##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

FORM 10-Q



---

|   |  |                                                                                                  
|-- |  | -------------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934. 
|  
|   |  | For the quarterly period ended June 30,
    2003                                                 
|  
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934.

For the transition period from

to

Commission file number 001-15595

METROPOLITAN MORTGAGE & SECURITIES
CO., INC.

(Exact name of registrant as specified in its
charter)


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

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

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

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

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act)     Yes o          No þ

Applicable only to corporate
issuers:

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

|            |  |                            
|----------- |  | ---------------------------
|Common A: |  | 97 shares at July 31, 2003.
|Common B: |  | 0 shares at July 31, 2003. 



---






---

TABLE OF CONTENTS



|                                                   |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|METROPOLITAN MORTGAGE & SECURITIES CO., INC. INDEX
|PART I--FINANCIAL INFORMATION                     
|                                                   | Item 1. Financial Statements                                                                 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|                                                   | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                   | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                   | Item 4. Controls and Procedures                                                              
|PART II--OTHER INFORMATION                        
|                                                   | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                        
|EXHIBIT INDEX                                     
|EX-31.1 Certification of Chief Executive Officer  
|EX-31.2 Certification- Principal Financial Officer
|EX-32.1 Certification Pursuant to 18 USC Sec. 1350
|EX-32.2 Certification Pursuant to 18 USC Sec. 1350



---



##### Table of Contents






METROPOLITAN MORTGAGE & SECURITIES CO.,
INC.

INDEX

PART IFINANCIAL INFORMATION

Item 1. Financial
Statements

|                                                                                                                                                      |  |  |   | 
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | - | 
|Consolidated Balance Sheets
    As of June 30, 2003 and September 30, 2002                                                                            |  |  | 2 | 
|Consolidated Statements of Operations
    Three Months Ended June 30, 2003 and 2002
    Nine Months Ended June 30, 2003 and 2002                      |  |  | 3 | 
|Consolidated Statements of Comprehensive Income
    (Loss)
    Three Months Ended June 30, 2003 and 2002
    Nine Months Ended June 30, 2003 and 2002 |  |  | 4 | 
|Consolidated Statement of Stockholders
    Equity
    Nine Months Ended June 30, 2003                                                                |  |  | 5 | 
|Consolidated Statements of Cash Flows
    Nine Months Ended June 30, 2003 and 2002                                                                    |  |  | 6 | 
|Notes to Consolidated Financial Statements                                                                                                            |  |  | 8 | 

1



---



##### Table of Contents






PART IFINANCIAL INFORMATION




Item 1. Financial Statements

METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          |                                            |               |             |               |   |               |             |               | 
|--------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------------- | ----------- | ------------- | - | ------------- | ----------- | ------------- | 
|                      |                                                                                                                                                                                                                                                              | June 30,                                                                                                                                                                 |                                            | September 30,
|                      |                                                                                                                                                                                                                                                              | 2003                                                                                                                                                                     |                                            | 2002         
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          |                                            |              
|                      |                                                                                                                                                                                                                                                              | (unaudited)                                                                                                                                                              |                                            |              
|ASSETS:              
|                      | Cash and cash equivalents                                                                                                                                                                                                                                    |                                                                                                                                                                          | $                                          | 11,238,689    |             |               | $ | 68,317,397    |            
|                      | Investments:                                                                                                                                                                                                                                                 |                                                                                                                                                                          |                                            |               |             |               |   |               |            
|                      |                                                                                                                                                                                                                                                              | Available-for-sale securities, at fair value                                                                                                                             |                                            |               | 320,269,368 |               |   |               | 495,060,513 |              
|                      |                                                                                                                                                                                                                                                              | Held-to maturity securities, at amortized cost                                                                                                                           |                                            |               | 252,006,918 |               |   |               | 40,228,608  |              
|                      |                                                                                                                                                                                                                                                              | Accrued interest on investments                                                                                                                                          |                                            |               | 3,097,092   |               |   |               | 3,195,679   |              
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          |                                            |               |             |               |   |              
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          | Total investments                          |               |             | 575,373,378   |   |               |             | 538,484,800   | 
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          |                                            |               |             |               |   |              
|                      | Receivables:                                                                                                                                                                                                                                                 |                                                                                                                                                                          |                                            |               |             |               |   |               |            
|                      |                                                                                                                                                                                                                                                              | Real estate contracts and mortgage notes and
    other receivables, net of discounts and origination fees,
    including $27,695,014 and $13,246,825 due from affiliates |                                            |               | 994,826,847 |               |   |               | 762,424,455 |              
|                      |                                                                                                                                                                                                                                                              | Less allowance for losses on receivables                                                                                                                                 |                                            |               | (19,919,541 | )             |   |               | (11,339,002 | )            
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          |                                            |               |             |               |   |              
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          | Net receivables                            |               |             | 974,907,306   |   |               |             | 751,085,453   | 
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          |                                            |               |             |               |   |              
|                      | Other assets:                                                                                                                                                                                                                                                |                                                                                                                                                                          |                                            |               |             |               |   |               |            
|                      |                                                                                                                                                                                                                                                              | Real estate held for sale and development at the
    lower of cost or market, net of allowances of $2,646,109 and
    $1,998,448                                         |                                            |               | 120,931,676 |               |   |               | 106,979,005 |              
|                      |                                                                                                                                                                                                                                                              | Reinsurance receivable                                                                                                                                                   |                                            |               | 153,131,622 |               |   |               | 148,392,448 |              
|                      |                                                                                                                                                                                                                                                              | Deferred costs, net                                                                                                                                                      |                                            |               | 77,719,998  |               |   |               | 80,412,809  |              
|                      |                                                                                                                                                                                                                                                              | Land, buildings and equipment, net                                                                                                                                       |                                            |               | 27,595,909  |               |   |               | 27,365,485  |              
|                      |                                                                                                                                                                                                                                                              | Deferred income tax benefit                                                                                                                                              |                                            |               | 17,293,731  |               |   |               | 7,625,033   |              
|                      |                                                                                                                                                                                                                                                              | Current income taxes receivable                                                                                                                                          |                                            |               | 12,881,468  |               |   |               | 14,240,000  |              
|                      |                                                                                                                                                                                                                                                              | Due from affiliates                                                                                                                                                      |                                            |               | 11,515,703  |               |   |               | 8,672,929   |              
|                      |                                                                                                                                                                                                                                                              | Other assets, net                                                                                                                                                        |                                            |               | 29,948,103  |               |   |               | 35,543,441  |              
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          |                                            |               |             |               |   |              
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          | Total other assets                         |               |             | 451,018,210   |   |               |             | 429,231,150   | 
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          |                                            |               |             |               |   |              
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          | Total assets                               |               | $           | 2,012,537,583 |   |               | $           | 1,787,118,800 | 
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          |                                            |               |             |               |   |              
|LIABILITIES:         
|                      | Life insurance and annuity reserves                                                                                                                                                                                                                          |                                                                                                                                                                          | $                                          | 1,362,041,048 |             |               | $ | 1,225,660,253 |            
|                      | Debenture bonds and accrued interest                                                                                                                                                                                                                         |                                                                                                                                                                          |                                            | 390,056,440   |             |               |   | 355,465,932   |            
|                      | Debt payable, including $11,271,107 and
    $3,197,355 due to affiliates                                                                                                                                                                                     |                                                                                                                                                                          |                                            | 161,942,545   |             |               |   | 123,138,257   |            
|                      | Accounts payable and accrued expenses                                                                                                                                                                                                                        |                                                                                                                                                                          |                                            | 13,385,571    |             |               |   | 9,574,039     |            
|                      | Minority interest in subsidiaries                                                                                                                                                                                                                            |                                                                                                                                                                          |                                            | 14,944,183    |             |               |   |              |            
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          |                                            |               |             |               |   |              
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          | Total liabilities                          |               |             | 1,942,369,787 |   |               |             | 1,713,838,481 | 
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          |                                            |               |             |               |   |              
|Stockholders equity: |                                                                                                                                                                                                                                                              |                                                                                                                                                                          |                                            |               |             |               |   |              
|                      | Preferred stock, Series A, B, C, D, E, G and
    H cumulative with variable rate, $10 par value, 13,325,000
    shares authorized, 1,114,153 shares and 1,167,096 shares issued
    and outstanding (liquidation preference $28,970,303 and
    $31,458,375) |                                                                                                                                                                          |                                            | 11,141,531    |             |               |   | 11,670,954    |            
|                      | Preferred stock, Series E-7 cumulative with
    variable rate, $2.50 par value, 10,000,000 shares authorized,
    2,975,956 shares and 1,959,943 shares issued and outstanding
    (liquidation preference $74,398,907 and $48,998,581)                      |                                                                                                                                                                          |                                            | 7,439,891     |             |               |   | 4,899,857     |            
|                      | Common stock, Class A, $2,250 par, 97 shares
    issued and outstanding                                                                                                                                                                                      |                                                                                                                                                                          |                                            | 218,250       |             |               |   | 218,250       |            
|                      | Common stock, Class B, $2,250 par, no shares
    issued and outstanding                                                                                                                                                                                      |                                                                                                                                                                          |                                            |              |             |               |   |              |            
|                      | Additional paid-in capital                                                                                                                                                                                                                                   |                                                                                                                                                                          |                                            | 64,999,459    |             |               |   | 49,836,670    |            
|                      | Accumulated other comprehensive income                                                                                                                                                                                                                       |                                                                                                                                                                          |                                            | 4,474,329     |             |               |   | 3,291,285     |            
|                      | Retained earnings (deficit)                                                                                                                                                                                                                                  |                                                                                                                                                                          |                                            | (18,105,664   | )           |               |   | 3,363,303     |            
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          |                                            |               |             |               |   |              
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          | Total stockholders equity                 |               |             | 70,167,796    |   |               |             | 73,280,319    | 
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          |                                            |               |             |               |   |              
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          | Total liabilities and stockholders equity |               | $           | 2,012,537,583 |   |               | $           | 1,787,118,800 | 
|                      |                                                                                                                                                                                                                                                              |                                                                                                                                                                          |                                            |               |             |               |   |              

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
OPERATIONS

(unaudited)


|                                                                                               |                                                                                                                                                                                    |                             |            |                            |            |      |            |            |            |   |             |             |             |   |            |             |             | 
|---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ---------- | -------------------------- | ---------- | ---- | ---------- | ---------- | ---------- | - | ----------- | ----------- | ----------- | - | ---------- | ----------- | ----------- | 
|                                                                                               |                                                                                                                                                                                    |                             |            |                           
|                                                                                               |                                                                                                                                                                                    | Three Months Ended June 30, |            | Nine Months Ended June 30,
|                                                                                               |                                                                                                                                                                                    |                             |            |                           
|                                                                                               |                                                                                                                                                                                    | 2003                        |            | 2002                       |            | 2003 |            | 2002      
|                                                                                               |                                                                                                                                                                                    |                             |            |                            |            |      |            |           
|Revenues:                                                                                      |                                                                                                                                                                                    |                             |            |                            |            |      |            |            |            |   |             |             |             |   |            |            
|                                                                                               | Insurance premiums and annuity considerations                                                                                                                                      |                             | $          | 406,617                    |            |      | $          | 422,408    |            |   | $           | 1,171,200   |             |   | $          | 1,355,587   |            
|                                                                                               | Interest on receivables                                                                                                                                                            |                             |            | 21,281,257                 |            |      |            | 14,334,051 |            |   |             | 62,670,825  |             |   |            | 38,737,036  |            
|                                                                                               | Earned discount on receivables and investments                                                                                                                                     |                             |            | 8,072,408                  |            |      |            | 9,435,537  |            |   |             | 23,016,251  |             |   |            | 26,566,299  |            
|                                                                                               | Other investment income, including $564,892,
    $316,599, $1,399,986 and $828,940 from affiliates                                                                                 |                             |            | 9,095,979                  |            |      |            | 7,928,615  |            |   |             | 26,845,892  |             |   |            | 23,277,571  |            
|                                                                                               | Real estate sales                                                                                                                                                                  |                             |            | 3,211,406                  |            |      |            | 6,406,795  |            |   |             | 13,244,484  |             |   |            | 12,321,917  |            
|                                                                                               | Fees, commissions, service and other income,
    including $433,466, $300,024, $984,164 and $756,820 from
    affiliates                                                           |                             |            | 1,720,506                  |            |      |            | 2,052,768  |            |   |             | 5,054,955   |             |   |            | 5,516,190   |            
|                                                                                               | Net losses on investments                                                                                                                                                          |                             |            | (427,663                   | )          |      |            | (5,385,246 | )          |   |             | (15,834,665 | )           |   |            | (13,919,699 | )          
|                                                                                               | Net gains (losses) on sales of receivables,
    including gains of $0, $0, $0 and $839,856 from affiliates                                                                         |                             |            | (26,477                    | )          |      |            |           |            |   |             | (26,477     | )           |   |            | 1,176,102   |            
|                                                                                               |                                                                                                                                                                                    |                             |            |                            |            |      |            |            |            |   |             |             |             |   |            |            
|                                                                                               |                                                                                                                                                                                    | Total revenues              |            |                            | 43,334,033 |      |            |            | 35,194,928 |   |             |             | 116,142,465 |   |            |             | 95,031,003  | 
|                                                                                               |                                                                                                                                                                                    |                             |            |                            |            |      |            |            |            |   |             |             |             |   |            |            
|Expenses:                                                                                      |                                                                                                                                                                                    |                             |            |                            |            |      |            |            |            |   |             |             |             |   |            |            
|                                                                                               | Insurance policy and annuity benefits                                                                                                                                              |                             |            | 16,644,051                 |            |      |            | 13,010,834 |            |   |             | 47,906,785  |             |   |            | 38,637,106  |            
|                                                                                               | Interest, net, including $208,254, $96,852,
    $592,624 and $312,211 from affiliates                                                                                              |                             |            | 9,502,992                  |            |      |            | 7,917,364  |            |   |             | 27,457,666  |             |   |            | 23,047,562  |            
|                                                                                               | Cost of real estate sold                                                                                                                                                           |                             |            | 2,389,607                  |            |      |            | 5,112,908  |            |   |             | 11,575,865  |             |   |            | 10,943,996  |            
|                                                                                               | Provision for losses                                                                                                                                                               |                             |            | 6,936,291                  |            |      |            | 866,566    |            |   |             | 17,184,541  |             |   |            | 2,746,436   |            
|                                                                                               | Salaries and employee benefits                                                                                                                                                     |                             |            | 5,202,161                  |            |      |            | 3,806,811  |            |   |             | 13,573,915  |             |   |            | 11,751,669  |            
|                                                                                               | Commissions to agents, net of $370,621,
    $1,743,228, $384,146 and $2,034,746 ceded to affiliates                                                                                |                             |            | 2,339,291                  |            |      |            | 2,627,440  |            |   |             | 9,597,282   |             |   |            | 6,389,649   |            
|                                                                                               | Other operating and underwriting expenses, net of
    capitalization of contracts acquisition costs (includes
    $937,584, $1,141,589, $4,246,864 and $3,998,300 from affiliates) |                             |            | 5,081,006                  |            |      |            | 3,337,783  |            |   |             | 15,604,340  |             |   |            | 10,834,186  |            
|                                                                                               | Amortization of deferred policy acquisition
    costs, net of costs capitalized                                                                                                    |                             |            | 3,787,386                  |            |      |            | (2,017,238 | )          |   |             | 2,657,314   |             |   |            | 285,315     |            
|                                                                                               |                                                                                                                                                                                    |                             |            |                            |            |      |            |            |            |   |             |             |             |   |            |            
|                                                                                               |                                                                                                                                                                                    | Total expenses              |            |                            | 51,882,785 |      |            |            | 34,662,468 |   |             |             | 145,557,708 |   |            |             | 104,635,919 | 
|                                                                                               |                                                                                                                                                                                    |                             |            |                            |            |      |            |            |            |   |             |             |             |   |            |            
|Income (loss) before income taxes and
    minority interest                                    |                                                                                                                                                                                    |                             | (8,548,752 | )                          |            |      | 532,460    |            |            |   | (29,415,243 | )           |             |   | (9,604,916 | )          
|Income tax provision (benefit)                                                                 |                                                                                                                                                                                    |                             | 2,929,532  |                            |            |      | (166,142   | )          |            |   | 10,302,912  |             |             |   | 3,381,306  |            
|                                                                                               |                                                                                                                                                                                    |                             |            |                            |            |      |            |            |            |   |             |             |             |   |            |            
|Income (loss) before minority interest                                                         |                                                                                                                                                                                    |                             | (5,619,220 | )                          |            |      | 366,318    |            |            |   | (19,112,331 | )           |             |   | (6,223,610 | )          
|(Income) loss of consolidated subsidiaries
    allocated to minority stockholders              |                                                                                                                                                                                    |                             | (279,263   | )                          |            |      |           |            |            |   | (554,176    | )           |             |   | (57,671    | )          
|                                                                                               |                                                                                                                                                                                    |                             |            |                            |            |      |            |            |            |   |             |             |             |   |            |            
|Net income (loss)                                                                              |                                                                                                                                                                                    |                             | (5,898,483 | )                          |            |      | 366,318    |            |            |   | (19,666,507 | )           |             |   | (6,281,281 | )          
|Preferred stock dividends, including $53,933,
    $51,285, $157,175 and $152,762 to affiliates |                                                                                                                                                                                    |                             | (2,170,402 | )                          |            |      | (1,268,639 | )          |            |   | (5,897,259  | )           |             |   | (3,255,349 | )          
|                                                                                               |                                                                                                                                                                                    |                             |            |                            |            |      |            |            |            |   |             |             |             |   |            |            
|Loss applicable to common stockholders                                                         |                                                                                                                                                                                    | $                           | (8,068,885 | )                          |            | $    | (902,321   | )          |            | $ | (25,563,766 | )           |             | $ | (9,536,630 | )          
|                                                                                               |                                                                                                                                                                                    |                             |            |                            |            |      |            |            |            |   |             |             |             |   |            |            

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

3



---



##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)

(unaudited)


|                                                   |                                           |                                                                                   |            |                   |         |      |           |           |            |   |             |           |            |   |            |           |            |  
|-------------------------------------------------- | ----------------------------------------- | --------------------------------------------------------------------------------- | ---------- | ----------------- | ------- | ---- | --------- | --------- | ---------- | - | ----------- | --------- | ---------- | - | ---------- | --------- | ---------- | -
|                                                   |                                           |                                                                                   |            |                  
|                                                   |                                           | Three Months Ended                                                                |            | Nine Months Ended
|                                                   |                                           | June 30,                                                                          |            | June 30,         
|                                                   |                                           |                                                                                   |            |                  
|                                                   |                                           | 2003                                                                              |            | 2002              |         | 2003 |           | 2002     
|                                                   |                                           |                                                                                   |            |                   |         |      |           |          
|Net income (loss)                                  |                                           | $                                                                                 | (5,898,483 | )                 |         | $    | 366,318   |           |            | $ | (19,666,507 | )         |            | $ | (6,281,281 | )        
|                                                   |                                           |                                                                                   |            |                   |         |      |           |           |            |   |             |           |            |   |            |          
|Other comprehensive income, net of income
    tax: |                                           |                                                                                   |            |                   |         |      |           |           |            |   |             |           |            |   |            |          
|                                                   | Unrealized gains (losses) on investments: |                                                                                   |            |                   |         |      |           |           |            |   |             |           |            |   |            |           |           
|                                                   |                                           | Unrealized holding gains (losses) arising
    during period(1)                    |            |                   | 328,693 |      |           |           | 8,958,622  |   |             |           | (9,090,064 | ) |            |           | 6,087,082  |  
|                                                   |                                           | Less reclassification adjustment for (gains)
    losses included in net income(2) |            |                   | 277,980 |      |           |           | (4,271,582 | ) |             |           | 10,273,108 |   |            |           | (1,150,628 | )
|                                                   |                                           |                                                                                   |            |                   |         |      |           |           |            |   |             |           |            |   |            |          
|                                                   | Net other comprehensive income            |                                                                                   |            | 606,673           |         |      |           | 4,687,040 |            |   |             | 1,183,044 |            |   |            | 4,936,454 |           
|                                                   |                                           |                                                                                   |            |                   |         |      |           |           |            |   |             |           |            |   |            |          
|Comprehensive income (loss)                        |                                           | $                                                                                 | (5,291,810 | )                 |         | $    | 5,053,358 |           |            | $ | (18,483,463 | )         |            | $ | (1,344,827 | )        
|                                                   |                                           |                                                                                   |            |                   |         |      |           |           |            |   |             |           |            |   |            |          



---



|    |                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net of related tax of $176,989 and $4,666,150
    during the three months ended June 30, 2003 and 2002 and
    ($4,897,460) and $3,120,091 during the nine months ended
    June 30, 2003 and 2002, respectively.
|   
|(2) | Net of related tax of $149,682 and ($2,300,081)
    during the three months ended June 30, 2003 and 2002 and
    $5,531,674 and ($619,568) during the nine months ended
    June 30, 2003 and 2002, respectively.

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

4



---



##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS
EQUITY

(unaudited)


|                                                                                                   |  |           |            |        |  |            |         |               |  |           |            |       |  |   |           |  |  |   |             |   |  |   |             |  
|-------------------------------------------------------------------------------------------------- |  | --------- | ---------- | ------ |  | ---------- | ------- | ------------- |  | --------- | ---------- | ----- |  | - | --------- |  |  | - | ----------- | - |  | - | ----------- | -
|                                                                                                   |  |           |            |        |  |            |         | Accumulated   |  |           |            |      
|                                                                                                   |  |           |            |        |  | Additional |         | Other         |  | Retained  |            |      
|                                                                                                   |  | Preferred |            | Common |  | Paid-in    |         | Comprehensive |  | Earnings  |            |      
|                                                                                                   |  | Stock     |            | Stock  |  | Capital    |         | Income        |  | (Deficit) |            | Total
|                                                                                                   |  |           |            |        |  |            |         |               |  |           |            |      
|Balance, October 1, 2002                                                                           |  | $         | 16,570,811 |        |  | $          | 218,250 |               |  | $         | 49,836,670 |       |  | $ | 3,291,285 |  |  | $ | 3,363,303   |   |  | $ | 73,280,319  |  
|Net loss                                                                                           |  |           |            |        |  |            |         |               |  |           |            |       |  |   |           |  |  |   | (19,666,507 | ) |  |   | (19,666,507 | )
|Net unrealized gains on available-for-sale
    securities, net of income tax provision of $634,214 |  |           |            |        |  |            |         |               |  |           |            |       |  |   | 1,183,044 |  |  |   |             |   |  |   | 1,183,044   |  
|Cash dividends, common ($2,209 per share)                                                          |  |           |            |        |  |            |         |               |  |           | (155,852   | )     |  |   |           |  |  |   | (58,445     | ) |  |   | (214,297    | )
|Cash dividends, preferred (variable rate)                                                          |  |           |            |        |  |            |         |               |  |           | (4,153,244 | )     |  |   |           |  |  |   | (1,744,015  | ) |  |   | (5,897,259  | )
|Redemption and retirement variable rate of
    preferred stock (84,602 shares)                     |  |           | (612,566   | )      |  |            |         |               |  |           | (368,787   | )     |  |   |           |  |  |   |             |   |  |   | (981,353    | )
|Sale of variable rate preferred stock, net
    (1,047,672 shares)                                  |  |           | 2,623,177  |        |  |            |         |               |  |           | 19,840,672 |       |  |   |           |  |  |   |             |   |  |   | 22,463,849  |  
|                                                                                                   |  |           |            |        |  |            |         |               |  |           |            |       |  |   |           |  |  |   |             |   |  |   |             |  
|Balance, June 30, 2003                                                                             |  | $         | 18,581,422 |        |  | $          | 218,250 |               |  | $         | 64,999,459 |       |  | $ | 4,474,329 |  |  | $ | (18,105,664 | ) |  | $ | 70,167,796  |  
|                                                                                                   |  |           |            |        |  |            |         |               |  |           |            |       |  |   |           |  |  |   |             |   |  |   |             |  

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

5



---



##### Table of Contents



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

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(unaudited)


|                                     |                                                                                                                                                                       |                                                                                           |                                                                       |                                           |             |            |              |              |             |            |              |  
|------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------- | ----------- | ---------- | ------------ | ------------ | ----------- | ---------- | ------------ | -
|                                     |                                                                                                                                                                       |                                                                                          
|                                     |                                                                                                                                                                       | Nine Months Ended                                                                        
|                                     |                                                                                                                                                                       | June 30,                                                                                 
|                                     |                                                                                                                                                                       |                                                                                          
|                                     |                                                                                                                                                                       | 2003                                                                                      |                                                                       | 2002                                     
|                                     |                                                                                                                                                                       |                                                                                           |                                                                       |                                          
|Cash flow from operating activities: |                                                                                                                                                                       |                                                                                           |                                                                       |                                           |             |            |              |             
|                                     | Net loss                                                                                                                                                              |                                                                                           | $                                                                     | (19,666,507                               | )           |            | $            | (6,281,281   | )          
|                                     | Adjustments to reconcile net loss to net cash
    provided by operating activities:                                                                                   |                                                                                           |                                                                       |                                           |             |            |              |              |            
|                                     |                                                                                                                                                                       | Proceeds from sales of trading securities                                                 |                                                                       |                                           |            |            |              |              | 13,590,118  |           
|                                     |                                                                                                                                                                       | Proceeds from maturities of trading securities                                            |                                                                       |                                           |            |            |              |              | 1,020,171   |           
|                                     |                                                                                                                                                                       | Acquisition of trading securities                                                         |                                                                       |                                           |            |            |              |              | (4,669,460  | )         
|                                     |                                                                                                                                                                       | Earned discount on receivables and investments                                            |                                                                       |                                           | (23,016,251 | )          |              |              | (26,566,299 | )         
|                                     |                                                                                                                                                                       | Losses on investments and receivables, net,
    including $0 and $839,856 from affiliates |                                                                       |                                           | 15,861,142  |            |              |              | 12,743,597  |           
|                                     |                                                                                                                                                                       | Gains on sales of real estate                                                             |                                                                       |                                           | (1,668,619  | )          |              |              | (1,377,921  | )         
|                                     |                                                                                                                                                                       | Provision for losses                                                                      |                                                                       |                                           | 17,184,541  |            |              |              | 2,746,436   |           
|                                     |                                                                                                                                                                       | Depreciation and amortization                                                             |                                                                       |                                           | 3,318,686   |            |              |              | 3,846,021   |           
|                                     |                                                                                                                                                                       | Minority interests                                                                        |                                                                       |                                           | 554,176     |            |              |              | 57,671      |           
|                                     |                                                                                                                                                                       | Deferred income tax benefit                                                               |                                                                       |                                           | (9,668,698  | )          |              |              | 2,500,523   |           
|                                     |                                                                                                                                                                       | Changes in assets and liabilities:                                                        |                                                                       |                                           |             |            |              |              |             |           
|                                     |                                                                                                                                                                       |                                                                                           | Deferred cost, net                                                    |                                           |             | 2,692,811  |              |              |             | (158,045   | )           
|                                     |                                                                                                                                                                       |                                                                                           | Life insurance and annuity reserves                                   |                                           |             | 41,790,763 |              |              |             | 38,476,934 |             
|                                     |                                                                                                                                                                       |                                                                                           | Compound and accrued interest on debenture bonds
    and debt payable |                                           |             | 6,992,065  |              |              |             | 5,925,345  |             
|                                     |                                                                                                                                                                       |                                                                                           | Accrued interest on receivables and investments                       |                                           |             | (7,199,609 | )            |              |             | (6,658,968 | )           
|                                     |                                                                                                                                                                       |                                                                                           | Other assets                                                          |                                           |             | 1,483,781  |              |              |             | (7,935,191 | )           
|                                     |                                                                                                                                                                       |                                                                                           | Accounts payable and accrued expenses                                 |                                           |             | 8,429,864  |              |              |             | (4,321,837 | )           
|                                     |                                                                                                                                                                       |                                                                                           |                                                                       |                                           |             |            |              |             
|                                     |                                                                                                                                                                       |                                                                                           |                                                                       | Net cash provided by operating activities |             |            | 37,088,145   |              |             |            | 22,937,814   |  
|                                     |                                                                                                                                                                       |                                                                                           |                                                                       |                                           |             |            |              |             
|Cash flow from investing activities: |                                                                                                                                                                       |                                                                                           |                                                                       |                                           |             |            |              |             
|                                     | Proceeds from maturities of available-for-sale
    securities                                                                                                         |                                                                                           |                                                                       | 53,069,221                                |             |            |              | 43,027,393   |            
|                                     | Proceeds from sales of available-for-sale
    securities                                                                                                              |                                                                                           |                                                                       | 328,808,676                               |             |            |              | 140,479,545  |            
|                                     | Purchases of available-for-sale securities,
    including $0 and $2,325,945 from affiliates                                                                           |                                                                                           |                                                                       | (491,642,223                              | )           |            |              | (266,618,363 | )          
|                                     | Proceeds from maturities of held-to-maturity
    securities                                                                                                           |                                                                                           |                                                                       | 50,873,438                                |             |            |              |              |            
|                                     | Purchases of held-to-maturity securities                                                                                                                              |                                                                                           |                                                                       |                                          |             |            |              | (25,944,429  | )          
|                                     | Principal payments received on real estate
    contracts and mortgage notes and other receivable investments,
    including $9,155,617 and $653,975 from affiliates   |                                                                                           |                                                                       | 160,454,019                               |             |            |              | 156,951,452  |            
|                                     | Proceeds from sales of real estate contracts and
    mortgage notes and other receivable investments, including
    $1,023,333 and $16,038,118 from affiliates        |                                                                                           |                                                                       | 1,229,140                                 |             |            |              | 19,554,515   |            
|                                     | Purchases and originations of real estate
    contracts and mortgage notes and other receivable investments,
    including $27,197,431 and $4,404,024 from affiliates |                                                                                           |                                                                       | (377,709,349                              | )           |            |              | (256,638,237 | )          
|                                     | Proceeds from sales of real estate                                                                                                                                    |                                                                                           |                                                                       | 8,990,083                                 |             |            |              | 9,921,637    |            
|                                     | Purchases of and costs associated with real
    estate held for sale and development, including $247,042 and $0
    from affiliates                                   |                                                                                           |                                                                       | (11,639,198                               | )           |            |              | (5,690,615   | )          
|                                     | Capital expenditures                                                                                                                                                  |                                                                                           |                                                                       | (2,091,553                                | )           |            |              | (791,777     | )          
|                                     |                                                                                                                                                                       |                                                                                           |                                                                       |                                           |             |            |              |             
|                                     |                                                                                                                                                                       |                                                                                           |                                                                       | Net cash used in investing activities     |             |            | (279,657,746 | )            |             |            | (185,748,879 | )
|                                     |                                                                                                                                                                       |                                                                                           |                                                                       |                                           |             |            |              |             

6



---



##### Table of Contents



|                                                            |                                                                                                |                                           |             |              |             |  |             |             |             | 
|----------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ----------------------------------------- | ----------- | ------------ | ----------- |  | ----------- | ----------- | ----------- | 
|                                                            |                                                                                                |                                          
|                                                            |                                                                                                | Nine Months Ended                        
|                                                            |                                                                                                | June 30,                                 
|                                                            |                                                                                                |                                          
|                                                            |                                                                                                | 2003                                      |             | 2002        
|                                                            |                                                                                                |                                           |             |             
|Cash flow from financing activities:                        |                                                                                                |                                           |             |              |             |  |             |            
|                                                            | Receipts from life and annuity products                                                        |                                           |             | 198,548,947  |             |  |             | 162,095,252 |            
|                                                            | Withdrawals of life and annuity products                                                       |                                           |             | (110,982,175 | )           |  |             | (85,715,436 | )          
|                                                            | Ceding of life and annuity products to affiliated
    reinsurers                               |                                           |             | (7,453,067   | )           |  |             | (46,805,193 | )          
|                                                            | Ceding of life and annuity products from
    affiliated reinsurers                             |                                           |             | 9,213,510    |             |  |             | 20,120,303  |            
|                                                            | Proceeds from issuance of debenture bonds                                                      |                                           |             | 76,339,458   |             |  |             | 66,934,049  |            
|                                                            | Repayments of debenture bonds                                                                  |                                           |             | (48,573,905  | )           |  |             | (29,094,198 | )          
|                                                            | Increase in debt payable, including $11,300,000
    and $0 from affiliates                     |                                           |             | 103,600,000  |             |  |             | 39,400,000  |            
|                                                            | Repayments of debt payable, including $3,226,248
    and $1,093,738 from affiliates            |                                           |             | (64,962,822  | )           |  |             | (1,596,497  | )          
|                                                            | Issuance of preferred stock                                                                    |                                           |             | 22,463,849   |             |  |             | 19,507,366  |            
|                                                            | Redemption and retirement of preferred stock                                                   |                                           |             | (981,353     | )           |  |             | (4,791,408  | )          
|                                                            | Issuance of subsidiarys preferred stock to
    minority interests, net of dividends paid      |                                           |             | 14,390,007   |             |  |             |            |            
|                                                            | Repurchase of minority interest                                                                |                                           |             |             |             |  |             | (2,434,602  | )          
|                                                            | Cash dividends, including $157,175 and $152,762
    to affiliates                              |                                           |             | (6,111,556   | )           |  |             | (3,430,683  | )          
|                                                            |                                                                                                |                                           |             |              |             |  |             |            
|                                                            |                                                                                                | Net cash provided by financing activities |             |              | 185,490,893 |  |             |             | 134,188,953 | 
|                                                            |                                                                                                |                                           |             |              |             |  |             |            
|Net increase (decrease) in cash and cash
    equivalents    |                                                                                                |                                           | (57,078,708 | )            |             |  | (28,622,112 | )          
|Cash and cash equivalents:                                  |                                                                                                |                                           |             |              |             |  |             |            
|                                                            | Beginning of period                                                                            |                                           |             | 68,317,397   |             |  |             | 68,019,397  |            
|                                                            |                                                                                                |                                           |             |              |             |  |             |            
|                                                            | End of period                                                                                  |                                           | $           | 11,238,689   |             |  | $           | 39,397,285  |            
|                                                            |                                                                                                |                                           |             |              |             |  |             |            
|Non cash investing and financing activities of
    Company: |                                                                                                |                                           |             |              |             |  |             |            
|                                                            | Real estate held for sale and development
    acquired through foreclosure                     |                                           |             | 15,196,206   |             |  |             | 23,250,298  |            
|                                                            | Receivables originated to facilitate the sale of
    real estate                               |                                           |             | 4,254,401    |             |  |             | 2,400,280   |            
|                                                            | Transfers between annuity products                                                             |                                           |             | 23,079,704   |             |  |             | 40,023,788  |            
|                                                            | Transfer of investments from available-for-sale
    portfolio to held-to-maturity portfolio(1) |                                           |             | 262,518,789  |             |  |             |            |            
|                                                            | Transfer of investments from trading portfolio to
    available-for-sale portfolio             |                                           |             |             |             |  |             | 38,607,522  |            
|                                                            | Timing difference on settlements of securities
    sales                                       |                                           |             | 826,536      |             |  |             | 4,147,031   |            
|                                                            | Timing difference on settlements of securities
    purchases                                   |                                           |             | 71,715       |             |  |             | 15,292,250  |            



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | During the nine months ended June 30, 2003,
    the Company transferred $262.5 million of securities from
    its available-for-sale portfolio to its held-to-maturity
    portfolio. The securities transferred included those securities
    pledged as collateral to secure the FHLB line of credit
    agreement. The Company has the intent and ability to hold these
    securities until maturity.

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

7



---



##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


1.  Basis of Presentation

The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America
for interim financial information. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying
unaudited consolidated financial statements contain all
adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position of
Metropolitan Mortgage & Securities Co., Inc. and
subsidiaries (the Company or Consolidated
Group) as of June 30, 2003, the results of operations
for the three months and nine months ended June 30, 2003
and 2002 and the cash flows for the nine months ended
June 30, 2003 and 2002. The results of operations for the
three months and nine months ended June 30, 2003 and 2002
are not necessarily indicative of the results to be expected for
the full year. These financial statements should be read in
conjunction with the consolidated financial statements including
notes thereto included in the Companys fiscal 2002
Form 10-K.

Certain amounts in the prior years
consolidated financial statements have been reclassified to
conform to the current years presentation (See Note 5
following). These reclassifications had no effect on net income
(loss) or retained earnings as previously reported.

2.  Segment Reporting

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

Information about the Companys separate
business segments and in total as of and for the nine-month and
three-month periods ended June 30, 2003 and 2002 is as
follows (see MD&A for discussion of significant items):

|                              |  |                                                         |               |             |  |           |             |              |  |       |             |   |  |   |            |   |  |   |               |  
|----------------------------- |  | ------------------------------------------------------- | ------------- | ----------- |  | --------- | ----------- | ------------ |  | ----- | ----------- | - |  | - | ---------- | - |  | - | ------------- | -
|                              |  |                                                        
|                              |  | As of and for the nine month period ended June 30, 2003
|                              |  |                                                        
|                              |  |                                                         |               | Property    |  |           |             | Intersegment |  |      
|                              |  | Insurance                                               |               | Development |  | Investing |             | Eliminations |  | Total
|                              |  |                                                         |               |             |  |           |             |              |  |      
|Revenues                      |  | $                                                       | 111,698,393   |             |  | $         | 5,532,864   |              |  | $     | 3,603,303   |   |  | $ | (4,692,095 | ) |  | $ | 116,142,465   |  
|Income (loss) from operations |  |                                                         | 7,756,947     |             |  |           | 1,300,221   |              |  |       | (38,472,411 | ) |  |   |           |   |  |   | (29,415,243   | )
|Identifiable assets, net      |  |                                                         | 1,733,512,767 |             |  |           | 115,271,950 |              |  |       | 168,967,621 |   |  |   | (5,214,755 | ) |  |   | 2,012,537,583 |  
|Depreciation and amortization |  |                                                         | 496,382       |             |  |           | 470,408     |              |  |       | 2,351,896   |   |  |   |           |   |  |   | 3,318,686     |  
|Capital expenditures          |  |                                                         | 633,030       |             |  |           |            |              |  |       | 1,386,523   |   |  |   |           |   |  |   | 2,019,553     |  

8



---



##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENT(Continued)



2.  Segment
Reporting (continued)


|                              |  |                                                          |               |             |  |           |             |              |  |       |             |   |  |   |            |   |  |   |               |  
|----------------------------- |  | -------------------------------------------------------- | ------------- | ----------- |  | --------- | ----------- | ------------ |  | ----- | ----------- | - |  | - | ---------- | - |  | - | ------------- | -
|                              |  |                                                         
|                              |  | As of and for the three month period ended June 30, 2003
|                              |  |                                                         
|                              |  |                                                          |               | Property    |  |           |             | Intersegment |  |      
|                              |  | Insurance                                                |               | Development |  | Investing |             | Eliminations |  | Total
|                              |  |                                                          |               |             |  |           |             |              |  |      
|Revenues                      |  | $                                                        | 39,471,898    |             |  | $         | 1,027,941   |              |  | $     | 4,341,343   |   |  | $ | (1,507,149 | ) |  | $ | 43,334,033    |  
|Income (loss) from operations |  |                                                          | 766,769       |             |  |           | 213,396     |              |  |       | (9,528,917  | ) |  |   |           |   |  |   | (8,548,752    | )
|Identifiable assets, net      |  |                                                          | 1,733,512,767 |             |  |           | 115,271,950 |              |  |       | 168,967,621 |   |  |   | (5,214,755 | ) |  |   | 2,012,537,583 |  
|Depreciation and amortization |  |                                                          | 237,887       |             |  |           | 149,762     |              |  |       | 686,867     |   |  |   |           |   |  |   | 1,074,516     |  
|Capital expenditures          |  |                                                          | 432,070       |             |  |           |            |              |  |       | 855,597     |   |  |   |           |   |  |   | 1,287,667     |  

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

|                              |  |                                                          |               |             |  |           |            |              |  |       |             |   |  |   |            |   |  |   |               | 
|----------------------------- |  | -------------------------------------------------------- | ------------- | ----------- |  | --------- | ---------- | ------------ |  | ----- | ----------- | - |  | - | ---------- | - |  | - | ------------- | 
|                              |  |                                                         
|                              |  | As of and for the three month period ended June 30, 2002
|                              |  |                                                         
|                              |  |                                                          |               | Property    |  |           |            | Intersegment |  |      
|                              |  | Insurance                                                |               | Development |  | Investing |            | Eliminations |  | Total
|                              |  |                                                          |               |             |  |           |            |              |  |      
|Revenues                      |  | $                                                        | 22,513,361    |             |  | $         | 682,708    |              |  | $     | 13,594,058  |   |  | $ | (1,595,199 | ) |  | $ | 35,194,928    | 
|Income (loss) from operations |  |                                                          | 2,443,519     |             |  |           | 827,210    |              |  |       | (2,738,269  | ) |  |   |           |   |  |   | 532,460       | 
|Identifiable assets, net      |  |                                                          | 1,333,544,067 |             |  |           | 73,808,802 |              |  |       | 184,113,517 |   |  |   | 2,357,766  |   |  |   | 1,593,824,152 | 
|Depreciation and amortization |  |                                                          | 82,710        |             |  |           | 209,152    |              |  |       | 1,076,053   |   |  |   |           |   |  |   | 1,367,915     | 
|Capital expenditures          |  |                                                          | 122,840       |             |  |           |           |              |  |       | 392,954     |   |  |   |           |   |  |   | 515,794       | 

3.  Minority Interest

Western United Holding Company, a subsidiary of
the Company, had registered for sale up to $50.0 million of
Series A preferred stock at December 31, 2002.
Effective January 2, 2003, the initial escrow period ended
and Western United Holding Company completed the initial sale of
the preferred stock. Shortly after January 2, 2003, Western
United Holding Company commenced its continuous best efforts
offering of the preferred stock. As of June 30, 2003,
696,194 shares of Western United Holding Companys
preferred stock were outstanding, which resulted in net proceeds
to Western United Holding Company of $14.9 million. This
preferred stock registration expired July 31, 2003. On
June 12, 2003, Western United Holding Company filed with
the SEC a registration statement for the sale of up to 6,000,000
shares of Series A preferred stock for a total preferred
stock offering price of $150.0 million. This registration
statement is currently under regulatory review.

9



---



##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENT(Continued)

4.     Income
Taxes

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

In the event of an unfavorable resolution
relative to the investment, the earnings of the Company would be
adversely affected by the amount disallowed, including interest
if applicable. If wholly disallowed, the potential earnings
effect would be $28.0 million plus applicable interest. At
June 30, 2003, the Company cannot reasonably estimate a
loss, if any, associated with this transaction.

Based on the Companys federal income tax
filing for the calendar year ended December 31, 2002, the
Company has utilized approximately $7.0 million of the
$28.0 million tax benefit recorded in prior years.

5.     ReclassificationInterest
on Receivables and Provision for losses

Historically, the Company has accrued interest
income on delinquent commercial loans until foreclosure.
However, once the delinquent commercial loan achieved a net
realizable value of 80% of the underlying collateral, increases
in interest income were offset through a similar increase in the
provision for losses on receivables. During the three months
ended June 30, 2003, the Company ceased recording
simultaneous increases in both interest income and provision for
losses on delinquent commercial loans that achieved a net
realizable value of 80% of the underlying collateral.
Furthermore, and for comparative purposes, the Company
reclassified approximately $1.4 million of provision for
losses on receivables against interest income during the six
months ended March 31, 2003. The reclassification resulted
in a reduction in interest income with a corresponding reduction
in provision for losses on receivables. For comparability
purposes, the Company is providing the following information to
quantify the impact of the reclassification adjustments for the
three months ended December 31, 2002 and for the three
months and six months ended March 31, 2003. Prior year
information, both quarterly and year to date, have not been
reclassified as amounts are not deemed material.

|                                                                   |  |             |             |                 |  |   |             |  
|------------------------------------------------------------------ |  | ----------- | ----------- | --------------- |  | - | ----------- | -
|                                                                   |  | As reported |             | As reclassified
|                                                                   |  |             |             |                
|As of December 31, 2002                                            |  |             |             |                 |  |   |             |  
|Real estate contracts and mortgage notes and
    other receivables |  | $           | 860,409,434 |                 |  | $ | 859,782,731 |  
|Allowance for losses on receivables                                |  |             | (12,525,352 | )               |  |   | (11,898,649 | )
|Net receivables                                                    |  |             | 847,884,082 |                 |  |   | 847,884,082 |  
|For the three months ended December 31,
    2002                   |  |             |             |                 |  |   |             |  
|Interest on receivables                                            |  |             | 19,185,153  |                 |  |   | 18,558,450  |  
|Total revenues                                                     |  |             | 39,704,722  |                 |  |   | 39,078,019  |  
|Provision for losses                                               |  |             | 3,492,324   |                 |  |   | 2,865,621   |  
|Total expenses                                                     |  |             | 43,762,237  |                 |  |   | 43,135,534  |  
|Net loss                                                           |  |             | (2,637,791  | )               |  |   | (2,637,791  | )

|                                                                   |  |             |             |                 |  |   |             |  
|------------------------------------------------------------------ |  | ----------- | ----------- | --------------- |  | - | ----------- | -
|                                                                   |  | As reported |             | As reclassified
|                                                                   |  |             |             |                
|As of March 31, 2003                                               |  |             |             |                 |  |   |             |  
|Real estate contracts and mortgage notes and
    other receivables |  | $           | 931,218,807 |                 |  | $ | 929,798,695 |  
|Allowance for losses on receivables                                |  |             | (18,852,734 | )               |  |   | (17,432,622 | )
|Net receivables                                                    |  |             | 912,366,073 |                 |  |   | 912,366,073 |  

10



---



##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENT(Continued)

5.     ReclassificationInterest
on Receivables and Provision for
losses (continued)

|                                              |  |             |             |                 |  |  |             |  
|--------------------------------------------- |  | ----------- | ----------- | --------------- |  |  | ----------- | -
|                                              |  | As reported |             | As reclassified
|                                              |  |             |             |                
|For the six months ended March 31,
    2003   |  |             |             |                 |  |  |             |  
|Interest on receivables                       |  |             | 42,809,680  |                 |  |  | 41,389,568  |  
|Total revenues                                |  |             | 74,228,544  |                 |  |  | 72,808,432  |  
|Provision for losses                          |  |             | 11,668,362  |                 |  |  | 10,248,250  |  
|Total expenses                                |  |             | 95,095,035  |                 |  |  | 93,674,923  |  
|Net loss                                      |  |             | (13,768,024 | )               |  |  | (13,768,024 | )
|For the three months ended March 31,
    2003 |  |             |             |                 |  |  |             |  
|Interest on receivables                       |  |             | 23,624,527  |                 |  |  | 22,831,118  |  
|Total revenues                                |  |             | 34,523,822  |                 |  |  | 33,730,413  |  
|Provision for losses                          |  |             | 8,176,038   |                 |  |  | 7,382,629   |  
|Total expenses                                |  |             | 51,332,798  |                 |  |  | 50,539,389  |  
|Net loss                                      |  |             | (11,130,233 | )               |  |  | (11,130,233 | )

6.     Subsequent
Events

Metropolitan Investment Securities, Inc.
(MIS), an affiliate and a National Association of
Securities Dealers, Inc. (NASD) member firm, is the
sole broker dealer responsible for the offer and sale of the
Companys preferred stock and debt securities. MIS has
received a Wells letter from the NASD stating that
the staff of the NASD has made a preliminary determination to
recommend that a disciplinary action be brought against MIS.
Under the Wells process adopted by the NASD, MIS has been
provided an opportunity to respond before the NASD staff makes a
formal recommendation to the NASD regarding any such action. MIS
is cooperating with the NASD to resolve this matter. The Company
is unable to determine at this time the impact on the Company of
the ultimate resolution of the pending matters. The ultimate
resolution of the pending matters could have an adverse affect
on MISs ability to continue selling the Companys
securities. If MIS is unable to continue selling the
Companys securities, it could have an adverse affect on
the Company.

11



---



##### Table of Contents








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

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

General

We were established in 1953. Through growth and
acquisitions we have developed into a diversified financial
institution with assets exceeding $2.0 billion. Our
principal subsidiaries are Western United Life Assurance
Company, an annuity and life insurance company, Metwest Mortgage
Services, Inc., a receivable servicer and loan originator and
Western United Holding Company, a holding company with only one
wholly owned operating subsidiary, Western Life. The terms
we, our and us refer to
Metropolitan and our subsidiaries collectively, while the term
Metropolitan refers solely to the parent company.

We are engaged in the business of investing in
cash flowing assets, consisting of obligations secured by real
estate, structured settlements, annuities, lottery prizes and
other investments, which we refer to collectively as
receivables, and investment securities, which
consist primarily of U.S. Treasury and government agency
obligations and investment grade bonds, which we refer to
collectively as securities investments.

We are affiliated, due to common control by C.
Paul Sandifur, Jr., with National Summit Corp, which has as its
principal subsidiaries Summit Securities, Inc., Old Standard
Life Insurance Company, Old West Life Insurance & Annuity
Company, Summit Property Development and Metropolitan Investment
Securities, Inc. We refer to Summit Securities, Inc. and its
subsidiaries collectively as Summit. These
affiliates provide services to us for a fee and engage in
various business transactions with us. We also provide services
to Summit for a fee.

Historically, Metropolitan has generally funded
its investing activities through the sales of debentures and
preferred stock. Furthermore, Metropolitan has relied on new
offerings to re-finance previously issued debt as it matures.
Currently, Metropolitan has two public offerings under
regulatory review and as such, are not currently available to
the public. While Metropolitan maintains sufficient short term
liquidity (generally up to twelve months) to pay maturing
debentures and preferred stock dividends during periods in which
its securities offerings are not available to the public,
Metropolitan does not anticipate that it will generate
sufficient after tax cash earnings that would permit it to fully
pay its maturing debt obligations on a continual basis without
the sale of additional debt securities to re-finance that debt
as it matures. Metropolitans short-term liquidity is
primarily comprised of cash and other assets including
investments and receivables that can be converted to cash
through the sale of those assets. To the extent Metropolitan is
unable to sell additional securities or re-finance debentures as
they mature from another source, and to the extent that existing
short-term liquidity is not sufficient, our business would be
harmed.

Critical Accounting Policies

The accounting policies described below are those
that we consider critical in preparing our financial statements.
These policies include significant estimates we make 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 we use in
preparing our financial statements is included in our audited
financial statements for the year ended September 30, 2002.

12



---



##### Table of Contents



Asset Valuations

Investments

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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Available-for-Sale Securities.Available-for-sale securities,
    consisting primarily of mortgage- and asset-backed securities,
    government-backed bonds, corporate bonds, equity securities and
    venture capital investments, are carried at quoted and estimated
    fair values. Unrealized gains and losses on available-for-sale
    securities are excluded from earnings and presented as
    accumulated other comprehensive income or loss, net of related
    deferred income taxes, as a component of stockholders
    equity. We regularly monitor our investment portfolio for other
    than temporary declines in the value of securities. When an
    other than a temporary decline in the value below cost or
    amortized cost is identified, the investment is reduced to its
    fair value, which becomes the new cost basis of the investment.
    The amount of the reduction is reported as a realized loss in
    the statement of operations. Any recovery of value in excess of
    the investments new cost basis is recognized as a realized
    gain only on sale, maturity or other disposition of the
    investment. Factors that we evaluate in determining the
    existence of an other than temporary decline in value include
    (1) the length of time and extent to which the fair value
    has been less than cost or carrying value, (2) the
    circumstances contributing to the decline in fair value
    (including a change in interest rates or spreads to benchmarks),
    (3) recent performance of the security, (4) the
    financial strength of the issuer, and (5) our intent and
    ability to retain the investment for a period of time sufficient
    to allow for anticipated recovery. Additionally, for
    asset-backed securities, we consider the security rating and the
    amount of credit support available for the security.
|
| | We hold debt securities generated from our own
    securitization transactions. For these securities, estimated
    fair value is derived from expected discounted future cash
    flows. When estimating expected future cash flows, we consider
    interest rates, estimated prepayment rates, collateral value,
    historical default rates and recent loss severity experienced by
    the securities. To the extent that actual experience is less
    favorable than the assumptions, other than temporary declines in
    the value in the debt securities could result. We periodically
    assess the assumptions used in valuing the cash flows and the
    related carrying value of these securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | The following assumptions were used at
    June 30, 2003 to value our investments in the residual and
    interest only securities retained from our own securitization
    transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                                 |  |  |           | 
|-------------------------------- |  |  | --------- | 
|Prepayment speed assumptions(1)  |  |  | 21%37%   | 
|Expected loss rates(2)           |  |  | 2.7%6.9% | 
|Cumulative default rate increase |  |  | 7%16%    | 



---



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



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

Allowances for Losses

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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Allowance for Losses on Receivables.Commercial loans are individually
    evaluated for impairment. A commercial loan is considered
    impaired when, based on specific facts and circumstances, it is
    probable that we will be unable to collect all amounts due
    according to the contractual terms of the loan agreement. When a
    commercial loan has been identified as impaired, we determine
    the allowance for

13



---



##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | losses based on the estimated net realizable
    value of the collateral compared to the carrying value of the
    receivable (including accrued interest and fees).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | When determining the estimated net realizable
    value of the collateral, we have historically taken into
    consideration the most recent third party appraisal and other
    relevant market information. When reviewing the most recent
    third party appraisal, we consider the type of property, changes
    in the economic factors of the region since the most recent
    appraisal and the various underlying appraisal assumptions.
    In-house licensed appraisers that assist in the commercial
    origination process also assist in this review. Furthermore, we
    may also perform additional on-site collateral visits to update
    our historical assessments and gain additional information. If
    the estimated net realizable value of the collateral is less
    than the carrying value, an allowance for losses is recognized
    for the amount at which the carrying value exceeds the estimated
    net realizable value.                                                                                                                                                                                                                                                                                                                                                                                             
|
| | The remaining real estate contracts and mortgage
    notes receivable portfolio is made up of a large group of
    smaller-balance homogenous loans that are collectively evaluated
    for impairment. We establish an allowance for inherent losses on
    these receivables based primarily on current delinquencies and
    recent foreclosure and loss experience. To the extent actual
    experience differs from assumptions, such adjustments would be
    included in the statement of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Allowance for Losses on Real Estate Held for
    Sale and Development.The allowance
    for losses on real estate held for sale and development includes
    amounts for estimated losses as a result of impairment in value.
    We review our real estate held for sale and development
    properties for impairment in value whenever events or
    circumstances indicate that the carrying value of the asset may
    exceed its estimated net realizable value. The carrying value of
    a repossessed property is determined as of the date of
    repossession of the property and is based on the lower of the
    estimated net realizable value or carrying value at the time the
    property was repossessed. For non-commercial properties, an
    appraisal is obtained on the foreclosed property to determine
    its estimated net realizable value at the time of repossession.
    For commercial properties, an appraisal is obtained on the
    foreclosed property to determine the estimated net realizable
    value only if the most recent appraisal is more than one year
    old, otherwise the existing appraisal is used. Periodically, we
    may not order an updated appraisal in accordance with our
    established policies if current negotiations with a potential
    purchaser establish an indication of value.
|
| | Subsequent to repossession (or acquisition in the
    case of development properties), if the value of the property
    declines such that the estimated net realizable value from the
    disposition of the asset is less than its carrying value, an
    impairment is recognized in the statement of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

Income Recognition on Delinquent Commercial
Real Estate Receivables

We generally accrue interest on delinquent
commercial real estate receivables unless the receivable is not
considered well secured or in the process of collection. We
consider commercial loans with carrying values less than 80% of
the estimated net realizable value of the collateral (estimated
net realizable value) to be well secured. We cease accruing
interest and other related loan fees when the carrying value of
a commercial loan reaches its estimated net realizable value. A
nonaccrual receivable may be restored to accrual status when
delinquent principal and interest payments are brought current
and the receivable is paying in accordance with its payment
terms or when an increase in the collateral value has occurred
such that the carrying value is less than its estimated net
realizable value.

Deferred Policy Acquisition Costs

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

14



---



##### Table of Contents



Life Insurance and Annuity Reserves

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

Results of Operations

Nine Months Ended June 30, 2003 Compared
to Nine Months Ended June 30, 2002

The following table presents the components of
the results of operations during the nine months ended
June 30, 2003 and 2002:

|                                                                           |                                                   |                |             |             |   |   |             |            | 
|-------------------------------------------------------------------------- | ------------------------------------------------- | -------------- | ----------- | ----------- | - | - | ----------- | ---------- | 
|                                                                           |                                                   |               
|                                                                           |                                                   | Nine Months   
|                                                                           |                                                   | Ended June 30,
|                                                                           |                                                   |               
|                                                                           |                                                   | 2003           |             | 2002       
|                                                                           |                                                   |                |             |            
|Net interest income                                                        |                                                   | $              | 37,168,517  |             |   | $ | 26,896,238  |           
|Provision for losses on receivables                                        |                                                   |                | (15,124,342 | )           |   |   | (2,870,557  | )         
|                                                                           |                                                   |                |             |             |   |   |             |           
|                                                                           | Net interest spread                               |                |             | 22,044,175  |   |   |             | 24,025,681 | 
|Net non-interest expense                                                   |                                                   |                | (32,549,382 | )           |   |   | (22,103,727 | )         
|Capitalized deferred policy acquisition costs,
    net of amortization     |                                                   |                | (2,657,314  | )           |   |   | (285,315    | )         
|                                                                           |                                                   |                |             |             |   |   |             |           
|                                                                           | Income (loss) before gains (losses) on
    assets |                |             | (13,162,521 | ) |   |             | 1,636,639  | 
|Net losses on investments and receivables                                  |                                                   |                | (15,861,142 | )           |   |   | (12,743,597 | )         
|Provision for losses on real estate held for sale                          |                                                   |                | (2,060,199  | )           |   |   | 124,121     |           
|Gains on sales of real estate                                              |                                                   |                | 1,668,619   |             |   |   | 1,377,921   |           
|                                                                           |                                                   |                |             |             |   |   |             |           
|Loss before income taxes and minority interest                             |                                                   |                | (29,415,243 | )           |   |   | (9,604,916  | )         
|Income tax benefit                                                         |                                                   |                | 10,302,912  |             |   |   | 3,381,306   |           
|                                                                           |                                                   |                |             |             |   |   |             |           
|Loss before minority interest                                              |                                                   |                | (19,112,331 | )           |   |   | (6,223,610  | )         
|Income of consolidated subsidiaries allocated to
    minority stockholders |                                                   |                | (554,176    | )           |   |   | (57,671     | )         
|                                                                           |                                                   |                |             |             |   |   |             |           
|Net loss                                                                   |                                                   |                | (19,666,507 | )           |   |   | (6,281,281  | )         
|Preferred stock dividends                                                  |                                                   |                | (5,897,259  | )           |   |   | (3,255,349  | )         
|                                                                           |                                                   |                |             |             |   |   |             |           
|Loss applicable to common stockholders                                     |                                                   | $              | (25,563,766 | )           |   | $ | (9,536,630  | )         
|                                                                           |                                                   |                |             |             |   |   |             |           

15



---



##### Table of Contents



Net Interest Income

The following table presents the components of
net interest income during the during the nine months ended
June 30, 2003 and 2002:

|                    |                                                |                        |            |            |             |   |            |            |            | 
|------------------- | ---------------------------------------------- | ---------------------- | ---------- | ---------- | ----------- | - | ---------- | ---------- | ---------- | 
|                    |                                                |                       
|                    |                                                | Nine Months           
|                    |                                                | Ended June 30,        
|                    |                                                |                       
|                    |                                                | 2003                   |            | 2002      
|                    |                                                |                        |            |           
|Interest income:    |                                                |                        |            |            |             |   |            |           
|                    | Interest on receivables                        |                        | $          | 62,670,825 |             |   | $          | 38,737,036 |           
|                    | Earned discount on receivables and investments |                        |            | 23,016,251 |             |   |            | 26,566,299 |           
|                    | Other investment income                        |                        |            | 26,845,892 |             |   |            | 23,277,571 |           
|                    |                                                |                        |            |            |             |   |            |           
|                    |                                                | Total interest income  |            |            | 112,532,968 |   |            |            | 88,580,906 | 
|                    |                                                |                        |            |            |             |   |            |           
|Interest expense:   |                                                |                        |            |            |             |   |            |           
|                    | Insurance policy and annuity benefits          |                        |            | 47,906,785 |             |   |            | 38,637,106 |           
|                    | Interest, net                                  |                        |            | 27,457,666 |             |   |            | 23,047,562 |           
|                    |                                                |                        |            |            |             |   |            |           
|                    |                                                | Total interest expense |            |            | 75,364,451  |   |            |            | 61,684,668 | 
|                    |                                                |                        |            |            |             |   |            |           
|Net interest income |                                                | $                      | 37,168,517 |            |             | $ | 26,896,238 |           
|                    |                                                |                        |            |            |             |   |            |           

The following table summarizes the rate/ volume
change in total interest income between the nine months ended
June 30, 2003 and 2002 by interest sensitive asset class:

|                                                        |  |                                     |            |      |  |              |             |   |  |   |            |  
|------------------------------------------------------- |  | ----------------------------------- | ---------- | ---- |  | ------------ | ----------- | - |  | - | ---------- | -
|                                                        |  |                                    
|                                                        |  | Nine months ended June 30, 2003 vs.
|                                                        |  | Nine months ended June 30, 2002    
|                                                        |  |                                    
|                                                        |  |                                     |            |     
|                                                        |  | Increase (Decrease) Due to          |            |     
|                                                        |  |                                     |            |     
|                                                        |  | Volume                              |            | Rate |  | Total Change
|                                                        |  |                                     |            |      |  |             
|Interest sensitive assets:                              |  |                                     |            |      |  |              |             |   |  |   |            |  
|                                                        |  |                                     |            |      |  |              |             |   |  |   |            |  
|Investments (including cash)                            |  | $                                   | 9,479,699  |      |  | $            | (8,392,956  | ) |  | $ | 1,086,743  |  
|Real estate contracts and mortgage notes
    receivable |  |                                     | 31,895,534 |      |  |              | (7,341,257  | ) |  |   | 24,554,277 |  
|Other receivables                                       |  |                                     | (2,567,365 | )    |  |              | 878,407     |   |  |   | (1,688,958 | )
|                                                        |  |                                     |            |      |  |              |             |   |  |   |            |  
|                                                        |  | $                                   | 38,807,868 |      |  | $            | (14,855,806 | ) |  | $ | 23,952,062 |  
|                                                        |  |                                     |            |      |  |              |             |   |  |   |            |  

16



---



##### Table of Contents



The following table presents the net average
yields we realized on interest sensitive assets and liabilities
during the nine months ended June 30, 2003 and 2002 based
on the average monthly ending asset/ liability balances:

|                                                                       |       |              |               |              |   |   |             |       |  
|---------------------------------------------------------------------- | ----- | ------------ | ------------- | ------------ | - | - | ----------- | ----- | -
|                                                                       |       | June 30,     |               | June 30,    
|                                                                       |       | 2003 Average |               | 2002 Average
|                                                                       |       |              |               |             
|Interest sensitive assets:                                             |       |              |               |              |   |   |             |      
|                                                                       |       |              |               |              |   |   |             |      
|Investments (including cash)                                           |       | $            | 635,384,939   |              |   | $ | 416,112,646 |      
|                                                                       | Yield |              |               | 5.11         | % |   |             | 7.27  | %
|Real estate contracts and mortgage notes
    receivable                |       | $            | 757,136,105   |              |   | $ | 477,438,881 |      
|                                                                       | Yield |              |               | 14.16        | % |   |             | 15.20 | %
|Other receivables                                                      |       | $            | 132,237,727   |              |   | $ | 173,156,878 |      
|                                                                       | Yield |              |               | 9.25         | % |   |             | 8.36  | %
|Interest sensitive liabilities:                                        |       |              |               |              |   |   |             |      
|                                                                       |       |              |               |              |   |   |             |      
|Life insurance and annuity reserves, net of
    reinsurance receivable |       | $            | 1,159,788,636 |              |   | $ | 901,748,248 |      
|                                                                       | Yield |              |               | 5.51         | % |   |             | 5.82  | %
|Debenture bonds                                                        |       | $            | 375,808,544   |              |   | $ | 328,138,483 |      
|                                                                       | Yield |              |               | 8.83         | % |   |             | 8.92  | %
|Debt payable                                                           |       | $            | 168,256,054   |              |   | $ | 52,856,395  |      
|                                                                       | Yield |              |               | 4.01         | % |   |             | 5.09  | %

The increase in interest income for the nine
months ended June 30, 2003 as compared to the nine months
ended June 30, 2002 was primarily due to an increase in
interest income from an increase in our commercial lending
activities. Commercial loans, which have higher yields than our
residential portfolio, accounted for $553.0 million, or
67.9%, of the outstanding principal balance of real estate
contracts and mortgage notes receivable at June 30, 2003,
compared to $257.2 million, or 47.0%, at June 30, 2002.

The increase in our interest income as a result
of our commercial lending activities has been partially offset
by a decrease in the yields earned on our investment portfolio
due to a decrease in the 5-year constant maturity U.S. Treasury
rate, which is similar to the average maturity of our fixed
income portfolio. During the twelve-month period ended
June 30, 2003, proceeds from the sales and maturities of
the investment portfolio totaled $673.5 million. As
proceeds from the sales and maturities of investments have been
reinvested back into a lower interest rate market, the overall
portfolio yield was reduced. Additionally, our recent focus on
improving the average credit rating of our investment portfolio
has also contributed to the reduction in our investment yields.
At June 30, 2003, approximately 84.7% of our portfolio was
rated either AAA or AA compared to 60.0% at June 30, 2002.
The higher credit rating is expected to result in a lower
effective yield, but also reduced credit risk.

Additionally, a reduction in our other receivable
portfolio has resulted in a decrease in interest income on the
other receivable portfolio when compared to the similar period
last year. However, the decrease was partially offset by an
increase in the average yield on the remaining portfolio.

The increase in interest expense for the nine
months ended June 30, 2003 as compared to the nine months
ended June 30, 2002 was primarily due to an increase in the
average balances of debt payable, debenture bonds and life and
annuity reserves. However, the reduction in the interest rate
environment during the last twelve months has allowed us to
borrow funds on our secured line of credit with the Federal Home
Loan Bank of Seattle at lower interest rates. This borrowing
facility has contributed to a reduction in the current year debt
payable cost of funds. Additionally, the reduction in the
interest rate environment during the last twelve months has also
contributed to a lower cost of funds on our life and annuity
reserves.

17



---



##### Table of Contents



Provision for Losses on Receivables

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

When determining the estimated net realizable
value of the collateral, we have historically taken into
consideration the most recent third party appraisal and other
relevant market information. When reviewing the most recent
third party appraisal, we consider the type of property, changes
in the economic factors of the region since the most recent
appraisal and the various underlying appraisal assumptions.
In-house licensed appraisers that assist in the commercial
origination process also assist in this review. Furthermore, we
may also perform additional on-site collateral visits to update
our historical assessments and gain additional information. If
the estimated net realizable value of the collateral is less
than the carrying value, an allowance for losses is recognized
for the amount at which the carrying value exceeds the estimated
net realizable value.

During the nine months ended June 30, 2003,
we provided provisions for losses on our commercial loan
portfolio of approximately $10.8 million. The current year
provisions resulted from a review of the most recent appraisals
and other relevant market information on loans that we deemed
impaired during the nine months ended June 30, 2003. Loans
that we considered impaired at June 30, 2003 were
approximately $113.2 million compared to $50.2 million
at September 30, 2002. Of the $113.2 million
considered impaired at June 30, 2003, seven loans with
principal balances of approximately $70.1 million that were
deemed to be impaired became impaired since September 30,
2002. Fluctuations in the provision for losses result from using
the specific impairment methodology.

In addition to the commercial loan provision, we
also provided provisions for losses on our residential and other
real estate loans of approximately $2.8 million and
approximately $1.6 million on our other receivables during
the nine months ended June 30, 2003. The residential and
other real estate receivable portfolio is made up of a large
group of smaller-balance homogenous loans that are collectively
evaluated for impairment. We establish an allowance for inherent
losses on these receivables based primarily on current
delinquencies and recent foreclosure and loss experience.

Net Non-Interest Expense

The following table presents the components of
net non-interest expense during the nine months ended
June 30, 2003 and 2002:

|                      |                                               |                            |   |            |            |  |   |            |            | 
|--------------------- | --------------------------------------------- | -------------------------- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                      |                                               |                           
|                      |                                               | Nine Months               
|                      |                                               | Ended June 30,            
|                      |                                               |                           
|                      |                                               | 2003                       |   | 2002      
|                      |                                               |                            |   |           
|Non-interest income:  |                                               |                            |   |            |            |  |   |           
|                      | Insurance premiums and annuity considerations |                            | $ | 1,171,200  |            |  | $ | 1,355,587  |           
|                      | Servicing income                              |                            |   | 1,467,479  |            |  |   | 1,526,661  |           
|                      | Fees, commissions and other income            |                            |   | 3,587,476  |            |  |   | 3,989,529  |           
|                      |                                               |                            |   |            |            |  |   |           
|                      |                                               | Total non-interest income  |   |            | 6,226,155  |  |   |            | 6,871,777  | 
|                      |                                               |                            |   |            |            |  |   |           
|Non-interest expense: |                                               |                            |   |            |            |  |   |           
|                      | Salaries and employee benefits                |                            |   | 13,573,915 |            |  |   | 11,751,669 |           
|                      | Commissions to agents                         |                            |   | 9,597,282  |            |  |   | 6,389,649  |           
|                      | Other operating and underwriting expenses     |                            |   | 15,604,340 |            |  |   | 10,834,186 |           
|                      |                                               |                            |   |            |            |  |   |           
|                      |                                               | Total non-interest expense |   |            | 38,775,537 |  |   |            | 28,975,504 | 
|                      |                                               |                            |   |            |            |  |   |           
|                      |                                               | Net non-interest expense   |   | $          | 32,549,382 |  |   | $          | 22,103,727 | 
|                      |                                               |                            |   |            |            |  |   |           

18



---



##### Table of Contents



The increase in salaries and employee benefits
was primarily due to a growth in the number of our full time
equivalent employees, which increased from 283 at June 30,
2002 to 323 at June 30, 2003.

The increase in commission to agents was due
primarily to a $3.4 million increase in commissions paid on
annuity business, net of ceding.

The increase in other operating and underwriting
expenses was primarily due to a $0.8 million increase in
recruiting and training expenses, a $0.9 million increase
in audit and legal fees, a $1.7 million increase in holding
costs associated with our properties held for sale and
development, a $0.6 million reduction in ceding allowances
associated with new annuity business ceded to Summit under our
annuity reinsurance agreement and a $0.2 million increase
in guaranty fund assessments.

Amortization of Deferred Policy Acquisition
Costs, Net of Costs Capitalized

Amortization of deferred policy acquisition
costs, net of costs capitalized, is comprised of the
capitalization of expenses incurred to sell and underwrite life
and annuity policies, offset by the amortization of previously
capitalized expenses. The following table reflects the
components of our net expense reported for the nine months ended
June 30, 2003 and 2002:

|                                                          |  |                |            |      |  |   |            |  
|--------------------------------------------------------- |  | -------------- | ---------- | ---- |  | - | ---------- | -
|                                                          |  |               
|                                                          |  | Nine Months   
|                                                          |  | Ended June 30,
|                                                          |  |               
|                                                          |  | 2003           |            | 2002
|                                                          |  |                |            |     
|Current period costs capitalized                          |  | $              | (8,832,872 | )    |  | $ | (5,214,685 | )
|Amortization of previously capitalized expenses           |  |                | 11,490,186 |      |  |   | 5,500,000  |  
|                                                          |  |                |            |      |  |   |            |  
|Net amortization of deferred policy acquisition
    costs |  | $              | 2,657,314  |      |  | $ | 285,315    |  
|                                                          |  |                |            |      |  |   |            |  

The increase in current period costs capitalized
is due primarily to a $3.4 million increase in commissions
paid on annuity business, net of ceding and a $0.6 million
decrease in ceding allowance associated with new annuity
business. Annuity business production, net of ceding during the
nine months ended June 30, 2003 was approximately
$191.1 million compared to approximately
$115.3 million during the similar period ended
June 30, 2002. Our funding for the acquisitions of
receivables is provided primarily through the sale of our
annuity products. We manage our financing activities to match
investment opportunities that are available. Since the sale of
annuity products are interest rate sensitive, we can manage
annuity product sales by pricing the products accordingly.
During the nine months ended June 30, 2003, we offered a
more competitive price on our annuity products than during the
similar period ended June 30, 2002 and therefore
experienced an increase in annuity sales during the current
period as compared to the similar period last year.

According to Statement of Financial Accounting
Standards No. 97 (SFAS No. 97), policy
acquisition costs, such as commissions, are to be deferred and
amortized over the life of a group of policies in relation to
the present value of the estimated future gross profits related
to that group of policies. For purposes of amortizing deferred
policy acquisition costs, the estimated gross profits consist of
estimated future earnings based on investment of policy account
balances less estimated future interest to be credited to
account balances, estimated future policy expense charges less
estimated future policy administration expenses and estimated
future surrender charges. These estimated gross profits are to
be based on our best estimate without provision for
adverse deviation. Further, SFAS No. 97 requires that
estimates of expected gross profit used as a basis of deferred
policy acquisition cost amortization are to be evaluated
regularly, and the total amortization recorded to date is to be
adjusted by a charge or credit to the statement of operations if
actual experience or other evidence suggests that earlier
estimates should be revised.

Our future estimated earnings rate on the assets
that support the annuity business over the remaining estimated
life of the annuity business is expected to range from 6.9% to
10.7%. The primary factors that influence the range of future
estimated earnings rate include the asset mix and the
corresponding potential range of yields of the assets that
support the annuity business. Since real estate receivables
represent the highest yielding category, a shift in assets
between real estate receivables and lower yielding fixed income

19



---



##### Table of Contents



securities and other receivables supporting the
annuity business can affect the earning rates we realize on the
assets that support the annuity business.


After giving consideration to the asset mix and
corresponding yields realized on the assets supporting the
annuity business, we believe that a future estimated earnings
rate of 10.0% at June 30, 2003 is a reasonable expectation
of the yields to be realized on the assets that support the
annuity business over the estimated remaining life. The future
estimated earnings rate of 10.0% is a reduction from 10.8% that
was estimated as of September 30, 2002. This reduction in
future estimated earnings rate has contributed to an increase in
the amortization of previously capitalized expenses for the nine
months ended June 30, 2003 as compared to the nine months
ended June 30, 2002. Additionally, during the nine months
ended June 30, 2002, the amortization of deferred policy
acquisition costs was affected by lower than expected surrender
rates. The effects of lower than expected surrender rates during
the nine months ended June 30, 2002 (which resulted in
lower amortization of deferred policy acquisition costs) and a
reduction in the future estimated earnings rate that was made
during the nine months ended June 30, 2003 (which resulted
in an increase in the amortization of deferred policy
acquisition costs) has resulted in a net increase in
amortization during the current period of approximately
$6.0 million when compared to the similar period last year.

Net Losses on Investments and
Receivables

The following table presents the components of
net losses on investments and receivables during the nine months
ended June 30, 2003 and 2002:

|                                          |                                            |                |             |             |   |   |             |            |  
|----------------------------------------- | ------------------------------------------ | -------------- | ----------- | ----------- | - | - | ----------- | ---------- | -
|                                          |                                            |               
|                                          |                                            | Nine Months   
|                                          |                                            | Ended June 30,
|                                          |                                            |               
|                                          |                                            | 2003           |             | 2002       
|                                          |                                            |                |             |            
|Other than temporary declines in value:   |                                            |                |             |             |   |   |             |           
|                                          | Subordinate and interest only certificates |                | $           | (15,485,881 | ) |   | $           | (6,896,044 | )
|                                          | Equity securities                          |                |             | (817,143    | ) |   |             | (4,482,792 | )
|                                          | Other securities                           |                |             | (3,998,419  | ) |   |             | (4,451,731 | )
|Realized gains (losses):                  |                                            |                |             |             |   |   |             |           
|                                          | Securities investments                     |                |             | 4,466,778   |   |   |             | 1,811,054  |  
|                                          | Receivables                                |                |             | (26,477     | ) |   |             | 1,176,102  |  
|                                          | Trading securities                         |                |             |            |   |   |             | 99,814     |  
|                                          |                                            |                |             |             |   |   |             |           
|Net losses on investments and receivables |                                            | $              | (15,861,142 | )           |   | $ | (12,743,597 | )         
|                                          |                                            |                |             |             |   |   |             |           



| |                                               
| | ----------------------------------------------
| | Subordinate and interest only
    certificates

We hold subordinate (including residuals) and
interest only certificates generated from our own securitization
activities. The fair value of these securities, which do not
have established market prices, is estimated using expected
discounted future cash flows. When estimating expected future
cash flows, we consider interest rates, estimated prepayment
rates, collateral value, historical default rates and recent
loss severity. During the nine months ended June 30, 2003,
we determined that certain securities had other than temporary
declines in value of approximately $4.9 million as the
collateral supporting the securities experienced higher than
expected prepayment rates, loss severity and default rates. In
response to sustained prepayment rates, higher than expected
loss severities and an increase in defaults, we revised our
assumptions of future prepayments, loss severity and default
rates. Changes in these assumptions resulted in an additional

20



---



##### Table of Contents



$10.6 million impairment during the nine months
ended June 30, 2003. The following table reflects the
impairments associated with the change in assumptions.


|                 |  |               |      | 
|---------------- |  | ------------- | ---- | 
|                 |  | Amount of    
|                 |  | Impairment   
|                 |  |              
|                 |  | (in millions)
|Prepayment rates |  | $             | 4.9  | 
|Loss severity    |  |               | 4.5  | 
|Default rates    |  |               | 1.2  | 
|                 |  |               |      | 
|                 |  | $             | 10.6 | 
|                 |  |               |      | 

The following assumptions were used at
June 30, 2003 to value our investments in the subordinate
and interest only securities retained from our own
securitization transactions.

|                                |  |                  |           |             |  |  |           | 
|------------------------------- |  | ---------------- | --------- | ----------- |  |  | --------- | 
|                                |  | At September 30, |           | At June 30,
|                                |  | 2002             |           | 2003       
|                                |  |                  |           |            
|Prepayment speed assumptions(1) |  |                  | 19%29%   |             |  |  | 21%37%   | 
|Expected loss rates(2)          |  |                  | 2.4%4.4% |             |  |  | 2.7%6.9% | 



---



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

We will continue to periodically assess the
assumptions used in valuing the cash flows and the related
carrying value of securities generated from our securitization
activities.



| |                  
| | -----------------
| | Equity securities

During the nine months ended June 30, 2003,
approximately $0.8 million in declines in various venture
capital and other equity securities were determined to be other
than temporary due to the length of time and extent that the
investments had traded below cost or carrying value.



| |                 
| | ----------------
| | Other securities

During the nine months ended June 30, 2003,
we reported approximately $4.0 million in other than
temporary declines in value on certain fixed income securities.
The impairments were primarily due to deterioration in the
underlying collateral of certain asset-backed securities,
including $2.1 million in impairments on airline related
asset-backed securities, in addition to credit deterioration in
some higher yielding corporate bond investments.

Provision for Losses on Real Estate Held for
Sale

Real estate held for sale is periodically
evaluated for impairment. Loss provisions for real estate held
for sale are calculated as the difference between the estimated
net realizable value and the carrying value at the measurement
date. During the nine months ended June 30, 2003 we
provided a $2.1 million provision for losses primarily due to a
reduction in sales prices on some of our real estate held for
sale portfolio and a $0.8 million provision for losses on
an orchard in Washington that lost its organic status. The $0.8
million provision was based on a new appraisal that we obtained
on the orchard.

Income Taxes

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

21



---



##### Table of Contents



We have received a notice from the Internal
Revenue Service stating that the $28.0 million tax benefit
we recorded for a transaction entered into during fiscal 1999
would be wholly disallowed by the IRS. However, we intend to
vigorously defend our tax treatment of the transaction and we
believe that our tax treatment was, and continues to be,
supportable and appropriate.

In the event of an unfavorable resolution
relative to the investment, our earnings would be adversely
affected by the amount disallowed, including interest if
applicable. If wholly disallowed, the potential earnings effect
would be $28.0 million plus applicable interest. At
June 30, 2003, we cannot reasonably estimate a loss, if
any, associated with this transaction.

Based on our federal income tax filing for the
calendar year ended December 31, 2002, we have utilized
approximately $7.0 million of the $28.0 million tax benefit
recorded in prior years.

Three Months Ended June 30, 2003 Compared
to Three Months Ended June 30, 2002

The following table presents the components of
the results of operations during the three months ended
June 30, 2003 and 2002:

|                                                                           |                                                   |                |             |            |   |   |            |           | 
|-------------------------------------------------------------------------- | ------------------------------------------------- | -------------- | ----------- | ---------- | - | - | ---------- | --------- | 
|                                                                           |                                                   |               
|                                                                           |                                                   | Three Months  
|                                                                           |                                                   | Ended June 30,
|                                                                           |                                                   |               
|                                                                           |                                                   | 2003           |             | 2002      
|                                                                           |                                                   |                |             |           
|Net interest income                                                        |                                                   | $              | 12,302,601  |            |   | $ | 10,770,005 |          
|Provision for losses on receivables                                        |                                                   |                | (6,371,432  | )          |   |   | (1,186,336 | )        
|                                                                           |                                                   |                |             |            |   |   |            |          
|                                                                           | Net interest spread                               |                |             | 5,931,169  |   |   |            | 9,583,669 | 
|Net non-interest expense                                                   |                                                   |                | (10,495,335 | )          |   |   | (7,296,858 | )        
|Capitalized deferred policy acquisition costs,
    net of amortization     |                                                   |                | (3,787,386  | )          |   |   | 2,017,238  |          
|                                                                           |                                                   |                |             |            |   |   |            |          
|                                                                           | Income (loss) before gains (losses) on
    assets |                |             | (8,351,552 | ) |   |            | 4,304,049 | 
|Net losses on investments and receivables                                  |                                                   |                | (454,140    | )          |   |   | (5,385,246 | )        
|Provision for losses on real estate held for sale                          |                                                   |                | (564,859    | )          |   |   | 319,770    |          
|Gains on sales of real estate                                              |                                                   |                | 821,799     |            |   |   | 1,293,887  |          
|                                                                           |                                                   |                |             |            |   |   |            |          
|Income (loss) before income taxes and
    minority interest                |                                                   |                | (8,548,752  | )          |   |   | 532,460    |          
|Income tax benefit (provision)                                             |                                                   |                | 2,929,532   |            |   |   | (166,142   | )        
|                                                                           |                                                   |                |             |            |   |   |            |          
|Income (loss) before minority interest                                     |                                                   |                | (5,619,220  | )          |   |   | 366,318    |          
|Income of consolidated subsidiaries allocated to
    minority stockholders |                                                   |                | (279,263    | )          |   |   |           |          
|                                                                           |                                                   |                |             |            |   |   |            |          
|Net income (loss)                                                          |                                                   |                | (5,898,483  | )          |   |   | 366,318    |          
|Preferred stock dividends                                                  |                                                   |                | (2,170,402  | )          |   |   | (1,268,639 | )        
|                                                                           |                                                   |                |             |            |   |   |            |          
|Loss applicable to common stockholders                                     |                                                   | $              | (8,068,885  | )          |   | $ | (902,321   | )        
|                                                                           |                                                   |                |             |            |   |   |            |          

22



---



##### Table of Contents



Net Interest Income

The following table presents the components of
net interest income during the during the three months ended
June 30, 2003 and 2002:

|                    |                                                |                        |            |            |            |   |            |            |            | 
|------------------- | ---------------------------------------------- | ---------------------- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                    |                                                |                       
|                    |                                                | Three Months          
|                    |                                                | Ended June 30,        
|                    |                                                |                       
|                    |                                                | 2003                   |            | 2002      
|                    |                                                |                        |            |           
|Interest income:    |                                                |                        |            |            |            |   |            |           
|                    | Interest on receivables                        |                        | $          | 21,281,257 |            |   | $          | 14,334,051 |           
|                    | Earned discount on receivables and investments |                        |            | 8,072,408  |            |   |            | 9,435,537  |           
|                    | Other investment income                        |                        |            | 9,095,979  |            |   |            | 7,928,615  |           
|                    |                                                |                        |            |            |            |   |            |           
|                    |                                                | Total interest income  |            |            | 38,449,644 |   |            |            | 31,698,203 | 
|                    |                                                |                        |            |            |            |   |            |           
|Interest expense:   |                                                |                        |            |            |            |   |            |           
|                    | Insurance policy and annuity benefits          |                        |            | 16,644,051 |            |   |            | 13,010,834 |           
|                    | Interest, net                                  |                        |            | 9,502,992  |            |   |            | 7,917,364  |           
|                    |                                                |                        |            |            |            |   |            |           
|                    |                                                | Total interest expense |            |            | 26,147,043 |   |            |            | 20,928,198 | 
|                    |                                                |                        |            |            |            |   |            |           
|Net interest income |                                                | $                      | 12,302,601 |            |            | $ | 10,770,005 |           
|                    |                                                |                        |            |            |            |   |            |           

The increase in interest income for the three
months ended June 30, 2003 as compared to the three months
ended June 30, 2002 was primarily due to an increase in our
commercial lending activities. Commercial loans, which have
higher yields than our residential portfolio, accounted for
$553.0 million, or 67.9%, of the outstanding principal
balance of real estate contracts and mortgage notes receivable
at June 30, 2003, compared to $257.2 million, or
47.0%, at June 30, 2002.

The increase in our interest income as a result
of our commercial lending activities have been partially offset
by a decrease in the yields on our investment portfolio due to a
decrease in the 5-year constant maturity U.S. Treasury rate,
which is similar to the average maturity of our fixed income
portfolio. During the twelve-month period ended June 30,
2003, proceeds from the sales and maturities of our investment
portfolio totaled $673.5 million. As proceeds from the
sales and maturities of investments were reinvested back into a
lower interest rate market, the overall portfolio yield was
reduced. Additionally, our recent focus on improving the average
credit rating of our investment portfolio has also contributed
to the reduction in our investment yields. At June 30,
2003, approximately 84.7% of our portfolio was rated either AAA
or AA compared to 60.0% at June 30, 2002. The higher credit
rating is expected to result in a lower effective yield, but
also reduced credit risk.

The increase in interest expense for the three
months ended June 30, 2003 as compared to the three months
ended June 30, 2002 was primarily due to an increase in the
average balances of debt payable, debenture bonds and life and
annuity reserves. However, the reduction in the interest rate
environment during the last twelve months has allowed us to
borrow funds on our secured line of credit with the Federal Home
Loan Bank of Seattle at lower interest rates. This borrowing
facility has led to a reduction in the current year debt payable
cost of funds. The reduction in the interest rate environment
during the last twelve months has also contributed to the lower
cost of funds on life and annuity reserves.

23



---



##### Table of Contents



Net Non-Interest Expense

The following table presents the components of
net non-interest expense during the three months ended
June 30, 2003 and 2002:

|                      |                                               |                            |   |           |            |  |   |           |           | 
|--------------------- | --------------------------------------------- | -------------------------- | - | --------- | ---------- |  | - | --------- | --------- | 
|                      |                                               |                           
|                      |                                               | Three Months              
|                      |                                               | Ended June 30,            
|                      |                                               |                           
|                      |                                               | 2003                       |   | 2002     
|                      |                                               |                            |   |          
|Non-interest income:  |                                               |                            |   |           |            |  |   |          
|                      | Insurance premiums and annuity considerations |                            | $ | 406,617   |            |  | $ | 422,408   |          
|                      | Servicing income                              |                            |   | 691,313   |            |  |   | 513,533   |          
|                      | Fees, commissions and other income            |                            |   | 1,029,193 |            |  |   | 1,539,235 |          
|                      |                                               |                            |   |           |            |  |   |          
|                      |                                               | Total non-interest income  |   |           | 2,127,123  |  |   |           | 2,475,176 | 
|                      |                                               |                            |   |           |            |  |   |          
|Non-interest expense: |                                               |                            |   |           |            |  |   |          
|                      | Salaries and employee benefits                |                            |   | 5,202,161 |            |  |   | 3,806,811 |          
|                      | Commissions to agents                         |                            |   | 2,339,291 |            |  |   | 2,627,440 |          
|                      | Other operating and underwriting expenses     |                            |   | 5,081,006 |            |  |   | 3,337,783 |          
|                      |                                               |                            |   |           |            |  |   |          
|                      |                                               | Total non-interest expense |   |           | 12,622,458 |  |   |           | 9,772,034 | 
|                      |                                               |                            |   |           |            |  |   |          
|                      |                                               | Net non-interest expense   |   | $         | 10,495,335 |  |   | $         | 7,296,858 | 
|                      |                                               |                            |   |           |            |  |   |          

The decrease in fees, commissions and other
income was due primarily to a decrease in rental and operational
income from properties held for sale or development.

The increase in salaries and employee benefits
was primarily due to a growth in the number of our full time
equivalent employees, which increased from 283 at June 30,
2002 to 323 at June 30, 2003.

The decrease in commissions to agents was due
primarily to a $0.2 million decrease in commissions paid on
annuity business, net of ceding.

The increase in other operating and underwriting
expenses was primarily due to a $0.2 million increase in
recruiting and training expenses, a $0.4 million increase in
audit and legal fees, a $0.5 million reduction in ceding
allowances associated with new annuity business ceded to Summit
under our annuity reinsurance agreement and a $0.4 million
increase in holding costs associated with our properties held
for sale and development.

Amortization of Deferred Policy Acquisition
Costs, Net of Costs Capitalized

Amortization of deferred policy acquisition
costs, net of costs capitalized, is comprised of the
capitalization of expenses incurred to acquire or renew life and
annuity policies, offset by the amortization of previously
capitalized expenses. The following table reflects the
components of the net expense we reported for the three months
ended June 30, 2003 and 2002:

|                                                                           |  |                |            |      |  |   |            |  
|-------------------------------------------------------------------------- |  | -------------- | ---------- | ---- |  | - | ---------- | -
|                                                                           |  |               
|                                                                           |  | Three Months  
|                                                                           |  | Ended June 30,
|                                                                           |  |               
|                                                                           |  | 2003           |            | 2002
|                                                                           |  |                |            |     
|Current period costs capitalized                                           |  | $              | (2,102,800 | )    |  | $ | (1,917,238 | )
|Amortization of previously capitalized expenses                            |  |                | 5,890,186  |      |  |   | (100,000   | )
|                                                                           |  |                |            |      |  |   |            |  
|Net amortization (capitalization) of
    deferred policy acquisition costs |  | $              | 3,787,386  |      |  | $ | (2,017,238 | )
|                                                                           |  |                |            |      |  |   |            |  

According to SFAS No. 97, policy acquisition
costs, such as commissions, are to be deferred and amortized
over the life of a group of policies in relation to the present
value of the estimated future gross profits related to that
group of policies. For purposes of amortizing deferred policy
acquisition costs, the estimated gross profits consist of
estimated future earnings based on investment of policy account
balances less

24



---



##### Table of Contents



estimated future interest to be credited to
account balances, estimated future policy expense charges less
estimated future policy administration expenses and estimated
future surrender charges. These estimated gross profits are to
be based on our best estimate without provision for
adverse deviation. Further, SFAS No. 97 requires that
estimates of expected gross profit used as a basis of deferred
policy acquisition cost amortization are to be evaluated
regularly, and the total amortization recorded to date is to be
adjusted by a charge or credit to the statement of operations if
actual experience or other evidence suggests that earlier
estimates should be revised.


Our future estimated earnings rate on the assets
that support the annuity business over the remaining estimated
life of the annuity business is expected to range from 6.9% to
10.7%. The primary factors that influence the range of future
estimated earnings rate include the asset mix and the
corresponding potential range of yields of the assets that
support the annuity business. Since real estate receivables
represent the highest yielding category, a shift in assets
between real estate receivables and lower yielding fixed income
securities and other receivables supporting the annuity business
can affect the earning rates we realize on the assets that
support the annuity business.

After giving consideration to the asset mix and
corresponding yields realized on the assets supporting the
annuity business, we believe that a future estimated earnings
rate of 10.0% at June 30, 2003 is a reasonable expectation
of the yields to be realized on the assets that support the
annuity business over the estimated remaining life. The future
estimated earnings rate of 10.0% is a reduction from 10.8% that
was estimated as of September 30, 2002. This reduction in
future estimated earnings rate has contributed to an increase in
the amortization of previously capitalized expenses for the
three months ended June 30, 2003 as compared to the three
months ended June 30, 2002. Additionally, during the three
months ended June 30, 2002, the amortization of deferred
policy acquisition costs was affected by lower than expected
surrender rates during 2002. The effects of lower than expected
surrender rates in 2002 (which resulted in lower amortization of
deferred policy acquisition costs) and a reduction in the future
estimated earnings rate that was made during the three months
ended June 30, 2003 (which resulted in an increase in the
amortization of deferred policy acquisition costs) has resulted
in a net increase in amortization during the current period of
approximately $6.0 million when compared to the similar period
last year.

Net Losses on Investments and
Receivables

The following table presents the components of
net losses on investments and receivables during the three
months ended June 30, 2003 and 2002:

|                                          |                                            |                |          |            |   |   |            |            |  
|----------------------------------------- | ------------------------------------------ | -------------- | -------- | ---------- | - | - | ---------- | ---------- | -
|                                          |                                            |               
|                                          |                                            | Three Months  
|                                          |                                            | Ended June 30,
|                                          |                                            |               
|                                          |                                            | 2003           |          | 2002      
|                                          |                                            |                |          |           
|Other than temporary declines in value:   |                                            |                |          |            |   |   |            |           
|                                          | Subordinate and interest only certificates |                | $        | (2,247,585 | ) |   | $          | (3,658,516 | )
|                                          | Equity securities                          |                |          | (15,861    | ) |   |            | (969,729   | )
|                                          | Other securities                           |                |          | (1,549,874 | ) |   |            | (1,485,879 | )
|Realized gains (losses):                  |                                            |                |          |            |   |   |            |           
|                                          | Securities investments                     |                |          | 3,385,657  |   |   |            | 765,929    |  
|                                          | Receivables                                |                |          | (26,477    | ) |   |            |           |  
|                                          | Trading securities                         |                |          |           |   |   |            | (37,051    | )
|                                          |                                            |                |          |            |   |   |            |           
|Net losses on investments and receivables |                                            | $              | (454,140 | )          |   | $ | (5,385,246 | )         
|                                          |                                            |                |          |            |   |   |            |           



| |                                               
| | ----------------------------------------------
| | Subordinate and interest only
    certificates

We hold subordinate (including residuals) and
interest only securities generated from our own securitization
activities. The fair value of these securities, which do not
have established market prices, is estimated using expected
discounted future cash flows. When estimating expected future
cash flows, we

25



---



##### Table of Contents



consider interest rates, estimated prepayment
rates, collateral value, historical default rates and recent
loss severity. During the three months ended June 30, 2003,
we determined that certain securities had other than temporary
declines in value of approximately $0.7 million as the
collateral supporting the securities experienced higher than
expected prepayment rates, loss severity and default rates. In
response to sustained prepayment rates, higher than expected
loss severities and an increase in defaults, we revised our
assumptions of future prepayments, loss severity and default
rates. Changes in these assumptions resulted in an additional
$1.5 million in other than temporary impairments during the
three months ended June 30, 2003.




| |                 
| | ----------------
| | Other securities

During the three months ended June 30, 2003,
we reported approximately $1.5 million in other than
temporary impairments on certain fixed income securities. The
impairments were primarily due to deterioration in the
underlying collateral of certain asset-backed securities,
including $0.8 million in impairments on airline related
asset-backed securities.

Unrealized Losses on Investments

Temporary declines in the fair value of
investments that are classified as
available-for-sale are excluded from earnings and
presented as accumulated other comprehensive income or loss, net
of related income taxes, as a component of stockholders
equity. We regularly monitor our investment portfolio for other
than temporary impairments of our securities. When an other than
temporary decline in value below cost or amortized cost is
identified, the investment is reduced to its fair value, which
becomes the new cost basis of the investment. The amount of
reduction is reported as a realized loss in the statement of
operations. In determining whether the losses are temporary or
other than temporary, we consider (1) the length of time
and extent to which the fair value has been less than cost or
carrying value, (2) the circumstances contributing to the
decline in fair value (including a change in interest rates or
spreads to benchmarks), (3) recent performance of the
security, (4) the financial strength of the issuer, and
(5) our intent and ability to retain the investment for a
period of time sufficient to allow for anticipated recovery.
Additionally, for asset-backed investments, we also consider the
credit rating and determine the amount of credit support
available for the security. At June 30, 2003, our investment
portfolio had approximately $2.0 million in unrealized
losses that were deemed to be temporary. To the extent that any
losses currently deemed temporary are determined to be other
than temporary in the future, the unrealized losses will be
reported as realized losses in future statements of operations.

The following table stratifies the unrealized
losses as of June 30, 2003 by investment category:

|                                      |                                       |                               |           |             |             |  |         |            |            |  
|------------------------------------- | ------------------------------------- | ----------------------------- | --------- | ----------- | ----------- |  | ------- | ---------- | ---------- | -
|                                      |                                       | Carrying                      |           | Unrealized 
|                                      |                                       | Value                         |           | Losses     
|                                      |                                       |                               |           |            
|Fixed income maturities:              |                                       |                               |           |             |             |  |         |           
|                                      | Government-backed bonds               |                               | $         | 40,766,040  |             |  | $       | (121,822   | )         
|                                      | Mortgage- and asset-backed securities |                               |           | 87,560,592  |             |  |         | (1,789,616 | )         
|                                      |                                       |                               |           |             |             |  |         |           
|                                      |                                       | Total fixed income maturities |           |             | 128,326,632 |  |         |            | (1,911,438 | )
|Common stocks                         |                                       |                               | 13,574    |             |             |  | (2,396  | )         
|Preferred stocks                      |                                       |                               | 5,410,800 |             |             |  | (89,200 | )         
|Venture Capital/ Limited Partnerships |                                       |                               | 179,132   |             |             |  | (16,333 | )         
|                                      |                                       |                               |           |             |             |  |         |           
|                                      | Totals                                |                               | $         | 133,930,138 |             |  | $       | (2,019,367 | )         
|                                      |                                       |                               |           |             |             |  |         |           

26



---



##### Table of Contents



The following table stratifies the unrealized
losses as of June 30, 2003 by market sector:

|                                       |                                    |                                             |           |             |            |  |         |            |            |  
|-------------------------------------- | ---------------------------------- | ------------------------------------------- | --------- | ----------- | ---------- |  | ------- | ---------- | ---------- | -
|                                       |                                    | Carrying                                    |           | Unrealized 
|                                       |                                    | Value                                       |           | Losses     
|                                       |                                    |                                             |           |            
|Government-backed bonds:               |                                    |                                             |           |             |            |  |         |           
|                                       | Agency                             |                                             | $         | 40,766,040  |            |  | $       | (121,822   | )         
|                                       |                                    |                                             |           |             |            |  |         |           
|                                       |                                    | Total government-backed bonds               |           |             | 40,766,040 |  |         |            | (121,822   | )
|Mortgage- and asset-backed securities: |                                    |                                             |           |             |            |  |         |           
|                                       | Collateralized mortgage obligation |                                             |           | 69,004,725  |            |  |         | (775,461   | )         
|                                       | Other asset-backed                 |                                             |           | 6,553,419   |            |  |         | (465,459   | )         
|                                       | Home equity                        |                                             |           | 6,272,683   |            |  |         | (391,388   | )         
|                                       | Manufactured housing               |                                             |           | 5,729,765   |            |  |         | (157,308   | )         
|                                       |                                    |                                             |           |             |            |  |         |           
|                                       |                                    | Total mortgage- and asset-backed securities |           |             | 87,560,592 |  |         |            | (1,789,616 | )
|Common stocks                          |                                    |                                             | 13,574    |             |            |  | (2,396  | )         
|Preferred stocks                       |                                    |                                             | 5,410,800 |             |            |  | (89,200 | )         
|Venture Capital/ Limited Partnerships  |                                    |                                             | 179,132   |             |            |  | (16,333 | )         
|                                       |                                    |                                             |           |             |            |  |         |           
|                                       | Totals                             |                                             | $         | 133,930,138 |            |  | $       | (2,019,367 | )         
|                                       |                                    |                                             |           |             |            |  |         |           

The following table stratifies the unrealized
losses as of June 30, 2003 by credit rating:

|                                      |        |          |             |             |  |   |          |            |  
|------------------------------------- | ------ | -------- | ----------- | ----------- |  | - | -------- | ---------- | -
|                                      |        | Carrying |             | Unrealized 
|                                      |        | Value    |             | Losses     
|                                      |        |          |             |            
|AAA                                   |        | $        | 109,770,764 |             |  | $ | (897,283 | )         
|AA                                    |        |          | 3,912,000   |             |  |   | (88,000  | )         
|A                                     |        |          | 6,515,237   |             |  |   | (249,237 | )         
|BBB                                   |        |          | 5,267,848   |             |  |   | (137,068 | )         
|BB                                    |        |          | 5,367,815   |             |  |   | (306,409 | )         
|C                                     |        |          | 2,903,768   |             |  |   | (322,641 | )         
|Common stocks                         |        |          | 13,574      |             |  |   | (2,396   | )         
|Venture Capital/ Limited Partnerships |        |          | 179,132     |             |  |   | (16,333  | )         
|                                      |        |          |             |             |  |   |          |           
|                                      | Totals |          | $           | 133,930,138 |  |   | $        | (2,019,367 | )
|                                      |        |          |             |             |  |   |          |           

Unrealized losses relating to the investment
grade assets (BBB and higher) are generally due to changes in
interest rates, which may include changes in spreads to
benchmarks for a particular sector of the market. To the extent
that unrealized losses in our investment grade portfolio are the
result of issues other than interest rate changes, the
investments are evaluated for other than temporary impairment.
At June 30, 2003, approximately $0.4 million in
unrealized losses in our investment grade assets were due to
investments in airline-related asset-backed securities. In
determining whether these losses were temporary or other than
temporary, the we considered (1) recent performance of the
security, (2) the credit rating of the security,
(3) the amount of credit support available for the
security, (4) circumstances contributing to the decline in
value, (5) the length of time and extent to which the fair
value has been less than cost or carrying value, and
(6) our intent and ability to retain the investment for a
period of time sufficient to allow for anticipated recovery.

27



---



##### Table of Contents



The following table stratifies the unrealized
losses as of June 30, 2003 by trading class:

|           |        |          |             |             |  |   |            |            |  
|---------- | ------ | -------- | ----------- | ----------- |  | - | ---------- | ---------- | -
|           |        | Carrying |             | Unrealized 
|           |        | Value    |             | Losses     
|           |        |          |             |            
|Traded     |        | $        | 133,751,006 |             |  | $ | (2,003,034 | )         
|Non-Traded |        |          | 179,132     |             |  |   | (16,333    | )         
|           |        |          |             |             |  |   |            |           
|           | Totals |          | $           | 133,930,138 |  |   | $          | (2,019,367 | )
|           |        |          |             |             |  |   |            |           

The following table stratifies the unrealized
losses as of June 30, 2003 by length of time the securities
have continuously been in an unrealized loss position:

|                                      |                      |              |   |             |             |  |   |            |            |  
|------------------------------------- | -------------------- | ------------ | - | ----------- | ----------- |  | - | ---------- | ---------- | -
|                                      |                      | Carrying     |   | Unrealized 
|                                      |                      | Value        |   | Losses     
|                                      |                      |              |   |            
|Fixed Income Securities:              |                      |              |   |             |             |  |   |           
|                                      | Investment Grade     |              |   |             |             |  |   |            |           
|                                      |                      | 0-6 months   |   | $           | 113,539,812 |  |   | $          | (1,033,151 | )
|                                      |                      | 7-12 months  |   |             | 2,865,586   |  |   |            | (106,419   | )
|                                      |                      | 25-30 months |   |             | 3,649,651   |  |   |            | (142,818   | )
|                                      | Non-Investment Grade |              |   |             |             |  |   |            |           
|                                      |                      | 0-6 months   |   |             | 8,271,583   |  |   |            | (629,050   | )
|Preferred Stocks:                     |                      |              |   |             |             |  |   |           
|                                      |                      | 0-6 months   |   |             | 3,912,000   |  |   |            | (88,000    | )
|                                      |                      | 7-12 months  |   |             | 1,498,800   |  |   |            | (1,200     | )
|Common Stocks:                        |                      |              |   |             |             |  |   |           
|                                      |                      | 0-6 months   |   |             | 13,574      |  |   |            | (2,396     | )
|Venture Capital/ Limited Partnerships |                      |              |   |             |             |  |   |           
|                                      |                      | 0-6 months   |   |             | 179,132     |  |   |            | (16,333    | )
|                                      |                      |              |   |             |             |  |   |           
|                                      | Total                |              | $ | 133,930,138 |             |  | $ | (2,019,367 | )         
|                                      |                      |              |   |             |             |  |   |           

The maturities of fixed income investments that
are in an unrealized loss position at June 30, 2003 are as
follows:

|                                       |                                                 |          |            |             |  |   |            |            |  
|-------------------------------------- | ----------------------------------------------- | -------- | ---------- | ----------- |  | - | ---------- | ---------- | -
|                                       |                                                 | Carrying |            | Unrealized 
|                                       |                                                 | Value    |            | Losses     
|                                       |                                                 |          |            |            
|Due in one year through five years     |                                                 | $        | 24,320,780 |             |  | $ | (36,621    | )         
|Due after five years through ten years |                                                 |          | 15,237,760 |             |  |   | (85,130    | )         
|Due thereafter                         |                                                 |          | 1,207,500  |             |  |   | (71        | )         
|                                       |                                                 |          |            |             |  |   |            |           
|                                       | Total non-mortgage- and asset-backed securities |          |            | 40,766,040  |  |   |            | (121,822   | )
|Mortgage- and asset-backed securities  |                                                 |          | 87,560,592 |             |  |   | (1,789,616 | )         
|                                       |                                                 |          |            |             |  |   |            |           
|                                       | Total fixed income securities                   |          | $          | 128,326,632 |  |   | $          | (1,911,438 | )
|                                       |                                                 |          |            |             |  |   |            |           

We are authorized by our investment policies to
use financial futures instruments for the purpose of hedging
interest rate risk relative to our securities portfolio or
potential trading situations. In both cases, the futures
transaction is intended to reduce the risk associated with price
movements for a balance sheet asset. In addition, securities may
be sold short (the sale of securities which are not
currently in the portfolio and therefore must be purchased to
close out the sale agreement) as another means of hedging
interest rate risk, to benefit from an anticipated movement in
the financial markets. As of and during the nine months ended
June 30, 2003, we had no outstanding hedge transactions or
open short sales positions.

28



---



##### Table of Contents



Asset Quality

Servicing, Collection and Delinquency
Experience

The principal amount of our commercial loans (as
a percentage of total outstanding commercial loans) that were in
arrears for more than 90 days as of the following dates
were as follows:

|                   |  |            |             |            |  |            |             |  |  |  |       |  
|------------------ |  | ---------- | ----------- | ---------- |  | ---------- | ----------- |  |  |  | ----- | -
|                   |  | Total      |             | Commercial |  |           
|                   |  | Commercial |             | Loans in   |  | Percentage
|                   |  | Loans      |             | Arrears    |  | in Arrears
|                   |  |            |             |            |  |           
|June 30, 2003      |  | $          | 553,001,132 |            |  | $          | 108,275,047 |  |  |  | 19.58 | %
|September 30, 2002 |  | $          | 353,794,571 |            |  | $          | 26,349,403  |  |  |  | 7.45  | %
|                  
|June 30, 2002      |  | $          | 257,211,588 |            |  | $          | 7,402,330   |  |  |  | 2.88  | %
|September 30, 2001 |  | $          | 128,259,529 |            |  | $          | 5,742,560   |  |  |  | 4.48  | %

In addition to the amounts included in the table
above at June 30, 2003, there were approximately
$5.0 million in additional delinquent loans that we had
serious doubts that the borrowers had the ability to comply with
present loan repayment terms, and therefore may become
90 days delinquent. As of June 30, 2003, these loans
accounted for less than 1.0% of the total outstanding commercial
loans, but were not included in the table above because they
were less than 90 days delinquent. During the nine months
ended June 30, 2003, ten new delinquencies with principal
balances of approximately $95.4 million contributed to the
increase in delinquencies since September 30, 2002.

The following is information regarding the five
largest delinquent commercial loans at June 30, 2003:

|           |  |              |            |              |  |           |            |          |  |             |            |          |  |               |           |              |  |            |           |           |  |   |            |  |  |   |            |  |  |  |            |  |  |  |           |  |  |   |         | 
|---------- |  | ------------ | ---------- | ------------ |  | --------- | ---------- | -------- |  | ----------- | ---------- | -------- |  | ------------- | --------- | ------------ |  | ---------- | --------- | --------- |  | - | ---------- |  |  | - | ---------- |  |  |  | ---------- |  |  |  | --------- |  |  | - | ------- | 
|           |  |              |            |              |  |           |            |          |  |             |            |          |  | Estimated Net |           |              |  |            |           |          
|           |  |              |            |              |  |           |            |          |  | Fees and    |            |          |  | Realizable    |           |              |  | Delinquent |           |          
|Commercial |  | Date of      |            | Initial Loan |  | Principal |            | Accrued  |  | Servicer    |            | Carrying |  | Value of      |           | Date of Last |  | Payment    |           | Allocated
|Loan       |  | Initial Loan |            | Amount       |  | Balance   |            | Interest |  | Advances(1) |            | Value    |  | Collateral    |           | Appraisal    |  | Date       |           | Reserve  
|           |  |              |            |              |  |           |            |          |  |             |            |          |  |               |           |              |  |            |           |          
|A          |  |              | 5/8/2002   |              |  | $         | 15,000,000 |          |  | $           | 18,029,925 |          |  | $             | 1,472,444 |              |  | $          | (128,801  | )         |  | $ | 19,373,568 |  |  | $ | 20,460,000 |  |  |  | 5/8/2002   |  |  |  | 1/1/2003  |  |  | $ |        | 
|B          |  |              | 12/30/2002 |              |  |           | 13,779,500 |          |  |             | 13,779,500 |          |  |               | 895,668   |              |  |            | (177,193  | )         |  |   | 14,497,975 |  |  |   | 15,748,000 |  |  |  | 12/10/2002 |  |  |  | 2/1/2003  |  |  |   |        | 
|C          |  |              | 3/29/2002  |              |  |           | 11,775,000 |          |  |             | 11,775,000 |          |  |               | 693,918   |              |  |            | 150,337   |           |  |   | 12,619,255 |  |  |   | 12,560,000 |  |  |  | 3/18/2002  |  |  |  | 7/5/2002  |  |  |   | 59,255  | 
|D          |  |              | 4/1/2002   |              |  |           | 7,000,000  |          |  |             | 7,000,000  |          |  |               | 326,762   |              |  |            | 4,097,890 |           |  |   | 11,424,652 |  |  |   | 10,800,000 |  |  |  | 12/30/2002 |  |  |  | 7/1/2002  |  |  |   | 624,652 | 
|E          |  |              | 8/17/2001  |              |  |           | 9,000,000  |          |  |             | 10,647,487 |          |  |               | 938,839   |              |  |            | (66,326   | )         |  |   | 11,520,000 |  |  |   | 11,520,000 |  |  |  | 5/16/2003  |  |  |  | 12/1/2002 |  |  |   |        | 



---



|    |                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Fees and servicer advances includes late charges,
    discount, amortized exit fees and advances to the servicer for
    property taxes and other servicer advances.

Commercial Loan A  The primary
collateral consists of a first position loan on 11.5 acres of
undeveloped land. This land is the proposed site for two
condominium towers within Seascape Resort in Destin, Florida.
Foreclosure proceedings began April 1, 2003. At
June 30, 2003, we were proceeding with foreclosure action.

Commercial Loan B  The collateral
consists of eleven C-stores, two car washes, a retail strip
mall, an office building and two parcels of improved land,
located in Central Utah and Southwestern Wyoming. Foreclosure
proceedings began May 2, 2003. At June 30, 2003, we
were proceeding with foreclosure action.

Commercial Loan C  The primary
collateral consists of a first position mortgage on an
automobile dealership on 5.5 acres of land in Gurnee, Illinois.
Foreclosure proceedings began October 3, 2002. At
June 30, 2003, we were proceeding with foreclosure action.

Commercial Loan D  The primary
collateral consists of a first position mortgage on 3,139 acres
of land, which includes 19 separate residential development
areas, 3 golf courses, club house and tennis courts. The
borrower filed for bankruptcy on April 1, 2003. At
June 30, 2003, this receivable was in bankruptcy with a
court appointed company managing the operations.

29



---



##### Table of Contents



Commercial Loan E  The primary
collateral consists of a first position mortgage on an office
building on 4.5 acres of land in Scottsdale, Arizona.
Foreclosure proceedings began March 3, 2003. At
June 30, 2003, we were proceeding with foreclosure action.

The estimated net realizable value of the
collateral is estimated at 80% of the estimated market value of
the collateral based on current appraisal/sales information.
Based on our review, to the extent that the carrying value
exceeds the estimated net realizable value, an allowance for
losses is recognized for the amount at which the carrying value
exceeds the estimated net realizable value. To the extent that
the estimated net realizable value exceeds the carrying value,
an allowance for losses is not recognized. We believe that in
the event of foreclosure, proceeds from the sale of the
collateral will be sufficient to satisfy the net carrying value
of the receivables.

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

Our problem loan review committee is composed of
representatives from underwriting, risk management, operations,
commercial lending, legal and property development departments.
The committee meets weekly and reviews all newly defaulted
loans, continuing defaulted loans, loans in foreclosure, loans
in bankruptcy and progress on approved workout plans.

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

|                   |  |                    |             |                   |  |            |            |  |  |  |       |  
|------------------ |  | ------------------ | ----------- | ----------------- |  | ---------- | ---------- |  |  |  | ----- | -
|                   |  |                    |             | Residential and   |  |           
|                   |  | Total Residential  |             | Other Real Estate |  |           
|                   |  | and Other Real     |             | Receivables in    |  | Percentage
|                   |  | Estate Receivables |             | Arrears           |  | in Arrears
|                   |  |                    |             |                   |  |           
|June 30, 2003      |  | $                  | 260,864,219 |                   |  | $          | 29,422,800 |  |  |  | 11.28 | %
|September 30, 2002 |  | $                  | 279,362,588 |                   |  | $          | 26,105,228 |  |  |  | 9.34  | %
|                  
|June 30, 2002      |  | $                  | 290,764,796 |                   |  | $          | 31,777,357 |  |  |  | 10.93 | %
|September 30, 2001 |  | $                  | 317,266,267 |                   |  | $          | 28,396,155 |  |  |  | 8.95  | %

The real estate receivables we acquire are
generally A-, B and C credit receivables. We expect higher
delinquency rates because receivables we purchase or originate
are typically not of the same quality as mortgages that we
originate for sale to agencies such as the Federal National
Mortgage Association (Fannie Mae). We believe that
the economic effects of these higher delinquency rates will be
generally offset by the higher yields expected to be received on
these receivables than those typically received on the
conventional A credit lending markets and the value
of the underlying collateral.

30



---



##### Table of Contents



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

|                   |  |             |             |                   |  |            |            |  |  |  |      |  
|------------------ |  | ----------- | ----------- | ----------------- |  | ---------- | ---------- |  |  |  | ---- | -
|                   |  | Total Other |             | Other Receivables |  | Percentage
|                   |  | Receivables |             | in Arrears        |  | in Arrears
|                   |  |             |             |                   |  |           
|June 30, 2003      |  | $           | 139,536,988 |                   |  | $          | 9,246,403  |  |  |  | 6.63 | %
|September 30, 2002 |  | $           | 128,241,355 |                   |  | $          | 8,435,862  |  |  |  | 6.58 | %
|                  
|June 30, 2002      |  | $           | 159,817,379 |                   |  | $          | 10,531,403 |  |  |  | 6.59 | %
|September 30, 2001 |  | $           | 176,104,766 |                   |  | $          | 8,535,415  |  |  |  | 4.85 | %

Provision and Allowance for Losses on
Receivables

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

|                                                |                                         |                             |            |                            |   |      |            |            |   |   |            |            |   |   |            |            |  
|----------------------------------------------- | --------------------------------------- | --------------------------- | ---------- | -------------------------- | - | ---- | ---------- | ---------- | - | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                                |                                         |                             |            |                           
|                                                |                                         | Three Months Ended June 30, |            | Nine Months Ended June 30,
|                                                |                                         |                             |            |                           
|                                                |                                         | 2003                        |            | 2002                       |   | 2003 |            | 2002      
|                                                |                                         |                             |            |                            |   |      |            |           
|Beginning balance                               |                                         | $                           | 17,432,622 |                            |   | $    | 10,504,114 |            |   | $ | 11,339,002 |            |   | $ | 13,509,977 |           
|Provisions                                      |                                         |                             | 6,371,432  |                            |   |      | 1,186,336  |            |   |   | 15,124,342 |            |   |   | 2,870,557  |           
|Charge offs:                                    |                                         |                             |            |                            |   |      |            |            |   |   |            |            |   |   |            |           
|                                                | Commercial Loans                        |                             |            | (1,982,867                 | ) |      |            |           |   |   |            | (2,346,219 | ) |   |            | (1,960,777 | )
|                                                | Residential and other real estate loans |                             |            | (1,599,175                 | ) |      |            | (1,335,862 | ) |   |            | (3,605,679 | ) |   |            | (4,065,169 | )
|                                                | Leases                                  |                             |            | (189,720                   | ) |      |            |           |   |   |            | (479,154   | ) |   |            |            |  
|                                                | Other receivables                       |                             |            | (112,751                   | ) |      |            |           |   |   |            | (112,751   | ) |   |            |           |  
|                                                |                                         |                             |            |                            |   |      |            |            |   |   |            |            |   |   |            |           
|Ending balance                                  |                                         | $                           | 19,919,541 |                            |   | $    | 10,354,588 |            |   | $ | 19,919,541 |            |   | $ | 10,354,588 |           
|                                                |                                         |                             |            |                            |   |      |            |            |   |   |            |            |   |   |            |           
|Charge offs as a percent of average Receivables |                                         |                             | 0.42       | %                          |   |      | 0.20       | %          |   |   | 0.76       | %          |   |   | 0.93       | %         
|Allowance as a percentage of total Receivables  |                                         |                             | 2.09       | %                          |   |      | 1.46       | %          |   |   | 2.09       | %          |   |   | 1.46       | %         

31



---



##### Table of Contents



An analysis of the allowance for losses on
receivables was as follows:

|                                        |  |               |            |            |  |             |       |   |  |  |        |  
|--------------------------------------- |  | ------------- | ---------- | ---------- |  | ----------- | ----- | - |  |  | ------ | -
|                                        |  |               |            | Allocated  |  | Loan       
|                                        |  | Allocated     |            | Allowance  |  | Category   
|                                        |  | Allowance for |            | as a % of  |  | as a % of  
|                                        |  | Receivable    |            | Receivable |  | Total      
|                                        |  | Losses        |            | Category   |  | Receivables
|                                        |  |               |            |            |  |            
|June 30, 2003                           |  |               |            |            |  |             |       |   |  |  |        |  
|Commercial Loans                        |  | $             | 10,773,395 |            |  |             | 1.95  | % |  |  | 58.00  | %
|Residential and other real estate loans |  |               | 5,269,457  |            |  |             | 2.02  | % |  |  | 27.36  | %
|Leases                                  |  |               | 715,127    |            |  |             | 29.39 | % |  |  | 0.26   | %
|Other receivables                       |  |               | 1,371,040  |            |  |             | 1.00  | % |  |  | 14.38  | %
|Unallocated                             |  |               | 1,790,522  |            |  |             | 0.22  | % |  |  |        |  
|                                        |  |               |            |            |  |             |       |   |  |  |        |  
|                                        |  | $             | 19,919,541 |            |  |             | 2.09  | % |  |  | 100.00 | %
|                                        |  |               |            |            |  |             |       |   |  |  |        |  
|June 30, 2002                           |  |               |            |            |  |             |       |   |  |  |        |  
|Commercial Loans                        |  | $             | 1,901,605  |            |  |             | 0.74  | % |  |  | 36.34  | %
|Residential and other real estate loans |  |               | 6,221,489  |            |  |             | 2.14  | % |  |  | 41.08  | %
|Leases                                  |  |               | 600,730    |            |  |             | 18.19 | % |  |  | 0.47   | %
|Other receivables                       |  |               | 425,216    |            |  |             | 0.27  | % |  |  | 22.11  | %
|Unallocated                             |  |               | 1,205,548  |            |  |             | 0.22  | % |  |  |        |  
|                                        |  |               |            |            |  |             |       |   |  |  |        |  
|                                        |  | $             | 10,354,588 |            |  |             | 1.46  | % |  |  | 100.00 | %
|                                        |  |               |            |            |  |             |       |   |  |  |        |  

The allowance for losses on receivables
represents our estimate of credit losses inherent in the
portfolios as of the balance sheet dates. We perform regular
reviews in order to identify these inherent losses, and to
assess the overall collection probability of the portfolios.
This process provides an allowance that consists of two
components: allocated and unallocated. To arrive at the
allocated component, we combine estimates of the allowance
needed for loans that are evaluated collectively and those that
are evaluated individually.

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

When determining the estimated value of
collateral, we have historically taken into consideration the
most recent third party appraisal and other relevant market
information. When reviewing the most recent third party
appraisal, we consider the type of property, changes in the
economic factors of the region since the most recent appraisal
and the various underlying appraisal assumptions. In-house
licensed appraisers that assist in the commercial origination
process also assist in this review. Furthermore, we may also
perform additional on-site collateral visits to update our
historical assessments and gain additional information. If the
estimated net realizable value of the collateral is less than
the carrying value, an allowance for losses is recognized for
the amount at which the carrying value exceeds the estimated net
realizable value.

During the nine months ended June 30, 2003,
we provided provisions for losses on our commercial loan
portfolio of approximately $10.8 million. The current year
provisions resulted from a review of the most recent appraisals
and other relevant market information on loans that we deemed
impaired during the nine months ended June 30, 2003. Loans
that we considered impaired at June 30, 2003 were
approximately $113.2 million compared to $50.2 million
at September 30, 2002. Of the $113.2 million
considered impaired at June 30, 2003, seven loans with
principal balances of approximately $70.1 million that were
deemed to be impaired became impaired since September 30,
2002.

We establish an allowance for losses on
residential and other real estate receivables, including accrued
interest, inherent in the portfolio at the balance sheet date
based primarily on current delinquencies and recent

32



---



##### Table of Contents



foreclosure and loss experience. The residential
and other real estate receivable portfolio is comprised of a
large group of smaller-balance homogeneous loans that are
collectively evaluated for impairment. In addition to
delinquencies and loss severity experience, we consider the
effectiveness of the residential and other real estate
receivable loan servicing activities. Since 2001, we have
experienced a reduction in foreclosure experience on our
delinquent residential and other real estate receivable
portfolio as a result of an increase in the effectiveness of the
servicing activities. While over 90 day delinquencies have
remained relatively steady, actual foreclosures have decreased
from $20.3 million in 2001 to $19.2 million 2002 to
$7.2 million during the nine months ended June 30,
2003. This reduction in foreclosure experience has resulted in a
reduction in loan losses allocated to the residential and other
real estate receivable portfolio from $6.2 million at
June 30, 2002 to $5.3 million at June 30, 2003.
We consider the allocated allowance of $5.3 million at
June 30, 2003 to represent our estimate of inherent credit
losses within our residential and other real estate receivable
portfolio after giving consideration to the delinquency rates,
loss severity experience and expected default rates.


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

Allowance for Losses on Real Estate Held for
Sale

The following table summarizes changes in our
allowance for losses on real estate held for sale:

|                  |  |                    |           |                   |  |      |           |      |  |   |            |   |  |   |           |  
|----------------- |  | ------------------ | --------- | ----------------- |  | ---- | --------- | ---- |  | - | ---------- | - |  | - | --------- | -
|                  |  |                    |           |                  
|                  |  | Three Months Ended |           | Nine Months Ended
|                  |  | June 30,           |           | June 30,         
|                  |  |                    |           |                  
|                  |  | 2003               |           | 2002              |  | 2003 |           | 2002
|                  |  |                    |           |                   |  |      |           |     
|Beginning balance |  | $                  | 2,680,097 |                   |  | $    | 3,066,042 |      |  | $ | 1,998,448  |   |  | $ | 3,661,247 |  
|Provisions        |  |                    | 564,859   |                   |  |      | (319,770  | )    |  |   | 2,060,199  |   |  |   | (124,121  | )
|Charge-offs       |  |                    | (598,847  | )                 |  |      | (20,897   | )    |  |   | (1,412,538 | ) |  |   | (811,751  | )
|                  |  |                    |           |                   |  |      |           |      |  |   |            |   |  |   |           |  
|Ending balance    |  | $                  | 2,646,109 |                   |  | $    | 2,725,375 |      |  | $ | 2,646,109  |   |  | $ | 2,725,375 |  
|                  |  |                    |           |                   |  |      |           |      |  |   |            |   |  |   |           |  

Real estate held for sale is periodically
evaluated for impairment. Loss provisions for real estate held
for sale are calculated as the difference between the estimated
net realizable value and the carrying value at the measurement
date. The $2.1 million provision for losses during the nine
months ended June 30, 2003 was primarily the result of a
reduction in sales prices on some of our real estate held for
sale portfolio and a $0.8 million provision for losses on
an orchard in Washington that lost its organic status. The $0.8
million provision was based on a new appraisal that we obtained
on the orchard.

Liquidity and Capital Resources

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

Annuities

The annuity and life insurance business is highly
competitive. We compete with other financial institutions,
including ones with greater resources and greater name
recognition. Premium rates, annuity yields

33



---



##### Table of Contents



and commissions to agents are particularly
sensitive to competitive forces. We believe 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 we are unable to effectively
price our annuities, offer competitive commissions and
effectively compete in general for the sale of our annuity
products, our liquidity could be adversely affected.


Our annuity and insurance subsidiary has a
reinsurance agreement with Summit, which became effective
July 1, 1998. Under this agreement, our annuity and life
insurance subsidiary can reinsure with Summit 75% of the risk on
various annuity products. The reinsurance agreement is an
ongoing arrangement with no stated expiration or termination
date, although either party may stop and restart at their
discretion upon providing a 30-day advance written notice.
During the nine months ended June 30, 2003,
$7.5 million of additional annuity premiums were ceded to
Summit under this agreement.

At June 30, 2003, approximately 90% our
assets were held by our annuity and life insurance subsidiary.
The growth in our assets during the nine months ended June 2003
was primarily due to the growth in annuity sales. Future growth
will continue to be dependent upon the successful efforts of our
annuity and life insurance subsidiary to sell annuity products.
We manage our financing activities to match investment
opportunities that are available. Since the sale of annuity
products are interest rate sensitive, we can manage annuity
product sales by pricing the products accordingly. During the
nine months ended June 30, 2003, we offered a more
competitive price on our annuity products than during the nine
months ended June 30, 2002, and therefore experienced an
increase in annuity sales during the current period as compared
to the similar period last year. If we maintain our current
level of annuity sales, our annuity sales are expected to exceed
annuity surrenders, which could lead to a growth in our total
assets and thereby potentially increasing our earnings. To the
extent that annuity sales decline such that annuity surrenders
begin to exceed new annuity sales, we could experience a
reduction in our total assets, thereby potentially reducing our
earnings capacity.

Debt and Equity Securities

Historically, Metropolitan has generally funded
its investing activities through the sales of debentures and
preferred stock. Furthermore, Metropolitan has relied on new
debt offerings to re-finance previously issued debt as it
matures. While Metropolitan maintains sufficient short term
liquidity (generally up to twelve months) to pay maturing
debentures and preferred stock dividends during periods in which
its securities offerings are not available to the public,
Metropolitan does not anticipate that it will generate
sufficient after tax cash earnings that would permit it to fully
pay its maturing debt obligations on a continual basis without
the sale of additional debt securities to re-finance that debt
as it matures. Metropolitans short-term liquidity is
primarily comprised of cash and other assets including
investments and receivables that can be converted to cash
through the sale of those assets. To the extent Metropolitan is
unable to sell additional securities or re-finance debentures as
they mature from another source, and to the extent that existing
short-term liquidity is not sufficient, our business would be
harmed.

Metropolitans investments are typically
offered to the public on a continuous best efforts basis through
a subsidiary of Summit. At June 30, 2003, Metropolitan had
registered for sale up to 6,000,000 shares of Series E-7
preferred stock that carried a $25 issue price for a total
preferred stock offering price of $150.0 million. This
preferred stock registration expired July 31, 2003. On
March 27, 2003, Metropolitan filed with the SEC a
registration statement for the sale of up to $150.0 million
of Series III and III-A Debenture Bonds. This registration
statement is currently under regulatory review.

Our subsidiary, Western Holding, had registered
for sale up to 2,000,000 shares of Series A preferred stock
that carry a $25 issue price for a total preferred stock
offering price of $50.0 million. Effective January 2,
2003, the initial escrow period ended and Western Holding
completed the initial sale of the preferred stock. Shortly after
January 2, 2003, Western Holding commenced its continuous
best efforts offering of the

34



---



##### Table of Contents



preferred stock. As of June 30, 2003,
696,194 shares of Western Holdings preferred stock were
outstanding, which resulted in net proceeds of
$14.9 million to Western Holding. This preferred stock
registration expired July 31, 2003. On June 12, 2003,
Western Holding filed with the SEC a registration statement for
the sale of up to 6,000,000 shares of Series A preferred
stock for a total preferred stock offering price of
$150.0 million. This registration statement is currently
under regulatory review.


Secured Line of Credit

Our annuity and life insurance subsidiary has a
secured line of credit agreement with the Federal Home Loan Bank
of Seattle (FHLB). When an institution becomes a stockholder in
the FHLB, it can borrow from the FHLB at a stock to borrowing
ratio of 1 to 20. At June 30, 2003, our annuity and life
insurance subsidiary had a stock investment in the FHLB of
approximately $7.9 million. The collateral eligible to be
used to secure the borrowing is predefined by the FHLB and
generally consists of high quality collateralized mortgage
obligations. Each type of collateral has a minimum requirement
that ranges from 100% to 125% of borrowings. At June 30,
2003, our annuity and life insurance subsidiary had
$307.8 million in eligible collateral with a market value
of $375.9 million and a borrowing capacity of
$258.5 million, subject to the purchase of approximately
$6.3 million in additional FHLB stock. Approximately
$164.3 million in securities having a market value of
$200.6 million were pledged to collateralize the
outstanding borrowings to the FHLB at June 30, 2003. At
June 30, 2003, our annuity and life insurance subsidiary
had approximately $138.0 million in outstanding borrowings
to the FHLB leaving an unused borrowing capacity of
approximately $120.5 million, subject to the purchase of
approximately $6.3 million in additional FHLB stock. During
the nine months ended June 30, 2003, our annuity and life
insurance subsidiarys outstanding borrowings on the
secured line of credit increased $35.0 million. This
increase accounted for approximately 19% of our net cash
provided by financing activities.

Other Liquidity Sources

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

Capital and Regulatory
Considerations

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

Recently, our annuity and life insurance
subsidiary has maintained adequate levels of capital through
capital contributions from us. Through our annuity and life
insurance subsidiarys holding company, we contributed
$41.4 million of capital to our annuity and life insurance
subsidiary during the nine months ended June 30, 2003.
Additionally, its holding company had registered for sale up to
$50.0 million of Series A preferred stock at
June 30, 2003. As of June 30, 2003, its holding
company had issued 696,194 shares of preferred stock and
received net proceeds of approximately $14.9 million, of
which its holding company used approximately $11.5 million
as capital contributions to our annuity and life insurance
subsidiary. The ability of our annuity and life insurance
subsidiary to generate capital is dependent on our ability to
maintain adequate levels of liquidity permitting us to make
further capital investments in our annuity and life insurance
subsidiary and its holding companys ability to sell
preferred stock, allowing its holding company to make capital
contributions to our annuity and life insurance subsidiary. To
the extent that we or its holding company do not generate
sufficient liquidity permitting us to make further capital
investments in our annuity and life

35



---



##### Table of Contents



insurance subsidiary, our annuity and life
insurance subsidiarys ability to generate capital could be
adversely affected, which in turn could negatively affect our
ability to increase our investments in higher risk-adjusted
assets such as commercial loans, real estate and equity
investments.


Our ability to sell available-for-sale
investments for liquidity purposes is partially affected by the
laws of the state of Washington that limit our annuity and life
insurance subsidiarys investments in real estate related
assets to 65% of its statutory assets. Our annuity and life
insurance subsidiary is restricted from selling non-real estate
related assets if, after the sale, our annuity and life
insurance subsidiarys real estate assets would exceed 65%
of our statutory assets. However, occasionally our annuity and
life insurance subsidiary 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,
our annuity and life insurance subsidiary can acquire qualifying
real estate loans in amounts in excess of the 65% limitation. At
June 30, 2003, our annuity and life insurance subsidiary
had approximately 57% of its statutory admitted assets invested
in real estate related assets that did not qualify as SMMEA
investments.

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

Our insurance subsidiary is subject to regulatory
restrictions on its ability to pay dividends. These restrictions
affect our ability to receive dividends from our insurance
subsidiary. As of June 30, 2003, our insurance
subsidiarys unassigned statutory accumulated earnings,
reduced by any unrealized capital gains, was in a deficit
position, which restricts our insurance subsidiary from paying
dividends. These restrictions could have an adverse effect on
our ability to meet our obligations when due to the extent we
are unable to successfully sell securities or borrow funds from
other sources.

Lending Commitments

We had approximately $69.4 million of
outstanding commitments to extend credit to commercial borrowers
at June 30, 2003.

New Accounting Rules

In October 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which is
effective for fiscal years beginning after December 15,
2001. SFAS No. 144 addresses accounting and reporting of
long-lived assets, except goodwill, that are either held and
used or disposed of through sale or other means. Adoption of
this new standard on October 1, 2002 did not have a
material impact on our financial statements.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity,which
is effective for the first interim period beginning after
June 15, 2003. SFAS No. 150 establishes how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. Management does
not expect the adoption of this new standard on July 1,
2003 to have a material impact on our financial statements.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities, which is effective for the first
fiscal year or interim period beginning after June 15,
2003. FIN No. 46 is a clarification of the application of
Accounting Research Bulletin No. 51, Consolidated Financial
Statements, which addresses the consolidation by business
enterprises of variable interest entities. Management does not
expect the adoption of this new standard on July 1, 2003 to
have a material impact on our financial statements.

36



---



##### Table of Contents






Item 3. Quantitative and Qualitative
Disclosures About Market Risk

We monitor interest sensitive income and expenses
as we manage the objectives for our 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.

We believe there has not been a material change
in our market risk since the end of our last fiscal year.




Item 4. Controls and
Procedures

Our principal executive officer and principal
financial officer have evaluated the effectiveness of our
disclosure controls and procedures, as that term is
defined in Rule 13a-15(e) of the Securities Exchange Act of
1934 (the Exchange Act), as of the end of the
quarterly period covered by this Quarterly Report on
Form 10-Q. Based on their evaluation, the principal
executive officer and principal financial officer concluded that
our disclosure controls and procedures are effective to ensure
that information we are required to disclose in the reports we
file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms, and include controls and procedures
designed to ensure that information required to be disclosed by
us in those reports is accumulated and communicated to our
management, including our principal executive officer and
principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.

In addition, our principal executive officer and
principal financial officer concluded that during the quarter
ended June 30, 2003, there has been no change in our
internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.




PART IIOTHER INFORMATION




Item 6. Exhibits and Reports on
Form 8-K

(a) Exhibits

| |      |  |  |                              
| | ---- |  |  | -----------------------------
| | 31.1 |  |  | Rule 13a-14(a) Certification.
| | 31.2 |  |  | Rule 13a-14(a) Certification.
| | 32.1 |  |  | Section 1350 Certification.  
| | 32.2 |  |  | Section 1350 Certification.  

(b) Reports on Form 8-K



| |      
| | -----
| | None.

37



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on this 14th day of August 2003 on its behalf by
the undersigned, thereunto duly authorized.



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

38



---



##### Table of Contents






EXHIBIT INDEX

| |      |  |  |                              
| | ---- |  |  | -----------------------------
| | 31.1 |  |  | Rule 13a-14(a) Certification.
| | 31.2 |  |  | Rule 13a-14(a) Certification.
| | 32.1 |  |  | Section 1350 Certification.  
| | 32.2 |  |  | Section 1350 Certification.  

39