<PAGE>

                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

         For the quarterly period ended June 30, 2001

                              OR

/ /      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934.

         For the transition period from ____________ to ____________

               Commission file number 001-15595

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

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

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

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

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

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

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

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

         APPLICABLE ONLY TO CORPORATE ISSUERS:

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

         Common "A":  97 shares at July 31, 2001.
         Common "B":   0 shares at April 30, 2001.

<PAGE>

                  METROPOLITAN MORTGAGE & SECURITIES CO., INC.
                                      INDEX

                         PART I - FINANCIAL INFORMATION

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

         Condensed Consolidated Balance Sheets
         As of June 30, 2001 and September 30, 2000 (unaudited) .............. 3

         Condensed Consolidated Statements of Operations
         Nine Months Ended June 30, 2001 and 2000 (unaudited)
         Three Months Ended June 30, 2001 and 2000 (unaudited) ............... 5

         Condensed Consolidated Statements of Comprehensive Income
         Nine Months Ended June 30, 2001 and 2000 (unaudited)
         Three Months Ended June 30, 2001 and 2000 (unaudited) ............... 6

         Condensed Consolidated Statement of Stockholders' Equity
         Nine Months Ended June 30, 2001 (unaudited) ......................... 7

         Condensed Consolidated Statements of Cash Flows
         Nine Months Ended June 30, 2001 and 2000 (unaudited) ................ 8

         Notes to Condensed Consolidated Financial Statements ................ 9


                                       2

<PAGE>

                         PART I - FINANCIAL INFORMATION

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

          METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (unaudited)

<TABLE>
<CAPTION>

                                                                           June 30,              September 30,
                                                                             2001                    2000
                                                                    ---------------------- -----------------------

<S>                                                                                <C>                     <C>
ASSETS
    Cash and cash equivalents                                              $61,922,821             $ 2,664,035
    Investments
       Trading securities, at market                                        57,161,704              61,052,838
       Available-for-sale securities, at market                            290,965,456             204,081,643
       Held-to-maturity securities, at amortized cost (market
          value $0 and $59,045,232)                                                  -              59,415,992
      Accrued interest on investments                                        3,401,002               2,532,995
                                                                        --------------          --------------

          TOTAL CASH AND INVESTMENTS                                       413,450,983             329,747,503
                                                                        --------------          --------------

    Real estate contracts and mortgage notes and other
       receivables, net, including real estate contracts
       and mortgage notes and other receivables held for
       sale of approximately $5,368,000 and $43,979,000                    570,619,441             584,628,899
    Real estate held for sale and development,including
       foreclosed real estate                                               87,858,838              74,144,242
                                                                        --------------          --------------
    Total receivables and real estate assets                               658,478,279             658,773,141
    Less allowance for losses                                              (15,958,179)            (15,050,114)
                                                                        --------------          --------------
    NET RECEIVABLES AND REAL ESTATE ASSETS                                 642,520,100             643,723,027
    ----------------------------------------------------------------------------------------------------------
    Reinsurance receivable                                                 110,189,345             111,378,331
    Deferred acquisition costs, net                                         64,657,902              65,296,489
    Land, building and equipment, net of accumulated
       depreciation                                                         29,005,175              32,514,204
    Mortgage servicing rights, net                                           8,913,434              14,821,575
    Deferred income taxes                                                   20,291,156                       -
    Other assets, net of allowance, including receivable from
       affiliates                                                           41,270,824              55,451,509
                                                                        --------------          --------------
          TOTAL ASSETS                                                  $1,330,298,919          $1,252,932,638
                                                                        ==============          ==============
    ----------------------------------------------------------------------------------------------------------
</TABLE>

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


                                       3

<PAGE>

          METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED BALANCE SHEETS, continued
                                   (unaudited)

<TABLE>
<CAPTION>

                                                                           June 30,              September 30,
                                                                             2001                    2000
<S>                                                                                <C>                     <C>
LIABILITIES
    Life insurance and annuity reserves                                   $947,643,420           $ 886,510,121
    Debenture bonds and accrued interest                                   279,410,474             238,834,850
    Advances under line of credit                                                    -               7,805,520
    Other debt payable                                                      39,827,912              41,706,063
    Accounts payable and accrued expenses                                   24,000,076              14,024,723
    Deferred income taxes                                                            -               5,133,844
    Minority interest in consolidated subsidiaries                           2,283,610               2,059,929
                                                                        --------------           -------------
       TOTAL LIABILITIES                                                 1,293,165,492           1,196,075,050
                                                                        --------------           -------------
STOCKHOLDERS' EQUITY
    Preferred stock, Series A, B, C, D, E
       cumulative with variable rate, $10
       par value, authorized 8,325,000,
       issued 1,490,812 shares and 1,829,108
       shares (liquidation preference
       $52,810,244 and $62,504,429
       respectively)                                                        14,908,123              18,291,083
    Class A common stock-voting, $2,250 par
       value, authorized 222 shares, issued
       97 shares                                                               218,250                 218,250
    Additional paid-in capital                                              25,959,957              32,264,380
    Retained earnings                                                          974,665              17,797,681
    Accumulated other comprehensive loss                                    (4,927,568)            (11,713,806)
                                                                        --------------           -------------
       TOTAL STOCKHOLDERS' EQUITY                                           37,133,427              56,857,588
                                                                        --------------           -------------
       TOTAL LIABILITIES AND STOCKHOLDERS'
          EQUITY                                                        $1,330,298,919          $1,252,932,638
                                                                        ==============          ==============
</TABLE>

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


                                       4

<PAGE>

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

<TABLE>
<CAPTION>

                                                            Three Months Ended                           Nine Months Ended
                                                                 June 30,                                    June 30,
                                                        2001                  2000                  2001                 2000
                                                        ----                  ----                  ----                 ----
<S>                                                       <C>                  <C>                  <C>                  <C>
REVENUES
    Insurance premiums earned                        $   354,287          $    407,225          $  1,109,167         $  1,204,725
    Interest on receivables                           10,178,798            10,821,607            29,517,926           32,989,515
    Earned discount on receivables                     5,184,328             5,004,856            14,923,995           15,946,677
    Other investment income                            7,920,730             8,116,196            23,329,689           21,673,132
    Real estate sales                                  3,374,389            10,610,080            12,677,720           32,187,906
    Fees, commissions, service and other
       income                                          3,605,909             3,448,818            10,484,771            9,688,883
    Investment losses, net                            (1,114,192)          (10,438,381)          (10,191,579)          (9,191,656)
    Receivable gains (losses), net                    (1,650,266)               26,795             1,267,497            9,698,914
                                                    ------------          ------------          ------------         ------------
       TOTAL REVENUES                                 27,853,983            27,997,196            83,119,186          114,198,096
                                                    ------------          ------------          ------------         ------------
EXPENSES
    Insurance policy and annuity benefits             12,657,617            11,222,014            36,622,302           34,894,834
    Interest expense                                   6,563,494             6,979,265            19,079,740           19,400,090
    Cost of real estate sold                           3,324,508            10,657,198            12,439,489           30,684,919
    Provision for losses on real estate assets         3,338,995             3,593,618             8,229,952            8,171,859
    Provision for losses on other assets                  55,065             2,664,197             2,024,999            3,618,775
    Servicing rights valuation                                 -             1,365,343                     -            1,306,958
    Salaries and employee benefits                     5,623,385             8,874,031            18,887,775           24,058,548
    Commissions to agents                              2,366,749             3,440,137             9,126,930            9,261,659
    Other operating and underwriting expenses          6,499,368             3,207,154            17,645,629            7,532,665
    Amortization of deferred acquisition
       costs, net of costs capitalized                   869,141               534,056               853,850            1,798,066
                                                    ------------          ------------          ------------         ------------
       TOTAL EXPENSES                                 41,298,322            52,537,013           124,910,666          140,728,373
                                                    ------------          ------------          ------------         ------------
Loss before income taxes and minority
       interest                                      (13,444,339)          (24,539,817)          (41,791,480)         (26,530,277)
Benefit for income taxes                              18,824,088             8,539,711            28,704,459            9,278,890
                                                    ------------          ------------          ------------         ------------
Income (loss) before minority interest                 5,379,749           (16,000,106)          (13,087,021)         (17,251,387)
(Income) loss of consolidated subsidiaries
    allocated to minority stockholders                  (358,067)              112,458              (223,682)              20,018
                                                    ------------          ------------          ------------         ------------
Net income (loss)                                      5,021,682           (15,887,648)          (13,310,703)         (17,231,369)
Preferred stock dividends                             (1,018,552)           (1,146,487)           (3,311,980)          (3,374,653)
                                                    ------------          ------------          ------------         ------------
INCOME (LOSS) APPLICABLE TO COMMON
    STOCKHOLDERS                                     $ 4,003,130          $(17,034,135)         $(16,622,683)        $(20,606,022)
                                                    ============          ============          ============         ============
Basic and diluted income (loss) per share
    applicable to common stockholders                $    41,269          $   (145,591)         $   (171,368)        $   (164,848)
                                                    ============          ============          ============         ============
Weighted average number of shares of common
    stock outstanding                                         97                   117                    97                  125
                                                    ============          ============          ============         ============
</TABLE>

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


                                       5

<PAGE>

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

<TABLE>
<CAPTION>

                                                             Three Months Ended                          Nine Months Ended
                                                                  June 30,                                   June 30,
                                                        2001                 2000                  2001                 2000
                                                 --------------------- --------------------- --------------------- -----------------
<S>                                                    <C>                   <C>                   <C>                  <C>

    Net income (loss)                               $ 5,021,681          $(15,887,648)       $ (13,310,703)       $ (17,231,369)

    OTHER COMPREHENSIVE INCOME (LOSS):
       Change in unrealized income (loss) on
         investments                                 (1,769,478)          (11,084,753)          10,811,126)         (12,644,185)
       Cumulative effect of accounting change,
         net of tax                                           -                     -             (240,994)                   -
       Less deferred income tax (provision)
         benefit                                        497,219             3,879,880           (3,783,894            4,425,291
                                                   ------------          ------------         ------------         ------------
    Net other comprehensive income (loss)            (1,272,259)           (7,204,873)           6,786,238           (8,218,894)
                                                   ------------          ------------         ------------         ------------
    Comprehensive income (loss)                     $ 3,749,422          $(23,092,521)         $(6,524,465)        $(25,450,263)
                                                   ============          ============         ============         ============
</TABLE>

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


                                       6

<PAGE>

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

<TABLE>
<CAPTION>
                                                                              Accumulated
                                                 Class A       Additional        Other
                                 Preferred        Common        Paid-In      Comprehensive         Retained
                                  Stock           Stock         Capital       Income (Loss)        Earnings            Total
                                  -----           -----         -------       -------------        --------            -----
<S>                                <C>            <C>              <C>              <C>               <C>                <C>

Balance, September 30,
   2000                        $18,291,083      $218,250       $32,264,380    $(11,713,806)      $17,797,681       $56,857,588

Net loss                                                                                         (13,310,703)      (13,310,703)
Net change in
   unrealized losses on
   investments, net of
   taxes                                                                         6,786,238                           6,786,238
Cash dividends, common
   ($2,065 per share)                                                                               (200,333)         (200,333)
Cash dividends,
   preferred (variable
   rate)                                                                                          (3,311,980)       (3,311,980)
Redemption and
   retirement of
   preferred stock              (3,472,160)                     (7,110,717)                                        (10,582,877)
Sale of variable rate
   preferred stock, net             89,200                         806,294                                             895,494
                                ----------      --------       -----------    ------------        ----------       -----------

Balance, June 30, 2001         $14,908,123      $218,250       $25,959,957     $(4,927,568)      $   974,665       $37,133,427
                                ==========      ========       ===========    ============        ==========       ===========
</TABLE>

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


                                       7

<PAGE>

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

<TABLE>
<CAPTION>

                                                                                    Nine Months Ended June 30,
                                                                                  2001                    2000
                                                                             --------------            ------------
<S>                                                                                     <C>                     <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                                                   $ (13,310,703)            $(17,231,369)
      Adjustments to reconcile net loss to net
      cash from operating activities
         Proceeds from sales of trading
         securities                                                             38,276,656               18,444,597
         Proceeds from maturities of trading
         securities                                                              5,044,525                  578,404
         Acquisition of trading securities                                     (40,549,270)             (38,800,599)
         Earned discounts on receivables                                       (14,923,995)             (15,946,677)
         (Gains) losses on investments and
          receivables, net                                                       8,924,082                 (507,258)
         Gains on sales of real estate                                            (238,231)              (1,502,987)
         Provision for losses on real estate assets                              8,229,952                8,171,859
         Provision for losses on other assets                                    2,024,999                3,618,775
         Depreciation and amortization                                           3,953,276                3,679,921
         Minority interests                                                        223,682                  (20,018)
         Deferred income tax benefit                                            (8,703,999)             (10,973,766)
         Changes in assets and liabilities:
           Deferred costs                                                          638,587                  (15,142)
           Life insurance and annuity reserves                                  34,736,887               32,823,855
           Compound and accrued interest on
           debentures and debt payable                                           6,589,796               (3,695,426)
           Other assets                                                         (3,966,250)              12,120,177
           Accrued interest on receivables and
           investments                                                          (2,405,428)              (2,179,997)
           Accounts payable and accrued expenses                                 9,564,117                8,418,618
           Other, net                                                             (504,008)                (120,400)
                                                                             --------------          --------------
               Net cash from (used by) operating
               activities                                                       33,604,675               (3,137,433)
                                                                             --------------          --------------
CASH FLOWS FROM INVESTING ACTIVITIES
    Principal payments on real estate
       contracts and mortgage notes and other
       receivables                                                              94,343,016              135,794,677
    Proceeds from real estate sales                                             12,102,130               24,357,069
    Proceeds from investment maturities                                          8,813,262               13,274,769
    Proceeds from sale of available-for-sale
       securities                                                               74,555,106               11,674,531
    Purchase of available-for-sale securities                                 (110,101,467)             (81,540,232)
    Purchase of held to maturity securities                                              -                 (187,026)
    Proceeds from sale of real estate
       contracts and mortgage notes and other
       receivables                                                             120,927,469              349,656,536
    Acquisition of real estate contracts and
       mortgage notes and other receivables                                   (199,159,432)            (495,227,486)
    Additions to real estate held                                              (12,604,452)              (7,272,460)
    Retained mortgage servicing rights                                          (1,046,116)              (1,417,139)
    Capital expenditures                                                          (549,095)              (8,788,465)
                                                                             --------------          --------------
       NET CASH USED BY INVESTING ACTIVITIES                                   (12,719,579)             (59,675,226)
                                                                             --------------          --------------
CASH FLOWS FROM FINANCING ACTIVITIES
    Increase (decrease) in borrowings                                           (9,302,217)              88,616,391
    Receipts from life and annuity products                                    113,858,387               83,094,001
    Withdrawals on life and annuity products                                   (92,307,083)            (135,024,374)
    Ceding of life and annuity products from
       reinsurers, net                                                           6,034,094               11,003,150
    Repayment of debt payable                                                     (686,630)                (491,891)
    Issuance of debenture bonds                                                 45,201,635               68,133,833
    Issuance of preferred stock                                                    895,494               10,035,982
    Repayment of debenture bonds                                               (11,224,800)             (44,530,037)
    Cash dividends                                                              (3,512,313)              (3,599,986)
    Redemption of preferred stock                                              (10,582,877)              (1,419,345)
    Redemption of common stock                                                           -               (3,212,185)
                                                                             --------------          --------------
       NET CASH FROM FINANCING ACTIVITIES                                       38,373,690               72,605,539
                                                                             --------------          --------------
Net change in cash and cash equivalents                                         59,258,786                9,792,880
Cash and cash equivalents at beginning of period                                 2,664,035               20,406,837
                                                                             --------------          --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                     $61,922,821             $ 30,199,717
                                                                             ==============          ==============

NON CASH INVESTING AND FINANCING ACTIVITIES
  OF COMPANY:
  Real estate acquired through foreclosure                                     $16,373,523              $15,449,418
  Receivables originated to facilitate the
    sale of real estate                                                            575,590                7,830,837
  Transfer of investments from
    held-to-maturity to available-for-sale                                      59,415,992                        -

</TABLE>

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


                                       8

<PAGE>

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

1.  Basis of Presentation

         The accompanying unaudited condensed 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 condensed consolidated financial
statements contain all 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, 2001, the results of
operations for the three and nine month periods ended June 30, 2001 and 2000 and
the cash flows for the nine month periods ended June 30, 2001 and 2000. The
results of operations for the three and nine month periods ended June 30, 2001
and 2000 are not necessarily indicative of the results to be expected for the
full year. These financial statements should be read in conjunction with the
consolidated financial statements including notes thereto included in the
Company's fiscal 2000 Form 10-K, as amended.

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

Recent Accounting Developments
------------------------------

     In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
was issued. SFAS No. 133 established accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It required that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. In June 1999 and 2000, Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of Effective Date of SFAS 133" ("SFAS No. 137") and
Statement of Financial Accounting Standards No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities an amendment of SFAS 133"
("SFAS No. 138") were issued. SFAS No. 137 amends SFAS No. 133 to become
effective for all quarters of fiscal years beginning after June 15, 2000. The
Company implemented SFAS No. 133, as amended, on October 1, 2000. As part of the
implementation, the Company reclassified approximately $59.4 million of
investments, including $0.4 million of unrealized losses, from held-to-maturity
to available-for-sale.

     In December, 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views on applying generally
accepted accounting principles to revenue recognition in financial statements.
On June 26, 2000, the SEC issued SAB 101B to defer the effective date of
implementation of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 31, 1999. The adoption of SAB 101 on July
1, 2001 did not have a material impact on the consolidated financial statements.



                                       9

<PAGE>

     During the third quarter of 2000, the Emerging Issues Task Force issued
EITF 99-20 "Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets" ("EITF 99-20").
This EITF changed the manner in which the Consolidated Group determines whether
a decline in fair value of certain investments is other than temporary. As of
June 30, 2001, the Company had approximately $2.2 million in temporary declines
in fair value (net of tax) of securitization residual interests recorded in
accumulated other comprehensive loss in stockholders' equity. The implementation
of EITF 99-20 on April 1, 2001 did not have a material impact on the
consolidated financial statements.

         On September 29, 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - A
Replacement of FASB Statement No. 125" ("SFAS 140"). SFAS 140 is effective for
transfers occurring after March 31, 2001 and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. The implementation of SFAS 140 did not have a material impact
on the Consolidated Group's results of operations or financial condition.

Securitizations
---------------

         Loan securitizations are generally structured as follows: First, the
Company sells a portfolio of mortgage loans to a special purpose entity (SPE)
which has been established for the limited purpose of buying and reselling
mortgage loans. The SPE then transfers the same mortgage loans to a Real Estate
Mortgage Investment Conduit or Owners Trust (the REMIC or Trust), and the Trust
in turn issues interest-bearing asset-backed securities (the Certificates)
generally in an amount equal to the aggregate principal balance of the mortgage
loans. The Certificates are typically sold at face value and without recourse
except that representations and warranties customary to the mortgage banking
industry are provided by the Company to the Trust. One or more investors
purchase these Certificates for cash. The Trust uses the cash proceeds to pay
the Company the cash portion of the purchase price for the mortgage loans. The
Trust also issues a certificate representing a residual interest in the payments
on the securitized loans.

         At the closing of each securitization, the Company removes the mortgage
loans sold from its consolidated balance sheet and adds to its consolidated
balance sheet the cash received, and any interest in the mortgage loans retained
from the securitizations in the form of certificates, residuals and servicing
asset. The Company allocates its basis in the mortgage loans between the portion
of the mortgage loans sold through the Certificates to outside investors and any
portion retained (certificates, residuals and servicing assets) based on the
relative fair values of those portions on the date of sale. The excess of the
cash received and the assets retained by the Company over the carrying value of
the loans sold, less transaction costs, equals the net gain on sale of mortgage
loans recorded by the Company.

         At September 30, 2000, the Company had approximately $68 million in
securitization prefunding. During the three month period ended December 31,
2000, the Company contributed $68 million of real estate receivables and
recognized gains of approximately $2.8 million. The Company does not anticipate
participating in any mortgage related securitizations during 2001.


                                       10

<PAGE>

Residuals
---------

         Since the Annual Percentage Rate (APR) of the mortgage loans are
greater than the pass-through rate on the certificates, there is more cash
generated from the pool of mortgages than is needed to reduce the non-residual
certificates to zero. A portion of the total excess cash flow is used to (i) pay
the master servicer a servicing fee for the servicing and collection of the
receivables (ii) pay the trustee for services performed, and (iii) cover losses
incurred on defaulted loans. Any remaining cash flow will eventually be passed
through to the Company over the life of the securitization. The excess cash flow
to be passed through to the Company is commonly referred to as the Residual.

         The Company is not aware of an active market for the purchase or sale
of residuals and, accordingly, the Company determines the estimated fair value
of the residuals by discounting the expected cash flows using a discount rate
commensurate with the risks involved. When determining the expected cash flow,
the Company must estimate the future rates of prepayments, defaults, and default
loss severity (the loss realized upon liquidation of collateral from repossessed
loans) as they affect the amount and timing of the estimated cash flows. The
assumptions used for valuing the residual certificates as of June 30, 2001 were
as follows:

                                                  Assumptions
                   Prepayment rates                11% - 20%
                   Default rate                   1.4% - 4.4%
                   Loss severity                   22% - 35%
                   Discount rate                      10%

         The Company may experience changes in the fair value of its residuals,
which are recorded at estimated fair value and accounted for as either "trading"
or "available-for-sale" securities. Changes in the fair value of residuals that
are "trading" are included in earnings. Temporary declines in the fair value of
residuals that are "available-for-sale" are excluded from earnings and reported
as a separate component of shareholders' equity. During the current period, the
Company determined that certain "available-for-sale" residuals had experienced a
deterioration of future expected cash flows. The new expected cash flows, when
discounted at the current yield, were $4.1 million less than the carrying value.
Accordingly, a $4.1 million permanent impairment was recorded in the statement
of operations a loss on investments. The Company will continue to periodically
assess the assumptions used in valuing the cash flows and the related carrying
value of its residuals.

2.  Segment Reporting

         The Company principally operates in three industry segments which
encompass: (1) investing in real estate contracts and mortgage notes receivable,
other receivables and investment securities; (2) insurance and annuity
operations; and (3) property development activities. The insurance segment also
invests a substantial portion of the proceeds from insurance and annuity
operations in real estate contracts and mortgage notes receivables, other
receivables and investment securities. All transactions between segments are
eliminated. The Company allocates certain overhead and operating expenses
amongst its segments.


                                       11

<PAGE>

         Information about the Company's separate business segments and in total
as of and for the nine and three month periods ended June 30, 2001 and 2000 is
as follows:

<TABLE>
<CAPTION>
                                                       As of and for the nine month period ended June 30, 2001
                              ------------------------------------------------------------------------------------------------------
                                                                            Property            Intersegment
                                 Investing              Insurance          Development          Elimination            Total
                              -------------------- --------------------- ------------------- --------------------- -----------------
  <S>                           <C>                         <C>               <C>                 <C>                   <C>
  Revenues                      $14,663,663            $72,100,782         $2,169,733           $(5,814,992)          $83,119,186
  Income (loss)
  from operations               (41,436,242)              (428,210)            72,972                     -           (41,791,480)
  Identifiable
  assets, net                   169,277,017          1,089,120,013         66,646,165             5,255,724         1,330,298,919
  Depreciation and
  amortization                    2,897,176                233,801            822,299                     -             3,953,276
  Capital
  expenditures                      515,576                 33,519                  -                     -               549,095

</TABLE>

<TABLE>
<CAPTION>
                                                        As of and for the three month period ended June 30, 2001
                              ------------------------------------------------------------------------------------------------------
                                                                            Property            Intersegment
                                 Investing              Insurance          Development          Elimination            Total
                              -------------------- --------------------- ------------------- --------------------- -----------------
  <S>                           <C>                         <C>                 <C>                   <C>               <C>
  Revenues                      $(1,748,359)            $30,830,757          $264,269           $(1,492,684)          $27,853,983
  Income (loss)
  from operations               (18,570,227)              5,217,828           (91,940)                    -           (13,444,339)
  Identifiable
  assets, net                   169,277,017           1,089,120,013        66,646,165             5,255,724         1,330,298,919
  Depreciation and
  amortization                    1,893,379                 145,192           554,199                     -             2,592,770
  Capital
  expenditures                      268,998                   6,329                 -                     -               275,327
</TABLE>

<TABLE>
<CAPTION>
                                                         As of and for the nine month period ended June 30, 2000
                              ------------------------------------------------------------------------------------------------------
                                                                            Property            Intersegment
                                 Investing              Insurance          Development          Elimination            Total
                              -------------------- --------------------- ------------------- --------------------- -----------------
  <S>                                <C>                    <C>                  <C>                    <C>                   <C>
  Revenues                      $37,519,181             $76,062,998        $7,527,475           $(6,911,558)         $114,198,096
  Income (loss) from
  operations                    (24,045,519)             (2,213,572)         (271,186)                    -           (26,530,277)
  Identifiable
  assets, net                   344,529,320           1,023,865,788        58,048,035           (33,187,501)        1,393,255,642
  Depreciation and
  amortization                    2,548,264                 248,957           882,700                     -             3,679,921
  Capital
  expenditures                    8,596,073                 192,392                 -                     -             8,788,465

</TABLE>


                                       12

<PAGE>

<TABLE>
<CAPTION>
                                                        As of and for the three month period ended June 30, 2000
                              ------------------------------------------------------------------------------------------------------
                                                                            Property            Intersegment
                                 Investing              Insurance          Development          Elimination            Total
                              -------------------- --------------------- ------------------- --------------------- -----------------
  <S>                                <C>                    <C>                  <C>                    <C>                   <C>
  Revenues                         $(92,840)            $27,728,621        $3,083,693           $(2,722,278)          $27,997,196
  Income (loss)
  from operations               (17,667,870)             (6,774,626)          (97,321)                    -           (24,539,817)
  Identifiable
  assets, net                   344,529,320           1,023,865,788        58,048,035           (33,187,501)        1,393,255,642
  Depreciation and
  amortization                    1,006,597                  85,233           269,900                     -             1,361,730
  Capital
  expenditures                    3,805,366                   4,510                 -                     -             3,809,876
</TABLE>

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 or phrases such as "will continue to
be," "will be," "continue to," "expect to," "anticipates that," "to be," or "can
impact." Management cautions that forward-looking statements are subject to
risks and uncertainties that could cause the Company's actual results to differ
materially from those projected in forward-looking statements.

General

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

         The Company and its subsidiaries principal business activity is
investing in cash flowing assets, consisting of obligations collateralized by
real estate, structured settlements, annuities, lottery prizes, and other
investments ("Receivables"). The Receivables primarily consist of real estate
contracts and promissory notes collateralized by first position liens on real
estate. The Company predominantly invests in Receivables where the borrower or
the collateral does not qualify for conventional financing or the seller


                                       13

<PAGE>

or the buyer chose to use non-conventional financing. This market is commonly
referred to as the non-conventional market. Obligors on the Consolidated Group's
real estate receivables include A-, B and C credit quality obligors. In addition
to investing in existing receivables, the Consolidated Group began originating
non-conventional, A-, B and C credit borrower loans during late fiscal 1996
through Metwest. The Consolidated Group discontinued these originations through
Metwest in January of 2001. Additionally, during the first quarter of fiscal
year 2001, the Consolidated Group discontinued the origination of equipment
leases and does not currently have plans to resume this division.

         In April 2001, Metropolitan participated with certain affiliated
entities in a transaction with Ocwen Financial Corporation (NYSE: OCN) where the
servicing rights to approximately $1.8 billion in securitized mortgages and
owned loans were transferred to Ocwen. Of the total servicing rights
transferred, Metropolitan contributed $1.7 billion in securitized and owned
loans. The transaction resulted in Metropolitan receiving cash for the mortgage
servicing rights, the return of advances previously deposited into the
securitization trusts, a reduction in servicing income from the securitized
loans and a reduction in operating expenses.

         As a result of exiting mortgage originations, equipment leasing and
loan servicing, the Company has reduced its full time equivalent employees from
approximately 630 at June 30, 2000 to approximately 360 at June 30, 2001. The
Company's future business activities will involve investing in cash flowing
assets as well as investments in marketable debt securities, commercial lending,
property development, and other investments. The Company believes that a
re-focus of business activities in these higher yielding assets will result in
an improvement in future net interest income. The foregoing, along with
reductions in non-interest expenses as a result of exiting loan servicing and
certain origination functions, are expected to result in improvements in future
operating results.

Individual & Pool Receivable Acquisition Sources

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

Commercial Loans

     The Company, through Old Standard, originates commercial loans
collateralized by various types of commercial properties. These commercial loans
are generally small to mid-sized loans that are originated for less than $15
million. The Company currently projects continued expansion of the origination
of commercial loans during the remainder of 2001. This projection is in part due
to management's current perception that this market may be inadequately served
by current lenders, who are not flexible in their underwriting and pricing
policies and who are not able to quickly underwrite and close such loans,
particularly in the temporary, bridge and development commercial loan markets.


                                       14

<PAGE>

Loan Sources

         Metwest originated first lien residential mortgage loans, including
both fixed and adjustable interest rate loans. Metwest discontinued its
origination of wholesale and retail loans in January of 2001.

Correspondent Lending Sources

         Beginning in 1997, Metropolitan began acquiring loans through loan
correspondent agreements. Under these agreements, Metropolitan agreed to
purchase loans at a specified yield immediately after their origination, so long
as they complied with Metropolitan's underwriting guidelines. Metropolitan
discontinued originations through this source in January of 2001. Such loans
previously originated through correspondent lending may be insured by a primary
mortgage guarantee insurance policy.

Lottery, Structured Settlement and Annuity Sources

         Metropolitan also negotiates the purchase of Receivables which are not
collateralized by real estate, such as structured settlements, annuities and
lottery prizes. The lottery prizes generally arise out of state operated lottery
games which are typically paid in annual installments to the prize winner. The
structured settlements generally arise out of the settlement of legal disputes
where the prevailing party is awarded a sum of money, payable over a period of
time, generally through the creation of an annuity. Other annuities generally
consist of investments that cannot be cashed in directly with the issuing
insurance company. Metropolitan's source for these investments is generally
private brokers who specialize in these types of Receivables.

Delinquency

        The principal amount of real estate receivables as to which payments
were in arrears more than three months was $19.5 million at June 30, 2001 and
$23.5 million at June 30, 2000.

        The principal amount of other receivables as to which payments were in
arrears more than three months was $8.5 million at June 30, 2001 and $11.2
million at June 30, 2000.

Securitizations

         Loan securitizations are generally structured as follows: First, the
Company sells a portfolio of mortgage loans to a special purpose entity (SPE)
which has been established for the limited purpose of buying and reselling
mortgage loans. The SPE then transfers the same mortgage loans to a Real Estate
Mortgage Investment Conduit or Owners Trust (the REMIC or Trust), and the Trust
in turn issues interest-bearing asset-backed securities (the Certificates)
generally in an amount equal to the aggregate principal balance of the mortgage
loans. The Certificates are typically sold at face value and without recourse
except that representations and warranties customary to the mortgage banking
industry are provided by the Company to the Trust. One or more investors
purchase these Certificates for cash. The Trust uses the cash proceeds to pay
the Company the cash portion of the purchase price for the mortgage loans. The
Trust also issues a certificate representing a residual interest in the payments
on the securitized loans.


                                       15

<PAGE>

         At the closing of each securitization, the Company removes the mortgage
loans sold from its consolidated balance sheet and adds to its consolidated
balance sheet the cash received, and any interest in the mortgage loans retained
from the securitizations in the form of certificates, residuals and servicing
asset. The Company allocates its basis in the mortgage loans between the portion
of the mortgage loans sold through the Certificates to outside investors and any
portion retained (certificates, residuals and servicing assets) based on the
relative fair values of those portions on the date of sale. The excess of the
cash received and the assets retained by the Company over the carrying value of
the loans sold, less transaction costs, equals the net gain on sale of mortgage
loans recorded by the Company.

         At September 30, 2000, the Company had approximately $68 million in
securitization prefunding. During the first quarter of the current year, the
Company contributed $68 million of real estate receivables to fulfill the
September 30, 2000 prefunding balance and recognized gains of approximately $2.8
million. The Company does not anticipate participating in any additional
securitizations during 2001.

Residuals

         Since the Annual Percentage Rate (APR) of the mortgage loans is greater
than the pass-through rate on the certificates, there is more cash generated
from the pool of mortgages than is needed to reduce the non-residual
certificates to zero. A portion of the total excess cash flow is used to (i) pay
the master servicer a servicing fee for the servicing and collection of the
receivables (ii) pay the trustee for services performed, and (iii) cover losses
incurred on defaulted loans. Any remaining cash flow will eventually be passed
through to the Company over the life of the securitization. The excess cash flow
to be passed through to the Company is commonly referred to as the Residual.

         The Company is not aware of an active market for the purchase or sale
of residuals and, accordingly, the Company determines the estimated fair value
of the residuals by discounting the expected cash flows using a discount rate
commensurate with the risks involved. When determining the expected cash flow,
the Company must estimate the future rates of prepayments, defaults, and default
loss severity (the loss realized upon liquidation of collateral from repossessed
loans) as they affect the amount and timing of the estimated cash flows. The
assumptions used for valuing the residual certificates as of June 30, 2001 were
as follows:


                                                   Assumptions
                   Prepayment rates                 11% - 20%
                   Default rate                    1.4% - 4.4%
                   Loss severity                    22% - 35%
                   Discount rate                       10%

         The Company may experience changes in the fair value of its residuals,
which are recorded at estimated fair value and accounted for as either "trading"
or "available-for-sale" securities. Changes in the fair value of residuals that
are "trading" are included in earnings. Temporary declines in the fair value of
residuals that are "available-for-sale" are excluded from earnings and reported
as a separate component of


                                       16

<PAGE>

shareholders' equity. During the current period, the Company determined that
certain "available-for-sale" residuals had experienced a deterioration of future
expected cash flows. The new expected cash flows, when discounted at the current
yield, were $4.1 million less than the carrying value. Accordingly, a $4.1
million permanent impairment was recorded in the statement of operations as loss
on investments. The Company will continue to periodically assess the assumptions
used in valuing the cash flows and the related carrying value of its residuals.

Liquidity and Capital Resources

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

Federal Home Loan Bank of Seattle (FHLB)

         The Company has a secured line of credit agreement with the FHLB
through its subsidiary, WULA. When an institution becomes a stockholder in the
FHLB, it can borrow from the FHLB at a stock to borrowing ratio of 1 to 20. At
June 30, 2001, WULA had a stock investment in the FHLB of approximately $3.0
million, which resulted in a borrowing capacity of approximately $60.9 million.
The collateral eligible to be used to secure the borrowing is predefined by the
FHLB and generally consists of eligible securities and mortgage loans.
Additionally, each type of collateral has a minimum pledge requirement that
ranges from 100% to 125%. At June 30, 2001, WULA had pledged $67.3 million in
eligible collateral with a market value of $65.3 million and a borrowing
potential of $45.8 million. At June 30, 2001 WULA had $22.0 million in
outstanding borrowings leaving an unused borrowing potential of $23.8 million.
In the event that WULA wanted to increase the borrowing capacity of the FHLB
line of credit, it could purchase additional stock or pledge additional eligible
collateral.

Issuance of Annuity and Life Insurance Products

         The Company, through its WULA subsidiary, generates liquidity through
the sale of annuities and to a lesser degree whole life and term insurance. The
Company uses a network of approximately 1400 independent producers to market its
products in 16 states. Currently, the products that WULA offers are targeted to
the middle income senior market. Generally, younger purchasers direct their
savings and investment dollars to mutual funds and/or variable annuities, while
senior citizens tend to be more conservative with their retirement dollars and
may favor fixed annuity products. Nonetheless, Management anticipates that some
younger buyers could be inclined to reallocate their retirement funds if the
stock market continues to be volatile or if the market returns decline.

         The life insurance and annuity business is highly competitive. WULA
competes with other financial institutions including ones with greater resources
and greater name recognition. Premium volumes, annuity crediting rates and
commissions to agents are particularly sensitive to competitive forces. WULA
management believes it is in an advantageous position in this regard because of
its earnings capability through investments in receivables compared to that of
most other life insurance companies. WULA has been assigned a rating of "B+"
("Very Good") by A.M. Best Co., a nationally recognized insurance company rating


                                       17

<PAGE>

organization. Best bases its ratings on a number of complex financial analyses,
the length of time a company has been in business, the nature, quality, and
liquidity of investments in its portfolio, depth and experience of management
and various other factors. Best's ratings are supplied primarily for the benefit
of policyholders and insurance agents.

         WULA prices its new annuity products and renewals in order to achieve a
positive spread between its annuity costs and yields available on Receivable and
other investments while also considering current annuity market rates of
interest and competitive pressures. Flexible and single premium annuities are
offered with surrender charges for periods that vary from one year to ten years.
Management believes that the surrender charges in conjunction with current
pricing policies enable the company to manage its insurance lapse rates and
underlying interest rate risk.

Reverse Repurchase Agreements

         In order to increase liquidity, the Company may sell a group of
securities to a broker-dealer under the provision that the Company will buy them
back by a predetermined date for a specific price. The difference between the
amount the Company received for the securities and the amount the Company will
pay the broker-dealer when buying them back represents the interest. At June 30,
2001, the Company did not have any reverse repurchase agreements outstanding.

Issuance of Debt Securities and Preferred Stock

         As of June 30, 2001, the Company had registered $100,000,000 of Series
III Debenture Bonds. These securities will be offered to the public on a
continuous best efforts basis through April 30, 2002. As of June 30, 2001, the
Company had registered with the Securities Exchange Commission 500,000 shares of
preferred stock that carry a $100 issue price. However, the Company has not
issued any shares of the preferred stock and is currently awaiting regulatory
approval in Washington and Idaho.

         For the nine month period ended June 30, 2001, $510.3 million in funds
provided by the Company's various liquidity sources were used to (1) invest
$323.5 million primarily in receivables, investments and capital expenditures
and (2) fund $127.6 million in debt maturities, life and annuity product
surrenders, redemption of preferred stock, and the payment of dividends.

         For the nine month period ended June 30, 2000, $795.6 million in funds
provided by the Company's various liquidity sources were used to (1) invest
$594.4 million primarily in receivables, investments and capital expenditures
and (2) fund $191.4 million in debt maturities, life and annuity product
surrenders, payment of dividends and operating activities.

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


                                       18

<PAGE>

Results of Operations

Nine Month Period Ended June 30, 2001 Compared to Nine Month Period Ended June
30, 2000.

         The net loss for the nine month period ended June 30, 2001 was $13.3
million on $83.1 million in revenues compared to a net loss of $17.2 million on
$114.2 million in revenues for the nine month period ended June 30, 2000. The
loss before income taxes and minority interest for the nine month period ended
June 30, 2001 was $41.8 million compared to a loss before income taxes and
minority interest of $26.5 million for the nine month period ended June 30,
2000.

         The increase in loss before income taxes and minority interest of $15.3
million was primarily due to:

         o  a decrease in gains on sales of receivables of $8.4 million,
         o  an increase in investment losses of $1.0 million,
         o  a decrease in net interest spread of $4.3 million,
         o  a decrease in net gains on real estate sales of $1.3 million
         o  an increase in salaries and employee benefits, commissions, and
            other operating and underwriting expenses after capitalized
            acquisition costs of $3.9 million.

         These increases in loss were only partially offset by:

         o  a decrease in loss provisions on other assets of $1.6 million,
         o  a decrease in servicing rights valuations of $1.3 million.


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

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

         During the nine month period ended June 30, 2001, the excess of
interest sensitive income over interest sensitive expense was approximately
$13.2 million compared to $17.5 million in the prior year's period. The decrease
between periods is primarily the result of a reduction in earning assets due to
securitization and whole loan sales. Additionally, the average net interest
margin decreased to 1.78% through June 2001 compared to 2.19% through June 2000.


                                       19

<PAGE>


         The Company's future business activities will involve investing in cash
flowing assets as well as investments in marketable debt securities, commercial
lending, property development, and other investments. The Company believes that
a re-focus of business activities in these higher yielding assets will result in
an improvement in future net interest income.

         During the nine month period ended June 30, 2001, the Company reported
a $10.2 million loss on investments. The Company may experience changes in the
fair value of its investments, which are recorded at fair value and accounted
for as either "trading" or "available-for-sale" securities. Changes in the fair
value of investments that are "trading" are included in earnings. Temporary
declines in the fair value of investments that are "available-for-sale" are
excluded from earnings and reported as a separate component of stockholders'
equity. During the nine month period ended June 30, 2001, the Company determined
that certain "available-for-sale" investments had other than temporary declines
in value. The declines in value resulted from a downgrading of certain
securities and a deterioration of expected future cash flows of certain residual
certificates. Additionally, the Company realized a loss on the sale of a certain
investment. Of the $10.7 million loss reported as a result of sales and
permanent impairments, $6.4 million had previously been reported as a temporary
decline in accumulated other comprehensive loss in stockholders' equity.
Additionally, the Company realized gains of $1.6 million on the sale of other
investments that were partially offset by mark to market losses of $1.1 million
on equity and other trading investments.

         Provision for losses on other assets decreased to $2.0 million during
the nine month period ended June 30, 2001 from $3.6 million during the similar
time period ended June 30, 2000. The decrease during the current period was
primarily the result the Company's decision to discontinue lease originations in
2000.

         The following table summarizes changes in the Consolidated Group's
allowance for losses on real estate and other assets for the nine month periods
ended June 30, 2001 and 2000:

                                                2001                 2000
                                             -----------         -----------
Beginning Balance October 1,                 $15,050,114          $9,318,072

Provision for losses                          10,254,951          11,790,634
Charge-offs                                   (9,346,886)         (7,289,749)
                                             -----------         -----------

Ending Balance June 30,                      $15,958,179         $13,818,957
                                             ===========         ===========

         Securitization gains decreased from $9.3 million on $353.5 million of
Receivables securitized for the nine month period ended June 30, 2000 to gains
of $2.8 million on $68.0 million of securitization prefundings during the
current nine month period. The Company does not anticipate participating in any
additional real estate backed securitizations during 2001. Additionally, as a
result of pursuing the sale of the remaining lease receivable portfolio, the
Company recorded a $2 million receivable loss to reduce the carrying value to
market vale.


                                       20

<PAGE>

         The $28.7 million tax benefit for the nine month period ended June 30,
2001 includes a $14 million release of valuation allowance as a result of recent
favorable court rulings. The allowance was related to a $28 million tax benefit,
of which $14 million was recorded in income tax benefits during the fiscal year
ended September 30, 1999, that arose from an investment that held the potential
for significant returns with acceptable risk, which ultimately resulted in a
loss. The valuation release resulted in an effective tax benefit rate of
approximately 69% compared to the historical effective rate of approximately
35%.

         During the nine month period ended June 30, 2001, the Consolidated
Group experienced a $3.9 million increase in salaries and employee benefits and
other operating and underwriting expenses after capitalized acquisition costs in
comparison to the nine month period ended June 30, 2000. The increase resulted
primarily from (i) a decrease in capitalized acquisition costs due to a
reduction in the mortgage lending and contract acquisition operations during the
first quarter of the current year (ii) severance, software and equipment charges
of $3.3 million associated with the termination of certain staff and the
discontinuance of certain loan origination and servicing activities (iii)
participation expenses associated with the completion of certain timeshare sale
and servicing programs during the second quarter of the current year and (iv) an
increase in the amortization of capitalized policy acquisition costs. These
increases were partially offset by a reduction in salaries and other expenses as
the Company has reduced its full time equivalent employees from approximately
630 at June 30, 2000 to approximately 360 at June 30, 2001. The reduction in
full time equivalent employees was the result of the Company's planned exit from
loan servicing and certain loan origination functions.

Three Month Period Ended June 30, 2001 Compared to Three Month Period Ended June
30, 2000.

         The net income for the three month period ended June 30, 2001 was $5.0
million on $27.9 million in revenues compared to a net loss of $15.9 million on
$28.0 million in revenues for the three month period ended June 30, 2000. The
loss before income taxes and minority interest for the three month period ended
June 30, 2001 was $13.4 million compared to a loss before income taxes and
minority interest of $24.5 million for the three month period ended June 30,
2000.

         The decrease in loss before income taxes and minority interest of $11.1
million was primarily due to:

         o  a decrease in investment losses of $9.3 million,
         o  a decrease in loss provisions on other assets of $2.6 million
         o  a decrease in servicing rights valuation of $1.4 million,
         o  an increase in salaries and employee benefits, commissions, and
            other operating and underwriting expenses after capitalized
            acquisition costs of $0.7 million.

         These decreases in loss were partially offset by:

         o  a reduction in net interest spread of $1.7 million,
         o  a reduction in receivable gains of $1.7 million.



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<PAGE>

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

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

         During the three month period ended June 30, 2001, the excess of
interest sensitive income over interest sensitive expense was approximately $4.4
million compared to $6.1 million in the prior year's period. The decrease
between periods is primarily the result of a reduction in earning assets due to
securitization and whole loan sales. Additionally, the average net interest
margin decreased to 1.78% through June 2001 compared to 2.19% through June 2000.

         The Company's future business activities will involve investing in cash
flowing assets as well as investments in marketable debt securities, commercial
lending, property development, and other investments. The Company believes that
a re-focus of business activities in these higher yielding assets will result in
an improvement in future net interest income.

         During the three month period ended June 30, 2001, the Company reported
a $1.1 million loss on investments. The Company may experience changes in the
fair value of its investments, which are recorded at fair value and accounted
for as either "trading" or "available-for-sale" securities. Changes in the fair
value of investments that are "trading" are included in earnings. Temporary
declines in the fair value of investments that are "available-for-sale" are
excluded from earnings and reported as a separate component of stockholders'
equity. During the three month period ended June 30, 2001, the Company
determined that certain "available-for-sale" investments had other than
temporary declines in value. The declines in value resulted from a deterioration
of expected future cash flows of certain residual certificates. Accordingly, the
Company recorded a $2.7 million charge to investment losses. The impairment
charges were partially offset by mark to market gains on equity and other
trading investments of $0.9 million and gains on investment sales of $0.7
million.

         Provision for losses on other assets decreased to $0.1 million during
the nine month period ended June 30, 2001 from $2.7 million during the similar
time period ended June 30, 2000. The decrease during the current period was
primarily the result the Company's decision to discontinue lease originations in
2000.

         The following table summarizes changes in the Consolidated Group's
allowance for losses on real estate and other assets for the three month periods
ended June 30, 2001 and 2000:


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<PAGE>

                                               2001                 2000
                                            -----------       ------------
Beginning Balance April 1,                 $16,300,890          $9,975,961

Provision for losses                         3,394,060           6,257,815
Charge-offs                                 (3,736,771)         (1,214,819)
                                            -----------       ------------

Ending Balance June 30,                    $15,958,179         $15,018,957
                                           ===========         ===========


         As a result of pursuing the sale of the remaining lease receivable
portfolio, the Company recorded a $2 million receivable loss to reduce the
carrying value to market value during the three month period ended June 30,
2001.

         The $18.8 million tax benefit for the three month period ended June 30,
2001 includes a $14 million release of valuation allowance as a result of recent
favorable court rulings. The allowance was related to a $28 million tax benefit,
of which $14 million was recorded in income tax benefits during the fiscal year
ended September 30, 1999, that arose from an investment that held the potential
for significant returns with acceptable risk, which ultimately resulted in a
loss. The valuation release resulted in an effective tax benefit rate of
approximately 140% compared to the historical effective rate of approximately
35%.

         During the three month period ended June 30, 2001, the Consolidated
Group experienced a $0.7 million decrease in salaries and employee benefits and
other operating and underwriting expenses after capitalized acquisition costs in
comparison to the three month period ended June 30, 2000. The decrease in net
expense was primarily the result of a reduction in full time equivalent
employees (FTE's) from approximately 630 at June 30, 2000 to approximately 360
at June 30, 2001. The benefit derived from a reduction in FTE's was partially
offset by severance and equipment charges of $1.1 million associated with the
termination of certain staff related to the discontinuance of loan servicing
activities.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

         During the nine month period ended June 30, 2001, the excess of
interest sensitive income over interest sensitive expense was approximately
$13.2 million compared to $17.5 million in the prior year's period. During


                                       23

<PAGE>

the three month period ended June 30, 2001, the excess of interest sensitive
income over interest sensitive expense was approximately $4.4 million compared
to $6.1 million in the prior year's period. The decrease during the nine and
three month periods was primarily the result of a reduction in earning assets
due to securitization and whole loan sales. Additionally, the average net
interest margin decreased to 1.78% through June 2001 compared to 2.19% through
June 2000.

         The Company's future business activities will involve investing in cash
flowing assets as well as investments in marketable debt securities, commercial
lending, property development, and other investments. The Company believes that
a re-focus of business activities in these higher yielding assets will result in
an improvement in future net interest income.

PART II-OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

     None

(b)  During the quarter ended June 30, 2001, the Registrant filed the following
reports on Form 8-K:

                  Form 8-K dated April 23, 2001, filed April 23, 2001, reporting
         a press release announcing new developments under Item 5, Other Events,
         and Item 7, Financial Statements and Exhibits.

                  Form 8-K dated June 12, 2001, filed June 18, 2001 and amended
         on June 28, 2001, reporting a change in auditors under Item 4, Change
         in Registrant's Certifying Accountant, and Item 7, Financial Statements
         and Exhibits.



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<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on this 13th day of
August, 2001 on its behalf by the undersigned, thereunto duly authorized.

                  METROPOLITAN MORTGAGE & SECURITIES CO., INC.

                  /s/ C. PAUL SANDIFUR, JR.

                  ----------------------------------------------
                  C. Paul Sandifur, Jr.
                  Chairman, President, Chief Executive Officer

                  /s/WILLIAM SNIDER

                  ----------------------------------------------
                  William Snider
                  Chief Financial Officer

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