##### Table of Contents



FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

|      |  |                                                                                          
|----- |  | -----------------------------------------------------------------------------------------
|[X]   |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. 
|      |  |                                                                                          
|      |  | For the quarterly period ended March 31, 2002                                            
|      |  |                                                                                          
|      |  | OR                                                                                       
|      |  |                                                                                          
|[   ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
|      |  |                                                                                          
|      |  | For the transition period from  to                                                       

Commission file number 001-15595

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

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

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

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

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

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

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

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

Yes [   ] No [   ] N/A.

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common A: 97 shares at April 30, 2002.

Common B: 0 shares at April 30, 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            



---



##### Table of Contents



METROPOLITAN MORTGAGE  SECURITIES CO., INC.
INDEX

|                             |                                                                                                                                            |                                | 
|---------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------ | 
|                             |                                                                                                                                            | PART I  FINANCIAL INFORMATION | 
|ITEM 1. FINANCIAL STATEMENTS |                                                                                                                                           
|                             | Consolidated
Balance Sheets
As of March 31, 2002 and September 30, 2001                                                                    | 1                             
|                             | Consolidated
Statements of Operations
Three Months Ended March 31, 2002 and 2001
Six Months Ended March 31, 2002 and 2001                  | 2                             
|                             | Consolidated
Statements of Comprehensive Income (Loss)
Three Months Ended March 31, 2002 and 2001
Six Months Ended March 31, 2002 and 2001 | 3                             
|                             | Consolidated
Statement of Stockholders Equity
Six Months Ended March 31, 2002                                                             | 4                             
|                             | Consolidated
Statements of Cash Flows
Six Months Ended March 31, 2002 and 2001                                                             | 5                             
|                             | Notes to Consolidated Financial Statements                                                                                                 | 6                             





---



##### Table of Contents






PART I  FINANCIAL INFORMATION







ITEM 1. FINANCIAL STATEMENTS

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

|                      |                                                                                                                                                                                                                       |                                              |                                                         |               |             |               |               |             |             |               | 
|--------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------------- | ------------- | ----------- | ------------- | ------------- | ----------- | ----------- | ------------- | 
|                      |                                                                                                                                                                                                                       |                                              |                                                         |               | March 31,   |               | September 30,
|                      |                                                                                                                                                                                                                       |                                              |                                                         |               | 2002        |               | 2001         
|                      |                                                                                                                                                                                                                       |                                              |                                                         |               |             |               |              
|                      |                                                                                                                                                                                                                       |                                              |                                                         |               | (unaudited) |               |               |             |            
|Assets:               |                                                                                                                                                                                                                       |                                              |                                                         |               |             |               |               |            
|                      | Cash and cash equivalents                                                                                                                                                                                             |                                              | $                                                       | 20,724,302    |             |               | $             | 68,019,397  |            
|                      | Investments:                                                                                                                                                                                                          |                                              |                                                         |               |             |               |               |             |            
|                      |                                                                                                                                                                                                                       | Trading securities, at fair value            |                                                         |               | 0           |               |               |             | 48,832,529  |              
|                      |                                                                                                                                                                                                                       | Available-for-sale securities, at fair value |                                                         |               | 427,354,616 |               |               |             | 311,803,378 |              
|                      |                                                                                                                                                                                                                       | Accrued interest on investments              |                                                         |               | 2,756,244   |               |               |             | 2,734,943   |              
|                      |                                                                                                                                                                                                                       |                                              |                                                         |               |             |               |               |             |            
|                      |                                                                                                                                                                                                                       |                                              | Total investments                                       |               |             | 430,110,860   |               |             |             | 363,370,850   | 
|                      |                                                                                                                                                                                                                       |                                              |                                                         |               |             |               |               |             |            
|                      | Real estate contracts and mortgage notes receivable,
net of discounts and origination fees and net
of allowances of $8,940,494 and $11,241,981                                                                        |                                              |                                                         | 492,644,809   |             |               |               | 426,376,243 |            
|                      | Real estate held for sale and development at the
lower of cost or market, net of allowances of
$5,026,819 and $3,661,247                                                                                              |                                              |                                                         | 97,825,847    |             |               |               | 81,934,751  |            
|                      | Other receivable investments, net of discounts
and origination fees and net of allowances
of $1,563,620 and $2,267,996                                                                                                |                                              |                                                         | 160,053,392   |             |               |               | 173,836,770 |            
|                      |                                                                                                                                                                                                                       |                                              |                                                         |               |             |               |               |             |            
|                      |                                                                                                                                                                                                                       |                                              | Net real estate assets and other receivable
investments |               |             | 750,524,048   |               |             |             | 682,147,764   | 
|                      |                                                                                                                                                                                                                       |                                              |                                                         |               |             |               |               |             |            
|                      | Other assets:                                                                                                                                                                                                         |                                              |                                                         |               |             |               |               |             |            
|                      |                                                                                                                                                                                                                       | Reinsurance receivable                       |                                                         |               | 109,156,655 |               |               |             | 109,608,025 |              
|                      |                                                                                                                                                                                                                       | Deferred costs, net                          |                                                         |               | 65,029,826  |               |               |             | 66,755,118  |              
|                      |                                                                                                                                                                                                                       | Land, buildings and equipment, net           |                                                         |               | 27,956,933  |               |               |             | 29,411,423  |              
|                      |                                                                                                                                                                                                                       | Mortgage servicing rights, net               |                                                         |               | 824,512     |               |               |             | 3,994,096   |              
|                      |                                                                                                                                                                                                                       | Deferred income taxes                        |                                                         |               | 20,759,621  |               |               |             | 20,894,075  |              
|                      |                                                                                                                                                                                                                       | Other assets, net                            |                                                         |               | 40,097,792  |               |               |             | 49,927,066  |              
|                      |                                                                                                                                                                                                                       |                                              |                                                         |               |             |               |               |             |            
|                      |                                                                                                                                                                                                                       |                                              | Total other assets                                      |               |             | 263,825,339   |               |             |             | 280,589,803   | 
|                      |                                                                                                                                                                                                                       |                                              |                                                         |               |             |               |               |             |            
|                      |                                                                                                                                                                                                                       |                                              | Total assets                                            |               | $           | 1,465,184,549 |               |             | $           | 1,394,127,814 | 
|                      |                                                                                                                                                                                                                       |                                              |                                                         |               |             |               |               |             |            
|Liabilities:          |                                                                                                                                                                                                                       |                                              |                                                         |               |             |               |               |            
|                      | Life insurance and annuity reserves                                                                                                                                                                                   |                                              | $                                                       | 1,018,501,777 |             |               | $             | 971,216,178 |            
|                      | Debenture bonds and accrued interest                                                                                                                                                                                  |                                              |                                                         | 334,623,313   |             |               |               | 300,367,995 |            
|                      | Debt payable                                                                                                                                                                                                          |                                              |                                                         | 58,608,418    |             |               |               | 39,628,517  |            
|                      | Accounts payable and accrued expenses                                                                                                                                                                                 |                                              |                                                         | 15,430,431    |             |               |               | 39,625,703  |            
|                      | Minority interest in consolidated subsidiaries                                                                                                                                                                        |                                              |                                                         | 0             |             |               |               | 2,376,931   |            
|                      |                                                                                                                                                                                                                       |                                              |                                                         |               |             |               |               |             |            
|                      |                                                                                                                                                                                                                       |                                              | Total liabilities                                       |               |             | 1,427,163,939 |               |             |             | 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 1,256,257 shares and 1,299,254 shares
(liquidation preference $35,433,740 and $35,973,840) |                                              |                                                         | 12,562,576    |             |               |               | 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 $24,503,340 and $16,921,890)                                         |                                              |                                                         | 2,450,334     |             |               |               | 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                                                                                                                                                                                            |                                              |                                                         | 31,306,627    |             |               |               | 26,024,897  |            
|                      | Accumulated other comprehensive loss                                                                                                                                                                                  |                                              |                                                         | (4,224,997    | )           |               |               | (4,474,411  | )          
|                      | Retained earnings                                                                                                                                                                                                     |                                              |                                                         | (4,292,180    | )           |               |               | 4,459,018   |            
|                      |                                                                                                                                                                                                                       |                                              |                                                         |               |             |               |               |             |            
|                      |                                                                                                                                                                                                                       |                                              | Total stockholders equity                              |               |             | 38,020,610    |               |             |             | 40,912,490    | 
|                      |                                                                                                                                                                                                                       |                                              |                                                         |               |             |               |               |             |            
|                      |                                                                                                                                                                                                                       |                                              | Total liabilities and stockholders equity              |               | $           | 1,465,184,549 |               |             | $           | 1,394,127,814 | 
|                      |                                                                                                                                                                                                                       |                                              |                                                         |               |             |               |               |             |            

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

1



---



##### Table of Contents






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

|                                                                              |                                                          |                |             |                    |            |                  |             |            |            |      |             |            |            |   |             |            |            | 
|----------------------------------------------------------------------------- | -------------------------------------------------------- | -------------- | ----------- | ------------------ | ---------- | ---------------- | ----------- | ---------- | ---------- | ---- | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | 
|                                                                              |                                                          |                |             | Three Months Ended |            | Six Months Ended
|                                                                              |                                                          |                |             | March 31,          |            | March 31,       
|                                                                              |                                                          |                |             |                    |            |                 
|                                                                              |                                                          |                |             | 2002               |            | 2001             |             | 2002       |            | 2001
|                                                                              |                                                          |                |             |                    |            |                  |             |            |            |     
|Revenues:                                                                     |                                                          |                |             |                    |            |                  |             |            |            |      |             |            |            |   |             |           
|                                                                              | Insurance premiums                                       |                | $           | 316,137            |            |                  | $           | 357,375    |            |      | $           | 674,749    |            |   | $           | 754,880    |           
|                                                                              | Interest on receivables                                  |                |             | 12,135,399         |            |                  |             | 9,993,618  |            |      |             | 24,402,985 |            |   |             | 19,382,981 |           
|                                                                              | Earned discount on receivables and investments           |                |             | 8,186,275          |            |                  |             | 4,798,450  |            |      |             | 17,130,762 |            |   |             | 9,696,043  |           
|                                                                              | Other investment income                                  |                |             | 7,649,054          |            |                  |             | 7,704,365  |            |      |             | 15,348,956 |            |   |             | 15,408,807 |           
|                                                                              | Real estate sales                                        |                |             | 3,575,708          |            |                  |             | 3,395,461  |            |      |             | 5,915,122  |            |   |             | 9,303,331  |           
|                                                                              | Fees, commissions, service and other income              |                |             | 2,278,484          |            |                  |             | 3,455,939  |            |      |             | 4,240,189  |            |   |             | 6,878,785  |           
|                                                                              | Net losses on investments                                |                |             | (9,737,630         | )          |                  |             | (8,265,123 | )          |      |             | (8,534,453 | )          |   |             | (9,077,387 | )         
|                                                                              | Net gains on sales of receivables                        |                |             | 828,127            |            |                  |             | 88,996     |            |      |             | 1,176,102  |            |   |             | 2,917,763  |           
|                                                                              |                                                          |                |             |                    |            |                  |             |            |            |      |             |            |            |   |             |            |           
|                                                                              |                                                          | Total revenues |             |                    | 25,231,554 |                  |             |            | 21,529,081 |      |             |            | 60,354,412 |   |             |            | 55,265,203 | 
|                                                                              |                                                          |                |             |                    |            |                  |             |            |            |      |             |            |            |   |             |            |           
|Expenses:                                                                     |                                                          |                |             |                    |            |                  |             |            |            |      |             |            |            |   |             |           
|                                                                              | Insurance policy and annuity benefits                    |                |             | 12,570,507         |            |                  |             | 12,337,259 |            |      |             | 25,626,271 |            |   |             | 23,964,685 |           
|                                                                              | Interest, net                                            |                |             | 7,482,723          |            |                  |             | 6,391,300  |            |      |             | 15,130,198 |            |   |             | 12,516,246 |           
|                                                                              | Cost of real estate sold                                 |                |             | 3,531,177          |            |                  |             | 3,382,995  |            |      |             | 5,831,088  |            |   |             | 9,114,981  |           
|                                                                              | Provision for losses on real estate assets               |                |             | 1,018,621          |            |                  |             | 3,026,400  |            |      |             | 1,879,870  |            |   |             | 4,890,957  |           
|                                                                              | Provision for losses on other assets                     |                |             | (101,582           | )          |                  |             | 1,291,945  |            |      |             | 0          |            |   |             | 1,969,934  |           
|                                                                              | Salaries and employee benefits                           |                |             | 3,823,927          |            |                  |             | 6,819,183  |            |      |             | 7,944,858  |            |   |             | 13,264,390 |           
|                                                                              | Commissions to agents                                    |                |             | 1,648,370          |            |                  |             | 3,609,145  |            |      |             | 3,670,742  |            |   |             | 6,760,181  |           
|                                                                              | Other operating and underwriting expenses                |                |             | 3,990,603          |            |                  |             | 7,101,782  |            |      |             | 8,106,208  |            |   |             | 11,146,261 |           
|                                                                              | Amortization of deferred costs, net of costs
capitalized |                |             | 1,582,393          |            |                  |             | (650,731   | )          |      |             | 2,302,553  |            |   |             | (15,291    | )         
|                                                                              |                                                          |                |             |                    |            |                  |             |            |            |      |             |            |            |   |             |            |           
|                                                                              |                                                          | Total expenses |             |                    | 35,546,739 |                  |             |            | 43,309,278 |      |             |            | 70,491,788 |   |             |            | 83,612,344 | 
|                                                                              |                                                          |                |             |                    |            |                  |             |            |            |      |             |            |            |   |             |            |           
|Loss before income taxes and
minority interest                                |                                                          |                | (10,315,185 | )                  |            |                  | (21,780,197 | )          |            |      | (10,137,376 | )          |            |   | (28,347,141 | )         
|Income tax benefit                                                            |                                                          |                | 3,578,908   |                    |            |                  | 7,575,510   |            |            |      | 3,547,448   |            |            |   | 9,880,371   |           
|                                                                              |                                                          |                |             |                    |            |                  |             |            |            |      |             |            |            |   |             |            |           
|Loss before minority interest                                                 |                                                          |                | (6,736,277  | )                  |            |                  | (14,204,687 | )          |            |      | (6,589,928  | )          |            |   | (18,466,770 | )         
|(Income) loss of consolidated subsidiaries
allocated to minority stockholders |                                                          |                | 31,111      |                    |            |                  | 122,537     |            |            |      | (57,671     | )          |            |   | 134,385     |           
|                                                                              |                                                          |                |             |                    |            |                  |             |            |            |      |             |            |            |   |             |            |           
|Net loss                                                                      |                                                          |                | (6,705,166  | )                  |            |                  | (14,082,150 | )          |            |      | (6,647,599  | )          |            |   | (18,332,385 | )         
|                                                                              |                                                          |                |             |                    |            |                  |             |            |            |      |             |            |            |   |             |            |           
|Preferred stock dividends                                                     |                                                          |                | (1,050,364  | )                  |            |                  | (1,132,125  | )          |            |      | (1,986,710  | )          |            |   | (2,293,428  | )         
|                                                                              |                                                          |                |             |                    |            |                  |             |            |            |      |             |            |            |   |             |            |           
|Loss applicable to common stockholders                                        |                                                          | $              | (7,755,530  | )                  |            | $                | (15,214,275 | )          |            | $    | (8,634,309  | )          |            | $ | (20,625,813 | )         
|                                                                              |                                                          |                |             |                    |            |                  |             |            |            |      |             |            |            |   |             |            |           

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

2



---



##### Table of Contents






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

|                                                      |                                                    |                                                                                |            |                    |           |                  |             |           |           |      |            |         |            |   |             |           |           | 
|----------------------------------------------------- | -------------------------------------------------- | ------------------------------------------------------------------------------ | ---------- | ------------------ | --------- | ---------------- | ----------- | --------- | --------- | ---- | ---------- | ------- | ---------- | - | ----------- | --------- | --------- | 
|                                                      |                                                    |                                                                                |            | Three Months Ended |           | Six Months Ended
|                                                      |                                                    |                                                                                |            | March 31,          |           | March 31,       
|                                                      |                                                    |                                                                                |            |                    |           |                 
|                                                      |                                                    |                                                                                |            | 2002               |           | 2001             |             | 2002      |           | 2001
|                                                      |                                                    |                                                                                |            |                    |           |                  |             |           |           |     
|Net loss                                              |                                                    | $                                                                              | (6,705,166 | )                  |           | $                | (14,082,150 | )         |           | $    | (6,647,599 | )       |            | $ | (18,332,385 | )        
|                                                      |                                                    |                                                                                |            |                    |           |                  |             |           |           |      |            |         |            |   |             |          
|Other comprehensive income (loss), net of income tax: |                                                    |                                                                                |            |                    |           |                  |             |           |           |      |            |         |            |   |             |          
|                                                      | Cumulative effect of accounting change, net of tax |                                                                                |            | 0                  |           |                  |             | 0         |           |      |            | 0       |            |   |             | (240,994  | )        
|                                                      | Unrealized gains (losses) on investments:          |                                                                                |            |                    |           |                  |             |           |           |      |            |         |            |   |             |           |          
|                                                      |                                                    | Unrealized holding gains (losses) arising
during period *                      |            |                    | 1,264,519 |                  |             |           | 5,610,646 |      |            |         | (2,871,540 | ) |             |           | 6,912,186 | 
|                                                      |                                                    | Less: reclassification adjustment for
(gains) losses included in net income ** |            |                    | 3,827,594 |                  |             |           | 1,305,238 |      |            |         | 3,120,954  |   |             |           | 1,387,305 | 
|                                                      |                                                    |                                                                                |            |                    |           |                  |             |           |           |      |            |         |            |   |             |          
|                                                      |                                                    | Unrealized gains (losses) on investments                                       |            |                    | 5,092,113 |                  |             |           | 6,915,884 |      |            |         | 249,414    |   |             |           | 8,299,491 | 
|                                                      |                                                    |                                                                                |            |                    |           |                  |             |           |           |      |            |         |            |   |             |          
|                                                      | Net other comprehensive income (loss)              |                                                                                |            | 5,092,113          |           |                  |             | 6,915,884 |           |      |            | 249,414 |            |   |             | 8,058,497 |          
|                                                      |                                                    |                                                                                |            |                    |           |                  |             |           |           |      |            |         |            |   |             |          
|Comprehensive loss                                    |                                                    | $                                                                              | (1,613,053 | )                  |           | $                | (7,166,266  | )         |           | $    | (6,398,185 | )       |            | $ | (10,273,888 | )        
|                                                      |                                                    |                                                                                |            |                    |           |                  |             |           |           |      |            |         |            |   |             |          



---

|*  |  | Net of related tax of $672,113 and $2,859,908 for the three months ended
March 31, 2002 and 2001, respectively, and $(1,546,059) and $3,534,103 for
the six months ended March 31, 2002 and 2001, respectively.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|** |  | Net of related tax of $2,061,011 and $702,820 for the three months ended
March 31, 2002 and 2001, respectively, and $1,680,513 and $747,010 for the
six months ended March 31, 2002 and 2001, respectively.    

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

3



---



##### Table of Contents






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

|                                                                                                 |  |           |            |        |  |         |         |               |  |            |            |       |  |             |            |   |  |   |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------ |  | --------- | ---------- | ------ |  | ------- | ------- | ------------- |  | ---------- | ---------- | ----- |  | ----------- | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                 |  |           |            |        |  |         |         |               |  |            |            |       |  | Accumulated |            |   |  |   |            |   |  |  
|                                                                                                 |  |           |            |        |  |         |         |               |  | Additional |            | Other |  |             |            |   |  |   |            |  
|                                                                                                 |  | Preferred |            | Common |  | Paid-in |         | Comprehensive |  | Retained   |            |       |  |            
|                                                                                                 |  | Stock     |            | Stock  |  | Capital |         | Loss          |  | Earnings   |            | Total
|                                                                                                 |  |           |            |        |  |         |         |               |  |            |            |      
|Balance, October 1, 2001                                                                         |  | $         | 14,684,736 |        |  | $       | 218,250 |               |  | $          | 26,024,897 |       |  | $           | (4,474,411 | ) |  | $ | 4,459,018  |   |  | $ | 40,912,490 |  
|Net loss                                                                                         |  |           |            |        |  |         |         |               |  |            |            |       |  |             |            |   |  |   | (6,647,599 | ) |  |   | (6,647,599 | )
|Net unrealized losses
on available-for-
sale securities,
net of income
tax provision
of $134,454 |  |           |            |        |  |         |         |               |  |            |            |       |  |             | 249,414    |   |  |   |            |   |  |   | 249,414    |  
|Cash dividends,
common
($1,205 per share)                                                        |  |           |            |        |  |         |         |               |  |            |            |       |  |             |            |   |  |   | (116,889   | ) |  |   | (116,889   | )
|Cash dividends,
preferred
(variable rate)                                                        |  |           |            |        |  |         |         |               |  |            |            |       |  |             |            |   |  |   | (1,986,710 | ) |  |   | (1,986,710 | )
|Redemption and
retirement
of preferred stock
(60,979 shares)                                     |  |           | (609,792   | )      |  |         |         |               |  |            | (2,433,159 | )     |  |             |            |   |  |   |            |   |  |   | (3,042,951 | )
|Sale of variable rate
preferred stock,
net (9,380
shares)                                        |  |           | 937,966    |        |  |         |         |               |  |            | 7,714,889  |       |  |             |            |   |  |   |            |   |  |   | 8,652,855  |  
|                                                                                                 |  |           |            |        |  |         |         |               |  |            |            |       |  |             |            |   |  |   |            |   |  |   |            |  
|Balance, March 31, 2002                                                                          |  | $         | 15,012,910 |        |  | $       | 218,250 |               |  | $          | 31,306,627 |       |  | $           | (4,224,997 | ) |  | $ | (4,292,180 | ) |  | $ | 38,020,610 |  
|                                                                                                 |  |           |            |        |  |         |         |               |  |            |            |       |  |             |            |   |  |   |            |   |  |   |            |  

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

4



---



##### Table of Contents






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

|                                                        |                                                                                                                     |                                           |                                                    |                                                                   |            |                  |              |              |            |            |            |  
|------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | -------------------------------------------------- | ----------------------------------------------------------------- | ---------- | ---------------- | ------------ | ------------ | ---------- | ---------- | ---------- | -
|                                                        |                                                                                                                     |                                           |                                                    |                                                                   |            | Six Months Ended
|                                                        |                                                                                                                     |                                           |                                                    |                                                                   |            | March 31,       
|                                                        |                                                                                                                     |                                           |                                                    |                                                                   |            |                 
|                                                        |                                                                                                                     |                                           |                                                    |                                                                   |            | 2002             |              | 2001        
|                                                        |                                                                                                                     |                                           |                                                    |                                                                   |            |                  |              |             
|Cash flow from operating activities:                    |                                                                                                                     |                                           |                                                    |                                                                   |            |                  |              |             
|                                                        | Net loss                                                                                                            |                                           | $                                                  | (6,647,599                                                        | )          |                  | $            | (18,332,385  | )         
|                                                        | Adjustments to reconcile net loss to
net cash from operating activities:                                            |                                           |                                                    |                                                                   |            |                  |              |              |           
|                                                        |                                                                                                                     |                                           | Proceeds from sales of trading securities          |                                                                   |            | 13,590,118       |              |              |            | 6,444,037  |           
|                                                        |                                                                                                                     |                                           | Proceeds from maturities of trading securities     |                                                                   |            | 1,020,171        |              |              |            | 3,089,858  |           
|                                                        |                                                                                                                     |                                           | Acquisition of trading securities                  |                                                                   |            | (4,669,460       | )            |              |            | (8,442,633 | )         
|                                                        |                                                                                                                     |                                           | Earned discount on receivables and investments     |                                                                   |            | (17,130,762      | )            |              |            | (9,739,667 | )         
|                                                        |                                                                                                                     |                                           | Net losses on investments and sales of receivables |                                                                   |            | 7,358,351        |              |              |            | 6,159,624  |           
|                                                        |                                                                                                                     |                                           | Gains on sales of real estate                      |                                                                   |            | (84,034          | )            |              |            | (188,350   | )         
|                                                        |                                                                                                                     |                                           | Provision for losses on real estate assets         |                                                                   |            | 1,879,870        |              |              |            | 4,890,957  |           
|                                                        |                                                                                                                     |                                           | Provision for losses on other assets               |                                                                   |            | 0                |              |              |            | 1,969,934  |           
|                                                        |                                                                                                                     |                                           | Depreciation and amortization                      |                                                                   |            | 2,478,106        |              |              |            | 2,674,009  |           
|                                                        |                                                                                                                     |                                           | Minority interests                                 |                                                                   |            | 57,671           |              |              |            | (134,386   | )         
|                                                        |                                                                                                                     |                                           | Deferred income tax provision (benefit)            |                                                                   |            | 134,454          |              |              |            | (8,161,143 | )         
|                                                        |                                                                                                                     |                                           | Changes in assets and liabilities:                 |                                                                   |            |                  |              |              |            |            |           
|                                                        |                                                                                                                     |                                           |                                                    | Deferred costs, net                                               |            |                  | 1,725,292    |              |            |            | (274,066   | )
|                                                        |                                                                                                                     |                                           |                                                    | Life insurance and annuity reserves                               |            |                  | 25,249,790   |              |            |            | 22,648,377 |  
|                                                        |                                                                                                                     |                                           |                                                    | Compound and accrued interest on debenture
bonds and debt payable |            |                  | 2,627,222    |              |            |            | 3,862,372  |  
|                                                        |                                                                                                                     |                                           |                                                    | Accrued interest on receivables and investments                   |            |                  | (5,952,112   | )            |            |            | (573,399   | )
|                                                        |                                                                                                                     |                                           |                                                    | Other assets                                                      |            |                  | 1,349,849    |              |            |            | 11,234,940 |  
|                                                        |                                                                                                                     |                                           |                                                    | Accounts payable and accrued expenses                             |            |                  | (4,783,260   | )            |            |            | (652,503   | )
|                                                        |                                                                                                                     |                                           |                                                    | Other, net                                                        |            |                  | (280,707     | )            |            |            | (40,873    | )
|                                                        |                                                                                                                     |                                           |                                                    |                                                                   |            |                  |              |              |           
|                                                        |                                                                                                                     |                                           |                                                    | Net cash provided by operating activities                         |            |                  | 17,922,960   |              |            |            | 16,434,703 |  
|                                                        |                                                                                                                     |                                           |                                                    |                                                                   |            |                  |              |              |           
|Cash flow from investing activities:                    |                                                                                                                     |                                           |                                                    |                                                                   |            |                  |              |             
|                                                        | Principal payments received on real estate
contracts and mortgage notes receivable and
other receivable investments |                                           |                                                    | 68,519,607                                                        |            |                  |              | 60,065,046   |           
|                                                        | Proceeds from sales of real estate contracts
and mortgage notes receivable and other
receivable investments         |                                           |                                                    | 24,127,272                                                        |            |                  |              | 103,801,491  |           
|                                                        | Proceeds from sales of real estate                                                                                  |                                           |                                                    | 5,915,122                                                         |            |                  |              | 8,727,741    |           
|                                                        | Proceeds from maturities of available-for-sale
investments                                                          |                                           |                                                    | 33,577,077                                                        |            |                  |              | 2,997,685    |           
|                                                        | Proceeds from sales of available-for-sale investments                                                               |                                           |                                                    | 83,012,301                                                        |            |                  |              | 51,344,658   |           
|                                                        | Acquisition of real estate contracts and mortgage
notes receivable                                                  |                                           |                                                    | (121,761,705                                                      | )          |                  |              | (147,946,692 | )         
|                                                        | Acquisition of other receivable investments                                                                         |                                           |                                                    | (15,383,914                                                       | )          |                  |              | (5,772,176   | )         
|                                                        | Purchases of available-for-sale investments                                                                         |                                           |                                                    | (213,055,238                                                      | )          |                  |              | (55,559,527  | )         
|                                                        | Purchases of and costs associated with real
estate held for sale and development                                    |                                           |                                                    | (4,168,130                                                        | )          |                  |              | (3,450,422   | )         
|                                                        | Capital expenditures                                                                                                |                                           |                                                    | (275,983                                                          | )          |                  |              | (649,365     | )         
|                                                        |                                                                                                                     |                                           |                                                    |                                                                   |            |                  |              |              |           
|                                                        |                                                                                                                     |                                           |                                                    | Net cash provided by (used in) investing
activities               |            | $                | (139,493,591 | )            |            | $          | 13,558,439 |  
|                                                        |                                                                                                                     |                                           |                                                    |                                                                   |            |                  |              |              |           
|Cash flow from financing activities:                    |                                                                                                                     |                                           |                                                    |                                                                   |            |                  |              |             
|                                                        | Increase (decrease) in borrowings                                                                                   |                                           | $                                                  | 19,286,073                                                        |            |                  | $            | (9,302,217   | )         
|                                                        | Repayments of debt payable                                                                                          |                                           |                                                    | (401,590                                                          | )          |                  |              | (566,377     | )         
|                                                        | Receipts from life and annuity products                                                                             |                                           |                                                    | 75,461,674                                                        |            |                  |              | 76,490,809   |           
|                                                        | Withdrawals of life and annuity products                                                                            |                                           |                                                    | (56,503,287                                                       | )          |                  |              | (61,922,558  | )         
|                                                        | Ceding of life and annuity products to
reinsurers                                                                   |                                           |                                                    | 3,528,792                                                         |            |                  |              | 4,034,520    |           
|                                                        | Issuance of debenture bonds                                                                                         |                                           |                                                    | 55,768,204                                                        |            |                  |              | 34,185,926   |           
|                                                        | Repayment of debenture bonds                                                                                        |                                           |                                                    | (24,044,690                                                       | )          |                  |              | (9,026,708   | )         
|                                                        | Issuance of preferred stock                                                                                         |                                           |                                                    | 8,652,855                                                         |            |                  |              | 895,494      |           
|                                                        | Redemption and retirement of preferred stock                                                                        |                                           |                                                    | (3,042,951                                                        | )          |                  |              | (6,961,678   | )         
|                                                        | Repurchase of minority interest                                                                                     |                                           |                                                    | (2,325,945                                                        | )          |                  |              | 0            |           
|                                                        | Cash dividends                                                                                                      |                                           |                                                    | (2,103,599                                                        | )          |                  |              | (2,410,317   | )         
|                                                        |                                                                                                                     |                                           |                                                    |                                                                   |            |                  |              |              |           
|                                                        |                                                                                                                     | Net cash provided by financing activities |                                                    |                                                                   | 74,275,536 |                  |              |              | 25,416,894 |           
|                                                        |                                                                                                                     |                                           |                                                    |                                                                   |            |                  |              |              |           
|Net change in cash and cash equivalents                 |                                                                                                                     |                                           | (47,295,095                                        | )                                                                 |            |                  | 55,410,036   |             
|Cash and cash equivalents:                              |                                                                                                                     |                                           |                                                    |                                                                   |            |                  |              |             
|                                                        | Beginning of period                                                                                                 |                                           |                                                    | 68,019,397                                                        |            |                  |              | 2,664,035    |           
|                                                        |                                                                                                                     |                                           |                                                    |                                                                   |            |                  |              |              |           
|                                                        | End of period                                                                                                       |                                           | $                                                  | 20,724,302                                                        |            |                  | $            | 58,074,071   |           
|                                                        |                                                                                                                     |                                           |                                                    |                                                                   |            |                  |              |              |           
|Non cash investing and financing activities of Company: |                                                                                                                     |                                           |                                                    |                                                                   |            |                  |              |             
|                                                        | Real estate acquired through foreclosure                                                                            |                                           |                                                    | 21,812,232                                                        |            |                  |              | 9,886,443    |           
|                                                        | 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                                                          |                                           |                                                    | 38,607,522                                                        |            |                  |              | 0            |           
|                                                        | Mortgage servicing rights retained from
securizations                                                               |                                           |                                                    | 0                                                                 |            |                  |              | 1,046,116    |           
|                                                        | Transfers between annuity products                                                                                  |                                           |                                                    | 18,397,682                                                        |            |                  |              | 67,734,738   |           

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

5



---



##### Table of Contents






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

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position of Metropolitan Mortgage
Securities Co., Inc. and subsidiaries (the Company or Consolidated Group)
as of March 31, 2002, the results of operations for the three months and six
months ended March 31, 2002 and 2001 and the cash flows for the six months
ended March 31, 2002 and 2001. The results of operations for the three months
and six months ended March 31, 2002 and 2001 are not necessarily indicative of
the results to be expected for the full year. These financial statements
should be read in conjunction with the consolidated financial statements
including notes thereto included in the Companys fiscal 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 six and three month periods ended March 31, 2002 and 2001 is as
follows:

|                              |  |                                                         |             |           |  |             |               |              |  |          |            |              |  |   |            |   |  |   |               |  
|----------------------------- |  | ------------------------------------------------------- | ----------- | --------- |  | ----------- | ------------- | ------------ |  | -------- | ---------- | ------------ |  | - | ---------- | - |  | - | ------------- | -
|                              |  | As of and for the six month period ended March 31, 2002
|                              |  |                                                        
|                              |  |                                                         |             |           |  |             |               |              |  | Property |            | Intersegment |  |   |            |  
|                              |  | Investing                                               |             | Insurance |  | Development |               | Eliminations |  | Total   
|                              |  |                                                         |             |           |  |             |               |              |  |         
|Revenues                      |  | $                                                       | 4,483,268   |           |  | $           | 56,756,927    |              |  | $        | 767,506    |              |  | $ | (1,653,289 | ) |  | $ | 60,354,412    |  
|Income (loss) from operations |  |                                                         | (22,982,878 | )         |  |             | 12,781,167    |              |  |          | 64,335     |              |  |   |           |   |  |   | (10,137,376   | )
|Identifiable assets, net      |  |                                                         | 177,108,901 |           |  |             | 1,212,394,474 |              |  |          | 73,007,251 |              |  |   | 2,673,923  |   |  |   | 1,465,184,549 |  
|Depreciation and amortization |  |                                                         | 1,812,938   |           |  |             | 164,969       |              |  |          | 500,199    |              |  |   |           |   |  |   | 2,478,106     |  
|Capital expenditures          |  |                                                         | 242,148     |           |  |             | 33,835        |              |  |          |           |              |  |   |           |   |  |   | 275,983       |  

|                              |  |                                                           |             |           |  |             |               |              |  |          |            |              |  |   |           |   |  |   |               |  
|----------------------------- |  | --------------------------------------------------------- | ----------- | --------- |  | ----------- | ------------- | ------------ |  | -------- | ---------- | ------------ |  | - | --------- | - |  | - | ------------- | -
|                              |  | As of and for the three month period ended March 31, 2002
|                              |  |                                                          
|                              |  |                                                           |             |           |  |             |               |              |  | Property |            | Intersegment |  |   |           |  
|                              |  | Investing                                                 |             | Insurance |  | Development |               | Eliminations |  | Total   
|                              |  |                                                           |             |           |  |             |               |              |  |         
|Revenues                      |  | $                                                         | (2,486,442  | )         |  | $           | 28,352,413    |              |  | $        | 265,982    |              |  | $ | (900,399  | ) |  | $ | 25,231,554    |  
|Income (loss) from operations |  |                                                           | (16,244,460 | )         |  |             | 6,200,485     |              |  |          | (271,210   | )            |  |   |          |   |  |   | (10,315,185   | )
|Identifiable assets, net      |  |                                                           | 177,108,901 |           |  |             | 1,212,394,474 |              |  |          | 73,007,251 |              |  |   | 2,673,923 |   |  |   | 1,465,184,549 |  
|Depreciation and amortization |  |                                                           | 918,229     |           |  |             | 83,714        |              |  |          | 223,099    |              |  |   |          |   |  |   | 1,225,042     |  
|Capital expenditures          |  |                                                           | 128,507     |           |  |             | 11,494        |              |  |          |           |              |  |   |          |   |  |   | 140,001       |  

6



---



##### Table of Contents



|                              |  |                                                         |             |           |  |             |               |              |  |          |            |              |  |   |              |   |  |   |               |  
|----------------------------- |  | ------------------------------------------------------- | ----------- | --------- |  | ----------- | ------------- | ------------ |  | -------- | ---------- | ------------ |  | - | ------------ | - |  | - | ------------- | -
|                              |  | As of and for the six month period ended March 31, 2001
|                              |  |                                                        
|                              |  |                                                         |             |           |  |             |               |              |  | Property |            | Intersegment |  |   |              |  
|                              |  | Investing                                               |             | Insurance |  | Development |               | Eliminations |  | Total   
|                              |  |                                                         |             |           |  |             |               |              |  |         
|Revenues                      |  | $                                                       | 8,329,954   |           |  | $           | 49,323,760    |              |  | $        | 1,905,464  |              |  | $ | (4,293,975   | ) |  | $ | 55,265,203    |  
|Income (loss) from operations |  |                                                         | (22,571,513 | )         |  |             | (5,593,032    | )            |  |          | (182,596   | )            |  |   |             |   |  |   | (28,347,141   | )
|Identifiable assets, net      |  |                                                         | 322,510,887 |           |  |             | 1,066,720,622 |              |  |          | 57,811,791 |              |  |   | (157,840,259 | ) |  |   | 1,289,203,041 |  
|Depreciation and amortization |  |                                                         | 1,974,008   |           |  |             | 154,802       |              |  |          | 545,199    |              |  |   |             |   |  |   | 2,674,009     |  
|Capital expenditures          |  |                                                         | 615,846     |           |  |             | 33,519        |              |  |          |           |              |  |   |             |   |  |   | 649,365       |  

|                              |  |                                                           |             |           |  |             |               |              |  |          |            |              |  |   |              |   |  |   |               |  
|----------------------------- |  | --------------------------------------------------------- | ----------- | --------- |  | ----------- | ------------- | ------------ |  | -------- | ---------- | ------------ |  | - | ------------ | - |  | - | ------------- | -
|                              |  | As of and for the three month period ended March 31, 2001
|                              |  |                                                          
|                              |  |                                                           |             |           |  |             |               |              |  | Property |            | Intersegment |  |   |              |  
|                              |  | Investing                                                 |             | Insurance |  | Development |               | Eliminations |  | Total   
|                              |  |                                                           |             |           |  |             |               |              |  |         
|Revenues                      |  | $                                                         | (1,869,862  | )         |  | $           | 25,094,890    |              |  | $        | 375,493    |              |  | $ | (2,071,440   | ) |  | $ | 21,529,081    |  
|Income (loss) from operations |  |                                                           | (15,829,441 | )         |  |             | (5,783,899    | )            |  |          | (166,857   | )            |  |   |             |   |  |   | (21,780,197   | )
|Identifiable assets, net      |  |                                                           | 322,510,887 |           |  |             | 1,066,720,622 |              |  |          | 57,811,791 |              |  |   | (157,840,259 | ) |  |   | 1,289,203,041 |  
|Depreciation and amortization |  |                                                           | 970,211     |           |  |             | 66,193        |              |  |          | 277,099    |              |  |   |             |   |  |   | 1,313,503     |  
|Capital expenditures          |  |                                                           | 369,268     |           |  |             | 6,329         |              |  |          |           |              |  |   |             |   |  |   | 375,597       |  

3. Preferred Stock Split

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

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

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

General

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

Critical Accounting Policies

The accounting policies described below are those that the Company
considers critical in preparing its Consolidated Financial Statements. These
policies include significant estimates made by management using information
available at the time the estimates are made. However, the estimates could
change materially if different information or assumptions are used. The
descriptions below are summarized and have been simplified for clarity. A more
detailed description of the significant accounting policies used by the Company
in preparing its consolidated financial statements is included in Note 2 of the
Companys 2001 Form 10-K.

7



---



##### Table of Contents



Asset Valuations

Investments

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



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Available-for-Sale Securities:Available-for-sale securities,
consisting primarily of mortgage- and asset-backed securities, are carried
at quoted and estimated fair values. The Company holds debt securities
generated from securitization transactions. For securities without an
established market price, estimated fair value is derived from expected
discounted future cash flows. When determining expected future cash flows,
the Company considers interest rates, estimated prepayment rates,
collateral value and historical default rates experienced by the
securities. To the extent that actual experience is less favorable than
the assumptions, an impairment in the debt securities could result. The
Company periodically assesses the assumptions used in valuing the cash
flows and the related carrying value of these securities.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Other available-for-sale securities include government-backed bonds,
corporate bonds, equity securities and venture capital investments.
Unrealized gains and losses on available-for-sale securities are excluded
from earnings and presented as accumulated other comprehensive income or
loss, net of related deferred income taxes. The Company continually
monitors its investment portfolio for other than temporary impairment of
its securities. When an other than a temporary decline in the value below
cost or amortized cost is identified, the investment is reduced to its
fair value, which becomes the new cost basis of the investment. The amount
of the reduction is reported as a realized loss in the statement of
income. Any recovery of value in excess of the investments new cost basis
is recognized as a realized gain only upon sale, maturity or other
disposition of the investment. Factors that the Company evaluates in
determining the existence of an other than temporary decline in value
include (1) the length of time and extent to which the fair value has been
less than cost, (2) the circumstances contributing to the decline in fair
value, (3) recent performance of the security, (4) the financial strength
of the issuer, and (5) the intent and ability to retain the investment for
a period of time sufficient to allow for anticipated recovery.



| |                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Held-to-Maturity Securities:Held-to-maturity securities are carried
at amortized cost. Premiums and discounts on these securities are
amortized on a specific-identification basis using the interest method.
The Company has the ability and intent to hold these investments until
maturity.

Real Estate Held for Sale and Development

Real estate held for sale and development is stated at the lower of cost
or fair value less estimated costs to sell. The Company principally acquires
real estate through acquisition and foreclosure. Cost is determined by the
purchase price of the real estate or, for real estate acquired by foreclosure,
at the lower of (a) the fair value of the property at the date of foreclosure
less estimated selling costs, or (b) carrying value at the date of foreclosure.
Project costs, including interest, associated with the development of real
estate are capitalized and included in the cost basis of the real estate.

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

Deferred Costs

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

8



---



##### Table of Contents



Allowances for Losses

Allowance for Losses on Real Estate Contracts and Mortgage Notes Receivable

Originated commercial loans are individually monitored for impairments.
When a loan has been identified as impaired, the Company determines the
allowance for loss based on the estimated fair value (less estimated
liquidation expenses) of the collateral compared to the carrying value of the
receivable. If the estimated fair value of the collateral is less than the
carrying value, an allowance for loss is recognized. Additionally, the Company
establishes a 0.25% allowance for losses that are inherent in the commercial
loan portfolio at the balance sheet date.

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

Allowance for Losses on Real Estate Held for Sale and Development

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

Life Insurance and Annuity Reserves

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

Liquidity and Capital Resources

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

Recently, the Company changed the focus of its receivable investment
strategy away from acquiring residential real estate loans for securitization
purposes, as it does not intend to participate in any real estate backed
securitizations in the near future. The Company has focused its receivable
investment activity on acquiring and holding both residential real estate loans
and commercial loans. Historically, proceeds from securitizations were
primarily used to pay-down a secured line of credit that was used to fund the
acquisition of securitizable product. Therefore, the Company does not believe
the change in investment strategy away from securitizations will have a
negative effect on its ability to acquire and hold residential and commercial
loans.

9



---



##### Table of Contents



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

On October 25, 2001, A.M. Best announced that they were downgrading the
financial strength rating of Western from B+ (Very Good) to B (Fair). According
to A.M. Best, the rating action reflected Westerns significant investment in
mortgages, mortgage-backed bonds, real estate relative to surplus, decreased
surrender charge protection on annuity reserves and declining risk-adjusted
capitalization, as well as the weakened financial position of Metropolitan, the
parent organization. Partially offsetting these items were Westerns historic
profitability and ability to grow their core individual annuity lines of
business. The Company anticipates that the change in ratings will result in a slight
increase to its cost of funds in addition to a slight increase in surrender
rates as current policies enter their surrender periods. Prior to the change in
ratings, the Company changed the focus of its receivable investment strategy
which has resulted in higher yields on investments. Therefore, a slight
increase in the cost of funds is expected to be more than offset by the higher
yields obtained through the new receivable investment strategy. In response to
the rating downgrade, Western has increased their capital through a $17.2
million sale of common stock to Metropolitan in addition to focusing on issuing
liabilities with greater surrender charge protection. A.M. Best ratings are
performed on an annual basis and the Company does not anticipate any further
rating changes in the coming year.

In 1993, the State of Washington enacted the Risk-Based Capital Model law,
which requires an insurance company to maintain minimum amounts of capital and
surplus based on complex calculations of risk factors that encompass the
invested assets and business activities of the insurance company. Westerns
capital and surplus levels exceeded the calculated minimum requirements at our
statutory reporting period ended December 31, 2001. Recently, Western has
maintained adequate levels of capital through the sale of common stock and
preferred stock to Metropolitan. To the extent that Metropolitan does not
maintain adequate levels of liquidity, Westerns ability to generate capital
from affiliates could be adversely affected, which in turn could negatively
affect their ability to increase its investments in higher risk-adjusted assets
such as commercial loans, real estate and equity investments.

Western has a secured line of credit agreement with the Federal Home Loan
Bank of Seattle (FHLB). When an institution becomes a stockholder in the FHLB,
it can borrow from the FHLB at a stock to borrowing ratio of 1 to 20. At March
31, 2002, Western had a stock investment in the FHLB of approximately $3.2
million, which resulted in a borrowing capacity of approximately $64.0 million,
subject to collateral requirements. The collateral used to secure the borrowing
is predefined by the FHLB and generally consists of high quality Collateralized
Mortgage Obligations. Each type of collateral has a minimum pledge requirement
that ranges from 100% to 125%. At March 31, 2002, Western had pledged $139.6
million in eligible collateral with a market value of $134.0 million resulting
in a borrowing potential of $96.1 million. At March 31, 2002, Western had
approximately $42.0 million in outstanding borrowings leaving an unused
borrowing potential of approximately $22.0 million based on their FHLB stock
investment. In order to increase the unused borrowing potential to match the
amount of collateral pledged, Western would be required to purchase
approximately $1.6 million in additional FHLB stock.

Western has entered into a reinsurance agreement with Old Standard, which
became effective July 1, 1998 and remained in effect at March 31, 2002. Under
this agreement, Western can reinsure with Old Standard 75% of the risk on
certain annuity products. The reinsurance agreement is an ongoing arrangement
with no stated expiration or termination date, although each may stop and
restart at their discretion upon providing a 30-day advance written notice.

Metropolitan engages in public offerings of debt securities and preferred
stock. These investments are typically offered to the public on a continuous
best efforts basis through MIS, an affiliated company. At March 31, 2002, the
Company had registered for sale up to $100 million of Series III and Series III-A Debenture
Bonds. This debenture bond registration expired April 30, 2002. On April 8,
2002 the Company filed a registration statement on Form S-2 for sale of up to
$150,000,000 of Series III and Series III-A Debenture
Bonds. This debenture bond registration expires April 30, 2003. At March 31,
2002, the Company had registered for sale up to 6,000,000 shares of Series E-7
preferred stock that carry a $25 issue price for a total preferred stock
offering price of $150,000,000. This preferred stock registration expires
October 31, 2002.

10



---



##### Table of Contents



Another source of liquidity is derived from payments received on
receivable cash flows and the sale of real estate. A decrease in the prepayment
rate on receivables or the ability to sell real estate would reduce future cash
flows from receivables.
Additionally, to increase liquidity, the Company may occasionally sell
securities to a broker-dealer under the provision that we will buy them back by
a predetermined date for a specific price (i.e., reverse repurchase agreement).
At March 31, 2002, the Company did not have any reverse repurchase agreements
outstanding.

The Companys ability to sell available-for-sale investments for liquidity
purposes is partially affected by the laws of the State of Washington that
limit Westerns investments in real estate related assets to 65% of their
statutory assets. Western may not sell non-real estate related assets for
liquidity purposes if the re-investment of the sale proceeds will result in
real estate assets exceeding 65% of its statutory assets. However, occasionally
Western may acquire real estate related receivables that qualify as
mortgage-related securities under the Secondary Mortgage Market Enhancement
Act, or SMMEA. SMMEA generally provides that qualifying loans may be acquired
to the same extent that obligations that are issued by or guaranteed as to
principal and interest by the United States Government, its agencies and the
instrumentalities can be acquired. As a result, Western can acquire qualifying
real estate loans in amounts in excess of the 65% limitation. At March 31,
2002, Western had approximately 42% of its statutory admitted assets invested
in real estate related assets that did not qualify as SMMEA investments.

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

During the six month period ended March 31, 2002, $403.5 million in funds
provided by the Companys various liquidity sources were used to (1) invest
$362.4 million primarily in receivables and investments and (2) fund $88.4
million in debt maturities, annuity product surrenders, and the payment of
dividends.

During the six month period ended March 31, 2001, $359.0 million in funds
provided by the Companys various liquidity sources were used to (1) invest
$213.4 million primarily in receivables and investments and (2) fund $90.2
million in debt maturities, annuity product surrenders, and the payment of
dividends.

Transactions with Affiliates

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

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

Metropolitan and Summit entered into the following purchase and sale
agreements during the six month period ending March 31, 2002.

On March 28, 2002, Western agreed to sell to Old Standard and Old West a
69.20% undivided beneficial interest in a certain Lottery Trust owned by
Western. The purchase price of $11.2 million, which was derived from future
expected cash flows discounted at a 6.957% market rate, resulted in a gain of
approximately $0.6 million. Additionally, on March 29, 2002, Metropolitan
agreed to sell to Summit the remaining participation in certain structured
settlements that Summit acquired from Metropolitan during the fiscal year ended
September 30, 2000. The purchase price of approximately $4.8 million, which was
derived from future expected cash flows discounted at an 8.5% market rate,
resulted in a gain of approximately $0.2 million. The primary purpose of
entering into the lottery trust and structured settlement purchase and sale
agreements was to generate additional funds that could be used for commercial
lending activities.

11



---



##### Table of Contents



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

Delinquency

The principal amount of real estate receivables as to which payments were
in arrears more than three months was $50.8 million at March 31, 2002 and $20.8
million at March 31, 2001.

The principal amount of other receivables as to which payments were in
arrears more than three months was $5.2 million at March 31, 2002 and $6.7
million at March 31, 2001.

Results of Operations

Six Months Ended March 31, 2002 Compared to Six Months Ended March 31, 2001

Net loss for the six month period ended March 31, 2002 was approximately
$6.6 million on $60.4 million in revenues compared to a net loss of $18.3
million on $55.3 million in revenues for the six month period ended March 31,
2001. Loss before income taxes and minority interest for the six month period
ended March 31, 2002 was approximately $10.1 million compared to a loss of
approximately $28.3 million for the six month period ended March 31, 2001.

The decrease in loss before income taxes and minority interest of $18.2 million
was primarily due to:



| |  | an increase in net interest spread of $8.0 million,          
|- |  | -------------------------------------------------------------
| 
| |  | a decrease in realized losses on investments of $0.5 million,
| 
| |  | a decrease in loan loss
provisions of $5.0 million, and      
| 
| |  | a decrease in non-interest expense of $9.1 million.          

These changes were partially offset by:



| |  | a reduction in gains on sales of receivables of $1.7 million,              
|- |  | ---------------------------------------------------------------------------
| 
| |  | a reduction of fees,
commissions, service and other income of $2.6 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 six month period ended March 31, 2002, the excess of interest
sensitive income over interest sensitive expense was approximately $16.8
million compared to $8.8 million in the prior years period. The increase
between periods was primarily the result of an increase in interest spreads
relating to the Companys commercial lending activities. The Companys average
net interest margin increased to 4.10% through March 2002 compared to 2.48%
through March 2001. As a result of the increase in the net interest margin, the
Company unlocked approximately $0.4 million of deferred acquisition costs
during the six month period ended March 31, 2002.

12



---



##### Table of Contents



The following table represents the average yields realized by the Company
on interest sensitive assets and liabilities during the six month periods ended
March 31, 2002 and 2001 based on average monthly ending balances:

|                      |  |         |             |         |  |   |             |  
|--------------------- |  | ------- | ----------- | ------- |  | - | ----------- | -
|                      |  | 2002    |             | 2001   
|                      |  | Average |             | Average
|                      |  |         |             |        
|Investments           |  | $       | 406,952,167 |         |  | $ | 307,289,223 |  
|Yield                 |  |         | 7.30        | %       |  |   | 8.18        | %
|Real estate contracts |  |         | 453,813,325 |         |  |   | 397,655,021 |  
|Yield                 |  |         | 14.99       | %       |  |   | 9.56        | %
|Other receivables     |  |         | 177,267,085 |         |  |   | 185,796,468 |  
|Yield                 |  |         | 8.49        | %       |  |   | 10.92       | %
|Life reserves         |  |         | 888,080,805 |         |  |   | 792,133,923 |  
|Yield                 |  |         | 5.71        | %       |  |   | 6.20        | %
|Debentures            |  |         | 322,184,330 |         |  |   | 253,811,447 |  
|Yield                 |  |         | 8.97        | %       |  |   | 8.83        | %
|Debt payable          |  |         | 46,263,578  |         |  |   | 40,399,003  |  
|Yield                 |  |         | 6.49        | %       |  |   | 7.64        | %

During the six month period ended March 31, 2001, the Company reported a
$9.1 million loss on investments. The loss was primarily the result of
reclassifying temporary declines in value of certain investments from
accumulated other comprehensive loss in stockholders equity to loss on
investments as a result of other than temporary impairments and sales. The
Company may experience changes in the fair value of its investments, which are
recorded at fair value and accounted for as either trading or
available-for-sale securities. Changes in the fair value of investments that
are trading are included in earnings. Temporary declines in the fair value of
investments that are available-for-sale are excluded from earnings and
presented as accumulated other comprehensive income or loss, net of related
income taxes. During the six month period ended March 31, 2001, the Company
determined that certain available-for-sale investments had other than
temporary declines in value. The declines in value resulted from a downgrading
of certain securities and a deterioration of expected future cash flows of a
certain residual certificate. Accordingly, the Company reclassified $4.4
million from accumulated other comprehensive loss in stockholders equity to
the statement of operations as a realized loss on investments. Additionally,
the Company recorded a realized loss on the sale of a certain investment. The
sale resulted in the Company reclassifying approximately $2.6 million from
accumulated other comprehensive loss in stockholders equity to the statement
of operations as a realized loss on investment.

Additionally, during the six month period March 31, 2001, the Company
experienced net mark to market losses on equity investments the Company made in
certain limited partnership interests. The limited partnerships generally
invest funds in both publicly and privately traded small and
microcapitalization equity securities. The performance of the NASDAQ, which
lost approximately 50% of its value during the six month period ended March 31,
2001, directly affected the value of the Companys investments in the limited
partnership interests. The value of the equity securities decreased during the
six months ended March 31, 2001, thereby decreasing the value of the Companys
investment by approximately $3.4 million. These losses were partially offset by
mark to market gains of approximately $1.4 million on other trading
investments.

During the six month period ended March 31, 2002, the Company determined
that certain available-for-sale residual and other fixed income securities
retained from its securitization activities had other-than temporary declines
in value. Accordingly, the carrying value of the investments were decreased by
approximately $4.6 million, representing the amount impaired. The declines in
value were primarily the result of an increase in loss severity and prepayment
rates of the underlying collateral. The Company continues to periodically
assess the assumptions used in valuing the cash flows and the related carrying
value of securities generated from its securitization activities. Additionally,
certain airline related fixed income securities were directly affected by the
events surrounding September 11, 2001. A $1.0 million impairment, which had
previously been deemed as temporary, was determined to be other than temporary
at March 31, 2002. The performance of the NASDAQ, which lost approximately
14.6% of its value since June 30, 2001, has directly affected the Companys
investments in certain equity securities. A $3.8 million impairment, which had
previously been deemed as temporary, was determined to be other than temporary
at March 31, 2002. The other than temporary impairments on the equity and fixed
income securities have been recorded in the statement of operations as a loss on investments. The
other than temporary impairments were partially offset by approximately $1.2
million of gains realized on the sale of other investment securities.

13Table of Contents

In January 2001, the Company announced a change in its receivable
investment strategy away from acquiring residential real estate loans for
securitization purposes to acquiring and holding both residential real estate
loans and commercial loans. When the Company was investing primarily in
residential real estate loans, the allowance for loss was calculated using a
large group of homogeneous loans that were collectively evaluated for
impairment. For commercial loans, the Company individually evaluates each loan
for impairment in accordance with FAS114, Accounting by Creditors for
Impairment of a Loan, as amended by FAS118 Accounting by Creditors for
Impairment of a Loan  Income Recognition and Disclosure. FAS114 addresses
the accounting by creditors for impairments of a loan by specifying how
allowances for credit losses related to certain loans should be determined.
According to FAS114, a loan is impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Probable is
defined as future events are likely to occur. When a loan has been identified
as impaired, the Company determines the allowance for loss based on the
estimated fair value (less estimated liquidation expenses) of the collateral
compared to the carrying value of the receivable. If the estimated fair value
of the collateral is less than the carrying value, an allowance for loss is
recognized. Additionally, the Company establishes a 0.25% allowance for losses
that are inherent in the commercial loan portfolio at the balance sheet date.

The change in receivable investment strategy, which has resulted in a
change in the mix of receivables being reserved using a specific reserve
methodology (commercial loans) versus a homogeneous pool methodology
(residential loans), has contributed to the loan loss provisions decreasing to
approximately $1.9 million during the six month period ended March 31, 2002
compared to $4.9 million during the similar six month period ended March 31,
2001. Additionally, during the six month period ended March 31, 2001 the
Company reserved approximately $1.0 million for non-recoverable servicer
advances and late charges related to the April 2001 servicing sale.

Provision for losses on other assets decreased from $1.9 million during
the six month period ended March 31, 2001 to no reserve requirements during the
similar time period ended March 31, 2002. The $1.9 million reserve requirement
during the six month period ended March 31, 2001 was the result of the Company
adjusting its loss reserve assumptions on equipment lease receivables based on
historical experience. The Company, which no longer originates equipment
leases, expects that the loss allowance at March 31, 2002 will be adequate to
cover the expected future losses that are inherent in the equipment lease
receivable portfolio as of March 31, 2002.

The following table summarizes changes in the Companys allowance for
losses on real estate and other assets for the six month periods ended March
31, 2002 and 2001:

|                  |  |           |            |      |  |   |            |  
|----------------- |  | --------- | ---------- | ---- |  | - | ---------- | -
|                  |  | March 31,
|                  |  |          
|                  |  | 2002      |            | 2001
|                  |  |           |            |     
|Beginning balance |  | $         | 17,171,224 |      |  | $ | 15,050,115 |  
|Provisions        |  |           | 1,879,870  |      |  |   | 6,860,891  |  
|Charge-offs       |  |           | (3,520,161 | )    |  |   | (5,610,116 | )
|                  |  |           |            |      |  |   |            |  
|Ending balance    |  | $         | 15,530,933 |      |  | $ | 16,300,890 |  
|                  |  |           |            |      |  |   |            |  

Gains on sales of receivables decreased to approximately $1.2 million
during the three month period ended March 31, 2002 from approximately $2.9
million during the similar time period ended March 31, 2001. The decrease in
the current period was primarily due to the Companys planned exit from real
estate backed securitization activities. Partially offsetting the reduction in
gains was a $0.8 million gain on the sale of other receivable investments to
our affiliates. Western agreed to sell to Old Standard and Old West a 69.20%
undivided beneficial interest in a certain Lottery Trust owned by Western. The
purchase price of $11.2 million was derived from future expected cash flows
discounted at a 6.957% market rate. Additionally, Metropolitan agreed to sell
to Summit the remaining participation in certain structured settlements that
Summit acquired from Metropolitan during the fiscal year ended September 30,
2000. The purchase price of approximately $4.8 million was derived from future
expected cash flows discounted at an 8.5% market rate. The primary purpose of
entering into the lottery trust and structured settlement purchase and sale
agreements was to generate additional funds that could be used for commercial
lending activities.

14



---



##### Table of Contents



Non-interest expense consists of all non-interest expenses except the cost
of real estate sold and provision for losses. Non-interest expense was
approximately $22.0 million for the six month period ended March 31, 2002
compared to $31.1 million for the similar period ended March 31, 2001. The
reduction in non-interest expenses during the current period was primarily the
result of (1) a $2.8 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 reduction in deferred policy acquisition
amortization due to an increase in investment spreads. The reduction in
non-interest expenses during the current period was partially offset by a $2.5
million reduction in loan servicing fee income. Additionally, during the six
month period ended March 31, 2001, the Company incurred severance, software and
equipment charges of $1.8 million associated with the termination of certain
staff and discontinuance of certain loan origination sources, and participation
expenses associated with the completion of certain timeshare sale and servicing
programs.

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

Net loss for the three month period ended March 31, 2002 was approximately
$6.7 million on $25.2 million in revenues compared to a net loss of $14.1
million on $21.5 million in revenues for the three month period ended March 31,
2001. Loss before income taxes and minority interest for the three months
ended March 31, 2002 was approximately $10.3 million compared to a loss of
approximately $21.8 million for the three months ended March 31, 2001.

The decrease in loss before income taxes and minority interest of $11.5 million
was primarily due to:



| |  | an increase in net interest spread of $3.9 million,         
|- |  | ------------------------------------------------------------
| 
| |  | a decrease in loan loss provisions of $3.4 million,         
| 
| |  | a decrease in non-interest
expense of $5.8 million, and     
| 
| |  | an increase in gains on sale of receivables of $0.7 million.

These changes were partially offset by:



| |  | an increase in losses on
investments of $1.5 million and                   
|- |  | ---------------------------------------------------------------------------
| 
| |  | a reduction of fees,
commissions, service and other income of $1.0 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 March 31, 2002, the excess of interest
sensitive income over interest sensitive expense was approximately $8.2 million
compared to $4.3 million in the prior years period. The increase between
periods was primarily the result of an increase in interest spreads relating to
the Companys commercial lending activities.

During the three month period ended March 31, 2001, the Company reported
an $8.3 million loss on investments. The loss was primarily the result of
reclassifying temporary declines in value of certain investments from
accumulated other comprehensive loss in stockholders equity to loss on
investments as a result of permanent impairments and sales. The Company may
experience changes in the fair value of its investments, which are recorded at
fair value and accounted for as either trading or available-for-sale
securities. Changes in the fair value of investments that are trading are
included in earnings. Temporary declines in the fair value of investments that
are available-for-sale are excluded from earnings and reported as a separate component of stockholders equity. During the three
month period ended March 31, 2001, the Company determined that certain
available-for-sale investments had other than temporary declines in value.
The declines in value resulted from a downgrading of certain securities and a
deterioration of expected future cash flows of a certain residual certificate.
Accordingly, the Company reclassified $3.7 million from accumulated other
comprehensive loss in stockholders equity to the statement of operations as a
loss on investments. Additionally, the Company recorded a realized loss on the
sale of a certain investment. The sale resulted in the Company reclassifying
approximately $2.6 million from accumulated other comprehensive loss in
stockholders equity to the statement of operations as a realized loss on
investment. The Company also experienced a decline in the value of other
trading investments that resulted in a mark to market adjustment of
approximately $1.3 million.

15



---



##### Table of Contents



During the three month period ended March 31, 2002, the Company determined
that certain available-for-sale residual and other fixed income securities
retained from its securitization activities had other than temporary declines
in value. Accordingly, the carrying value of the investments was decreased by
approximately $4.6 million, representing the amount impaired. The declines in
value were primarily the result of an increase in loss severity and prepayment
rates of the underlying collateral. The Company continues to periodically
assess the assumptions used in valuing the cash flows and the related carrying
value of securities generated from its securitization activities. Additionally,
certain airline related fixed income securities were directly affected by the
events surrounding September 11, 2001. A $1.0 million impairment, which had
previously been deemed as temporary, was determined to be other than temporary
at March 31, 2002. The performance of the NASDAQ, which lost approximately
14.6% of its value since June 30, 2001, has directly affected the Companys
investments in certain equity securities. A $3.8 million impairment, which had
previously been deemed as temporary, was determined to be other than temporary
at March 31, 2002. The other than temporary impairments on the equity and fixed
income securities have been recorded in the statement of operations as a loss
on investments.

In January 2001, the Company announced a change in its receivable
investment strategy away from acquiring residential real estate loans for
securitization purposes to acquiring and holding both residential real estate
loans and commercial loans. When the Company was investing primarily in
residential real estate loans, the allowance for loss was calculated using a
large group of homogeneous loans that were collectively evaluated for
impairment. For commercial loans, the Company individually evaluates each loan
for impairment in accordance with FAS114, Accounting by Creditors for
Impairment of a Loan, as amended by FAS118 Accounting by Creditors for
Impairment of a Loan  Income Recognition and Disclosure. FAS114 addresses
the accounting by creditors for impairments of a loan by specifying how
allowances for credit losses related to certain loans should be determined.
According to FAS114, a loan is impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Probable is
defined as future events are likely to occur. When a loan has been identified
as impaired, the Company determines the allowance for loss based on the
estimated fair value (less estimated liquidation expenses) of the collateral
compared to the carrying value of the receivable. If the estimated fair value
of the collateral is less than the carrying value, an allowance for loss is
recognized. Additionally, the Company establishes a 0.25% allowance for losses
that are inherent in the commercial loan portfolio at the balance sheet date.

The change in receivable investment strategy, which has resulted in a
change in the mix of receivables being reserved for using a specific reserve
methodology (commercial loans) versus a homogeneous pool methodology
(residential loans), has contributed to the loan loss provisions decreasing to
approximately $1.0 million during the three month period ended March 31, 2002
compared to $3.0 million during the similar three month period ended March 31,
2001. Additionally, during the three month period ended March 31, 2001 the
Company reserved approximately $1.0 million for non-recoverable servicer
advances and late charges related to the April 2001 servicing sale.

Provision for losses on other assets decreased from $1.3 million during
the three month period ended March 31, 2001 to a $0.1 million reserve release
during the similar time period ended March 31, 2002. The $1.3 million reserve
requirement during the three month period ended March 31, 2001 was the result
of the Company adjusting its loss reserve assumptions on equipment lease
receivables based on historical experience. The Company, which no longer
originates equipment leases, expects that the loss allowance at March 31, 2002
will be adequate to cover the expected future losses that are inherent in the
equipment lease receivable portfolio as of March 31, 2002.

16



---



##### Table of Contents



The following table summarizes changes in the Companys allowance for
losses on real estate and other assets for the three month periods ended March
31, 2002 and 2001:

|                  |  |           |            |      |  |   |            |  
|----------------- |  | --------- | ---------- | ---- |  | - | ---------- | -
|                  |  | March 31,
|                  |  |          
|                  |  | 2002      |            | 2001
|                  |  |           |            |     
|Beginning balance |  | $         | 17,291,146 |      |  | $ | 14,486,030 |  
|Provisions        |  |           | 917,039    |      |  |   | 4,318,345  |  
|Charge-offs       |  |           | (2,677,252 | )    |  |   | (2,503,485 | )
|                  |  |           |            |      |  |   |            |  
|Ending balance    |  | $         | 15,530,933 |      |  | $ | 16,300,890 |  
|                  |  |           |            |      |  |   |            |  

Gains on sales of receivables increased to approximately $0.8 million
during the three month period ended March 31, 2002 from approximately $0.1
million during the similar time period ended March 31, 2001. The increase in
the current period was primarily due to a $0.8 million gain on the sale of
other receivable investments to our affiliates. Western agreed to sell to Old
Standard and Old West a 69.20% undivided beneficial interest in a certain
Lottery Trust owned by Western. The purchase price of $11.2 million was derived
from future expected cash flows discounted at a 6.957% market rate.
Additionally, Metropolitan agreed to sell to Summit the remaining participation
in certain structured settlements that Summit acquired from Metropolitan during
the fiscal year ended September 30, 2000. The purchase price of approximately
$4.8 million was derived from future expected cash flows discounted at an 8.5%
market rate. The primary purpose of entering into the lottery trust and
structured settlement purchase and sale agreements was to generate additional
funds that could be used for commercial lending activities.

Non-interest expense consists of all non-interest expenses except the cost
of real estate sold and provision for losses. Non-interest expense was
approximately $11.0 million for the three month period ended March 31, 2002
compared to $16.8 million for the similar period ended March 31, 2001. The
reduction in non-interest expenses during the current period was primarily the
result of (1) a $1.2 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 reduction in deferred policy acquisition
amortization due to an increase in investment spreads. The reduction in
non-interest expenses during the current period was partially offset by a $1.0
million reduction in loan servicing fee income. Additionally, during the three
month period ended March 31, 2001, the Company incurred severance, software and
equipment charges of $1.8 million associated with the termination of certain
staff and discontinuance of certain loan origination sources, and participation
expenses associated with the completion of certain timeshare sale and servicing
programs.

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 six month period ended March 31, 2002, the excess of interest
sensitive income over interest sensitive expense was approximately $16.8
million compared to $8.8 million in the prior years period. The increase
between periods
17Table of Contents

was primarily the result of an increase in interest spreads relating to
the Companys commercial lending activities. The Companys average net interest
margin increased to 4.10% through March 2002 compared to 2.48% through March
2001.

During the three month period ended March 31, 2002, the excess of interest
sensitive income over interest sensitive expense was approximately $8.2 million
compared to $4.3 million in the prior years period. The increase between
periods was primarily the result of an increase in interest spreads relating to
the Companys commercial lending activities.

PART II-OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

|    |  |                                                                                                                                                                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Exhibits                                                                                                                                                                                                                                              
|    |  |                                                                                                                                                                                                                                                       
|    |  | None                                                                                                                                                                                                                                                  
|    |  |                                                                                                                                                                                                                                                       
|(b) |  | During the quarter ended March 31, 2002, the Registrant filed or furnished
the following reports on Form 8-K:                                                                                                                                         
|    |  |                                                                                                                                                                                                                                                       
|    |  | Form 8-K dated January 25, 2002, filed January 25, 2002, reporting the
announcement of the listing of its Variable Rate Cumulative Preferred
Stock, Series E-7, on the American Stock Exchange under the symbol
MPD.pr., under Item 5, Other Events.

18



---



##### Table of Contents



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on this 15th day of May,
2002 on its behalf by the undersigned, thereunto duly authorized.

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

19