10,217,820  | 
|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Totals                                |  | $              | 47,436,606  |            |  | $          | 3,388,468 |                |  | $ | (2,006,544 | ) |  | $ | 48,818,530  | 
|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Available-for-Sale                    |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Government-backed bonds               |  | $              | 14,862,862  |            |  | $          | 249,853   |                |  | $ |           |   |  | $ | 15,112,715  | 
|Corporate bonds                       |  |                | 32,266,114  |            |  |            | 1,047,491 |                |  |   | (953,550   | ) |  |   | 32,360,055  | 
|Mortgage- and asset-backed securities |  |                | 205,958,335 |            |  |            | 3,584,377 |                |  |   | (3,747,232 | ) |  |   | 205,795,480 | 
|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Total fixed maturities                |  |                | 253,087,311 |            |  |            | 4,881,721 |                |  |   | (4,700,782 | ) |  |   | 253,268,250 | 
|Equity securities                     |  |                | 13,886,525  |            |  |            | 149,959   |                |  |   | (3,361,185 | ) |  |   | 10,675,299  | 
|Venture Capital/ Limited Partnership  |  |                | 4,499,999   |            |  |            |          |                |  |   | (609,928   | ) |  |   | 3,890,071   | 
|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Totals                                |  | $              | 271,473,835 |            |  | $          | 5,031,680 |                |  | $ | (8,671,895 | ) |  | $ | 267,833,620 | 
|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 

F-15



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                        
|-- | -----------------------
|2. | Investments (continued)

The principal amount of mortgage- and
asset-backed securities with required principal or interest
payments being in arrears for more than 90 days was
approximately $4.2 million and $3.2 million at
September 30, 2002 and 2001, respectively.

Approximately $105.3 million and
$29.7 million in available-for-sale securities were pledged
to collateralize the note payable to Federal Home Loan Bank of
Seattle at September 30, 2002 and 2001. Additionally, all
held-to-maturity securities at September 30, 2002 were also
pledged to collateralize the note payable to Federal Home Loan
Bank of Seattle. Additionally, approximately $7.7 million
in available-for-sale securities were pledged to guarantee the
obligation of Western Life with respect to remitting tax
withholdings belonging to various lottery trusts and certain
other obligations of Western Life under the trust agreements.

Proceeds from sales of available-for-sale
securities during the years ended September 30, 2002, 2001
and 2000 were approximately $320.2 million,
$179.3 million and $15.4 million, respectively, which
resulted in gross realized gains of approximately
$6.7 million $6.4 million and $1.1 million and
gross realized losses of approximately $1.3 million,
$4.0 million and $0.2 million during each respective
year. There were no sales of held-to-maturity securities during
2002, 2001, or 2000.

During the years ended September 30, 2002,
2001 and 2000, the Company determined that certain
available-for-sale securities had other than
temporary impairments in value. Accordingly, the carrying values
of the securities were decreased by approximately
$17.9 million, $4.4 million and $1.1 million,
respectively, through a charge to operations.

The net change, adjusted for applicable tax
effects, in unrealized gains (losses) on trading fixed
income securities were approximately $1.5 million and
($1.2 million) during the years ended September 30,
2001 and 2000, respectively. The net change, adjusted for
applicable tax effects, in unrealized gains (losses) on
trading equity securities was approximately ($0.6 million),
($1.0 million) and $1.5 million during the years ended
September 30, 2002, 2001 and 2000, respectively.

The following aggregate investments with
individual issuers (excluding U.S. Government bonds) held by the
Company at September 30, 2002 and 2001, were in excess of
ten percent of stockholders equity:

|                                       |                                  |      |   |            |  |  |   |            | 
|-------------------------------------- | -------------------------------- | ---- | - | ---------- |  |  | - | ---------- | 
|Issuer                                 |                                  | 2002 |   | 2001      
|                                       |                                  |      |   |           
|Mortgage- and asset-backed securities: |                                  |      |   |            |  |  |   |           
|                                       | Freddie Mac                      |      | $ | 52,535,132 |  |  | $ |           | 
|                                       | Master Asset Securitization      |      |   | 38,062,661 |  |  |   |           | 
|                                       | Washington Mutual                |      |   | 30,239,086 |  |  |   |           | 
|                                       | Residential Funding Mtg Sec      |      |   | 29,750,737 |  |  |   |           | 
|                                       | Metropolitan Asset Funding, Inc. |      |   | 24,876,302 |  |  |   | 36,934,028 | 
|                                       | CS First Boston Mtg Sec Corp     |      |   | 23,811,531 |  |  |   |           | 
|                                       | Structured Asset Securities      |      |   | 23,237,166 |  |  |   |           | 
|                                       | Wells Fargo Mtg Backed Sec       |      |   | 21,695,347 |  |  |   |           | 
|                                       | Metropolitan Trust I             |      |   |           |  |  |   | 17,478,934 | 

The amortized cost and estimated fair value of
fixed maturities available-for-sale and held-to-maturity
securities at September 30, 2002, by contractual maturity,
are shown below. Expected maturities may differ from contractual
maturities because certain issuers have the right to call or
prepay obligations with or without call or prepayment penalties.

F-16



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                        
|-- | -----------------------
|2. | Investments (continued)

|                                           |                                                |                |             |                |  |   |             |            | 
|------------------------------------------ | ---------------------------------------------- | -------------- | ----------- | -------------- |  | - | ----------- | ---------- | 
|                                           |                                                |                |             | Estimated Fair
|                                           |                                                | Amortized Cost |             | Value         
|                                           |                                                |                |             |               
|Available-for-sale debt securities:        |                                                |                |             |                |  |   |             |           
|Due in one year or less                    |                                                | $              | 245,085     |                |  | $ | 245,156     |           
|Due after one year through five years      |                                                |                | 5,315,166   |                |  |   | 5,252,912   |           
|Due after five years and through ten years |                                                |                | 13,868,158  |                |  |   | 13,807,932  |           
|Due after ten years                        |                                                |                | 44,517,612  |                |  |   | 45,017,514  |           
|                                           |                                                |                |             |                |  |   |             |           
|                                           | Total non mortgage and asset-backed securities |                |             | 63,946,021     |  |   |             | 64,323,514 | 
|Mortgage- and asset-backed bonds           |                                                |                | 349,968,503 |                |  |   | 354,146,148 |           
|                                           |                                                |                |             |                |  |   |             |           
|                                           |                                                | $              | 413,914,524 |                |  | $ | 418,469,662 |           
|                                           |                                                |                |             |                |  |   |             |           
|Held-to-maturity debt securities:          |                                                |                |             |                |  |   |             |           
|Due in one year or less                    |                                                | $              |            |                |  | $ |            |           
|Due after one year through five years      |                                                |                |            |                |  |   |            |           
|Due after five years and through ten years |                                                |                | 15,970,154  |                |  |   | 16,253,718  |           
|                                           |                                                |                |             |                |  |   |             |           
|                                           | Total non mortgage and asset-backed securities |                |             | 15,970,154     |  |   |             | 16,253,718 | 
|Mortgage- and asset backed securities      |                                                |                | 23,253,829  |                |  |   | 24,079,638  |           
|                                           |                                                |                |             |                |  |   |             |           
|                                           |                                                | $              | 39,223,983  |                |  | $ | 40,333,356  |           
|                                           |                                                |                |             |                |  |   |             |           



|   |                                                                               
|-- | ------------------------------------------------------------------------------
|3. | Real Estate Contracts and Mortgage Notes and
    Other Receivable Investments:

Real estate contracts and mortgage notes and
other receivable investments are comprised of the following at
September 30, 2002 and 2001:

|                                                                              |  |      |             |      |  |   |             | 
|----------------------------------------------------------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | 
|                                                                              |  | 2002 |             | 2001
|                                                                              |  |      |             |     
|Real estate contracts and mortgage notes
    receivable                       |  | $    | 577,878,510 |      |  | $ | 390,257,862 | 
|Other receivable investments                                                  |  |      | 106,040,368 |      |  |   | 149,852,082 | 
|                                                                              |  |      |             |      |  |   |             | 
|Real estate contracts and mortgage notes and
    other receivable investments |  | $    | 683,918,878 |      |  | $ | 540,109,944 | 
|                                                                              |  |      |             |      |  |   |             | 

F-17



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                                                          
|-- | -----------------------------------------------------------------------------------------
|3. | Real Estate Contracts and Mortgage Notes and
    Other Receivable Investments (continued)



| |                                                        
| | -------------------------------------------------------
| | Real Estate Contracts and Mortgage Notes
    Receivable

Real estate contracts and mortgage notes
receivable consisted of the following at September 30, 2002
and 2001:

|                                                               |                                        |      |             |             |  |   |             |             | 
|-------------------------------------------------------------- | -------------------------------------- | ---- | ----------- | ----------- |  | - | ----------- | ----------- | 
|                                                               |                                        | 2002 |             | 2001       
|                                                               |                                        |      |             |            
|Commercial, face value(1)                                      |                                        | $    | 426,760,781 |             |  | $ | 140,297,542 |            
|Undisbursed portion of commercial                              |                                        |      | (84,128,271 | )           |  |   | (17,038,013 | )          
|                                                               |                                        |      |             |             |  |   |             |            
|                                                               | Commercial, net of undisbursed portion |      |             | 342,632,510 |  |   |             | 123,259,529 | 
|Residential, face value                                        |                                        |      | 158,265,860 |             |  |   | 167,219,530 |            
|Other, face value                                              |                                        |      | 88,862,967  |             |  |   | 115,995,207 |            
|Unrealized discounts, net of unamortized
    acquisition costs |                                        |      | (11,882,827 | )           |  |   | (16,216,404 | )          
|                                                               |                                        |      |             |             |  |   |             |            
|                                                               |                                        | $    | 577,878,510 |             |  | $ | 390,257,862 |            
|                                                               |                                        |      |             |             |  |   |             |            



---



|    |                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------
|(1) | The commercial real estate Receivables are
    defined as those generated through the Companys commercial
    lending source.

The weighted average interest rates and yields on
the Companys real estate contracts and mortgage notes
receivable as of September 30, 2002 and 2001 are as follows:

|            |  |                  |      |          |  |                  |      |                  |  |          |            |                  |  |  |      |   |  |  |      |   |  |   |            | 
|----------- |  | ---------------- | ---- | -------- |  | ---------------- | ---- | ---------------- |  | -------- | ---------- | ---------------- |  |  | ---- | - |  |  | ---- | - |  | - | ---------- | 
|            |  |                  |      |         
|            |  | 2002             |      | 2001    
|            |  |                  |      |         
|            |  | Weighted         |      | Weighted |  |                  |      | Weighted         |  | Weighted |            |                 
|            |  | average interest |      | average  |  |                  |      | average interest |  | average  |            |                 
|            |  | rate(1)          |      | yield    |  | Delinquencies(2) |      | rate(1)          |  | yield    |            | Delinquencies(2)
|            |  |                  |      |          |  |                  |      |                  |  |          |            |                 
|Commercial  |  |                  | 13.1 | %        |  |                  | 15.8 | %                |  | $        | 25,240,264 |                  |  |  | 13.3 | % |  |  | 14.3 | % |  | $ | 5,742,560  | 
|Residential |  |                  | 9.0  | %        |  |                  | 10.5 | %                |  | $        | 15,072,032 |                  |  |  | 9.1  | % |  |  | 10.5 | % |  | $ | 12,545,448 | 
|Other       |  |                  | 9.6  | %        |  |                  | 12.0 | %                |  | $        | 5,668,721  |                  |  |  | 9.7  | % |  |  | 13.9 | % |  | $ | 12,113,412 | 



---



|    |                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Less than 1% of the receivables are subject to
    variable interest rates.                                                                                
|   
|(2) | The principal amount of delinquent receivables
    are receivables with required principal or interest payments
    being in arrears for more than 90 days.

Aggregate amounts of receivable maturities at
their face value based on estimated prepayment rates are as
follows:

|                                 |  |                 |             |            |  |       |             |  |  |   |             | 
|-------------------------------- |  | --------------- | ----------- | ---------- |  | ----- | ----------- |  |  | - | ----------- | 
|                                 |  | Residential and |             | Commercial |  |      
|Fiscal Year Ending September 30, |  | Other           |             | Originated |  | Total
|                                 |  |                 |             |            |  |      
|2003                             |  | $               | 69,370,263  |            |  | $     | 101,140,252 |  |  | $ | 170,510,515 | 
|2004                             |  |                 | 59,072,404  |            |  |       | 98,877,472  |  |  |   | 157,949,876 | 
|2005                             |  |                 | 38,640,251  |            |  |       | 40,931,173  |  |  |   | 79,571,424  | 
|2006                             |  |                 | 27,510,565  |            |  |       | 21,750,210  |  |  |   | 49,260,775  | 
|2007                             |  |                 | 18,992,976  |            |  |       | 16,325,532  |  |  |   | 35,318,508  | 
|Thereafter                       |  |                 | 33,542,368  |            |  |       | 63,607,871  |  |  |   | 97,150,239  | 
|                                 |  |                 |             |            |  |       |             |  |  |   |             | 
|                                 |  | $               | 247,128,827 |            |  | $     | 342,632,510 |  |  | $ | 589,761,337 | 
|                                 |  |                 |             |            |  |       |             |  |  |   |             | 

F-18



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                                                          
|-- | -----------------------------------------------------------------------------------------
|3. | Real Estate Contracts and Mortgage Notes and
    Other Receivable Investments (continued)

The principal balances of the Companys real
estate contracts and mortgage notes receivable collateralized by
real estate are concentrated in the following geographic regions:

|                  |  |            |       |             |  |  |       |  
|----------------- |  | ---------- | ----- | ----------- |  |  | ----- | -
|                  |  |            |       | Residential
|                  |  | Commercial |       | and Other  
|                  |  |            |       |            
|Pacific Southwest |  |            | 49.7  | %           |  |  | 25.9  | %
|Southeast         |  |            | 18.0  | %           |  |  | 11.8  | %
|Southwest         |  |            | 15.6  | %           |  |  | 18.1  | %
|Midwest           |  |            | 10.4  | %           |  |  | 4.7   | %
|Pacific Northwest |  |            | 6.3   | %           |  |  | 33.0  | %
|Northeast         |  |            |      |             |  |  | 6.5   | %
|                  |  |            |       |             |  |  |       |  
|                  |  |            | 100.0 | %           |  |  | 100.0 | %
|                  |  |            |       |             |  |  |       |  

The value of real estate properties in these
geographic regions can be affected by changes in the economic
environment of the specific regions. It is reasonably possible
that these values could change in the near term, which would
affect the Companys estimate of its allowance for losses
associated with these receivables.

Other
Receivable Investments

Other receivable investments include various cash
flow investments, primarily annuities and lottery prizes.
Annuities are general obligations of the payer, which is
generally an insurance company. Lottery prizes are general
obligations of the insurance company or other entity making the
lottery prize payments. Additionally, when the lottery prizes
are from a state-run lottery, the lottery prizes are often
backed by the general credit of the respective state.

These investments normally are non-interest
bearing and are purchased at a discount sufficient to meet the
Companys investment yield requirements. The weighted
average yield on these receivables at September 30, 2002
and 2001 was approximately 8.43% and 9.20%, respectively.
Maturity dates range from 2002 to 2029.

The following is a reconciliation of the face
value of the other receivable investments to the Companys
carrying value at September 30, 2002 and 2001:

|                                                               |  |      |             |      |  |   |             |  
|-------------------------------------------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | -
|                                                               |  | 2002 |             | 2001
|                                                               |  |      |             |     
|Face value of receivables                                      |  | $    | 148,361,236 |      |  | $ | 221,543,693 |  
|Unrealized discounts, net of unamortized
    acquisition costs |  |      | (42,320,868 | )    |  |   | (71,691,611 | )
|                                                               |  |      |             |      |  |   |             |  
|Carrying value                                                 |  | $    | 106,040,368 |      |  | $ | 149,852,082 |  
|                                                               |  |      |             |      |  |   |             |  

The carrying value of other receivable
investments that were more than 90 days delinquent as of
September 30, 2002 and September 30, 2001 were
approximately $2.9 million and $2.5 million,
respectively.

During the years ended September 30, 2002,
2001 and 2000, the Company sold approximately
$46.2 million, $3.6 million and $23.9 million,
respectively, of other receivable investments without recourse
and recognized gains and (losses) on those sales of
approximately $3.3 million, $0.3 million and
($0.1 million), respectively.

The carrying value of the following other
receivable investments, by issuer, were in excess of ten percent
of stockholders equity at September 30, 2001. There
were no other receivable investments in excess of
ten percent of stockholders equity at
September 30, 2002.

F-19



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                                                          
|-- | -----------------------------------------------------------------------------------------
|3. | Real Estate Contracts and Mortgage Notes and
    Other Receivable Investments (continued)

|                     |  |      |            | 
|-------------------- |  | ---- | ---------- | 
|Issuer               |  | 2001
|                     |  |     
|WULA Trust Lotteries |  | $    | 26,838,747 | 

Aggregate amounts of contractual maturities of
other receivable investments to be received at their face values
as of September 30, 2002 are as follows:

|                                 |  |   |             | 
|-------------------------------- |  | - | ----------- | 
|Fiscal Year Ending September 30, |  |  
|                                 |  |  
|2003                             |  | $ | 22,212,021  | 
|2004                             |  |   | 20,931,989  | 
|2005                             |  |   | 18,705,048  | 
|2006                             |  |   | 15,868,639  | 
|2007                             |  |   | 13,747,018  | 
|Thereafter                       |  |   | 56,896,521  | 
|                                 |  |   |             | 
|                                 |  | $ | 148,361,236 | 
|                                 |  |   |             | 

4.     Allowance for
Losses on Receivables:

The following is a summary of the changes in the
allowance for losses on receivables for the years ended
September 30, 2002, 2001 and 2000:

|                  |                                         |      |           |            |   |      |           |            |   |   |           |            |  
|----------------- | --------------------------------------- | ---- | --------- | ---------- | - | ---- | --------- | ---------- | - | - | --------- | ---------- | -
|                  |                                         | 2002 |           | 2001       |   | 2000
|                  |                                         |      |           |            |   |     
|Beginning balance |                                         | $    | 9,166,763 |            |   | $    | 6,275,101 |            |   | $ | 3,037,582 |           
|Provisions        |                                         |      | 4,536,451 |            |   |      | 4,175,344 |            |   |   | 4,792,818 |           
|Charge offs:      |                                         |      |           |            |   |      |           |            |   |   |           |           
|                  | Commercial Loans                        |      |           | (1,960,777 | ) |      |           |           |   |   |           |           |  
|                  | Residential and other real estate loans |      |           | (3,044,659 | ) |      |           | (1,261,454 | ) |   |           | (1,555,299 | )
|                  | Other receivable investments            |      |           |           |   |      |           | (22,228    | ) |   |           |           |  
|                  |                                         |      |           |            |   |      |           |            |   |   |           |           
|Ending balance    |                                         | $    | 8,697,778 |            |   | $    | 9,166,763 |            |   | $ | 6,275,101 |           
|                  |                                         |      |           |            |   |      |           |            |   |   |           |           

Commercial Loans are individually monitored for
impairment. Commercial Loans in arrears for more than
90 days and other loans that the Company considered
impaired totaled approximately $49.2 million and
$5.7 million at September 30, 2002 and 2001,
respectively, with approximately $3.0 million and
$2.0 million established as allowance for losses.

Residential and other real estate receivables are
comprised of a large group of smaller-balance homogeneous loans
that are collectively evaluated for impairment. The Company
establishes a loss allowance on residential and other real
estate receivables, including accrued interest, inherent in the
portfolio at the balance sheet date based primarily on current
delinquencies and historical foreclosure and loss experience.

During the year ended September 30, 2000,
the Company established an allowance for losses on its
investments in annuity and structured settlements, as the
industry began to focus on state and federal collection laws and
their applicability to annuity and structured settlement
payments.

F-20



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##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.     Real Estate
Held for Sale and Development:

Real estate held for sale and development by
region as of September 30, 2002 is as follows:

|                               |  |             |            |             |  |       |            |  |  |   |            | 
|------------------------------ |  | ----------- | ---------- | ----------- |  | ----- | ---------- |  |  | - | ---------- | 
|                               |  | Development |            | Repossessed |  |      
|Region                         |  | Property    |            | Property    |  | Total
|                               |  |             |            |             |  |      
|Pacific Northwest              |  | $           | 23,644,376 |             |  | $     | 5,376,525  |  |  | $ | 29,020,901 | 
|Pacific Southwest              |  |             | 11,977,585 |             |  |       | 1,170,484  |  |  |   | 13,148,069 | 
|Southeast                      |  |             |           |             |  |       | 5,827,497  |  |  |   | 5,827,497  | 
|Southwest                      |  |             |           |             |  |       | 2,023,384  |  |  |   | 2,023,384  | 
|Northeast                      |  |             |           |             |  |       | 2,103,410  |  |  |   | 2,103,410  | 
|Midwest                        |  |             |           |             |  |       | 548,536    |  |  |   | 548,536    | 
|                               |  |             |            |             |  |       |            |  |  |   |            | 
|Balances at September 30, 2002 |  | $           | 35,621,961 |             |  | $     | 17,049,836 |  |  | $ | 52,671,797 | 
|                               |  |             |            |             |  |       |            |  |  |   |            | 
|Balances at September 30, 2001 |  | $           | 27,735,849 |             |  | $     | 13,834,398 |  |  | $ | 41,570,247 | 
|                               |  |             |            |             |  |       |            |  |  |   |            | 

At September 30, 2002, the Company had
approximately $1.9 million in commitments for construction
associated with the development properties.

The following is a summary of the changes in the
allowance for losses for the years ended September 30,
2002, 2001 and 2000:

|                  |  |      |            |      |  |      |           |   |  |   |           |  
|----------------- |  | ---- | ---------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                  |  | 2002 |            | 2001 |  | 2000
|                  |  |      |            |      |  |     
|Beginning balance |  | $    | 2,448,670  |      |  | $    | 1,442,424 |   |  | $ | 1,383,575 |  
|Provisions        |  |      | 1,013,820  |      |  |      | 1,676,031 |   |  |   | 408,568   |  
|Charge-offs       |  |      | (1,999,524 | )    |  |      | (669,785  | ) |  |   | (349,719  | )
|                  |  |      |            |      |  |      |           |   |  |   |           |  
|Ending balance    |  | $    | 1,462,966  |      |  | $    | 2,448,670 |   |  | $ | 1,442,424 |  
|                  |  |      |            |      |  |      |           |   |  |   |           |  

Loss provisions are calculated as the difference
between the estimated net realizable value and the carrying
value at the measurement date. Any loss on liquidation or
subsequent reduction in the carrying value is charged to
operations through provision for losses. The Company
periodically evaluates its reserves to determine their adequacy.

F-21



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6.     Net Investment
Income and Net Gains/ (Losses) on Investments:

The components of net investment income for the
years ended September 30 2002, 2001 and 2000 are as follows:

|                                          |                                             |      |             |             |  |      |            |            |  |   |            |            | 
|----------------------------------------- | ------------------------------------------- | ---- | ----------- | ----------- |  | ---- | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                          |                                             | 2002 |             | 2001        |  | 2000
|                                          |                                             |      |             |             |  |     
|Trading securities                        |                                             | $    | 1,099,573   |             |  | $    | 5,726,076  |            |  | $ | 5,449,701  |           
|Available-for-sale securities             |                                             |      | 22,731,033  |             |  |      | 16,706,592 |            |  |   | 12,753,095 |           
|Held-to-maturity securities               |                                             |      | 674,023     |             |  |      |           |            |  |   | 3,870,043  |           
|Real estate contracts and mortgages       |                                             |      | 70,093,973  |             |  |      | 41,407,090 |            |  |   | 34,371,438 |           
|Real estate held-for-sale and development |                                             |      | 1,615,095   |             |  |      | 1,262,139  |            |  |   | 1,352,282  |           
|Other receivable investments              |                                             |      | 13,794,874  |             |  |      | 13,959,212 |            |  |   | 14,089,143 |           
|Policy loans                              |                                             |      | 1,179,589   |             |  |      | 1,148,774  |            |  |   | 1,094,598  |           
|Cash and cash equivalents                 |                                             |      | 625,640     |             |  |      | 2,562,795  |            |  |   | 824,068    |           
|Indebtedness of related parties           |                                             |      | 1,687,673   |             |  |      | 2,070,086  |            |  |   | 2,145,418  |           
|                                          |                                             |      |             |             |  |      |            |            |  |   |            |           
|                                          | Gross investment income                     |      |             | 113,501,473 |  |      |            | 84,842,764 |  |   |            | 75,949,786 | 
|Less investment expenses:                 |                                             |      |             |             |  |      |            |            |  |   |            |           
|                                          | Salaries, commissions and employee benefits |      |             | 1,564,669   |  |      |            | 1,556,661  |  |   |            | 1,226,844  | 
|                                          | Other operating and underwriting expenses   |      |             | 9,591,561   |  |      |            | 9,754,582  |  |   |            | 7,147,505  | 
|                                          | Interest expense                            |      |             | 1,292,804   |  |      |            | 1,169,323  |  |   |            | 1,616,807  | 
|                                          |                                             |      |             |             |  |      |            |            |  |   |            |           
|Net investment income                     |                                             | $    | 101,052,439 |             |  | $    | 72,362,198 |            |  | $ | 65,958,630 |           
|                                          |                                             |      |             |             |  |      |            |            |  |   |            |           

The components of net gains (losses) on
investments for the years ended September 30, 2002, 2001
and 2000 are as follows:

|                                       |  |      |             |      |  |      |            |   |  |   |            |  
|-------------------------------------- |  | ---- | ----------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                       |  | 2002 |             | 2001 |  | 2000
|                                       |  |      |             |      |  |     
|Net gains on sales of real estate      |  | $    | 11,161,985  |      |  | $    | 237,312    |   |  | $ | 2,733,749  |  
|Net investment securities losses       |  |      | (12,416,838 | )    |  |      | (1,419,012 | ) |  |   | (619,677   | )
|Realized gains on sales of receivables |  |      | 3,313,998   |      |  |      | 1,203,092  |   |  |   | 3,141,145  |  
|Provision for losses                   |  |      | (5,550,271  | )    |  |      | (5,851,375 | ) |  |   | (5,201,386 | )
|                                       |  |      |             |      |  |      |            |   |  |   |            |  
|Net gains (losses) on investments      |  | $    | (3,491,126  | )    |  | $    | (5,829,983 | ) |  | $ | 53,831     |  
|                                       |  |      |             |      |  |      |            |   |  |   |            |  

7.     Land,
Buildings and Equipment:

Land, buildings and equipment and related
accumulated depreciation at September 30, 2002 and 2001
consisted of the following:

|                              |  |      |            |      |  |   |            |  
|----------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                              |  | 2002 |            | 2001
|                              |  |      |            |     
|Land                          |  | $    | 885,366    |      |  | $ | 1,101,366  |  
|Buildings and improvements    |  |      | 3,957,240  |      |  |   | 3,914,079  |  
|Furniture and equipment       |  |      | 2,022,608  |      |  |   | 1,903,573  |  
|                              |  |      |            |      |  |   |            |  
|                              |  |      | 6,865,214  |      |  |   | 6,919,018  |  
|Less accumulated depreciation |  |      | (2,583,166 | )    |  |   | (2,309,723 | )
|                              |  |      |            |      |  |   |            |  
|                              |  | $    | 4,282,048  |      |  | $ | 4,609,295  |  
|                              |  |      |            |      |  |   |            |  

F-22



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.     Life Insurance
and Annuity Reserves:

Life insurance and annuity reserves are based
upon contractual amounts due to the policyholder, including
credited interest. Annuity contract interest rates ranged from
3.00% to 9.95%, 3.75% to 9.95% and 4.65% to 10.25% during the
fiscal years ended September 30, 2002, 2001 and 2000,
respectively. Interest rate assumptions used to compute life
insurance reserves ranged from 4.5% to 6.5% during each of the
fiscal years ended September 30, 2002, 2001 and 2000.

The following is a summary of direct business and
reinsurance transactions ceded to Old Standard and other
reinsurers for the fiscal years ended September 30, 2002, 2001
and 2000:

|                                                     |                                     |               |   |               |  |          |   |             |  |  |   |         |  |  |   |               | 
|---------------------------------------------------- | ----------------------------------- | ------------- | - | ------------- |  | -------- | - | ----------- |  |  | - | ------- |  |  | - | ------------- | 
|                                                     |                                     |               |   | Ceded to Old  |  | Ceded to |   |            
|                                                     |                                     | Direct Amount |   | Standard      |  | Others   |   | Net Amount 
|                                                     |                                     |               |   |               |  |          |   |            
|As of and for the year ended
    September 30, 2002: |                                     |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              
|                                                     | Life insurance and annuity premiums |               | $ | 356,003,648   |  |          | $ | 56,527,704  |  |  | $ | 379,859 |  |  | $ | 299,096,085   | 
|                                                     |                                     |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              
|                                                     | Life insurance and annuity benefits |               | $ | 168,457,365   |  |          | $ | 24,884,602  |  |  | $ | 195,349 |  |  | $ | 143,377,414   | 
|                                                     |                                     |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              
|                                                     | Life insurance and annuity reserves |               | $ | 1,225,660,253 |  |          | $ | 148,258,177 |  |  | $ | 134,271 |  |  | $ | 1,077,267,805 | 
|                                                     |                                     |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              
|As of and for the year ended
    September 30, 2001: |                                     |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              
|                                                     | Life insurance and annuity premiums |               | $ | 241,592,209   |  |          | $ | 694,544     |  |  | $ | 361,995 |  |  | $ | 240,535,670   | 
|                                                     |                                     |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              
|                                                     | Life insurance and annuity benefits |               | $ | 211,642,826   |  |          | $ | 9,115,927   |  |  | $ | 635,660 |  |  | $ | 201,891,239   | 
|                                                     |                                     |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              
|                                                     | Life insurance and annuity reserves |               | $ | 974,261,517   |  |          | $ | 109,459,087 |  |  | $ | 148,938 |  |  | $ | 864,653,492   | 
|                                                     |                                     |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              
|As of and for the year ended
    September 30, 2000: |                                     |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              
|                                                     | Life insurance and annuity premiums |               | $ | 202,911,484   |  |          | $ | 27,434,956  |  |  | $ | 316,978 |  |  | $ | 175,159,550   | 
|                                                     |                                     |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              
|                                                     | Life insurance and annuity benefits |               | $ | 258,067,904   |  |          | $ | 18,743,525  |  |  | $ | 37,706  |  |  | $ | 239,286,673   | 
|                                                     |                                     |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              
|                                                     | Life insurance and annuity reserves |               | $ | 888,476,271   |  |          | $ | 111,217,445 |  |  | $ | 160,886 |  |  | $ | 777,097,940   | 
|                                                     |                                     |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              

The Company has ceded a portion of certain life
insurance risks, annuity reserves, and the related premiums to
other companies, including Old Standard, an affiliate. Such
reinsurance permits recovery of losses from reinsurers, although
it does not discharge the primary liability of the Company as
direct insurer of the risk reinsured. The Company is
contingently liable for claims on ceded insurance business in
the event the reinsuring companies do not meet their obligations
under those reinsurance agreements. The Company evaluates the
financial condition of its reinsurers and monitors
concentrations of credit risk to minimize its exposure to
significant losses from reinsurer insolvencies.

F-23



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

9.     Debt
Payable:

At September 30, 2002 and 2001, debt payable
consisted of the following:

|                                                                                                                                                                                                                                                              |  |      |             |      |  |   |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- |  | - | ---------- | 
|                                                                                                                                                                                                                                                              |  | 2002 |             | 2001
|                                                                                                                                                                                                                                                              |  |      |             |     
|Note payable to Federal Home Loan Bank of
    Seattle, interest rates ranging from 2.43% to 7.48% per annum;
    various maturity dates to March 2015; collateralized by
    $145.6 million $29.7 million, respectively, of various
    pledged securities    |  | $    | 103,000,000 |      |  | $ | 22,000,000 | 
|Real estate contracts and mortgage notes payable,
    interest rates ranging from 5.0% to 11.6%; due in installments
    through 2026; collateralized by senior liens on certain of the
    Companys real estate contracts and mortgage notes
    receivable |  |      | 846,582     |      |  |   | 1,109,973  | 
|Accrued interest payable                                                                                                                                                                                                                                      |  |      | 376,101     |      |  |   | 144,936    | 
|                                                                                                                                                                                                                                                              |  |      |             |      |  |   |            | 
|                                                                                                                                                                                                                                                              |  | $    | 104,222,683 |      |  | $ | 23,254,909 | 
|                                                                                                                                                                                                                                                              |  |      |             |      |  |   |            | 

Aggregate amounts of principal and accrued
interest payments due on debt payable as of September 30,
2002 are as follows:

|                                 |  |   |             | 
|-------------------------------- |  | - | ----------- | 
|Fiscal Year Ending September 30, |  |  
|                                 |  |  
|2003                             |  | $ | 20,521,090  | 
|2004                             |  |   | 20,156,244  | 
|2005                             |  |   | 9,168,374   | 
|2006                             |  |   | 10,181,445  | 
|2007                             |  |   | 4,195,530   | 
|Thereafter                       |  |   | 40,000,000  | 
|                                 |  |   |             | 
|                                 |  | $ | 104,222,683 | 
|                                 |  |   |             | 

F-24



---



##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

10.     Income
Taxes:

The income tax effects of the temporary
differences giving rise to the Companys deferred tax
assets and liabilities as of September 30, 2002 and 2001
are as follows:

|                               |                                                               |      |             |             |   |   |             |             |  
|------------------------------ | ------------------------------------------------------------- | ---- | ----------- | ----------- | - | - | ----------- | ----------- | -
|                               |                                                               | 2002 |             | 2001       
|                               |                                                               |      |             |            
|Deferred tax assets:           |                                                               |      |             |             |   |   |             |            
|                               | Realized impairments on investment securities                 |      | $           | 7,382,844   |   |   | $           |            |  
|                               | Unrealized loss on investment securities                      |      |             |            |   |   |             | 1,274,075   |  
|                               | Life insurance and annuity reserves                           |      |             | 1,305,470   |   |   |             | 2,467,544   |  
|                               | Guaranty fund reserves                                        |      |             | 710,565     |   |   |             | 726,157     |  
|                               | Fixed assets                                                  |      |             | 341,206     |   |   |             | 260,239     |  
|                               | Other, net                                                    |      |             | 85,570      |   |   |             | 1,338,715   |  
|                               |                                                               |      |             |             |   |   |             |            
|Total deferred tax assets      |                                                               |      | 9,825,655   |             |   |   | 6,066,730   |            
|                               |                                                               |      |             |             |   |   |             |            
|Deferred tax liabilities:      |                                                               |      |             |             |   |   |             |            
|                               | Deferred acquisition costs                                    |      |             | (23,985,777 | ) |   |             | (18,891,814 | )
|                               | Unrealized gain on investment securities                      |      |             | (1,555,502  | ) |   |             |            |  
|                               | Contract acquisition costs and discount yield
    adjustments |      |             | (2,359,298  | ) |   |             | (3,202,329  | )
|                               | Other, net                                                    |      |             | (1,156,267  | ) |   |             | (819,797    | )
|                               |                                                               |      |             |             |   |   |             |            
|Total deferred tax liabilities |                                                               |      | (29,056,844 | )           |   |   | (22,913,940 | )          
|                               |                                                               |      |             |             |   |   |             |            
|Net deferred tax liability     |                                                               | $    | (19,231,189 | )           |   | $ | (16,847,210 | )          
|                               |                                                               |      |             |             |   |   |             |            

Following is a reconciliation of the provision
for income taxes to an amount as computed by applying the
statutory federal income tax rate to income before income taxes
for the years ended September 30, 2002, 2001 and 2000:

|                                       |  |      |            |      |  |      |    |   |  |   |             |   |  |  |      |    |  |   |           |   |  |  |    |  
|-------------------------------------- |  | ---- | ---------- | ---- |  | ---- | -- | - |  | - | ----------- | - |  |  | ---- | -- |  | - | --------- | - |  |  | -- | -
|                                       |  |      |            |      |  |     
|                                       |  | 2002 |            | 2001 |  | 2000
|                                       |  |      |            |      |  |     
|                                       |  |      |            |      |  |      |    |   |  |  
|Federal income taxes at statutory rate |  | $    | 16,522,423 |      |  |      | 35 | % |  | $ | 2,782,325   |   |  |  | 35   | %  |  | $ | 2,360,566 |   |  |  | 35 | %
|Reduction in valuation allowance       |  |      |           |      |  |      |   |   |  |   | (11,200,000 | ) |  |  | (141 | )  |  |   |          |   |  |  |   |  
|Other                                  |  |      | (44        | )    |  |      |   |   |  |   | 5,461       |   |  |  |     |    |  |   | (3,551    | ) |  |  |   |  
|                                       |  |      |            |      |  |      |    |   |  |   |             |   |  |  |      |    |  |   |           |   |  |  |    |  
|Income tax provision (benefit)         |  | $    | 16,522,379 |      |  |      | 35 | % |  | $ | (8,412,214  | ) |  |  | (106 | )% |  | $ | 2,357,015 |   |  |  | 35 | %
|                                       |  |      |            |      |  |      |    |   |  |   |             |   |  |  |      |    |  |   |           |   |  |  |    |  

The components of the income tax provision
(benefit) for the for the years ended September 30,
2002, 2001 and 2000 are as follows:

|                                     |  |      |            |      |  |      |             |   |  |   |           | 
|------------------------------------ |  | ---- | ---------- | ---- |  | ---- | ----------- | - |  | - | --------- | 
|                                     |  | 2002 |            | 2001 |  | 2000
|                                     |  |      |            |      |  |     
|Current                              |  | $    | 16,967,977 |      |  | $    | 6,159,570   |   |  | $ | 92,184    | 
|Deferred                             |  |      | (445,598   | )    |  |      | (14,571,784 | ) |  |   | 2,264,831 | 
|                                     |  |      |            |      |  |      |             |   |  |   |           | 
|Total income tax provision (benefit) |  | $    | 16,522,379 |      |  | $    | (8,412,214  | ) |  | $ | 2,357,015 | 
|                                     |  |      |            |      |  |      |             |   |  |   |           | 

At September 30, 2002, the Company had no
unused net operating loss carryforwards. At September 30,
2002, the Company had no alternative minimum tax credit
carryforwards.

The Companys $8.4 million tax benefit
recorded during the fiscal year ended September 30, 2001,
includes an $11.2 million tax benefit relating to an
investment that was entered into in conjunction with
Metropolitan in 1999. In total, the investment resulted in
Western Life recording a $22.4 million tax benefit,

F-25



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##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                         
|--- | ------------------------
|10. | Income Taxes (continued)

of which $11.2 million was also recorded as
an income tax benefit during the fiscal year ended
September 30, 1999. The objectives for the investment were
to produce economic gains combined with favorable tax benefits.
Similar investments were presented throughout the United States
to numerous individuals and companies (the
Participants) as an investment and tax strategy.
Prior to, and in conjunction with the investment, Metropolitan
received two independent tax opinions relating to the
investment. Additionally, Western Life and Metropolitan executed
a supplement to their Federal Tax Sharing Agreement allowing
Western Life to recover from Metropolitan up to
$11.2 million, plus applicable interest on the
$11.2 million, in federal income tax benefits derived from
this investment that are not otherwise utilized by Western Life.
The non-utilization of the income tax benefits could result from
the expiration of the net operating loss carry forward limit of
20 years, disallowance on audit, or any enactment of law
that may affect the utilization of the benefits.

The Internal Revenue Service (IRS) has
notified the Participants by general public notice that they
have taken the position that the tax benefits relative to the
investment would be disallowed. Western Life has received an
audit notice from the IRS for the tax year in which the benefit
attributable to the investment was claimed. However, a specific
review of Western Lifes investment and related activity
has not yet taken place. At September 30, 2002, the Company
cannot reasonably estimate a loss, if any, associated with this
transaction. In the event of an unfavorable determination
relative to the investment, the earnings of the Company would be
adversely affected by amounts disallowed in excess of
$11.2 million, including interest if applicable. Any
amounts that may be disallowed, up to $11.2 million
including any applicable interest, as a result of an unfavorable
determination are recoverable from Metropolitan under the terms
of the supplement to the Federal Tax Sharing Agreement.

11.     Stockholders
Equity:

Preferred
Stock

The Companys Series A preferred stock
has a par value of $2.50 per share, is cumulative and the
holders thereof are entitled to receive monthly dividends at an
annual rate equal to the Five Year Constant Maturity
Rate plus 2.00%. The Companys Board of Directors
may, at their sole option, declare a higher dividend rate;
however, dividends shall be no less than 4% or greater than 14%
per annum. The Series A preferred stock is available for
sale to the public for $25 per share and is callable at the
sole option of the Companys Board of Directors at
$25 per share. The Series A preferred stock has a
liquidation preference of $25 per share, is non-voting and
is senior to the Companys common shares as to dividends.
At September 30, 2002, no Series A preferred stock had
been issued.



| |             
| | ------------
| | Common Stock

The Company has Class A common stock with a
par value of $0.01 per share. Common stock is subordinate in
liquidation to preferred stock.



| |                      
| | ---------------------
| | Dividend Restrictions

Dividend restrictions are imposed statutorily by
regulatory authorities on Western Life in which the Company has
a 100% common stock ownership interest. Dividends from the
insurance subsidiary can only be paid out of earned surplus.
Earned surplus includes accumulated statutory basis earnings of
the insurance subsidiary, but excludes surplus arising from
unrealized capital gains or a revaluation of assets (see note
12).



| |                   
| | ------------------
| | Minority Interests

Western Life has authorized 5 million shares
of its non-voting $10 par Series A preferred stock,
with 5,000,000 and 3,960,000 shares outstanding at
September 30, 2002 and 2001, respectively. Metropolitan held

F-26



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##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

11.     Stockholders
Equity (continued)

$50.0 million and $35.1 million at
September 30, 2002 and 2001, respectively, and Consumers
Insurance Company held $0 and $4.5 million of Western
Lifes Series A preferred stock at September 30,
2002 and 2001.

The holders of the preferred stock are entitled
to receive dividends out of the net earnings available for
dividends when and as declared by Western Lifes Board of
Directors. Western Lifes Board of Directors determines the
dividend rate of prime plus 1% annually and dividends payable on
the preferred stock have priority to the payment of any
dividends on Western Lifes common stock. Dividends are not
cumulative and have no right to accrue if not declared. The
preferred stock may be redeemed in whole or in part at the
option of Western Life at a redemption price of not less than
par. Dividend payments on the preferred stock were $2,747,250,
$3,940,250 and $3,015,406 during fiscal years ended
September 30, 2002, 2001 and 2000, respectively.

12.     Statutory
Accounting and Regulatory Capital (unaudited):

The Companys life insurance subsidiary,
Western Life, is required to file statutory basis financial
statements with state insurance regulatory authorities.
Accounting principles used to prepare these statutory basis
financial statements differ from GAAP. Selected statutory basis
and GAAP basis financial statement balances as of and for the
years ended September 30, 2002, 2001 and 2000 are as
follows:

|                                                |      |           |   |            |   |  |   |             | 
|----------------------------------------------- | ---- | --------- | - | ---------- | - |  | - | ----------- | 
|                                                |      | Statutory |   | GAAP      
|                                                |      |           |   |           
|Capital and surplus/stockholders equity:       |      |           |   |            |   |  |   |            
|                                                | 2002 |           | $ | 97,897,498 |   |  | $ | 196,983,093 | 
|                                                | 2001 |           |   | 73,520,668 |   |  |   | 136,039,538 | 
|                                                | 2000 |           |   | 61,444,898 |   |  |   | 99,528,648  | 
|Net income (loss):                              |      |           |   |            |   |  |   |            
|                                                | 2002 |           | $ | 7,110,173  |   |  | $ | 30,684,546  | 
|                                                | 2001 |           |   | (120,616   | ) |  |   | 16,361,727  | 
|                                                | 2000 |           |   | 5,385,593  |   |  |   | 4,387,459   | 
|Unassigned statutory surplus/retained earnings: |      |           |   |            |   |  |   |            
|                                                | 2002 |           | $ | 5,610,259  |   |  | $ | 101,807,062 | 
|                                                | 2001 |           |   | 9,006,103  |   |  |   | 73,869,766  | 
|                                                | 2000 |           |   | 14,489,898 |   |  |   | 61,448,289  | 

The National Association of Insurance
Commissioners (the NAIC) adopted the Codification of
Statutory Accounting Principles guidance, which replaced the
Accounting Practices and Procedures manual as the NAICs
primary guidance on statutory accounting. The adoption of the
Codification guidance on January 1, 2001 resulted in a
$1.8 million charge to Western Lifes statutory basis
capital and surplus. State regulatory authorities also impose
minimum risk-based capital requirements on insurance enterprises
that were developed by the NAIC. The formulas for determining
the amount of risk-based capital (RBC) specify
various weighting factors that are applied to financial balances
or various levels of activity based on perceived degree of risk.
Regulatory compliance is determined by a ratio of the
enterprises regulatory total adjusted capital, as defined
by the NAIC, to its authorized control level RBC, as defined by
the NAIC. Enterprises below specific trigger points or ratios
are classified within certain levels, each of which requires
specified corrective action. At the last annual review at its
statutory reporting period at December 31, 2001, Western
Lifes statutory-basis surplus exceeded the RBC
requirements.

F-27



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##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



12.     Statutory
Accounting (unaudited) (continued)


Statement of Statutory Accounting Principles
No. 37, Mortgage Loans, requires that all costs
incurred in connection with originating a loan, acquiring
purchased loans or committing to purchase loans be charged to
expense as incurred. The Washington State Insurance Department
has granted Western Life a permitted accounting practice that
differs from NAIC statutory accounting practices. The permitted
practice allows Western Life to capitalize and amortize certain
costs, including underwriting fee charges paid to its parent,
incurred in connection with acquiring purchased loans through
March 31, 1998, except that all such costs are to be
amortized into investment income no later than December 31,
2004. At September 30, 2002, the permitted practice has
resulted in an increase in Western Lifes statutory surplus
of approximately $4.4 million.

A reconciliation of GAAP net income to statutory
net income for the years ended September 30, 2002, 2001 and
2000, respectively, is as follows:

|                          |                                                           |      |            |             |   |      |            |             |   |   |           |            |  
|------------------------- | --------------------------------------------------------- | ---- | ---------- | ----------- | - | ---- | ---------- | ----------- | - | - | --------- | ---------- | -
|                          |                                                           | 2002 |            | 2001        |   | 2000
|                          |                                                           |      |            |             |   |     
|Net Income-GAAP           |                                                           | $    | 30,684,546 |             |   | $    | 16,361,727 |             |   | $ | 4,387,459 |           
|Adjustments to reconcile: |                                                           |      |            |             |   |      |            |             |   |   |           |           
|                          | Deferred policy acquisition costs                         |      |            | (16,729,885 | ) |      |            | (3,222,197  | ) |   |           | 3,360,555  |  
|                          | State insurance guaranty fund                             |      |            | (215,372    | ) |      |            | 159,644     |   |   |           | 679,022    |  
|                          | Annuity reserves and benefits                             |      |            | 1,335,310   |   |      |            | 2,168,879   |   |   |           | (3,346,757 | )
|                          | Capital gains (losses), IMR and Net Investment
    Income |      |            | (4,356,572  | ) |      |            | (5,468,238  | ) |   |           | (1,639,848 | )
|                          | Federal income taxes                                      |      |            | (3,607,854  | ) |      |            | (10,120,431 | ) |   |           | 1,945,162  |  
|                          |                                                           |      |            |             |   |      |            |             |   |   |           |           
|Net Income-Statutory      |                                                           | $    | 7,110,173  |             |   | $    | (120,616   | )           |   | $ | 5,385,593 |           
|                          |                                                           |      |            |             |   |      |            |             |   |   |           |           

13.     Supplemental
Disclosures for Statements of Cash Flows:

The following table summarizes interest costs,
net of amounts capitalized and income taxes paid
(refunded) during the years ended September 30, 2002,
2001 and 2000:

|                                     |  |      |           |      |  |      |           |   |  |   |            |  
|------------------------------------ |  | ---- | --------- | ---- |  | ---- | --------- | - |  | - | ---------- | -
|                                     |  | 2002 |           | 2001 |  | 2000
|                                     |  |      |           |      |  |     
|Interest, net of amounts capitalized |  | $    | 1,061,639 |      |  | $    | 1,183,823 |   |  | $ | 1,491,425  |  
|Income taxes                         |  |      | 1,168,958 |      |  |      | (69,635   | ) |  |   | (1,371,567 | )

F-28



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##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



13.     Supplemental
Disclosures for Statements of Cash Flows (continued)


Non-cash investing and financing activities of
the Company are as follows during the years ended
September 30, 2002, 2001 and 2000:

|                                                                                                                    |  |      |            |      |  |      |            |  |  |   |            | 
|------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | 
|                                                                                                                    |  | 2002 |            | 2001 |  | 2000
|                                                                                                                    |  |      |            |      |  |     
|Loans to facilitate the sale of real estate held                                                                    |  | $    | 19,204,500 |      |  | $    | 575,590    |  |  | $ | 5,814,668  | 
|Transfers between annuity products                                                                                  |  |      | 55,233,008 |      |  |      | 92,705,437 |  |  |   | 85,116,027 | 
|Real estate held for sale and development
    acquired through foreclosure                                          |  |      | 22,014,941 |      |  |      | 13,461,983 |  |  |   | 17,854,587 | 
|Assumption of other debt payable in connection
    with the acquisition of real estate contracts and mortgage notes |  |      |           |      |  |      | 377,895    |  |  |   | 206,264    | 
|Transfer of investments from trading portfolio to
    available-for-sale portfolio                                  |  |      | 38,593,522 |      |  |      | 15,193,478 |  |  |   |           | 
|Transfer of investments from held-to-maturity
    portfolio to available-for-sale portfolio                         |  |      |           |      |  |      | 58,522,805 |  |  |   |           | 
|Securities retained from securitizations                                                                            |  |      |           |      |  |      |           |  |  |   | 41,773,518 | 
|Timing differences on settlements of securities
    sales                                                           |  |      |           |      |  |      | 7,810,524  |  |  |   |           | 
|Timing differences on settlements of securities
    purchases                                                       |  |      |           |      |  |      | 19,675,519 |  |  |   |           | 

During the fiscal years ended September 30,
2002 and 2001, changes in the Companys investment strategy
affected the classification of trading securities as they no
longer qualified as investments held principally for the purpose
of selling them in the near term. Accordingly, the Company
reclassified approximately $38.6 million and
$15.2 million during the fiscal years ended
September 30, 2002 and 2001, respectively from trading to
available-for-sale. At September 30, 2002, the Company did
not have an active trading portfolio.

At the date of initial application of SFAS
No. 133, Accounting for Derivative Investments and
Hedging Activities, as amended, the Statement provided that
an entity may transfer any held-to-maturity security into the
available-for-sale category or the trading category.
Accordingly, as part of the Companys implementation of
SFAS No. 133 on October 1, 2000, the Company
reclassified approximately $58.5 million of investments
from held-to-maturity to available-for-sale. The unrealized gain
on the date of transfer was $0.4 million and was included
in other comprehensive income.

F-29



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##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

14.     Related-Party
Transactions:

During the years ended September 30, 2002,
2001 and 2000, the Company had the following related-party
transactions with Metropolitan and its other affiliates due to
common control of C. Paul Sandifur, Jr.:

|                                                                                                                                                                |  |      |            |      |  |      |             |   |  |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                                                                                                                                                |  | 2002 |            | 2001 |  | 2000
|                                                                                                                                                                |  |      |            |      |  |     
|Real estate contracts and mortgage notes
    receivable and other receivables sold to affiliates                                                                |  | $    | 46,538,090 |      |  | $    | 13,307,619  |   |  | $ | 251,125,506 |  
|Gains on real estate contracts and mortgage notes
    receivable and other receivable instruments sold to Metro,
    Summit, Old Standard, Old West and Metwest |  |      | 3,313,998  |      |  |      |            |   |  |   |            |  
|Real estate contracts and mortgage notes
    receivable and other receivable investments purchased from
    affiliates                                          |  |      | 7,146,951  |      |  |      | 127,925,213 |   |  |   | 494,754,295 |  
|Ceding of annuity premiums to Old Standard                                                                                                                      |  |      | 56,527,704 |      |  |      | 694,544     |   |  |   | 27,434,956  |  
|Policyholder benefits recovered from Old Standard                                                                                                               |  |      | 24,884,602 |      |  |      | 9,115,927   |   |  |   | 18,840,440  |  
|Annuity servicing fees charged to Old Standard                                                                                                                  |  |      | 486,541    |      |  |      | 441,703     |   |  |   | 374,964     |  
|Ceding commissions charged to Old Standard                                                                                                                      |  |      | 3,324,726  |      |  |      | 74,737      |   |  |   | 1,479,000   |  
|Service fees paid to Summit Property Development                                                                                                                |  |      | 841,377    |      |  |      | 441,385     |   |  |   | 1,051,325   |  
|Net interest and dividends paid on preferred
    stock and surplus notes                                                                                        |  |      | 2,747,250  |      |  |      | 3,940,250   |   |  |   | 3,283,343   |  
|Real estate contract acquisitions, investment
    servicing and other administrative overhead                                                                   |  |      | 8,485,904  |      |  |      | 7,833,917   |   |  |   | 10,725,674  |  
|Net change in indebtedness of affiliates                                                                                                                        |  |      | (957,697   | )    |  |      | (653,802    | ) |  |   | (4,483,632  | )
|Interest received on indebtedness of affiliates                                                                                                                 |  |      | 1,687,673  |      |  |      | 2,070,086   |   |  |   | 2,145,418   |  
|Repayment of surplus notes                                                                                                                                      |  |      |           |      |  |      |            |   |  |   | 9,450,000   |  
|Issuance of preferred stock of Western Life                                                                                                                     |  |      | 10,400,000 |      |  |      | 5,000,000   |   |  |   | 9,450,000   |  
|Issuance of common stock of Western Life                                                                                                                        |  |      | 17,372,674 |      |  |      | 12,559,565  |   |  |   |            |  

At September 30, 2002 and 2001, the Company
had non-secured receivable due from (payables due to) affiliates
of approximately $6.3 million and ($2.1 million),
respectively.

The Company entered into the following purchase
and sale agreements during the fiscal year ended
September 30, 2002.

On March 28, 2002, Western Life agreed to
sell to Old Standard and Old West a 69.20% undivided beneficial
interest in a lottery trust owned by Western Life. The purchase
price of $11.2 million, which was derived from future
expected cash flows discounted at a 6.957% market rate, resulted
in a gain of approximately $0.6 million.

On August 15, 2002, Western Life agreed to
sell to Old Standard and Old West the remaining interest in a
certain Lottery Trust owned by Western Life. The purchase price
of $6.2 million, which was derived from future expected
cash flows discounted at a 5.527% market rate, resulted in a
gain of approximately $0.7 million. Additionally, on
August 15, 2002, Western Life agreed to sell to Old
Standard and Old West a 95.83% undivided beneficial interest in
a certain Lottery Trust owned by Western Life. The purchase
price of $29.1 million, which was derived from future
expected cash flows discounted at a 5.888% market rate, resulted
in a gain of approximately $2.0 million.

F-30



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##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



14.     Related-Party
Transactions (continued)


The market rates on the above lottery trust sales
were calculated at 2.0% over the Treasury benchmark as of the
date of the sale, which is consistent with corporate bonds with
similar credit profiles along with recent transactions involving
large blocks of lottery receivables.

Western Life entered into a reinsurance agreement
with Old Standard, which became effective July 1, 1998.
Under this agreement, Western Life reinsured with Old Standard
75% of the risk on various annuity products. The reinsurance
agreement is an ongoing arrangement with no stated expiration or
termination date, although either party may stop and restart at
their discretion upon providing a 30-day advance written notice.
Western Life receives ceding allowances equal to the actual
commission plus 1.5% of the premium from Old Standard to
compensate Western Life for its annuity issuance costs.
Additionally, Western Life receives a fee from Old Standard for
servicing the reinsured policies of approximately 0.40% annually
on the cash value of the reinsured policies in addition to
ceding allowances equal to the actual commission plus 1.5% of
the premium.

Summit Property Development, Inc., a wholly owned
subsidiary of Summit Securities, Inc., one of the Company
affiliates, provides real estate development services to the
Company for a fee. These services may include the following:
sales, marketing, market analysis, architectural services,
design services, subdividing properties and coordination with
regulatory groups to obtain the approvals that are necessary to
develop a particular property.

Real estate contract acquisitions, investment
servicing and other administrative services are governed by two
separate inter-company agreements executed between Western Life
and Metropolitan. The Company believes that the charges incurred
are reasonable and result in the payment to Metropolitan of all
significant direct expenses incurred on the Companys
behalf.

Indebtedness of related parties consisted of the
following:

|                                                                                                                                                                                                           |  |               |            |      |  |   |            | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | ---- |  | - | ---------- | 
|                                                                                                                                                                                                           |  |              
|                                                                                                                                                                                                           |  | September 30,
|                                                                                                                                                                                                           |  |              
|                                                                                                                                                                                                           |  | 2002          |            | 2001
|                                                                                                                                                                                                           |  |               |            |     
|Note receivable from Metropolitan Mortgage,
    interest at prime plus 1% (5.75% at September 30, 2002),
    due December 27, 2015; collateralized by commercial
    property located in Pasco, Washington |  | $             | 7,968,092  |      |  | $ | 8,507,426  | 
|Note receivable from Metropolitan Mortgage,
    interest at 10.5% per annum, due January 1, 2010;
    collateralized by commercial property located in Spokane,
    Washington                             |  |               | 10,953,838 |      |  |   | 11,372,201 | 
|                                                                                                                                                                                                           |  |               |            |      |  |   |            | 
|                                                                                                                                                                                                           |  | $             | 18,921,930 |      |  | $ | 19,879,627 | 
|                                                                                                                                                                                                           |  |               |            |      |  |   |            | 

15.     Fair Value of
Financial Instruments:

The following methods and assumptions were used
to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value.
Potential income tax ramifications related to the realization of
unrealized gains and losses that would be incurred in an actual
sale and/or settlement have not been taken into consideration.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Publicly Traded Investment
    SecuritiesFair value is
    determined by quoted market prices.                                                                                                                                                                                                                                                                                                                                           
|
| | Non-Publicly Traded Investment
    SecuritiesFair value is derived
    from quoted market prices for securities with similar
    characteristics and risks, or is estimated based upon expected
    discounted future cash flows. When determining expected future
    cash flows, the Company considers interest rates, estimated
    prepayment rates, collateral value and historical default rates
    experienced by the securities.

F-31



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##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



15.     Fair Value of
Financial Instruments (continued)




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Real Estate Contracts and Mortgage Notes
    ReceivableFor receivables
    (excluding accrued interest receivable), fair value is estimated
    by discounting contractual cash flows adjusted for prepayment
    estimates. The prepayment estimates are based upon internal
    historical data. The discount rate is estimated using rates
    currently offered for receivables of similar characteristics
    that reflect the credit and interest rate risk inherent in the
    receivable.
|
| | Other Receivable
    InvestmentsThe fair value of
    other receivable investments is based on the discounted value of
    future contractual cash flows. The discount rate is estimated
    using the rates currently offered for investments with similar
    credit ratings and similar remaining maturities.                                                                                                                                                                                 
|
| | Policy
    LoansPolicy loans are charged
    interest at a variable rate subject to current market
    conditions. Thus, carrying value approximates fair value.                                                                                                                                                                                                                                                                                                                                 
|
| | Indebtedness of Related
    PartyFor indebtedness of related
    party, the discount rate is estimated using rates currently
    offered for receivables of similar characteristics that reflect
    the credit and interest rate risk inherent in the loan.                                                                                                                                                                                                                                     
|
| | Reinsurance
    ReceivableThe fair value of
    reinsurance receivable is based on the discounted value of
    contractual cash flows. The discount rate is determined using
    the rates currently offered for similar reinsurance receivables.                                                                                                                                                                                                                                                
|
| | Life Insurance and Annuity
    ReservesThe fair value of
    annuity reserves is based on the discounted value of contractual
    cash flows. The discount rate is determined using the rates
    currently offered for similar annuity reserves.                                                                                                                                                                                                                                                
|
| | Debt
    PayableThe fair value of debt
    payable is based on the discounted value of contractual cash
    flows. The discount rate is estimated using the rates currently
    offered for debt with similar remaining maturities.                                                                                                                                                                                                                                                              

F-32



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##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



15.     Fair Value of
Financial Instruments (continued)


The estimated fair values of the following
financial instruments as of September 30, 2002 and 2001 are
as follows:

|                       |                                                         |                               |   |               |             |          |   |               |             |  |   |             |             |  |   |             |             | 
|---------------------- | ------------------------------------------------------- | ----------------------------- | - | ------------- | ----------- | -------- | - | ------------- | ----------- |  | - | ----------- | ----------- |  | - | ----------- | ----------- | 
|                       |                                                         |                               |   |              
|                       |                                                         | 2002                          |   | 2001         
|                       |                                                         |                               |   |              
|                       |                                                         | Carrying                      |   |               |             | Carrying |   |              
|                       |                                                         | Amounts                       |   | Fair Value    |             | Amounts  |   | Fair Value   
|                       |                                                         |                               |   |               |             |          |   |              
|Financial assets:      |                                                         |                               |   |               |             |          |   |               |             |  |   |             |             |  |   |            
|                       | Cash and cash equivalents                               |                               | $ | 44,035,987    |             |          | $ | 44,035,987    |             |  | $ | 53,286,888  |             |  | $ | 53,286,888  |            
|                       | Investments:                                            |                               |   |               |             |          |   |               |             |  |   |             |             |  |   |             |            
|                       |                                                         | Trading securities            |   |               |            |          |   |               |            |  |   |             | 48,818,530  |  |   |             | 48,818,530  | 
|                       |                                                         | Available-for-sale securities |   |               | 458,488,402 |          |   |               | 458,488,402 |  |   |             | 267,833,620 |  |   |             | 267,833,620 | 
|                       |                                                         | Held-to-maturity securities   |   |               | 39,223,983  |          |   |               | 40,333,356  |  |   |             |            |  |   |             |            | 
|                       | Real estate contracts and mortgage notes
    receivable |                               |   | 577,878,510   |             |          |   | 596,073,773   |             |  |   | 390,257,862 |             |  |   | 423,411,805 |            
|                       | Other receivable investments                            |                               |   | 106,040,368   |             |          |   | 121,250,503   |             |  |   | 149,852,082 |             |  |   | 171,760,876 |            
|                       | Policy loans                                            |                               |   | 20,238,963    |             |          |   | 21,000,446    |             |  |   | 19,381,119  |             |  |   | 19,381,119  |            
|                       | Indebtedness of related parties                         |                               |   | 18,921,930    |             |          |   | 20,230,417    |             |  |   | 19,879,627  |             |  |   | 21,957,987  |            
|                       | Reinsurance receivable                                  |                               |   | 148,392,448   |             |          |   | 150,308,655   |             |  |   | 109,608,025 |             |  |   | 111,056,188 |            
|Financial liabilities: |                                                         |                               |   |               |             |          |   |               |             |  |   |             |             |  |   |            
|                       | Life insurance and annuity reserves                     |                               |   | 1,225,660,253 |             |          |   | 1,241,487,326 |             |  |   | 971,216,177 |             |  |   | 984,048,079 |            
|                       | Debt payableprincipal                                  |                               |   | 103,846,582   |             |          |   | 109,091,564   |             |  |   | 23,109,973  |             |  |   | 24,914,716  |            



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | LimitationsThe
    fair value estimates are made at a discrete point in time based
    on relevant market information and information about the
    financial instruments. Because no market exists for a
    significant portion of these financial instruments, fair value
    estimates are based on judgments regarding future expected loss
    experience, current economic conditions, risk characteristics of
    various financial instruments and other factors. These estimates
    are subjective in nature and involve uncertainties and matters
    of significant judgment and, therefore, cannot be determined
    with precision. Changes in assumptions could significantly
    affect the estimates. Accordingly, the estimates presented
    herein are not necessarily indicative of what the Company could
    realize in a current market exchange.

16.     Employee
Benefit Plans:

Metropolitan sponsors a Retirement Savings Plan
(the Plan), authorized under Section 401(k) of
the Tax Reform Act of 1986, as amended. This Plan is available
to all of the Companys employees over the age of 18 upon
completion of six months of service. Prior to January 1,
2002, employees may defer from 1% to 15% of their compensation
in multiples of whole percentages. Effective January 1,
2002, the plan was amended to allow employees to defer from 1%
to 80% of their compensation up to the annual maximum amount as
determined by the IRS.

Prior to January 1, 1999, if Metropolitan
had a net profit for the fiscal year ending within a calendar
year, a match equal to 50% of pre-tax contributions up to 6% of
the participants compensation was credited to the

F-33



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##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

16.        Employee
Benefit Plans (continued)

account of each active participant on
December 31. Effective January 1, 1999, the Plan was
amended to modify the employer match to a discretionary matching
contribution equal to a uniform percentage of the amount of the
participant contribution, up to 6% of the participants
annual compensation. The uniform percentage is to be determined
annually by Metropolitan. Metropolitan may also make an
additional discretionary contribution for any plan year. The
Companys contributions to the Plan were approximately
$54,000, $0 and $61,000 during the years ended
September 30, 2002, 2001 and 2000, respectively.

17.     Parent
Company Only Financial Statements:

The condensed balance sheet of Western Holding at
September 30, 2002 is as follows:

|                                                |              |                                            |             |             |             | 
|----------------------------------------------- | ------------ | ------------------------------------------ | ----------- | ----------- | ----------- | 
|                                                |              | 2002                                      
|                                                |              |                                           
|ASSETS                                         
|Cash and cash equivalents                       |              | $                                          | 1,010,000   |            
|Equity in subsidiary company                    |              |                                            | 146,983,093 |            
|                                                |              |                                            |             |            
|                                                | Total assets |                                            | $           | 147,993,093 |            
|                                                |              |                                            |             |            
|                                               
|STOCKHOLDERS EQUITY                           
|Common stock, $0.01 par, 100 shares outstanding |              | $                                          | 1           |            
|Additional paid-in capital                      |              |                                            | 147,993,092 |            
|                                                |              |                                            |             |            
|                                                |              | Total stockholders equity                 |             |             | 147,993,093 | 
|                                                |              |                                            |             |            
|                                                |              | Total liabilities and stockholders equity |             | $           | 147,993,093 | 
|                                                |              |                                            |             |            

Western Holdings condensed statement of
operations for the year ended September 30, 2002 is as
follows:

|                                               |  |      |            | 
|---------------------------------------------- |  | ---- | ---------- | 
|                                               |  | 2002
|                                               |  |     
|Equity in undistributed income of subsidiaries |  | $    | 27,937,296 | 
|                                               |  |      |            | 
|Net income                                     |  | $    | 27,937,296 | 
|                                               |  |      |            | 

F-34



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##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

17.     Parent
Company Only Financial Statements (continued)

Western Holdings condensed statement of
cash flows for the period from May 3, 2002 to
September 30, 2002 is as follows:

|                                                 |                                                                                      |                                           |           |             |           | 
|------------------------------------------------ | ------------------------------------------------------------------------------------ | ----------------------------------------- | --------- | ----------- | --------- | 
|                                                 |                                                                                      | 2002                                     
|                                                 |                                                                                      |                                          
|Cash flows from operating activities:            |                                                                                      |                                           |           |            
|                                                 | Net income                                                                           |                                           | $         | 27,937,296  |          
|                                                 | Adjustments to reconcile net income
    (loss) to net cash from operating activities |                                           |           | (27,937,296 | )        
|                                                 |                                                                                      |                                           |           |            
|                                                 |                                                                                      | Net cash provided by operating activities |           |             | 0         | 
|                                                 |                                                                                      |                                           |           |            
|Cash flows from investing activities:            |                                                                                      |                                           |           |            
|                                                 |                                                                                      | Net cash used by investing activities     |           |             | 0         | 
|                                                 |                                                                                      |                                           |           |            
|Cash flows from financing activities:            |                                                                                      |                                           |           |            
|                                                 | Issuance of common stock and contributed capital                                     |                                           |           | 1,010,000   |          
|                                                 |                                                                                      |                                           |           |            
|                                                 |                                                                                      | Net cash provided by financing activities |           |             | 1,010,000 | 
|                                                 |                                                                                      |                                           |           |            
|Net change in cash and cash equivalents          |                                                                                      |                                           | 1,010,000 |            
|Cash and cash equivalents at beginning of period |                                                                                      |                                           |          |            
|                                                 |                                                                                      |                                           |           |            
|Cash and cash equivalents at end of period       |                                                                                      | $                                         | 1,010,000 |            
|                                                 |                                                                                      |                                           |           |            
|Non-cash investing activities:                   |                                                                                      |                                           |           |            
|                                                 | Contribution of investment in Western Life common
    stock from Metropolitan        |                                           | $         | 125,329,064 |          
|                                                 |                                                                                      |                                           |           |            

Accounting policies followed in the preparation
of the preceding condensed financial statements of Western
Holding are the same as those policies described in the
consolidated financial statements except that the equity method
was used in accounting for the investments in and net income
from subsidiaries.

18.     Supplementary
Financial Information (unaudited):

Supplementary financial information of the
Company for each three-month period (September 30,
June 30, March 31 and December 31) of the fiscal
years ended September 30, 2002 and 2001 are as follows:

|                  |              |                        |        |      |  |       |        |          |  |           |        |       |  |       |        |          |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   | 
|----------------- | ------------ | ---------------------- | ------ | ---- |  | ----- | ------ | -------- |  | --------- | ------ | ----- |  | ----- | ------ | -------- |  | - | ------ |  |  | - | ------ |  |  | - | ------ | - |  | - | ------ | - | 
|                  |              |                       
|                  |              | Three Months Ended    
|                  |              |                       
|                  |              | September              |        | June |  | March |        | December |  | September |        | June  |  | March |        | December
|                  |              | 2002                   |        | 2002 |  | 2002  |        | 2001     |  | 2001      |        | 2001  |  | 2001  |        | 2000    
|                  |              |                        |        |      |  |       |        |          |  |           |        |       |  |       |        |         
|                  |              |                       
|                  |              | (Dollars in thousands)
|STATEMENTS OF     |              |                        |        |      |  |       |        |          |  |           |        |       |  |       |        |          |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |  
|                  | INCOME DATA: |                        |        |      |  |       |        |          |  |           |        |       |  |       |        |          |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |   | 
|Revenues          |              | $                      | 36,868 |      |  | $     | 23,557 |          |  | $         | 16,388 |       |  | $     | 22,515 |          |  | $ | 27,587 |  |  | $ | 15,814 |  |  | $ | 10,233 |   |  | $ | 14,869 |  
|                  |              |                        |        |      |  |       |        |          |  |           |        |       |  |       |        |          |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |  
|Net income (loss) |              | $                      | 19,245 | (1)  |  | $     | 5,887  | (2)      |  | $         | (405   | ) (3) |  | $     | 3,211  |          |  | $ | 7,995  |  |  | $ | 10,237 |  |  | $ | (4,578 | ) |  | $ | (1,232 | )
|                  |              |                        |        |      |  |       |        |          |  |           |        |       |  |       |        |          |  |   |        |  |  |   |        |  |  |   |        |   |  |   |        |  



---



|    |                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes gains on real estate sales of
    $7.2 million, net of tax; reversal of previously amortized
    deferred policy acquisition costs of $5.7 million, net of
    tax; and investment impairments of $5.2 million, net of tax.
|   
|(2) | Includes reversal of previously amortized
    deferred policy acquisition costs of $1.9 million; net of
    tax; and investment impairments of $2.0 million, net of tax.                                                            
|   
|(3) | Includes investment impairments of
    $4.4 million, net of tax.                                                                                                                                                                    

F-35



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##### Table of Contents



WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY

INDEX TO FINANCIAL STATEMENT
SCHEDULES

|             |  |                                                                                                                         
|------------ |  | ------------------------------------------------------------------------------------------------------------------------
|Schedule I   |  | Summary of InvestmentsOther Than
    Investments in Related Parties as of September 30, 2002                           
|Schedule III |  | Supplementary Insurance Information as of
    September 30, 2002, 2001 and 2000 and for each of the years
    then ended
|Schedule IV  |  | Reinsurance as of September 30, 2002, 2001
    and 2000 and for each of the years then ended                            
|Schedule V   |  | Valuation and Qualifying Accounts as of
    September 30, 2002                                                          

All schedules, other than those listed above, are
omitted because the information is not required or because the
information is included in the Companys Consolidated
Financial Statements or Notes thereto.

S-1



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##### Table of Contents



SCHEDULE I

Page 1 of 4


WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY

SUMMARY OF INVESTMENTS


OTHER THAN INVESTMENTS IN RELATED
PARTIES


September 30, 2002

|                                                                                          |                                                             |                |               |              |  |                |             |             |  |   |               |             | 
|----------------------------------------------------------------------------------------- | ----------------------------------------------------------- | -------------- | ------------- | ------------ |  | -------------- | ----------- | ----------- |  | - | ------------- | ----------- | 
|                                                                                          |                                                             |                |               |              |  | Amount at     
|                                                                                          |                                                             |                |               |              |  | Which Shown on
|Types of Investments                                                                      |                                                             | Amortized Cost |               | Market Value |  | Balance Sheet 
|                                                                                          |                                                             |                |               |              |  |               
|FIXED MATURITIES                                                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            
|Investments:                                                                              |                                                             |                |               |              |  |                |             |             |  |   |               |            
|                                                                                          | U.S. Government and Government Agencies and
    Authorities |                | $             | 59,885,625   |  |                | $           | 60,666,185  |  |   | $             | 60,382,621  | 
|                                                                                          | Corporate Bonds                                             |                |               | 20,030,550   |  |                |             | 19,911,047  |  |   |               | 19,911,047  | 
|                                                                                          | Mortgage and Asset Backed Bonds                             |                |               | 373,222,332  |  |                |             | 378,225,786 |  |   |               | 377,399,977 | 
|                                                                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            
|TOTAL FIXED MATURITIES                                                                    |                                                             | $              | 453,138,507   |              |  | $              | 458,803,018 |             |  | $ | 457,693,645   |            
|                                                                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            
|Equity Securities                                                                         |                                                             | $              | 37,085,773    |              |  | $              | 36,974,929  |             |  | $ | 36,974,929    |            
|                                                                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            
|Venture Capital/ Limited Partnership                                                      |                                                             | $              | 3,043,811     |              |  | $              | 3,043,811   |             |  | $ | 3,043,811     |            
|                                                                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            
|Real Estate Contracts and Mortgage Notes
    Receivables and Other Receivable Investments |                                                             | $              | 683,918,878   |              |  |                |             |             |  | $ | 683,918,878   |            
|Less Allowance for Losses on Receivables                                                  |                                                             |                | (8,697,778    | )            |  |                |             |             |  |   | (8,697,778    | )          
|                                                                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            
|NET RECEIVABLES                                                                           |                                                             | $              | 675,221,100   |              |  |                |             |             |  | $ | 675,221,100   |            
|                                                                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            
|REAL ESTATE HELD FOR SALE AND DEVELOPMENT                                                 |                                                             | $              | 51,208,831    |              |  |                |             |             |  | $ | 51,208,831    |            
|                                                                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            
|OTHER ASSETSPOLICY LOANS                                                                 |                                                             | $              | 20,238,963    |              |  |                |             |             |  | $ | 20,238,963    |            
|                                                                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            
|TOTAL INVESTMENTS                                                                         |                                                             | $              | 1,239,936,985 |              |  |                |             |             |  | $ | 1,244,381,279 |            
|                                                                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            

S-2



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##### Table of Contents



SCHEDULE I

Page 2 of 4


WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY

LOANS ON REAL ESTATE


At September 30, 2002, the Company held
contracts and mortgage notes Receivables with face values as
follows:

|                                                                                                      |  |             |             |            |  |          |            |          |  |  |      |   |  |  |      |  
|----------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | ---------- |  | -------- | ---------- | -------- |  |  | ---- | - |  |  | ---- | -
|                                                                                                      |  |             |             |            |  | Weighted |            |         
|                                                                                                      |  | Carrying    |             | Delinquent |  | Average  |            | Weighted
|                                                                                                      |  | Amount of   |             | Principal  |  | Coupon   |            | Average 
|Description                                                                                           |  | Receivables |             | Amount(2)  |  | Rate(3)  |            | Yield   
|                                                                                                      |  |             |             |            |  |          |            |         
|Commercial(1)                                                                                         |  | $           | 342,632,510 |            |  | $        | 25,240,264 |          |  |  | 13.1 | % |  |  | 15.8 | %
|Residential                                                                                           |  |             | 158,265,860 |            |  |          | 15,072,032 |          |  |  | 9.0  | % |  |  | 10.5 | %
|Other                                                                                                 |  |             | 88,862,967  |            |  |          | 5,668,721  |          |  |  | 9.6  | % |  |  | 12.0 | %
|Unrealized discounts, net of unamortized
    acquisition cost, on Receivables purchased at a discount |  |             | (11,882,827 | )          |  |          |            |          |  |  |      |   |  |  |      |  
|                                                                                                      |  |             |             |            |  |          |            |          |  |  |      |   |  |  |      |  
|                                                                                                      |  | $           | 577,878,510 |            |  | $        | 45,981,017 |          |  |  |      |   |  |  |      |  
|                                                                                                      |  |             |             |            |  |          |            |          |  |  |      |   |  |  |      |  



---



| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) The commercial real estate Receivables
    are defined as those generated through the Companys
    commercial lending source.                            
|
| | (2) The principal amounts of real estate
    Receivables subject to delinquent principal or interest is
    defined as being in arrears for more than 90 days.
|
| | (3) Approximately 1% of the real estate
    Receivables are subject to variable interest rates.                                                               

The future maturities of the aggregate amounts of
Commercial Receivables (face amount) are as follows:

|                                      |  |            |             | 
|------------------------------------- |  | ---------- | ----------- | 
|                                      |  | Commercial
|                                      |  | Principal 
|                                      |  |           
|Due in one year or less               |  | $          | 101,140,252 | 
|Due after one year through five years |  |            | 177,884,386 | 
|Due after five years                  |  |            | 63,607,872  | 
|                                      |  |            |             | 
|                                      |  | $          | 342,632,510 | 
|                                      |  |            |             | 

S-3



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##### Table of Contents



SCHEDULE I

Page 3 of 4


WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY

LOANS ON REAL ESTATE


Years Ended September 30, 2002, 2001 and
2000

|                               |                                                                                                  |      |             |             |  |      |             |             |  |   |             |             | 
|------------------------------ | ------------------------------------------------------------------------------------------------ | ---- | ----------- | ----------- |  | ---- | ----------- | ----------- |  | - | ----------- | ----------- | 
|                               |                                                                                                  | 2002 |             | 2001        |  | 2000
|                               |                                                                                                  |      |             |             |  |     
|Balance at beginning of period |                                                                                                  | $    | 390,257,862 |             |  | $    | 330,076,232 |             |  | $ | 414,044,130 |            
|Additions during period:       |                                                                                                  |      |             |             |  |      |             |             |  |   |             |            
|                               | New receivablescash                                                                             |      |             | 311,871,483 |  |      |             | 242,062,586 |  |   |             | 465,274,629 | 
|                               | Loans to facilitate the sale of real estate
    heldnon cash                                    |      |             | 19,204,500  |  |      |             | 575,590     |  |   |             | 5,814,668   | 
|                               | Assumption of other debt payable in conjunction
    with acquisition of new receivablesnon cash |      |             |            |  |      |             | 377,895     |  |   |             | 206,264     | 
|                               | Earned discount amortization                                                                     |      |             | 20,688,548  |  |      |             | 5,654,226   |  |   |             | 3,276,304   | 
|                               |                                                                                                  |      |             |             |  |      |             |             |  |   |             |            
|Total additions                |                                                                                                  |      | 351,764,531 |             |  |      | 248,670,297 |             |  |   | 474,571,865 |            
|                               |                                                                                                  |      |             |             |  |      |             |             |  |   |             |            
|Deductions during period:      |                                                                                                  |      |             |             |  |      |             |             |  |   |             |            
|                               | Collections of principalcash                                                                    |      |             | 136,869,677 |  |      |             | 86,898,639  |  |   |             | 125,150,888 | 
|                               | Cost of receivables sold                                                                         |      |             | 2,022,056   |  |      |             | 88,361,472  |  |   |             | 414,347,647 | 
|                               | Foreclosuresnon cash                                                                            |      |             | 25,252,150  |  |      |             | 13,228,556  |  |   |             | 19,041,228  | 
|                               |                                                                                                  |      |             |             |  |      |             |             |  |   |             |            
|Total deductions               |                                                                                                  |      | 164,143,883 |             |  |      | 188,488,667 |             |  |   | 558,539,763 |            
|                               |                                                                                                  |      |             |             |  |      |             |             |  |   |             |            
|Balance at end of period       |                                                                                                  | $    | 577,878,510 |             |  | $    | 390,257,862 |             |  | $ | 330,076,232 |            
|                               |                                                                                                  |      |             |             |  |      |             |             |  |   |             |            

S-4



---



##### Table of Contents



SCHEDULE I

Page 4 of 4


WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY

REAL ESTATE HELD FOR SALE AND
DEVELOPMENT


|                               |                                 |                          |            |            |  |      |            |            |  |   |            |            | 
|------------------------------ | ------------------------------- | ------------------------ | ---------- | ---------- |  | ---- | ---------- | ---------- |  | - | ---------- | ---------- | 
|                               |                                 |                         
|                               |                                 | Year Ended September 30,
|                               |                                 |                         
|                               |                                 | 2002                     |            | 2001       |  | 2000
|                               |                                 |                          |            |            |  |     
|Balance at beginning of period |                                 | $                        | 41,570,247 |            |  | $    | 33,315,087 |            |  | $ | 38,300,482 |           
|Additions during period:       |                                 |                          |            |            |  |      |            |            |  |   |            |           
|                               | Purchases and development costs |                          |            | 12,457,131 |  |      |            | 9,986,539  |  |   |            | 5,503,299  | 
|                               | Foreclosures                    |                          |            | 20,015,417 |  |      |            | 12,792,197 |  |   |            | 15,302,476 | 
|                               |                                 |                          |            |            |  |      |            |            |  |   |            |           
|Total additions                |                                 |                          | 32,472,548 |            |  |      | 22,778,736 |            |  |   | 20,805,775 |           
|                               |                                 |                          |            |            |  |      |            |            |  |   |            |           
|Deductions during period:      |                                 |                          |            |            |  |      |            |            |  |   |            |           
|                               | Depreciation                    |                          |            | 304,575    |  |      |            | 267,600    |  |   |            | 299,600    | 
|                               | Real estate sold                |                          |            | 21,066,423 |  |      |            | 14,255,976 |  |   |            | 25,491,570 | 
|                               |                                 |                          |            |            |  |      |            |            |  |   |            |           
|Total deductions               |                                 |                          | 21,370,998 |            |  |      | 14,523,576 |            |  |   | 25,791,170 |           
|                               |                                 |                          |            |            |  |      |            |            |  |   |            |           
|Balance at end of period       |                                 | $                        | 52,671,797 |            |  | $    | 41,570,247 |            |  | $ | 33,315,087 |           
|                               |                                 |                          |            |            |  |      |            |            |  |   |            |           

S-5



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##### Table of Contents



SCHEDULE III

Page 1 of 2


WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY

SUPPLEMENTARY INSURANCE INFORMATION


|                   |                              |             |   |                |  |          |   |               |  |  |   |   |  |  |   |   | 
|------------------ | ---------------------------- | ----------- | - | -------------- |  | -------- | - | ------------- |  |  | - | - |  |  | - | - | 
|                   |                              | Deferred    |   | Benefits,      |  |          |   | Other Policy 
|                   |                              | Policy      |   | Losses, Claims |  |          |   | Claims and   
|                   |                              | Acquisition |   | and Loss       |  | Unearned |   | Benefits     
|                   |                              | Cost        |   | Expense        |  | Premiums |   | Payable      
|                   |                              |             |   |                |  |          |   |              
|September 30, 2002 |                              |             |   |                |  |          |   |               |  |  |   |   |  |  |   |  
|                   | Life Insurance and Annuities |             | $ | 72,205,121     |  |          | $ | 1,225,660,253 |  |  | $ |  |  |  | $ |  | 
|                   |                              |             |   |                |  |          |   |               |  |  |   |   |  |  |   |  
|September 30, 2001 |                              |             |   |                |  |          |   |               |  |  |   |   |  |  |   |  
|                   | Life Insurance and Annuities |             | $ | 56,356,646     |  |          | $ | 971,216,177   |  |  | $ |  |  |  | $ |  | 
|                   |                              |             |   |                |  |          |   |               |  |  |   |   |  |  |   |  
|September 30, 2000 |                              |             |   |                |  |          |   |               |  |  |   |   |  |  |   |  
|                   | Life Insurance and Annuities |             | $ | 55,059,377     |  |          | $ | 886,510,121   |  |  | $ |  |  |  | $ |  | 
|                   |                              |             |   |                |  |          |   |               |  |  |   |   |  |  |   |  

S-6



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##### Table of Contents



SCHEDULE III

Page 2 of 2


WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY

SUPPLEMENTARY INSURANCE INFORMATION


|                   |                              |         |   |            |  |            |   |              |  |           |   |            |  |  |   |            |   |  |   |           | 
|------------------ | ---------------------------- | ------- | - | ---------- |  | ---------- | - | ------------ |  | --------- | - | ---------- |  |  | - | ---------- | - |  | - | --------- | 
|                   |                              |         |   |            |  | Benefit    |   | Amortization |  |          
|                   |                              |         |   |            |  | Claims,    |   | of Deferred  |  |          
|                   |                              |         |   | Net        |  | Losses and |   | Policy       |  | Other    
|                   |                              | Premium |   | Investment |  | Settlement |   | Acquisition  |  | Operating
|                   |                              | Revenue |   | Income     |  | Expenses   |   | Costs        |  | Expenses 
|                   |                              |         |   |            |  |            |   |              |  |          
|September 30, 2002 |                              |         |   |            |  |            |   |              |  |           |   |            |  |  |   |            |   |  |   |          
|                   | Life Insurance and Annuities |         | $ | 1,766,851  |  |            | $ | 101,052,439  |  |           | $ | 53,131,625 |  |  | $ | (5,016,172 | ) |  | $ | 4,005,786 | 
|                   |                              |         |   |            |  |            |   |              |  |           |   |            |  |  |   |            |   |  |   |          
|September 30, 2001 |                              |         |   |            |  |            |   |              |  |           |   |            |  |  |   |            |   |  |   |          
|                   | Life Insurance and Annuities |         | $ | 1,971,123  |  |            | $ | 72,362,198   |  |           | $ | 47,473,339 |  |  | $ | 8,650,000  |   |  | $ | 4,430,486 | 
|                   |                              |         |   |            |  |            |   |              |  |           |   |            |  |  |   |            |   |  |   |          
|September 30, 2000 |                              |         |   |            |  |            |   |              |  |           |   |            |  |  |   |            |   |  |   |          
|                   | Life Insurance and Annuities |         | $ | 2,406,532  |  |            | $ | 65,958,630   |  |           | $ | 46,122,863 |  |  | $ | 12,300,000 |   |  | $ | 3,251,656 | 
|                   |                              |         |   |            |  |            |   |              |  |           |   |            |  |  |   |            |   |  |   |          

S-7



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##### Table of Contents



SCHEDULE IV

WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY

SUPPLEMENTARY REINSURANCE
INFORMATION


|                   |                         |                |   |             |           |           |   |            |         |            |   |   |   |  |   |             |           |  |   |   |   | 
|------------------ | ----------------------- | -------------- | - | ----------- | --------- | --------- | - | ---------- | ------- | ---------- | - | - | - |  | - | ----------- | --------- |  | - | - | - | 
|                   |                         |                |   |             |           | Assumed   |   |            |         | Percentage
|                   |                         |                |   | Ceded to    |           | From      |   |            |         | of Amount 
|                   |                         |                |   | Other       |           | Other     |   | Net        |         | Assumed to
|                   |                         | Gross Amount   |   | Companies   |           | Companies |   | Amount     |         | Net       
|                   |                         |                |   |             |           |           |   |            |         |           
|September 30, 2002 |                         |                |   |             |           |           |   |            |         |            |   |   |   |  |   |             |           |  |   |  
|                   | Life insurance in force |                | $ | 234,636,728 |           |           | $ | 31,255,290 |         |            | $ |  |   |  | $ | 203,381,438 |           |  | $ |  |  
|                   | Premiums                |                |   |             |           |           |   |            |         |            |   |   |   |  |   |             |           |  |   |   |  
|                   |                         | Life insurance |   | $           | 1,520,101 |           |   | $          | 223,503 |            |   | $ |  |  |   | $           | 1,296,598 |  |   | $ |  | 
|September 30, 2001 |                         |                |   |             |           |           |   |            |         |            |   |   |   |  |   |             |           |  |   |  
|                   | Life insurance in force |                | $ | 244,702,038 |           |           | $ | 33,711,514 |         |            | $ |  |   |  | $ | 210,990,524 |           |  | $ |  |  
|                   | Premiums                |                |   |             |           |           |   |            |         |            |   |   |   |  |   |             |           |  |   |   |  
|                   |                         | Life insurance |   | $           | 1,698,983 |           |   | $          | 332,611 |            |   | $ |  |  |   | $           | 1,366,372 |  |   | $ |  | 
|September 30, 2000 |                         |                |   |             |           |           |   |            |         |            |   |   |   |  |   |             |           |  |   |  
|                   | Life insurance in force |                | $ | 259,975,571 |           |           | $ | 37,594,536 |         |            | $ |  |   |  | $ | 222,381,035 |           |  | $ |  |  
|                   | Premiums                |                |   |             |           |           |   |            |         |            |   |   |   |  |   |             |           |  |   |   |  
|                   |                         | Life insurance |   | $           | 1,766,947 |           |   | $          | 308,923 |            |   | $ |  |  |   | $           | 1,458,024 |  |   | $ |  | 

S-8



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##### Table of Contents



SCHEDULE V

WESTERN UNITED HOLDING COMPANY AND
SUBSIDIARY

VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES


Years Ended September 30, 2002, 2001 and
2000

|                                                                                                                        |      |            |   |              |  |             |   |             |  |  |   |           |  |  |   |           | 
|----------------------------------------------------------------------------------------------------------------------- | ---- | ---------- | - | ------------ |  | ----------- | - | ----------- |  |  | - | --------- |  |  | - | --------- | 
|                                                                                                                        |      |            |   | (Reductions) |  | Deductions  |   |            
|                                                                                                                        |      | Balance at |   | Charges to   |  | and         |   |            
|                                                                                                                        |      | Beginning  |   | Costs and    |  | Accounts    |   | Balance at 
|Description                                                                                                             |      | of Year    |   | Expenses     |  | Written Off |   | End of Year
|                                                                                                                        |      |            |   |              |  |             |   |            
|Allowance for probable losses on receivables                                                                            |      |            |   |              |  |             |   |             |  |  |   |           |  |  |   |          
|                                                                                                                        | 2002 |            | $ | 9,166,763    |  |             | $ | 4,536,451   |  |  | $ | 5,005,436 |  |  | $ | 8,697,778 | 
|                                                                                                                        | 2001 |            |   | 6,275,101    |  |             |   | 4,175,344   |  |  |   | 1,283,682 |  |  |   | 9,166,763 | 
|                                                                                                                        | 2000 |            |   | 3,037,582    |  |             |   | 4,792,818   |  |  |   | 1,555,299 |  |  |   | 6,275,101 | 
|Allowance for probable losses on real estate held
    for sale deducted from real estate held for sale in balance sheet |      |            |   |              |  |             |   |             |  |  |   |           |  |  |   |          
|                                                                                                                        | 2002 |            | $ | 2,448,670    |  |             | $ | 1,013,820   |  |  | $ | 1,999,524 |  |  | $ | 1,462,966 | 
|                                                                                                                        | 2001 |            |   | 1,442,424    |  |             |   | 1,676,031   |  |  |   | 669,785   |  |  |   | 2,448,670 | 
|                                                                                                                        | 2000 |            |   | 1,383,575    |  |             |   | 408,568     |  |  |   | 349,719   |  |  |   | 1,442,424 | 

S-9



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##### Table of Contents



EXHIBIT INDEX

|        |      |             |  |                                                                                                                                                                                  
|------- | ---- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 3.1  |             |  | Articles of Incorporation of Western United
    Holding Company.(1)                                                                                                              
|        | 3.2  |             |  | Bylaws of Western United Holding
    Company.(1)                                                                                                                                 
|        | 4.1  |             |  | Statement of Rights, Designations and Preferences
    of Variable Rate Cumulative Preferred Stock,
    Series A.(1)                                                              
|        | 10.1 |             |  | Receivable Acquisition and Underwriting Agreement
    between Western United Life Assurance Company and Metropolitan
    Mortgage & Securities Co., Inc.(1)                      
|        | 10.2 |             |  | Form of General Support Services and Rental
    Agreement between Western United Life Assurance Company and
    Metropolitan Mortgage & Securities Co., Inc., as
    amended. (1)
|        | 10.3 |             |  | First Amendment to General Support Services and
    Rental Agreement between Western United Life Assurance Company
    and Metropolitan Mortgage & Securities Co.,
    Inc.(1)   
|        | 12.1 |             |  | Statement regarding computation of ratios.                                                                                                                                       
|        | 16.1 |             |  | Letter regarding change in certifying accountant.                                                                                                                                
|        | 21.1 |             |  | Subsidiaries of the Registrant.                                                                                                                                                  



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|    |                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the Registrants
    Registration Statement on Form S-1, Registration
    No. 333-72346-01.