##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-Q

|   |  |                                                                                              
|-- |  | ---------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. 
|  
|   |  | For the quarterly period ended March 31,
    2003                                            
|  
|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                                                         |  | 91-0609840                              
|(State or other jurisdiction of
    incorporation or organization) |  | (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 þ          No o

Indicate by check mark whether the registrant is
an accelerated
filer     Yes o          No þ

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
April 30, 2003.

Common B: 0 shares at
April 30, 2003.




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TABLE OF CONTENTS



|                                                                                                    |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION                                                                    
|PART I -- FINANCIAL INFORMATION                                                                    
|METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES 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                                                         
|PART II -- OTHER INFORMATION                                                                       
|SIGNATURES                                                                                         
|CERTIFICATIONS                                                                                     
|CERTIFICATIONS                                                                                     



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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 March 31,
    2003 and September 30, 2002                                                                          |  |  | 3 | 
|        |  | Consolidated Statements of Operations, Three
    Months Ended March 31, 2003 and 2002, Six Months Ended
    March 31, 2003 and 2002                  |  |  | 4 | 
|        |  | Consolidated Statements of Comprehensive Income
    (Loss), Three Months Ended March 31, 2003 and 2002, Six
    Months Ended March 31, 2003 and 2002 |  |  | 5 | 
|        |  | Consolidated Statement of Stockholders
    Equity, Six Months Ended March 31, 2003                                                                  |  |  | 6 | 
|        |  | Consolidated Statements of Cash Flows, Six Months
    Ended March 31, 2003 and 2002                                                                  |  |  | 7 | 
|        |  | Notes to Consolidated Financial Statements                                                                                                           |  |  | 9 | 

2



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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

|                                                                         |                                                                                                                                                                                                                                                              |                                            |               |               |               |   |               |             |               | 
|------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------------- | ------------- | ------------- | - | ------------- | ----------- | ------------- | 
|                                                                         |                                                                                                                                                                                                                                                              | March 31,                                  |               | September 30,
|                                                                         |                                                                                                                                                                                                                                                              | 2003                                       |               | 2002         
|                                                                         |                                                                                                                                                                                                                                                              |                                            |               |              
|                                                                         |                                                                                                                                                                                                                                                              | (Unaudited)                                |               |              
|ASSETS                                                                  
|Cash and cash equivalents                                                |                                                                                                                                                                                                                                                              | $                                          | 23,438,381    |               |               | $ | 68,317,397    |            
|Investments:                                                             |                                                                                                                                                                                                                                                              |                                            |               |               |               |   |               |            
|                                                                         | Available-for-sale securities, at fair value                                                                                                                                                                                                                 |                                            |               | 345,042,714   |               |   |               | 495,060,513 |              
|                                                                         | Held-to maturity securities, at amortized cost                                                                                                                                                                                                               |                                            |               | 275,062,858   |               |   |               | 40,228,608  |              
|                                                                         | Accrued interest on investments                                                                                                                                                                                                                              |                                            |               | 3,230,307     |               |   |               | 3,195,679   |              
|                                                                         |                                                                                                                                                                                                                                                              |                                            |               |               |               |   |               |            
|                                                                         |                                                                                                                                                                                                                                                              | Total investments                          |               |               | 623,335,879   |   |               |             | 538,484,800   | 
|                                                                         |                                                                                                                                                                                                                                                              |                                            |               |               |               |   |               |            
|Receivables:                                                             |                                                                                                                                                                                                                                                              |                                            |               |               |               |   |               |            
|                                                                         | Real estate contracts and mortgage notes and
    other receivables, net of discounts and origination fees,
    including $18,946,825 and $13,246,825 due from affiliates                                                                                     |                                            |               | 931,218,807   |               |   |               | 762,424,455 |              
|                                                                         | Less allowance for losses on receivables                                                                                                                                                                                                                     |                                            |               | (18,852,734   | )             |   |               | (11,339,002 | )            
|                                                                         |                                                                                                                                                                                                                                                              |                                            |               |               |               |   |               |            
|                                                                         |                                                                                                                                                                                                                                                              | Net receivables                            |               |               | 912,366,073   |   |               |             | 751,085,453   | 
|                                                                         |                                                                                                                                                                                                                                                              |                                            |               |               |               |   |               |            
|Other assets:                                                            |                                                                                                                                                                                                                                                              |                                            |               |               |               |   |               |            
|                                                                         | Real estate held for sale and development at the
    lower of cost or market, net of allowances of $2,680,097 and
    $1,998,448                                                                                                                             |                                            |               | 112,146,783   |               |   |               | 106,979,005 |              
|                                                                         | Reinsurance receivable                                                                                                                                                                                                                                       |                                            |               | 147,661,562   |               |   |               | 148,392,448 |              
|                                                                         | Deferred costs, net                                                                                                                                                                                                                                          |                                            |               | 82,013,623    |               |   |               | 80,412,809  |              
|                                                                         | Land, buildings and equipment, net                                                                                                                                                                                                                           |                                            |               | 26,866,366    |               |   |               | 27,365,485  |              
|                                                                         | Deferred income tax benefit                                                                                                                                                                                                                                  |                                            |               | 14,690,870    |               |   |               | 7,625,033   |              
|                                                                         | Current income taxes receivable                                                                                                                                                                                                                              |                                            |               | 11,584,043    |               |   |               | 14,240,000  |              
|                                                                         | Due from affiliates                                                                                                                                                                                                                                          |                                            |               | 2,528,604     |               |   |               | 8,672,929   |              
|                                                                         | Other assets, net                                                                                                                                                                                                                                            |                                            |               | 29,562,117    |               |   |               | 35,543,441  |              
|                                                                         |                                                                                                                                                                                                                                                              |                                            |               |               |               |   |               |            
|                                                                         |                                                                                                                                                                                                                                                              | Total other assets                         |               |               | 427,053,968   |   |               |             | 429,231,150   | 
|                                                                         |                                                                                                                                                                                                                                                              |                                            |               |               |               |   |               |            
|                                                                         |                                                                                                                                                                                                                                                              | Total assets                               |               | $             | 1,986,194,301 |   |               | $           | 1,787,118,800 | 
|                                                                         |                                                                                                                                                                                                                                                              |                                            |               |               |               |   |               |            
|LIABILITIES                                                             
|Life insurance and annuity reserves                                      |                                                                                                                                                                                                                                                              | $                                          | 1,335,594,297 |               |               | $ | 1,225,660,253 |            
|Debenture bonds and accrued interest                                     |                                                                                                                                                                                                                                                              |                                            | 385,431,501   |               |               |   | 355,465,932   |            
|Debt payable, including $11,285,742 and
    $3,197,355 due to affiliates |                                                                                                                                                                                                                                                              |                                            | 172,095,506   |               |               |   | 123,138,257   |            
|Accounts payable and accrued expenses                                    |                                                                                                                                                                                                                                                              |                                            | 9,977,829     |               |               |   | 9,574,039     |            
|Minority interest in subsidiaries                                        |                                                                                                                                                                                                                                                              |                                            | 9,317,878     |               |               |   |              |            
|                                                                         |                                                                                                                                                                                                                                                              |                                            |               |               |               |   |               |            
|                                                                         |                                                                                                                                                                                                                                                              | Total liabilities                          |               |               | 1,912,417,011 |   |               |             | 1,713,838,481 | 
|                                                                         |                                                                                                                                                                                                                                                              |                                            |               |               |               |   |               |            
|Stockholders equity:                                                    |                                                                                                                                                                                                                                                              |                                            |               |               |               |   |               |            
|                                                                         | Preferred stock, Series A, B, C, D, E, G and
    H cumulative with variable rate, $10 par value,
    13,325,000 shares authorized, 1,127,073 shares and
    1,167,096 shares issued and outstanding (liquidation
    preference $29,515,499 and $31,458,375) |                                            |               | 11,270,733    |               |   |               | 11,670,954  |              
|                                                                         | Preferred stock, Series E-7 cumulative with
    variable rate, $2.50 par value, 10,000,000 shares
    authorized, 2,784,851 shares and 1,959,943 shares
    issued and outstanding (liquidation preference $69,621,283 and
    $48,998,581)                  |                                            |               | 6,962,128     |               |   |               | 4,899,857   |              
|                                                                         | Common stock, Class A, $2,250 par,
    97 shares issued and outstanding                                                                                                                                                                                      |                                            |               | 218,250       |               |   |               | 218,250     |              
|                                                                         | Common stock, Class B, $2,250 par, no shares
    issued and outstanding                                                                                                                                                                                      |                                            |               |              |               |   |               |            |              
|                                                                         | Additional paid-in capital                                                                                                                                                                                                                                   |                                            |               | 63,665,704    |               |   |               | 49,836,670  |              
|                                                                         | Accumulated other comprehensive income                                                                                                                                                                                                                       |                                            |               | 3,867,656     |               |   |               | 3,291,285   |              
|                                                                         | Retained earnings (deficit)                                                                                                                                                                                                                                  |                                            |               | (12,207,181   | )             |   |               | 3,363,303   |              
|                                                                         |                                                                                                                                                                                                                                                              |                                            |               |               |               |   |               |            
|                                                                         |                                                                                                                                                                                                                                                              | Total stockholders equity                 |               |               | 73,777,290    |   |               |             | 73,280,319    | 
|                                                                         |                                                                                                                                                                                                                                                              |                                            |               |               |               |   |               |            
|                                                                         |                                                                                                                                                                                                                                                              | Total liabilities and stockholders equity |               | $             | 1,986,194,301 |   |               | $           | 1,787,118,800 | 
|                                                                         |                                                                                                                                                                                                                                                              |                                            |               |               |               |   |               |            

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

3



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##### Table of Contents






METROPOLITAN MORTGAGE & SECURITIES
CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                               |                                                                                                                                                                                          |                              |             |                            |            |      |             |            |            |   |             |             |            |   |             |            |            | 
|---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | ----------- | -------------------------- | ---------- | ---- | ----------- | ---------- | ---------- | - | ----------- | ----------- | ---------- | - | ----------- | ---------- | ---------- | 
|                                                                                               |                                                                                                                                                                                          |                              |             |                           
|                                                                                               |                                                                                                                                                                                          | Three Months Ended March 31, |             | Six Months Ended March 31,
|                                                                                               |                                                                                                                                                                                          |                              |             |                           
|                                                                                               |                                                                                                                                                                                          | 2003                         |             | 2002                       |            | 2003 |             | 2002      
|                                                                                               |                                                                                                                                                                                          |                              |             |                            |            |      |             |           
|                                                                                               |                                                                                                                                                                                          |                             
|                                                                                               |                                                                                                                                                                                          | (Unaudited)                 
|Revenues:                                                                                      |                                                                                                                                                                                          |                              |             |                            |            |      |             |            |            |   |             |             |            |   |             |           
|                                                                                               | Insurance premiums and annuity considerations                                                                                                                                            |                              | $           | 360,822                    |            |      | $           | 462,008    |            |   | $           | 764,583     |            |   | $           | 933,179    |           
|                                                                                               | Interest on receivables                                                                                                                                                                  |                              |             | 23,624,527                 |            |      |             | 12,135,399 |            |   |             | 42,809,680  |            |   |             | 24,402,985 |           
|                                                                                               | Earned discount on receivables and investments                                                                                                                                           |                              |             | 7,209,698                  |            |      |             | 8,186,275  |            |   |             | 14,943,843  |            |   |             | 17,130,762 |           
|                                                                                               | Other investment income, including $518,495,
    $256,170, $835,094 and $512,341 from affiliates                                                                                         |                              |             | 8,696,662                  |            |      |             | 7,649,054  |            |   |             | 17,749,913  |            |   |             | 15,348,956 |           
|                                                                                               | Real estate sales                                                                                                                                                                        |                              |             | 4,994,962                  |            |      |             | 3,575,708  |            |   |             | 10,033,078  |            |   |             | 5,915,122  |           
|                                                                                               | Fees, commissions, service and other income,
    including $220,256, $236,298, $550,698 and $456,796 from
    affiliates                                                                 |                              |             | 1,922,874                  |            |      |             | 1,721,211  |            |   |             | 3,334,449   |            |   |             | 3,463,422  |           
|                                                                                               | Net losses on investments                                                                                                                                                                |                              |             | (12,300,358                | )          |      |             | (9,737,630 | )          |   |             | (15,407,002 | )          |   |             | (8,534,453 | )         
|                                                                                               | Net gains on sales of receivables, including
    gains of $0, $0, $0 and $839,856 from affiliates                                                                                        |                              |             | 14,635                     |            |      |             | 828,127    |            |   |             |            |            |   |             | 1,176,102  |           
|                                                                                               |                                                                                                                                                                                          |                              |             |                            |            |      |             |            |            |   |             |             |            |   |             |           
|                                                                                               |                                                                                                                                                                                          | Total revenues               |             |                            | 34,523,822 |      |             |            | 24,820,152 |   |             |             | 74,228,544 |   |             |            | 59,836,075 | 
|                                                                                               |                                                                                                                                                                                          |                              |             |                            |            |      |             |            |            |   |             |             |            |   |             |           
|Expenses:                                                                                      |                                                                                                                                                                                          |                              |             |                            |            |      |             |            |            |   |             |             |            |   |             |           
|                                                                                               | Insurance policy and annuity benefits, including
    $2,616,031, $395,242, $4,868,869 and $3,528,792 net from
    affiliates                                                             |                              |             | 15,669,103                 |            |      |             | 12,457,949 |            |   |             | 31,262,734  |            |   |             | 25,626,272 |           
|                                                                                               | Interest, net, including $296,501, $99,767,
    $384,370 and $215,359 from affiliates                                                                                                    |                              |             | 9,217,138                  |            |      |             | 7,482,723  |            |   |             | 17,954,674  |            |   |             | 15,130,198 |           
|                                                                                               | Cost of real estate sold                                                                                                                                                                 |                              |             | 4,520,591                  |            |      |             | 3,531,177  |            |   |             | 9,186,258   |            |   |             | 5,831,088  |           
|                                                                                               | Provision for losses                                                                                                                                                                     |                              |             | 8,176,038                  |            |      |             | 917,039    |            |   |             | 11,668,362  |            |   |             | 1,879,870  |           
|                                                                                               | Salaries and employee benefits                                                                                                                                                           |                              |             | 4,546,753                  |            |      |             | 3,823,927  |            |   |             | 8,371,754   |            |   |             | 7,944,858  |           
|                                                                                               | Commissions to agents, net of $1,864, $373,346,
    $13,525 and $382,985 ceded to affiliates                                                                                             |                              |             | 3,276,225                  |            |      |             | 1,648,370  |            |   |             | 7,257,991   |            |   |             | 3,670,742  |           
|                                                                                               | Other operating and underwriting expenses, net of
    capitalization of contracts acquisition costs (includes
    $1,591,319, $1,285,528, $3,309,280 and $2,948,178 from
    affiliates) |                              |             | 5,936,072                  |            |      |             | 3,691,759  |            |   |             | 10,523,334  |            |   |             | 7,587,870  |           
|                                                                                               | Amortization of deferred policy acquisition
    costs, net of costs capitalized                                                                                                          |                              |             | (9,122                     | )          |      |             | 1,582,393  |            |   |             | (1,130,072  | )          |   |             | 2,302,553  |           
|                                                                                               |                                                                                                                                                                                          |                              |             |                            |            |      |             |            |            |   |             |             |            |   |             |           
|                                                                                               |                                                                                                                                                                                          | Total expenses               |             |                            | 51,332,798 |      |             |            | 35,135,337 |   |             |             | 95,095,035 |   |             |            | 69,973,451 | 
|                                                                                               |                                                                                                                                                                                          |                              |             |                            |            |      |             |            |            |   |             |             |            |   |             |           
|Loss before income taxes and minority interest                                                 |                                                                                                                                                                                          |                              | (16,808,976 | )                          |            |      | (10,315,185 | )          |            |   | (20,866,491 | )           |            |   | (10,137,376 | )         
|Income tax benefit                                                                             |                                                                                                                                                                                          |                              | 5,953,656   |                            |            |      | 3,578,908   |            |            |   | 7,373,380   |             |            |   | 3,547,448   |           
|                                                                                               |                                                                                                                                                                                          |                              |             |                            |            |      |             |            |            |   |             |             |            |   |             |           
|Loss before minority interest                                                                  |                                                                                                                                                                                          |                              | (10,855,320 | )                          |            |      | (6,736,277  | )          |            |   | (13,493,111 | )           |            |   | (6,589,928  | )         
|(Income) loss of consolidated subsidiaries
    allocated to minority stockholders              |                                                                                                                                                                                          |                              | (274,913    | )                          |            |      | 31,111      |            |            |   | (274,913    | )           |            |   | (57,671     | )         
|                                                                                               |                                                                                                                                                                                          |                              |             |                            |            |      |             |            |            |   |             |             |            |   |             |           
|Net loss                                                                                       |                                                                                                                                                                                          |                              | (11,130,233 | )                          |            |      | (6,705,166  | )          |            |   | (13,768,024 | )           |            |   | (6,647,599  | )         
|Preferred stock dividends, including $52,084,
    $50,319, $103,242 and $101,477 to affiliates |                                                                                                                                                                                          |                              | (1,982,842  | )                          |            |      | (1,050,364  | )          |            |   | (3,726,857  | )           |            |   | (1,986,710  | )         
|                                                                                               |                                                                                                                                                                                          |                              |             |                            |            |      |             |            |            |   |             |             |            |   |             |           
|Loss applicable to common stockholders                                                         |                                                                                                                                                                                          | $                            | (13,113,075 | )                          |            | $    | (7,755,530  | )          |            | $ | (17,494,881 | )           |            | $ | (8,634,309  | )         
|                                                                                               |                                                                                                                                                                                          |                              |             |                            |            |      |             |            |            |   |             |             |            |   |             |           

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

4



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES
CO., INC. AND SUBSIDIARIES






CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)


|                                                          |                                           |                                                                           |             |                            |            |      |            |           |           |   |             |         |            |   |            |         |            |  
|--------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------------------------- | ----------- | -------------------------- | ---------- | ---- | ---------- | --------- | --------- | - | ----------- | ------- | ---------- | - | ---------- | ------- | ---------- | -
|                                                          |                                           |                                                                           |             |                           
|                                                          |                                           | Three Months Ended March 31,                                              |             | Six Months Ended March 31,
|                                                          |                                           |                                                                           |             |                           
|                                                          |                                           | 2003                                                                      |             | 2002                       |            | 2003 |            | 2002     
|                                                          |                                           |                                                                           |             |                            |            |      |            |          
|                                                          |                                           |                                                                          
|                                                          |                                           | (Unaudited)                                                              
|Net loss                                                  |                                           | $                                                                         | (11,130,233 | )                          |            | $    | (6,705,166 | )         |           | $ | (13,768,024 | )       |            | $ | (6,647,599 | )      
|Other comprehensive income (loss), net of
    income tax: |                                           |                                                                           |             |                            |            |      |            |           |           |   |             |         |            |   |            |        
|                                                          | Unrealized gains (losses) on investments: |                                                                           |             |                            |            |      |            |           |           |   |             |         |            |   |            |         |           
|                                                          |                                           | Unrealized holding gains (losses) arising
    during period(1)            |             |                            | (6,893,942 | )    |            |           | 1,264,519 |   |             |         | (9,418,757 | ) |            |         | (2,871,540 | )
|                                                          |                                           | Less reclassification adjustment for losses
    included in net income(2) |             |                            | 7,995,233  |      |            |           | 3,827,594 |   |             |         | 9,995,128  |   |            |         | 3,120,954  |  
|                                                          |                                           |                                                                           |             |                            |            |      |            |           |           |   |             |         |            |   |            |        
|                                                          | Net other comprehensive gains             |                                                                           |             | 1,101,291                  |            |      |            | 5,092,113 |           |   |             | 576,371 |            |   |            | 249,414 |           
|                                                          |                                           |                                                                           |             |                            |            |      |            |           |           |   |             |         |            |   |            |        
|Comprehensive loss                                        |                                           | $                                                                         | (10,028,942 | )                          |            | $    | (1,613,053 | )         |           | $ | (13,191,653 | )       |            | $ | (6,398,185 | )      
|                                                          |                                           |                                                                           |             |                            |            |      |            |           |           |   |             |         |            |   |            |        



---



|    |                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net of related tax of ($3,712,122) and $672,113
    during the three months ended March 31, 2003 and 2002 and
    ($5,074,449) and ($1,546,059) during the six months ended
    March 31, 2003 and 2002, respectively.
|   
|(2) | Net of related tax of $4,305,125 and $2,061,011
    during the three months ended March 31, 2003 and 2002 and
    $5,381,992 and $1,680,513 during the six months ended
    March 31, 2003 and 2002, respectively.    

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

5



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES
CO., INC. AND SUBSIDIARIES






CONSOLIDATED STATEMENT OF STOCKHOLDERS
EQUITY


|                                                                                                   |  |             |            |        |  |            |         |               |  |           |            |       |  |   |           |  |  |   |             |   |  |   |             |  
|-------------------------------------------------------------------------------------------------- |  | ----------- | ---------- | ------ |  | ---------- | ------- | ------------- |  | --------- | ---------- | ----- |  | - | --------- |  |  | - | ----------- | - |  | - | ----------- | -
|                                                                                                   |  |             |            |        |  |            |         | Accumulated   |  |           |            |      
|                                                                                                   |  |             |            |        |  | Additional |         | Other         |  | Retained  |            |      
|                                                                                                   |  | Preferred   |            | Common |  | Paid-in    |         | Comprehensive |  | Earnings  |            |      
|                                                                                                   |  | Stock       |            | Stock  |  | Capital    |         | Income        |  | (Deficit) |            | Total
|                                                                                                   |  |             |            |        |  |            |         |               |  |           |            |      
|                                                                                                   |  |            
|                                                                                                   |  | (Unaudited)
|Balance, October 1, 2002                                                                           |  | $           | 16,570,811 |        |  | $          | 218,250 |               |  | $         | 49,836,670 |       |  | $ | 3,291,285 |  |  | $ | 3,363,303   |   |  | $ | 73,280,319  |  
|Net loss                                                                                           |  |             |            |        |  |            |         |               |  |           |            |       |  |   |           |  |  |   | (13,768,024 | ) |  |   | (13,768,024 | )
|Net unrealized gains on available-for-sale
    securities, net of income tax provision of $307,543 |  |             |            |        |  |            |         |               |  |           |            |       |  |   | 576,371   |  |  |   |             |   |  |   | 576,371     |  
|Cash dividends, common ($1,305 per share)                                                          |  |             |            |        |  |            |         |               |  |           | (68,184    | )     |  |   |           |  |  |   | (58,445     | ) |  |   | (126,629    | )
|Cash dividends, preferred (variable rate)                                                          |  |             |            |        |  |            |         |               |  |           | (1,982,842 | )     |  |   |           |  |  |   | (1,744,015  | ) |  |   | (3,726,857  | )
|Redemption and retirement variable rate of
    preferred stock (55,703 shares)                     |  |             | (442,082   | )      |  |            |         |               |  |           | (1,917,555 | )     |  |   |           |  |  |   |             |   |  |   | (2,359,637  | )
|Sale of variable rate preferred stock, net
    (840,589 shares)                                    |  |             | 2,104,132  |        |  |            |         |               |  |           | 17,797,615 |       |  |   |           |  |  |   |             |   |  |   | 19,901,747  |  
|                                                                                                   |  |             |            |        |  |            |         |               |  |           |            |       |  |   |           |  |  |   |             |   |  |   |             |  
|Balance, March 31, 2003                                                                            |  | $           | 18,232,861 |        |  | $          | 218,250 |               |  | $         | 63,665,704 |       |  | $ | 3,867,656 |  |  | $ | (12,207,181 | ) |  | $ | 73,777,290  |  
|                                                                                                   |  |             |            |        |  |            |         |               |  |           |            |       |  |   |           |  |  |   |             |   |  |   |             |  

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

6



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES
CO., INC. AND SUBSIDIARIES CONDENSED






CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                     |                                                                                                                                                                     |                                                                                           |                                                                       |                                           |             |            |              |              |             |            |              |  
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------- | ----------- | ---------- | ------------ | ------------ | ----------- | ---------- | ------------ | -
|                                     |                                                                                                                                                                     |                                                                                          
|                                     |                                                                                                                                                                     | Six Months Ended March 31,                                                               
|                                     |                                                                                                                                                                     |                                                                                          
|                                     |                                                                                                                                                                     | 2003                                                                                      |                                                                       | 2002                                     
|                                     |                                                                                                                                                                     |                                                                                           |                                                                       |                                          
|                                     |                                                                                                                                                                     |                                                                                          
|                                     |                                                                                                                                                                     | (Unaudited)                                                                              
|Cash flow from operating activities: |                                                                                                                                                                     |                                                                                           |                                                                       |                                           |             |            |              |             
|                                     | Net loss                                                                                                                                                            |                                                                                           | $                                                                     | (13,768,024                               | )           |            | $            | (6,647,599   | )          
|                                     | Adjustments to reconcile net loss to net cash
    provided by operating activities:                                                                                 |                                                                                           |                                                                       |                                           |             |            |              |              |            
|                                     |                                                                                                                                                                     | Proceeds from sales of trading securities                                                 |                                                                       |                                           |            |            |              |              | 13,590,118  |           
|                                     |                                                                                                                                                                     | Proceeds from maturities of trading securities                                            |                                                                       |                                           |            |            |              |              | 1,020,171   |           
|                                     |                                                                                                                                                                     | Acquisition of trading securities                                                         |                                                                       |                                           |            |            |              |              | (4,669,460  | )         
|                                     |                                                                                                                                                                     | Earned discount on receivables and investments                                            |                                                                       |                                           | (14,943,843 | )          |              |              | (17,130,762 | )         
|                                     |                                                                                                                                                                     | Losses on investments and receivables, net,
    including $0 and $839,856 from affiliates |                                                                       |                                           | 15,407,002  |            |              |              | 7,358,351   |           
|                                     |                                                                                                                                                                     | Gains on sales of real estate                                                             |                                                                       |                                           | (846,820    | )          |              |              | (84,034     | )         
|                                     |                                                                                                                                                                     | Provision for losses                                                                      |                                                                       |                                           | 11,668,362  |            |              |              | 1,879,870   |           
|                                     |                                                                                                                                                                     | Depreciation and amortization                                                             |                                                                       |                                           | 2,244,170   |            |              |              | 2,478,106   |           
|                                     |                                                                                                                                                                     | Minority interests                                                                        |                                                                       |                                           | 274,913     |            |              |              | 57,671      |           
|                                     |                                                                                                                                                                     | Deferred income tax benefit                                                               |                                                                       |                                           | (2,862,181  | )          |              |              | 134,454     |           
|                                     |                                                                                                                                                                     | Changes in assets and liabilities:                                                        |                                                                       |                                           |             |            |              |              |             |           
|                                     |                                                                                                                                                                     |                                                                                           | Deferred cost, net                                                    |                                           |             | (1,600,814 | )            |              |             | 1,725,292  |             
|                                     |                                                                                                                                                                     |                                                                                           | Life insurance and annuity reserves                                   |                                           |             | 26,238,894 |              |              |             | 25,249,790 |             
|                                     |                                                                                                                                                                     |                                                                                           | Compound and accrued interest on debenture bonds
    and debt payable |                                           |             | 4,321,010  |              |              |             | 2,627,222  |             
|                                     |                                                                                                                                                                     |                                                                                           | Accrued interest on receivables and investments                       |                                           |             | (8,136,839 | )            |              |             | (5,952,112 | )           
|                                     |                                                                                                                                                                     |                                                                                           | Other assets                                                          |                                           |             | 9,349,670  |              |              |             | 1,349,849  |             
|                                     |                                                                                                                                                                     |                                                                                           | Accounts payable and accrued expenses                                 |                                           |             | 5,093,837  |              |              |             | (5,063,967 | )           
|                                     |                                                                                                                                                                     |                                                                                           |                                                                       |                                           |             |            |              |             
|                                     |                                                                                                                                                                     |                                                                                           |                                                                       | Net cash provided by operating activities |             |            | 32,439,337   |              |             |            | 17,922,960   |  
|                                     |                                                                                                                                                                     |                                                                                           |                                                                       |                                           |             |            |              |             
|Cash flow from investing activities: |                                                                                                                                                                     |                                                                                           |                                                                       |                                           |             |            |              |             
|                                     | Proceeds from maturities of available-for-sale
    securities                                                                                                       |                                                                                           |                                                                       | 29,926,829                                |             |            |              | 33,577,077   |            
|                                     | Proceeds from sales of available-for-sale
    securities                                                                                                            |                                                                                           |                                                                       | 177,923,899                               |             |            |              | 83,012,301   |            
|                                     | Purchases of available-for-sale securities,
    including $0 and $2,325,945 from affiliates                                                                         |                                                                                           |                                                                       | (342,402,551                              | )           |            |              | (213,055,238 | )          
|                                     | Proceeds from maturities of held-to-maturity
    securities                                                                                                         |                                                                                           |                                                                       | 28,414,698                                |             |            |              |             |            
|                                     | Principal payments received on real estate
    contracts and mortgage notes and other receivable investments,
    including $1,000,000 and $653,975 from affiliates |                                                                                           |                                                                       | 91,504,234                                |             |            |              | 68,519,607   |            
|                                     | Proceeds from sales of real estate contracts and
    mortgage notes and other receivable investments, including
    $1,023,333 and $16,038,118 from affiliates      |                                                                                           |                                                                       | 1,081,866                                 |             |            |              | 24,127,272   |            
|                                     | Purchases and originations of real estate
    contracts and mortgage notes and other receivable investments,
    including $10,497,431 and $911,596 from affiliates |                                                                                           |                                                                       | (244,799,233                              | )           |            |              | (137,145,619 | )          
|                                     | Proceeds from sales of real estate                                                                                                                                  |                                                                                           |                                                                       | 10,033,078                                |             |            |              | 5,915,122    |            
|                                     | Purchases of and costs associated with real
    estate held for sale and development, including $247,042 and $0
    from affiliates                                 |                                                                                           |                                                                       | (9,825,349                                | )           |            |              | (4,168,130   | )          
|                                     | Capital expenditures                                                                                                                                                |                                                                                           |                                                                       | (731,886                                  | )           |            |              | (275,983     | )          
|                                     |                                                                                                                                                                     |                                                                                           |                                                                       |                                           |             |            |              |             
|                                     |                                                                                                                                                                     |                                                                                           |                                                                       | Net cash used in investing activities     |             |            | (258,874,415 | )            |             |            | (139,493,591 | )
|                                     |                                                                                                                                                                     |                                                                                           |                                                                       |                                           |             |            |              |             

7



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES
CO., INC. AND SUBSIDIARIES CONDENSED


CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)

|                                                            |                                                                                                |                                           |             |             |             |  |             |             |            | 
|----------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ----------------------------------------- | ----------- | ----------- | ----------- |  | ----------- | ----------- | ---------- | 
|                                                            |                                                                                                |                                          
|                                                            |                                                                                                | Six Months Ended March 31,               
|                                                            |                                                                                                |                                          
|                                                            |                                                                                                | 2003                                      |             | 2002       
|                                                            |                                                                                                |                                           |             |            
|                                                            |                                                                                                |                                          
|                                                            |                                                                                                | (Unaudited)                              
|Cash flow from financing activities:                        |                                                                                                |                                           |             |             |             |  |             |            
|                                                            | Receipts from life and annuity products                                                        |                                           |             | 148,432,054 |             |  |             | 75,461,674  |           
|                                                            | Withdrawals of life and annuity products                                                       |                                           |             | (69,256,308 | )           |  |             | (56,503,287 | )         
|                                                            | Ceding of life and annuity products to affiliated
    reinsurers                               |                                           |             |            |             |  |             | (6,097,779  | )         
|                                                            | Ceding of life and annuity products from
    affiliated reinsurers                             |                                           |             | 5,046,919   |             |  |             | 9,626,571   |           
|                                                            | Proceeds from issuance of debenture bonds                                                      |                                           |             | 59,275,071  |             |  |             | 55,768,204  |           
|                                                            | Repayments of debenture bonds                                                                  |                                           |             | (33,442,404 | )           |  |             | (24,044,690 | )         
|                                                            | Increase in debt payable, including $8,088,387
    and $(713,927) from affiliates              |                                           |             | 83,300,000  |             |  |             | 19,286,073  |           
|                                                            | Repayments of debt payable                                                                     |                                           |             | (34,530,859 | )           |  |             | (401,590    | )         
|                                                            | Issuance of preferred stock                                                                    |                                           |             | 19,901,747  |             |  |             | 8,652,855   |           
|                                                            | Redemption and retirement of preferred stock                                                   |                                           |             | (2,359,637  | )           |  |             | (3,042,951  | )         
|                                                            | Minority interest purchase of subsidiary, net of
    dividends paid                            |                                           |             | 9,042,965   |             |  |             |            |           
|                                                            | Repurchase of minority interest                                                                |                                           |             |            |             |  |             | (2,325,945  | )         
|                                                            | Cash dividends, including $103,242 and $101,477
    to affiliates                              |                                           |             | (3,853,486  | )           |  |             | (2,103,599  | )         
|                                                            |                                                                                                |                                           |             |             |             |  |             |            
|                                                            |                                                                                                | Net cash provided by financing activities |             |             | 181,556,062 |  |             |             | 74,275,536 | 
|                                                            |                                                                                                |                                           |             |             |             |  |             |            
|Net change in cash and cash equivalents                     |                                                                                                |                                           | (44,879,016 | )           |             |  | (47,295,095 | )          
|Cash and cash equivalents:                                  |                                                                                                |                                           |             |             |             |  |             |            
|                                                            | Beginning of period                                                                            |                                           |             | 68,317,397  |             |  |             | 68,019,397  |           
|                                                            |                                                                                                |                                           |             |             |             |  |             |            
|                                                            | End of period                                                                                  |                                           | $           | 23,438,381  |             |  | $           | 20,724,302  |           
|                                                            |                                                                                                |                                           |             |             |             |  |             |            
|Non cash investing and financing activities of
    Company: |                                                                                                |                                           |             |             |             |  |             |            
|                                                            | Real estate held for sale and development
    acquired through foreclosure                     |                                           | $           | 6,382,780   |             |  | $           | 21,812,232  |           
|                                                            | Transfers between annuity products                                                             |                                           |             | 14,806,169  |             |  |             | 18,397,682  |           
|                                                            | Transfer of investments from available-for-sale
    portfolio to held-to-maturity portfolio(1) |                                           |             | 262,518,789 |             |  |             |            |           
|                                                            | Transfer of investments from trading portfolio to
    available-for-sale portfolio             |                                           |             |            |             |  |             | 38,607,522  |           



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | During the six months ended March 31, 2003,
    the Company transferred $262.5 million of securities from
    its available-for-sale portfolio to its held-to-maturity
    portfolio. The securities transferred included those securities
    pledged as collateral to secure the FHLB line of credit
    agreement. The Company has the intent and ability to hold these
    securities until maturity.

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

8



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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 March 31, 2003, the results of
operations for the three months and six months ended
March 31, 2003 and 2002 and the cash flows for the six
months ended March 31, 2003 and 2002. The results of
operations for the three months and six months ended
March 31, 2003 and 2002 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 2002 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.



|   |                  
|-- | -----------------
|2. | Segment Reporting

The Company principally operates in three
industry segments which encompass: (1) insurance and
annuity operations (Insurance), including investing
in Receivables with funds generated from the issuance of annuity
products and parent company capital contributions;
(2) property development activities and (3) investing
activities (consisting primarily of the assets and operations of
Metropolitan Mortgage & Securities Co., Inc., the
parent company) using funds generated from the issuance of
investment certificates and preferred stock that have not been
used as capital contributions to the insurance segment.
Historically, a portion of the proceeds generated from the sale
of debt and equity securities have been contributed by the
parent to its insurance subsidiary to provide capital.
Therefore, the identifiable assets of the investing segment,
which excludes investments in subsidiaries, are less than the
total outstanding investment certificates and preferred stock of
the parent. Interest costs associated with the investing segment
activities are not allocated to the annuity operations. All
transactions between segments are eliminated. The Company
allocates certain overhead and operating expenses amongst its
segments.

9



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES
CO., INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Information about the Companys separate
business segments and in total as of and for the six-month and
three-month periods ended March 31, 2003 and 2002 is as
follows (see MD&A for discussion of significant items):

|                              |  |                                                         |               |             |  |           |            |              |  |       |             |   |  |   |            |   |  |   |               |  
|----------------------------- |  | ------------------------------------------------------- | ------------- | ----------- |  | --------- | ---------- | ------------ |  | ----- | ----------- | - |  | - | ---------- | - |  | - | ------------- | -
|                              |  |                                                        
|                              |  | As of and for the Six Month Period Ended March 31, 2003
|                              |  |                                                        
|                              |  |                                                         |               | Property    |  |           |            | Intersegment |  |      
|                              |  | Insurance                                               |               | Development |  | Investing |            | Eliminations |  | Total
|                              |  |                                                         |               |             |  |           |            |              |  |      
|Revenues                      |  | $                                                       | 73,646,607    |             |  | $         | 4,504,923  |              |  | $     | (738,040    | ) |  | $ | (3,184,946 | ) |  | $ | 74,228,544    |  
|Income (loss) from operations |  |                                                         | 6,990,178     |             |  |           | 1,086,825  |              |  |       | (28,943,494 | ) |  |   |           |   |  |   | (20,866,491   | )
|Identifiable assets, net      |  |                                                         | 1,679,119,087 |             |  |           | 89,302,544 |              |  |       | 221,566,957 |   |  |   | (3,794,287 | ) |  |   | 1,986,194,301 |  
|Depreciation and amortization |  |                                                         | 258,495       |             |  |           | 320,646    |              |  |       | 1,665,029   |   |  |   |           |   |  |   | 2,244,170     |  
|Capital expenditures          |  |                                                         | 200,960       |             |  |           |           |              |  |       | 530,926     |   |  |   |           |   |  |   | 731,886       |  

|                              |  |                                                           |               |             |  |           |            |              |  |       |             |   |  |   |            |   |  |   |               |  
|----------------------------- |  | --------------------------------------------------------- | ------------- | ----------- |  | --------- | ---------- | ------------ |  | ----- | ----------- | - |  | - | ---------- | - |  | - | ------------- | -
|                              |  |                                                          
|                              |  | As of and for the Three Month Period Ended March 31, 2003
|                              |  |                                                          
|                              |  |                                                           |               | Property    |  |           |            | Intersegment |  |      
|                              |  | Insurance                                                 |               | Development |  | Investing |            | Eliminations |  | Total
|                              |  |                                                           |               |             |  |           |            |              |  |      
|Revenues                      |  | $                                                         | 47,666,243    |             |  | $         | 2,108,895  |              |  | $     | (13,408,870 | ) |  | $ | (1,842,446 | ) |  | $ | 34,523,822    |  
|Income (loss) from operations |  |                                                           | 1,829,294     |             |  |           | 698,588    |              |  |       | (19,336,858 | ) |  |   |           |   |  |   | (16,808,976   | )
|Identifiable assets, net      |  |                                                           | 1,679,119,087 |             |  |           | 89,302,544 |              |  |       | 221,566,957 |   |  |   | (3,794,287 | ) |  |   | 1,986,194,301 |  
|Depreciation and amortization |  |                                                           | 173,244       |             |  |           | 138,781    |              |  |       | 802,464     |   |  |   |           |   |  |   | 1,114,489     |  
|Capital expenditures          |  |                                                           | 166,423       |             |  |           |           |              |  |       | (68,479     | ) |  |   |           |   |  |   | 97,944        |  

|                              |  |                                                         |               |             |  |           |            |              |  |       |             |   |  |   |            |   |  |   |               |  
|----------------------------- |  | ------------------------------------------------------- | ------------- | ----------- |  | --------- | ---------- | ------------ |  | ----- | ----------- | - |  | - | ---------- | - |  | - | ------------- | -
|                              |  |                                                        
|                              |  | As of and for the Six Month Period Ended March 31, 2002
|                              |  |                                                        
|                              |  |                                                         |               | Property    |  |           |            | Intersegment |  |      
|                              |  | Insurance                                               |               | Development |  | Investing |            | Eliminations |  | Total
|                              |  |                                                         |               |             |  |           |            |              |  |      
|Revenues                      |  | $                                                       | 56,869,486    |             |  | $         | 767,506    |              |  | $     | 3,852,372   |   |  | $ | (1,653,289 | ) |  | $ | 59,836,075    |  
|Income (loss) from operations |  |                                                         | 12,781,167    |             |  |           | 64,335     |              |  |       | (22,982,878 | ) |  |   |           |   |  |   | (10,137,376   | )
|Identifiable assets, net      |  |                                                         | 1,212,394,474 |             |  |           | 73,007,251 |              |  |       | 177,108,901 |   |  |   | 2,673,923  |   |  |   | 1,465,184,549 |  
|Depreciation and amortization |  |                                                         | 164,969       |             |  |           | 500,199    |              |  |       | 1,812,938   |   |  |   |           |   |  |   | 2,478,106     |  
|Capital expenditures          |  |                                                         | 33,835        |             |  |           |           |              |  |       | 242,148     |   |  |   |           |   |  |   | 275,983       |  

|                              |  |                                                           |               |             |  |           |            |              |  |       |             |   |  |   |           |   |  |   |               |  
|----------------------------- |  | --------------------------------------------------------- | ------------- | ----------- |  | --------- | ---------- | ------------ |  | ----- | ----------- | - |  | - | --------- | - |  | - | ------------- | -
|                              |  |                                                          
|                              |  | As of and for the Three Month Period Ended March 31, 2002
|                              |  |                                                          
|                              |  |                                                           |               | Property    |  |           |            | Intersegment |  |      
|                              |  | Insurance                                                 |               | Development |  | Investing |            | Eliminations |  | Total
|                              |  |                                                           |               |             |  |           |            |              |  |      
|Revenues                      |  | $                                                         | 28,352,413    |             |  | $         | 265,982    |              |  | $     | (2,897,844  | ) |  | $ | (900,399  | ) |  | $ | 24,820,152    |  
|Income (loss) from operations |  |                                                           | 6,200,485     |             |  |           | (271,210   | )            |  |       | (16,244,460 | ) |  |   |          |   |  |   | (10,315,185   | )
|Identifiable assets, net      |  |                                                           | 1,212,394,474 |             |  |           | 73,007,251 |              |  |       | 177,108,901 |   |  |   | 2,673,923 |   |  |   | 1,465,184,549 |  
|Depreciation and amortization |  |                                                           | 83,714        |             |  |           | 223,099    |              |  |       | 918,229     |   |  |   |          |   |  |   | 1,225,042     |  
|Capital expenditures          |  |                                                           | 11,494        |             |  |           |           |              |  |       | 128,507     |   |  |   |          |   |  |   | 140,001       |  

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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES
CO., INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                  
|-- | -----------------
|3. | Minority Interest

Western United Holding Company, a subsidiary of
the Company, registered for sale up to $50.0 million of
Series A preferred stock at December 31, 2002.
Effective January 2, 2003, the initial escrow period ended
and Western United Holding Company completed the initial sale of
its preferred stock to the public. Subsequently, Western United
Holding Company commenced its continuous best efforts offering
of the preferred stock. As of March 31, 2003,
446,571 shares of Western United Holding Companys
preferred stock were outstanding, which resulted in net proceeds
to the Company of $9.3 million. This preferred stock
offering expires July 31, 2003.



|   |             
|-- | ------------
|4. | Income Taxes

The Consolidated Group has received a Notice of
Proposed Adjustment from the Internal Revenue Service stating
that a $28.0 million tax benefit the Consolidated Group
recorded in prior years for a transaction entered into during
fiscal 1999 would be wholly disallowed by the IRS. However, the
Consolidated Group intends to vigorously defend its tax
treatment of the transaction and the Consolidated Groups
management believes that its tax treatment was, and continues to
be, supportable and appropriate.

In the event of an unfavorable resolution
relative to the 1999 transaction, the earnings of the
Consolidated Group would be adversely affected by the amount
disallowed, including interest if applicable. If wholly
disallowed, the potential earnings effect would be
$28.0 million plus applicable interest. At March 31,
2003, the Consolidated Group cannot reasonably estimate a loss,
if any, associated with this transaction.

11



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##### Table of Contents





|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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
financial institution with assets exceeding $1.9 billion.
Its principal subsidiaries are Western United Life Assurance
Company (Western Life), an annuity and life
insurance company, Metwest Mortgage Services, Inc.
(Metwest), a receivable servicer and loan originator
and Western United Holding Company (Western
Holding), a holding company with only one wholly owned
operating subsidiary, Western Life. 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.

The Company is engaged in the business of
investing in cash flowing assets, consisting of obligations
collateralized by real estate, structured settlements,
annuities, lottery prizes and other investments
(Receivables) and in securities, which consist
primarily of U.S. Treasury and government agency
obligations and investment grade bonds (Securities
Investment).

Critical Accounting Policies

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



| |                 
| | ----------------
| | Asset Valuations



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

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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Available-for-Sale Securities.Available-for-sale securities,
    consisting primarily of mortgage- and asset-backed securities,
    government-backed bonds, corporate bonds, equity securities and
    venture capital investments, are carried at quoted and estimated
    fair values. Unrealized gains and losses on available-for-sale
    securities are excluded from earnings and presented as
    accumulated other comprehensive income or loss, net of related
    deferred income taxes, as a component of stockholders
    equity. The Consolidated Group continually monitors its
    investment portfolio for other than temporary impairment of
    securities. When an other than a temporary decline in the value
    below cost or amortized cost is identified, the investment is
    reduced to its fair value, which becomes the new cost basis of
    the investment. The amount of the reduction is reported as a
    realized loss in the statement of operations. Any recovery of
    value in excess of the investments new cost basis is
    recognized as a realized gain only on sale, maturity or other
    disposition of the investment. Factors that the Consolidated
    Group evaluates in determining the existence

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##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | of an other than temporary decline in value
    include (1) the length of time and extent to which the fair
    value has been less than cost or carrying value, (2) the
    circumstances contributing to the decline in fair value
    (including a change in interest rates or spreads to benchmarks),
    (3) recent performance of the security, (4) the
    financial strength of the issuer, and (5) the intent and
    ability of the Consolidated Group to retain the investment for a
    period of time sufficient to allow for anticipated recovery.
    Additionally, for asset-backed securities, the Consolidated
    Group considers the security rating and the amount of credit
    support available for the security.                 
|
| | The Consolidated Group holds debt securities
    generated from its own securitization transactions. For these
    securities, estimated fair value is derived from expected
    discounted future cash flows. When estimating expected future
    cash flows, the Consolidated Group considers interest rates,
    estimated prepayment rates, collateral value, historical default
    rates and recent loss severity 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 Consolidated Group periodically assesses the assumptions
    used in valuing the cash flows and the related carrying value of
    these securities.
|
| | The following assumptions were used at
    March 31, 2003 to value the Consolidated Groups
    investments in the residual and interest only securities
    retained from its own securitization transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                  |  |  |           | 
|--------------------------------- |  |  | --------- | 
|Prepayment speed assumptions(1)   |  |  | 21%-33%   | 
|Expected loss rates(2)            |  |  | 2.7%-6.9% | 
|Residual cash flow discount rates |  |  | 10%       | 





| |     |                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Prepayment speed assumptions are for the next six
    months. Thereafter, the speeds decline in six-month intervals
    until reaching 10% during fiscal 2006.
|
| | (2) | As a percent of original pool balance.                                                                                                                        



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



| |                      
| | ---------------------
| | Allowances for Losses

The Company maintains various allowances for
losses. The significant accounting policies related to the
allowances are as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Allowance for Losses on Receivables.Commercial Loans are individually
    evaluated for impairment. A commercial loan is considered
    impaired when, based on specific facts and circumstances, it is
    probable that the Company will be unable to collect all amounts
    due according to the contractual terms of the loan agreement.
    When a commercial loan has been identified as impaired, the
    Company determines the allowance for loss based on the estimated
    net realizable value of the collateral compared to the carrying
    value of the receivable (including accrued interest and fees).                                                                                                                                                                                                                                                                                                                                           
|
| | When determining the estimated value of
    collateral, the Company has historically taken into
    consideration the most recent third party appraisal and other
    relevant market information. When reviewing the most recent
    third party appraisal, the Company considers the type of
    property, changes in the economic factors of the region since
    the most recent appraisal and the various underlying appraisal
    assumptions. In-house licensed appraisers that assist in the
    commercial origination process also assist in this review.
    Furthermore, the Company may also perform additional on-site
    collateral visits to update its historical assessments and gain
    additional information. If the estimated net realizable value of
    the collateral is less than the carrying value, an allowance for
    loss is recognized for the amount at which the carrying value
    exceeds the estimated net realizable value.
|
| | The remaining real estate contracts and mortgage
    notes receivable portfolio is made up of a large group of
    smaller-balance homogenous loans that are collectively evaluated
    for impairment. The Consolidated Group establishes an allowance
    for inherent losses on the receivables based primarily on                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

13



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##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | current delinquencies and recent foreclosure and
    loss experience. To the extent actual experience differs from
    assumptions, such adjustments would be included in the statement
    of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Allowances for losses on real estate contracts
    and mortgage notes receivable are based on the carrying value of
    the receivable, including accrued interest. Accordingly, the
    Company accrues interest on delinquent receivables until
    foreclosure.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | Allowance for Losses on Real Estate Held for
    Sale and Development.The allowance
    for losses on real estate held for sale and development includes
    amounts for estimated losses as a result of impairment in value.
    The Consolidated Group reviews its real estate properties for
    impairment in value whenever events or circumstances indicate
    that the carrying value of the asset may exceed its fair market
    value. The carrying value of a repossessed property is
    determined as of the date of repossession of the property and is
    based on the lower of the estimated net realizable value or
    carrying value at the time the property was repossessed. For
    non-commercial properties, an appraisal is obtained on the
    foreclosed property to determine its fair market value at the
    time of repossession. For commercial properties, an appraisal is
    obtained on the foreclosed property to determine the fair market
    value only if the most recent appraisal is more than one year
    old, otherwise the existing appraisal is used. Periodically, the
    Consolidated Group may not order an updated appraisal in
    accordance with its established policies if current negotiations
    with a potential purchaser establishes an indication of value.
|
| | Subsequent to repossession (or acquisition in the
    case of development properties), if the value of the property
    declines such that the estimated net realizable value from the
    disposition of the asset is less than its carrying value, an
    impairment is recognized in the statement of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



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

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



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

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

14



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##### Table of Contents



Results of Operations



| |                                                                                
| | -------------------------------------------------------------------------------
| | Six Months Ended March 31, 2003
    Compared to Six Months Ended March 31, 2002

The following table presents the components of
the results of operations during the six months ended
March 31, 2003 and 2002:

|                                                                           |                                               |                            |             |            |   |   |             |            |  
|-------------------------------------------------------------------------- | --------------------------------------------- | -------------------------- | ----------- | ---------- | - | - | ----------- | ---------- | -
|                                                                           |                                               |                           
|                                                                           |                                               | Six Months Ended March 31,
|                                                                           |                                               |                           
|                                                                           |                                               | 2003                       |             | 2002      
|                                                                           |                                               |                            |             |           
|Net interest income                                                        |                                               | $                          | 26,286,028  |            |   | $ | 16,126,233  |           
|Provision for losses on Receivables                                        |                                               |                            | (10,173,022 | )          |   |   | (1,684,221  | )         
|                                                                           |                                               |                            |             |            |   |   |             |           
|                                                                           | Net interest spread                           |                            |             | 16,113,006 |   |   |             | 14,442,012 |  
|Net non-interest expense                                                   |                                               |                            | (22,054,047 | )          |   |   | (14,806,869 | )         
|Capitalized deferred policy acquisition costs,
    net of amortization     |                                               |                            | 1,130,072   |            |   |   | (2,302,553  | )         
|                                                                           |                                               |                            |             |            |   |   |             |           
|                                                                           | Income (loss) before gains (losses) on assets |                            |             | (4,810,969 | ) |   |             | (2,667,410 | )
|Net losses on investments and receivables                                  |                                               |                            | (15,407,002 | )          |   |   | (7,358,351  | )         
|Provision for losses on real estate held for sale                          |                                               |                            | (1,495,340  | )          |   |   | (195,649    | )         
|Gains on sales of real estate                                              |                                               |                            | 846,820     |            |   |   | 84,034      |           
|                                                                           |                                               |                            |             |            |   |   |             |           
|Loss before income taxes and minority interest                             |                                               |                            | (20,866,491 | )          |   |   | (10,137,376 | )         
|Income tax benefit                                                         |                                               |                            | 7,373,380   |            |   |   | 3,547,448   |           
|                                                                           |                                               |                            |             |            |   |   |             |           
|Loss before minority interest                                              |                                               |                            | (13,493,111 | )          |   |   | (6,589,928  | )         
|Income of consolidated subsidiaries allocated to
    minority stockholders |                                               |                            | (274,913    | )          |   |   | (57,671     | )         
|                                                                           |                                               |                            |             |            |   |   |             |           
|Net loss                                                                   |                                               |                            | (13,768,024 | )          |   |   | (6,647,599  | )         
|Preferred stock dividends                                                  |                                               |                            | (3,726,857  | )          |   |   | (1,986,710  | )         
|                                                                           |                                               |                            |             |            |   |   |             |           
|Loss applicable to common stockholders                                     |                                               | $                          | (17,494,881 | )          |   | $ | (8,634,309  | )         
|                                                                           |                                               |                            |             |            |   |   |             |           



| |                    
| | -------------------
| | Net Interest Income

The following table presents the components of
net interest income during the during the six months ended
March 31, 2003 and 2002:

|                    |                                                |                            |            |            |            |   |            |            |            | 
|------------------- | ---------------------------------------------- | -------------------------- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                    |                                                |                           
|                    |                                                | Six Months Ended March 31,
|                    |                                                |                           
|                    |                                                | 2003                       |            | 2002      
|                    |                                                |                            |            |           
|Interest income:    |                                                |                            |            |            |            |   |            |           
|                    | Interest on receivables                        |                            | $          | 42,809,680 |            |   | $          | 24,402,985 |           
|                    | Earned discount on receivables and investments |                            |            | 14,943,843 |            |   |            | 17,130,762 |           
|                    | Other investment income                        |                            |            | 17,749,913 |            |   |            | 15,348,956 |           
|                    |                                                |                            |            |            |            |   |            |           
|                    |                                                | Total interest income      |            |            | 75,503,436 |   |            |            | 56,882,703 | 
|                    |                                                |                            |            |            |            |   |            |           
|Interest expense:   |                                                |                            |            |            |            |   |            |           
|                    | Insurance policy and annuity benefits          |                            |            | 31,262,734 |            |   |            | 25,626,272 |           
|                    | Interest, net                                  |                            |            | 17,954,674 |            |   |            | 15,130,198 |           
|                    |                                                |                            |            |            |            |   |            |           
|                    |                                                | Total interest expense     |            |            | 49,217,408 |   |            |            | 40,756,470 | 
|                    |                                                |                            |            |            |            |   |            |           
|Net interest income |                                                | $                          | 26,286,028 |            |            | $ | 16,126,233 |           
|                    |                                                |                            |            |            |            |   |            |           

15



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##### Table of Contents



The following table summarizes the rate/volume
change in total interest income between the six months ended
March 31, 2003 and 2002 by interest sensitive asset class:

|                                                        |  |                                     |            |      |  |              |            |   |  |   |            |  
|------------------------------------------------------- |  | ----------------------------------- | ---------- | ---- |  | ------------ | ---------- | - |  | - | ---------- | -
|                                                        |  |                                    
|                                                        |  | Six Months Ended March 31, 2003 vs.
|                                                        |  | Six Months Ended March 31, 2002    
|                                                        |  |                                    
|                                                        |  |                                     |            |     
|                                                        |  | Increase (Decrease) Due to          |            |     
|                                                        |  |                                     |            |     
|                                                        |  | Volume                              |            | Rate |  | Total Change
|                                                        |  |                                     |            |      |  |             
|Interest sensitive assets:                              |  |                                     |            |      |  |              |            |   |  |   |            |  
|Investments (including cash)                            |  | $                                   | 6,663,449  |      |  | $            | (5,823,657 | ) |  | $ | 839,792    |  
|Real estate contracts and mortgage notes
    receivable |  |                                     | 20,107,272 |      |  |              | (825,288   | ) |  |   | 19,281,984 |  
|Other receivables                                       |  |                                     | (2,094,288 | )    |  |              | 593,245    |   |  |   | (1,501,043 | )
|                                                        |  |                                     |            |      |  |              |            |   |  |   |            |  
|                                                        |  | $                                   | 24,676,433 |      |  | $            | (6,055,700 | ) |  | $ | 18,620,733 |  
|                                                        |  |                                     |            |      |  |              |            |   |  |   |            |  

The increase in net interest income for the
six-month period ended March 31, 2003 as compared to the
six-month period ended March 31, 2002 was primarily due to
an increase in the commercial lending activities of the
Consolidated Group. Commercial Loans, which have higher yields
than the Consolidated Groups residential portfolio,
accounted for 64.0% of the outstanding principal balance of real
estate contracts and mortgage notes receivable at March 31,
2003, compared to 34.9% at March 31, 2002.

Increases in the Companys net interest
income as a result of the commercial lending activities have
been partially offset by a decrease in the yields earned on its
investment portfolio as the 5-year constant maturity
U.S. Treasury rate, which is similar to the average
maturity of the Consolidated Groups fixed income
portfolio, has decreased. During the twelve-month period ended
March 31, 2003, proceeds from the sales and maturities of
the investment portfolio totaled $544.0 million. As
proceeds from the sales and maturities were reinvested back into
a lower interest rate market, the overall portfolio yield was
reduced. Additionally, the Companys recent focus on
improving the average credit rating of its investment portfolio
has also contributed to the reduction in the investment yields.
At March 31, 2003, approximately 85.2% of the Consolidated
Groups portfolio was rated either AAA or AA compared to
54.8% at March 31, 2002. The higher credit rating is
expected to result in a lower effective yield, but also reduced
credit risk.

The following table presents the net average
yields realized by the Consolidated Group on interest sensitive
assets and liabilities during the six months ended
March 31, 2003 and 2002 based on the average monthly ending
asset/liability balances:

|                                                                       |       |                |               |                |   |   |             |       |  
|---------------------------------------------------------------------- | ----- | -------------- | ------------- | -------------- | - | - | ----------- | ----- | -
|                                                                       |       | March 31, 2003 |               | March 31, 2002
|                                                                       |       | Average        |               | Average       
|                                                                       |       |                |               |               
|Interest sensitive assets:                                             |       |                |               |                |   |   |             |      
|Investments (including cash)                                           |       | $              | 641,854,830   |                |   | $ | 447,556,800 |      
|                                                                       | Yield |                |               | 5.04           | % |   |             | 6.86  | %
|Real estate contracts and mortgage notes
    receivable                |       | $              | 705,790,049   |                |   | $ | 443,552,593 |      
|                                                                       | Yield |                |               | 15.10          | % |   |             | 15.34 | %
|Other receivables                                                      |       | $              | 127,925,126   |                |   | $ | 177,267,085 |      
|                                                                       | Yield |                |               | 9.42           | % |   |             | 8.49  | %
|Interest sensitive liabilities:                                        |       |                |               |                |   |   |             |      
|Life insurance and annuity reserves, net of
    reinsurance receivable |       | $              | 1,138,886,076 |                |   | $ | 888,080,805 |      
|                                                                       | Yield |                |               | 5.49           | % |   |             | 5.77  | %
|Debenture bonds                                                        |       | $              | 368,121,079   |                |   | $ | 322,184,330 |      
|                                                                       | Yield |                |               | 8.83           | % |   |             | 8.97  | %
|Debt payable                                                           |       | $              | 163,302,544   |                |   | $ | 46,263,578  |      
|                                                                       | Yield |                |               | 4.64           | % |   |             | 6.16  | %

16



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##### Table of Contents



The yields on the Companys other
receivables increased for the six month period ended
March 31, 2003 as compared to the similar period ended
March 31, 2002 as a result of a $12.0 million
unsecured line of credit agreement that Metropolitan entered
into with Summit during the six-month period ended
March 31, 2003. At March 31, 2003, outstanding
advances to Summit, which have an interest rate of 11.5%,
totaled $5.7 million.

The reduction in the interest rate environment
during the last twelve months has allowed the Consolidated Group
to borrow funds on its secured line of credit with the Federal
Home Loan Bank of Seattle at lower interest rates. This
borrowing facility has led to a reduction in the current year
debt payable cost of funds.



| |                                    
| | -----------------------------------
| | Provision for Losses on Receivables

Commercial Loans are individually evaluated for
impairment. A commercial loan is considered impaired when, based
on specific facts and circumstances, it is probable that the
Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. When a commercial
loan has been identified as impaired, the Company determines the
allowance for loss based on the estimated net realizable value
of the collateral compared to the carrying value of the
receivable (including accrued interest and fees).

When determining the estimated value of
collateral, the Company has historically taken into
consideration the most recent third party appraisal and other
relevant market information. When reviewing the most recent
third party appraisal, the Company considers the type of
property, changes in the economic factors of the region since
the most recent appraisal and the various underlying appraisal
assumptions. In-house licensed appraisers that assist in the
commercial origination process also assist in this review.
Furthermore, the Company may also perform additional on-site
collateral visits to update its historical assessments and gain
additional information. If the estimated net realizable value of
the collateral is less than the carrying value, an allowance for
loss is recognized for the amount at which the carrying value
exceeds the estimated net realizable value. During the six month
period ended March 31, 2003, the Company recorded
provisions for losses on its commercial loan portfolio of
approximately $7.9 million. The current period provisions
resulted from a review of the most recent appraisals and other
relevant market information on loans that the Company deemed as
impaired at March 31, 2003. Loans that the Company
considered impaired at March 31, 2003 were approximately
$103.6 million compared to $50.2 million at
September 30, 2002. The During the six month period ended
March 31, 2003, five new impaired loans with principal
balances of approximately $59.4 million contributed to the
increase in loans that the Company deemed as impaired since
September 30, 2002. Fluctuations in the provision for
losses result from using the specific impairment methodology.

During the six month period ended March 31,
2003, in addition to the $7.9 million provision for losses
on commercial loans, the Company recorded provisions for losses
on its residential and other real estate loans of approximately
$1.3 million and approximately $1.0 million on its
other receivables.

17



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##### Table of Contents





| |                         
| | ------------------------
| | Net Non-Interest Expense

The following table presents the components of
net non-interest expense during the six months ended
March 31, 2003 and 2002:

|                      |                                               |                            |   |            |            |  |   |           |            | 
|--------------------- | --------------------------------------------- | -------------------------- | - | ---------- | ---------- |  | - | --------- | ---------- | 
|                      |                                               |                           
|                      |                                               | Six Months Ended March 31,
|                      |                                               |                           
|                      |                                               | 2003                       |   | 2002      
|                      |                                               |                            |   |           
|Non-interest income:  |                                               |                            |   |            |            |  |   |          
|                      | Insurance premiums and annuity considerations |                            | $ | 764,583    |            |  | $ | 933,179   |           
|                      | Servicing income                              |                            |   | 776,166    |            |  |   | 1,013,128 |           
|                      | Fees, commissions and other income            |                            |   | 2,558,283  |            |  |   | 2,450,294 |           
|                      |                                               |                            |   |            |            |  |   |          
|                      |                                               | Total non-interest income  |   |            | 4,099,032  |  |   |           | 4,396,601  | 
|                      |                                               |                            |   |            |            |  |   |          
|Non-interest expense: |                                               |                            |   |            |            |  |   |          
|                      | Salaries and employee benefits                |                            |   | 8,371,754  |            |  |   | 7,944,858 |           
|                      | Commissions to agents                         |                            |   | 7,257,991  |            |  |   | 3,670,742 |           
|                      | Other operating and underwriting expenses     |                            |   | 10,523,334 |            |  |   | 7,587,870 |           
|                      |                                               |                            |   |            |            |  |   |          
|                      |                                               | Total non-interest expense |   |            | 26,153,079 |  |   |           | 19,203,470 | 
|                      |                                               |                            |   |            |            |  |   |          
|                      |                                               | Net non-interest expense   |   | $          | 22,054,047 |  |   | $         | 14,806,869 | 
|                      |                                               |                            |   |            |            |  |   |          

The increase in salaries and employee benefits
was primarily due to a growth in salaries and employee benefits
as the Companys full time equivalent employees increased
from 277 at March 31, 2002 to 305 at March 31, 2003.
This increase was partially offset by a $0.7 million
reduction to the Companys self-insurance benefit program
accrued liability to reflect current claim experience during the
six months ended March 31, 2003.

The increase in commission was due primarily to a
$3.5 million increase in commissions paid on annuity
business, net of ceding.

The increase in other operating and underwriting
expenses was primarily due to a $0.6 million increase in
recruiting and training expenses, a $0.5 million increase
in audit and legal fees, a $1.3 million increase in holding
costs associated with the Companys properties held for
sale and development and a $0.2 million increase in
guaranty fund assessments.



| |                                                                                
| | -------------------------------------------------------------------------------
| | Amortization of Deferred Policy Acquisition
    Costs, Net of Costs Capitalized

Amortization of deferred policy acquisition
costs, net of costs capitalized, is comprised of the
capitalization of expenses incurred to sell and underwrite life
and annuity policies, offset by the amortization of previously
capitalized expenses. The following table reflects the
components of the net expense reported by the Consolidated Group
for the six months ended March 31, 2003 and 2002:

|                                                                           |  |                            |            |      |  |   |            |  
|-------------------------------------------------------------------------- |  | -------------------------- | ---------- | ---- |  | - | ---------- | -
|                                                                           |  |                           
|                                                                           |  | Six Months Ended March 31,
|                                                                           |  |                           
|                                                                           |  | 2003                       |            | 2002
|                                                                           |  |                            |            |     
|Current period costs capitalized                                           |  | $                          | (6,630,072 | )    |  | $ | (3,297,447 | )
|Amortization of previously capitalized expenses                            |  |                            | 5,500,000  |      |  |   | 5,600,000  |  
|                                                                           |  |                            |            |      |  |   |            |  
|Net amortization (capitalization) of
    deferred policy acquisition costs |  | $                          | (1,130,072 | )    |  | $ | 2,302,553  |  
|                                                                           |  |                            |            |      |  |   |            |  

The increase in current period costs capitalized
is due primarily to a $3.5 million increase in commissions
paid on annuity business, net of ceding. Annuity business
production during the six-month period ended March 31, 2003
was approximately $148.4 million compared to approximately
$75.5 million during the similar period ended
March 31, 2002. The funding for the acquisitions of
receivables by the Company is provided primarily through the
sale of its annuity products. The Company manages its financing
activities to match investment opportunities that are available.
Since the sale of annuity products are interest rate sensitive,
the

18



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##### Table of Contents



Company can manage annuity product sales by
pricing the products accordingly. During the six month period
ended March 31, 2003, the Company offered a more
competitive price on its annuity products than during the
similar period ended March 31, 2002 and therefore
experienced an increase in annuity sales during the current
period as compared to the similar period last year.




| |                                                      
| | -----------------------------------------------------
| | Net Gains (Losses) on Investments and
    Receivables

The following table presents the components of
net gains (losses) on investments and receivables during
the six months ended March 31, 2003 and 2002:

|                                          |                                            |                            |             |             |   |   |            |            |  
|----------------------------------------- | ------------------------------------------ | -------------------------- | ----------- | ----------- | - | - | ---------- | ---------- | -
|                                          |                                            |                           
|                                          |                                            | Six Months Ended March 31,
|                                          |                                            |                           
|                                          |                                            | 2003                       |             | 2002       
|                                          |                                            |                            |             |            
|Other than temporary declines in value:   |                                            |                            |             |             |   |   |            |           
|                                          | Subordinate and interest only certificates |                            | $           | (13,238,296 | ) |   | $          | (3,237,528 | )
|                                          | Equity securities                          |                            |             | (801,282    | ) |   |            | (3,513,063 | )
|                                          | Other securities                           |                            |             | (2,448,545  | ) |   |            | (2,965,852 | )
|Realized gains:                           |                                            |                            |             |             |   |   |            |           
|                                          | Securities investments                     |                            |             | 1,081,121   |   |   |            | 1,045,125  |  
|                                          | Receivables                                |                            |             |            |   |   |            | 1,176,102  |  
|                                          | Trading securities                         |                            |             |            |   |   |            | 136,865    |  
|                                          |                                            |                            |             |             |   |   |            |           
|Net losses on investments and receivables |                                            | $                          | (15,407,002 | )           |   | $ | (7,358,351 | )         
|                                          |                                            |                            |             |             |   |   |            |           



| |                                               
| | ----------------------------------------------
| | Subordinate and Interest Only
    Certificates

The Consolidated Group holds subordinate
(including residuals) and interest only securities generated
from its own securitization activities. The fair value of these
securities, which do not have established market prices, is
estimated using expected discounted future cash flows. When
estimating expected future cash flows, management considers
interest rates, estimated prepayment rates, collateral value,
historical default rates and recent loss severity. During the
six month period ended March 31, 2003, the Consolidated
Group determined that certain securities had other than
temporary declines in value of approximately $4.1 million
as the collateral supporting the securities experienced higher
than expected prepayment rates, loss severity and default rates.
In response to sustained prepayment rates, higher than expected
loss severities and an increase in defaults, the Consolidated
Group revised its assumptions of future prepayments, loss
severity and default rates. Changes in these assumptions
resulted in an additional $9.1 million impairment during
the six month period ended March 31, 2003. The following
table reflects the impairments associated with the change in
assumptions.

|                 |  |               |     | 
|---------------- |  | ------------- | --- | 
|                 |  | Amount of    
|                 |  | Impairment   
|                 |  |              
|                 |  | (In millions)
|Prepayment rates |  | $             | 3.9 | 
|Loss severity    |  |               | 4.0 | 
|Default rates    |  |               | 1.2 | 
|                 |  |               |     | 
|                 |  | $             | 9.1 | 
|                 |  |               |     | 

The following assumptions were used at
March 31, 2003 to value the Consolidated Groups
investments in the subordinate and interest only securities
retained from its own securitization transactions.

|                                |  |                  |             |              |  |  |             | 
|------------------------------- |  | ---------------- | ----------- | ------------ |  |  | ----------- | 
|                                |  | At September 30, |             | At March 31,
|                                |  | 2002             |             | 2003        
|                                |  |                  |             |             
|Prepayment speed assumptions(1) |  |                  | 19% - 29%   |              |  |  | 21% - 33%   | 
|Expected loss rates(2)          |  |                  | 2.4% - 4.4% |              |  |  | 2.7% - 6.9% | 

19



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---



|    |                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Prepayment speed assumptions are for the next six
    months. Thereafter, the speeds decline in six-month intervals
    until reaching 10% during fiscal 2006.
|   
|(2) | As a percent of original pool balance.                                                                                                                        

The Consolidated Group will continue to
periodically assess the assumptions used in valuing the cash
flows and the related carrying value of securities generated
from its securitization activities.



| |                  
| | -----------------
| | Equity Securities

During the six month period ended March 31,
2003, approximately $0.8 million in declines in values of
various venture capital and other equity securities were
determined to be other than temporary due to the length of time
and extent that the investments had traded below cost or
carrying value.



| |                 
| | ----------------
| | Other Securities

During the six month period ended March 31,
2003, the Consolidated Group reported approximately
$2.4 million in other than temporary declines in value on
certain fixed income securities. The impairments were primarily
due to deterioration in the underlying collateral of certain
asset-backed securities, including $1.3 million in
impairments on airline related asset-backed securities, in
addition to credit deterioration in some higher yielding
corporate bond investments.



| |                                                      
| | -----------------------------------------------------
| | Provision for Losses on Real Estate Held for
    Sale

Real estate held for sale is periodically
evaluated for impairment. Loss provisions for real estate held
for sale are calculated as the difference between the estimated
net realizable value and the carrying value at the measurement
date. The $1.5 million provision for loss during the
six-month period ended March 31, 2003 was primarily the
result of a reduction in the sales price on some of the
Companys real estate held for sale portfolio and a
$0.8 million provision for loss on an orchard in Washington
that lost its organic growing status. The $0.8 million
provision was based on a new appraisal that the Company obtained
on the orchard.



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

In prior years, the Consolidated Group recorded a
$28.0 million tax benefit relating to an investment made in
1999. The objectives for the investment were to produce economic
gains combined with favorable tax benefits. Similar investments
were presented throughout the country to numerous individuals
and companies as an investment and tax strategy. Prior to, and
in conjunction with the investment, the Consolidated Group
received two independent tax opinions relating to the investment.

The Consolidated Group has received a Notice of
Proposed Adjustment from the Internal Revenue Service stating
that the $28.0 million tax benefit the Consolidated Group
recorded for the transaction entered into during fiscal 1999
would be wholly disallowed by the IRS. However, the Consolidated
Group intends to vigorously defend its tax treatment of the
transaction and the Consolidated Groups management
believes that its tax treatment was, and continues to be,
supportable and appropriate.

In the event of an unfavorable resolution
relative to the 1999 transaction, the earnings of the
Consolidated Group would be adversely affected by the amount
disallowed, including interest if applicable. If wholly
disallowed, the potential earnings effect would be
$28.0 million plus applicable interest. At March 31,
2003, the Consolidated Group cannot reasonably estimate a loss,
if any, associated with this transaction.

20



---



##### Table of Contents





| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Three Months Ended March 31, 2003
    Compared to Three Months Ended March 31, 2002

The following table presents the components of
the results of operations during the three months ended
March 31, 2003 and 2002:

|                                                                           |                                               |                              |             |            |   |   |             |            |  
|-------------------------------------------------------------------------- | --------------------------------------------- | ---------------------------- | ----------- | ---------- | - | - | ----------- | ---------- | -
|                                                                           |                                               |                             
|                                                                           |                                               | Three Months Ended March 31,
|                                                                           |                                               |                             
|                                                                           |                                               | 2003                         |             | 2002      
|                                                                           |                                               |                              |             |           
|Net interest income                                                        |                                               | $                            | 14,644,646  |            |   | $ | 8,030,056   |           
|Provision for losses on Receivables                                        |                                               |                              | (7,983,022  | )          |   |   | (481,004    | )         
|                                                                           |                                               |                              |             |            |   |   |             |           
|                                                                           | Net interest spread                           |                              |             | 6,661,624  |   |   |             | 7,549,052  |  
|Net non-interest expense                                                   |                                               |                              | (11,475,354 | )          |   |   | (6,980,837  | )         
|Capitalized deferred policy acquisition costs,
    net of amortization     |                                               |                              | 9,122       |            |   |   | (1,582,393  | )         
|                                                                           |                                               |                              |             |            |   |   |             |           
|                                                                           | Income (loss) before gains (losses) on assets |                              |             | (4,804,608 | ) |   |             | (1,014,178 | )
|Net losses on investments and receivables                                  |                                               |                              | (12,285,723 | )          |   |   | (8,909,503  | )         
|Provision for losses on real estate held for sale                          |                                               |                              | (193,016    | )          |   |   | (436,035    | )         
|Gains on sales of real estate                                              |                                               |                              | 474,371     |            |   |   | 44,531      |           
|                                                                           |                                               |                              |             |            |   |   |             |           
|Loss before income taxes and minority interest                             |                                               |                              | (16,808,976 | )          |   |   | (10,315,185 | )         
|Income tax benefit                                                         |                                               |                              | 5,953,656   |            |   |   | 3,578,908   |           
|                                                                           |                                               |                              |             |            |   |   |             |           
|Loss before minority interest                                              |                                               |                              | (10,855,320 | )          |   |   | (6,736,277  | )         
|Income of consolidated subsidiaries allocated to
    minority stockholders |                                               |                              | (274,913    | )          |   |   | 31,111      |           
|                                                                           |                                               |                              |             |            |   |   |             |           
|Net loss                                                                   |                                               |                              | (11,130,233 | )          |   |   | (6,705,166  | )         
|Preferred stock dividends                                                  |                                               |                              | (1,982,842  | )          |   |   | (1,050,364  | )         
|                                                                           |                                               |                              |             |            |   |   |             |           
|Loss applicable to common stockholders                                     |                                               | $                            | (13,113,075 | )          |   | $ | (7,755,530  | )         
|                                                                           |                                               |                              |             |            |   |   |             |           



| |                    
| | -------------------
| | Net Interest Income

The following table presents the components of
net interest income during the during the three months ended
March 31, 2003 and 2002:

|                    |                                                |                              |            |            |            |   |           |            |            | 
|------------------- | ---------------------------------------------- | ---------------------------- | ---------- | ---------- | ---------- | - | --------- | ---------- | ---------- | 
|                    |                                                |                             
|                    |                                                | Three Months Ended March 31,
|                    |                                                |                             
|                    |                                                | 2003                         |            | 2002      
|                    |                                                |                              |            |           
|Interest income:    |                                                |                              |            |            |            |   |           |           
|                    | Interest on receivables                        |                              | $          | 23,624,527 |            |   | $         | 12,135,399 |           
|                    | Earned discount on receivables and investments |                              |            | 7,209,698  |            |   |           | 8,186,275  |           
|                    | Other investment income                        |                              |            | 8,696,662  |            |   |           | 7,649,054  |           
|                    |                                                |                              |            |            |            |   |           |           
|                    |                                                | Total interest income        |            |            | 39,530,887 |   |           |            | 27,970,728 | 
|                    |                                                |                              |            |            |            |   |           |           
|Interest expense:   |                                                |                              |            |            |            |   |           |           
|                    | Insurance policy and annuity benefits          |                              |            | 15,669,103 |            |   |           | 12,457,949 |           
|                    | Interest, net                                  |                              |            | 9,217,138  |            |   |           | 7,482,723  |           
|                    |                                                |                              |            |            |            |   |           |           
|                    |                                                | Total interest expense       |            |            | 24,886,241 |   |           |            | 19,940,672 | 
|                    |                                                |                              |            |            |            |   |           |           
|Net interest income |                                                | $                            | 14,644,646 |            |            | $ | 8,030,056 |           
|                    |                                                |                              |            |            |            |   |           |           

The increase in net interest income from March
2002 to March 2003 was primarily due to an increase in the
commercial lending activities of the Consolidated Group.
Commercial Loans, which have higher yields than the Consolidated
Groups residential portfolio, accounted for 64.0% of the
outstanding principal balance of real estate contracts and
mortgage notes receivable at March 31, 2003, compared to
34.9% at March 31, 2002.

21



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##### Table of Contents



Increases in the Companys net interest
income as a result of the commercial lending activities have
been partially offset by a decrease in the yields earned on its
investment portfolio as the 5-year constant maturity
U.S. Treasury rate, which is similar to the average
maturity of the Consolidated Groups fixed income
portfolio, has decreased. During the twelve-month period ended
March 31, 2003, proceeds from the sales and maturities of
its investment portfolio totaled $544.0 million. As
proceeds from the sales and maturities were reinvested back into
a lower interest rate market, the overall portfolio yield was
reduced. Additionally, the Consolidated Groups recent
focus on improving the average credit rating of its investment
portfolio has also contributed to the reduction in the
investment yields. At March 31, 2003, approximately 85.2%
of the Consolidated Groups portfolio was rated either AAA
or AA compared to 54.8% at March 31, 2002. The higher
credit rating is expected to result in a lower effective yield,
but also reduced credit risk.

The reduction in the interest rate environment
during the last twelve months has allowed the Consolidated Group
to borrow funds on its secured line of credit with the Federal
Home Loan Bank of Seattle at lower interest rates. This
borrowing facility has led to a reduction in the current year
debt payable cost of funds.



| |                         
| | ------------------------
| | Net Non-Interest Expense

The following table presents the components of
net non-interest expense during the three months ended
March 31, 2003 and 2002:

|                      |                                               |                            |   |           |            |  |   |           |           | 
|--------------------- | --------------------------------------------- | -------------------------- | - | --------- | ---------- |  | - | --------- | --------- | 
|                      |                                               |                           
|                      |                                               | Three Months Ended        
|                      |                                               | March 31,                 
|                      |                                               |                           
|                      |                                               | 2003                       |   | 2002     
|                      |                                               |                            |   |          
|Non-interest income:  |                                               |                            |   |           |            |  |   |          
|                      | Insurance premiums and annuity considerations |                            | $ | 360,822   |            |  | $ | 462,008   |          
|                      | Servicing income                              |                            |   | 385,940   |            |  |   | 685,611   |          
|                      | Fees, commissions and other income            |                            |   | 1,536,934 |            |  |   | 1,035,600 |          
|                      |                                               |                            |   |           |            |  |   |          
|                      |                                               | Total non-interest income  |   |           | 2,283,696  |  |   |           | 2,183,219 | 
|                      |                                               |                            |   |           |            |  |   |          
|Non-interest expense: |                                               |                            |   |           |            |  |   |          
|                      | Salaries and employee benefits                |                            |   | 4,546,753 |            |  |   | 3,823,927 |          
|                      | Commissions to agents                         |                            |   | 3,276,225 |            |  |   | 1,648,370 |          
|                      | Other operating and underwriting expenses     |                            |   | 5,936,072 |            |  |   | 3,691,759 |          
|                      |                                               |                            |   |           |            |  |   |          
|                      |                                               | Total non-interest expense |   |           | 13,759,050 |  |   |           | 9,164,056 | 
|                      |                                               |                            |   |           |            |  |   |          
|                      |                                               | Net non-interest expense   |   | $         | 11,475,354 |  |   | $         | 6,980,837 | 
|                      |                                               |                            |   |           |            |  |   |          

The increase in fees, commissions and other
income was due primarily to an increase in rental and
operational income from properties held for investment, sale and
development.

The increase in salaries and employee benefits
was primarily due to a growth in salaries and employee benefits
as the Companys full time equivalent employees increased
from 277 at March 31, 2002 to 305 at March 31, 2003.

The increase in commissions was due primarily to
a $1.4 million increase in commissions paid on annuity
business, net of ceding.

The increase in other operating and underwriting
expenses was primarily due to a $0.3 million increase in
recruiting and training expenses, a $0.3 million increase
in audit and legal fees, and a $1.3 million increase in
holding costs associated with the Companys properties held
for sale and development.



| |                                                                                
| | -------------------------------------------------------------------------------
| | Amortization of Deferred Policy Acquisition
    Costs, Net of Costs Capitalized

Amortization of deferred policy acquisition
costs, net of costs capitalized, is comprised of the
capitalization of expenses incurred to acquire or renew life and
annuity policies, offset by the amortization of previously

22



---



##### Table of Contents



capitalized expenses. The following table
reflects the components of the net expense reported by the
Consolidated Group for the three months ended March 31,
2003 and 2002:


|                                                                           |  |                              |            |      |  |   |            |  
|-------------------------------------------------------------------------- |  | ---------------------------- | ---------- | ---- |  | - | ---------- | -
|                                                                           |  |                             
|                                                                           |  | Three Months Ended March 31,
|                                                                           |  |                             
|                                                                           |  | 2003                         |            | 2002
|                                                                           |  |                              |            |     
|Current period costs capitalized                                           |  | $                            | (2,809,122 | )    |  | $ | (1,417,607 | )
|Amortization of previously capitalized expenses                            |  |                              | 2,800,000  |      |  |   | 3,000,000  |  
|                                                                           |  |                              |            |      |  |   |            |  
|Net amortization (capitalization) of
    deferred policy acquisition costs |  | $                            | (9,122     | )    |  | $ | 1,582,393  |  
|                                                                           |  |                              |            |      |  |   |            |  

The increase in current period costs capitalized
is due primarily to a $1.4 million increase in commissions
paid on annuity business, net of ceding. Annuity business
production during the three months ended March 31, 2003 was
approximately $60.9 million compared to approximately
$35.5 million during the similar period ended
March 31, 2002. The funding for the acquisitions of
receivables by the Company is provided primarily through the
sale of its annuity products. The Company manages its financing
activities to match investment opportunities that are available.
Since the sale of annuity products are interest rate sensitive,
the Company can manage annuity product sales by pricing the
products accordingly. During the three month period ended
March 31, 2003, the Company offered a more competitive
price on its annuity products than during the similar period
ended March 31, 2002 and therefore experienced an increase
in annuity sales during the current period as compared to the
similar period last year.



| |                                                      
| | -----------------------------------------------------
| | Net Gains (Losses) on Investments and
    Receivables

The following table presents the components of
net gains (losses) on investments and receivables during
the three months ended March 31, 2003 and 2002:

|                                          |                                            |                              |             |             |   |   |            |            |  
|----------------------------------------- | ------------------------------------------ | ---------------------------- | ----------- | ----------- | - | - | ---------- | ---------- | -
|                                          |                                            |                             
|                                          |                                            | Three Months Ended March 31,
|                                          |                                            |                             
|                                          |                                            | 2003                         |             | 2002       
|                                          |                                            |                              |             |            
|Other than temporary declines in value:   |                                            |                              |             |             |   |   |            |           
|                                          | Subordinate and interest only certificates |                              | $           | (11,118,791 | ) |   | $          | (3,237,528 | )
|                                          | Equity securities                          |                              |             | (678,993    | ) |   |            | (3,502,587 | )
|                                          | Other securities                           |                              |             | (1,473,933  | ) |   |            | (2,945,556 | )
|Realized gains (losses):                  |                                            |                              |             |             |   |   |            |           
|                                          | Securities investments                     |                              |             | 971,359     |   |   |            | (72,784    | )
|                                          | Receivables                                |                              |             | 14,635      |   |   |            | 828,127    |  
|                                          | Trading securities                         |                              |             |            |   |   |            | 20,825     |  
|                                          |                                            |                              |             |             |   |   |            |           
|Net losses on investments and receivables |                                            | $                            | (12,285,723 | )           |   | $ | (8,909,503 | )         
|                                          |                                            |                              |             |             |   |   |            |           



| |                                               
| | ----------------------------------------------
| | Subordinate and Interest Only
    Certificates

The Consolidated Group holds subordinate
(including residuals) and interest only securities generated
from its own securitization activities. The fair value of these
securities, which do not have established market prices, is
estimated using expected discounted future cash flows. When
estimating expected future cash flows, management considers
interest rates, estimated prepayment rates, collateral value,
historical default rates and recent loss severity. During the
three month period ended March 31, 2003, the Consolidated
Group determined that certain securities had other than
temporary declines in value of approximately $2.0 million
as the collateral supporting the securities experienced higher
than expected prepayment rates, loss severity and default rates.
In response to sustained prepayment rates, higher than expected
loss severities and an increase in defaults, the Consolidated
Group revised its assumptions of future prepayments, loss
severity and default rates. Changes in these assumptions
resulted in an additional $9.1 million impairment during
the three month period ended March 31, 2003.

23



---



##### Table of Contents





| |                  
| | -----------------
| | Equity Securities

During the three month period ended
March 31, 2003, approximately $0.7 million in declines
in values of various venture capital and other equity securities
were determined to be other than temporary due to the length of
time and extent that the investments had traded below cost or
carrying value.



| |                 
| | ----------------
| | Other Securities

During the three month period ended
March 31, 2003, the Consolidated Group reported
approximately $1.5 million in other than temporary
impairments on certain fixed income securities. The impairments
were primarily due to deterioration in the underlying collateral
of certain asset-backed securities, including $0.9 million
in impairments on airline related asset-backed securities.



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

Temporary declines in the fair value of
investments that are available-for-sale are excluded
from earnings and presented as accumulated other comprehensive
income or loss, net of related income taxes, as a component of
stockholders equity. The Consolidated Group continually
monitors its investment portfolio for other than temporary
impairments of its securities. When an other than temporary
decline in value below cost or amortized cost is identified, the
investment is reduced to its fair value, which becomes the new
cost basis of the investment. The amount of reduction is
reported as a realized loss in the statement of operations. In
determining whether the losses are temporary or other than
temporary, the Consolidated Group considers (1) the length
of time and extent to which the fair value has been less than
cost or carrying value, (2) the circumstances contributing
to the decline in fair value (including a change in interest
rates or spreads to benchmarks), (3) recent performance of
the security, (4) the financial strength of the issuer, and
(5) the intent and ability of the Consolidated Group to
retain the investment for a period of time sufficient to allow
for anticipated recovery. Additionally, for asset-backed
investments, the Consolidated Group also considers the credit
rating and determines the amount of credit support available for
the security. At March 31, 2003, the Consolidated
Groups investment portfolio had approximately
$1.6 million in unrealized losses that were deemed to be
temporary. To the extent that any losses currently deemed as
temporary are determined to be other than temporary in the
future, the unrealized losses will be reported as realized
losses in future statements of operations.

The following table stratifies the unrealized
losses as of March 31, 2003 by investment category:

|                                      |                                       |          |           |            |            |  |          |            |            |  
|------------------------------------- | ------------------------------------- | -------- | --------- | ---------- | ---------- |  | -------- | ---------- | ---------- | -
|                                      |                                       | Carrying |           | Unrealized
|                                      |                                       | Value    |           | Losses    
|                                      |                                       |          |           |           
|Fixed income maturities:              |                                       |          |           |            |            |  |          |           
|                                      | Mortgage- and asset-backed securities |          | $         | 75,387,668 |            |  | $        | (1,124,967 | )         
|Preferred stocks                      |                                       |          | 3,458,600 |            |            |  | (70,120  | )         
|Venture Capital/ Limited Partnerships |                                       |          | 2,470,440 |            |            |  | (377,209 | )         
|                                      |                                       |          |           |            |            |  |          |           
|                                      |                                       | Totals   |           | $          | 81,316,708 |  |          | $          | (1,572,296 | )
|                                      |                                       |          |           |            |            |  |          |           

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The following table stratifies the unrealized
losses as of March 31, 2003 by market sector:

|                                       |                                    |          |            |            |            |  |            |          |            |  
|-------------------------------------- | ---------------------------------- | -------- | ---------- | ---------- | ---------- |  | ---------- | -------- | ---------- | -
|                                       |                                    | Carrying |            | Unrealized
|                                       |                                    | Value    |            | Losses    
|                                       |                                    |          |            |           
|Mortgage- and asset-backed securities: |                                    |          |            |            |            |  |            |         
|                                       | Collateralized mortgage obligation |          | $          | 54,937,293 |            |  | $          | (453,254 | )         
|                                       | Other asset-backed                 |          |            | 11,061,290 |            |  |            | (290,770 | )         
|                                       | Mortgage-backed security           |          |            | 1,120,946  |            |  |            | (3,453   | )         
|                                       | Home equity                        |          |            | 2,483,178  |            |  |            | (275,976 | )         
|                                       | Manufactured housing               |          |            | 5,784,961  |            |  |            | (101,514 | )         
|                                       |                                    |          |            |            |            |  |            |         
|                                       |                                    |          | 75,387,668 |            |            |  | (1,124,967 | )       
|Preferred stocks                       |                                    |          | 3,458,600  |            |            |  | (70,120    | )       
|Venture Capital/ Limited Partnerships  |                                    |          | 2,470,440  |            |            |  | (377,209   | )       
|                                       |                                    |          |            |            |            |  |            |         
|                                       |                                    | Totals   |            | $          | 81,316,708 |  |            | $        | (1,572,296 | )
|                                       |                                    |          |            |            |            |  |            |         

The following table stratifies the unrealized
losses as of March 31, 2003 by credit rating:

|                                      |        |          |            |            |  |   |          |            |  
|------------------------------------- | ------ | -------- | ---------- | ---------- |  | - | -------- | ---------- | -
|                                      |        | Carrying |            | Unrealized
|                                      |        | Value    |            | Losses    
|                                      |        |          |            |           
|AAA                                   |        | $        | 56,058,239 |            |  | $ | (456,707 | )         
|A                                     |        |          | 9,947,210  |            |  |   | (357,960 | )         
|BB                                    |        |          | 9,382,219  |            |  |   | (310,300 | )         
|BBB                                   |        |          | 3,458,600  |            |  |   | (70,120  | )         
|Venture Capital/ Limited Partnerships |        |          | 2,470,440  |            |  |   | (377,209 | )         
|                                      |        |          |            |            |  |   |          |           
|                                      | Totals |          | $          | 81,316,708 |  |   | $        | (1,572,296 | )
|                                      |        |          |            |            |  |   |          |           

Unrealized losses relating to the investment
grade assets (BBB and higher) are generally due to changes in
interest rates that may include changes in spreads to benchmarks
for a particular sector of the market. To the extent that
unrealized losses in the Consolidated Groups investment
grade portfolio are the result of issues other than interest
rate changes, the investments are evaluated for other than
temporary impairment. At March 31, 2003, approximately
$0.3 million in unrealized losses in the Consolidated
Groups investment grade assets were due to investments in
airline-related asset-backed securities. In determining whether
these losses were temporary or other than temporary, the
Consolidated Group considered (1) recent performance of the
security, (2) the credit rating of the security,
(3) the amount of credit support available for the
security, (4) circumstances contributing to the decline in
value, (5) the length of time and extent to which the fair
value has been less than cost or carrying value, and
(6) the intent and ability of the Consolidated Group to
retain the investment for a period of time sufficient to allow
for anticipated recovery.

The following table stratifies the unrealized
losses as of March 31, 2003 by trading class:

|           |        |          |            |            |  |   |            |            |  
|---------- | ------ | -------- | ---------- | ---------- |  | - | ---------- | ---------- | -
|           |        | Carrying |            | Unrealized
|           |        | Value    |            | Losses    
|           |        |          |            |           
|Traded     |        | $        | 81,316,708 |            |  | $ | (1,572,296 | )         
|Non-Traded |        |          |           |            |  |   |           |           
|           |        |          |            |            |  |   |            |           
|           | Totals |          | $          | 81,316,708 |  |   | $          | (1,572,296 | )
|           |        |          |            |            |  |   |            |           

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The following table stratifies the unrealized
losses as of March 31, 2003 by length of time the
securities have continuously been in an unrealized loss position:

|                                      |                  |              |       |            |            |            |  |   |          |            |  
|------------------------------------- | ---------------- | ------------ | ----- | ---------- | ---------- | ---------- |  | - | -------- | ---------- | -
|                                      |                  | Carrying     |       | Unrealized
|                                      |                  | Value        |       | Losses    
|                                      |                  |              |       |           
|Fixed Income Securities:              |                  |              |       |            |            |            |  |  
|                                      | Investment Grade |              |       |            |            |            |  |   |         
|                                      |                  | 0-6 months   |       | $          | 68,335,458 |            |  | $ | (843,895 | )         
|                                      |                  | 13-18 months |       |            | 7,052,210  |            |  |   | (281,072 | )         
|Preferred Stocks:                     |                  |              |       |            |            |            |  |  
|                                      |                  | 0-6 months   |       |            | 502,200    |            |  |   | (1,800   | )         
|                                      |                  | 7-12 months  |       |            | 1,946,400  |            |  |   | (50,820  | )         
|                                      |                  | 13-18 months |       |            | 1,010,000  |            |  |   | (17,500  | )         
|Venture Capital/ Limited Partnerships |                  |              |       |            |            |            |  |  
|                                      |                  | 0-6 months   |       |            | 2,470,440  |            |  |   | (377,209 | )         
|                                      |                  |              |       |            |            |            |  |  
|                                      |                  |              | Total |            | $          | 81,316,708 |  |   | $        | (1,572,296 | )
|                                      |                  |              |       |            |            |            |  |  

The maturities of fixed income investments that
are in an unrealized loss position at March 31, 2003 are as
follows:

|                                       |                                                 |          |            |            |  |   |            |            |  
|-------------------------------------- | ----------------------------------------------- | -------- | ---------- | ---------- |  | - | ---------- | ---------- | -
|                                       |                                                 | Carrying |            | Unrealized
|                                       |                                                 | Value    |            | Losses    
|                                       |                                                 |          |            |           
|Due in one year through five years     |                                                 | $        |           |            |  | $ |           |           
|Due after five years through ten years |                                                 |          |           |            |  |   |           |           
|Due thereafter                         |                                                 |          |           |            |  |   |           |           
|                                       |                                                 |          |            |            |  |   |            |           
|                                       | Total non-mortgage- and asset-backed securities |          |            | 0          |  |   |            | 0          |  
|Mortgage- and asset-backed securities  |                                                 |          | 75,387,668 |            |  |   | (1,124,967 | )         
|                                       |                                                 |          |            |            |  |   |            |           
|                                       | Total fixed income securities                   |          | $          | 75,387,668 |  |   | $          | (1,124,967 | )
|                                       |                                                 |          |            |            |  |   |            |           

The Consolidated Group is authorized by their
respective investment policies to use financial futures
instruments for the purpose of hedging interest rate risk
relative to the securities portfolio or potential trading
situations. In both cases, the futures transaction is intended
to reduce the risk associated with price movements for a balance
sheet asset. In addition, securities may be sold
short (the sale of securities which are not
currently in the portfolio and therefore must be purchased to
close out the sale agreement) as another means of hedging
interest rate risk, to benefit from an anticipated movement in
the financial markets. As of and during the six month period
ended March 31, 2003, the Consolidated Group had no
outstanding hedge transactions or open short sales positions.

Asset Quality



| |                                                     
| | ----------------------------------------------------
| | Servicing, Collection and Delinquency
    Experience

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

|                   |  |            |             |            |  |            |            |  |  |  |        | 
|------------------ |  | ---------- | ----------- | ---------- |  | ---------- | ---------- |  |  |  | ------ | 
|                   |  | Total      |             | Commercial |  |           
|                   |  | Commercial |             | Loans      |  | Percentage
|                   |  | Loans      |             | in Arrears |  | in Arrears
|                   |  |            |             |            |  |           
|March 31, 2003     |  | $          | 501,492,869 |            |  | $          | 83,223,192 |  |  |  | 16.60% | 
|September 30, 2002 |  | $          | 353,794,571 |            |  | $          | 26,349,403 |  |  |  | 7.45%  | 
|March 31, 2002     |  | $          | 164,778,219 |            |  | $          | 8,203,384  |  |  |  | 4.98%  | 
|September 30, 2001 |  | $          | 128,259,529 |            |  | $          | 5,742,560  |  |  |  | 4.48%  | 

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In addition to the amounts included in the table
above at March 31, 2003, there were approximately
$20.4 million in additional delinquent loans that the
Consolidated Group had serious doubts that the borrowers had the
ability to comply with present loan repayment terms, and
therefore may become 90 days delinquent. As of
March 31, 2003, these loans accounted for approximately
4.1% of the total outstanding Commercial Loans, but were not
included in the table above because they were less than
90 days delinquent. During the six month period ended
March 31, 2003, six new delinquencies with principal
balances of approximately $64.7 million contributed to the
increase in delinquencies since September 30, 2002.

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

The Problem Loan Review Committee is composed of
representatives from underwriting, risk management, operations,
commercial lending, legal and property development. The
committee meets weekly and reviews all newly defaulted loans,
continuing defaulted loans, loans in foreclosure, loans in
bankruptcy and progress on approved workout plans.

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

|                   |  |                    |             |                   |  |            |            |  |  |  |        | 
|------------------ |  | ------------------ | ----------- | ----------------- |  | ---------- | ---------- |  |  |  | ------ | 
|                   |  |                    |             | Residential and   |  |           
|                   |  | Total Residential  |             | Other Real Estate |  |           
|                   |  | and Other Real     |             | Receivables       |  | Percentage
|                   |  | Estate Receivables |             | in Arrears        |  | in Arrears
|                   |  |                    |             |                   |  |           
|March 31, 2003     |  | $                  | 282,462,065 |                   |  | $          | 33,079,360 |  |  |  | 11.71% | 
|September 30, 2002 |  | $                  | 279,362,588 |                   |  | $          | 26,105,228 |  |  |  | 9.34%  | 
|March 31, 2002     |  | $                  | 307,266,287 |                   |  | $          | 42,629,602 |  |  |  | 13.87% | 
|September 30, 2001 |  | $                  | 317,266,267 |                   |  | $          | 28,396,155 |  |  |  | 8.95%  | 

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

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

|                   |  |             |             |             |  |            |           |  |  |  |       | 
|------------------ |  | ----------- | ----------- | ----------- |  | ---------- | --------- |  |  |  | ----- | 
|                   |  |             |             | Other       |  |           
|                   |  | Total Other |             | Receivables |  | Percentage
|                   |  | Receivables |             | in Arrears  |  | in Arrears
|                   |  |             |             |             |  |           
|March 31, 2003     |  | $           | 133,359,904 |             |  | $          | 8,678,290 |  |  |  | 6.51% | 
|September 30, 2002 |  | $           | 128,241,355 |             |  | $          | 8,435,862 |  |  |  | 6.58% | 
|March 31, 2002     |  | $           | 161,617,012 |             |  | $          | 9,632,567 |  |  |  | 5.96% | 
|September 30, 2001 |  | $           | 176,104,766 |             |  | $          | 8,535,415 |  |  |  | 4.85% | 



| |                                                      
| | -----------------------------------------------------
| | Provision and Allowance for Losses on
    Receivables

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

|                                                |                                         |                              |            |                            |   |      |            |            |   |   |            |            |   |   |            |            |  
|----------------------------------------------- | --------------------------------------- | ---------------------------- | ---------- | -------------------------- | - | ---- | ---------- | ---------- | - | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                                |                                         |                              |            |                           
|                                                |                                         | Three Months Ended March 31, |            | Six Months Ended March 31,
|                                                |                                         |                              |            |                           
|                                                |                                         | 2003                         |            | 2002                       |   | 2003 |            | 2002      
|                                                |                                         |                              |            |                            |   |      |            |           
|Beginning balance                               |                                         | $                            | 12,525,352 |                            |   | $    | 13,976,282 |            |   | $ | 11,339,002 |            |   | $ | 13,509,977 |           
|Provisions                                      |                                         |                              | 7,983,022  |                            |   |      | 481,004    |            |   |   | 10,173,022 |            |   |   | 1,684,221  |           
|Charge offs, net:                               |                                         |                              |            |                            |   |      |            |            |   |   |            |            |   |   |            |           
|                                                | Commercial loans                        |                              |            | (363,352                   | ) |      |            | (1,960,777 | ) |   |            | (363,352   | ) |   |            | (1,960,777 | )
|                                                | Residential and other real estate loans |                              |            | (1,002,854                 | ) |      |            | (1,992,395 | ) |   |            | (2,006,504 | ) |   |            | (2,729,307 | )
|                                                | Leases                                  |                              |            | (289,434                   | ) |      |            |           |   |   |            | (289,434   | ) |   |            |           |  
|                                                | Other receivables                       |                              |            |                           |   |      |            |           |   |   |            |           |   |   |            |           |  
|                                                |                                         |                              |            |                            |   |      |            |            |   |   |            |            |   |   |            |           
|Ending balance                                  |                                         | $                            | 18,852,734 |                            |   | $    | 10,504,114 |            |   | $ | 18,852,734 |            |   | $ | 10,504,114 |           
|                                                |                                         |                              |            |                            |   |      |            |            |   |   |            |            |   |   |            |           
|Charge offs as a percent of average receivables |                                         |                              | 0.19       | %                          |   |      | 0.62       | %          |   |   | 0.32       | %          |   |   | 0.74       | %         
|Allowance as a percentage of total receivables  |                                         |                              | 2.06       | %                          |   |      | 1.66       | %          |   |   | 2.06       | %          |   |   | 1.66       | %         

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

|                                        |  |               |            |            |  |             |        |  |  |  |         | 
|--------------------------------------- |  | ------------- | ---------- | ---------- |  | ----------- | ------ |  |  |  | ------- | 
|                                        |  |               |            | Allocated  |  | Loan       
|                                        |  | Allocated     |            | Allowance  |  | Category   
|                                        |  | Allowance for |            | as a % of  |  | as a % of  
|                                        |  | Receivable    |            | Receivable |  | Total      
|                                        |  | Losses        |            | Category   |  | Receivables
|                                        |  |               |            |            |  |            
|March 31, 2003                          |  |               |            |            |  |             |        |  |  |  |         | 
|Commercial Loans                        |  | $             | 10,239,808 |            |  |             | 2.04%  |  |  |  | 54.67%  | 
|Residential and other real estate loans |  |               | 5,066,779  |            |  |             | 1.79%  |  |  |  | 30.79%  | 
|Leases                                  |  |               | 611,296    |            |  |             | 19.31% |  |  |  | 0.35%   | 
|Other receivables                       |  |               | 1,210,150  |            |  |             | 0.93%  |  |  |  | 14.19%  | 
|Unallocated                             |  |               | 1,724,701  |            |  |             | 0.22%  |  |  |  |         | 
|                                        |  |               |            |            |  |             |        |  |  |  |         | 
|                                        |  | $             | 18,852,734 |            |  |             | 2.06%  |  |  |  | 100.00% | 
|                                        |  |               |            |            |  |             |        |  |  |  |         | 
|March 31, 2002                          |  |               |            |            |  |             |        |  |  |  |         | 
|Commercial Loans                        |  | $             | 1,512,441  |            |  |             | 0.92%  |  |  |  | 26.01%  | 
|Residential and other real estate loans |  |               | 6,389,555  |            |  |             | 2.08%  |  |  |  | 48.49%  | 
|Leases                                  |  |               | 600,730    |            |  |             | 18.19% |  |  |  | 0.52%   | 
|Other receivables                       |  |               | 962,890    |            |  |             | 0.61%  |  |  |  | 24.98%  | 
|Unallocated                             |  |               | 1,038,498  |            |  |             | 0.22%  |  |  |  |         | 
|                                        |  |               |            |            |  |             |        |  |  |  |         | 
|                                        |  | $             | 10,504,114 |            |  |             | 1.66%  |  |  |  | 100.00% | 
|                                        |  |               |            |            |  |             |        |  |  |  |         | 

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

Commercial Loans are individually evaluated for
impairment. A commercial loan is considered impaired when, based
on specific facts and circumstances, it is probable that the
Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. When a commercial
loan has been identified as impaired, the Company determines the
allowance for loss based on the estimated net realizable value
of the collateral compared to the carrying value of the
receivable (including accrued interest and fees).

When determining the estimated value of
collateral, the Company has historically taken into
consideration the most recent third party appraisal and other
relevant market information. When reviewing the most recent
third party appraisal, the Company considers the type of
property, changes in the economic factors of the region since
the most recent appraisal and the various underlying appraisal
assumptions. In-house licensed appraisers that assist in the
commercial origination process also assist in this review.
Furthermore, the Company may also perform additional on-site
collateral visits to update its historical assessments and gain
additional information. If the estimated net realizable value of
the collateral is less than the carrying value, an allowance for
loss is recognized for the amount at which the carrying value
exceeds the estimated net realizable value. During the six month
period ended March 31, 2003, the Company recorded
provisions for losses on its commercial loan portfolio of
approximately $7.9 million. The current period provisions
resulted from a review of the most recent appraisals and other
relevant market information on loans that the Company deemed as
impaired at March 31, 2003. Loans that the Company
considered impaired at March 31, 2003 were approximately
$103.6 million compared to $50.2 million at
September 30, 2002. The During the six month period ended
March 31, 2003, five new impaired loans with principal
balances of approximately $59.4 million contributed to the
increase in loans that the Company deemed as impaired since
September 30, 2002.

The Consolidated Group establishes an allowance
for loss on residential and other real estate Receivables,
including accrued interest, inherent in the portfolio at the
balance sheet date based primarily on current

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##### Table of Contents



delinquencies and recent foreclosure and loss
experience. The residential and other real estate receivable
portfolio is comprised of a large group of smaller-balance
homogeneous loans that are collectively evaluated for
impairment. The reduction in the allocated allowance for losses
on residential and other real estate loans at March 31,
2003 compared to March 31, 2002 was primarily due to the
overall seasoning of the loan portfolio and a reduction in the
90-day delinquencies. As the Consolidated Group has recently
focused on Commercial Loan originations, the remaining real
estate receivable portfolio has been decreasing in size due to
payoffs and maturities. The remaining portfolio, which is
comprised of production from previous years, contains different
loss potential characteristics depending upon the year the loans
were produced (production pool years). Not all production pool
years will experience the same rate of loss over their
respective remaining lives. Pools that have seasoned beyond the
four-year mark generally experience lower future losses than
pools that are less seasoned.


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



| |                                                      
| | -----------------------------------------------------
| | Allowance for Losses on Real Estate Held
    for Sale

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

|                  |  |                    |           |                  |  |      |           |      |  |   |           |   |  |   |           |  
|----------------- |  | ------------------ | --------- | ---------------- |  | ---- | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                  |  |                    |           |                 
|                  |  | Three Months Ended |           | Six Months Ended
|                  |  | March 31,          |           | March 31,       
|                  |  |                    |           |                 
|                  |  | 2003               |           | 2002             |  | 2003 |           | 2002
|                  |  |                    |           |                  |  |      |           |     
|Beginning balance |  | $                  | 2,608,189 |                  |  | $    | 2,672,373 |      |  | $ | 1,998,448 |   |  | $ | 3,661,247 |  
|Provisions        |  |                    | 193,016   |                  |  |      | 436,035   |      |  |   | 1,495,340 |   |  |   | 195,649   |  
|Charge-offs, net  |  |                    | (121,108  | )                |  |      | (42,366   | )    |  |   | (813,691  | ) |  |   | (790,854  | )
|                  |  |                    |           |                  |  |      |           |      |  |   |           |   |  |   |           |  
|Ending balance    |  | $                  | 2,680,097 |                  |  | $    | 3,066,042 |      |  | $ | 2,680,097 |   |  | $ | 3,066,042 |  
|                  |  |                    |           |                  |  |      |           |      |  |   |           |   |  |   |           |  

Real estate held for sale is periodically
evaluated for impairment. Loss provisions for real estate held
for sale are calculated as the difference between the estimated
net realizable value and the carrying value at the measurement
date. The $1.5 million provision for loss during the
six-month period ended March 31, 2003 was primarily the
result of a reduction in the sales price on some of the
Companys real estate held for sale portfolio and a
$0.8 million provision for loss on an orchard in Washington
that lost its organic growing status. The $0.8 million
provision was based on a new appraisal that the Company obtained
on the orchard.

Liquidity and Capital Resources

The objective of liquidity management is to
provide funds at an acceptable cost to service liabilities as
they become due and to meet demands for Commercial Loans and
Receivable purchases. Managing liquidity also enables the
Consolidated Group to take advantage of opportunities for
business expansion. The Consolidated Group finances its business
operations and growth primarily through the sale of annuity and
life insurance products, the sale of debt securities and
preferred stock and a secured line of credit agreement in
addition to the maturity of the current Receivable portfolio.
Primarily, the Consolidated Groups sources of liquidity
are long-term in nature as they are used for long-term
investments. Generally, short-term liquidity is provided through
earnings and contractual repayments from its Receivable and
investment portfolios. However, the secured line of credit
agreement and the reverse repurchase agreement discussed below
can be used for short-term liquidity purposes.

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| |          
| | ---------
| | Annuities

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

Western Life has a reinsurance agreement with Old
Standard, an affiliate, which became effective July 1,
1998. Under this agreement, Western Life can reinsure with Old
Standard 75% of the risk on various annuity products. The
reinsurance agreement is an ongoing arrangement with no stated
expiration or termination date, although either party may stop
and restart at their discretion upon providing a 30-day advance
written notice. During the six months ended March 31, 2003,
no additional annuity premiums were ceded to Old Standard under
this agreement.

At March 31, 2003, approximately 85% of the
Consolidated Groups assets were held by Western Life. The
growth in the assets of Consolidated Group during the six months
ended March 2003 was primarily due to the growth in annuity
sales. Future growth of the Consolidated Group will continue to
be dependent upon the successful efforts of Western Life to sell
annuity products. To the extent that annuity sales decline such
that annuity surrenders begin to exceed new annuity sales, the
Consolidated Group could experience a reduction in its total
assets, thereby potentially reducing the earnings capacity of
the Consolidated Group.



| |                           
| | --------------------------
| | Debt and Equity Securities

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 broker/ dealer. At March 31, 2003,
Metropolitan had registered for sale up to $150.0 million
of Series III and Series III-A Debenture Bonds. This
debenture bond offering expired on April 30, 2003.
Additionally, Metropolitan 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 offering
expires July 31, 2003. On March 27, 2003, the Company
filed with the SEC a registration statement for the sale of up
to $150.0 million of Series III and III-A
Debenture Bonds. This registration statement is currently under
regulatory review. If cash flows from earnings, Receivables and
other existing assets are inadequate to satisfy
Metropolitans obligation to pay maturing investment
certificates and preferred stock dividends, Metropolitans
inability to access public offerings of investment certificates
and preferred stock would impact its ability to meet its
obligations related to its previously issued debt and equity
securities.

Western Holding had registered for sale up to
2,000,000 shares of Series A preferred stock that are
offered at $25 per share for a total preferred stock
offering price of $50.0 million. Effective January 2,
2003, the initial escrow period ended and Western Holding
completed the initial sale of its preferred stock to the public.
Subsequently, Western Holding commenced its continuous best
efforts offering of the preferred stock. As of March 31,
2003, 446,571 shares of Western Holdings preferred
stock were outstanding, which resulted in net proceeds of
$9.3 million. This preferred stock offering expires
July 31, 2003.



| |                       
| | ----------------------
| | Secured Line of Credit

Western Life has a secured line of credit
agreement with the Federal Home Loan Bank of Seattle
(FHLB). When an institution becomes a stockholder in the FHLB,
it can borrow from the FHLB at a stock to borrowing ratio of
1 to 20. At March 31, 2003, Western Life had a stock
investment in the FHLB of

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approximately $7.6 million. The collateral
eligible to be used to secure the borrowing is predefined by the
FHLB and generally consists of high quality collateralized
mortgage obligations. Each type of collateral has a minimum
requirement that ranges from 100% to 125% of borrowings. At
March 31, 2003, Western Life had $307.2 million in
eligible collateral with a market value of $318.5 million
and a borrowing capacity of $224.5 million, subject to the
purchase of approximately $6.1 million in additional FHLB
stock. Approximately $202.5 million in securities having a
market value of $210.0 million were pledged to
collateralize the outstanding borrowings to the FHLB at
March 31, 2003. At March 31, 2003, Western Life had
approximately $148.0 million in outstanding borrowings to
the FHLB leaving an unused borrowing capacity of approximately
$76.5 million, subject to the purchase of approximately
$6.1 million in additional FHLB stock. During the six
months ended March 31, 2003, Western Lifes
outstanding borrowings on the secured line of credit increased
$45.0 million. This increase accounted for approximately
24.8% of the Consolidated Groups net cash provided by
financing activities.




| |                        
| | -----------------------
| | Other Liquidity Sources

Another source of liquidity is derived from
payments received on receivables and investments and the sale of
real estate. A decrease in the prepayment rate on receivables or
in the ability to sell real estate would reduce future cash
flows from receivables. Additionally, to increase liquidity, the
Consolidated Group may occasionally sell securities to a third
party broker-dealer under the provision that the Consolidated
Group will buy them back by a predetermined date for a specific
price, often called a reverse repurchase agreement The
Consolidated Group did not enter into any reverse repurchase
transactions during the periods presented.

During the six months ended March 31, 2003,
the Consolidated Group transferred $262.5 million of
securities from its available-for-sale portfolio to its
held-to-maturity portfolio. The securities transferred included
those securities pledged as collateral to secure the FHLB line
of credit agreement. The Consolidated Group has the intent and
ability to hold these securities until maturity.



| |                                          
| | -----------------------------------------
| | Capital and Regulatory
    Considerations

The state of Washingtons Risk-Based Capital
Model law requires an insurance company to maintain specified
amounts of capital and surplus based on complex calculations of
risk factors that encompass the invested assets and business
activities of the insurance company. Compliance with the
Risk-Based Capital Model Law requirements is tested annually as
of a calendar year-end. At the last annual review at its
statutory reporting period ended December 31, 2002, Western
Lifes capital and surplus levels exceeded the calculated
specified requirements.

Recently, Western Life has maintained adequate
levels of capital through capital contributions from
Metropolitan. Through Western Holding, Metropolitan contributed
$41.4 million of capital to Western Life during the
six-month period ended March 31, 2003. Additionally,
Western Holding, the parent company of Western Life, had
registered for sale up to $50.0 million of Series A
preferred stock at March 31, 2003. As of March 31,
2003, Western Holding had issued 446,571 shares of
preferred stock and received net proceeds of approximately
$9.3 million, which Western Holding used as capital
contributions to Western Life. Western Lifes ability to
generate capital is dependent on Metropolitans ability to
maintain adequate levels of liquidity permitting it to make
further capital investments in Western Life and Western
Holdings ability to sell preferred stock, allowing Western
Holding to make capital contributions to Western Life. To the
extent that Metropolitan or Western Holding do not generate
sufficient liquidity permitting them to make further capital
investments in Western Life, Western Lifes ability to
generate capital could be adversely affected, which in turn
could negatively affect its ability to increase its investments
in higher risk-adjusted assets such as commercial loans, real
estate and equity investments.

The Consolidated Group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 Lifes investments in real estate related
assets to 65% of its statutory assets. Western Life is
restricted from selling non-real estate related assets if, after
the sale, Western Lifes real estate assets would exceed
65% of its statutory assets. However, occasionally Western Life
may acquire real estate related receivables that qualify as
mortgage-related securities under the

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Secondary Mortgage Market Enhancement Act, or
SMMEA. SMMEA generally provides that qualifying loans may be
acquired to the same extent that obligations that are issued by
or guaranteed as to principal and interest by the United States
Government, its agencies and the instrumentalities can be
acquired. As a result, Western Life can acquire qualifying real
estate loans in amounts in excess of the 65% limitation. At
March 31, 2003, Western Life had approximately 51.2% of its
statutory admitted assets invested in real estate related assets
that did not qualify as SMMEA investments.


For statutory purposes, Western Life performs
cash flow testing under seven different interest rate scenarios.
An annual opinion regarding the adequacy of the cash flow
testing is filed with the insurance departments in the states
where Western Life is licensed as an insurance company. At
December 31, 2002, the results of this cash flow testing
process were satisfactory.



| |                    
| | -------------------
| | Lending Commitments

The Consolidated Group had approximately
$76.9 million of outstanding commitments to extend credit
to commercial borrowers at March 31, 2003.



| |                     
| | --------------------
| | New Accounting Rules

In October 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards 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. Implementation
of this new standard on October 1, 2002 did not have a
material impact on the Consolidated Groups 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 believes there has not been a
material change in its market risk since the end of its last
fiscal year.



|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

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

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

33



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##### Table of Contents






PART II  OTHER
INFORMATION



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

(a) Exhibits

None.

(b) During the quarter ended
March 31, 2003, the Registrant filed the following reports
on Form 8-K:

None.

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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 15th day of May 2003 on its behalf by
the undersigned, thereunto duly authorized.



| |                                                 
| | ------------------------------------------------
| | METROPOLITAN MORTGAGE & SECURITIES CO.,
    INC.
|
| | /s/ C. PAUL SANDIFUR, JR.                       
| |                                                 
| | C. Paul Sandifur, Jr.                           
| | Chief Executive Officer,                        
| | President and Chairman of the Board             
|
| | /s/ ROBERT A. NESS                              
| |                                                 
| | Robert A. Ness                                  
| | Controller (Principal Financial
    Officer)    

35



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##### Table of Contents






CERTIFICATIONS

I, C. Paul Sandifur, Jr., Chief Executive Officer
of Metropolitan Mortgage & Securities Co., Inc.,
certify that:

1. I have reviewed this quarterly report on
Form 10-Q of Metropolitan Mortgage & Securities
Co., Inc.;

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

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

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



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

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



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

6. The registrants other certifying
officers and I have indicated in this quarterly report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



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

Date: May 15, 2003

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##### Table of Contents






CERTIFICATIONS

I, Robert A. Ness, Controller (Principal
Financial Officer) of Metropolitan Mortgage &
Securities Co., Inc., certify that:

1. I have reviewed this quarterly report on
Form 10-Q of Metropolitan Mortgage & Securities
Co., Inc;

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

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

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



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

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



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

6. The registrants other certifying
officers and I have indicated in this quarterly report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



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

Date: May 15, 2003

37