##### Table of Contents



FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


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

For the quarterly period ended December 31, 2002

OR

[   ] 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 [X] No [   ]

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [X]

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 [   ] No [   ] 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 January 31, 2003.

Common B: 0 shares at January 31, 2003.





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TABLE OF CONTENTS



|                               |                              |                                                        |  |  |  |  |  | 
|------------------------------ | ---------------------------- | ------------------------------------------------------ |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | ITEM 1. FINANCIAL STATEMENTS
|                               |                              | CONSOLIDATED BALANCE SHEETS                           
|                               |                              | CONSOLIDATED STATEMENTS OF OPERATIONS                 
|                               |                              | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|                               |                              | CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY        
|                               |                              | CONSOLIDATED STATEMENTS OF CASH FLOWS                 
|                               |                              | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS            
|SIGNATURES                    
|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 December 31, 2002 and September 30, 2002                          
|                             | Consolidated Statements of Operations
Three Months Ended December 31, 2002 and 2001                 
|                             | Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended December 31, 2002 and 2001
|                             | Consolidated Statement of Stockholders Equity
Three Months Ended December 31, 2002                 
|                             | Consolidated Statements of Cash Flows
Three Months Ended December 31, 2002 and 2001                 
|                             | Notes to Consolidated Financial Statements                                                          





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##### Table of Contents






PART I  FINANCIAL INFORMATION




|        |  |                     
|------- |  | --------------------
|ITEM 1. |  | FINANCIAL STATEMENTS




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

|                      |                                                                                                                                                                                                                                              |                                                                                                                          |                                            |               |               |               |               |               |               |               | 
|--------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------------- | ------------- | ------------- | ------------- | ------------- | ------------- | ------------- | 
|                      |                                                                                                                                                                                                                                              |                                                                                                                          |                                            |               | December 31,  |               | September 30,
|                      |                                                                                                                                                                                                                                              |                                                                                                                          |                                            |               | 2002          |               | 2002         
|                      |                                                                                                                                                                                                                                              |                                                                                                                          |                                            |               |               |               |              
|                      |                                                                                                                                                                                                                                              |                                                                                                                          |                                            |               | (unaudited)   |               |               |               |              
|Assets:               |                                                                                                                                                                                                                                              |                                                                                                                          |                                            |               |               |               |               |              
|                      | Cash and cash equivalents                                                                                                                                                                                                                    |                                                                                                                          | $                                          | 31,992,393    |               |               | $             | 68,317,397    |              
|                      | Investments:                                                                                                                                                                                                                                 |                                                                                                                          |                                            |               |               |               |               |               |              
|                      |                                                                                                                                                                                                                                              | Available-for-sale securities, at fair value                                                                             |                                            |               | 308,942,295   |               |               |               | 495,060,513   |              
|                      |                                                                                                                                                                                                                                              | Held-to maturity securities, at amortized cost                                                                           |                                            |               | 291,415,803   |               |               |               | 40,228,608    |              
|                      |                                                                                                                                                                                                                                              | Accrued interest on investments                                                                                          |                                            |               | 4,579,693     |               |               |               | 3,195,679     |              
|                      |                                                                                                                                                                                                                                              |                                                                                                                          |                                            |               |               |               |               |               |              
|                      |                                                                                                                                                                                                                                              |                                                                                                                          | Total investments                          |               |               | 604,937,791   |               |               |               | 538,484,800   | 
|                      |                                                                                                                                                                                                                                              |                                                                                                                          |                                            |               |               |               |               |               |              
|                      | Receivables:                                                                                                                                                                                                                                 |                                                                                                                          |                                            |               |               |               |               |               |              
|                      |                                                                                                                                                                                                                                              | Real estate contracts and mortgage notes and other
receivables, net of discounts and origination fees                    |                                            |               | 860,409,434   |               |               |               | 762,424,455   |              
|                      |                                                                                                                                                                                                                                              | Less allowance for losses on receivables                                                                                 |                                            |               | (12,525,352   | )             |               |               | (11,339,002   | )            
|                      |                                                                                                                                                                                                                                              |                                                                                                                          |                                            |               |               |               |               |               |              
|                      |                                                                                                                                                                                                                                              |                                                                                                                          | Net receivables                            |               |               | 847,884,082   |               |               |               | 751,085,453   | 
|                      |                                                                                                                                                                                                                                              |                                                                                                                          |                                            |               |               |               |               |               |              
|                      | Other assets:                                                                                                                                                                                                                                |                                                                                                                          |                                            |               |               |               |               |               |              
|                      |                                                                                                                                                                                                                                              | Real estate held for sale and development at the
lower of cost or market, net of allowances of
$2,608,189 and $1,998,448 |                                            |               | 111,968,105   |               |               |               | 106,979,005   |              
|                      |                                                                                                                                                                                                                                              | Reinsurance receivable                                                                                                   |                                            |               | 148,145,873   |               |               |               | 148,392,448   |              
|                      |                                                                                                                                                                                                                                              | Deferred costs, net                                                                                                      |                                            |               | 81,756,659    |               |               |               | 80,412,809    |              
|                      |                                                                                                                                                                                                                                              | Land, buildings and equipment, net                                                                                       |                                            |               | 27,324,792    |               |               |               | 27,365,485    |              
|                      |                                                                                                                                                                                                                                              | Deferred income tax benefit                                                                                              |                                            |               | 9,330,217     |               |               |               | 7,625,033     |              
|                      |                                                                                                                                                                                                                                              | Current income taxes receivable                                                                                          |                                            |               | 10,858,315    |               |               |               | 14,240,000    |              
|                      |                                                                                                                                                                                                                                              | Other assets, net                                                                                                        |                                            |               | 41,554,023    |               |               |               | 44,216,370    |              
|                      |                                                                                                                                                                                                                                              |                                                                                                                          |                                            |               |               |               |               |               |              
|                      |                                                                                                                                                                                                                                              |                                                                                                                          | Total other assets                         |               |               | 430,937,984   |               |               |               | 429,231,150   | 
|                      |                                                                                                                                                                                                                                              |                                                                                                                          |                                            |               |               |               |               |               |              
|                      |                                                                                                                                                                                                                                              |                                                                                                                          | Total assets                               |               | $             | 1,915,752,250 |               |               | $             | 1,787,118,800 | 
|                      |                                                                                                                                                                                                                                              |                                                                                                                          |                                            |               |               |               |               |               |              
|Liabilities:          |                                                                                                                                                                                                                                              |                                                                                                                          |                                            |               |               |               |               |              
|                      | Life insurance and annuity reserves                                                                                                                                                                                                          |                                                                                                                          | $                                          | 1,290,795,610 |               |               | $             | 1,225,660,253 |              
|                      | Debenture bonds and accrued interest                                                                                                                                                                                                         |                                                                                                                          |                                            | 366,582,410   |               |               |               | 355,465,932   |              
|                      | Debt payable                                                                                                                                                                                                                                 |                                                                                                                          |                                            | 172,249,832   |               |               |               | 123,138,257   |              
|                      | Accounts payable and accrued expenses                                                                                                                                                                                                        |                                                                                                                          |                                            | 10,362,640    |               |               |               | 9,574,039     |              
|                      |                                                                                                                                                                                                                                              |                                                                                                                          |                                            |               |               |               |               |               |              
|                      |                                                                                                                                                                                                                                              | Total liabilities                                                                                                        |                                            |               | 1,839,990,492 |               |               |               | 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,
1,150,179 shares and 1,167,096 shares issued and outstanding
(liquidation preference $30,546,247 and $31,458,375) |                                                                                                                          |                                            | 11,501,782    |               |               |               | 11,670,954    |              
|                      | Preferred stock, Series E-7 cumulative with variable rate, $2.50 par value,
10,000,000 shares authorized, 2,312,898 shares and 1,959,943 shares issued
and outstanding (liquidation preference $57,822,458 and $48,998,581)                  |                                                                                                                          |                                            | 5,782,246     |               |               |               | 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                                                                                                                                                                                                                   |                                                                                                                          |                                            | 56,570,063    |               |               |               | 49,836,670    |              
|                      | Accumulated other comprehensive income                                                                                                                                                                                                       |                                                                                                                          |                                            | 2,766,365     |               |               |               | 3,291,285     |              
|                      | Retained earnings (deficit)                                                                                                                                                                                                                  |                                                                                                                          |                                            | (1,076,948    | )             |               |               | 3,363,303     |              
|                      |                                                                                                                                                                                                                                              |                                                                                                                          |                                            |               |               |               |               |               |              
|                      |                                                                                                                                                                                                                                              |                                                                                                                          | Total stockholders equity                 |               |               | 75,761,758    |               |               |               | 73,280,319    | 
|                      |                                                                                                                                                                                                                                              |                                                                                                                          |                                            |               |               |               |               |               |              
|                      |                                                                                                                                                                                                                                              |                                                                                                                          | Total liabilities and stockholders equity |               | $             | 1,915,752,250 |               |               | $             | 1,787,118,800 | 
|                      |                                                                                                                                                                                                                                              |                                                                                                                          |                                            |               |               |               |               |               |              

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





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##### Table of Contents






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

|                                                                       |                                                                             |                |            |                    |            |      |          |            |            | 
|---------------------------------------------------------------------- | --------------------------------------------------------------------------- | -------------- | ---------- | ------------------ | ---------- | ---- | -------- | ---------- | ---------- | 
|                                                                       |                                                                             |                |            | Three Months Ended
|                                                                       |                                                                             |                |            | December 31,      
|                                                                       |                                                                             |                |            |                   
|                                                                       |                                                                             |                |            | 2002               |            | 2001
|                                                                       |                                                                             |                |            |                    |            |     
|Revenues:                                                              |                                                                             |                |            |                    |            |      |          |           
|                                                                       | Insurance premiums and annuity considerations                               |                | $          | 403,761            |            |      | $        | 471,171    |           
|                                                                       | Interest on receivables                                                     |                |            | 19,185,153         |            |      |          | 12,267,586 |           
|                                                                       | Earned discount on receivables and investments                              |                |            | 7,734,145          |            |      |          | 8,944,487  |           
|                                                                       | Other investment income                                                     |                |            | 9,053,251          |            |      |          | 7,699,902  |           
|                                                                       | Real estate sales                                                           |                |            | 5,038,116          |            |      |          | 2,339,414  |           
|                                                                       | Fees, commissions, service and other income                                 |                |            | 1,411,575          |            |      |          | 1,961,705  |           
|                                                                       | Net gains (losses) on investments                                           |                |            | (3,106,644         | )          |      |          | 1,203,177  |           
|                                                                       | Net gains (losses) on sales of receivables                                  |                |            | (14,635            | )          |      |          | 347,975    |           
|                                                                       |                                                                             |                |            |                    |            |      |          |            |           
|                                                                       |                                                                             | Total revenues |            |                    | 39,704,722 |      |          |            | 35,235,417 | 
|                                                                       |                                                                             |                |            |                    |            |      |          |            |           
|Expenses:                                                              |                                                                             |                |            |                    |            |      |          |           
|                                                                       | Insurance policy and annuity benefits                                       |                |            | 15,593,631         |            |      |          | 13,168,323 |           
|                                                                       | Interest, net                                                               |                |            | 8,737,536          |            |      |          | 7,647,475  |           
|                                                                       | Cost of real estate sold                                                    |                |            | 4,665,667          |            |      |          | 2,299,911  |           
|                                                                       | Provision for losses                                                        |                |            | 3,492,324          |            |      |          | 962,831    |           
|                                                                       | Salaries and employee benefits                                              |                |            | 3,825,001          |            |      |          | 4,120,931  |           
|                                                                       | Commissions to agents                                                       |                |            | 3,981,766          |            |      |          | 2,022,372  |           
|                                                                       | Other operating and underwriting expenses                                   |                |            | 4,587,262          |            |      |          | 4,115,605  |           
|                                                                       | Amortization of deferred policy acquisition
costs, net of costs capitalized |                |            | (1,120,950         | )          |      |          | 720,160    |           
|                                                                       |                                                                             |                |            |                    |            |      |          |            |           
|                                                                       |                                                                             | Total expenses |            |                    | 43,762,237 |      |          |            | 35,057,608 | 
|                                                                       |                                                                             |                |            |                    |            |      |          |            |           
|Income (loss) before income taxes and
minority interest                |                                                                             |                | (4,057,515 | )                  |            |      | 177,809  |           
|Income tax (provision) benefit                                         |                                                                             |                | 1,419,724  |                    |            |      | (31,460  | )         
|                                                                       |                                                                             |                |            |                    |            |      |          |            |           
|Income (loss) before minority interest                                 |                                                                             |                | (2,637,791 | )                  |            |      | 146,349  |           
|Income of consolidated subsidiaries
allocated to minority stockholders |                                                                             |                |           |                    |            |      | (88,782  | )         
|                                                                       |                                                                             |                |            |                    |            |      |          |            |           
|Net income (loss)                                                      |                                                                             |                | (2,637,791 | )                  |            |      | 57,567   |           
|Preferred stock dividends                                              |                                                                             |                | (1,744,015 | )                  |            |      | (936,346 | )         
|                                                                       |                                                                             |                |            |                    |            |      |          |            |           
|Loss applicable to common stockholders                                 |                                                                             | $              | (4,381,806 | )                  |            | $    | (878,779 | )         
|                                                                       |                                                                             |                |            |                    |            |      |          |            |           

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





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##### Table of Contents






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

|                                                      |                                           |                                                                               |            |                    |            |      |            |            |            |  
|----------------------------------------------------- | ----------------------------------------- | ----------------------------------------------------------------------------- | ---------- | ------------------ | ---------- | ---- | ---------- | ---------- | ---------- | -
|                                                      |                                           |                                                                               |            | Three Months Ended
|                                                      |                                           |                                                                               |            | December 31,      
|                                                      |                                           |                                                                               |            |                   
|                                                      |                                           |                                                                               |            | 2002               |            | 2001
|                                                      |                                           |                                                                               |            |                    |            |     
|Net income (loss)                                     |                                           | $                                                                             | (2,637,791 | )                  |            | $    | 57,567     |           
|                                                      |                                           |                                                                               |            |                    |            |      |            |           
|Other comprehensive income (loss), net of income tax: |                                           |                                                                               |            |                    |            |      |            |           
|                                                      | Unrealized gains (losses) on investments: |                                                                               |            |                    |            |      |            |            |           
|                                                      |                                           | Unrealized holding gains (losses) arising
during period(1)                    |            |                    | (2,524,815 | )    |            |            | (4,136,059 | )
|                                                      |                                           | Less reclassification adjustment for
(gains) losses included in net income(2) |            |                    | 1,999,895  |      |            |            | (706,640   | )
|                                                      |                                           |                                                                               |            |                    |            |      |            |           
|                                                      | Net other comprehensive loss              |                                                                               |            | (524,920           | )          |      |            | (4,842,699 | )         
|                                                      |                                           |                                                                               |            |                    |            |      |            |           
|Comprehensive loss                                    |                                           | $                                                                             | (3,162,711 | )                  |            | $    | (4,785,132 | )         
|                                                      |                                           |                                                                               |            |                    |            |      |            |           



---

|(1) |  | Net of related tax of ($1,362,327) and ($2,218,172) during the three
months ended December 31, 2002 and 2001, respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Net of related tax of $1,076,867 and ($380,498) during the three months
ended December 31, 2002 and 2001, respectively.    

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





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##### Table of Contents






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

|                                                                                              |  |           |            |        |  |         |         |               |  |            |            |       |  |             |           |   |  |   |            |   |  |   |            |  
|--------------------------------------------------------------------------------------------- |  | --------- | ---------- | ------ |  | ------- | ------- | ------------- |  | ---------- | ---------- | ----- |  | ----------- | --------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                                                              |  |           |            |        |  |         |         |               |  |            |            |       |  | Accumulated |           |   |  |   |            |   |  |  
|                                                                                              |  |           |            |        |  |         |         |               |  | Additional |            | Other |  | Retained    |           |   |  |  
|                                                                                              |  | Preferred |            | Common |  | Paid-in |         | Comprehensive |  | Earnings   |            |       |  |            
|                                                                                              |  | Stock     |            | Stock  |  | Capital |         | Income        |  | (Deficit)  |            | Total
|                                                                                              |  |           |            |        |  |         |         |               |  |            |            |      
|Balance, October 1, 2002                                                                      |  | $         | 16,570,811 |        |  | $       | 218,250 |               |  | $          | 49,836,670 |       |  | $           | 3,291,285 |   |  | $ | 3,363,303  |   |  | $ | 73,280,319 |  
|Net income (loss)                                                                             |  |           |            |        |  |         |         |               |  |            |            |       |  |             |           |   |  |   | (2,637,791 | ) |  |   | (2,637,791 | )
|Net unrealized losses
on available-for-sale
securities, net of
income tax benefit
of $285,460 |  |           |            |        |  |         |         |               |  |            |            |       |  |             | (524,920  | ) |  |   |            |   |  |   | (524,920   | )
|Cash dividends, common
($605 per share)                                                       |  |           |            |        |  |         |         |               |  |            |            |       |  |             |           |   |  |   | (58,445    | ) |  |   | (58,445    | )
|Cash dividends, preferred
(variable rate)                                                     |  |           |            |        |  |         |         |               |  |            |            |       |  |             |           |   |  |   | (1,744,015 | ) |  |   | (1,744,015 | )
|Redemption and
retirement variable
rate of preferred
stock (21,027
shares)                    |  |           | (180,770   | )      |  |         |         |               |  |            | (847,924   | )     |  |             |           |   |  |   |            |   |  |   | (1,028,694 | )
|Sale of variable rate
preferred stock, net
(357,065 shares)                                   |  |           | 893,987    |        |  |         |         |               |  |            | 7,581,317  |       |  |             |           |   |  |   |            |   |  |   | 8,475,304  |  
|                                                                                              |  |           |            |        |  |         |         |               |  |            |            |       |  |             |           |   |  |   |            |   |  |   |            |  
|Balance, December 31, 2002                                                                    |  | $         | 17,284,028 |        |  | $       | 218,250 |               |  | $          | 56,570,063 |       |  | $           | 2,766,365 |   |  | $ | (1,076,948 | ) |  | $ | 75,761,758 |  
|                                                                                              |  |           |            |        |  |         |         |               |  |            |            |       |  |             |           |   |  |   |            |   |  |   |            |  

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





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##### Table of Contents






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

|                                                        |                                                                                                          |                                           |                                                    |                                                                   |             |                    |             |              |            |             |            |  
|------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | ----------------------------------------- | -------------------------------------------------- | ----------------------------------------------------------------- | ----------- | ------------------ | ----------- | ------------ | ---------- | ----------- | ---------- | -
|                                                        |                                                                                                          |                                           |                                                    |                                                                   |             | Three Months Ended
|                                                        |                                                                                                          |                                           |                                                    |                                                                   |             | December 31,      
|                                                        |                                                                                                          |                                           |                                                    |                                                                   |             |                   
|                                                        |                                                                                                          |                                           |                                                    |                                                                   |             | 2002               |             | 2001        
|                                                        |                                                                                                          |                                           |                                                    |                                                                   |             |                    |             |             
|Cash flow from operating activities:                    |                                                                                                          |                                           |                                                    |                                                                   |             |                    |             |             
|                                                        | Net income (loss)                                                                                        |                                           | $                                                  | (2,637,791                                                        | )           |                    | $           | 57,567       |           
|                                                        | Adjustments to reconcile net income (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                  |                                                                   |             |                   |             |              |            | (4,669,459  | )         
|                                                        |                                                                                                          |                                           | Earned discount on receivables and investments     |                                                                   |             | (7,734,145         | )           |              |            | (8,944,487  | )         
|                                                        |                                                                                                          |                                           | Losses (gains) on investments and receivables, net |                                                                   |             | 3,121,279          |             |              |            | (1,551,153  | )         
|                                                        |                                                                                                          |                                           | Gains on sales of real estate                      |                                                                   |             | (372,449           | )           |              |            | (39,503     | )         
|                                                        |                                                                                                          |                                           | Provision for losses                               |                                                                   |             | 3,492,324          |             |              |            | 962,831     |           
|                                                        |                                                                                                          |                                           | Depreciation and amortization                      |                                                                   |             | 1,129,681          |             |              |            | 1,253,064   |           
|                                                        |                                                                                                          |                                           | Minority interests                                 |                                                                   |             |                   |             |              |            | 88,782      |           
|                                                        |                                                                                                          |                                           | Deferred income tax benefit                        |                                                                   |             | (1,705,184         | )           |              |            | (2,598,670  | )         
|                                                        |                                                                                                          |                                           | Changes in assets and liabilities:                 |                                                                   |             |                    |             |              |            |             |           
|                                                        |                                                                                                          |                                           |                                                    | Deferred cost, net                                                |             |                    | (1,343,850  | )            |            |             | 8,339      |  
|                                                        |                                                                                                          |                                           |                                                    | Life insurance and annuity reserves                               |             |                    | 11,594,680  |              |            |             | 13,349,168 |  
|                                                        |                                                                                                          |                                           |                                                    | Compound and accrued interest on debenture
bonds and debt payable |             |                    | 1,680,482   |              |            |             | 593,142    |  
|                                                        |                                                                                                          |                                           |                                                    | Accrued interest on receivables and investments                   |             |                    | (6,649,282  | )            |            |             | (3,101,863 | )
|                                                        |                                                                                                          |                                           |                                                    | Other assets                                                      |             |                    | 6,008,785   |              |            |             | 6,001,818  |  
|                                                        |                                                                                                          |                                           |                                                    | Accounts payable and accrued expenses                             |             |                    | 5,478,648   |              |            |             | (3,405,044 | )
|                                                        |                                                                                                          |                                           |                                                    |                                                                   |             |                    |             |              |           
|                                                        |                                                                                                          |                                           |                                                    | Net cash provided by operating activities                         |             |                    | 12,063,178  |              |            |             | 12,614,821 |  
|                                                        |                                                                                                          |                                           |                                                    |                                                                   |             |                    |             |              |           
|Cash flow from investing activities:                    |                                                                                                          |                                           |                                                    |                                                                   |             |                    |             |             
|                                                        | Proceeds from maturities of available-for-sale securities                                                |                                           |                                                    | 10,228,173                                                        |             |                    |             | 18,988,551   |           
|                                                        | Proceeds from sales of available-for-sale securities                                                     |                                           |                                                    | 107,354,227                                                       |             |                    |             | 37,484,332   |           
|                                                        | Purchases of available-for-sale securities                                                               |                                           |                                                    | (204,878,873                                                      | )           |                    |             | (126,629,165 | )         
|                                                        | Proceeds from maturities of held-to-maturity securities                                                  |                                           |                                                    | 12,668,930                                                        |             |                    |             |             |           
|                                                        | Principal payments received on real estate contracts
and mortgage notes and other receivable investments |                                           |                                                    | 43,515,206                                                        |             |                    |             | 44,615,339   |           
|                                                        | Proceeds from sales of real estate contracts and mortgage
notes and other receivable investments         |                                           |                                                    | 1,067,231                                                         |             |                    |             | 3,491,257    |           
|                                                        | Purchases and originations of real estate contracts and
mortgage notes and other receivable investments  |                                           |                                                    | (135,094,888                                                      | )           |                    |             | (52,474,689  | )         
|                                                        | Proceeds from sales of real estate                                                                       |                                           |                                                    | 5,038,116                                                         |             |                    |             | 2,339,414    |           
|                                                        | Purchases of and costs associated with real estate held
for sale and development                         |                                           |                                                    | (5,543,029                                                        | )           |                    |             | (2,675,387   | )         
|                                                        | Capital expenditures                                                                                     |                                           |                                                    | (633,942                                                          | )           |                    |             | (135,982     | )         
|                                                        |                                                                                                          |                                           |                                                    |                                                                   |             |                    |             |              |           
|                                                        |                                                                                                          |                                           | Net cash used in investing activities              |                                                                   |             | (166,278,849       | )           |              |            | (74,996,330 | )         
|                                                        |                                                                                                          |                                           |                                                    |                                                                   |             |                    |             |              |           
|Cash flow from financing activities:                    |                                                                                                          |                                           |                                                    |                                                                   |             |                    |             |             
|                                                        | Receipts from life and annuity products                                                                  |                                           |                                                    | 87,540,646                                                        |             |                    |             | 40,013,211   |           
|                                                        | Withdrawals of life and annuity products                                                                 |                                           |                                                    | (36,272,594                                                       | )           |                    |             | (29,367,103  | )         
|                                                        | Ceding of life and annuity products to reinsurers                                                        |                                           |                                                    |                                                                  |             |                    |             | (83,669      | )         
|                                                        | Ceding of life and annuity products from reinsurers                                                      |                                           |                                                    | 2,430,894                                                         |             |                    |             | 3,217,219    |           
|                                                        | Proceeds from issuance of debenture bonds                                                                |                                           |                                                    | 20,649,237                                                        |             |                    |             | 37,644,483   |           
|                                                        | Repayments of debenture bonds                                                                            |                                           |                                                    | (11,042,632                                                       | )           |                    |             | (13,242,936  | )         
|                                                        | Increase in debt payable                                                                                 |                                           |                                                    | 83,300,000                                                        |             |                    |             | 10,000,000   |           
|                                                        | Repayments of debt payable                                                                               |                                           |                                                    | (34,359,034                                                       | )           |                    |             | (230,316     | )         
|                                                        | Issuance of preferred stock                                                                              |                                           |                                                    | 8,475,304                                                         |             |                    |             | 421,820      |           
|                                                        | Redemption and retirement of preferred stock                                                             |                                           |                                                    | (1,028,694                                                        | )           |                    |             | (1,584,757   | )         
|                                                        | Cash dividends                                                                                           |                                           |                                                    | (1,802,460                                                        | )           |                    |             | (994,791     | )         
|                                                        |                                                                                                          |                                           |                                                    |                                                                   |             |                    |             |              |           
|                                                        |                                                                                                          | Net cash provided by financing activities |                                                    |                                                                   | 117,890,667 |                    |             |              | 45,793,161 |            
|                                                        |                                                                                                          |                                           |                                                    |                                                                   |             |                    |             |              |           
|Net change in cash and cash equivalents                 |                                                                                                          |                                           | (36,325,004                                        | )                                                                 |             |                    | (16,588,348 | )           
|Cash and cash equivalents:                              |                                                                                                          |                                           |                                                    |                                                                   |             |                    |             |             
|                                                        | Beginning of period                                                                                      |                                           |                                                    | 68,317,397                                                        |             |                    |             | 68,019,397   |           
|                                                        |                                                                                                          |                                           |                                                    |                                                                   |             |                    |             |              |           
|                                                        | End of period                                                                                            |                                           | $                                                  | 31,992,393                                                        |             |                    | $           | 51,431,049   |           
|                                                        |                                                                                                          |                                           |                                                    |                                                                   |             |                    |             |              |           
|Non cash investing and financing activities of Company: |                                                                                                          |                                           |                                                    |                                                                   |             |                    |             |             
|                                                        | Real estate held for sale and development acquired
through foreclosure                                   |                                           |                                                    | 5,595,927                                                         |             |                    |             | 2,842,296    |           
|                                                        | Transfers between annuity products                                                                       |                                           |                                                    | 7,514,794                                                         |             |                    |             | 8,614,706    |           
|                                                        | Transfer of investments from available-for-sale portfolio
to held-to-maturity portfolio                  |                                           |                                                    | 262,518,789                                                       |             |                    |             |             |           
|                                                        | Transfer of investments from trading portfolio to
available-for-sale portfolio                           |                                           |                                                    |                                                                  |             |                    |             | 37,396,757   |           
|                                                        | Timing difference on settlements of securities sales                                                     |                                           |                                                    |                                                                  |             |                    |             | 11,234,369   |           
|                                                        | Timing difference on settlements of securities purchases                                                 |                                           |                                                    |                                                                  |             |                    |             | 100,957      |           

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





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##### Table of Contents






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

1.     Basis of Presentation

The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position of Metropolitan Mortgage &
Securities Co., Inc. and subsidiaries (the Company or Consolidated Group)
as of December 31, 2002, the results of operations for the three months ended
December 31, 2002 and 2001 and the cash flows for the three months ended
December 31, 2002 and 2001. The results of operations for the three months
ended December 31, 2002 and 2001 are not necessarily indicative of the results
to be expected for the full year. These financial statements should be read in
conjunction with the consolidated financial statements including notes thereto
included in the Companys fiscal 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) investing in real estate contracts and mortgage notes
receivable, other receivables and investment securities (Investing); (2)
insurance and annuity operations (Insurance); and (3) property development
activities. The insurance segment also invests a substantial portion of the
proceeds from insurance and annuity operations in real estate contracts and
mortgage notes receivables, other receivables and investment securities. All
transactions between segments are eliminated. The Company allocates certain
overhead and operating expenses amongst its segments.

Information about the Companys separate business segments and in total as
of and for the three-month period ended December 31, 2002 and 2001 is as
follows:

|                              |  |                                                              |             |           |  |             |               |              |  |          |            |              |  |   |             |   |  |   |               |  
|----------------------------- |  | ------------------------------------------------------------ | ----------- | --------- |  | ----------- | ------------- | ------------ |  | -------- | ---------- | ------------ |  | - | ----------- | - |  | - | ------------- | -
|                              |  | As of and for the three month period ended December 31, 2002
|                              |  |                                                             
|                              |  |                                                              |             |           |  |             |               |              |  | Property |            | Intersegment |  |   |             |  
|                              |  | Investing                                                    |             | Insurance |  | Development |               | Eliminations |  | Total   
|                              |  |                                                              |             |           |  |             |               |              |  |         
|Revenues                      |  | $                                                            | 12,670,830  |           |  | $           | 25,980,364    |              |  | $        | 2,396,028  |              |  | $ | (1,342,500  | ) |  | $ | 39,704,722    |  
|Income (loss)
from operations |  |                                                              | (9,606,636  | )         |  |             | 5,160,884     |              |  |          | 388,237    |              |  |   |            |   |  |   | (4,057,515    | )
|Identifiable
assets, net      |  |                                                              | 163,488,482 |           |  |             | 1,675,680,709 |              |  |          | 90,904,474 |              |  |   | (14,321,415 | ) |  |   | 1,915,752,250 |  
|Depreciation and
amortization |  |                                                              | 862,565     |           |  |             | 85,251        |              |  |          | 181,865    |              |  |   |            |   |  |   | 1,129,681     |  
|Capital
expenditures          |  |                                                              | 599,405     |           |  |             | 34,537        |              |  |          |           |              |  |   |            |   |  |   | 633,942       |  





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##### Table of Contents



|                              |  |                                                              |             |           |  |             |               |              |  |          |            |              |  |   |          |   |  |   |               | 
|----------------------------- |  | ------------------------------------------------------------ | ----------- | --------- |  | ----------- | ------------- | ------------ |  | -------- | ---------- | ------------ |  | - | -------- | - |  | - | ------------- | 
|                              |  | As of and for the three month period ended December 31, 2001
|                              |  |                                                             
|                              |  |                                                              |             |           |  |             |               |              |  | Property |            | Intersegment |  |   |          |  
|                              |  | Investing                                                    |             | Insurance |  | Development |               | Eliminations |  | Total   
|                              |  |                                                              |             |           |  |             |               |              |  |         
|Revenues                      |  | $                                                            | 6,969,710   |           |  | $           | 28,517,073    |              |  | $        | 501,524    |              |  | $ | (752,890 | ) |  | $ | 35,235,417    | 
|Income (loss)
from operations |  |                                                              | (6,858,660  | )         |  |             | 6,580,682     |              |  |          | 335,545    |              |  |   |         |   |  |   | 57,567        | 
|Identifiable
assets, net      |  |                                                              | 174,838,052 |           |  |             | 1,178,244,775 |              |  |          | 71,221,987 |              |  |   | 157,602  |   |  |   | 1,424,462,416 | 
|Depreciation and
amortization |  |                                                              | 894,709     |           |  |             | 81,255        |              |  |          | 277,100    |              |  |   |         |   |  |   | 1,253,064     | 
|Capital
expenditures          |  |                                                              | 113,641     |           |  |             | 22,341        |              |  |          |           |              |  |   |         |   |  |   | 135,982       | 

|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|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, and
Metwest Mortgage Services, Inc. (Metwest), a receivable servicer and loan
originator. The Company provides services to certain affiliated entities (the
Affiliated Companies) for a fee and engages in various business transactions
with these entities. The Affiliated Companies are National Summit Corp. and
its principal subsidiaries which include Summit Securities, Inc. (Summit),
Old Standard Life Insurance Company (Old Standard), Old West Life Insurance &
Annuity Company (Old West), Summit Property Development and Metropolitan
Investment Securities, Inc. (MIS). The Affiliated Companies are affiliated
with the Consolidated Group because of the common control of the Consolidated
Group and the Affiliated Companies by C. Paul Sandifur, Jr.

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.





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##### Table of Contents



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 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 determining
expected future cash flows, the Consolidated Group considers interest rates,
estimated prepayment rates, collateral value, historical default rates and
estimated 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 December 31, 2002 to value the
Consolidated Groups investments in the residual and interest only
securities retained from its own securitization transactions.

|                                  |  |  |            |  
|--------------------------------- |  |  | ---------- | -
|Prepayment speed assumptions(1)   |  |  | 19% - 29   | %
|Expected loss rates(2)            |  |  | 2.4% - 4.4 | %
|Residual cash flow discount rates |  |  | 10         | %



---

|(1) |  | Prepayment speed assumptions are for the next three months.
Thereafter, the speeds decline in six-month intervals until reaching
10% during fiscal 2004.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(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



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





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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The remaining real estate contracts and mortgage notes receivable
portfolio is made up of a large group of smaller-balance homogenous loans
that are collectively evaluated for impairment. The Consolidated Group
establishes an allowance for inherent losses on the receivables based
primarily on current delinquencies and 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 fair market value less selling costs
or carrying value at the time the property was repossessed. For
non-commercial properties, an appraisal is obtained on the foreclosed
property to determine its fair market value at time of repossession. For
commercial properties, an appraisal is obtained on the foreclosed property
to determine the fair market value only if the most recent appraisal is more
than one year old, otherwise the existing appraisal is used. Periodically,
the Consolidated Group may not order an updated appraisal in accordance with
its established policies if current negotiations with a potential purchaser
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 expected
fair market value, less selling costs, from the disposition of the asset is
less than its carrying value, an impairment is recognized in the statement
of operations.

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.





---



##### Table of Contents



Results of Operations

Three Months Ended December 31, 2002 Compared to Three Months Ended December
31, 2001

The following table presents the components of the results of operations
during the three months ended December 31, 2002 and 2001:

|                                                                       |                                               |   |                    |           |      |   |            |            |  
|---------------------------------------------------------------------- | --------------------------------------------- | - | ------------------ | --------- | ---- | - | ---------- | ---------- | -
|                                                                       |                                               |   | Three Months Ended
|                                                                       |                                               |   | December 31,      
|                                                                       |                                               |   |                   
|                                                                       |                                               |   | 2002               |           | 2001
|                                                                       |                                               |   |                    |           |     
|Net interest income                                                    |                                               | $ | 11,641,382         |           |      | $ | 8,096,177  |           
|Provision for losses on Receivables                                    |                                               |   | (2,190,000         | )         |      |   | (1,203,217 | )         
|                                                                       |                                               |   |                    |           |      |   |            |           
|                                                                       | Net interest spread                           |   |                    | 9,451,382 |      |   |            | 6,892,960  |  
|Net non-interest expense                                               |                                               |   | (10,578,693        | )         |      |   | (7,826,032 | )         
|Capitalized deferred costs, net of amortization                        |                                               |   | 1,120,950          |           |      |   | (720,160   | )         
|                                                                       |                                               |   |                    |           |      |   |            |           
|                                                                       | Income (loss) before gains (losses) on assets |   |                    | (6,361    | )    |   |            | (1,653,232 | )
|Net gains (losses) on investments and receivables                      |                                               |   | (3,121,279         | )         |      |   | 1,551,152  |           
|Provision for losses on real estate held for sale                      |                                               |   | (1,302,324         | )         |      |   | 240,386    |           
|Gains on sales of real estate                                          |                                               |   | 372,449            |           |      |   | 39,503     |           
|                                                                       |                                               |   |                    |           |      |   |            |           
|Income (loss) before income taxes and
minority interest                |                                               |   | (4,057,515         | )         |      |   | 177,809    |           
|Income tax (provision) benefit                                         |                                               |   | 1,419,724          |           |      |   | (31,460    | )         
|                                                                       |                                               |   |                    |           |      |   |            |           
|Income (loss) before minority interest                                 |                                               |   | (2,637,791         | )         |      |   | 146,349    |           
|Income of consolidated subsidiaries
allocated to minority stockholders |                                               |   |                   |           |      |   | (88,782    | )         
|                                                                       |                                               |   |                    |           |      |   |            |           
|Net income (loss)                                                      |                                               |   | (2,637,791         | )         |      |   | 57,567     |           
|Preferred stock dividends                                              |                                               |   | (1,744,015         | )         |      |   | (936,346   | )         
|                                                                       |                                               |   |                    |           |      |   |            |           
|Loss applicable to common stockholders                                 |                                               | $ | (4,381,806         | )         |      | $ | (878,779   | )         
|                                                                       |                                               |   |                    |           |      |   |            |           

Net Interest Income

The following table presents the components of net interest income during
the during the three months ended December 31, 2002 and 2001:

|                    |                                                |                        |            |                    |            |      |           |            |            | 
|------------------- | ---------------------------------------------- | ---------------------- | ---------- | ------------------ | ---------- | ---- | --------- | ---------- | ---------- | 
|                    |                                                |                        |            | Three Months Ended
|                    |                                                |                        |            | December 31,      
|                    |                                                |                        |            |                   
|                    |                                                |                        |            | 2002               |            | 2001
|                    |                                                |                        |            |                    |            |     
|Interest income:    |                                                |                        |            |                    |            |      |           |           
|                    | Interest on receivables                        |                        | $          | 19,185,153         |            |      | $         | 12,267,586 |           
|                    | Earned discount on receivables and investments |                        |            | 7,734,145          |            |      |           | 8,944,487  |           
|                    | Other investment income                        |                        |            | 9,053,251          |            |      |           | 7,699,902  |           
|                    |                                                |                        |            |                    |            |      |           |            |           
|                    |                                                | Total interest income  |            |                    | 35,972,549 |      |           |            | 28,911,975 | 
|                    |                                                |                        |            |                    |            |      |           |            |           
|Interest expense:   |                                                |                        |            |                    |            |      |           |           
|                    | Insurance policy and annuity benefits          |                        |            | 15,593,631         |            |      |           | 13,168,323 |           
|                    | Interest, net                                  |                        |            | 8,737,536          |            |      |           | 7,647,475  |           
|                    |                                                |                        |            |                    |            |      |           |            |           
|                    |                                                | Total interest expense |            |                    | 24,331,167 |      |           |            | 20,815,798 | 
|                    |                                                |                        |            |                    |            |      |           |            |           
|Net interest income |                                                | $                      | 11,641,382 |                    |            | $    | 8,096,177 |           
|                    |                                                |                        |            |                    |            |      |           |            |           





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##### Table of Contents



The following table summarizes the rate/volume change in total interest
income between the three months ended December 31, 2002 and 2001 by interest
sensitive asset class:

|                                                    |  |                                          |            |      |  |              |            |   |  |   |            |  
|--------------------------------------------------- |  | ---------------------------------------- | ---------- | ---- |  | ------------ | ---------- | - |  | - | ---------- | -
|                                                    |  | Three months ended December 31, 2002 vs.
|                                                    |  | Three months ended December 31, 2001    
|                                                    |  |                                         
|                                                    |  | Increase (Decrease)                      |            |      |  |             
|                                                    |  | Due to                                   |            |      |  |             
|                                                    |  |                                          |            |      |  |             
|                                                    |  | Volume                                   |            | Rate |  | Total Change
|                                                    |  |                                          |            |      |  |             
|Interest sensitive assets:                          |  |                                          |            |      |  |              |            |   |  |   |            |  
|Investments (including cash)                        |  | $                                        | 3,444,724  |      |  | $            | (2,407,974 | ) |  | $ | 1,036,750  |  
|Real estate contracts and
mortgage notes receivable |  |                                          | 9,170,623  |      |  |              | (1,818,654 | ) |  |   | 7,351,969  |  
|Other receivables                                   |  |                                          | (1,082,227 | )    |  |              | (245,918   | ) |  |   | (1,328,145 | )
|                                                    |  |                                          |            |      |  |              |            |   |  |   |            |  
|                                                    |  | $                                        | 11,533,120 |      |  | $            | (4,472,546 | ) |  | $ | 7,060,574  |  
|                                                    |  |                                          |            |      |  |              |            |   |  |   |            |  

The following table presents the net average yields realized by the
Consolidated Group on interest sensitive assets and liabilities during the
three months ended December 31, 2002 and 2001 based on the average monthly
ending asset/liability balances:

|                                                                   |       |   |               |       |              |   |             |       |  
|------------------------------------------------------------------ | ----- | - | ------------- | ----- | ------------ | - | ----------- | ----- | -
|                                                                   |       |   | December 31,  |       | December 31,
|                                                                   |       |   | 2002 Average  |       | 2001 Average
|                                                                   |       |   |               |       |             
|Interest sensitive assets:                                         |       |   |               |       |              |   |             |      
|Investments (including cash)                                       |       | $ | 641,179,762   |       |              | $ | 442,995,700 |      
|                                                                   | Yield |   |               | 5.45  | %            |   |             | 6.95  | %
|Real estate contracts and mortgage notes receivable                |       | $ | 662,414,981   |       |              | $ | 433,178,819 |      
|                                                                   | Yield |   |               | 14.90 | %            |   |             | 16.00 | %
|Other receivables                                                  |       | $ | 128,842,467   |       |              | $ | 178,632,961 |      
|                                                                   | Yield |   |               | 7.93  | %            |   |             | 8.69  | %
|Interest sensitive liabilities:                                    |       |   |               |       |              |   |             |      
|Life insurance and annuity reserves, net of
reinsurance receivable |       | $ | 1,113,499,015 |       |              | $ | 876,259,394 |      
|                                                                   | Yield |   |               | 5.60  | %            |   |             | 5.96  | %
|Debenture bonds                                                    |       | $ | 361,062,458   |       |              | $ | 316,115,879 |      
|                                                                   | Yield |   |               | 8.95  | %            |   |             | 9.13  | %
|Debt payable                                                       |       | $ | 157,169,651   |       |              | $ | 41,997,689  |      
|                                                                   | Yield |   |               | 4.53  | %            |   |             | 7.63  | %

The increase in net interest income from 2001 to 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 60.1% of the outstanding principal balance
of real estate contracts and mortgage notes receivable at December 31, 2002,
compared to 33.3% at December 31, 2001. The increase in the commercial loan
portfolio was partially offset by a reduction in the portfolio yield due to a
reduction in exit fees earned on its commercial loans during the three month
period ended December 31, 2002 compared to the similar period ended December
31, 2001.





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##### Table of Contents



The Company has experienced a decrease in the yields 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 December 31, 2002 proceeds from
the sale and maturities of the investment portfolio totaled $498.1 million. As
proceeds from the sales
and maturities were reinvested back into a lower interest rate market, the
overall portfolio yield was reduced. Additionally, the Consolidated Groups
recent focus on improving the average credit rating of the investment portfolio
has also contributed to the reduction in the investment yields. At December 31,
2002, approximately 71.7% of the Consolidated Groups portfolio was rated
either AAA or AA compared to 52.9% at December 31, 2001. 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 December 31, 2002 and 2001:

|                      |                                               |                            |   |                    |            |      |   |           |            | 
|--------------------- | --------------------------------------------- | -------------------------- | - | ------------------ | ---------- | ---- | - | --------- | ---------- | 
|                      |                                               |                            |   | Three Months Ended
|                      |                                               |                            |   | December 31,      
|                      |                                               |                            |   |                   
|                      |                                               |                            |   | 2002               |            | 2001
|                      |                                               |                            |   |                    |            |     
|Non-interest income:  |                                               |                            |   |                    |            |      |   |          
|                      | Insurance premiums and annuity considerations |                            | $ | 403,761            |            |      | $ | 471,171   |           
|                      | Servicing income                              |                            |   | 322,110            |            |      |   | 306,081   |           
|                      | Fees, commissions and other income            |                            |   | 1,089,465          |            |      |   | 1,655,624 |           
|                      |                                               |                            |   |                    |            |      |   |           |           
|                      |                                               | Total non-interest income  |   |                    | 1,815,336  |      |   |           | 2,432,876  | 
|                      |                                               |                            |   |                    |            |      |   |           |           
|Non-interest expense: |                                               |                            |   |                    |            |      |   |          
|                      | Salaries and employee benefits                |                            |   | 3,825,001          |            |      |   | 4,120,931 |           
|                      | Commissions to agents                         |                            |   | 3,981,766          |            |      |   | 2,022,372 |           
|                      | Other operating and underwriting expenses     |                            |   | 4,587,262          |            |      |   | 4,115,605 |           
|                      |                                               |                            |   |                    |            |      |   |           |           
|                      |                                               | Total non-interest expense |   |                    | 12,394,029 |      |   |           | 10,258,908 | 
|                      |                                               |                            |   |                    |            |      |   |           |           
|                      |                                               | Net non-interest expense   |   | $                  | 10,578,693 |      |   | $         | 7,826,032  | 
|                      |                                               |                            |   |                    |            |      |   |           |           

The reduction in fees, commissions and other income is due primarily to a
reduction in rental income from properties held for investment, sale or
development.

The reduction in salaries and employee benefits was primarily due to a
$0.7 million reduction to the Companys self-insurance benefit program accrued
liability to reflect current claim experience offset by a growth in salaries
and employee benefits as the Companys full time equivalent employees increased
from 273 at December 31, 2001 to 296 at December 31, 2002.

The increase in other operating and underwriting expenses was primarily
due to a $0.3 million increase in recruiting and training expenses and a $0.3
million increase in guaranty fund assessments as a result of a $0.2 million
refund received during the three month period ended December 31, 2001.





---



##### Table of Contents



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
capitalized expenses. The following table reflects the components of the net
expense reported by the Consolidated Group for the three months ended December
31, 2002 and 2001:

|                                                                       |  |                    |            |      |  |   |            |  
|---------------------------------------------------------------------- |  | ------------------ | ---------- | ---- |  | - | ---------- | -
|                                                                       |  | Three Months Ended
|                                                                       |  | December 31,      
|                                                                       |  |                   
|                                                                       |  | 2002               |            | 2001
|                                                                       |  |                    |            |     
|Current period costs capitalized                                       |  | $                  | (3,820,950 | )    |  | $ | (1,879,840 | )
|Amortization of previously capitalized expenses                        |  |                    | 2,700,000  |      |  |   | 2,600,000  |  
|                                                                       |  |                    |            |      |  |   |            |  
|Net amortization (capitalization) of deferred
policy acquisition costs |  | $                  | (1,120,950 | )    |  | $ | 720,160    |  
|                                                                       |  |                    |            |      |  |   |            |  

The increase in current period costs capitalized is due primarily to a
$2.1 increase in commissions paid on annuity business, net of ceding. Annuity
business production during the three-month period ended December 31, 2002 was
approximately $87.5 million compared to approximately $40.0 million during the
similar period ended December 31, 2001.

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 December 31, 2002 and
2001:

|                                                  |                                               |   |                    |            |      |   |           |           |  
|------------------------------------------------- | --------------------------------------------- | - | ------------------ | ---------- | ---- | - | --------- | --------- | -
|                                                  |                                               |   | Three Months Ended
|                                                  |                                               |   | December 31,      
|                                                  |                                               |   |                   
|                                                  |                                               |   | 2002               |            | 2001
|                                                  |                                               |   |                    |            |     
|Other than temporary declines in value:           |                                               |   |                    |            |      |   |           |          
|                                                  | Residual and other interest only certificates |   | $                  | (1,760,352 | )    |   | $         |          |  
|                                                  | Equity securities                             |   |                    | (122,289   | )    |   |           | (10,476   | )
|                                                  | Other securities                              |   |                    | (1,333,765 | )    |   |           | (20,296   | )
|Realized gains (losses):                          |                                               |   |                    |            |      |   |           |          
|                                                  | Securities investments                        |   |                    | 109,762    |      |   |           | 1,117,909 |  
|                                                  | Receivables                                   |   |                    | (14,635    | )    |   |           | 347,975   |  
|                                                  | Trading securities                            |   |                    |           |      |   |           | 116,040   |  
|                                                  |                                               |   |                    |            |      |   |           |           |  
|Net gains (losses) on investments and receivables |                                               | $ | (3,121,279         | )          |      | $ | 1,551,152 |          
|                                                  |                                               |   |                    |            |      |   |           |           |  

Residual and other interest only certificates

The Consolidated Group holds residual and other 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 determining expected future cash
flows, management considers interest rates, estimated prepayment rates,
collateral value, historical default rates and estimated loss severity. During
the three month period ended December 31, 2002, the Consolidated Group
determined that certain residual and other interest only certificates had other
than temporary declines in value. Accordingly, the carrying values of the
investments were decreased by approximately $1.8 million, representing the
amount impaired. The reduction in value was due primarily to higher than
expected loss severity and default rates.





---



##### Table of Contents



The following assumptions were used at December 31, 2002 to value the
Consolidated Groups investments in the residual and interest only securities
retained from its own securitization transactions.

|                                |  |  |            |  
|------------------------------- |  |  | ---------- | -
|Prepayment speed assumptions(1) |  |  | 19% - 29   | %
|Expected loss rates(2)          |  |  | 2.4% - 4.4 | %



---

|(1) |  | Prepayment speed assumptions are for the next three months.
Thereafter, the speeds decline in six-month intervals until reaching 10%
during fiscal 2004.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(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.

Other securities

During the three month period ended December 31, 2002, the Consolidated
Group reported approximately $1.3 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
in addition to credit deterioration in some higher yielding corporate bond
investments.

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 December 31, 2002, the Consolidated Groups
investment portfolio had approximately $2.5 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 December 31,
2002 by investment category:

|                                      |                               |   |                |             |                   |   |            |            |  
|------------------------------------- | ----------------------------- | - | -------------- | ----------- | ----------------- | - | ---------- | ---------- | -
|                                      |                               |   | Carrying Value |             | Unrealized Losses
|                                      |                               |   |                |             |                  
|Government-backed bonds               |                               | $ | 9,226,648      |             |                   | $ | (15,413    | )         
|Corporate bonds                       |                               |   | 26,621,865     |             |                   |   | (26,498    | )         
|Mortgage- and asset-backed securities |                               |   | 128,092,396    |             |                   |   | (1,712,827 | )         
|                                      |                               |   |                |             |                   |   |            |           
|                                      | Total fixed income maturities |   |                | 163,940,909 |                   |   |            | (1,754,738 | )
|                                      |                               |   |                |             |                   |   |            |           
|Common stocks                         |                               |   | 14,561         |             |                   |   | (2,851     | )         
|Preferred stocks                      |                               |   | 5,923,774      |             |                   |   | (81,719    | )         
|Venture Capital/Limited Partnerships  |                               |   | 8,782,357      |             |                   |   | (612,896   | )         
|                                      |                               |   |                |             |                   |   |            |           
|                                      | Totals                        |   | $              | 178,661,601 |                   |   | $          | (2,452,204 | )
|                                      |                               |   |                |             |                   |   |            |           





---



##### Table of Contents



The following table stratifies the unrealized losses as of December 31,
2002 by market sector:

|                                     |                                       |        |            |                |                   |   |            |            |            |  
|------------------------------------ | ------------------------------------- | ------ | ---------- | -------------- | ----------------- | - | ---------- | ---------- | ---------- | -
|                                     |                                       |        |            | Carrying Value | Unrealized Losses
|                                     |                                       |        |            |                |                  
|Agency                               |                                       | $      | 9,226,648  |                |                   | $ | (15,413    | )         
|Municipals                           |                                       |        |           |                |                   |   |           |           
|                                     |                                       |        |            |                |                   |   |            |           
|                                     | Government-backed bonds               |        |            | 9,226,648      |                   |   |            | (15,413    | )         
|                                     |                                       |        |            |                |                   |   |            |           
|                                     | Corporate bonds                       |        |            | 26,621,865     |                   |   |            | (26,498    | )         
|                                     |                                       |        |            |                |                   |   |            |           
|Collateralized mortgage obligation   |                                       |        | 92,967,586 |                |                   |   | (475,822   | )         
|Other asset-backed                   |                                       |        | 15,393,448 |                |                   |   | (1,074,096 | )         
|Mortgage-backed security             |                                       |        | 272,041    |                |                   |   | (682       | )         
|Home equity                          |                                       |        | 13,735,766 |                |                   |   | (1         | )         
|Manufactured housing                 |                                       |        | 5,723,555  |                |                   |   | (162,226   | )         
|                                     |                                       |        |            |                |                   |   |            |           
|                                     | Mortgage- and asset-backed securities |        |            | 128,092,396    |                   |   |            | (1,712,827 | )         
|                                     |                                       |        |            |                |                   |   |            |           
|Common stocks                        |                                       |        | 14,561     |                |                   |   | (2,851     | )         
|Preferred stocks                     |                                       |        | 5,923,774  |                |                   |   | (81,719    | )         
|Venture Capital/Limited Partnerships |                                       |        | 8,782,357  |                |                   |   | (612,896   | )         
|                                     |                                       |        |            |                |                   |   |            |           
|                                     |                                       | Totals |            | $              | 178,661,601       |   |            | $          | (2,452,204 | )
|                                     |                                       |        |            |                |                   |   |            |           

The following table stratifies the unrealized losses as of December 31,
2002 by credit rating:

|                                     |        |   |                |             |                   |   |          |            |  
|------------------------------------ | ------ | - | -------------- | ----------- | ----------------- | - | -------- | ---------- | -
|                                     |        |   | Carrying Value |             | Unrealized Losses
|                                     |        |   |                |             |                  
|AAA                                  |        | $ | 115,125,369    |             |                   | $ | (611,200 | )         
|AA                                   |        |   | 11,175,060     |             |                   |   | (430,455 | )         
|A                                    |        |   | 6,979,331      |             |                   |   | (477,498 | )         
|BBB                                  |        |   | 34,321,423     |             |                   |   | (99,318  | )         
|Other                                |        |   | 2,263,500      |             |                   |   | (217,986 | )         
|Common stocks                        |        |   | 14,561         |             |                   |   | (2,851   | )         
|Venture Capital/Limited Partnerships |        |   | 8,782,357      |             |                   |   | (612,896 | )         
|                                     |        |   |                |             |                   |   |          |           
|                                     | Totals |   | $              | 178,661,601 |                   |   | $        | (2,452,204 | )
|                                     |        |   |                |             |                   |   |          |           

Unrealized losses relating to the investment grade assets (BBB and higher)
are generally due to changes in interest rates which 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 December 31, 2002,
approximately $0.9 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 December 31,
2002 by trading class:

|           |        |   |                |             |                   |   |            |            |  
|---------- | ------ | - | -------------- | ----------- | ----------------- | - | ---------- | ---------- | -
|           |        |   | Carrying Value |             | Unrealized Losses
|           |        |   |                |             |                  
|Traded     |        | $ | 178,661,601    |             |                   | $ | (2,452,204 | )         
|Non-Traded |        |   |               |             |                   |   |           |           
|           |        |   |                |             |                   |   |            |           
|           | Totals |   | $              | 178,661,601 |                   |   | $          | (2,452,204 | )
|           |        |   |                |             |                   |   |            |           





---



##### Table of Contents



The following table stratifies the unrealized losses as of December 31,
2002 by length of time the securities have continuously been in an unrealized
loss position:

|                                                |                  |              |           |                |             |                   |          |   |            |  
|----------------------------------------------- | ---------------- | ------------ | --------- | -------------- | ----------- | ----------------- | -------- | - | ---------- | -
|                                                |                  |              |           | Carrying Value |             | Unrealized Losses
|                                                |                  |              |           |                |             |                  
|Fixed Income Securities:                        |                  |              |           |                |             |                   |          |  
|                                                | Investment
Grade |              |           |                |             |                   |          |   |           
|                                                |                  | 0-6 months   |           | $              | 150,948,369 |                   |          | $ | (899,840   | )
|                                                |                  | 7-12 months  |           |                |            |                   |          |   |           |  
|                                                |                  | 13-18 months |           |                | 12,992,540  |                   |          |   | (854,898   | )
|Preferred Stocks:                               |                  |              |           |                |             |                   |          |  
|                                                |                  | 0-6 months   |           |                | 4,255,604   |                   |          |   | (37,439    | )
|                                                |                  | 7-12 months  |           |                | 1,668,170   |                   |          |   | (44,280    | )
|Common Stocks:                                  |                  |              |           |                |             |                   |          |  
|                                                |                  | 0-6 months   |           |                | 14,561      |                   |          |   | (2,851     | )
|Venture Capital/Limited Partnerships
0-6 months |                  |              | 8,782,357 |                |             |                   | (612,896 | )
|                                                |                  |              |           |                |             |                   |          |   |           
|                                                |                  | Total        |           | $              | 178,661,601 |                   |          | $ | (2,452,204 | )
|                                                |                  |              |           |                |             |                   |          |   |           

The maturities of fixed income investments that are in an unrealized loss
position at December 31, 2002 are as follows:

|                                       |                                                 |   |                |             |                   |   |            |            |  
|-------------------------------------- | ----------------------------------------------- | - | -------------- | ----------- | ----------------- | - | ---------- | ---------- | -
|                                       |                                                 |   | Carrying Value |             | Unrealized Losses
|                                       |                                                 |   |                |             |                  
|Due in one year through five years     |                                                 | $ | 26,621,865     |             |                   | $ | (26,498    | )         
|Due after five years through ten years |                                                 |   |               |             |                   |   |           |           
|Due thereafter                         |                                                 |   | 9,226,648      |             |                   |   | (15,413    | )         
|                                       |                                                 |   |                |             |                   |   |            |           
|                                       | Total non-mortgage- and asset-backed securities |   |                | 35,848,513  |                   |   |            | (41,911    | )
|Mortgage- and asset-backed securities  |                                                 |   | 128,092,395    |             |                   |   | (1,712,827 | )         
|                                       |                                                 |   |                |             |                   |   |            |           
|                                       | Total fixed income securities                   |   | $              | 163,940,908 |                   |   | $          | (1,754,738 | )
|                                       |                                                 |   |                |             |                   |   |            |           

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. 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. At December 31, 2002, 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
|                   |  |            |             |            |  |           
|December 31, 2002  |  | $          | 425,358,442 |            |  | $          | 46,116,682 |  |  |  | 10.84 | %
|September 30, 2002 |  | $          | 353,794,571 |            |  | $          | 26,349,403 |  |  |  | 7.45  | %
|December 31, 2001  |  | $          | 150,983,472 |            |  | $          | 13,492,260 |  |  |  | 8.94  | %
|September 30, 2001 |  | $          | 128,259,529 |            |  | $          | 5,742,560  |  |  |  | 4.48  | %

In addition to the amounts included in the table above at December 31,
2002, there were approximately $0.3 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 December 31, 2002, these loans
accounted for less than 0.1% of the total outstanding Commercial Loans, but
were not included in the table above because they were less than 90 days
delinquent.





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##### Table of Contents



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, foreclosure is begun immediately by counsel. 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     
|                   |  |                    |             |                   |  |                
|December 31, 2002  |  | $                  | 275,502,013 |                   |  | $               | 25,747,048 |  |  |  | 9.35  | %
|September 30, 2002 |  | $                  | 279,362,588 |                   |  | $               | 26,105,228 |  |  |  | 9.34  | %
|December 31, 2001  |  | $                  | 302,825,346 |                   |  | $               | 34,248,289 |  |  |  | 11.31 | %
|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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##### Table of Contents



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:

|                   |  |             |             |                   |  |            |            |  |  |  |      |  
|------------------ |  | ----------- | ----------- | ----------------- |  | ---------- | ---------- |  |  |  | ---- | -
|                   |  | Total Other |             | Other Receivables |  | Percentage
|                   |  | Receivables |             | in arrears        |  | in arrears
|                   |  |             |             |                   |  |           
|December 31, 2002  |  | $           | 129,746,133 |                   |  | $          | 5,842,208  |  |  |  | 4.50 | %
|September 30, 2002 |  | $           | 128,241,355 |                   |  | $          | 6,270,822  |  |  |  | 4.89 | %
|December 31, 2001  |  | $           | 180,251,689 |                   |  | $          | 10,371,904 |  |  |  | 5.75 | %
|September 30, 2001 |  | $           | 176,104,766 |                   |  | $          | 6,834,560  |  |  |  | 3.88 | %

Provision and Allowance for Losses on Receivables

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

|                                                |                                         |   |              |            |      |   |            |          |  
|----------------------------------------------- | --------------------------------------- | - | ------------ | ---------- | ---- | - | ---------- | -------- | -
|                                                |                                         |   | December 31,
|                                                |                                         |   |             
|                                                |                                         |   | 2002         |            | 2001
|                                                |                                         |   |              |            |     
|Beginning balance                               |                                         | $ | 11,339,002   |            |      | $ | 13,509,977 |         
|Provisions                                      |                                         |   | 2,190,000    |            |      |   | 1,203,217  |         
|Charge offs:                                    |                                         |   |              |            |      |   |            |         
|                                                | Commercial Loans                        |   |              |           |      |   |            |         |  
|                                                | Residential and other real estate loans |   |              | (1,003,650 | )    |   |            | (736,912 | )
|                                                | Other receivables                       |   |              |           |      |   |            |         |  
|                                                |                                         |   |              |            |      |   |            |         
|Ending balance                                  |                                         | $ | 12,525,352   |            |      | $ | 13,976,282 |         
|                                                |                                         |   |              |            |      |   |            |         
|Charge offs as a percent of
average Receivables |                                         |   | 0.13         | %          |      |   | 0.12       | %       
|Allowance as a percentage
of total Receivables  |                                         |   | 1.51         | %          |      |   | 2.20       | %       

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

|                                        |  |                   |            |            |  |                   |       |   |  |  |        |  
|--------------------------------------- |  | ----------------- | ---------- | ---------- |  | ----------------- | ----- | - |  |  | ------ | -
|                                        |  |                   |            |            |  | Allocated         |       |   |  | 
|                                        |  |                   |            |            |  | Allowance         |       |   |  | 
|                                        |  | Allocated         |            | as a % of  |  | Loan Category    
|                                        |  | Allowance for     |            | Receivable |  | as a % of        
|                                        |  | Receivable Losses |            | Category   |  | Total Receivables
|                                        |  |                   |            |            |  |                  
|December 31, 2002                       |  |                   |            |            |  |                   |       |   |  |  |        |  
|Commercial Loans                        |  | $                 | 4,566,384  |            |  |                   | 1.07  | % |  |  | 51.21  | %
|Residential and other real estate loans |  |                   | 5,312,057  |            |  |                   | 1.93  | % |  |  | 33.17  | %
|Leases                                  |  |                   | 600,730    |            |  |                   | 16.35 | % |  |  | 0.44   | %
|Other receivables                       |  |                   | 504,288    |            |  |                   | 0.40  | % |  |  | 15.18  | %
|Unallocated                             |  |                   | 1,541,893  |            |  |                   | 0.22  | % |  |  | 0.00   | %
|                                        |  |                   |            |            |  |                   |       |   |  |  |        |  
|                                        |  | $                 | 12,525,352 |            |  |                   | 1.51  | % |  |  | 100.00 | %
|                                        |  |                   |            |            |  |                   |       |   |  |  |        |  
|December 31, 2001                       |  |                   |            |            |  |                   |       |   |  |  |        |  
|Commercial Loans                        |  | $                 | 3,037,692  |            |  |                   | 2.01  | % |  |  | 23.81  | %
|Residential and other real estate loans |  |                   | 7,570,634  |            |  |                   | 2.50  | % |  |  | 47.76  | %
|Leases                                  |  |                   | 600,730    |            |  |                   | 14.76 | % |  |  | 0.64   | %
|Other receivables                       |  |                   | 1,768,848  |            |  |                   | 1.00  | % |  |  | 27.79  | %
|Unallocated                             |  |                   | 998,379    |            |  |                   | 0.22  | % |  |  | 0.00   | %
|                                        |  |                   |            |            |  |                   |       |   |  |  |        |  
|                                        |  | $                 | 13,976,283 |            |  |                   | 2.20  | % |  |  | 100.00 | %
|                                        |  |                   |            |            |  |                   |       |   |  |  |        |  





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##### Table of Contents



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

Commercial Loans are individually monitored for impairment. When a loan
has been identified as impaired, the Consolidated Group determines the
allowance for loss based on the estimated fair value, less estimated
liquidation expenses, of the collateral compared to the carrying value of the
receivable, including accrued interest. The estimated fair value is based on
the most recent appraisal of the collateral. If the most recent appraisal is
more than one year old, a new appraisal is ordered. In the interim, estimated
fair value is established through a review of the most recent appraisal in
addition to a review of other relevant market information. When reviewing the
most recent appraisal, management considers several factors. Some of those
factors include the type of property, changes in regional economic factors, the
underlying appraisal assumptions, and any recent communication with local real
estate brokers. If the estimated fair market value of the collateral is less
than the carrying value, including accrued interest, an allowance for loss is
recorded. The increase in the allocated allowance for losses on Commercial
Loans at December 31, 2002 was due to an increase in the Consolidated Groups
commercial lending activities. Fluctuations in the provision for losses and/or
percentage of allowance to outstanding principal result from using the specific
impairment methodology.

The Consolidated Group establishes an allowance for loss on residential
and other real estate Receivables, including accrued interest, inherent in the
portfolio at the balance sheet date based primarily on current delinquencies
and 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 December 31, 2002 compared to December 31, 2001 was primarily due to
the overall seasoning of the loan portfolio. As the Consolidated Group has
recently focused on Commercial Loan originations, the remaining real estate
receivable portfolio has been decreasing in size due to payoffs and maturities.
The remaining portfolio, which is comprised of production from previous years,
contains different loss potential characteristics depending upon the year the
loans were produced (production pool years). Not all production pool years will
experience the same rate of loss over their respective remaining lives. Pools
that have seasoned beyond the four-year mark generally experience lower future
losses than pools that are less seasoned.

The reduction in allocated allowance for losses on other receivables at
December 31, 2002 compared to December 31, 2001 was due to a positive change in
the federal tax law effecting structured settlement transfers and the
consequential cooperation by certain annuity issuers with respect to the
payment of defaulted, and in some cases current, structured settlements.

In estimating the amount of credit losses inherent in the Receivable
portfolios, management utilizes various judgments and assumptions. For
Receivables that are collateral-dependent, the estimated fair market value of
the collateral may deviate significantly from the proceeds received when the
collateral is sold. To mitigate the imprecision inherent in most estimates of
expected credit losses, the 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.





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##### Table of Contents



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:

|                        |  |              |           |      |  |   |           |  
|----------------------- |  | ------------ | --------- | ---- |  | - | --------- | -
|                        |  | December 31,
|                        |  |             
|                        |  | 2002         |           | 2001
|                        |  |              |           |     
|Beginning balance       |  | $            | 1,998,448 |      |  | $ | 3,661,247 |  
|Provisions (recoveries) |  |              | 1,302,324 |      |  |   | (240,386  | )
|Charge-offs             |  |              | (692,583  | )    |  |   | (748,488  | )
|                        |  |              |           |      |  |   |           |  
|Ending balance          |  | $            | 2,608,189 |      |  | $ | 2,672,373 |  
|                        |  |              |           |      |  |   |           |  

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

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.

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.

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. During the three-month period ended
December 31, 2002, Metropolitan contributed $41.4 million of capital to Western
Life. Additionally, Western Holding, the parent company of Western Life, had
registered for sale up to $50.0 million of Series A preferred stock at December
31, 2002. Effective January 2, 2003, the preferred stock sale was completed and
Western Holding issued 437,604 shares of preferred stock and received proceeds
of approximately $10.9 million. 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.





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##### Table of Contents



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
December 31, 2002, Western Life had a stock investment in the FHLB of
approximately $7.5 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 December 31, 2002,
Western Life had $333.6 million in eligible collateral with a market value of
$337.1 million and a borrowing capacity of $239.3 million, subject to the
purchase of additional stock. Approximately $206.4 million in securities having
a market value of $208.5 million were pledged to collateralize the outstanding
borrowings to the FHLB at December 31, 2002. At December 31, 2002, Western
Life had approximately $148.0 million in outstanding borrowings to the FHLB
leaving an unused borrowing capacity of approximately $91.3 million, subject to
the purchase of additional stock. During the three months ended December 31,
2002, Western Lifes outstanding borrowings on the secured line of credit
increased $45.0 million. This increase accounted for approximately 38% of the
Consolidated Groups net cash provided by financing activities. In order to
increase the unused borrowing capacity, Western Life would be required to
purchase approximately $2.2 million in additional FHLB stock.

During the three months ended December 31, 2002, 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.

Western Life has a reinsurance agreement with Old Standard, which became
effective July 1, 1998. Under this agreement, Western Life can reinsure with
Old Standard 75% of the risk on various annuity products. The reinsurance
agreement is an ongoing arrangement with no stated expiration or termination
date, although either party may stop and restart at their discretion upon
providing a 30-day advance written notice. During the three months ended
December 31, 2002, no additional annuity premiums were ceded to Old Standard
under this agreement.

Metropolitan engages in public offerings of debt securities and preferred
stock. These investments are typically offered to the public on a continuous
best efforts basis through MIS, an affiliated company. At December 31, 2002,
Metropolitan had registered for sale up to $150.0 million of Series III and
Series III-A Debenture Bonds. This debenture bond registration expires April
30, 2003. 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
registration expires July 31, 2003.

Another source of liquidity is derived from payments received on
receivables and the sale of real estate. A decrease in the prepayment rate on
receivables or in the ability to sell real estate would reduce future cash
flows from receivables. Additionally, to increase liquidity, the Consolidated
Group may occasionally sell securities to a broker-dealer under the provision
that the Consolidated Group will buy them back by a predetermined date for a
specific price, often called a reverse repurchase agreement. At December 31,
2002, the Consolidated Group had no outstanding reverse repurchase agreements.

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 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 December 31, 2002, Western Life had
approximately 46.1% of its statutory admitted assets invested in real estate
related assets that did not qualify as SMMEA investments.





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##### Table of Contents



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

The Consolidated Group had approximately $75.7 million of outstanding
commitments to extend credit to commercial borrowers at December 31, 2002.

During the three months ended December 31, 2002, $394.3 million in funds
provided by the Consolidated Groups various liquidity sources were used to (1)
invest $346.1 million primarily in Receivables and investments and (2) fund
$84.5 million in debt maturities, annuity product withdrawals and surrenders,
and the payment of dividends.

During the three month period ended December 31, 2001, $210.8 million in
funds provided by the Companys various liquidity sources were used to (1)
invest $181.9 million primarily in Receivables and investments and (2) fund
$45.5 million in debt maturities, annuity product withdrawals and surrenders,
and the payment of dividends.

New Accounting Rules

In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is
effective for fiscal years beginning after December 15, 2001. SFAS No. 144
addresses accounting and reporting of long-lived assets, except goodwill, that
are either held and used or disposed of through sale or other means.
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.





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##### Table of Contents



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.

PART II-OTHER INFORMATION

|        |  |                                 
|------- |  | --------------------------------
|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits           
| | --- |  | -------------------
|
| |     |  | None.              
|
| | (b) |  | 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 14th day of
February 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)                           





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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.

|                                                                         |  | 
|------------------------------------------------------------------------ |  | 
|Date: February 14, 2003                                                  |  | 
|                                                                         |  | 
|/s/ C. Paul Sandifur, Jr.

C. Paul Sandifur, Jr.
Chief Executive Officer |  | 





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##### Table of Contents



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.

|                                                                            |  | 
|--------------------------------------------------------------------------- |  | 
|Date: February 14, 2003                                                     |  | 
|                                                                            |  | 
|/s/ Robert A. Ness

Robert A. Ness
Controller (Principal Financial Officer) |  |