##### Table of Contents



FORM 10-Q

|                                                        
|--------------------------------------------------------
|SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2002

|  
|--
|OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from  to

Commission file number 001-15595

METROPOLITAN MORTGAGE & SECURITIES CO., INC.(Exact name of registrant as specified in its charter)

|                                                                          |  |                                                
|------------------------------------------------------------------------- |  | -----------------------------------------------
|WASHINGTON
(State or other jurisdiction of
incorporation or organization) |  | 91-0609840
(I.R.S. Employer
Identification No.)

601 W. 1ST AVENUE, SPOKANE, WASHINGTON 99201-5015
(Address of principal executive offices) (Zip Code)

Registrants telephone number, including area code: (509)838-3111

Former name, former address and
former fiscal year, if changed since last report: N/A.

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS: N/A.

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes o No o N/A.

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.

| |                                                                                  | 
| | -------------------------------------------------------------------------------- | 
| | Common A: 97 shares at July 31, 2002.
Common B:   0 shares at July 31, 2002. | 





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TABLE OF CONTENTS



|                                                       |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                        
|CONSOLIDATED BALANCE SHEETS                           
|CONSOLIDATED STATEMENTS OF OPERATIONS                 
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY        
|CONSOLIDATED STATEMENTS OF CASH FLOWS                 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS            
|                                                       | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                       | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                                       | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                            



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO., INC.
INDEX

PART I  FINANCIAL INFORMATION

|        |                                                                                                                                           | 
|------- | ----------------------------------------------------------------------------------------------------------------------------------------- | 
|ITEM 1. | FINANCIAL STATEMENTS                                                                                                                      | 
|        |                                                                                                                                           | 
|        |                                                                                                                                           | 
|        | Consolidated Balance Sheets
As of June 30, 2002 and September 30, 2001                                                                    | 
|        |                                                                                                                                           | 
|        | Consolidated Statements of Operations
Three Months Ended June 30, 2002 and 2001
Nine Months Ended June 30, 2002 and 2001                  | 
|        |                                                                                                                                           | 
|        | Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended June 30, 2002 and 2001
Nine Months Ended June 30, 2002 and 2001 | 
|        |                                                                                                                                           | 
|        | Consolidated Statement of Stockholders Equity
Nine Months Ended June 30, 2002                                                            | 
|        |                                                                                                                                           | 
|        | Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2002 and 2001                                                            | 
|        |                                                                                                                                           | 
|        | Notes to Consolidated Financial Statements                                                                                               





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##### Table of Contents






PART I  FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS




METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |               |             |             |               | 
|--------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------------------------------------- | ------------- | ----------- | ------------- | ------------- | ----------- | ----------- | ------------- | 
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               | June 30,    |               | September 30,
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               | 2002        |               | 2001         
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |              
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               | (unaudited) |               |               |             |            
|Assets:               |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |              
|                      | Cash and cash equivalents                                                                                                                      |                                                                                                                                                                                                                       | $                                              | 39,397,285                                              |               |             | $             | 68,019,397    |            
|                      | Investments:                                                                                                                                   |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |               |            
|                      |                                                                                                                                                |                                                                                                                                                                                                                       | Trading securities, at fair value              |                                                         |               |            |               |               |             | 48,832,529  |              
|                      |                                                                                                                                                |                                                                                                                                                                                                                       | Available-for-sale securities, at fair value   |                                                         |               | 426,760,221 |               |               |             | 311,803,378 |              
|                      |                                                                                                                                                |                                                                                                                                                                                                                       | Held to maturity securities, at amortized cost |                                                         |               | 26,044,919  |               |               |             |            |              
|                      |                                                                                                                                                |                                                                                                                                                                                                                       | Accrued interest on investments                |                                                         |               | 2,909,583   |               |               |             | 2,734,943   |              
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |              
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                | Total investments                                       |               |             | 455,714,723   |               |             |             | 363,370,850   | 
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |              
|                      | Real estate contracts and mortgage notes receivable,
net of discounts and origination fees and net
of allowances of $9,328,642 and $11,241,981 |                                                                                                                                                                                                                       |                                                | 538,122,852                                             |               |             |               | 426,376,243   |            
|                      | Real estate held for sale and development at the
lower of cost or market, net of allowances of
$2,725,375 and $3,661,247                       |                                                                                                                                                                                                                       |                                                | 96,056,873                                              |               |             |               | 81,934,751    |            
|                      | Other receivable investments, net of discounts
and origination fees and net of allowances
of $1,025,946 and $2,267,996                         |                                                                                                                                                                                                                       |                                                | 158,791,433                                             |               |             |               | 173,836,770   |            
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |              
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                | Net real estate assets and other receivable
investments |               |             | 792,971,158   |               |             |             | 682,147,764   | 
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |              
|                      | Other assets:                                                                                                                                  |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |               |            
|                      |                                                                                                                                                | Reinsurance receivable                                                                                                                                                                                                |                                                |                                                         | 141,088,780   |             |               |               | 109,608,025 |            
|                      |                                                                                                                                                | Deferred costs, net                                                                                                                                                                                                   |                                                |                                                         | 66,913,163    |             |               |               | 66,755,118  |            
|                      |                                                                                                                                                | Land, buildings and equipment, net                                                                                                                                                                                    |                                                |                                                         | 27,529,092    |             |               |               | 29,411,423  |            
|                      |                                                                                                                                                | Mortgage servicing rights, net                                                                                                                                                                                        |                                                |                                                         | 749,512       |             |               |               | 3,994,096   |            
|                      |                                                                                                                                                | Deferred income taxes                                                                                                                                                                                                 |                                                |                                                         | 18,393,552    |             |               |               | 20,894,075  |            
|                      |                                                                                                                                                | Other assets, net                                                                                                                                                                                                     |                                                |                                                         | 51,066,887    |             |               |               | 49,927,066  |            
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |              
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                | Total other assets                                      |               |             | 305,740,986   |               |             |             | 280,589,803   | 
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |              
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                | Total assets                                            |               | $           | 1,593,824,152 |               |             | $           | 1,394,127,814 | 
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |              
|Liabilities:          |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |              
|                      |                                                                                                                                                | Life insurance and annuity reserves                                                                                                                                                                                   |                                                | $                                                       | 1,090,485,405 |             |               | $             | 971,216,178 |            
|                      |                                                                                                                                                | Debenture bonds and accrued interest                                                                                                                                                                                  |                                                |                                                         | 343,989,936   |             |               |               | 300,367,995 |            
|                      |                                                                                                                                                | Debt payable                                                                                                                                                                                                          |                                                |                                                         | 77,575,275    |             |               |               | 39,628,517  |            
|                      |                                                                                                                                                | Accounts payable and accrued expenses                                                                                                                                                                                 |                                                |                                                         | 30,920,598    |             |               |               | 39,625,703  |            
|                      |                                                                                                                                                | Minority interest in consolidated subsidiaries                                                                                                                                                                        |                                                |                                                         |              |             |               |               | 2,376,931   |            
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |              
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                | Total liabilities                                       |               |             | 1,542,971,214 |               |             |             | 1,353,215,324 | 
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |              
|Stockholders equity: |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |              
|                      |                                                                                                                                                | Preferred stock, Series A, B, C, D, E, G and H cumulative
with variable rate, $10 par value, authorized 13,325,000,
issued 1,224,600 shares and 1,299,254 shares
(liquidation preference $33,971,910 and $35,973,840) |                                                |                                                         | 12,245,995    |             |               |               | 12,992,547  |            
|                      |                                                                                                                                                | Preferred stock, Series E-7 cumulative with variable rate, $2.50
par value, authorized 10,000,000, issued 1,427,270 and 676,876
shares (liquidation preference $35,681,760 and $16,921,890)                           |                                                |                                                         | 3,568,176     |             |               |               | 1,692,189   |            
|                      |                                                                                                                                                | Common stock, Class A, $2,250 par, authorized
222 shares, 97 shares issued and outstanding                                                                                                                            |                                                |                                                         | 218,250       |             |               |               | 218,250     |            
|                      |                                                                                                                                                | Additional paid-in capital                                                                                                                                                                                            |                                                |                                                         | 39,611,420    |             |               |               | 26,024,897  |            
|                      |                                                                                                                                                | Accumulated other comprehensive income (loss)                                                                                                                                                                         |                                                |                                                         | 462,043       |             |               |               | (4,474,411  | )          
|                      |                                                                                                                                                | Retained earnings                                                                                                                                                                                                     |                                                |                                                         | (5,252,946    | )           |               |               | 4,459,018   |            
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |              
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                | Total stockholders equity                              |               |             | 50,852,938    |               |             |             | 40,912,490    | 
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |              
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                | Total liabilities and stockholders equity              |               | $           | 1,593,824,152 |               |             | $           | 1,394,127,814 | 
|                      |                                                                                                                                                |                                                                                                                                                                                                                       |                                                |                                                         |               |             |               |              

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





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##### Table of Contents






METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

|                                                                       |                                                                        |                |            |                    |            |                   |             |            |            |      |            |             |             |   |             |             |             | 
|---------------------------------------------------------------------- | ---------------------------------------------------------------------- | -------------- | ---------- | ------------------ | ---------- | ----------------- | ----------- | ---------- | ---------- | ---- | ---------- | ----------- | ----------- | - | ----------- | ----------- | ----------- | 
|                                                                       |                                                                        |                |            | Three Months Ended |            | Nine Months Ended
|                                                                       |                                                                        |                |            | June 30,           |            | June 30,         
|                                                                       |                                                                        |                |            |                    |            |                  
|                                                                       |                                                                        |                |            | 2002               |            | 2001              |             | 2002       |            | 2001
|                                                                       |                                                                        |                |            |                    |            |                   |             |            |            |     
|Revenues:                                                              |                                                                        |                |            |                    |            |                   |             |            |            |      |            |             |             |   |             |            
|                                                                       | Insurance premiums                                                     |                | $          | 324,922            |            |                   | $           | 354,287    |            |      | $          | 999,671     |             |   | $           | 1,109,167   |            
|                                                                       | Interest on receivables                                                |                |            | 14,334,051         |            |                   |             | 10,178,798 |            |      |            | 38,737,036  |             |   |             | 29,517,926  |            
|                                                                       | Earned discount on receivables and investments                         |                |            | 9,435,537          |            |                   |             | 5,184,328  |            |      |            | 26,566,299  |             |   |             | 14,923,995  |            
|                                                                       | Other investment income                                                |                |            | 7,928,615          |            |                   |             | 7,920,730  |            |      |            | 23,277,571  |             |   |             | 23,329,689  |            
|                                                                       | Real estate sales                                                      |                |            | 6,406,795          |            |                   |             | 3,374,389  |            |      |            | 12,321,917  |             |   |             | 12,677,720  |            
|                                                                       | Fees, commissions, service and other income                            |                |            | 1,631,917          |            |                   |             | 3,605,909  |            |      |            | 5,872,106   |             |   |             | 10,484,771  |            
|                                                                       | Net losses on investments                                              |                |            | (5,385,246         | )          |                   |             | (1,114,192 | )          |      |            | (13,919,699 | )           |   |             | (10,191,579 | )          
|                                                                       | Net gains (losses) on sales of receivables                             |                |            |                   |            |                   |             | (1,650,266 | )          |      |            | 1,176,102   |             |   |             | 1,267,497   |            
|                                                                       |                                                                        |                |            |                    |            |                   |             |            |            |      |            |             |             |   |             |            
|                                                                       |                                                                        | Total revenues |            |                    | 34,676,591 |                   |             |            | 27,853,983 |      |            |             | 95,031,003  |   |             |             | 83,119,186  | 
|                                                                       |                                                                        |                |            |                    |            |                   |             |            |            |      |            |             |             |   |             |            
|Expenses:                                                              |                                                                        |                |            |                    |            |                   |             |            |            |      |            |             |             |   |             |            
|                                                                       | Insurance policy and annuity benefits                                  |                |            | 13,010,835         |            |                   |             | 12,657,617 |            |      |            | 38,637,106  |             |   |             | 36,622,302  |            
|                                                                       | Interest, net                                                          |                |            | 7,917,364          |            |                   |             | 6,563,494  |            |      |            | 23,047,562  |             |   |             | 19,079,740  |            
|                                                                       | Cost of real estate sold                                               |                |            | 5,112,908          |            |                   |             | 3,324,508  |            |      |            | 10,943,996  |             |   |             | 12,439,489  |            
|                                                                       | Provision for losses on real estate assets                             |                |            | 2,033,832          |            |                   |             | 3,338,995  |            |      |            | 3,913,702   |             |   |             | 8,229,952   |            
|                                                                       | Provision for (recovery of) losses on other assets                     |                |            | (1,167,266         | )          |                   |             | 55,065     |            |      |            | (1,167,266  | )           |   |             | 2,024,999   |            
|                                                                       | Salaries and employee benefits                                         |                |            | 3,806,811          |            |                   |             | 5,623,385  |            |      |            | 11,751,669  |             |   |             | 18,887,775  |            
|                                                                       | Commissions to agents                                                  |                |            | 2,016,829          |            |                   |             | 2,366,749  |            |      |            | 5,687,571   |             |   |             | 9,126,930   |            
|                                                                       | Other operating and underwriting expenses                              |                |            | 3,430,056          |            |                   |             | 6,499,368  |            |      |            | 11,536,264  |             |   |             | 17,645,629  |            
|                                                                       | Decrease (increase) in deferred acquisition
costs, net of amortization |                |            | (2,017,238         | )          |                   |             | 869,141    |            |      |            | 285,315     |             |   |             | 853,850     |            
|                                                                       |                                                                        |                |            |                    |            |                   |             |            |            |      |            |             |             |   |             |            
|                                                                       |                                                                        | Total expenses |            |                    | 34,144,131 |                   |             |            | 41,298,322 |      |            |             | 104,635,919 |   |             |             | 124,910,666 | 
|                                                                       |                                                                        |                |            |                    |            |                   |             |            |            |      |            |             |             |   |             |            
|Income (loss) before income taxes and
minority interest                |                                                                        |                | 532,460    |                    |            |                   | (13,444,339 | )          |            |      | (9,604,916 | )           |             |   | (41,791,480 | )          
|Income tax benefit (provision)                                         |                                                                        |                | (166,142   | )                  |            |                   | 18,824,088  |            |            |      | 3,381,306  |             |             |   | 28,704,459  |            
|                                                                       |                                                                        |                |            |                    |            |                   |             |            |            |      |            |             |             |   |             |            
|Income (loss) before minority interest                                 |                                                                        |                | 366,318    |                    |            |                   | 5,379,749   |            |            |      | (6,223,610 | )           |             |   | (13,087,021 | )          
|Income of consolidated subsidiaries
allocated to minority stockholders |                                                                        |                |           |                    |            |                   | (358,067    | )          |            |      | (57,671    | )           |             |   | (223,682    | )          
|                                                                       |                                                                        |                |            |                    |            |                   |             |            |            |      |            |             |             |   |             |            
|Net income (loss)                                                      |                                                                        |                | 366,318    |                    |            |                   | 5,021,682   |            |            |      | (6,281,281 | )           |             |   | (13,310,703 | )          
|Preferred stock dividends                                              |                                                                        |                | (1,268,639 | )                  |            |                   | (1,018,552  | )          |            |      | (3,255,349 | )           |             |   | (3,311,980  | )          
|                                                                       |                                                                        |                |            |                    |            |                   |             |            |            |      |            |             |             |   |             |            
|Income (loss) applicable to common stockholders                        |                                                                        | $              | (902,321   | )                  |            | $                 | 4,003,130   |            |            | $    | (9,536,630 | )           |             | $ | (16,622,683 | )          
|                                                                       |                                                                        |                |            |                    |            |                   |             |            |            |      |            |             |             |   |             |            

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





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##### Table of Contents






METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)

|                                                      |                                                    |                                                                                |           |                    |            |                   |           |            |            |      |            |           |            |   |             |           |           | 
|----------------------------------------------------- | -------------------------------------------------- | ------------------------------------------------------------------------------ | --------- | ------------------ | ---------- | ----------------- | --------- | ---------- | ---------- | ---- | ---------- | --------- | ---------- | - | ----------- | --------- | --------- | 
|                                                      |                                                    |                                                                                |           | Three Months Ended |            | Nine Months Ended
|                                                      |                                                    |                                                                                |           | June 30,           |            | June 30,         
|                                                      |                                                    |                                                                                |           |                    |            |                  
|                                                      |                                                    |                                                                                |           | 2002               |            | 2001              |           | 2002       |            | 2001
|                                                      |                                                    |                                                                                |           |                    |            |                   |           |            |            |     
|Net income (loss)                                     |                                                    | $                                                                              | 366,318   |                    |            | $                 | 5,021,682 |            |            | $    | (6,281,281 | )         |            | $ | (13,310,703 | )        
|                                                      |                                                    |                                                                                |           |                    |            |                   |           |            |            |      |            |           |            |   |             |          
|Other comprehensive income (loss), net of income tax: |                                                    |                                                                                |           |                    |            |                   |           |            |            |      |            |           |            |   |             |          
|                                                      | Cumulative effect of accounting change, net of tax |                                                                                |           | 0                  |            |                   |           | 0          |            |      |            | 0         |            |   |             | (240,994  | )        
|                                                      | Unrealized gains (losses) on investments:          |                                                                                |           |                    |            |                   |           |            |            |      |            |           |            |   |             |           |          
|                                                      |                                                    | Unrealized holding gains (losses) arising
during period *                      |           |                    | 8,958,622  |                   |           |            | (1,174,935 | )    |            |           | 6,087,082  |   |             |           | 5,737,251 | 
|                                                      |                                                    | Less: reclassification adjustment for
(gains) losses included in net income ** |           |                    | (4,271,582 | )                 |           |            | (97,324    | )    |            |           | (1,150,628 | ) |             |           | 1,289,981 | 
|                                                      |                                                    |                                                                                |           |                    |            |                   |           |            |            |      |            |           |            |   |             |          
|                                                      |                                                    | Unrealized gains (losses) on investments                                       |           |                    | 4,687,040  |                   |           |            | (1,272,259 | )    |            |           | 4,936,454  |   |             |           | 7,027,232 | 
|                                                      |                                                    |                                                                                |           |                    |            |                   |           |            |            |      |            |           |            |   |             |          
|                                                      | Net other comprehensive income (loss)              |                                                                                |           | 4,687,040          |            |                   |           | (1,272,259 | )          |      |            | 4,936,454 |            |   |             | 6,786,238 |          
|                                                      |                                                    |                                                                                |           |                    |            |                   |           |            |            |      |            |           |            |   |             |          
|Comprehensive income (loss)                           |                                                    | $                                                                              | 5,053,358 |                    |            | $                 | 3,749,423 |            |            | $    | (1,344,827 | )         |            | $ | (6,524,465  | )        
|                                                      |                                                    |                                                                                |           |                    |            |                   |           |            |            |      |            |           |            |   |             |          



---

|*  |  | Net of related tax of $4,666,151 and $(444,814) for the three months
ended June 30, 2002 and 2001, respectively, and $3,120,092 and $3,089,289
for the nine months ended June 30, 2002 and 2001, respectively.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|** |  | Net of related tax of $(2,300,082) and $(52,405) for the three months
ended June 30, 2002 and 2001, respectively, and $(619,569) and $694,605
for the nine months ended June 30, 2002 and 2001, respectively. 

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





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##### Table of Contents






METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(UNAUDITED)

|                                                                                                  |  |           |            |        |  |         |         |               |  |            |            |       |  |             |            |   |  |   |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------- |  | --------- | ---------- | ------ |  | ------- | ------- | ------------- |  | ---------- | ---------- | ----- |  | ----------- | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                  |  |           |            |        |  |         |         |               |  |            |            |       |  | Accumulated |            |   |  |   |            |   |  |  
|                                                                                                  |  |           |            |        |  |         |         |               |  | Additional |            | Other |  |             |            |   |  |   |            |  
|                                                                                                  |  | Preferred |            | Common |  | Paid-in |         | Comprehensive |  | Retained   |            |       |  |            
|                                                                                                  |  | Stock     |            | Stock  |  | Capital |         | Loss          |  | Earnings   |            | Total
|                                                                                                  |  |           |            |        |  |         |         |               |  |            |            |      
|Balance, October 1,
2001                                                                          |  | $         | 14,684,736 |        |  | $       | 218,250 |               |  | $          | 26,024,897 |       |  | $           | (4,474,411 | ) |  | $ | 4,459,018  |   |  | $ | 40,912,490 |  
|Net loss                                                                                          |  |           |            |        |  |         |         |               |  |            |            |       |  |             |            |   |  |   | (6,281,281 | ) |  |   | (6,281,281 | )
|Net unrealized gains
on available-for-
sale securities,
net of income
tax provision
of $2,500,523 |  |           |            |        |  |         |         |               |  |            |            |       |  |             | 4,936,454  |   |  |   |            |   |  |   | 4,936,454  |  
|Cash dividends,
common stock
($1,205 per share)                                                   |  |           |            |        |  |         |         |               |  |            |            |       |  |             |            |   |  |   | (175,334   | ) |  |   | (175,334   | )
|Cash dividends,
preferred stock
(variable rate)                                                   |  |           |            |        |  |         |         |               |  |            |            |       |  |             |            |   |  |   | (3,255,349 | ) |  |   | (3,255,349 | )
|Redemption and
retirement
of preferred stock
(95,277 shares)                                      |  |           | (952,772   | )      |  |         |         |               |  |            | (3,838,636 | )     |  |             |            |   |  |   |            |   |  |   | (4,791,408 | )
|Sale of variable rate
preferred stock,
net (20,822
shares)                                        |  |           | 2,082,207  |        |  |         |         |               |  |            | 17,425,159 |       |  |             |            |   |  |   |            |   |  |   | 19,507,366 |  
|                                                                                                  |  |           |            |        |  |         |         |               |  |            |            |       |  |             |            |   |  |   |            |   |  |   |            |  
|Balance, June 30,
2002                                                                            |  | $         | 15,814,171 |        |  | $       | 218,250 |               |  | $          | 39,611,420 |       |  | $           | 462,043    |   |  | $ | (5,252,946 | ) |  | $ | 50,852,938 |  
|                                                                                                  |  |           |            |        |  |         |         |               |  |            |            |       |  |             |            |   |  |   |            |   |  |   |            |  

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





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##### Table of Contents






METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                     |                                                                                                                     |                                                     |                                                                   |                                           |              |                   |            |              |             |            |            | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ----------------------------------------------------------------- | ----------------------------------------- | ------------ | ----------------- | ---------- | ------------ | ----------- | ---------- | ---------- | 
|                                     |                                                                                                                     |                                                     |                                                                   |                                           |              | Nine Months Ended
|                                     |                                                                                                                     |                                                     |                                                                   |                                           |              | June 30,         
|                                     |                                                                                                                     |                                                     |                                                                   |                                           |              |                  
|                                     |                                                                                                                     |                                                     |                                                                   |                                           |              | 2002              |            | 2001        
|                                     |                                                                                                                     |                                                     |                                                                   |                                           |              |                   |            |             
|Cash flow from operating activities: |                                                                                                                     |                                                     |                                                                   |                                           |              |                   |            |             
|                                     | Net loss                                                                                                            |                                                     | $                                                                 | (6,281,281                                | )            |                   | $          | (13,310,703  | )          
|                                     | Adjustments to reconcile net loss to
net cash from operating activities:                                            |                                                     |                                                                   |                                           |              |                   |            |              |            
|                                     |                                                                                                                     | Proceeds from sales of trading securities           |                                                                   |                                           | 13,590,118   |                   |            |              | 38,276,656  |           
|                                     |                                                                                                                     | Proceeds from maturities of trading securities      |                                                                   |                                           | 1,020,171    |                   |            |              | 5,044,525   |           
|                                     |                                                                                                                     | Purchases of trading securities                     |                                                                   |                                           | (4,669,460   | )                 |            |              | (40,549,270 | )         
|                                     |                                                                                                                     | Earned discount on receivables and investments      |                                                                   |                                           | (26,566,299  | )                 |            |              | (14,923,995 | )         
|                                     |                                                                                                                     | Net losses on investments and sales of receivables  |                                                                   |                                           | 12,743,597   |                   |            |              | 8,924,082   |           
|                                     |                                                                                                                     | Gains on sales of real estate                       |                                                                   |                                           | (1,377,921   | )                 |            |              | (238,231    | )         
|                                     |                                                                                                                     | Provision for losses on real estate assets          |                                                                   |                                           | 3,913,702    |                   |            |              | 8,229,952   |           
|                                     |                                                                                                                     | Provision for (recovery of) losses on other assets  |                                                                   |                                           | (1,167,266   | )                 |            |              | 2,024,999   |           
|                                     |                                                                                                                     | Depreciation and amortization                       |                                                                   |                                           | 3,846,021    |                   |            |              | 3,953,276   |           
|                                     |                                                                                                                     | Minority interests                                  |                                                                   |                                           | 57,671       |                   |            |              | 223,682     |           
|                                     |                                                                                                                     | Deferred income tax provision (benefit)             |                                                                   |                                           | 2,500,523    |                   |            |              | (8,703,999  | )         
|                                     |                                                                                                                     | Changes in assets and liabilities:                  |                                                                   |                                           |              |                   |            |              |             |           
|                                     |                                                                                                                     |                                                     | Deferred costs, net                                               |                                           |              | (158,045          | )          |              |             | 638,587    |           
|                                     |                                                                                                                     |                                                     | Life insurance and annuity reserves                               |                                           |              | 38,476,934        |            |              |             | 34,736,887 |           
|                                     |                                                                                                                     |                                                     | Compound and accrued interest on debenture
bonds and debt payable |                                           |              | 5,925,345         |            |              |             | 6,589,796  |           
|                                     |                                                                                                                     |                                                     | Accrued interest on receivables and investments                   |                                           |              | (6,658,968        | )          |              |             | (2,405,428 | )         
|                                     |                                                                                                                     |                                                     | Other assets                                                      |                                           |              | (8,294,883        | )          |              |             | (3,966,250 | )         
|                                     |                                                                                                                     |                                                     | Accounts payable and accrued expenses                             |                                           |              | (4,321,837        | )          |              |             | 8,020,651  |           
|                                     |                                                                                                                     |                                                     | Other, net                                                        |                                           |              | 359,692           |            |              |             | (504,008   | )         
|                                     |                                                                                                                     |                                                     |                                                                   |                                           |              |                   |            |             
|                                     |                                                                                                                     |                                                     |                                                                   | Net cash provided by operating
activities |              |                   | 22,937,814 |              |             |            | 32,061,209 | 
|                                     |                                                                                                                     |                                                     |                                                                   |                                           |              |                   |            |             
|Cash flow from investing activities: |                                                                                                                     |                                                     |                                                                   |                                           |              |                   |            |             
|                                     | Principal payments received on real estate
contracts and mortgage notes receivable and
other receivable investments |                                                     |                                                                   | 156,951,452                               |              |                   |            | 94,343,016   |            
|                                     | Proceeds from sales of real estate contracts
and mortgage notes receivable and other
receivable investments         |                                                     |                                                                   | 19,554,515                                |              |                   |            | 119,881,353  |            
|                                     | Proceeds from sales of real estate                                                                                  |                                                     |                                                                   | 9,921,637                                 |              |                   |            | 12,102,130   |            
|                                     | Proceeds from maturities of available-for-sale
investments                                                          |                                                     |                                                                   | 43,027,393                                |              |                   |            | 8,813,262    |            
|                                     | Proceeds from sales of available-for-sale investments                                                               |                                                     |                                                                   | 140,479,545                               |              |                   |            | 74,555,106   |            
|                                     | Acquisition of real estate contracts and mortgage
notes receivable                                                  |                                                     |                                                                   | (239,034,417                              | )            |                   |            | (189,156,320 | )          
|                                     | Acquisition of other receivable investments                                                                         |                                                     |                                                                   | (17,603,820                               | )            |                   |            | (10,003,112  | )          
|                                     | Purchases of available-for-sale investments                                                                         |                                                     |                                                                   | (266,618,363                              | )            |                   |            | (108,558,001 | )          
|                                     | Purchases of held-to-maturity investments                                                                           |                                                     |                                                                   | (25,944,429                               | )            |                   |            |             |            
|                                     | Purchases of and costs associated with real
estate held for sale and development                                    |                                                     |                                                                   | (5,690,615                                | )            |                   |            | (12,604,452  | )          
|                                     | Capital expenditures                                                                                                |                                                     |                                                                   | (791,777                                  | )            |                   |            | (549,095     | )          
|                                     |                                                                                                                     |                                                     |                                                                   |                                           |              |                   |            |             
|                                     |                                                                                                                     | Net cash provided by (used in) investing
activities |                                                                   |                                           | (185,748,879 | )                 |            |              | (11,176,113 | )         
|                                     |                                                                                                                     |                                                     |                                                                   |                                           |              |                   |            |             
|Cash flow from financing activities: |                                                                                                                     |                                                     |                                                                   |                                           |              |                   |            |             
|                                     | Increase (decrease) in debt payable                                                                                 |                                                     |                                                                   | 39,400,000                                |              |                   |            | (9,302,217   | )          
|                                     | Repayments of debt payable                                                                                          |                                                     |                                                                   | (1,596,497                                | )            |                   |            | (686,630     | )          
|                                     | Receipts from life and annuity products                                                                             |                                                     |                                                                   | 162,095,252                               |              |                   |            | 113,858,387  |            
|                                     | Withdrawals of life and annuity products                                                                            |                                                     |                                                                   | (85,715,436                               | )            |                   |            | (92,307,083  | )          
|                                     | Ceding of life and annuity products to
reinsurers                                                                   |                                                     |                                                                   | (26,684,890                               | )            |                   |            | 6,034,094    |            





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##### Table of Contents



|                                                        |                                                                     |                                           |             |                   |             |      |            |             |            | 
|------------------------------------------------------- | ------------------------------------------------------------------- | ----------------------------------------- | ----------- | ----------------- | ----------- | ---- | ---------- | ----------- | ---------- | 
|                                                        |                                                                     |                                           |             | Nine Months Ended
|                                                        |                                                                     |                                           |             | June 30,         
|                                                        |                                                                     |                                           |             |                  
|                                                        |                                                                     |                                           |             | 2002              |             | 2001
|                                                        |                                                                     |                                           |             |                   |             |     
|                                                        | Issuance of debenture bonds                                         |                                           |             | 66,934,049        |             |      |            | 45,201,635  |           
|                                                        | Repayment of debenture bonds                                        |                                           |             | (29,094,198       | )           |      |            | (11,224,800 | )         
|                                                        | Issuance of preferred stock                                         |                                           |             | 19,507,366        |             |      |            | 895,494     |           
|                                                        | Redemption and retirement of preferred stock                        |                                           |             | (4,791,408        | )           |      |            | (10,582,877 | )         
|                                                        | Repurchase of minority interest                                     |                                           |             | (2,434,602        | )           |      |            |            |           
|                                                        | Cash dividends                                                      |                                           |             | (3,430,683        | )           |      |            | (3,512,313  | )         
|                                                        |                                                                     |                                           |             |                   |             |      |            |            
|                                                        |                                                                     | Net cash provided by financing activities |             |                   | 134,188,953 |      |            |             | 38,373,690 | 
|                                                        |                                                                     |                                           |             |                   |             |      |            |            
|Net change in cash and cash equivalents                 |                                                                     |                                           | (28,622,112 | )                 |             |      | 59,258,786 |            
|Cash and cash equivalents:                              |                                                                     |                                           |             |                   |             |      |            |            
|                                                        | Beginning of period                                                 |                                           |             | 68,019,397        |             |      |            | 2,664,035   |           
|                                                        |                                                                     |                                           |             |                   |             |      |            |            
|                                                        | End of period                                                       |                                           | $           | 39,397,285        |             |      | $          | 61,922,821  |           
|                                                        |                                                                     |                                           |             |                   |             |      |            |            
|Non cash investing and financing activities of Company: |                                                                     |                                           |             |                   |             |      |            |            
|                                                        | Real estate acquired through foreclosure                            |                                           |             | 23,250,298        |             |      |            | 16,373,523  |           
|                                                        | Receivables originated to facilitate the sale of
real estate        |                                           |             | 2,400,280         |             |      |            | 575,590     |           
|                                                        | Transfer of investments from held-to-maturity to
available-for-sale |                                           |             |                  |             |      |            | 59,415,992  |           
|                                                        | Transfer of investments from trading to
available-for-sale          |                                           |             | 38,607,522        |             |      |            |            |           
|                                                        | Mortgage servicing rights retained from
securizations               |                                           |             |                  |             |      |            | 1,046,116   |           
|                                                        | Transfers between annuity products                                  |                                           |             | 40,023,788        |             |      |            | 79,168,414  |           
|                                                        | Timing difference on settlements of securities sales                |                                           |             | 4,147,031         |             |      |            |            |           
|                                                        | Timing difference on settlements of securities purchases            |                                           |             | 15,292,250        |             |      |            | 1,543,466   |           

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





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##### Table of Contents






METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position of Metropolitan Mortgage &
Securities Co., Inc. and subsidiaries (the Company or Consolidated Group)
as of June 30, 2002, the results of operations for the three months and nine
months ended June 30, 2002 and 2001 and the cash flows for the nine months
ended June 30, 2002 and 2001. The results of operations for the three months
and nine months ended June 30, 2002 and 2001 are not necessarily indicative of
the results to be expected for the full year. These financial statements
should be read in conjunction with the consolidated financial statements
including notes thereto included in the Companys fiscal 2001 Form 10-K.

Certain amounts in the prior years consolidated financial statements have
been reclassified to conform to the current years presentation. These
reclassifications had no effect on net income (loss) or retained earnings as
previously reported and were not considered material.

2. Segment Reporting

The Company principally operates in three industry segments which
encompass: (1) investing in real estate contracts and mortgage notes
receivable, other receivables and investment securities; (2) insurance and
annuity operations; and (3) property development activities. The insurance and
annuity segment also invests a substantial portion of the proceeds from
insurance and annuity operations in real estate contracts and mortgage notes
receivables, other receivables and investment securities. All transactions
between segments are eliminated. The Company allocates certain overhead and
operating expenses amongst its segments.

Information about the Companys separate business segments and in total as
of and for the nine and three month periods ended June 30, 2002 and 2001 is as
follows:

|                              |  |                                                         |             |             |  |             |               |              |  |              |            |  |  |   |            |   |  |   |               |  
|----------------------------- |  | ------------------------------------------------------- | ----------- | ----------- |  | ----------- | ------------- | ------------ |  | ------------ | ---------- |  |  | - | ---------- | - |  | - | ------------- | -
|                              |  | As of and for the nine month period ended June 30, 2002
|                              |  |                                                        
|                              |  |                                                         |             |             |  | Insurance   |               | Property     |  | Intersegment |            |  |  |  
|                              |  | Investing                                               |             | and Annuity |  | Development |               | Eliminations |  | Total       
|                              |  |                                                         |             |             |  |             |               |              |  |             
|Revenues                      |  | $                                                       | 17,446,430  |             |  | $           | 79,382,847    |              |  | $            | 1,450,214  |  |  | $ | (3,248,488 | ) |  | $ | 95,031,003    |  
|Income (loss) from operations |  |                                                         | (25,721,147 | )           |  |             | 15,224,686    |              |  |              | 891,545    |  |  |   | 0          |   |  |   | (9,604,916    | )
|Identifiable assets, net      |  |                                                         | 184,113,517 |             |  |             | 1,333,544,067 |              |  |              | 73,808,802 |  |  |   | 2,357,766  |   |  |   | 1,593,824,152 |  
|Depreciation and amortization |  |                                                         | 2,888,991   |             |  |             | 247,679       |              |  |              | 709,351    |  |  |   | 0          |   |  |   | 3,846,021     |  
|Capital expenditures          |  |                                                         | 635,102     |             |  |             | 156,675       |              |  |              | 0          |  |  |   | 0          |   |  |   | 791,777       |  

|                              |  |                                                          |             |             |  |             |               |              |  |              |            |  |  |   |            |   |  |   |               | 
|----------------------------- |  | -------------------------------------------------------- | ----------- | ----------- |  | ----------- | ------------- | ------------ |  | ------------ | ---------- |  |  | - | ---------- | - |  | - | ------------- | 
|                              |  | As of and for the three month period ended June 30, 2002
|                              |  |                                                         
|                              |  |                                                          |             |             |  | Insurance   |               | Property     |  | Intersegment |            |  |  |  
|                              |  | Investing                                                |             | and Annuity |  | Development |               | Eliminations |  | Total       
|                              |  |                                                          |             |             |  |             |               |              |  |             
|Revenues                      |  | $                                                        | 12,963,162  |             |  | $           | 22,625,920    |              |  | $            | 682,708    |  |  | $ | (1,595,199 | ) |  | $ | 34,676,591    | 
|Income (loss) from operations |  |                                                          | (2,738,269  | )           |  |             | 2,443,519     |              |  |              | 827,210    |  |  |   | 0          |   |  |   | 532,460       | 
|Identifiable assets, net      |  |                                                          | 184,113,517 |             |  |             | 1,333,544,067 |              |  |              | 73,808,802 |  |  |   | 2,357,766  |   |  |   | 1,593,824,152 | 
|Depreciation and amortization |  |                                                          | 1,076,053   |             |  |             | 82,710        |              |  |              | 209,152    |  |  |   | 0          |   |  |   | 1,367,915     | 
|Capital expenditures          |  |                                                          | 392,954     |             |  |             | 122,840       |              |  |              | 0          |  |  |   | 0          |   |  |   | 515,794       | 





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##### Table of Contents



|                              |  |                                                         |             |             |  |             |               |              |  |              |            |  |  |   |            |   |  |   |               |  
|----------------------------- |  | ------------------------------------------------------- | ----------- | ----------- |  | ----------- | ------------- | ------------ |  | ------------ | ---------- |  |  | - | ---------- | - |  | - | ------------- | -
|                              |  | As of and for the nine month period ended June 30, 2001
|                              |  |                                                        
|                              |  |                                                         |             |             |  | Insurance   |               | Property     |  | Intersegment |            |  |  |  
|                              |  | Investing                                               |             | and Annuity |  | Development |               | Eliminations |  | Total       
|                              |  |                                                         |             |             |  |             |               |              |  |             
|Revenues                      |  | $                                                       | 14,663,663  |             |  | $           | 72,100,782    |              |  | $            | 2,169,733  |  |  | $ | (5,814,992 | ) |  | $ | 83,119,186    |  
|Income (loss) from operations |  |                                                         | (41,436,242 | )           |  |             | (428,210      | )            |  |              | 72,972     |  |  |   | 0          |   |  |   | (41,791,480   | )
|Identifiable assets, net      |  |                                                         | 169,277,017 |             |  |             | 1,089,120,013 |              |  |              | 66,646,165 |  |  |   | 5,255,724  |   |  |   | 1,330,298,919 |  
|Depreciation and amortization |  |                                                         | 2,897,176   |             |  |             | 233,801       |              |  |              | 822,299    |  |  |   | 0          |   |  |   | 3,953,276     |  
|Capital expenditures          |  |                                                         | 515,576     |             |  |             | 33,519        |              |  |              | 0          |  |  |   | 0          |   |  |   | 549,095       |  

|                              |  |                                                          |             |             |  |             |               |              |  |              |            |   |  |   |            |   |  |   |               |  
|----------------------------- |  | -------------------------------------------------------- | ----------- | ----------- |  | ----------- | ------------- | ------------ |  | ------------ | ---------- | - |  | - | ---------- | - |  | - | ------------- | -
|                              |  | As of and for the three month period ended June 30, 2001
|                              |  |                                                         
|                              |  |                                                          |             |             |  | Insurance   |               | Property     |  | Intersegment |            |   |  |  
|                              |  | Investing                                                |             | and Annuity |  | Development |               | Eliminations |  | Total       
|                              |  |                                                          |             |             |  |             |               |              |  |             
|Revenues                      |  | $                                                        | (1,748,359  | )           |  | $           | 30,830,757    |              |  | $            | 264,269    |   |  | $ | (1,492,684 | ) |  | $ | 27,853,983    |  
|Income (loss) from operations |  |                                                          | (18,570,227 | )           |  |             | 5,217,828     |              |  |              | (91,940    | ) |  |   | 0          |   |  |   | (13,444,339   | )
|Identifiable assets, net      |  |                                                          | 169,277,017 |             |  |             | 1,089,120,013 |              |  |              | 66,646,165 |   |  |   | 5,255,724  |   |  |   | 1,330,298,919 |  
|Depreciation and amortization |  |                                                          | 1,893,379   |             |  |             | 145,192       |              |  |              | 554,199    |   |  |   | 0          |   |  |   | 2,592,770     |  
|Capital expenditures          |  |                                                          | 268,998     |             |  |             | 6,329         |              |  |              | 0          |   |  |   | 0          |   |  |   | 275,327       |  

3. Preferred Stock Split

On October 22, 2001, the Companys Board of Directors declared a stock
split of the Companys Variable Rate Cumulative Preferred Stock, Series E-7
(the Series E-7 Preferred Stock). On November 5, 2001, each outstanding share
of Series E-7 Preferred Stock was converted into four shares of Series E-7
Preferred Stock. Accordingly, the par value of each such share was adjusted
from $10.00 per share to $2.50 per share and the liquidation preference and
dividend calculation amount of each such share was adjusted from $100.00 per
share to $25.00 per share to reflect the split.




ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

These discussions may contain forward-looking statements. A
forward-looking statement may contain words such as will continue to be,
will be, continue to, expect to, anticipates that, to be, or can
impact. Management cautions that forward-looking statements are subject to
risks and uncertainties that could cause the Companys actual results to differ
materially from those projected in forward-looking statements.

General

Metropolitan was established in 1953. Through growth and acquisitions it
has developed into a diversified institution with assets exceeding $1.5
billion. Its principal subsidiaries are Western United Life Assurance Company
(Western or WULA), an annuity and life insurance company, and Metwest
Mortgage Services, Inc. (Metwest), a receivable servicer and loan originator.
The Company provides services to certain affiliated entities (the Affiliated
Companies) for a fee and engages in various business transactions with these
entities. The Affiliated Companies are National Summit Corp. and its principal
subsidiaries which include Summit Securities, Inc. (Summit), Old Standard
Life Insurance Company (Old Standard), Old West Life Insurance & Annuity
Company (Old West), Summit Property Development and Metropolitan Investment
Securities, Inc. (MIS). The Affiliated Companies are affiliated with the
Consolidated Group because of the common control of the Consolidated Group and
the Affiliated Companies by C. Paul Sandifur, Jr.

Critical Accounting Policies

The accounting policies described below are those that the Company
considers critical in preparing its Consolidated Financial Statements. These
policies include significant estimates made by management 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 Company in preparing its consolidated financial statements is included
in Note 2 of the Companys 2001 Form 10-K.





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##### Table of Contents



Asset Valuations

Investments

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



| |                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Trading Securities: Trading securities consist primarily of
mortgage- and asset-backed securities and are recorded at fair value
based on quoted market prices. Realized and unrealized gains and losses
on these securities are included in the consolidated statements of
operations.



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Available-for-Sale Securities:Available-for-sale securities,
consisting 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 Company continually
monitors its investment portfolio for other than temporary impairment of
its 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 upon 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, (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 to retain the
investment for a period of time sufficient to allow for anticipated
recovery. Additionally, for asset-backed securities the Company also
considers the credit rating and the amount of credit support available
for the security.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company holds debt securities generated from securitization
transactions. For securities without an established market price,
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, an
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.



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

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 (a) the fair value of the property at the date of foreclosure
less estimated selling costs, or (b) 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.





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##### Table of Contents



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.

Deferred Costs

Deferred acquisition costs, consisting of commissions to agents and other
insurance underwriting and annuity policy costs, are deferred. Cost for annuity
contracts and life insurance policies are 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 the consolidated statement of operations.

Allowances for Losses

Allowance for Losses on Real Estate Contracts and Mortgage Notes Receivable

Originated commercial loans are individually monitored for impairments.
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. If the estimated fair value of the collateral is less than the
carrying value, an allowance for loss is recognized. Additionally, the Company
has established a 0.25% allowance for losses that represent inherent losses
within the commercial loan portfolio at the balance sheet date.

The remaining real estate contracts and mortgage notes receivable
portfolio consists of a large group of smaller-balance homogenous loans that
are collectively evaluated for impairment. The Company establishes an allowance
for inherent losses (both principal and interest) on the receivables based
primarily on historical foreclosure and loss experience. To the extent actual
experience differs from assumptions, such adjustments would be included in
consolidated statement of operations.

Allowance for Losses on Real Estate Held for Sale and Development

The established allowance for losses on real estate held for sale and
development includes amounts for estimated losses as a result of an impairment
in value of the real property. The Company reviews its real estate properties
for impairment in value periodically or whenever events or circumstances
indicate that the carrying value of the asset may not be recoverable. The
carrying value of a repossessed property is determined as of the date of
repossession of the property. It is based on the lower of fair value or
carrying value at the time the property was repossessed. The fair value is
based on an appraisal by a licensed independent appraiser at the time of
repossession. If expected future undiscounted cash flows from the use of the
asset or the fair value, less selling costs, from the disposition of the asset
is less than its carrying value, an impairment is recognized in the
consolidated statement of operations.

Life Insurance and Annuity Reserves

Premiums for universal life insurance contracts and annuities are reported
as life insurance and annuity reserves under the deposit method. Reserves for
universal life insurance and annuities 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 possible changes in the factors
considered in the actuarial calculations, it is reasonably possible that the
reserves for insurance and annuities could change in the future.





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##### Table of Contents



Liquidity and Capital Resources

The objective of liquidity management is to provide funds at an acceptable
cost to meet demands for receivable purchases and commercial loans and to
service other liabilities as they become due. Managing liquidity also enables
the Company to take advantage of opportunities for business expansion. The
Company finances its business operations and growth with the proceeds from the
sale of debenture certificates and preferred stock, annuity and life insurance
products, a secured line of credit agreement, reverse repurchase agreements,
receivable cash flows, the sale of real estate, the sale of marketable
securities, and investment portfolio earnings.

Recently, the Company changed the focus of its receivable 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 Company has focused its receivable
investment activity on acquiring, originating and holding both residential real
estate loans and commercial loans. Historically, proceeds from securitizations
were primarily used to pay-down a secured line of credit that was used to fund
the acquisition of securitizable product. Therefore, the Company does not
believe 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 Company
competes with other financial institutions including ones with greater
resources and greater name recognition. Premium rates, annuity yields and
commissions to agents are particularly sensitive to competitive forces. The
Company believes that it is in an advantageous position in this regard because
of their earnings capability through investments in receivables compared to
that of most other life insurance companies. Additionally, the Company 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 Company is unable
to effectively price its annuities, offer competitive commissions and
effectively compete in general for the sale of our annuity products, its
liquidity could be adversely affected.

On October 25, 2001, A.M. Best announced that they were downgrading the
financial strength rating of Western from B+ (Very Good) to B (Fair). According
to A.M. Best, the rating action reflected Westerns significant investment in
mortgages, mortgage-backed bonds, real estate relative to surplus, decreased
surrender charge protection on annuity reserves and declining risk-adjusted
capitalization, as well as the weakened financial position of Metropolitan, the
parent organization. Partially offsetting these items were Westerns historic
profitability and ability to grow their core individual annuity lines of
business.

The Company anticipates that the change in ratings will result in a slight
increase to its cost of funds in addition to a slight increase in surrender
rates as current policies enter their surrender periods. Prior to the change in
ratings, the Company changed the focus of its receivable investment strategy
that has resulted in higher yields on investments. Therefore, a slight increase
in the cost of funds is expected to be offset by the higher yields obtained
through the new receivable investment strategy. In response to the rating
downgrade, Western has increased their capital through a $17.2 million sale of
common stock to Metropolitan in addition to focusing on issuing liabilities
with greater surrender charge protection. A.M. Best ratings are performed on an
annual basis and the Company does not anticipate any further rating changes in
the coming year.





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##### Table of Contents



In 1993, the State of Washington enacted the Risk-Based Capital Model law,
which requires an insurance company to maintain minimum amounts of capital and
surplus based on complex calculations of risk factors that encompass the
invested assets and business activities of the insurance company. Westerns
capital and surplus levels exceeded the calculated minimum requirements at
our statutory reporting period ended December 31, 2001. Recently, Western 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, Westerns ability to generate capital
from affiliates could be adversely affected, which in turn could negatively
affect their ability to increase its investments in higher risk-adjusted assets
such as commercial loans, real estate and equity investments.

Western 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 June
30, 2002, Western had a stock investment in the FHLB of approximately $3.5
million, which resulted in a borrowing capacity of approximately $70.0 million,
subject to collateral requirements. 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 pledge requirement
that ranges from 100% to 125%. At June 30, 2002, Western had pledged $218.3
million in eligible collateral with a market value of $222.0 million resulting
in a borrowing potential of $170.6 million. At June 30, 2002, Western had
approximately $61.4 million in outstanding borrowings leaving an unused
borrowing potential of approximately $9.6 million based on their FHLB stock
investment. In order to increase the unused borrowing potential to match the
amount of collateral pledged, Western would be required to purchase
approximately $5.0 million in additional FHLB stock.

Western has entered into a reinsurance agreement with Old Standard, which
became effective July 1, 1998 and remained in effect at June 30, 2002. Under
this agreement, Western can reinsure with Old Standard 75% of the risk on
certain annuity products. The reinsurance agreement is an ongoing arrangement
with no stated expiration or termination date, although each may stop and
restart at their discretion upon providing a 30-day advance written notice.

Metropolitan engages in public offerings of debt securities and preferred
stock. These investments are typically offered to the public on a continuous
best efforts basis through MIS, an affiliated company. At June 30, 2002, the
Company had registered for sale up to $150.0 million of Series III and Series
III-A Debenture Bonds. This debenture bond registration expires April 30,
2003. At June 30, 2002, the Company had registered for sale up to 6,000,000
shares of Series E-7 preferred stock that carry a $25 issue price for a total
preferred stock offering price of $150.0 million. This preferred stock
registration expires October 31, 2002.

Another source of liquidity is derived from payments received on
receivable cash flows and the sale of real estate. A decrease in the prepayment
rate on receivables or the ability to sell real estate would reduce future cash
flows from receivables. Additionally, to increase liquidity, the Company may
occasionally sell securities to a broker-dealer under the provision that we
will buy them back by a predetermined date for a specific price (i.e., reverse
repurchase agreement). At June 30, 2002, the Company did not have any reverse
repurchase agreements outstanding.

The Companys ability to sell available-for-sale investments for liquidity
purposes is partially affected by the laws of the State of Washington that
limit Westerns investments in real estate related assets to 65% of their
statutory assets. Western may not sell non-real estate related assets for
liquidity purposes if the re-investment of the sale proceeds will result in
real estate assets exceeding 65% of its statutory assets. However, occasionally
Western 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 can acquire qualifying
real estate loans in amounts in excess of the 65% limitation. At June 30, 2002,
Western had approximately 60% of its statutory admitted assets invested in real
estate related assets that did not qualify as SMMEA investments.

For statutory purposes, Western performs cash flow testing under seven
different rate scenarios. An opinion regarding the adequacy of the cash flow
testing is filed with the respective states. At December 31, 2001, the results
of this cash flow testing process were satisfactory.





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##### Table of Contents



During the nine month period ended June 30, 2002, $683.2 million in funds
provided by the Companys various liquidity sources were used to (1) invest
$558.1 million primarily in receivables and investments and (2) fund $153.7
million in debt maturities, annuity product surrenders, and the payment of
dividends.

During the nine month period ended June 30, 2001, $509.3 million in funds
provided by the Companys various liquidity sources were used to (1) invest
$322.4 million primarily in receivables and investments and (2) fund $127.6
million in debt maturities, annuity product surrenders, and the payment of
dividends.

Transactions with Affiliates

Summit was originally organized as a wholly owned subsidiary of
Metropolitan. On September 9, 1994, the controlling interest in Summit was
acquired by National Summit Corp., a Delaware corporation that is controlled by
C. Paul Sandifur, Jr. Following this sale, Metropolitan has continued to
provide, for a fee, principally all of Summits management services.

Mr. Sandifur holds effective control of Metropolitan. Prior to the sale,
Mr. Sandifur held effective control of Summit through Metropolitan. Following
the sale, Mr. Sandifur continues to control Summit through National Summit
Corp. Currently, no officer or director of Metropolitan is an officer or
director of Summit.

Metropolitan and Summit entered into the following purchase and sale
agreements during the nine month period ending June 30, 2002.

On March 28, 2002, Western agreed to sell to Old Standard and Old West a
69.20% undivided beneficial interest in a certain Lottery Trust owned by
Western. 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. Additionally, on March 29, 2002, Metropolitan
agreed to sell to Summit the remaining participation in certain structured
settlements that Summit acquired from Metropolitan during the fiscal year ended
September 30, 2000. The purchase price of approximately $4.8 million, which was
derived from future expected cash flows discounted at an 8.5% market rate,
resulted in a gain of approximately $0.2 million. The primary purpose of
entering into the lottery trust and structured settlement purchase and sale
agreements was to generate additional funds that could be used for commercial
lending activities.

On March 29, 2002, Metropolitan agreed to purchase Summits minority
investment in Consumers Group Holding Company, a subsidiary of Metropolitan.
The purchase price of approximately $2.3 million was based on an estimated fair
value of Consumers Group Holding of approximately two times the adjusted book
value, discounted to approximately the adjusted book value due to the minority
interest nature of the investment.

Delinquency

The principal amount of real estate receivables as to which payments were
in arrears more than three months was $39.2 million at June 30, 2002 and $19.5
million at June 30, 2001. The increase from June 30, 2001 to June 30, 2002 was
primarily due to a growth in the Companys commercial loan receivables, which
have principal balances that are larger than principal balances on residential
real estate receivables.

The principal amount of other receivables as to which payments were in
arrears more than three months was $10.5 million at June 30, 2002 and $8.5
million at June 30, 2001.





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##### Table of Contents



Results of Operations

Nine Months Ended June 30, 2002 Compared to Nine Months Ended June 30, 2001

Net loss for the nine month period ended June 30, 2002 was approximately
$6.3 million on $95.0 million in revenues compared to a net loss of $13.3
million on $83.1 million in revenues for the nine month period ended June 30,
2001. Loss before income taxes and minority interest for the nine month period
ended June 30, 2002 was approximately $9.6 million compared to a loss of
approximately $41.8 million for the nine month period ended June 30, 2001.

The decrease in loss before income taxes and minority interest of $32.2 million
was primarily due to:



| |  | an increase in net interest spread of $14.7 million,         
|- |  | -------------------------------------------------------------
| 
| |  | a decrease in loan loss provisions of $7.5 million,          
| 
| |  | a decrease in non-interest expense of $17.3 million and      
| 
| |  | an increase in gains on sales of real estate of $1.2 million.

These changes were partially offset by:



| |  | an increase in realized losses on investments of $3.7 million and          
|- |  | ---------------------------------------------------------------------------
| 
| |  | a reduction of fees, commissions, service and other income of $4.6 million.

Management monitors interest sensitive income and expenses as it manages
the objectives for the Companys results of operations. Interest sensitive
income consists of interest and earned discounts on receivables, insurance
revenues and other investment interest. Interest sensitive expense consists of
interest expense on borrowed money and insurance policy and annuity benefits.

The Company is in a liability sensitive position in that its interest
sensitive liabilities reprice or mature more quickly than do its interest
sensitive assets. Consequently, in a rising interest rate environment, the net
return from interest sensitive assets and liabilities will tend to decrease.
Conversely, in a falling interest rate environment, the net return from
interest sensitive assets and liabilities will tend to improve. The Company
believes there has not been a material change in its market risk since the end
of its last fiscal year.

During the nine month period ended June 30, 2002, the excess of interest
sensitive income over interest sensitive expense was approximately $27.9
million compared to $13.2 million in the prior years period. The increase
between periods was primarily the result of an increase in the Companys
commercial lending activities. During the nine month period ended June 30,
2002, the average monthly investment in interest earning assets was
approximately $1.1 billion compared to $0.9 billion during the same period the
previous year. Additionally, the Companys average net interest margin
increased to 4.14% through June 2002 compared to 2.42% through June 2001. As a
result of the increase in the net interest margin, the Company unlocked $0.4
million of deferred acquisition costs during the nine month period ended June
30, 2002.

The following table represents the average yields realized by the Company
on interest sensitive assets and liabilities during the nine month periods
ended June 30, 2002 and 2001 based on average monthly ending balances:

|                      |  |         |             |         |  |   |             |  
|--------------------- |  | ------- | ----------- | ------- |  | - | ----------- | -
|                      |  | 2002    |             | 2001   
|                      |  | Average |             | Average
|                      |  |         |             |        
|Investments           |  | $       | 416,112,646 |         |  | $ | 323,151,434 |  
|Yield                 |  |         | 7.27        | %       |  |   | 8.14        | %
|                      |  |         |             |         |  |   |             |  
|Real estate contracts |  |         | 477,438,881 |         |  |   | 397,031,497 |  
|Yield                 |  |         | 15.20       | %       |  |   | 10.80       | %
|                      |  |         |             |         |  |   |             |  
|Other receivables     |  |         | 173,156,878 |         |  |   | 183,491,606 |  
|Yield                 |  |         | 8.36        | %       |  |   | 8.92        | %
|                      |  |         |             |         |  |   |             |  
|Life reserves         |  |         | 901,748,248 |         |  |   | 804,091,774 |  
|Yield                 |  |         | 5.82        | %       |  |   | 6.30        | %
|                      |  |         |             |         |  |   |             |  
|Debentures            |  |         | 328,138,483 |         |  |   | 259,477,456 |  
|Yield                 |  |         | 8.92        | %       |  |   | 8.85        | %
|                      |  |         |             |         |  |   |             |  
|Debt payable          |  |         | 52,856,395  |         |  |   | 40,242,886  |  
|Yield                 |  |         | 5.09        | %       |  |   | 7.64        | %





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##### Table of Contents



During the nine month period ended June 30, 2002, the Company determined
that certain available-for-sale residual and other interest only certificates
retained from its securitization activities had other than temporary declines
in value. Accordingly, the carrying value of the investments were decreased by
approximately $8.5 million, representing the amount impaired. The declines in
value were primarily the result of an increase in loss severity and prepayment
rates of the underlying collateral. The Company continues to periodically
assess the assumptions used in valuing the cash flows and the related carrying
value of securities generated from its securitization activities. Additionally,
the Company reported approximately $2.6 million in other than temporary
impairments on certain asset-backed fixed income securities due to a
deterioration of the underlying collateral.

A $4.8 million decline in various equity securities which had previously
been deemed as temporary, was determined to be other than temporary at June 30,
2002 due to the length of time and extent that the investments have traded
below cost. The decline in value was primarily the result of an overall decline
in the value of stocks traded on the NASDAQ.

The other than temporary impairments on the equity and fixed income
securities have been recorded in the statement of operations as a loss on
investments. The other than temporary impairment losses during the nine month
period ended June 30, 2002 were partially offset by approximately $1.9 million
of gains realized on the sale of other investment securities.

During the nine month period ended June 30, 2001, the Company reported a
$10.2 million loss on investments. The losses resulted primarily from other
than temporary declines in value due to a downgrading of certain securities and
a deterioration of the expected future cash flows of certain residual
certificates. Additionally, the Company realized a loss on the sale of a
certain investment. Of the $10.7 million loss reported as a result of sales and
other than temporary impairments, $6.4 million had previously been reported as
a temporary decline in accumulated other comprehensive loss in stockholders
equity. Additionally, the Company realized gains of $1.6 million on the sale of
other investments that were partially offset by mark to market losses of $1.1
million on equity and other trading investments.

In January 2001, the Company announced a change in its receivable
investment strategy away from acquiring residential real estate loans for
securitization purposes to acquiring and holding both residential real estate
loans and commercial loans. When the Company was investing primarily in
residential real estate loans, the allowance for loss was calculated using a
large group of homogeneous loans that were collectively evaluated for
impairment. However, for commercial loans, the Company individually evaluates
each loan for impairment in accordance with FAS114, Accounting by Creditors
for Impairment of a Loan, as amended by FAS118 Accounting by Creditors for
Impairment of a Loan  Income Recognition and Disclosure. FAS114 addresses the
accounting by creditors for impairments of a loan by specifying how allowances
for credit losses related to certain loans should be determined. According to
FAS114, 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. If the estimated fair value of the collateral
is less than the carrying value, an allowance for loss is recognized.
Additionally, the Company established a 0.25% allowance for losses that
represent inherent losses within the commercial loan portfolio at the balance
sheet date.





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##### Table of Contents



The change in receivable investment strategy, which has resulted in a
change in the mix of receivables being reserved using a specific reserve
methodology (commercial loans) versus a homogeneous pool methodology
(residential loans), has contributed to the loan loss provisions decreasing to
approximately $3.9 million during the nine month period ended June 30, 2002
compared to $8.2 million during the similar nine month period ended June 30,
2001. Additionally, during the nine month period ended June 30, 2001 the
Company reserved approximately $1.0 million for non-recoverable servicer
advances and late charges related to an April 2001 servicing sale.

Provision for losses on other assets decreased from $2.0 million during
the nine month period ended June 30, 2001 to a $1.2 million reserve release
during the similar time period ended June 30, 2002. The $2.0 million reserve
requirement during the nine month period ended June 30, 2001 was the result of
the Company adjusting its loss reserve assumptions on equipment lease
receivables based on historical experience. The Company, which no longer
originates equipment leases, expects that the loss allowance at June 30, 2002
will be adequate to cover the expected future losses that are inherent in the
equipment lease receivable portfolio as of June 30, 2002. The $1.2 million
reserve release during the nine month period ended June 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.

The following table summarizes changes in the Companys allowance for
losses on real estate and other assets for the nine month periods ended June
30, 2002 and 2001:

|                                                   |  |          |            |      |  |   |            |  
|-------------------------------------------------- |  | -------- | ---------- | ---- |  | - | ---------- | -
|                                                   |  | June 30,
|                                                   |  |         
|                                                   |  | 2002     |            | 2001
|                                                   |  |          |            |     
|Beginning balance                                  |  | $        | 17,171,224 |      |  | $ | 15,050,114 |  
|Provision for losses on real estate assets         |  |          | 3,913,702  |      |  |   | 8,229,952  |  
|Provision for (recovery of) losses on other
assets |  |          | (1,167,266 | )    |  |   | 2,024,999  |  
|Charge-offs, net                                   |  |          | (6,837,697 | )    |  |   | (9,346,886 | )
|                                                   |  |          |            |      |  |   |            |  
|Ending balance                                     |  | $        | 13,079,963 |      |  | $ | 15,958,179 |  
|                                                   |  |          |            |      |  |   |            |  

Gains on sales of receivables were approximately $1.2 million during the
nine month periods ended June 30, 2002 and June 30, 2001, respectively. The
gains in the current period were primarily due to a $0.8 million gain on the
sale of other receivable investments to our affiliates. Western agreed to sell
to Old Standard and Old West a 69.20% undivided beneficial interest in a
certain Lottery Trust owned by Western. The purchase price of $11.2 million was
derived from future expected cash flows discounted at a 6.957% market rate.
Additionally, Metropolitan agreed to sell to Summit the remaining participation
in certain structured settlements that Summit acquired from Metropolitan during
the fiscal year ended September 30, 2000. The purchase price of approximately
$4.8 million was derived from future expected cash flows discounted at an 8.5%
market rate. The primary purpose of entering into the Lottery Trust and
structured settlement purchase and sale agreements was to generate additional
funds for Metropolitan that could be used for commercial lending activities.

Non-interest expense consists of all non-interest expenses except the cost
of real estate sold and provision for losses. Non-interest expense was
approximately $29.3 million for the nine month period ended June 30, 2002
compared to $46.6 million for the similar period ended June 30, 2001. The
reduction in non-interest expenses during the current period was primarily the
result of (1) a reduction in full time equivalent employees and other operating
expenses as a result of the Companys planned exit from loan servicing and
certain loan origination functions, (2) a $4.6 million increase in
administrative expenses charged to affiliates in accordance with established
cost sharing agreements, and (3) a reduction in deferred policy acquisition
amortization of $4.4 million due primarily to lower than expected surrender
rates. The reduction in non-interest expenses during the current period was
partially offset by a $3.0 million reduction
in loan servicing fee income during the period due to the Companys exit
from loan servicing activities in 2001.





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##### Table of Contents



Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001

Net income for the three month period ended June 30, 2002 was
approximately $0.4 million on $34.7 million in revenues compared to a net
income of $5.0 million on $27.9 million in revenues for the three month period
ended June 30, 2001. Income before income taxes and minority interest for the
three months ended June 30, 2002 was approximately $0.5 million compared to a
loss of approximately $13.4 million for the three months ended June 30, 2001.

The decrease in loss before income taxes and minority interest of $13.9 million
was primarily due to:



| |  | an increase in net interest spread of $6.7 million,            
|- |  | ---------------------------------------------------------------
| 
| |  | a decrease in loan loss provisions of $2.5 million,            
| 
| |  | a decrease in non-interest expense of $8.1 million,            
| 
| |  | an increase in gains on sale of receivables of $1.7 million and
| 
| |  | An increase in gains on sales of real estate of $1.3 million.  

These changes were partially offset by:



| |  | an increase in losses on investments of $4.3 million and                   
|- |  | ---------------------------------------------------------------------------
| 
| |  | a reduction of fees, commissions, service and other income of $2.0 million.

During the three month period ended June 30, 2002, the excess of interest
sensitive income over interest sensitive expense was approximately $11.1
million compared to $4.4 million in the prior years comparable period. The
increase between periods was primarily the result of an increase in the
Companys commercial lending activities.

During the three month period ended June 30, 2002, the Company determined
that certain available-for-sale residual and other interest only certificates
retained from its securitization activities had other than temporary declines
in value. Accordingly, the carrying value of the investments were decreased by
approximately $3.9 million, representing the amount impaired. The declines in
value were primarily the result of an increase in loss severity and prepayment
rates of the underlying collateral. The Company continues to periodically
assess the assumptions used in valuing the cash flows and the related carrying
value of securities generated from its securitization activities. Additionally,
the Company reported approximately $1.3 million in other than temporary
impairments on certain asset-backed fixed income securities due to a
deterioration of the underlying collateral.

A $1.0 million decline in various equity securities which had previously
been deemed as temporary, was determined to be other than temporary at June 30,
2002 due to the length of time and extent that the investments have traded
below cost. The decline in value was primarily the result of an overall decline
in the value of stocks traded on the NASDAQ.

The other than temporary impairments on the equity and fixed income
securities have been recorded in the statement of operations as a loss on
investments. The other than temporary impairment losses during the three month
period ended June 30, 2002 were partially offset by approximately $0.7 million
of gains realized on the sale of other investment securities.

During the three month period ended June 30, 2001, the Company reported a
$1.1 million loss on investments. The losses resulted from other than temporary
declines in value due to a deterioration of expected future cash flows of
certain residual certificates. Accordingly, the Company recorded a $2.7 million
charge to investment losses. The impairment charges were partially offset by
mark to market gains on equity and other trading investments of $0.9 million
and gains on investment sales of $0.7 million.





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##### Table of Contents



In January 2001, the Company announced a change in its receivable
investment strategy away from acquiring residential real estate loans for
securitization purposes to acquiring and holding both residential real estate
loans and commercial loans. When the Company was investing primarily in
residential real estate loans, the allowance for loss was calculated using a
large group of homogeneous loans that were collectively evaluated for
impairment. For commercial loans, the Company individually evaluates each loan
for impairment in accordance with FAS114, Accounting by Creditors for
Impairment of a Loan, as amended by FAS118 Accounting by Creditors for
Impairment of a Loan  Income Recognition and Disclosure. FAS114 addresses the
accounting by creditors for impairments of a loan by specifying how allowances
for credit losses related to certain loans should be determined. According to
FAS114, 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. If the estimated fair value of the collateral
is less than the carrying value, an allowance for loss is recognized.
Additionally, the Company established a 0.25% allowance for losses that
represent inherent losses within the commercial loan portfolio at the balance
sheet date.

The change in receivable investment strategy, which has resulted in a
change in the mix of receivables being reserved for using a specific reserve
methodology (commercial loans) versus a homogeneous pool methodology
(residential loans), has contributed to the loan loss provisions decreasing to
approximately $2.0 million during the three month period ended June 30, 2002
compared to $3.3 million during the similar three month period ended June 30,
2001.

Provision for losses on other assets decreased from $0.1 million during
the three month period ended June 30, 2001 to a $1.2 million reserve release
during the similar time period ended June 30, 2002. The $0.1 million reserve
requirement during the three month period ended June 30, 2001 was the result of
the Company adjusting its loss reserve assumptions on equipment lease
receivables based on historical experience. The Company, which no longer
originates equipment leases, expects that the loss allowance at June 30, 2002
will be adequate to cover the expected future losses that are inherent in the
equipment lease receivable portfolio as of June 30, 2002. The $1.2 million
reserve release during the three month period ended June 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.

The following table summarizes changes in the Companys allowance for
losses on real estate and other assets for the three month periods ended June
30, 2002 and 2001:

|                                                    |  |          |            |      |  |   |            |  
|--------------------------------------------------- |  | -------- | ---------- | ---- |  | - | ---------- | -
|                                                    |  | June 30,
|                                                    |  |         
|                                                    |  | 2002     |            | 2001
|                                                    |  |          |            |     
|Beginning balance                                   |  | $        | 17,291,146 |      |  | $ | 16,300,890 |  
|Provision for losses on real estate assets          |  |          | 2,033,832  |      |  |   | 3,338,995  |  
|Provisions for (recovery of) losses on
other assets |  |          | (1,167,266 | )    |  |   | 55,065     |  
|Charge-offs, net                                    |  |          | (3,317,536 | )    |  |   | (3,736,771 | )
|                                                    |  |          |            |      |  |   |            |  
|Ending balance                                      |  | $        | 14,840,176 |      |  | $ | 15,958,179 |  
|                                                    |  |          |            |      |  |   |            |  

No gains on sales of receivables were realized during the three month
period ended June 30, 2002 compared to approximately $1.7 million losses on
sales of receivables during the similar time period ended June 30, 2001.
During the three month period ended June 30, 2001, the Company recorded a $2
million receivable loss to reduce the carrying value to market value as a
result of pursuing the sale of the remaining lease receivable portfolio.





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##### Table of Contents



Non-interest expense consists of all non-interest expenses except the cost
of real estate sold and provision for losses. Non-interest expense was
approximately $7.3 million for the three month period ended June 30, 2002
compared to $15.4 million for the similar period ended June 30, 2001. The
reduction in non-interest expenses during the current period was primarily the
result of (1) a reduction in full time equivalent employees and other operating
expenses as a result of the Companys planned exit from loan servicing and
certain loan origination functions, (2) a $1.8 million increase in
administrative expenses charged to affiliates in accordance with established
cost sharing agreements, and (3) a reduction in deferred policy acquisition
amortization of $3.4 million due primarily to lower than expected surrender
rates. The reduction in non-interest expenses during the current period was
partially offset by a $1.5 million reduction in loan servicing fee income
during the period due to the Companys exit from loan servicing activities in
2001.

New Accounting Rules

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 Company is currently evaluating
the impact of this statement on the Companys consolidated financial
statements.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management monitors interest sensitive income and expenses as it manages
the objectives for the Companys results of operations. Interest sensitive
income consists of interest and earned discounts on receivables, insurance
revenues and other investment interest. Interest sensitive expense consists of
interest expense on borrowed money and insurance policy and annuity benefits.

The Company is in a liability sensitive position in that its interest
sensitive liabilities reprice or mature more quickly than do its interest
sensitive assets. Consequently, in a rising interest rate environment, the net
return from interest sensitive assets and liabilities will tend to decrease.
Conversely, in a falling interest rate environment, the net return from
interest sensitive assets and liabilities will tend to improve. The Company
believes there has not been a material change in its market risk since the end
of its last fiscal year.

During the nine month period ended June 30, 2002, the excess of interest
sensitive income over interest sensitive expense was approximately $27.9
million compared to $13.2 million in the prior years period. The increase
between periods was primarily the result of an increase in the Companys
commercial lending activities. During the nine month period ended June 30,
2002, the average monthly investment in interest earning assets was
approximately $1.1 billion compared to $0.9 billion during the same period the
previous year. Additionally, the Companys average net interest margin
increased to 4.14% through June 2002 compared to 2.42% through June 2001

During the three month period ended June 30, 2002, the excess of interest
sensitive income over interest sensitive expense was approximately $11.1
million compared to $4.4 million in the prior years period. The increase
between periods was primarily the result of an increase in the Companys
commercial lending activities.

PART II-OTHER INFORMATION




ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

|    |          |     
|--- | -------- | ----
|(a) | Exhibits |     
|    |          |     
|    |          | None





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##### Table of Contents



|    |                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | During the quarter ended June 30, 2002, the Registrant filed the following
report on Form 8-K:                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                  
|    | Form 8-K dated April 5, 2002, filed April 25, 2002, reporting the
resolution of the board of directors relating to distributions on the
Registrants Variable Rate Cumulative Preferred Stock, Series E-7 in
excess of the base rate, under Item 5, Other Events.





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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on this 14th day of August,
2002 on its behalf by the undersigned, thereunto duly authorized.

| |                                                                   
| | ------------------------------------------------------------------
| | METROPOLITAN MORTGAGE & SECURITIES CO., INC                       
|
| | /s/ C. PAUL SANDIFUR, JR                                          
| |                                                                   
| | C. Paul Sandifur, Jr.
Chairman, President, Chief Executive Officer
|
| | /s/ ROBERT A. NESS                                                
| |                                                                   
| | Robert A. Ness
Principal Accounting Officer