##### Table of Contents






________________________________________________________________________________ SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C. 20549




---

Form 10-Q

|   |  |                                                                                            
|-- |  | -------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934. 
|  
|   |  | For the quarterly period ended
	December 31, 2001                                          
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934.
|  
|   |  | For the transition period
	from           to                                               

Commission file number 001-15595



---

Metropolitan Mortgage & Securities Co.,
Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                 |  |                                      
|-------------------------------------------------------------------------------- |  | -------------------------------------
|Washington                                                                       |  | 91-0609840                           
|(State or other jurisdiction of
	incorporation or organization)                  |  | (I.R.S. Employer
	Identification No.)
|                                                                                
|601 W. 1st Avenue,
	Spokane, Washington(Address of principal executive
	offices) |  | 99201-5015(Zip Code)                 

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

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

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

Applicable only to issuers involved in
bankruptcy proceedings during the preceding five years: N/
A.

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

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, 2002.

Common B: 0 shares at
January 31, 2002.




---






---

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            
|                                | Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                | Item 3.Quantitative and Qualitative Disclosures About Market Risk                           
|PART II -- OTHER INFORMATION   
|                                | Item 6.Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                     



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC.

INDEX

PART I  FINANCIAL
INFORMATION

ITEM 1.     FINANCIAL
STATEMENTS

|                                                                                                       |  |      |  | 
|------------------------------------------------------------------------------------------------------ |  | ---- |  | 
|                                                                                                       |  | Page
|                                                                                                       |  |     
|Consolidated Balance Sheets
	As of December 31, 2001 and September 30, 2001                            |  |      |  | 
|Consolidated Statements of Operations
	Three Months Ended December 31, 2001 and 2000                   |  |      |  | 
|Consolidated Statements of Comprehensive Income
	(Loss)
	Three Months Ended December 31, 2001 and 2000 |  |      |  | 
|Consolidated Statement of Stockholders
	Equity
	Three Months Ended December 31, 2001                  |  |      |  | 
|Consolidated Statements of Cash Flows
	Three Months Ended December 31, 2001 and 2000                   |  |      |  | 
|Notes to Consolidated Financial Statements                                                             |  |      |  | 

1



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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,
|                                                                                                                                                                                                                         |                                              | 2001                                                     |             | 2001         
|                                                                                                                                                                                                                         |                                              |                                                          |             |              
|                                                                                                                                                                                                                         |                                              | (Unaudited)                                              |             |              
|ASSETS:                                                                                                                                                                                                                 
|Cash and cash equivalents                                                                                                                                                                                                |                                              | $                                                        | 51,431,049  |               |               | $ | 68,019,397  |            
|Investments:                                                                                                                                                                                                             |                                              |                                                          |             |               |               |   |             |            
|                                                                                                                                                                                                                         | Trading securities, at fair value            |                                                          |             | 1,200,674     |               |   |             | 48,832,529  |              
|                                                                                                                                                                                                                         | Available-for-sale securities, at fair value |                                                          |             | 390,456,252   |               |   |             | 311,803,378 |              
|                                                                                                                                                                                                                         | Accrued interest on investments              |                                                          |             | 2,872,875     |               |   |             | 2,734,943   |              
|                                                                                                                                                                                                                         |                                              |                                                          |             |               |               |   |             |            
|                                                                                                                                                                                                                         |                                              | Total investments                                        |             |               | 394,529,801   |   |             |             | 363,370,850   | 
|                                                                                                                                                                                                                         |                                              |                                                          |             |               |               |   |             |            
|Real estate contracts and mortgage notes
	receivable, net of discounts and origination fees and net of
	allowances of $11,606,705 and $11,241,981                                                                        |                                              |                                                          | 438,529,786 |               |               |   | 426,376,243 |            
|Real estate held for sale and development at the
	lower of cost or market, net of allowances of $3,314,864 and
	$3,661,247                                                                                               |                                              |                                                          | 84,473,318  |               |               |   | 81,934,751  |            
|Other receivable investments, net of discounts
	and origination fees and net of allowances of $2,369,577 and
	$2,267,996                                                                                                 |                                              |                                                          | 177,882,112 |               |               |   | 173,836,770 |            
|                                                                                                                                                                                                                         |                                              |                                                          |             |               |               |   |             |            
|                                                                                                                                                                                                                         |                                              | Net real estate assets and other receivable
	investments |             |               | 700,885,216   |   |             |             | 682,147,764   | 
|                                                                                                                                                                                                                         |                                              |                                                          |             |               |               |   |             |            
|Other assets:                                                                                                                                                                                                            |                                              |                                                          |             |               |               |   |             |            
|                                                                                                                                                                                                                         | Reinsurance receivable                       |                                                          |             | 107,883,112   |               |   |             | 109,608,025 |              
|                                                                                                                                                                                                                         | Deferred costs, net                          |                                                          |             | 66,746,779    |               |   |             | 66,755,118  |              
|                                                                                                                                                                                                                         | Land, buildings and equipment, net           |                                                          |             | 28,905,152    |               |   |             | 29,411,423  |              
|                                                                                                                                                                                                                         | Mortgage servicing rights, net               |                                                          |             | 899,510       |               |   |             | 3,994,096   |              
|                                                                                                                                                                                                                         | Deferred income taxes                        |                                                          |             | 23,492,745    |               |   |             | 20,894,075  |              
|                                                                                                                                                                                                                         | Other assets, net                            |                                                          |             | 49,689,052    |               |   |             | 49,927,066  |              
|                                                                                                                                                                                                                         |                                              |                                                          |             |               |               |   |             |            
|                                                                                                                                                                                                                         |                                              | Total other assets                                       |             |               | 277,616,350   |   |             |             | 280,589,803   | 
|                                                                                                                                                                                                                         |                                              |                                                          |             |               |               |   |             |            
|                                                                                                                                                                                                                         |                                              | Total assets                                             |             | $             | 1,424,462,416 |   |             | $           | 1,394,127,814 | 
|                                                                                                                                                                                                                         |                                              |                                                          |             |               |               |   |             |            
|LIABILITIES:                                                                                                                                                                                                            
|Life insurance and annuity reserves                                                                                                                                                                                      |                                              | $                                                        | 996,620,091 |               |               | $ | 971,216,178 |            
|Debenture bonds and accrued interest                                                                                                                                                                                     |                                              |                                                          | 325,338,851 |               |               |   | 300,367,995 |            
|Debt payable                                                                                                                                                                                                             |                                              |                                                          | 49,422,034  |               |               |   | 39,628,517  |            
|Accounts payable and accrued expenses                                                                                                                                                                                    |                                              |                                                          | 16,646,097  |               |               |   | 39,625,703  |            
|Minority interest in consolidated subsidiaries                                                                                                                                                                           |                                              |                                                          | 2,465,713   |               |               |   | 2,376,931   |            
|                                                                                                                                                                                                                         |                                              |                                                          |             |               |               |   |             |            
|                                                                                                                                                                                                                         |                                              | Total liabilities                                        |             |               | 1,390,492,786 |   |             |             | 1,353,215,324 | 
|                                                                                                                                                                                                                         |                                              |                                                          |             |               |               |   |             |            
|STOCKHOLDERS EQUITY:                                                                                                                                                                                                   
|Preferred stock, Series A, B, C, D, E, G and
	H cumulative with variable rate, $10 par value, authorized
	13,325,000, issued 1,272,528 shares and 1,299,254 shares
	(liquidation preference $35,379,080 and $35,973,840) |                                              |                                                          | 12,725,277  |               |               |   | 12,992,547  |            
|Preferred stock, Series E-7 cumulative with
	variable rate, $2.50 par value, authorized 10,000,000, issued
	676,876 shares (liquidation preference $16,921,890)                                                          |                                              |                                                          | 1,692,189   |               |               |   | 1,692,189   |            
|Common stock, Class A, $2,250 par,
	authorized 222 shares, 97 shares issued and outstanding                                                                                                                              |                                              |                                                          | 218,250     |               |               |   | 218,250     |            
|Additional paid-in capital                                                                                                                                                                                               |                                              |                                                          | 25,129,230  |               |               |   | 26,024,897  |            
|Accumulated other comprehensive loss                                                                                                                                                                                     |                                              |                                                          | (9,317,110  | )             |               |   | (4,474,411  | )          
|Retained earnings                                                                                                                                                                                                        |                                              |                                                          | 3,521,794   |               |               |   | 4,459,018   |            
|                                                                                                                                                                                                                         |                                              |                                                          |             |               |               |   |             |            
|                                                                                                                                                                                                                         |                                              | Total stockholders equity                               |             |               | 33,969,630    |   |             |             | 40,912,490    | 
|                                                                                                                                                                                                                         |                                              |                                                          |             |               |               |   |             |            
|                                                                                                                                                                                                                         |                                              | Total liabilities and stockholders equity               |             | $             | 1,424,462,416 |   |             | $           | 1,394,127,814 | 
|                                                                                                                                                                                                                         |                                              |                                                          |             |               |               |   |             |            

The accompanying notes are an integral part

of the consolidated financial statements.


2



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##### Table of Contents






METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                               |                                                           |                    |          |            |            |   |            |            |            | 
|------------------------------------------------------------------------------ | --------------------------------------------------------- | ------------------ | -------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                                                               |                                                           |                   
|                                                                               |                                                           | Three Months Ended
|                                                                               |                                                           | December 31,      
|                                                                               |                                                           |                   
|                                                                               |                                                           | 2001               |          | 2000      
|                                                                               |                                                           |                    |          |           
|                                                                               |                                                           |                   
|                                                                               |                                                           | (Unaudited)       
|Revenues:                                                                      |                                                           |                    |          |            |            |   |            |           
|                                                                               | Insurance premiums                                        |                    | $        | 358,612    |            |   | $          | 397,505    |           
|                                                                               | Interest on receivables                                   |                    |          | 12,267,586 |            |   |            | 9,389,363  |           
|                                                                               | Earned discount on receivables and investments            |                    |          | 8,944,487  |            |   |            | 4,897,593  |           
|                                                                               | Other investment income                                   |                    |          | 7,699,902  |            |   |            | 7,704,442  |           
|                                                                               | Real estate sales                                         |                    |          | 2,339,414  |            |   |            | 5,907,870  |           
|                                                                               | Fees, commissions, service and other income               |                    |          | 1,961,705  |            |   |            | 3,607,449  |           
|                                                                               | Net gains (losses) on investments                         |                    |          | 1,203,177  |            |   |            | (812,264   | )         
|                                                                               | Net gains on sales of receivables                         |                    |          | 347,975    |            |   |            | 2,828,767  |           
|                                                                               |                                                           |                    |          |            |            |   |            |           
|                                                                               |                                                           | Total revenues     |          |            | 35,122,858 |   |            |            | 33,920,725 | 
|                                                                               |                                                           |                    |          |            |            |   |            |           
|Expenses:                                                                      |                                                           |                    |          |            |            |   |            |           
|                                                                               | Insurance policy and annuity benefits                     |                    |          | 13,055,764 |            |   |            | 11,812,029 |           
|                                                                               | Interest, net                                             |                    |          | 7,647,475  |            |   |            | 6,124,946  |           
|                                                                               | Cost of real estate sold                                  |                    |          | 2,299,911  |            |   |            | 5,731,986  |           
|                                                                               | Provision for losses on real estate assets                |                    |          | 861,249    |            |   |            | 1,864,557  |           
|                                                                               | Provision for losses on other assets                      |                    |          | 101,582    |            |   |            | 677,989    |           
|                                                                               | Salaries and employee benefits                            |                    |          | 4,120,931  |            |   |            | 6,445,207  |           
|                                                                               | Commissions to agents                                     |                    |          | 2,022,372  |            |   |            | 3,151,036  |           
|                                                                               | Other operating and underwriting expenses                 |                    |          | 4,115,605  |            |   |            | 4,044,479  |           
|                                                                               | Amortization of deferred costs, net of costs
	capitalized |                    |          | 720,160    |            |   |            | 635,440    |           
|                                                                               |                                                           |                    |          |            |            |   |            |           
|                                                                               |                                                           | Total expenses     |          |            | 34,945,049 |   |            |            | 40,487,669 | 
|                                                                               |                                                           |                    |          |            |            |   |            |           
|Income (loss) before income taxes and
	minority interest                       |                                                           |                    | 177,809  |            |            |   | (6,566,944 | )         
|Income tax (provision) benefit                                                 |                                                           |                    | (31,460  | )          |            |   | 2,304,861  |           
|                                                                               |                                                           |                    |          |            |            |   |            |           
|Income (loss) before minority interest                                         |                                                           |                    | 146,349  |            |            |   | (4,262,083 | )         
|(Income) loss of consolidated subsidiaries
	allocated to minority stockholders |                                                           |                    | (88,782  | )          |            |   | 11,848     |           
|                                                                               |                                                           |                    |          |            |            |   |            |           
|Net income (loss)                                                              |                                                           |                    | 57,567   |            |            |   | (4,250,235 | )         
|Preferred stock dividends                                                      |                                                           |                    | (936,346 | )          |            |   | (1,161,303 | )         
|                                                                               |                                                           |                    |          |            |            |   |            |           
|Loss applicable to common stockholders                                         |                                                           | $                  | (878,779 | )          |            | $ | (5,411,538 | )         
|                                                                               |                                                           |                    |          |            |            |   |            |           

The accompanying notes are an integral part

of the consolidated financial statements.


3



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##### Table of Contents






METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)

|                                                       |                                                    |                                                                              |            |            |            |   |            |           |           | 
|------------------------------------------------------ | -------------------------------------------------- | ---------------------------------------------------------------------------- | ---------- | ---------- | ---------- | - | ---------- | --------- | --------- | 
|                                                       |                                                    |                                                                             
|                                                       |                                                    | Three Months Ended                                                          
|                                                       |                                                    | December 31,                                                                
|                                                       |                                                    |                                                                             
|                                                       |                                                    | 2001                                                                         |            | 2000      
|                                                       |                                                    |                                                                              |            |           
|                                                       |                                                    |                                                                             
|                                                       |                                                    | (Unaudited)                                                                 
|Net income (loss)                                      |                                                    | $                                                                            | 57,567     |            |            | $ | (4,250,235 | )        
|                                                       |                                                    |                                                                              |            |            |            |   |            |          
|Other comprehensive income (loss), net of income
	tax: |                                                    |                                                                              |            |            |            |   |            |          
|                                                       | Cumulative effect of accounting change, net of tax |                                                                              |            | 0          |            |   |            | (240,994  | )        
|                                                       | Unrealized gains (losses) on investments:          |                                                                              |            |            |            |   |            |           |          
|                                                       |                                                    | Unrealized holding gains (losses) arising
	during period                     |            |            | (4,136,059 | ) |            |           | 1,301,540 | 
|                                                       |                                                    | Less: reclassification adjustment for
	(gains) losses included in net income |            |            | (706,640   | ) |            |           | 82,067    | 
|                                                       |                                                    |                                                                              |            |            |            |   |            |          
|                                                       |                                                    | Unrealized gains (losses) on investments                                     |            |            | (4,842,699 | ) |            |           | 1,383,607 | 
|                                                       |                                                    |                                                                              |            |            |            |   |            |          
|                                                       | Net other comprehensive (loss) income              |                                                                              |            | (4,842,699 | )          |   |            | 1,142,613 |          
|                                                       |                                                    |                                                                              |            |            |            |   |            |          
|Comprehensive loss                                     |                                                    | $                                                                            | (4,785,132 | )          |            | $ | (3,107,622 | )        
|                                                       |                                                    |                                                                              |            |            |            |   |            |          

The accompanying notes are an integral part

of the consolidated financial statements.


4



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES






CONSOLIDATED STATEMENT OF STOCKHOLDERS
EQUITY


|                                                                                                 |  |             |            |        |  |            |         |               |  |          |            |       |  |   |            |   |  |   |           |   |  |   |            |  
|------------------------------------------------------------------------------------------------ |  | ----------- | ---------- | ------ |  | ---------- | ------- | ------------- |  | -------- | ---------- | ----- |  | - | ---------- | - |  | - | --------- | - |  | - | ---------- | -
|                                                                                                 |  |             |            |        |  |            |         | Accumulated   |  |          |            |      
|                                                                                                 |  |             |            |        |  | Additional |         | Other         |  |          |            |      
|                                                                                                 |  | Preferred   |            | Common |  | Paid-in    |         | Comprehensive |  | Retained |            |      
|                                                                                                 |  | Stock       |            | Stock  |  | Capital    |         | Loss          |  | Earnings |            | Total
|                                                                                                 |  |             |            |        |  |            |         |               |  |          |            |      
|                                                                                                 |  |            
|                                                                                                 |  | (Unaudited)
|Balance, October 1, 2001                                                                         |  | $           | 14,684,736 |        |  | $          | 218,250 |               |  | $        | 26,024,897 |       |  | $ | (4,474,411 | ) |  | $ | 4,459,018 |   |  | $ | 40,912,490 |  
|Net income                                                                                       |  |             |            |        |  |            |         |               |  |          |            |       |  |   |            |   |  |   | 57,567    |   |  |   | 57,567     |  
|Net unrealized losses on available-for-sale
	securities, net of income tax benefit of $2,598,670 |  |             |            |        |  |            |         |               |  |          |            |       |  |   | (4,842,699 | ) |  |   |           |   |  |   | (4,842,699 | )
|Cash dividends, common ($603 per share)                                                          |  |             |            |        |  |            |         |               |  |          |            |       |  |   |            |   |  |   | (58,445   | ) |  |   | (58,445    | )
|Cash dividends, preferred (variable rate)                                                        |  |             |            |        |  |            |         |               |  |          |            |       |  |   |            |   |  |   | (936,346  | ) |  |   | (936,346   | )
|Redemption and retirement of preferred stock
	(32,312 shares)                                    |  |             | (323,134   | )      |  |            |         |               |  |          | (1,261,623 | )     |  |   |            |   |  |   |           |   |  |   | (1,584,757 | )
|Sale of variable rate preferred stock, net (5,586
	shares)                                       |  |             | 55,864     |        |  |            |         |               |  |          | 365,956    |       |  |   |            |   |  |   |           |   |  |   | 421,820    |  
|                                                                                                 |  |             |            |        |  |            |         |               |  |          |            |       |  |   |            |   |  |   |           |   |  |   |            |  
|Balance, December 31, 2001                                                                       |  | $           | 14,417,466 |        |  | $          | 218,250 |               |  | $        | 25,129,230 |       |  | $ | (9,317,110 | ) |  | $ | 3,521,794 |   |  | $ | 33,969,630 |  
|                                                                                                 |  |             |            |        |  |            |         |               |  |          |            |       |  |   |            |   |  |   |           |   |  |   |            |  

The accompanying notes are an integral part

of the consolidated financial statements.


5



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES






CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                         |                                                                                                                       |                                                |                                                                    |                                                      |            |            |             |              |            |            |            | 
|-------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------------------------------------------------ | ---------------------------------------------------- | ---------- | ---------- | ----------- | ------------ | ---------- | ---------- | ---------- | 
|                                                         |                                                                                                                       |                                               
|                                                         |                                                                                                                       | Three Months Ended                            
|                                                         |                                                                                                                       | December 31,                                  
|                                                         |                                                                                                                       |                                               
|                                                         |                                                                                                                       | 2001                                           |                                                                    | 2000                                                
|                                                         |                                                                                                                       |                                                |                                                                    |                                                     
|                                                         |                                                                                                                       |                                               
|                                                         |                                                                                                                       | (Unaudited)                                   
|Cash flow from operating activities:                     |                                                                                                                       |                                                |                                                                    |                                                      |            |            |             |             
|                                                         | Net income (loss)                                                                                                     |                                                | $                                                                  | 57,567                                               |            |            | $           | (4,250,235   | )         
|                                                         | Adjustments to reconcile net income
	(loss) to net cash from operating activities:                                    |                                                |                                                                    |                                                      |            |            |             |              |           
|                                                         |                                                                                                                       | Proceeds from sales of trading securities      |                                                                    |                                                      | 13,590,118 |            |             |              | 6,441,537  |           
|                                                         |                                                                                                                       | Proceeds from maturities of trading securities |                                                                    |                                                      | 1,020,171  |            |             |              | 1,177,439  |           
|                                                         |                                                                                                                       | Acquisition of trading securities              |                                                                    |                                                      | (4,669,459 | )          |             |              | (3,674,892 | )         
|                                                         |                                                                                                                       | Earned discount on receivables and investments |                                                                    |                                                      | (8,944,487 | )          |             |              | (4,944,525 | )         
|                                                         |                                                                                                                       | Gains on investments and receivables, net      |                                                                    |                                                      | (1,551,153 | )          |             |              | (2,016,503 | )         
|                                                         |                                                                                                                       | Gains on sales of real estate                  |                                                                    |                                                      | (39,503    | )          |             |              | (175,884   | )         
|                                                         |                                                                                                                       | Provision for losses on real estate assets     |                                                                    |                                                      | 861,249    |            |             |              | 1,864,557  |           
|                                                         |                                                                                                                       | Provision for losses on other assets           |                                                                    |                                                      | 101,582    |            |             |              | 677,989    |           
|                                                         |                                                                                                                       | Depreciation and amortization                  |                                                                    |                                                      | 1,253,064  |            |             |              | 1,360,506  |           
|                                                         |                                                                                                                       | Minority interests                             |                                                                    |                                                      | 88,782     |            |             |              | (11,848    | )         
|                                                         |                                                                                                                       | Deferred income tax benefit                    |                                                                    |                                                      | (2,598,670 | )          |             |              | (2,815,566 | )         
|                                                         |                                                                                                                       | Changes in assets and liabilities:             |                                                                    |                                                      |            |            |             |              |            |           
|                                                         |                                                                                                                       |                                                | Deferred cost, net                                                 |                                                      |            | 8,339      |             |              |            | 472,450    |           
|                                                         |                                                                                                                       |                                                | Life insurance and annuity reserves                                |                                                      |            | 13,349,168 |             |              |            | 11,065,684 |           
|                                                         |                                                                                                                       |                                                | Compound and accrued interest on debenture bonds
	and debt payable |                                                      |            | 593,142    |             |              |            | 1,508,640  |           
|                                                         |                                                                                                                       |                                                | Accrued interest on receivables and investments                    |                                                      |            | (3,101,863 | )           |              |            | (798,004   | )         
|                                                         |                                                                                                                       |                                                | Other assets                                                       |                                                      |            | 5,926,818  |             |              |            | 15,182,111 |           
|                                                         |                                                                                                                       |                                                | Accounts payable and accrued expenses                              |                                                      |            | (3,405,044 | )           |              |            | 39,342     |           
|                                                         |                                                                                                                       |                                                | Other, net                                                         |                                                      |            | (767,909   | )           |              |            | (654,244   | )         
|                                                         |                                                                                                                       |                                                |                                                                    |                                                      |            |            |             |             
|                                                         |                                                                                                                       |                                                |                                                                    | Net cash provided by operating activities            |            |            | 11,771,912  |              |            |            | 20,448,554 | 
|                                                         |                                                                                                                       |                                                |                                                                    |                                                      |            |            |             |             
|Cash flow from investing activities:                     |                                                                                                                       |                                                |                                                                    |                                                      |            |            |             |             
|                                                         | Principal payments received on real estate
	contracts and mortgage notes receivable and other receivable
	investments |                                                |                                                                    | 44,709,760                                           |            |            |             | 32,469,055   |           
|                                                         | Proceeds from sales of real estate contracts and
	mortgage notes receivable and other receivable investments          |                                                |                                                                    | 3,491,257                                            |            |            |             | 78,179,895   |           
|                                                         | Proceeds from sales of real estate                                                                                    |                                                |                                                                    | 2,339,414                                            |            |            |             | 5,332,280    |           
|                                                         | Proceeds from maturities of available-for-sale
	investments                                                           |                                                |                                                                    | 18,988,551                                           |            |            |             | 1,525,701    |           
|                                                         | Proceeds from sales of available-for-sale
	investments                                                                |                                                |                                                                    | 37,484,332                                           |            |            |             | 36,853,397   |           
|                                                         | Acquisition of real estate contracts and mortgage
	notes receivable                                                   |                                                |                                                                    | (42,030,125                                          | )          |            |             | (105,892,823 | )         
|                                                         | Acquisition of other receivable investments                                                                           |                                                |                                                                    | (10,444,564                                          | )          |            |             | (4,161,993   | )         
|                                                         | Purchases of available-for-sale investments                                                                           |                                                |                                                                    | (126,629,165                                         | )          |            |             | (1,782,943   | )         
|                                                         | Purchases of and costs associated with real
	estate held for sale and development                                     |                                                |                                                                    | (1,926,899                                           | )          |            |             | (1,972,113   | )         
|                                                         | Capital expenditures                                                                                                  |                                                |                                                                    | (135,982                                             | )          |            |             | (273,768     | )         
|                                                         |                                                                                                                       |                                                |                                                                    |                                                      |            |            |             |             
|                                                         |                                                                                                                       |                                                |                                                                    | Net cash provided by (used in) investing
	activities |            | $          | (74,153,421 | )            |            | $          | 40,276,688 | 
|                                                         |                                                                                                                       |                                                |                                                                    |                                                      |            |            |             |             
|Cash flow from financing activities:                     |                                                                                                                       |                                                |                                                                    |                                                      |            |            |             |             
|                                                         | Increase (decrease) in borrowings                                                                                     |                                                | $                                                                  | 10,000,000                                           |            |            | $           | (9,302,217   | )         
|                                                         | Repayments of debt payable                                                                                            |                                                |                                                                    | (230,316                                             | )          |            |             | (122,222     | )         
|                                                         | Receipts from life and annuity products                                                                               |                                                |                                                                    | 40,013,211                                           |            |            |             | 30,126,169   |           
|                                                         | Withdrawals of life and annuity products                                                                              |                                                |                                                                    | (29,367,103                                          | )          |            |             | (30,450,803  | )         
|                                                         | Ceding of life and annuity products to reinsurers                                                                     |                                                |                                                                    | 3,133,550                                            |            |            |             | 1,898,873    |           
|                                                         | Issuance of debenture bonds                                                                                           |                                                |                                                                    | 37,644,483                                           |            |            |             | 16,624,472   |           
|                                                         | Repayment of debenture bonds                                                                                          |                                                |                                                                    | (13,242,936                                          | )          |            |             | (4,328,623   | )         
|                                                         | Issuance of preferred stock                                                                                           |                                                |                                                                    | 421,820                                              |            |            |             | 689,732      |           
|                                                         | Redemption and retirement of preferred stock                                                                          |                                                |                                                                    | (1,584,757                                           | )          |            |             | (2,738,734   | )         
|                                                         | Cash dividends                                                                                                        |                                                |                                                                    | (994,791                                             | )          |            |             | (1,219,747   | )         
|                                                         |                                                                                                                       |                                                |                                                                    |                                                      |            |            |             |             
|                                                         |                                                                                                                       |                                                |                                                                    | Net cash provided by financing activities            |            |            | 45,793,161  |              |            |            | 1,176,900  | 
|                                                         |                                                                                                                       |                                                |                                                                    |                                                      |            |            |             |             
|Net change in cash and cash equivalents                  |                                                                                                                       |                                                | (16,588,348                                                        | )                                                    |            |            | 61,902,142  |             
|Cash and cash equivalents:                               |                                                                                                                       |                                                |                                                                    |                                                      |            |            |             |             
|                                                         | Beginning of period                                                                                                   |                                                |                                                                    | 68,019,397                                           |            |            |             | 2,664,035    |           
|                                                         |                                                                                                                       |                                                |                                                                    |                                                      |            |            |             |             
|                                                         | End of period                                                                                                         |                                                | $                                                                  | 51,431,049                                           |            |            | $           | 64,566,177   |           
|                                                         |                                                                                                                       |                                                |                                                                    |                                                      |            |            |             |             
|Non cash investing and financing activities of
	Company: |                                                                                                                       |                                                |                                                                    |                                                      |            |            |             |             
|                                                         | Real estate acquired through foreclosure                                                                              |                                                |                                                                    | 2,842,296                                            |            |            |             | 3,699,851    |           
|                                                         | Receivables originated to facilitate the sale of
	real estate                                                         |                                                |                                                                    | 0                                                    |            |            |             | 575,590      |           
|                                                         | Transfer of investments from held-to-maturity to
	available-for-sale                                                  |                                                |                                                                    | 0                                                    |            |            |             | 59,415,992   |           
|                                                         | Transfer of investments from trading to
	available-for-sale                                                           |                                                |                                                                    | 37,396,757                                           |            |            |             | 0            |           
|                                                         | Mortgage servicing rights retained from
	securitizations                                                              |                                                |                                                                    | 0                                                    |            |            |             | 1,046,116    |           

The accompanying notes are an integral part

of the consolidated financial statements.


6



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES






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, 2001, the results of
operations for the three months ended December 31, 2001 and
2000 and the cash flows for the three months ended
December 31, 2001 and 2000. The results of operations for
the three months ended December 31, 2001 and 2000 are not
necessarily indicative of the results to be expected for the
full year. These financial statements should be read in
conjunction with the consolidated financial statements including
notes thereto included in the Companys fiscal 2001
Form 10-K.

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

2.     Segment
Reporting

The Company principally operates in three
industry segments which encompass: (1) investing in real
estate contracts and mortgage notes receivable, other
receivables and investment securities; (2) insurance and
annuity operations; and (3) property development
activities. The insurance 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, 2001 and 2000 is as follows:

|                              |  |                                                              |             |           |  |              |               |              |  |       |            |  |  |   |          |   |  |   |               | 
|----------------------------- |  | ------------------------------------------------------------ | ----------- | --------- |  | ------------ | ------------- | ------------ |  | ----- | ---------- |  |  | - | -------- | - |  | - | ------------- | 
|                              |  |                                                             
|                              |  | As of and for the Three Month Period Ended December 31, 2001
|                              |  |                                                             
|                              |  |                                                              |             | Property  |  | Intersegment |               |             
|                              |  | Investing                                                    |             | Insurance |  | Development  |               | Eliminations |  | Total
|                              |  |                                                              |             |           |  |              |               |              |  |      
|Revenues                      |  | $                                                            | 6,969,710   |           |  | $            | 28,404,514    |              |  | $     | 501,524    |  |  | $ | (752,890 | ) |  | $ | 35,122,858    | 
|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       | 

|                              |  |                                                              |             |           |  |              |               |              |  |       |            |   |  |   |              |   |  |   |               |  
|----------------------------- |  | ------------------------------------------------------------ | ----------- | --------- |  | ------------ | ------------- | ------------ |  | ----- | ---------- | - |  | - | ------------ | - |  | - | ------------- | -
|                              |  |                                                             
|                              |  | As of and for the Three Month Period Ended December 31, 2000
|                              |  |                                                             
|                              |  |                                                              |             | Property  |  | Intersegment |               |             
|                              |  | Investing                                                    |             | Insurance |  | Development  |               | Eliminations |  | Total
|                              |  |                                                              |             |           |  |              |               |              |  |      
|Revenues                      |  | $                                                            | 10,384,419  |           |  | $            | 24,228,870    |              |  | $     | 1,529,971  |   |  | $ | (2,222,535   | ) |  | $ | 33,920,725    |  
|Income (loss) from operations |  |                                                              | (6,742,072  | )         |  |              | 190,867       |              |  |       | (15,739    | ) |  |   |             |   |  |   | (6,566,944    | )
|Identifiable assets, net      |  |                                                              | 321,359,420 |           |  |              | 1,037,033,890 |              |  |       | 57,297,096 |   |  |   | (154,421,085 | ) |  |   | 1,261,269,321 |  
|Depreciation and amortization |  |                                                              | 1,003,191   |           |  |              | 88,609        |              |  |       | 268,100    |   |  |   |             |   |  |   | 1,359,900     |  
|Capital expenditures          |  |                                                              | 246,578     |           |  |              | 27,190        |              |  |       |           |   |  |   |             |   |  |   | 273,768       |  

7



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METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

3.     Preferred
Stock Split

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

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|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
	of Financial Condition and Results of Operations

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

General

Metropolitan was established in 1953. Through
growth and acquisitions it has developed into a diversified
institution with assets exceeding $1 billion. Its principal
subsidiaries are Western United Life Assurance Company
(Western or WULA), an annuity and life
insurance company, and Metwest Mortgage Services, Inc.
(Metwest), a receivable servicer and loan
originator. The Company provides services to certain affiliated
entities (the Affiliated Companies) for a fee and
engages in various business transactions with these entities.
The Affiliated Companies are National Summit Corp. and its
principal subsidiaries which include Summit Securities, Inc.
(Summit), Old Standard Life Insurance Company
(Old Standard), Old West Life Insurance &
Annuity Company (Old West), Summit Property
Development and Metropolitan Investment Securities, Inc.
(MIS). The Affiliated Companies are affiliated with
the Consolidated Group because of the common control of the
Consolidated Group and the Affiliated Companies by C. Paul
Sandifur, Jr.

The Company and its subsidiaries principal
business activity is investing in cash flowing assets,
consisting of obligations collateralized by real estate,
structured settlements, annuities, lottery prizes, and other
investments (Receivables). The Receivables primarily
consist of real estate contracts and promissory notes
collateralized by first position liens on real estate. The
Company predominantly invests in Receivables where the borrower
or the collateral does not qualify for conventional financing or
the seller or the buyer chose to use non-conventional financing.
This market is commonly referred to as the non-conventional
market. Obligors on the Consolidated Groups real estate
receivables include A-, B and C credit quality obligors.

Individual
and Pool Receivable Acquisition Sources

Historically, the majority of the Companys
real estate receivables were acquired as individual receivable
acquisitions. The Companys principal source for private
market receivables is independent brokers located throughout the
United States. These independent brokers typically deal directly
with private individuals or organizations that own and wish to
sell a Receivable. The Company may periodically acquire pools of
Receivables from the secondary market through brokers or
directly from other financial institutions. Additionally, the
Company may originate jumbo residential loans through Metwest.
The Company may also originate first lien residential loans as a
result of reselling real estate acquired through foreclosure.

Commercial
Loans

The Company, through Old Standard, originates
commercial loans collateralized by various types of commercial
properties. These commercial loans are generally small to
mid-sized loans that are originated for less than
$15 million. The Company currently projects continued
expansion of the origination of commercial loans during 2002.
This projection is in part due to managements current
perception that this market may be inadequately served by
current lenders, who are not flexible in their underwriting and
pricing policies and who are not able to quickly underwrite and
close such loans, particularly in the temporary, bridge and
development commercial loan markets.

Non Real
Estate Receivable Sources

Metropolitan also negotiates the purchase of
Receivables which are not collateralized by real estate, such as
annuities, lottery prizes and business notes. The lottery prizes
generally arise out of state operated lottery games which are
typically paid in annual installments to the prize winner. The
structured settlements generally arise out of the settlement of
legal disputes where the prevailing party is awarded a sum of
money, payable

9



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##### Table of Contents



over a period of time, generally through the
creation of an annuity. Other annuities generally consist of
investments that cannot be cashed in directly with the issuing
insurance company. Business notes are cashflow instruments that
are paid to a seller for the purchase of a business operation.
Metropolitans source for these investments is generally
private brokers who specialize in these types of Receivables.


Delinquency

The principal amount of real estate receivables
as to which payments were in arrears more than three months was
$47.6 million at December 31, 2001 and
$24.6 million at December 31, 2000.

The principal amount of other receivables as to
which payments were in arrears more than three months was
$10.4 million at December 31, 2001 and
$6.8 million at December 31, 2000.

Liquidity and Capital Resources

In addition to the liquidity provided through
internal sources which include the sale and maturity of
receivables and investments; receivable and portfolio earnings;
and the sale of real estate, the following liquidity sources are
available to the Company:

Federal Home
Loan Bank of Seattle (FHLB)

The Company has secured a line of credit
agreement with the FHLB through its subsidiary, WULA. 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, 2001, WULA had a stock investment in the FHLB
of $3.1 million, which resulted in a borrowing capacity of
$61.9 million. The collateral eligible to be used to secure
the borrowing is predefined by the FHLB and generally consists
of eligible securities and mortgage loans. Additionally, each
type of collateral has a minimum pledge requirement that ranges
from 100% to 125%. At December 31, 2001, WULA had pledged
$128.5 million in eligible collateral with a market value
of $112.1 million and a borrowing potential of
$83.2 million. At December 31, 2001 WULA had borrowed
$32.0 million leaving an unused borrowing potential of
$51.2 million. In the event that WULA wanted to increase
the borrowing capacity of the FHLB line of credit, it could
purchase additional stock and pledge additional eligible
collateral.

Issuance of
Annuity and Life Insurance Products

The Company, through its WULA subsidiary,
generates liquidity through the sale of annuities and to a
lesser degree whole life and term insurance. Currently, the
products that WULA offers are targeted to the middle income
senior market. Generally, younger purchasers direct their
savings and investment dollars to mutual funds and/or variable
annuities, in light of a strong financial market; while senior
citizens tend to be more conservative with their retirement
dollars and may favor fixed annuity products. Nonetheless,
Management anticipates that some younger buyers could be
inclined to reallocate their retirement funds if the stock
markets continue to be volatile or if market returns decline.

The life insurance and annuity business is highly
competitive. WULA competes with other financial institutions
including ones with greater resources and greater name
recognition. Premium volumes, annuity crediting rates and
commissions to agents are particularly sensitive to competitive
forces. WULA management believes it is in an advantageous
position in this regard because of its earnings capability
through investments in receivables compared to that of most
other life insurance companies. WULA has been assigned a rating
of B (Fair) by A.M. Best Co., a
nationally recognized insurance company rating organization.
A.M. Best bases its ratings on a number of complex
financial analyses, the length of time a company has been in
business, the nature, quality, and liquidity of investments in
its portfolio, depth and experience of management and various
other factors. A.M. Bests ratings are supplied
primarily for the benefit of policyholders and insurance agents.

WULA prices its new annuity products and renewals
in order to achieve a positive spread between its annuity costs
and yields available on Receivable and other investments while
also considering current annuity

10



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##### Table of Contents



market rates of interest and competitive
pressures. Flexible and single premium annuities are offered
with surrender charges for periods that vary from one year to
ten years. Management believes that the surrender charges in
conjunction with current pricing policies enable the company to
manage its insurance lapse rates and underlying interest rate
risk.


Reverse
Repurchase Agreements

In order to increase liquidity, the Company may
sell a group of securities to a broker-dealer under the
provision that the Company will buy them back by a predetermined
date for a specific price. The difference between the amount the
Company received for the securities and the amount the Company
will pay the broker-dealer when buying them back represents the
interest. At December 31, 2001, the Company did not have
any reverse repurchase agreements outstanding.

Issuance of
Debt Securities and Preferred Stock

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
Metropolitan Investment Securities, Inc., an affiliated company.
At December 31, 2001, the Company had registered
$100 million of Series III and Series III-A
Debenture Bonds. This debenture bond registration expires
April 30, 2002. At December 31, 2001, the Company had
registered 6,000,000 shares of preferred stock that carry a
$25 issue price for a total preferred stock offering price of
$150,000,000. This preferred stock registration expires
October 31, 2002.

For the three month period ended
December 31, 2001, $210.0 million in funds provided by
the Companys various liquidity sources were used to
(1) invest $181.2 million primarily in receivables,
investments and capital expenditures and (2) fund
$45.4 million in debt maturities, life and annuity product
surrenders, redemption of preferred stock, and the payment of
dividends.

For the three month period ended
December 31, 2000, $224.1 million in funds provided by
the Companys various liquidity sources were used to
(1) invest $114.1 million primarily in receivables,
investments and capital expenditures and (2) fund
$48.1 million in debt maturities, life and annuity product
surrenders, redemption of preferred stock, and the payment of
dividends.

Management believes that cash, cash equivalents
and liquidity provided through the Companys liquidity
sources will be adequate to meet planned asset additions, debt
retirements and other business operational requirements during
the next twelve months.

Results of Operations



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Three Months Ended December 31, 2001
	Compared to Three Months Ended December 31,
	2000

Net income for the three month period ended
December 31, 2001 was approximately $0.1 million on
$35.1 million in revenues compared to a net loss of
$4.3 million on $33.9 million in revenues for the
three month period ended December 31, 2000. Income before
income taxes and minority interest for the three months ended
December 31, 2001 was approximately $0.2 million
compared to a loss of approximately $6.6 million for the
three months ended December 31, 2000.

The increase in income before income taxes and
minority interest of $6.8 million was primarily due to:



| |   |                                                      
| | - | -----------------------------------------------------
| |  | an increase in net interest spread of
	$4.1 million, 
|
| |  | an increase in gains on investments of
	$2.0 million,
|
| |  | a decrease in loan loss provisions of
	$1.5 million, 
|
| |  | a decrease in non-interest expense of
	$3.3 million. 

11



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##### Table of Contents



These changes were partially offset by:



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | a reduction in gains on sales of receivables of
	$2.5 million,             
|
| |  | a reduction of fees, commissions, service and
	other income of $1.6 million

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

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

During the three month period ended
December 31, 2001, the excess of interest sensitive income
over interest sensitive expense was approximately
$8.6 million compared to $4.5 million in the prior
years period. The increase between periods is primarily
the result of an increase in fees associated with the
Companys commercial lending activities. Additionally, the
average net interest margin increased to 4.17% through December
2001 compared to 2.61% through December 2000. As a result of the
increase in the net interest margin, the Company unlocked
approximately $0.4 million of deferred acquisition costs at
December 31, 2001.

The Company classifies its investments in debt
and equity securities as either trading or
available-for-sale. From time to time, gains or
losses are recognized on trading positions and securities
classified as available-for-sale may be sold at a
gain or loss. During the three month periods ended
December 31, 2001 and 2000, the Company realized gains of
approximately $1.9 million and $1.0 million
respectively. Additionally, during the three month period ended
December 31, 2000, the Company determined that certain
available-for-sale investments had other than
temporary declines in value. Accordingly, the carrying value of
the investments were decreased by approximately
$0.9 million, representing the amount impaired. This amount
has been recorded in the statement of operations as a loss on
investments. The Company continues to periodically assess the
assumptions used in valuing the cash flows and the related
carrying value of its residuals and subordinated securities.

During the three month period ended
December 31, 2001 and 2000, the change in unrealized losses
on trading securities, recorded in the Statements of Operations,
were approximately $0.7 million and $0.9 million,
respectively.

Loan loss provisions decreased to approximately
$1.0 million during the three month period ended
December 31, 2001 compared to $2.5 million during the
similar three month period ended December 30, 2000. The
decrease during the current period was primarily due to a
reduction in the acquisitions of real estate contracts and
mortgage notes receivable and other receivables from
approximately $110.1 million during the three month period
ended December 30, 2000 to approximately $52.5 million
during the three month period ended December 30, 2001. The
reduction in the acquisition and origination of receivables was
primarily due to the Companys planned exit from real
estate backed securitization activities. The exit from
securitization activities also contributed to a reduction in
gains on sales of receivables to approximately $0.3 million
during the three month period ended December 31, 2001
compared to gains of approximately $2.8 million during the
similar period ended December 31, 2000.

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The following table summarizes changes in the
Consolidated Groups allowance for losses on real estate
and other assets for the three month periods ended
December 31, 2001 and 2000:

|                  |  |              |            |      |  |   |            |  
|----------------- |  | ------------ | ---------- | ---- |  | - | ---------- | -
|                  |  |             
|                  |  | December 31,
|                  |  |             
|                  |  | 2001         |            | 2000
|                  |  |              |            |     
|Beginning balance |  | $            | 17,171,224 |      |  | $ | 15,050,115 |  
|Provisions        |  |              | 962,831    |      |  |   | 2,542,546  |  
|Charge-offs       |  |              | (842,909   | )    |  |   | (3,106,631 | )
|                  |  |              |            |      |  |   |            |  
|Ending balance    |  | $            | 17,291,146 |      |  | $ | 14,486,030 |  
|                  |  |              |            |      |  |   |            |  

Non-interest expense consists of all non-interest
expenses except the cost of real estate sold and the provision
adjustments. Non-interest expense was approximately
$11.0 million for the three month period ended
December 30, 2001 compared to $14.3 million for the
similar period ended December 31, 2000. The reduction in
non-interest expenses during the current period was primarily
the result of (1) a $1.6 million increase in
administrative expenses charged to affiliates in accordance with
established cost sharing agreements, (2) a reduction in
full time equivalent employees and other operating expenses as a
result of the Companys planned exit from loan servicing
and certain loan origination functions, and (3) a
$0.4 million unlocking of deferred acquisition costs. The
$3.3 million reduction in non-interest expenses was
partially offset by a $1.5 million reduction in loan
servicing fee income.

New
Accounting Rules

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which is effective for fiscal years beginning
after December 15, 2001. SFAS No. 144 addresses
accounting and reporting of long-lived assets, except goodwill,
that are either held and used or disposed of through sale or
other means. The Company is currently evaluating the impact of
this statement on the Companys consolidated financial
statements.




Item
3.     Quantitative and Qualitative
Disclosures About Market Risk

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

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

During the three month period ended
December 31, 2001, the excess of interest sensitive income
over interest sensitive expense was approximately
$8.6 million in 2001, compared to $4.5 million in the
prior years period. The increase between periods is
primarily the result of an increase in fees associated with the
Companys commercial lending activities. Additionally, the
average net interest margin increased to 4.17% through December
2001 compared to 2.61% through December 2000.

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##### Table of Contents






PART II  OTHER
INFORMATION




Item
6.     Exhibits and Reports on Form
8-K

(a) Exhibits

None

(b)     During the
quarter ended December 31, 2001, the Registrant filed or
furnished the following reports on Form 8-K:



| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Form 8-K dated October 22, 2001, filed
	October 26, 2001, reporting the declaration of a stock
	split for the Registrants Variable Rate Cumulative
	Preferred Stock, Series E-7, under Item 5, Other
	Events.
|
| | Form 8-K dated December 19, 2001, filed
	December 19, 2001, reporting the unaudited operating
	results for fiscal quarter ending September 30, 2001, under
	Item 9, Regulation FD Disclosure.                 

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SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on this 13th day of February, 2002 on its behalf by
the undersigned, thereunto duly authorized.



| |                                              
| | ---------------------------------------------
| | METROPOLITAN MORTGAGE & SECURITIES CO., INC. 
|
| | /s/ C. PAUL SANDIFUR, JR.                    
| |                                              
| | C. Paul Sandifur, Jr.                        
| | Chairman, President, Chief Executive
	Officer
|
| | /s/ STERLING GALLAGHER                       
| |                                              
| | Sterling Gallagher                           
| | Chief Financial Officer                      

15