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United States


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K



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|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|x          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended September 30,
    2002                                                
|          
|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 1-15595

METROPOLITAN MORTGAGE & SECURITIES
CO., INC.

(Exact name of registrant as specified in its
charter)


|                                                                                                                               |  |                                                                               
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------
|Washington
    (State of incorporation)
    601 West First Avenue
    Spokane, WA
    (Address of Principal executive offices) |  | 91-0609840
    (IRS Employer Identification No.)
    99201-5015
    (Zip Code)

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

Securities registered pursuant to
Section 12(b) of the Act:

|                                                                               |  |                                                  
|------------------------------------------------------------------------------ |  | -------------------------------------------------
|                                                                               |  | Name of each exchange                            
|Title of Each Class                                                            |  | on which registered                              
|                                                                               |  |                                                  
|9% Notes due 2004
    Variable Rate Cumulative Preferred Stock,
    Series E-7 |  | Pacific Exchange
    American Stock Exchange, LLC

Securities registered pursuant to
Section 12(g) of the Act:

Variable Rate Cumulative Preferred Stock,
Series C

Variable Rate Cumulative Preferred Stock,
Series D


Variable Rate Cumulative Preferred Stock,
Series E-1


Variable Rate Cumulative Preferred Stock,
Series E-2


Variable Rate Cumulative Preferred Stock,
Series E-3


Variable Rate Cumulative Preferred Stock,
Series E-4


Variable Rate Cumulative Preferred Stock,
Series E-5


Variable Rate Cumulative Preferred Stock,
Series E-6




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(Title of Class)


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 o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.    x

Neither the voting nor non-voting common stock of
the registrant is traded on any exchange, therefore there is no
established market value. The aggregate market value of the
stock cannot be computed by reference to the price at which the
stock was sold, or the average bid and ask price of such common
stock, as of any date within 60 days prior to the date of
filing because there have been no sales of the common stock
within sixty days prior to the date of filing.

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

The number of shares of the Registrants
Class A Common Stock outstanding as of December 15,
2002 was 97.

Documents incorporated by reference:
None



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TABLE OF CONTENTS



|                                                                                      |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                                               
|                                                                                      | Item 1. Business                                                                             
|BUSINESS OVERVIEW                                                                    
|RECEIVABLE INVESTMENTS                                                               
|LIFE INSURANCE AND ANNUITY OPERATIONS                                                
|COMPETITION                                                                          
|REGULATION                                                                           
|                                                                                      | Item 2. Properties                                                                           
|                                                                                      | Item 3. Legal Proceedings                                                                    
|                                                                                      | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                                                              
|                                                                                      | Item 5. Market For The Registrants Common Equity And Related Stockholder Matters            
|                                                                                      | Item 6. Selected Financial Data                                                              
|SELECTED CONSOLIDATED FINANCIAL DATA                                                 
|                                                                                      | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                                                      | Item 7.A. Quantitative And Qualitative Disclosures About Market Risk                         
|                                                                                      | Item 8. Financial Statements And Supplementary Data                                          
|                                                                                      | Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure 
|PART III                                                                             
|                                                                                      | Item 10. Directors And Executive Officers Of the Registrant                                  
|                                                                                      | Item 11. Executive Compensation                                                              
|EXECUTIVE COMPENSATION                                                               
|                                                                                      | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                                                      | Item 13. Certain Relationships and Related Transactions                                      
|PART IV                                                                              
|                                                                                      | Item 14. Controls and Procedures                                                             
|                                                                                      | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.                    
|SIGNATURES                                                                           
|CERTIFICATIONS                                                                       
|EX-12.01 Statement Regarding Computation of Ratios                                   
|EX-21 Subsidiaries of the Registrant                                                 



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PART I






Item 1. Business


ORGANIZATIONAL CHART

(as of September 30, 2002)


The chart below lists Metropolitan Mortgage &
Securities Co., Inc.s (Metropolitan) principal
operating subsidiaries and their ownership (together with
Metropolitan, the Consolidated Group).

(ORG. CHART)

Metropolitan Mortgage & Securities Co.,
Inc.: Parent organization, invests in
Receivables (as defined herein) and other investments, including
real estate development, which are principally funded by
proceeds from Receivable investments, other investments and
securities offerings.

Consumers Group Holding Co.,
Inc.: A holding company, its sole
business activity currently being that of a shareholder of
Consumers Insurance Company.

Consumers Insurance
Company: Inactive property and
casualty insurer.

Western United Holding Company(Western Holding): A
holding company, its sole business activity currently being that
of a shareholder of Western United Life Assurance Company.

Western United Life Assurance Company(Western Life):
Metropolitans largest active subsidiary and the largest
active company within the Consolidated Group, is engaged
primarily in the sale of annuity contracts and investing in
Receivables and other investments. Western Life is licensed to
sell insurance in 16 states, but its sales are primarily
concentrated in the western half of the United States.

Metwest Mortgage Services, Inc.(Metwest): Primarily
performs collection and servicing functions for the Consolidated
Group and others. It is a Federal Housing Administration
(FHA) and U.S. Department of Housing and Urban
Development (HUD) licensed servicer and lender and
is licensed as a Federal National Mortgage Association
(Fannie Mae) seller/servicer.

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The chart below lists Summit Securities,
Inc.s (Summit) principal operating
subsidiaries and their ownership. Summit is one of the
Consolidated Groups affiliates.

(ORGANIZATIONAL CHART)

National Summit
Corp.: Parent company, inactive except
as owner of Summit. C. Paul Sandifur, Jr., President of
Metropolitan, is the controlling shareholder of National Summit
Corp.

Summit Securities,
Inc.: Invests in Receivables (as
defined herein) principally funded by proceeds from Receivable
investments, other investments and securities offerings.

Metropolitan Investment Securities, Inc.(MIS): Broker/dealer in
the business of marketing securities offered by Summit,
Metropolitan and Western Holding, mutual funds, and general
securities.

Summit Property Development,
Inc.: Provides real estate development
services to others, principally to Metropolitan and its
subsidiaries.

Summit Group Holding
Company: Inactive except as owner of
Old Standard Life Insurance Company.

Old Standard Life Insurance Company(Old Standard): Invests in
Receivables and other investments principally funded by proceeds
from Receivable investments and from annuity sales. Old Standard
is licensed to sell insurance products in eight states, but its
sales are primarily concentrated in the states of Idaho and
Oregon.

Old West Annuity & Life Insurance Company(Old West): Invests in
Receivables and other investments principally funded by proceeds
from Receivable investments and from annuity sales. Old West is
licensed to sell insurance products in seven states, but its
sales are primarily concentrated in the states of Arizona,
California, Idaho, Utah and Texas.

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BUSINESS OVERVIEW

General

Metropolitan was established in 1953. Through
growth and acquisitions it has developed into a diversified
financial institution with assets exceeding $1.7 billion.
Its principal subsidiaries are Western Life, an annuity and life
insurance company, and Metwest, a Receivable servicer and loan
originator. The Consolidated Group had approximately 289 full
time equivalent employees at September 30, 2002.

The Consolidated Groups principal business
activity is investing (1) in cash flowing assets,
consisting of obligations collateralized by real estate,
structured settlements, annuities, lottery prizes and other
investments (Receivables) and (2) in
securities, which consist primarily of U.S. Treasury and
government agency obligations and investment grade bonds
(Securities Investment).

The following depicts the distribution of the
Consolidated Groups assets as a percentage of total assets
as of September 30, 2002:

Distribution of Assets as a Percentage of
Total Assets

(PIE CHART)

The real estate Receivables primarily consist of
commercial and residential loans collateralized by first
position liens on real estate. The Consolidated Group invests in
Receivables where the borrower or the collateral does not
qualify for conventional financing or the seller or the buyer
chooses 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.

The Consolidated Group expanded the origination
of commercial real estate loans (Commercial Loans)
during the fiscal years ended September 30, 2002 and 2001
such that approximately 56% of the face value of the real estate
backed Receivables as of September 30, 2002 is of this type
compared to approximately 29% at September 30, 2001. These
loans are evaluated, underwritten and closed by an affiliate,
Old Standard, in accordance with the Consolidated Groups
predefined criteria. Metropolitan and its subsidiaries also
acquire other types of Receivables, including, but not limited
to, lottery prizes, structured settlements and annuities.

In addition to the Consolidated Groups
Receivable investments, Western Life and, to a lesser extent
Metropolitan, invest funds in securities which predominantly
consist of corporate bonds, U.S. Treasury and government agency
obligations, mortgage-backed securities and other securities.
These investments also include subordinate certificates and
residual interests created out of Receivable securitizations.
The Consolidated Group also invests in venture capital
investments.

The Consolidated Group has developed several
funding sources. The primary sources include the issuance of
annuity and life products, the issuance of debt and equity
securities and a collateralized line of credit.

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The Consolidated Groups annuity and life
products are issued by Western Life. It is domiciled in the
state of Washington and sells these products through over 1,700
independent sales representatives in 16 states, primarily in the
western half of the United States. Western Life intends to
expand its operations in other states as opportunities arise.

Western Life has been assigned an A.M. Best
rating of B- (Fair), which is the 8th highest rating. A.M. Best
publishes both a financial strength rating and a financial
performance rating on almost 6,000 life, health, property and
casualty insurance companies. A.M. Bests financial
strength ratings range from A++ (Superior) to F (In Liquidation)
and include 15 separate ratings (not including the S rating for
Suspended). A.M. Best bases its rating on a number
of complex financial ratios, the length of time a company has
been in business, the nature and quality of investments in its
portfolio, depth and experience of management and various other
factors. A.M. Bests ratings are supplied primarily for the
benefit of the policyholders and insurance agents.

A.M. Best defines both the ratings of B and B- as
fair.B (Fair) and B- (Fair) are assigned to
companies that have, on balance, fair balance sheet strength,
operating performance and market profile when compared to the
standards established by the A.M. Best Company. In A.M.
Bests opinion, these companies have an ability to meet
their current obligations to policyholders, but their financial
strength is vulnerable to adverse changes in underwriting and
economic conditions.

On November 14, 2002, A.M. Best informed
Western Life of its decision to assign a 2002 rating of B-
(Fair) with a stable outlook, revised from the 2001 rating of B
(Fair). The 2001 rating of B (Fair) had been revised from the
2000 rating of B+ (Very Good). According to A.M. Best, the
ratings action reflected Western Lifes significant
investment in mortgages, mortgage backed bonds and real estate
relative to capital and surplus and the associated potential
adverse impact on liquidity. A.M. Best also considered the
increased debt levels and operating performance of its parent
organization. Partially offsetting these items were Western
Lifes historic profitability, increase in statutory
capital, positive premium growth pattern and the ability to
retain its core individual annuity line of business, which has
adequate surrender charge protection.

The Consolidated Group anticipates that the
changes in ratings may result in a slight increase in its cost
of funds in addition to a slight increase in surrender rates as
current policies enter their surrender periods. Before the 2001
change in rating, the Consolidated Group changed the focus of
its investment strategy away from acquiring residential real
estate loans for securitization purposes, as it does not intend
to participate in any real estate backed securitizations in the
near future. The Consolidated Group refocused its investment
activity on acquiring and holding both residential and
commercial real estate loans. The change in focus has resulted
in higher yields on the Consolidated Groups investments.
Therefore, the Consolidated Group expects the slight increase in
its cost of funds will be offset by the higher yields obtained
through its new investment strategy.

To support this change in investment strategy and
in response to the rating change, Metropolitan increased its
capital contributions to Western Life during the fiscal year
ended September 30, 2002 through a $27.6 million
purchase of common and preferred stock. Additionally, to further
increase the capital of Western Life, Western Holding has
registered for sale up to $50.0 million of its
Series A preferred stock at September 30, 2002.
However, Western Holding must sell at least 400,000 shares of
the preferred stock to at least 800 qualifying investors before
the offering can be completed. Western Life is also focusing on
issuing liabilities with greater surrender charge protection.
Western Life does not anticipate any further change to its A.M.
Best rating in the coming year.

The Consolidated Group also sells and, through
the services of Summit Property Development, Inc. (Summit
Property Development), an affiliate of Metropolitan,
develops real estate generally acquired through the repossession
of property securing Receivables or in exchange for property
securing Receivables that have been repossessed.

The Consolidated Group provides services to and
receives services from some of its affiliated entities (the
Affiliated Companies) for a fee and engages in
various business transactions with some of these entities. The
Affiliated Companies are National Summit Corp. and its principal
subsidiaries which include Summit,

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Old Standard, Old West, Summit Property
Development, Inc. and MIS. The Consolidated Group is affiliated
with the Affiliated Companies through the common control by C.
Paul Sandifur, Jr. As a result of these relationships, conflicts
of interests may arise between the Consolidated Group and the
Summit group, including conflicts relating to the allocation of
investments and other business opportunities among the
affiliated companies. When allocating investment opportunities
among the Consolidated Group and its affiliates, Metropolitan
considers several factors including each companys
availability of cash, regulatory constraints related to the
particular investment, the size of the investment relative to
each companys asset size and other diversification and
asset/liability management issues. Although Metropolitan
attempts to maximize the profitability of each company, the
actual allocation of investments may at times be subject to
Metropolitans discretion and the actual allocation may not
prove to be in the best interests of the Consolidated Group. See
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS under
Item 13.


Factors Affecting Future Operating
Results

The Private Securities Litigation Reform Act of
1995 (the Act) provides a safe harbor
for companies which make forward-looking statements providing
prospective information. The safe harbor under the
Act relates to protection for companies with respect to
litigation filed on the basis of such forward-looking statements.

Metropolitan wishes to take advantage of the
safe harbor provisions of the Act and is therefore
including this section in its Annual Report on Form 10-K.
The statements contained in this Annual Report, if not
historical, are forward-looking statements and involve risks and
uncertainties which are described below and elsewhere herein
that could cause actual results to differ materially from the
results, financial or otherwise, or other expectations described
in such forward-looking statements. These statements are
identified with the words such as may,
will, expect, intend,
anticipate, believe,
continue, seeks, plans,
variations of those terms or the negative of those terms, or
words of similar meaning. Therefore, forward-looking statements
should not be relied upon as a prediction of actual future
results or occurrences.

Metropolitans future results may be
affected by certain risks and uncertainties including, but not
limited to, the following:

Net income may be insufficient to cover
fixed charges.

Net income of the Consolidated Group in 1999
through 2002 was insufficient to cover fixed charges including
preferred stock dividend requirements. In order to have the
necessary funds to meet its obligations as they become due, the
Consolidated Group will be required to generate additional
earnings, make additional sales of its preferred stock and
debentures, or borrow or obtain funds from other sources. If the
insufficiency in earnings continues, and if the Consolidated
Group is unable to sell a sufficient amount of preferred stock
and debentures or obtain funds from other sources, it may not
have sufficient funds to pay the Consolidated Groups
obligations when due.

Metropolitan may be unable to meet its
financial obligations as they become due.

Metropolitan generates cash flow primarily from
payments received on Receivables, other investments and the sale
of debt and equity securities. Cash flows from the existing
assets and sales of debt and equity securities have been
adequate during the past five years to satisfy the demand for
payment of maturing debentures and to pay preferred stock
dividends. If Metropolitan is unable to successfully sell
additional debentures and preferred stock, it may not be able to
meet its obligations when due.

If insurance subsidiary earnings are
unavailable for dividends and fees, Metropolitan could be
adversely affected.

At September 30, 2002, approximately 87% of
the Consolidated Groups assets were held by its insurance
subsidiary, Western Life. Metropolitan depends, in part, on its
subsidiaries to make cash payments to Metropolitan to meet
Metropolitans payment obligations. Regulations in the
state of Washington define the way in which an insurance
company, such as Western Life, can transfer assets and the
amount of money that

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can be paid out in dividends by the insurance
company. These regulations restrict the payment of cash
dividends to the insurance companys portion of available
surplus funds derived from any realized net profits as computed
in accordance with statutory accounting principles. Furthermore,
the payment of extraordinary dividends, as statutorily defined,
is subject to prior notice to, and review and approval by, the
Washington State Insurance Commissioner. The amount of surplus
funds available for dividends at September 30, 2002 was
approximately $5.6 million. Restrictions on Western
Lifes ability to declare dividends and transfer assets
could have an adverse effect on Metropolitans financial
performance and ability to meet its debt obligations and
preferred stock dividend payments when due.


Insufficient Risk-Based Capital of Western
Life may adversely affect the Consolidated Groups
operations.

Washington State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. If our insurance company
subsidiary, Western Life, is unable to maintain adequate
capital, it may be prevented from making further investments in
higher risk-adjusted assets such as Commercial Loans, real
estate and equity investments. Compliance with the Risk-Based
Capital Model Law requirements is tested annually at calendar
year-end. At the last annual review, at its statutory reporting
period ended December 31, 2001, Western Lifes capital
and surplus levels exceeded the calculated specified
requirements. Recently, Western Life has maintained adequate
levels of capital through the sale of common stock and preferred
stock to Metropolitan. To the extent that Metropolitan does not
maintain adequate levels of liquidity permitting it to make
additional capital investments in Western Life, or to the extent
that Western Holding cannot complete its Series A preferred
stock offering, Westerns ability to maintain specified
amounts of capital could be adversely affected.

The current focus of the Consolidated
Groups resources being allocated to originating Commercial
Loans could lead to losses.

The Consolidated Group focuses its loan
originations on Commercial Loans. Commercial Loans accounted for
approximately $288.1 million, or 81%, and $157.1 million,
or 60%, of the real estate Receivables purchased or originated
by the Consolidated Group in the fiscal years ended
September 30, 2002 and 2001, respectively. The Consolidated
Group expects the percentage of its Receivables that are
Commercial Loans to increase in the near future, but cannot
predict whether it will have the ability or the desire to
originate Commercial Loans in the future, whether such loans
will achieve desirable yields or whether it will be able to
accurately predict Commercial Loan default rates. This potential
decrease in the diversification of the Consolidated Groups
Receivables could lead to losses if the Consolidated
Groups Commercial Loan business is not profitable.

If existing underwriting standards
insufficiently evaluate the risk of losses on Receivables, it
could lead to higher than anticipated losses.

Many of the Receivables purchased by the
Consolidated Group were originated by sellers and other
non-institutional lenders. Therefore, the underwriting standards
used to originate these loans may have been less strict than the
standards typically used by conventional institutional lenders.
Metropolitan uses a variety of procedures to evaluate
Receivables depending on the type of investment. While
Metropolitan tries to minimize the risk of default and the risk
of losses if there is a default, Metropolitans
underwriting procedures may not be effective. If the
underwriting standards incorrectly assess the risk of an
investment, actual losses could be higher than anticipated.

Real estate used as collateral on
Receivables may be inadequate to recover all amounts owed in the
event of default, which could lead to losses for the
Consolidated Group.

Most of the Receivables purchased by the
Consolidated Group are collateralized by real estate to provide
security if a borrower defaults on the borrowers mortgage.
Several factors influence whether the value of the real estate
will be sufficient to cover the value of the Receivables,
including changes in economic conditions, property condition,
property values, zoning, land use, environmental laws and other
legal restrictions, including changes in and restrictions on the
timing and methods of foreclosure. If the market value of the
real estate

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used as collateral is insufficient to cover any
deficiency owed on a Receivable, the Consolidated Groups
business could be harmed.


Falling interest rates could negatively
affect the profitability of the Consolidated Group

In the next 12 months, the Consolidated
Groups gap analysis indicates a positive gap, meaning that
its interest-sensitive assets are expected to reprice before its
interest sensitive liabilities. In a falling interest rate
environment, the net interest income will tend to decrease which
could have a negative impact on the profitability of the
Consolidated Group.

Foreclosure on mortgages could delay or
reduce payments on Receivables, adversely affecting the
liquidity and profitability of the Consolidated
Group.

Foreclosure and other similar proceedings used to
enforce payment of mortgage loans are generally subject to
principles of equity which are designed to relieve the indebted
party from the legal effect of that partys default.
Statutes may limit the right of the Consolidated Group to obtain
a deficiency judgment against the defaulting party after a
foreclosure or sale. The application of any such principle may
lead to a loss or delay in the payment on a certificate in a
securitization in which the Consolidated Group is involved or in
loans held by the Consolidated Group.

If Metropolitan Investment Securities, Inc.
is unable to continue selling our preferred stock and
debentures, our business would be harmed.

The Consolidated Group relies entirely on the
efforts of Metropolitan Investment Securities, Inc.
(MIS), a broker-dealer affiliated with the
Consolidated Group, to sell the Consolidated Groups
preferred stock and debentures. The Consolidated Group does not
maintain any other relationships for the sale of its preferred
stock and debentures other than the relationships it has through
MIS. If MIS is unable to sell, or is prevented from selling, the
Consolidated Groups preferred stock and debentures, the
Consolidated Group may not be able to find a suitable
replacement broker-dealer to sell its investment securities. If
the Consolidated Group is unable to continue selling its
preferred stock and debentures, its business would be harmed.

Higher than anticipated life insurance and
annuity termination rates may decrease earnings.

Higher than anticipated termination rate of
annuity contracts and life insurance policies would tend to
decrease the earnings of Western Life because the insurance
subsidiaries would have to immediately expense the unamortized
deferred policy acquisition costs on those surrendered policies
instead of continuing to amortize those costs over time. The
rate at which annuity contracts and life insurance policies
terminate is affected by several factors, including changes in
interest rates, competition and changes in tax and other
regulations.

Real estate held for development may not be
able to be sold profitably.

The Consolidated Group is engaged in the
development of various real estate properties, including
substantially undeveloped properties. It is possible that one or
more of these properties will not be able to be sold at a price
exceeding the carrying value of the property. Factors such as
local and national trends in commercial property values as well
as local, state and national economic and regulatory trends may
impact the potential sales price for these properties.

If residual and subordinate interests in
securitizations do not perform as anticipated, the Consolidated
Group could have lower than anticipated income.

The Consolidated Group owns subordinated and
residual interests in several securitized loan pools which
generally are in a first loss position relative to
the more senior securities sold to third parties and which carry
a greater risk if loans in the securitizations are not paid or
losses occur. The Consolidated Group values these interests by
discounting the expected cash flows using a discount rate
commensurate with the risks involved. When determining the
expected cash flow, the Consolidated Group must estimate the
future rate of prepayments, defaults and losses of the
securitized Receivables. If those assumptions are inaccurate,
the Consolidated Group will have incorrectly valued these
interests on its balance sheet and may earn less income

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than was anticipated from those assets. In this
regard, the Consolidated Group has previously revised some of
the assumptions, which resulted in losses and may do so in the
future depending on the relationship of the assumptions to
actual events that occur in the future.


The Consolidated Group may be negatively
impacted by some of its equity investments.

The Consolidated Group invests in venture
capital, joint ventures and other related equity investments.
The market price and valuations of these investments may
fluctuate due to market conditions and other conditions over
which the Consolidated Group has no control. If these equity
investments decline in value, the earnings of the Consolidated
Group could be negatively affected. Additionally, these
investments may not have an active trading market and, as a
result, the Consolidated Group may not be able to easily sell
these investments and, if sold, they may not be sold at
favorable prices to the Consolidated Group.

The Consolidated Group purchases some
Receivable that are not secured by tangible assets, which could
lead to losses if borrowers default on those
Receivables.

The Consolidated Group purchases some Receivables
that are not secured by tangible assets, such as annuities,
lottery prizes, structured settlements or other investments. In
these cases, the Consolidated Group does not have a security
interest in a specific asset. It relies instead on a promise to
pay from an insurance company, a state government or other
entity. If the payor does not keep its promise to pay and
defaults, the Consolidated Group will not have the benefit of a
lien on any specific asset on which to foreclose to collect the
Receivable, which could lead to losses.

Environmental conditions and regulation of
property acquired by the Consolidated Group may lead to
losses.

The Consolidated Group acquires properties in the
course of its business, some of which may contain hazardous
waste or other toxic materials. Various federal, state and local
environmental laws, ordinances and regulations hold the owner or
the previous owner of the property liable for the costs of
removal or remediation of hazardous or toxic substances on,
under, in or near the affected property. Historically, the
Consolidated Group has tried to avoid acquiring properties or
Receivables collateralized by properties that may be
contaminated. As a result of its current business, the
Consolidated Group could sustain significant losses due to this
liability.

In addition, the government can place a lien on
environmentally contaminated property to guarantee that the
clean-up costs for that property are paid. In many states, these
liens have priority over the existing mortgage on the property.
The Consolidated Group may be subject to these liens directly,
or indirectly, if it participates in a securitization of
property, or a loan held by the Consolidated Group is securing
the property, or the Consolidated Group has a role in the
day-to-day management of the facility or property. Environmental
assessments to determine whether properties are contaminated are
performed by the Consolidated Group when deemed necessary. Even
when they are performed, they may not insulate the Consolidated
Group from liability for an environmental condition. If the
Consolidated Group is held liable for environmental clean-up
costs, its business could be harmed.

The Consolidated Group may be adversely
affected by competition and conflicts of interests with its
affiliates.

Several companies are affiliated with the
Consolidated Group through common control by C. Paul
Sandifur, Jr. Various officers and directors of these
affiliated companies are also employees of the Consolidated
Group. In addition, the Consolidated Group provides services to
affiliated companies, buys and sells Receivables to and from
affiliated companies and makes loans to or borrows money from
affiliated companies. These factors may lead to conflicts of
interests such as how Receivables are distributed among or
between separate companies, how fees for services are
established and charged, how intercompany sales and purchases of
Receivables are priced and the terms of any intercompany loan.
Old Standard and Old West may compete with the Consolidated
Group for the sale of annuities. Also, the Consolidated Group
may compete with Summit for the sale of securities. If these
conflicts are not resolved favorably to the Consolidated Group,
the performance of the Consolidated Group could be adversely
affected.

8



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RECEIVABLE INVESTMENTS

Real Estate Receivables

Non-Commercial Real Estate Receivable
Acquisition

In general, the non-commercial real estate
Receivables acquired or originated by the Consolidated Group
consist of non-conventional loans. This type of Receivable
possesses characteristics that differ from Receivables
originated in the conventional lending market in that either the
borrower or the property would not qualify for A
credit grade lending or the seller or borrower chose to use
non-conventional financing. For non-conventional loans,
generally the lender (often the seller of the property) will
focus on the quality of the collateral as the ultimate recourse
in the event of the borrowers default and depend less on
the ability of the borrower to repay the loan. Historically, the
majority of the Consolidated Groups real estate
Receivables were acquired from lenders as individual Receivable
acquisitions. See Current Mix of Receivable
Investment Holdings. Metropolitan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.

Metropolitans acquisition strategy is
designed to provide flexible structuring and pricing
alternatives to the real estate Receivable seller, and quick
closing times. Metropolitan believes these factors are key to
Metropolitans ability to attract and purchase Receivables.
In order to enhance its position in this market, Metropolitan
has improved its acquisition strategies and has implemented
flexible and strategic pricing and closing programs.
Metropolitan is exploring other methods and sources for
Receivable acquisitions in order to increase volume, decrease
cost, and enhance its competitive position. There can be no
assurance that any new strategies or programs developed will
achieve these goals.

Metropolitan has established underwriting
criteria for the acquisition of real estate Receivables. The
underwriting guidelines are based on Metropolitans past
experience and are intended to reflect some aspects of
conventional underwriting standards while still allowing for
flexibility to fit the specific characteristics of each
individual transaction. As part of the underwriting process,
Metropolitan considers the borrowers credit profile, the
market value of the collateral, demographic reports and property
profiles. Metropolitans underwriting involves a thorough
understanding of the different types of risk factors and how
these factors relate to the various strengths and weaknesses in
a transaction. There is no predetermined way to arrive at a
decision; each transaction stands on its own merits.

Commercial Loan Originations

The Consolidated Group originates Commercial
Loans secured by various types of commercial properties
including income producing properties, fully developed lots and
land held primarily for residential development. These
Commercial Loans are generally small to mid-sized loans that are
originated for less than $15 million and generally have
short-term balloon payments (approximately two to five years).
The Consolidated Group typically lends at 50-75% loan-to-value
ratios, and may require multiple pieces of collateral and
personal guarantees to secure a particular loan.

The Consolidated Group obtains leads for loans
through independent mortgage brokers. While these independent
mortgage brokers may be involved with the negotiation of terms
on behalf of the borrower, all applications, commitments and
documentation are drafted by the Consolidated Groups
counsel and executed directly with the borrower and guarantor.

Commercial loans originated by the Consolidated
Group are evaluated, underwritten and closed by Old Standard in
accordance with the Consolidated Groups predefined
standards. The Commercial Loans are underwritten by applying
criteria that generally include the following:



| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | evaluating the borrowers and
    guarantors financial statements/information and credit;
|
| |  | obtaining a current, satisfactory appraisal of
    the collateral;                        
|
| |  | making a physical inspection of the property;                                             

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| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | obtaining title insurance;                                                                                                                                
|
| |  | reviewing other factors that affect collateral
    valuation such as environmental reports, structural inspections,
    zoning and entitlement status; and
|
| |  | an analysis of demographic factors.                                                                                                                       

The sum of the underwriting evaluation and the
borrowers alternative financing options affect the
interest rate and loan-to-value ratio that the Consolidated
Group will require. In a circumstance where the borrower has
limited financing options due primarily to time constraints, the
Consolidated Group has the opportunity to charge higher rates at
lower loan-to-values than the risk might otherwise require. The
Consolidated Groups ability to be more responsive than the
competition to time-sensitive opportunities has been key to its
ability to capitalize on these circumstances that provide higher
returns for lower risk on some loans.

During fiscal years 2002 and 2001, Commercial
Loans accounted for approximately 81% and 60%, respectively, of
new real estate Receivable acquisitions and originations. The
expansion was in part due to managements perception that
this market may be inadequately served by current lenders, who
management believes 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.

Other Receivables

Metropolitan also negotiates the purchase of
Receivables which are not collateralized by real estate,
including 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 which cannot be immediately converted to
cash directly with the issuing insurance company.
Metropolitans source for these investments is generally
private brokers who specialize in these types of Receivables.

In the case of lottery prizes, the underwriting
guidelines generally include a review of the documents providing
proof of the prize and a review of the credit rating of the
state lottery commission, insurance company or other entity
making the lottery prize payments. Where the lottery prize is
from a state run lottery, the underwriting guidelines generally
include a confirmation with the respective lottery commission of
the prize winners right to sell the prize and
acknowledgment from the lottery commission of their receipt of
notice of the sale. In many states, the sale of a state lottery
prize requires that the winner obtain a court order permitting
the sale. In those states, Metropolitan requires a certified
copy of the court order.

In the case of annuity purchases,
Metropolitans underwriting guidelines generally include a
review of the annuity policy and review of the sellers
credit report. Upon submission of the file, the most current
credit rating of the annuity issuer will be obtained.
Furthermore, Metropolitan will conduct a Uniform Commercial Code
search on the annuitant in each state or county, as applicable,
where the annuitant resided over the last five years and where
the annuity issuer is located in order to ensure that no prior
liens exist on the structured settlement payments.

Yield and Discount Considerations

Metropolitan negotiates all Receivable
acquisitions at prices calculated to provide a desired yield.
Often, the negotiations result in a purchase price less than the
Receivables unpaid balance. The difference between the
unpaid balance and the purchase price is the
discount. The amount of the discount will vary in
any given transaction depending on the Consolidated Groups
yield requirements and the existing note rate at the time of the
purchase. Yield requirements are established in light of capital
costs, market conditions, the characteristics of particular
classes or types of Receivables and the risk of default by the
Receivable payor.

A greater effective yield can also be achieved
through negotiating amendments to Receivable agreements. These
amendments may involve adjusting the interest rate and/or
monthly payments, extension of financing in

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lieu of a required balloon payment or other
adjustments. As a result of these amendments, the cash flow may
be extended, maintained or accelerated. Acceleration increases
the yield realized on a Receivable purchased at a discount from
its face value through accelerating recognition of the discount.


For commercial development loans, the
Consolidated Group occasionally negotiates exit fee agreements
with the borrower. To the extent the exit fees do not result in
an overall yield to the Consolidated Group that is greater than
prevailing market rates after adjusting for the risk, the
transaction is accounted for as a loan. If the transaction
results in a yield that is greater than the prevailing market
rates after adjusting for the risk, the transaction is treated
as a loan if the exit fee is less than 50% of the expected
residual profits from the development and if the borrower has an
equity investment, substantial to the project, that is not
funded by the Consolidated Group. If the transaction meets the
requirements to be accounted for as a loan, the exit fee is
amortized into income over the estimated life of the loan using
the level yield method.




LIFE INSURANCE AND ANNUITY
OPERATIONS

Introduction

One of the Consolidated Groups principal
subsidiaries is Western Life. Western Life was incorporated in
Washington State in 1963. As of September 30, 2002, Western
Life had approximately $1.6 billion in assets before any
elimination of assets for consolidation purposes.

Western Life markets its annuity and life
insurance products through over 1,700 independent sales
representatives under contract. Based on first year and single
annuity premiums received in calendar year 2001, approximately
23% of sales were generated by ten brokers or groups of brokers,
with the highest single broker accounting for approximately 5%
of sales. These representatives may also sell life insurance
and/or annuity products for other companies. Western Life is
licensed as an insurer in the States of Alaska, Arizona, Hawaii,
Idaho, Indiana, Montana, Nebraska, Nevada, North Dakota,
Oklahoma, Oregon, South Dakota, Texas, Utah, Washington, and
Wyoming. During the calendar year ended December 31, 2001,
approximately 91% of Western Lifes deferred annuity
business was produced in the states of Idaho, Montana, Oregon,
Texas, Utah and Washington. Based on the latest data available,
during calendar year 2001, Western Lifes deferred annuity
market share in these six states was approximately 1.2%.

Management intends to expand the operations of
Western Life into other states as opportunities arise, which may
include the acquisition of other existing insurance companies.
Western Life currently has an insurance license application
pending in the state of New Mexico.

Western Life is a member of the Insurance Market
Standards Association, which is an association established to
promote ethical insurance marketing standards among its members.
Western Life is also a member of the Federal Home Loan Bank of
Seattle.

Western Life is required by the laws of the state
of Washington to limit its investment in real estate assets to
65% of its statutory assets. The balance of Western Lifes
investments are principally invested in government and
investment-grade securities, but may be invested in a variety of
other areas as permitted by applicable insurance regulations.
See MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Securities
Investments and REGULATION.

Annuities

Western Life has actively marketed single and
flexible premium deferred annuities since 1980. Western Life
offers flexible and single premium annuities with surrender
charges for periods varying from one year to ten years. During
the past three calendar years, nearly 99% of its direct premiums
were derived from annuity sales. Western Life prices its new
annuity products and renewals in order to achieve a positive
spread between its annuity costs and available investments,
while also considering current annuity market rates of interest
and competitive pressures.

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A deferred annuity is a contract that allows an
investor to accumulate payments to the issuing company and have
them grow with interest on a tax-deferred basis. That
accumulation is then used to provide periodic payments at some
future date. In a single premium deferred annuity, the annuity
contract is purchased with the payment of one lump sum when the
contract is issued. A flexible premium deferred annuity allows
the owner to make continual payments into the contract. Under
both types of contracts, interest on each payment is accumulated
from the date the payment is received.

Western Lifes annuity products are targeted
primarily toward todays senior population. Fixed annuities
are designed for older consumers looking for a predictable
payment structure that combines insurance and accumulation
attributes in a single product. As of September 30, 2002,
policyholders aged 61 or older accounted for approximately 80%
of Western Lifes annuity account values.

Insurance policy and annuity benefits primarily
consist of interest that is credited on outstanding policies at
the rates of return specified in the policy. Upon the issuance
of an annuity or an insurance policy, these rates of return are
guaranteed for a limited number of years. Thereafter, subject to
any guaranteed rate of return specified in the insurance policy
or annuity, these rates of return may be adjusted in Western
Lifes discretion. Additionally, insurance and annuity
policy benefits also include payments of death claims on
mortality contracts. During the past three calendar years, these
mortality contracts have accounted for less than 1% of Western
Lifes direct premiums with a portion of the life risk
being offset by reinsurance treaties.

The following products individually accounted for
10% or more of Western Lifes direct annuity premiums in
the fiscal years ended September 30, 2002, 2001 and 2000.

TD-Max Series
single premium deferred annuities with varying lengths of cliff
(i.e., fixed) surrender fee periods. The initial interest rate
is guaranteed over the term of the surrender fee period and then
re-determined annually thereafter, subject to a contractual
minimum. Policyholders may withdraw a portion of their account
values annually without surrender fees. These products have been
Western Lifes largest seller, accounting for approximately
36.9%, 34.4% and 35.6% of direct annuity premiums in the fiscal
years ended September 30, 2002, 2001 and 2000, respectively.

TD-Max Bailout
Series single premium deferred
annuities with varying lengths of surrender fee periods. The
initial interest rate is guaranteed for one year and then
re-determined annually thereafter, subject to a contractual
minimum. Policyholders may withdraw funds without surrender
penalty for 60 days if the crediting interest rate falls
below the bailout interest rate determined at issuance.
Policyholders may also withdraw a portion of their account
values annually without surrender fees. These products accounted
for approximately 12.0%, 11.6% and 15.8% of direct annuity
premiums in the fiscal years ended September 30, 2002, 2001
and 2000, respectively.

DiscoverMax
Seriessingle premium deferred
annuities with varying levels of declining surrender charges
over a six year term. The initial interest rate is guaranteed
for one year and then re-determined annually thereafter, subject
to a contractual minimum. The initial interest rate includes a
bonus of one to three percent, depending on the surrender fee
structure selected. Policyholders may withdraw funds without
surrender penalty for 60 days if the crediting interest
rate falls below the bailout interest rate determined at issue.
Policyholders may also withdraw a portion of their account
values annually without surrender fees. These products accounted
for approximately 23.2%, 30.0% and 27.2% of direct annuity
premiums in the fiscal years ended September 30, 2002, 2001 and
2000, respectively.

Liquid Flexible Premium
Annuitiesdeferred annuities with
no surrender fees. Premium deposits may be made at any time in
amounts as low as $100. Interest rates are guaranteed at
issuance and then re-determined annually subject to a 3% minimum
guarantee. These products accounted for approximately 14.4%,
10.1% and 7.6% of direct annuity premiums in the fiscal years
ended September 30, 2002, 2001 and 2000, respectively.

Life Insurance

In addition to the sale of annuities, Western
Life also receives premiums from the sale and renewal of whole
life and term life insurance policies. In fiscal year 2002, less
than 1% of Western Lifes premiums were

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derived from interest sensitive whole life
insurance and term life insurance policies. At
September 30, 2002, the face amount of life insurance
policies written and outstanding totaled $203.4 million,
net of $31.3 million ceded to reinsurers. As with
annuities, gross profits are determined by the difference
between interest rates credited on outstanding policies and
interest earned on investment of premiums. In addition,
profitability is affected by mortality experience.


Reinsurance

Reinsurance is the practice whereby an insurance
company enters into agreements called treaties with other
insurance companies in order to assign some of its insured risk,
for which a premium is paid, while retaining the remaining risk.
Although reinsurance treaties provide a contractual basis for
shifting a portion of the insured risk to other insurers, the
primary liability for payment of claims remains with the
original insurer. Life insurers commonly obtain reinsurance on a
portion of their risks in the ordinary course of business. The
amount of risk that a company is willing to retain is based
primarily on considerations of the amount of insurance, the
level of its capital and surplus and upon its ability to sustain
mortality fluctuations.

Annuity Reinsurance

Western Life entered into an annuity reinsurance
agreement with Old Standard, an affiliate, which became
effective July 1, 1998. This agreement allows Western Life
to continue its market presence and relationship with its
insurance agents while moderating its rate of growth. Under its
contractual terms, this 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. At September 30, 2002 and 2001,
Western Life had recorded a receivable from Old Standard of
$148.3 million and $109.5 million respectively,
related to this reinsurance agreement. Old Standard has been
assigned a rating of B- (Fair) by A.M. Best.

Under this agreement, Western Life may reinsure
with Old Standard 75% of the risk on 15 different annuity
products. The premiums ceded to Old Standard during the fiscal
years ended September 30, 2002, 2001 and 2000 were
approximately $56.5 million, $0.7 million and
$27.4 million, respectively. Western Life received ceding
allowances equal to actual commission plus 1.5% of premium,
which was approximately $3.3 million, $0.1 million and
$1.5 million during the fiscal years ended
September 30, 2002, 2001 and 2000, respectively. These
ceding allowances are paid by Old Standard to compensate Western
Life for its annuity issuance costs. Western Life also receives
a fee from Old Standard for servicing the reinsured policies of
approximately 0.40% annually on the cash value of the reinsured
policies.

Life Policy Reinsurance

Western Life had reinsured $31.3 million of
its life insurance risk at September 30, 2002, which
equaled all risk in excess of $100,000 on each whole life policy
and all risk in excess of $50,000 on each term life policy. Life
insurance in force at that time was $234.6 million. Western
Life is a party to 20 separate life reinsurance treaties with
ten reinsurance companies. The largest treaty is with Optimum
Reinsurance Company, which provided approximately
$15.3 million of reinsurance coverage at September 30,
2002. The majority of the remaining coverage is with Business
Mens Assurance Company of America and ERC Life
Reinsurance. Total life policy reinsurance premiums paid by
Western Life during the year ended September 30, 2002 were
approximately $0.2 million.

Reserves

Western Lifes reserves for both annuities
and life insurance are actuarially determined and prescribed by
Western Lifes state of domicile and other states in which
it does business through laws that are designed to protect
annuity contract owners and policy owners. An actuary reviews
the amount of these reserves required for compliance with state
law. These reserves are amounts which, at assumed rates, are
calculated to be sufficient to meet Western Lifes future
obligations under annuity contracts and life insurance policies
currently in force. Reserves are recalculated each year to
reflect amounts of reinsurance in force, issue ages of

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new policyholders, duration of policies and
variations in policy terms. Since these reserves are based on
actuarial assumptions, Western Lifes ultimate liability
could exceed these reserves.





COMPETITION

Competition for Receivable
Acquisition

The Consolidated Group competes with other
financial institutions including various real estate financing
firms, real estate brokers, banks and individual investors for
the Receivables it acquires. This competition includes financial
institutions, many of which are larger, have access to more
resources and have greater name recognition than the
Consolidated Group. The Consolidated Group believes the primary
competitive factors are the amounts offered and paid to
Receivable sellers and the speed at which the processing and
funding of the transaction can be completed. Competitive
advantages enjoyed by the Consolidated Group include:



| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | its access to markets throughout the United
    States;               
|
| |  | its flexibility in structuring Receivable
    acquisitions;           
|
| |  | its long history in the business; and                                 
|
| |  | its in-house capabilities for processing and
    funding transactions.

The Consolidated Group competes with many other
lending institutions in its Commercial Loan origination program.
The commercial lending market is a multi-billion dollar market
including competitors with greater resources, economies of scale
and name recognition than the Consolidated Group. The
Consolidated Group believes that its flexible underwriting,
pricing guidelines and closing speed enhance its ability to
compete in this market. To the extent other competing Receivable
investors may develop faster closing procedures, more flexible
investment policies, or other attributes that are more desirable
to Receivable sellers, they may experience a competitive
advantage over the Consolidated Group.

The Consolidated Group competes with other
investors in its lottery prize, structured settlement and
annuity acquisitions.

Competition for Funding Sources

The annuity and life insurance business is highly
competitive. The Consolidated Group competes with other
financial institutions including ones with greater resources and
greater name recognition. Premium rates, annuity yields and
commissions to agents are particularly sensitive to competitive
forces. Additionally, the Consolidated Group believes the
primary competitive factors among life insurance companies for
investment-oriented insurance products, like annuities, include
product flexibility, net return after fees, innovative product
design, the claims-paying ability rating and the name
recognition of the issuing company, the availability of
distribution channels and service rendered to the customer
before and after a policy or contract is issued. Other factors
affecting the annuity business include the benefits, including
before-tax and after tax investment returns, guarantees provided
to the customer and the commissions paid to the agent.

The securities capital markets are also highly
competitive. Metropolitans preferred stock and debt
securities products face competition for investors from other
securities issuers, many of which are larger, have greater name
recognition and offer alternative investments not available from
Metropolitan. Effective yields on security investments and
commissions to investment representatives are particularly
sensitive to competitive forces. Metropolitan believes that its
competitive pricing and commission structure, along with a
customer service orientation, provide it with the ability to
successfully continue to issue its debentures and preferred
stock.




REGULATION

Metwests lending and servicing activities
must comply with, among other regulations, the Truth in Lending
Act, the Real Estate Settlement Procedures Act, and
Regulation X and Z promulgated by the Board

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of Governors of the Federal Reserve System.
Metwest is licensed as an FHA/ HUD servicer/lender and a Fannie
Mae seller/servicer. As such, it must comply with applicable
FHA, HUD, and Fannie Mae regulations and guidelines.


The Consolidated Group is subject to the
Insurance Holding Company Act as administered by the Office of
the Insurance Commissioner of the State of Washington (the
OIC). This Act regulates transactions between
insurance companies and their affiliates. It requires that
Western Life provide notification to the Insurance Commissioner
of specified transactions between the insurance company and its
affiliates. In certain instances, the Commissioners
approval is required before a transaction with an affiliate can
be consummated.

Western Life is also subject to extensive
regulation and supervision by the OIC as a Washington domiciled
insurer, and to a lesser extent, by all of the other states in
which it operates. These regulations are directed toward
supervision of such matters like the granting and revoking
licenses to transact business on both the insurance company and
agency levels, approving policy forms, setting dividend levels,
prescribing the nature and amount of permitted investments,
establishing solvency standards and conducting extensive
periodic examinations of insurance company records. These
regulations are primarily intended to protect annuity contract
holders and insurance policy owners.

All states in which Western Life operates have
laws requiring solvent life insurance companies to pay guaranty
fund assessments to protect the interests of policyholders of
insolvent life insurance companies. Assessments are levied on
all member insurers in each state based on a proportionate share
of premiums written by member insurers in the lines of business
in which the insolvent insurer engaged. A portion of these
assessments can be offset against the payment of future premium
taxes. However, future changes in state laws could decrease the
amount available for offset.

Dividend restrictions are imposed by regulatory
authorities on Western Life. These restrictions limit dividends
that Western Life can pay to the unassigned statutory surplus,
reduced by any unrealized capital gains, which netted to
approximately $5.6 million at September 30, 2002.

Washington State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 at
calendar year-end. At the last annual review, Western
Lifes capital and surplus levels exceeded the calculated
minimum requirements at its statutory reporting period ended
December 31, 2001.




Item 2. Properties

Metropolitans home office building
containing approximately 200,000 square feet is located at 601
West First Avenue, Spokane, Washington. Approximately 12% of the
building is currently leased by other tenants. At
September 30, 2002, the mortgage balance on the building
was approximately $11.4 million.




Item 3. Legal Proceedings

Other than ordinary routine litigation incidental
to business, there are no material legal proceedings or actions
pending or threatened against Metropolitan or to which its
property is subject.




Item 4. Submission of Matters to a
Vote of Security Holders

None.

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##### Table of Contents






PART II




Item 5. Market For The
Registrants Common Equity And Related Stockholder
Matters

1. (a) Market Information: There
is no market for Metropolitans common stock.

(b) Holders: There were three
holders of Metropolitans Common Stock as of
September 30, 2002.

(c) Dividends: Metropolitan
declared dividends on its Common Stock during the three fiscal
years ended September 30, 2002 in the aggregate as follows:

|     |         |      |  |      |         |  |  |   |         | 
|---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|2002 |         | 2001 |  | 2000
|     |         |      |  |     
|$    | 233,778 |      |  | $    | 258,778 |  |  | $ | 283,778 | 

At the date of this Form 10-K, Metropolitan
had made no determination as to the likelihood that it will or
will not pay dividends on its Common Stock in the future.

2. Recent Sales of Unregistered
Securities: None.

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Item 6. Selected Financial
Data




SELECTED CONSOLIDATED FINANCIAL DATA

The consolidated financial data shown below as of
September 30, 2002 and 2001 and for the years ended
September 30, 2002, 2001 and 2000 (other than the ratios of
earnings to fixed charges and preferred stock dividends) have
been derived from, and should be read in conjunction with,
Metropolitans consolidated financial statements, related
notes, and Managements Discussion and Analysis of
Financial Condition and Results of Operations appearing
elsewhere herein. The consolidated financial data shown as of
September 30, 2000, 1999 and 1998 and for the years ended
September 30, 1999 and 1998 (other than the ratios of
earnings to fixed charges and preferred stock dividends) have
been derived from audited consolidated financial statements not
included herein.

|                                                                     |  |                                              |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|-------------------------------------------------------------------- |  | -------------------------------------------- | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- | - |  | - | --------- | - |  | - | --------- | -
|                                                                     |  |                                             
|                                                                     |  | Year Ended or at September 30,              
|                                                                     |  |                                             
|                                                                     |  | 2002                                         |           | 2001 |  | 2000 |           | 1999 |  | 1998
|                                                                     |  |                                              |           |      |  |      |           |      |  |     
|                                                                     |  |                                             
|                                                                     |  | (Dollars in Thousands Except Per Share Data)
|CONSOLIDATED STATEMENTS OF INCOME DATA:                              |  |                                              |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|Revenues                                                             |  | $                                            | 163,915   |      |  | $    | 119,162   |      |  | $    | 172,370   |   |  | $ | 165,008   |   |  | $ | 155,815   |  
|                                                                     |  |                                              |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|Income (loss) before minority interest                               |  |                                              | 3,979     |      |  |      | (8,606    | )    |  |      | (7,598    | ) |  |   | 16,593    |   |  |   | 10,453    |  
|Income allocated to minority interests                               |  |                                              | (57       | )    |  |      | (317      | )    |  |      | (3        | ) |  |   | (318      | ) |  |   | (126      | )
|                                                                     |  |                                              |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|Net income (loss)                                                    |  |                                              | 3,922     |      |  |      | (8,923    | )    |  |      | (7,601    | ) |  |   | 16,275    |   |  |   | 10,327    |  
|Preferred stock dividends                                            |  |                                              | (4,784    | )    |  |      | (4,157    | )    |  |      | (4,553    | ) |  |   | (3,642    | ) |  |   | (3,732    | )
|                                                                     |  |                                              |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|Income (loss) applicable to common
    stockholders                  |  | $                                            | (862      | )    |  | $    | (13,080   | )    |  | $    | (12,155   | ) |  | $ | 12,633    |   |  | $ | 6,595     |  
|                                                                     |  |                                              |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|Ratio of earnings to fixed charges and preferred
    stock dividends |  |                                              | (1        | )    |  |      | (1        | )    |  |      | (1        | ) |  |   | (1        | ) |  |   | 1.13      |  
|PER COMMON SHARE DATA:                                               |  |                                              |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|Cash dividends per common share                                      |  | $                                            | 2,410     |      |  | $    | 2,668     |      |  | $    | 2,400     |   |  | $ | 2,400     |   |  | $ | 1,200     |  
|                                                                     |  |                                              |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|CONSOLIDATED BALANCE SHEET DATA:                                     |  |                                              |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|Total assets                                                         |  | $                                            | 1,787,119 |      |  | $    | 1,394,021 |      |  | $    | 1,252,933 |   |  | $ | 1,328,357 |   |  | $ | 1,279,601 |  
|Debentures and other debt payable                                    |  |                                              | 478,604   |      |  |      | 339,997   |      |  |      | 288,346   |   |  |   | 336,233   |   |  |   | 323,908   |  
|Stockholders equity                                                 |  |                                              | 73,280    |      |  |      | 40,912    |      |  |      | 56,858    |   |  |   | 71,704    |   |  |   | 58,757    |  



---



|    |                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Earnings were insufficient to meet fixed charges
    and preferred stock dividends by approximately
    $3.4 million, $40.2 million, $17.4 million and
    $0.8 million for the years ended September 30, 2002,
    2001, 2000 and 1999, respectively.

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##### Table of Contents






Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operations

The following should be read in conjunction with
the attached audited consolidated financial statements and the
notes attached thereto for the three years ended
September 30, 2002.




MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION

AND RESULTS OF OPERATIONS


Critical Accounting Policies

The accounting policies described below are those
that the Consolidated Group considers critical in preparing its
financial statements. These policies include significant
estimates the Consolidated Group makes using information
available at the time the estimates are made. However, the
estimates could change materially if different information or
assumptions are used. The descriptions below are summarized and
have been simplified for clarity. A more detailed description of
the significant accounting policies used by the Consolidated
Group in preparing its financial statements is included in the
Consolidated Groups audited financial statements for the
year ended September 30, 2002.

Investments

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. The Consolidated Group continually
monitors its investment portfolio for other than temporary
impairment of securities. When an other than a temporary decline
in the value below cost or amortized cost is identified, the
investment is reduced to its fair value, which becomes the new
cost basis of the investment. The amount of the reduction is
reported as a realized loss in the statement of operations. Any
recovery of value in excess of the investments new cost
basis is recognized as a realized gain only on sale, maturity or
other disposition of the investment. Factors that the
Consolidated Group evaluates in determining the existence of an
other than temporary decline in value include (1) the
length of time and extent to which the fair value has been less
than cost or carrying value, (2) the circumstances
contributing to the decline in fair value (including a change in
interest rates or spreads to benchmarks), (3) recent
performance of the security, (4) the financial strength of
the issuer, and (5) the intent and ability of the
Consolidated Group to retain the investment for a period of time
sufficient to allow for anticipated recovery. Additionally, for
asset-backed securities, the Consolidated Group considers the
security rating and the amount of credit support available for
the security.

The Consolidated Group holds debt securities
generated from its own securitization transactions. For these
securities, estimated fair value is derived from expected
discounted future cash flows. When determining expected future
cash flows, the Consolidated Group considers interest rates,
estimated prepayment rates, collateral value, historical default
rates and estimated loss severity experienced by the securities.
To the extent that actual experience is less favorable than the
assumptions, an impairment in the debt securities could result.
The Consolidated Group periodically assesses the assumptions
used in valuing the cash flows and the related carrying value of
these securities.

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The following assumptions were used at
September 30, 2002 to value the Consolidated Groups
investments in the residual and interest only securities
retained from its own securitization transactions.

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



| | 
| | 
| | 



| |     |                                                                                                                                                                | 
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | (1) | Prepayment speed assumptions are for the next six
    months. Thereafter, the speeds decline in six month intervals
    until reaching 10% during fiscal 2004. | 
|
| | (2) | As a percent of original pool balance.                                                                                                                         | 

Deferred Policy Acquisition Costs

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

Allowances for Losses

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

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

Allowances for losses on real estate contracts
and mortgage notes receivable are based on the carrying value of
the receivable, including accrued interest. Accordingly, the
Consolidated Group accrues interest on delinquent Receivables
until foreclosure.

Allowance for Losses on Real Estate Held for
Sale and Development.The allowance
for losses on real estate held for sale and development includes
amounts for estimated losses as a result of impairment in value.
The Consolidated Group reviews its real estate properties for
impairment in value whenever events or circumstances indicate
that the carrying value of the asset may exceed its fair market
value. The carrying value of a repossessed property is
determined as of the date of repossession of the property and is
based on the lower of fair market value less selling costs or
carrying value at the time the property was repossessed. For
non-commercial properties, an appraisal is obtained on the
foreclosed property to determine its fair market value at time
of repossession. For commercial properties, an appraisal is
obtained on the foreclosed property to determine the fair market
value only if the most recent appraisal is more than one year
old, otherwise the existing appraisal is used. Periodically, the
Consolidated Group may not order an updated appraisal in

19



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##### Table of Contents



accordance with its established policies if
current negotiations with a potential purchaser establishes an
indication of value.


Subsequent to repossession (or acquisition in the
case of development properties), if the value of the property
declines such that the expected fair market value, less selling
costs, from the disposition of the asset is less than its
carrying value, an impairment is recognized in the statement of
operations.

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.

Net Deferred Tax Assets

At September 30, 2002, the accumulated net
operating loss carryforwards for the Consolidated Group were
approximately $73.6 million. The availability of tax
benefits for these net operating losses begin to expire in 2006.
After giving consideration to existing taxable temporary
differences, net deferred tax assets of approximately
$7.6 million have been recorded at September 30, 2002.
The Consolidated Group has performed an analysis of tax planning
strategies that would, if necessary, be implemented to
accelerate taxable amounts to utilize any expiring net operating
losses. This analysis included the ability to sell appreciated
assets that have an underlying appreciation of approximately
$28.2 million at September 30, 2002. As a result of
the Consolidated Groups analysis, management believes that
the Consolidated Group will obtain full benefit of the net
deferred tax assets recorded at September 30, 2002.

Results of Operations

Change in business strategy

Prior to 1996, the Consolidated Group invested
primarily in seller-financed real estate Receivable contracts in
addition to other fixed income investments. Financing for the
acquisition of investments was provided through the sale of
debenture certificates, issuance of annuity insurance products
and the sale of preferred stock. The Consolidated Groups
profitability was affected primarily by interest margins
received between its cost of funds and the yields obtained on
its investments.

In 1996, the Consolidated Group successfully
completed a securitization of seller-financed Receivables. In
order to take advantage of favorable market conditions for the
securitization of its Receivables, the Consolidated Group
shifted its focus to accumulation of Receivables for
securitizations instead of its former acquisition and hold
strategy. Beginning in 1998 and continuing into 2000, the
Consolidated Group increased its Receivable acquisition
activities to make securitizations more efficient. As a result,
the Consolidated Group began to originate mortgage loans through
its subsidiary, Metwest, and increased the volume of
acquisitions of other Receivables. The short-term liquidity
needs to facilitate the growth in origination activities were
provided through a secured line of credit. Metwest was
designated as the Master Servicer on the securitizations. As
Master Servicer, Metwest was responsible for all aspects of
servicing including collections, foreclosure, and the subsequent
sale of repossessed properties. Therefore, an infrastructure of
personnel and technology was developed to support the resulting
growth in the related servicing functions.

During 1999, global issues negatively impacted
the profitability of sub-prime securitization transactions as
investors began to require higher yields on their investments.
These higher yield requirements resulted in a reduction in
proceeds from the sale of securitizations, which resulted in
lower gains realized by the Consolidated Group. Gains on the
sale of Receivables decreased from $21.5 million on sales
of $530.0 million in 1999 to gains of $14.6 million on
sales of $592.0 million in 2000.

20



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##### Table of Contents



With the reduction in profitability, an increase
in competition that had access to lower cost of funds, and the
general instability of the securitization market, the
Consolidated Group decided to pursue other business strategies.
As a result, the Consolidated Group announced in 2000 that it
was exiting the mortgage banking business and would pursue the
sale of its servicing portfolio.

The effects of the change in business strategies
had a substantial impact on the Consolidated Groups
earnings. First, the exit from securitizations resulted in a
$14.6 million dollar reduction in gains on sale of
Receivables from 2000 to 2001. Additionally, the Consolidated
Group incurred non-recurring expenses associated with
dismantling the infrastructure that had been established to
support the growth in servicing. While the decision to exit
mortgage banking resulted in an immediate reduction in subprime
residential origination personnel, the decision to exit
servicing resulted in a gradual reduction in processing and
support personnel. Concurrent with the cessation of subprime
residential originations, the Consolidated Group began a
six-month process to find a qualified servicer, negotiate the
sale, and transfer the servicing portfolio. After the transfer
of the servicing portfolio, servicing personnel reductions were
completed. The Consolidated Group has reduced its full time
equivalent employees from approximately 635 at
September 30, 2000 to approximately 289 at
September 30, 2002.

After the Consolidated Group completed its exit
from mortgage banking and related servicing activities, it was
left with an asset base that did not provide sufficient interest
margins to cover its operating overhead. The Consolidated Group
has focused on increasing interest income through the
origination and retention of higher yielding Commercial Loans
and other investment options. During the fiscal year ended
September 30, 2002, the Consolidated Group experienced an
improvement in its core operations and expects that this trend
will continue as its balance sheet is strengthened. Income
before gains (losses) on assets improved from a loss of
$23.4 million in 2001 to income of $14.2 million in
2002. Additionally, the Consolidated Group sold certain assets
from its real estate held for sale and development portfolio for
net gains of $14.3 million during the fiscal year ended
September 30, 2002.

Offsetting these improvements in its core
operations and gains from real estate sales during the fiscal
year ended September 30, 2002 were approximately $29.4
million in asset impairments. These impairments were primarily
the result of (1) deterioration in residual and interest
only certificates generated from its own securitization
transactions due to higher than expected prepayment rates and
loss severity, (2) a decline in the value of the
Consolidated Groups investments in equity securities due
primarily to an overall decline in the value of stocks traded on
the NASDAQ, and (3) credit related losses on certain
asset-backed securities. In response to these impairments, the
Consolidated Group has temporarily limited the amount of new
capital invested into the equity markets and is currently
focusing on improving the average credit rating of its fixed
income investment portfolio. At September 30, 2002,
approximately 77.1% of the Consolidated Groups portfolio
was rated either AAA or AA compared to 46.8% at
September 30, 2001. See  Securities
Investments below.

21



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##### Table of Contents



The following table presents the components of
the results of operations for the years ended September 30,
2002, 2001 and 2000:

|                                                                           |                                                                   |      |             |            |  |      |             |             |   |   |             |             |  
|-------------------------------------------------------------------------- | ----------------------------------------------------------------- | ---- | ----------- | ---------- |  | ---- | ----------- | ----------- | - | - | ----------- | ----------- | -
|                                                                           |                                                                   | 2002 |             | 2001       |  | 2000
|                                                                           |                                                                   |      |             |            |  |     
|Net interest income                                                        |                                                                   | $    | 38,442,168  |            |  | $    | 19,476,063  |             |   | $ | 22,172,529  |            
|Provision for losses on Receivables                                        |                                                                   |      | (4,142,146  | )          |  |      | (7,515,420  | )           |   |   | (13,179,655 | )          
|                                                                           |                                                                   |      |             |            |  |      |             |             |   |   |             |            
|                                                                           | Net interest spread after provision for losses on
    Receivables |      |             | 34,300,022 |  |      |             | 11,960,643  |   |   |             | 8,992,874   |  
|Net non-interest expense                                                   |                                                                   |      | (33,085,273 | )          |  |      | (36,334,626 | )           |   |   | (36,948,986 | )          
|Capitalized deferred costs, net of amortization                            |                                                                   |      | 12,980,668  |            |  |      | 1,011,169   |             |   |   | (3,550,469  | )          
|                                                                           |                                                                   |      |             |            |  |      |             |             |   |   |             |            
|                                                                           | Income (loss) before gains (losses) on
    assets                 |      |             | 14,195,417 |  |      |             | (23,362,814 | ) |   |             | (31,506,581 | )
|Net gains (losses) on investments and
    Receivables                      |                                                                   |      | (20,036,611 | )          |  |      | (7,652,606  | )           |   |   | 19,841,360  |            
|Reduction in value of mortgage servicing rights                            |                                                                   |      |            |            |  |      |            |             |   |   | (1,306,958  | )          
|Provision for losses on real estate held for sale                          |                                                                   |      | (2,345,301  | )          |  |      | (4,276,355  | )           |   |   | (2,817,950  | )          
|Gains on sales of real estate                                              |                                                                   |      | 14,277,500  |            |  |      | 341,440     |             |   |   | 4,098,522   |            
|                                                                           |                                                                   |      |             |            |  |      |             |             |   |   |             |            
|Income (loss) before income taxes and
    minority interest                |                                                                   |      | 6,091,005   |            |  |      | (34,950,335 | )           |   |   | (11,691,607 | )          
|Income tax (provision) benefit                                             |                                                                   |      | (2,111,644  | )          |  |      | 26,344,215  |             |   |   | 4,093,296   |            
|                                                                           |                                                                   |      |             |            |  |      |             |             |   |   |             |            
|Income (loss) before minority interest                                     |                                                                   |      | 3,979,361   |            |  |      | (8,606,120  | )           |   |   | (7,598,311  | )          
|Income of consolidated subsidiaries allocated to
    minority stockholders |                                                                   |      | (57,671     | )          |  |      | (317,003    | )           |   |   | (3,042      | )          
|                                                                           |                                                                   |      |             |            |  |      |             |             |   |   |             |            
|Net income (loss)                                                          |                                                                   |      | 3,921,690   |            |  |      | (8,923,123  | )           |   |   | (7,601,353  | )          
|Preferred stock dividends                                                  |                                                                   |      | (4,783,627  | )          |  |      | (4,156,762  | )           |   |   | (4,553,322  | )          
|                                                                           |                                                                   |      |             |            |  |      |             |             |   |   |             |            
|Loss applicable to common stockholders                                     |                                                                   | $    | (861,937    | )          |  | $    | (13,079,885 | )           |   | $ | (12,154,675 | )          
|                                                                           |                                                                   |      |             |            |  |      |             |             |   |   |             |            

Net Interest Income

The following table presents the components of
net interest income during the years ended September 30,
2002, 2001 and 2000:

|                    |                                                |                       |                        |            |             |            |            |            |            |            |            |            |            |            | 
|------------------- | ---------------------------------------------- | --------------------- | ---------------------- | ---------- | ----------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | 
|                    |                                                | 2002                  |                        | 2001       |             | 2000      
|                    |                                                |                       |                        |            |             |           
|Interest income:    |                                                |                       |                        |            |             |            |            |            |            |            |            |           
|                    | Interest on Receivables                        |                       | $                      | 54,334,291 |             |            | $          | 41,097,622 |            |            | $          | 46,667,677 |           
|                    | Earned discount on Receivables and investments |                       |                        | 35,964,785 |             |            |            | 20,759,904 |            |            |            | 21,451,042 |           
|                    | Other investment income                        |                       |                        | 32,692,438 |             |            |            | 30,561,147 |            |            |            | 29,310,903 |           
|                    |                                                |                       |                        |            |             |            |            |            |            |            |            |           
|                    |                                                | Total interest income |                        |            | 122,991,514 |            |            |            | 92,418,673 |            |            |            | 97,429,622 |           
|                    |                                                |                       |                        |            |             |            |            |            |            |            |            |           
|Interest expense:   |                                                |                       |                        |            |             |            |            |            |            |            |            |           
|                    | Insurance policy and annuity benefits          |                       |                        | 53,131,625 |             |            |            | 47,473,339 |            |            |            | 46,122,863 |           
|                    | Interest, net                                  |                       |                        | 31,417,721 |             |            |            | 25,469,271 |            |            |            | 29,134,230 |           
|                    |                                                |                       |                        |            |             |            |            |            |            |            |            |           
|                    |                                                |                       | Total interest expense |            |             | 84,549,346 |            |            |            | 72,942,610 |            |            |            | 75,257,093 | 
|                    |                                                |                       |                        |            |             |            |            |            |            |            |            |           
|Net interest income |                                                | $                     | 38,442,168             |            |             | $          | 19,476,063 |            |            | $          | 22,172,529 |           
|                    |                                                |                       |                        |            |             |            |            |            |            |            |            |           

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The following table summarizes the rate/volume
change in total interest income between the fiscal years ended
September 30, 2002, 2001 and 2000 by interest sensitive
asset class:

|                                                        |  |                     |            |               |  |                     |            |        |  |      |            |              |  |   |            |   |  |   |            |   |  |   |            |  
|------------------------------------------------------- |  | ------------------- | ---------- | ------------- |  | ------------------- | ---------- | ------ |  | ---- | ---------- | ------------ |  | - | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                        |  |                     |            |              
|                                                        |  | 2002 vs. 2001       |            | 2001 vs. 2000
|                                                        |  |                     |            |              
|                                                        |  |                     |            |               |  |                     |            |       
|                                                        |  | Increase (Decrease) |            |               |  | Increase (Decrease) |            |       
|                                                        |  | Due to              |            |               |  | Due to              |            |       
|                                                        |  |                     |            |               |  |                     |            |       
|                                                        |  | Volume              |            | Rate          |  | Total Change        |            | Volume |  | Rate |            | Total Change
|                                                        |  |                     |            |               |  |                     |            |        |  |      |            |             
|Interest sensitive assets:                              |  |                     |            |               |  |                     |            |        |  |      |            |              |  |   |            |   |  |   |            |   |  |   |            |  
|Investments (including cash)                            |  | $                   | 7,298,077  |               |  | $                   | (6,623,197 | )      |  | $    | 674,880    |              |  | $ | 4,498,460  |   |  | $ | (2,956,593 | ) |  | $ | 1,541,867  |  
|Real estate contracts and mortgage notes
    receivable |  |                     | 10,781,608 |               |  |                     | 21,643,543 |        |  |      | 32,425,151 |              |  |   | (8,896,046 | ) |  |   | 3,726,138  |   |  |   | (5,169,908 | )
|Other Receivable investments                            |  |                     | (1,569,352 | )             |  |                     | (957,838   | )      |  |      | (2,527,190 | )            |  |   | (470,096   | ) |  |   | (912,812   | ) |  |   | (1,382,908 | )
|                                                        |  |                     |            |               |  |                     |            |        |  |      |            |              |  |   |            |   |  |   |            |   |  |   |            |  
|                                                        |  | $                   | 16,510,333 |               |  | $                   | 14,062,508 |        |  | $    | 30,572,841 |              |  | $ | (4,867,682 | ) |  | $ | (143,267   | ) |  | $ | (5,010,949 | )
|                                                        |  |                     |            |               |  |                     |            |        |  |      |            |              |  |   |            |   |  |   |            |   |  |   |            |  

The following table presents the net average
yields realized by the Consolidated Group on interest sensitive
assets and liabilities during the three years ended
September 30, 2002, 2001 and 2000 based on the average
monthly ending asset/liability balances:

|                                                                       |       |         |             |         |  |         |             |        |  |   |             |        | 
|---------------------------------------------------------------------- | ----- | ------- | ----------- | ------- |  | ------- | ----------- | ------ |  | - | ----------- | ------ | 
|                                                                       |       | 2002    |             | 2001    |  | 2000   
|                                                                       |       | Average |             | Average |  | Average
|                                                                       |       |         |             |         |  |        
|Interest sensitive assets:                                             |       |         |             |         |  |         |             |        |  |   |             |       
|Investments (including cash)                                           |       | $       | 478,349,534 |         |  | $       | 386,849,991 |        |  | $ | 335,382,282 |       
|                                                                       | Yield |         |             | 6.59%   |  |         |             | 7.97%  |  |   |             | 8.75%  | 
|Real estate contracts and mortgage notes
    receivable                |       | $       | 496,411,549 |         |  | $       | 400,660,145 |        |  | $ | 486,778,695 |       
|                                                                       | Yield |         |             | 15.62%  |  |         |             | 11.26% |  |   |             | 10.33% | 
|Other receivable investments                                           |       | $       | 165,144,541 |         |  | $       | 182,562,437 |        |  | $ | 187,505,617 |       
|                                                                       | Yield |         |             | 8.43%   |  |         |             | 9.01%  |  |   |             | 9.51%  | 
|Interest sensitive liabilities:                                        |       |         |             |         |  |         |             |        |  |   |             |       
|Life insurance and annuity reserves, net of
    reinsurance receivable |       | $       | 936,990,690 |         |  | $       | 815,417,282 |        |  | $ | 794,005,601 |       
|                                                                       | Yield |         |             | 5.67%   |  |         |             | 5.82%  |  |   |             | 5.81%  | 
|Debenture bonds                                                        |       | $       | 333,602,060 |         |  | $       | 267,488,759 |        |  | $ | 211,966,689 |       
|                                                                       | Yield |         |             | 8.92%   |  |         |             | 8.87%  |  |   |             | 8.56%  | 
|Debt payable                                                           |       | $       | 63,054,379  |         |  | $       | 42,265,363  |        |  | $ | 158,006,764 |       
|                                                                       | Yield |         |             | 4.73%   |  |         |             | 7.63%  |  |   |             | 7.78%  | 

The increase in net interest income from 2000 to
2002 was primarily due to an increase in the commercial lending
activities of the Consolidated Group. Commercial Loans, which
have higher yields than the Consolidated Groups
residential portfolio, accounted for 55.9% of the outstanding
principal balance of real estate contracts and mortgage notes
receivable at September 30, 2002, compared to 28.8% and
1.8% at September 30, 2001 and 2000, respectively.
Additionally, for commercial development loans, the Consolidated
Group occasionally negotiates exit fee agreements with the
borrower. If the transaction meets the requirements to be
accounted for as a loan, the exit fee is amortized into income
over the estimated life of the loan using the level yield
method. The amortization of exit fees accounted for 2.36% of the
increase in yield on real estate contracts and mortgage notes
receivable in 2002.

The increase in yields on the real estate
contracts and mortgage notes receivable portfolio were partially
offset by lower yields on the investment portfolio as the 5-year
constant maturity treasury rate, which is similar to the average
maturity of the Consolidated Groups fixed income
portfolio, decreased from 5.95% on September 30, 2000 to
2.65% on September 30, 2002. During the fiscal year ended
September 30, 2002, the Consolidated Group sold
approximately $367.7 million in available-for-sale
investments for gains of approximately $5.4 million. As
proceeds from the sales and maturities were reinvested back into
a lower interest rate

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market, the overall portfolio yield was reduced.
Additionally, the Consolidated Groups recent focus on
improving the average credit rating of the investment portfolio
has also contributed to the reduction in the investment yields.
At September 30, 2002, approximately 77.1% of the
Consolidated Groups portfolio was rated either AAA or AA
compared to 46.8% at September 30, 2001. Generally, the
higher the credit rating, the lower the effective yield.


The reduction in the interest rate environment,
particularly during the fiscal year ended September 30,
2002, has allowed the Consolidated Group to borrow funds on its
secured line of credit with the Federal Home Loan Bank of
Seattle at lower interest rates. This borrowing facility has led
to a reduction in the current year debt payable cost of funds.

While a weaker economy may have contributed to
the declining treasury rates, credit sensitive securities may
experience an increase in yields during the same time period.
This was true for the Consolidated Group as the yields offered
on its debt securities sold to the public increased slightly
during the last two fiscal years.

Net Non-Interest Expense

The following table presents the components of
net non-interest expense during the years ended
September 30, 2002, 2001 and 2000:

|                      |                                               |                            |   |            |            |      |   |            |            |  |   |            |            | 
|--------------------- | --------------------------------------------- | -------------------------- | - | ---------- | ---------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                      |                                               | 2002                       |   | 2001       |            | 2000
|                      |                                               |                            |   |            |            |     
|Non-interest income:  |                                               |                            |   |            |            |      |   |            |            |  |   |           
|                      | Insurance premiums and annuity considerations |                            | $ | 1,766,851  |            |      | $ | 1,971,123  |            |  | $ | 2,406,532  |           
|                      | Servicing income                              |                            |   | 1,795,696  |            |      |   | 8,673,948  |            |  |   | 6,649,395  |           
|                      | Fees, commissions and other income            |                            |   | 5,573,168  |            |      |   | 6,248,724  |            |  |   | 5,697,475  |           
|                      |                                               |                            |   |            |            |      |   |            |            |  |   |           
|                      |                                               | Total non-interest income  |   |            | 9,135,715  |      |   |            | 16,893,795 |  |   |            | 14,753,402 | 
|                      |                                               |                            |   |            |            |      |   |            |            |  |   |           
|Non-interest expense: |                                               |                            |   |            |            |      |   |            |            |  |   |           
|                      | Salaries and employee benefits                |                            | $ | 14,998,380 |            |      | $ | 23,005,332 |            |  | $ | 30,698,838 |           
|                      | Commissions to agents                         |                            |   | 11,900,919 |            |      |   | 10,933,466 |            |  |   | 11,271,223 |           
|                      | Other operating and underwriting expenses     |                            |   | 15,321,689 |            |      |   | 19,289,623 |            |  |   | 9,732,327  |           
|                      |                                               |                            |   |            |            |      |   |            |            |  |   |           
|                      |                                               | Total non-interest expense |   |            | 42,220,988 |      |   |            | 53,228,421 |  |   |            | 51,702,388 | 
|                      |                                               |                            |   |            |            |      |   |            |            |  |   |           
|                      |                                               | Net non-interest expense   |   | $          | 33,085,273 |      |   | $          | 36,334,626 |  |   | $          | 36,948,986 | 
|                      |                                               |                            |   |            |            |      |   |            |            |  |   |           

Prior to April 2001, Metwest had been designated
Master Servicer for pools of mortgage loans securitized by the
Consolidated Group. As compensation for its services, Metwest
was entitled to retain, from amounts collected on mortgage
loans, service fees that ranged from .50% to .75% per annum of
the scheduled principal balance of the mortgage loan pool as of
the first day of the month. The agreements also entitled Metwest
to receive all late payment fees, prepayment penalties,
assumption fees and all other similar fees. The increase in
servicing income during the fiscal year ended September 30,
2001 was due to an increase in the size of the securitized pool
of mortgage loans serviced by Metwest.

In April 2001, Metwest sold the servicing rights
to the pools of securitized mortgage loans. The reduction in
servicing income during the fiscal year ended September 30,
2002 was due to the sale of the servicing portfolio in 2001. At
September 30, 2002, Metwest continued to provide Receivable
servicing for a fee to Summit, Old Standard and Old West.

The reduction in non-interest expenses from 2000
to 2002 was primarily due to a reduction in non-capitalizable
salaries and other expenses as the Consolidated Group has
reduced its full time equivalent employees from approximately
635 at September 30, 2000 to approximately 289 at
September 30, 2002. The reduction in full time equivalent
employees and other operating expenses was the result of the
Consolidated Groups exit from loan servicing and certain
loan origination functions. Additionally, a reduction in non-

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interest expense resulted from an increase in
expenses allocated to affiliates. Metropolitan provides
accounting, data processing and other administrative services to
some of its affiliates. During the year ended September 30,
2001, Metropolitan entered into an agreement with some of its
affiliates to change the calculation of the service fee and
administrative charges to a cost sharing arrangement from a
fixed and calculated fee arrangement. Expense allocated to
affiliates were approximately $6.0 million,
$4.7 million and $0.5 million during the fiscal years
ended September 30, 2002, 2001 and 2000, respectively.
Management believes that the fixed and calculated fee
arrangement that Metropolitan had been operating under prior to
the fiscal year ended September 30, 2001, did not result in
a reimbursement to Metropolitan of all significant direct
expenses incurred on behalf of its affiliates.


These reductions in expenses were partially
offset by severance, software and equipment charges of
approximately $3.5 million recorded in fiscal 2001
associated with the termination of certain staff and the
discontinuance of certain loan origination and servicing
activities.

Amortization of Deferred Costs, Net of Costs
Capitalized (DPAC)

Amortization of deferred 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 the net expense
reported by the Consolidated Group for the last three fiscal
years:

|                                                |  |      |             |      |  |      |            |   |  |   |            | 
|----------------------------------------------- |  | ---- | ----------- | ---- |  | ---- | ---------- | - |  | - | ---------- | 
|                                                |  | 2002 |             | 2001 |  | 2000
|                                                |  |      |             |      |  |     
|Current year costs capitalized                  |  | $    | 10,832,302  |      |  | $    | 9,961,169  |   |  | $ | 9,049,531  | 
|Amortization of previously capitalized expenses |  |      | (2,148,366  | )    |  |      | 8,950,000  |   |  |   | 12,600,000 | 
|                                                |  |      |             |      |  |      |            |   |  |   |            | 
|Net expense                                     |  | $    | (12,980,668 | )    |  | $    | (1,011,169 | ) |  | $ | 3,550,469  | 
|                                                |  |      |             |      |  |      |            |   |  |   |            | 

While the capitalization of current year costs is
dependent upon actual expenses (commissions and other) incurred,
the amortization of capitalized costs is dependent upon the net
investment yields (after default costs and related investment
expenses) obtained by Western Life, policy crediting rates, and
the policy termination experience, which is actuarially
determined. DPAC is also impacted by the assumptions for these
variables expected in future years. During the fiscal years
ended September 30, 2002 and 2001, the Consolidated Group
revised its amortization assumptions on the DPAC related to its
deferred annuity business (92% of the total DPAC as of
September 30, 2002) to reflect the higher yields Western
Life expected to be earned on its commercial real estate loan
portfolio and the expected future crediting rates on the annuity
business which the investments support. The earnings rate for
2003 assumes that Western Life will generate, on a monthly
basis, approximately $37.0 million in Commercial Loans with an
average yield of 15.0%. The monthly average production for
Western Life during the last quarter of fiscal 2002 was $38.2
million in Commercial Loans with an average yield of 16.1%. The
expected future crediting rates are based primarily on Western
Lifes current policy for repricing its existing annuity
products assuming a level interest rate environment. Since the
amortization of deferred acquisition costs is based on the
estimated gross profits of the underlying life and annuity
products using current effective crediting rates, increases in
the crediting rate environment may accelerate the amortization
of these costs in the future.

During the years ended September 30, 2002
and 2001, these revised assumptions resulted in an increase of
approximately $8.8 million and $4.3 million, respectively,
in deferred costs with a corresponding decrease in the
amortization of deferred acquisition costs. There were no
adjustments made during the year ended September 30, 2000.

|                               |  |             |       |        |  |      |       |      |  |  |       |   |  |  |       |  
|------------------------------ |  | ----------- | ----- | ------ |  | ---- | ----- | ---- |  |  | ----- | - |  |  | ----- | -
|                               |  |             |       |       
|                               |  |             |       | Actual
|                               |  | Future      |       |       
|                               |  | Assumptions |       | 2002   |  | 2001 |       | 2000
|                               |  |             |       |        |  |      |       |     
|Net investment earnings rate   |  |             | 10.80 | %      |  |      | 9.34  | %    |  |  | 7.33  | % |  |  | 7.03  | %
|Average credited interest rate |  |             | 5.05  | %      |  |      | 5.67  | %    |  |  | 5.82  | % |  |  | 5.81  | %
|Lapse rates                    |  |             | 15.90 |        |  |      | 13.27 |      |  |  | 19.85 |   |  |  | 30.23 |  

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Annuity lapse rates are calculated by dividing
cash outflows related to partial and full surrenders, periodic
payments and death benefits by average annuity reserves.

Net Gains (Losses) on Investments and
Receivables

The following table presents the components of
net gains (losses) on investments and Receivables during
the years ended September 30, 2002, 2001 and 2000:

|                                                      |                                               |      |             |             |   |      |            |            |   |   |            |            |  
|----------------------------------------------------- | --------------------------------------------- | ---- | ----------- | ----------- | - | ---- | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                                      |                                               | 2002 |             | 2001        |   | 2000
|                                                      |                                               |      |             |             |   |     
|Other than temporary declines in value:               |                                               |      |             |             |   |      |            |            |   |   |            |           
|                                                      | Residual and other interest only certificates |      | $           | (13,868,444 | ) |      | $          | (4,263,946 | ) |   | $          | (7,471,494 | )
|                                                      | Equity securities                             |      |             | (7,249,144  | ) |      |            | (140,000   | ) |   |            |           |  
|                                                      | Other securities                              |      |             | (8,327,453  | ) |      |            | (4,256,124 | ) |   |            |           |  
|Realized gains (losses):                              |                                               |      |             |             |   |      |            |            |   |   |            |           
|                                                      | Securities investments                        |      |             | 5,375,100   |   |      |            | 1,654,490  |   |   |            | (123,794   | )
|                                                      | Receivables                                   |      |             | 3,931,209   |   |      |            | (1,321,127 | ) |   |            | 26,914,099 |  
|                                                      | Trading securities                            |      |             | 102,121     |   |      |            | 674,101    |   |   |            | 522,549    |  
|                                                      |                                               |      |             |             |   |      |            |            |   |   |            |           
|Net gains (losses) on investments and
    receivables |                                               | $    | (20,036,611 | )           |   | $    | (7,652,606 | )          |   | $ | 19,841,360 |           
|                                                      |                                               |      |             |             |   |      |            |            |   |   |            |           

Residual and other interest only
certificates

The Consolidated Group holds residual and other
interest only securities generated from its own securitization
activities. The fair value of these securities, which do not
have established market prices, is estimated using expected
discounted future cash flows. When determining expected future
cash flows, management considers interest rates, estimated
prepayment rates, collateral value, historical default rates and
estimated loss severity. During the fiscal years ended
September 30, 2002, 2001 and 2000, the Consolidated Group
determined that certain residual and other interest only
certificates had other than temporary declines in value.
Accordingly, the carrying values of the investments were
decreased by approximately $13.9 million, $4.3 million
and $7.5 million, respectively, representing the amount
impaired.

During the last two fiscal years, the 10-year
constant maturity Treasury rate, which is a widely accepted
benchmark for mortgage prepayments and pricing, decreased from
approximately 5.9% at September 30, 2000 to approximately
3.6% at September 30, 2002. The reduction in the interest
rate environment has resulted in higher than expected prepayment
rates as borrowers refinanced their mortgages at lower interest
rates. Additionally, the collateral supporting the residual
certificates experienced higher than expected loss severities
during the fiscal year ended September 30, 2002. In
response to the sustained prepayment rates and higher loss
severities, the Consolidated Group revised its assumptions of
future prepayments and loss severity. The change in assumptions
contributed, in part, to the $13.9 million impairment in
2002. The following assumptions were used at September 30,
2002 to value the Consolidated Groups investments in the
residual and interest only securities retained from its own
securitization transactions.

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



| |  | 
| |  | 
| |  | 



| |     |                                                                                                                                                                | 
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | (1) | Prepayment speed assumptions are for the next six
    months. Thereafter, the speeds decline in six month intervals
    until reaching 10% during fiscal 2004. | 
|
| | (2) | As a percent of original pool balance.                                                                                                                         | 

The Consolidated Group will continue to
periodically assess the assumptions used in valuing the cash
flows and the related carrying value of securities generated
from its securitization activities.

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Equity securities

During the fiscal year ended September 30,
2002, approximately $7.2 million of declines in various 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. The decline in value was primarily the
result of an overall decline in the value of stocks traded on
the NASDAQ. At September 30, 2002, the Consolidated Group
had an equity investment portfolio (including venture capital
investments) of approximately $43.6 million.

Other securities

During the fiscal years ended September 30,
2002 and 2001, the Consolidated Group reported approximately
$8.3 million and $4.3 million, respectively, in other
than temporary impairments on certain fixed income securities.
The impairments were primarily due to deterioration in the
underlying collateral of certain asset-backed securities in
addition to credit deterioration in some higher yielding
corporate bond investments .

In 2002 and as a result of the impairment
experience of the Consolidated Groups portfolio,
management changed the investment strategy to move away from
lower credit rating exposure. At September 30, 2002,
approximately 77.1% of the Consolidated Groups fixed
income portfolio was rated either AAA or AA compared to 46.8% at
September 30, 2001.

Securities investment realized gains

The increase in securities investment gains for
the year ended September 30, 2002 was primarily due to sales of
fixed income securities that increased in value as a result of a
change in the 5-year constant maturity Treasury rate. The 5-year
constant maturity Treasury rate, which is similar to the average
maturity of the Consolidated Groups fixed income
portfolio, decreased from 5.95% on September 30, 2000 to
2.65% on September 30, 2002. Generally, as the Treasury
yield decreases, the value of the fixed income securities
portfolio increases.

Realized gains on Receivables

On March 28, 2002, Western Life agreed to
sell to Old Standard and Old West a 69.20% undivided beneficial
interest in a certain Lottery Trust owned by Western Life. The
purchase price of $11.2 million, which was derived from
future expected cash flows discounted at a 6.957% market rate,
resulted in a gain of approximately $0.6 million.
Additionally, on March 29, 2002, Metropolitan agreed to
sell to Summit the remaining participation in certain structured
settlements that Summit acquired from Metropolitan during the
fiscal year ended September 30, 2000. The purchase price of
approximately $4.8 million, which was derived from future
expected cash flows discounted at an 8.5% market rate, resulted
in a gain of approximately $0.2 million.

On August 15, 2002, Western Life agreed to
sell to Old Standard and Old West the remaining interest in
Lottery Trust owned by Western Life. The purchase price of
$6.2 million, which was derived from future expected cash
flows discounted at a 5.527% market rate, resulted in a gain of
approximately $0.7 million. Additionally, on
August 15, 2002, Western Life agreed to sell to Old
Standard and Old West a 95.83% undivided beneficial interest in
a certain Lottery Trust owned by Western Life. The purchase
price of $29.1 million, which was derived from future
expected cash flows discounted at a 5.888% market rate, resulted
in a gain of approximately $2.0 million.

The market rates on the above lottery trust sales
were calculated as 2.0% over the Treasury benchmark on the date
of the sale, which is consistent with corporate bonds with
similar credit profiles along with recent transactions involving
large blocks of lottery Receivables.

The loss on Receivables during the fiscal year
ended September 30, 2001 was primarily the result of
pursuing the sale of the remaining lease Receivable portfolio.
As a result, the Consolidated Group recorded a $2.0 million
loss to reduce the carrying value to the market value.

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During the fiscal year ended September 30,
2000, the Consolidated Group participated in four securitization
transactions that resulted in approximately $14.6 million
in gains. Additionally, the Consolidated Group sold an $18
million non-interest bearing contract receivable, collateralized
by timber rights in Hawaii, to Summit at estimated fair value
using a discount rate of 12%. The $13.2 million of proceeds
resulted in a gain of $10.7 million. The reduction in gains
from 2000 to 2001 was due to the Consolidated Groups
decision in January 2001 to change the focus of its investment
strategy away from acquiring residential real estate loans for
securitization purposes.

Gains on Sale of Real Estate

The Consolidated Group is in the real estate
market due primarily to its repossession of properties following
Receivable defaults. Additionally, the Consolidated Group will
occasionally acquire property for the purpose of development and
sale. The development or improvement of properties is undertaken
for the purpose of enhancing values to increase marketability
and to maximize profit potential. During the fiscal years ended
September 30, 2002, 2001 and 2000, the Consolidated Group
realized gains of approximately $14.3 million,
$0.3 million, and $4.4 million, respectively, on sales
of $51.8 million, $17.5 million and
$40.3 million, respectively.

Income Taxes

The Consolidated Groups $26.3 million
tax benefit recorded during the fiscal year ended
September 30, 2001, includes a $14.0 million tax
benefit relating to an investment that Metropolitan entered into
in conjunction with Western Life in 1999. In total, the
investment resulted in the Consolidated Group recording a
$28.0 million tax benefit, of which $14.0 million was also
recorded as an income tax benefit during the fiscal year ended
September 30, 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, the
Consolidated Group received two independent tax opinions
relating to the investment.

The Internal Revenue Service (IRS) has
notified the participants by general public notice that they
have taken the position that the tax benefits relative to the
investment would be disallowed. The Consolidated Group has
received an audit notice from the IRS for the tax year in which
the tax benefit attributable to the investment was claimed.
However, a specific review of the Consolidated Groups
investment and related activity has not yet taken place. At
September 30, 2002, the Consolidated Group cannot
reasonably estimate a loss, if any, associated with this
transaction. In the event of an unfavorable determination
relative to the investment, the earnings of the Consolidated
Group would be adversely affected by the amount disallowed,
including interest if applicable. If wholly disallowed, the
potential earnings effect would be a loss of $28.0 million
plus applicable interest.

Additionally, in conjunction with the investment,
Metropolitan and Western Life executed a supplement to their
Federal Tax Sharing Agreement allowing Western Life to recover
from Metropolitan up to $11.2 million, plus applicable
interest, in federal income tax benefits derived from this
investment that are not otherwise utilized by Western Life. Any
amounts that may be disallowed, up to $11.2 million, plus
applicable interest, are recoverable by Western Life from
Metropolitan under the terms of the supplement to the Federal
Tax Sharing Agreement.

At September 30, 2002, the accumulated net
operating loss carryforwards for the Consolidated Group were
approximately $73.6 million. The availability of tax
benefits for these net operating losses begin to expire in 2006.
After giving consideration to existing taxable temporary
differences, net deferred tax assets of approximately
$7.6 million have been recorded at September 30, 2002.
The Consolidated Group has performed an analysis of tax planning
strategies that would, if necessary, be implemented to
accelerate taxable amounts to utilize any expiring net operating
losses. This analysis included the ability to sell appreciated
assets that have an underlying appreciation of approximately
$28.2 million at September 30, 2002. As a result of
the Consolidated Groups analysis, management believes that
the Consolidated Group will obtain the full benefit of the net
deferred tax assets recorded at September 30, 2002.

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Financial Condition

The following depicts the distribution of the
Consolidated Groups assets as a percentage of total assets
as of September 30, 2002:

Distribution of Assets as a Percentage of
Total Assets

(PIE CHART)

Receivables Collateralized by Real
Estate

Current Mix of Receivable Investment
Holdings

The Consolidated Groups investments in
Receivables include Receivables collateralized by first or
junior real estate liens, primarily on single family residential
property and commercial properties.

During the fiscal years ended September 30,
2001 and 2002, the Consolidated Group expanded the origination
of Commercial Loans. The expansion was due to the Consolidated
Groups current perception that this market may be
inadequately served by current lenders, who it believes are
inflexible in their underwriting and pricing policies and who
are not able to quickly underwrite and close these loans,
particularly in the temporary, bridge and development Commercial
Loan markets.

The stated yields on Commercial Loans are higher
than the yield on Receivables collateralized by single family
residential property because the market and credit risks are
lower for the mortgage collateralized by single family
residential property and there are less competitors with
commercial real estate financing capabilities. However,
investments in Commercial Loans are less diversified because the
principal amount of a Commercial Loan is generally greater than
the principal amount of a residential mortgage or other
Receivable.

Management continually monitors economic and
demographic conditions throughout the country in an effort to
avoid a concentration of its acquired real estate Receivables in
those areas experiencing economic decline, which could result in
higher than anticipated default rates and subsequent investment
losses.

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##### Table of Contents



The following charts present information
regarding type of real estate collateral, lien priority and
geographical distribution of the Consolidated Groups
portfolio of outstanding real estate Receivables as of
September 30, 2002.

Receivables by Collateral Type

(PIE CHART)

Receivables by Security Position

(PIE CHART)

The Consolidated Groups real estate
Receivables at September 30, 2002 were collateralized by
properties located throughout the United States as follows:

|                  |  |            |       |             |  |  |       |  
|----------------- |  | ---------- | ----- | ----------- |  |  | ----- | -
|                  |  | Commercial |       | Residential
|                  |  | Originated |       | and Other  
|                  |  |            |       |            
|Pacific Southwest |  |            | 49.5  | %           |  |  | 25.7  | %
|Southeast         |  |            | 17.7  | %           |  |  | 11.7  | %
|Southwest         |  |            | 16.0  | %           |  |  | 18.1  | %
|Midwest           |  |            | 10.4  | %           |  |  | 5.3   | %
|Pacific Northwest |  |            | 6.4   | %           |  |  | 32.5  | %
|Northeast         |  |            |      |             |  |  | 6.7   | %
|                  |  |            |       |             |  |  |       |  
|                  |  |            | 100.0 | %           |  |  | 100.0 | %
|                  |  |            |       |             |  |  |       |  

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At September 30, 2002, the Consolidated
Group held contracts and mortgage notes Receivables with face
values as follows:

|                                                                                                      |  |             |             |            |  |                |            |          |  |  |      |   |  |  |      |  
|----------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | ---------- |  | -------------- | ---------- | -------- |  |  | ---- | - |  |  | ---- | -
|                                                                                                      |  | Carrying    |             | Delinquent |  | Weighted       |            | Weighted
|                                                                                                      |  | Amount of   |             | Principal  |  | Average Coupon |            | Average 
|Description                                                                                           |  | Receivables |             | Amount(2)  |  | Rate(3)        |            | Yield(4)
|                                                                                                      |  |             |             |            |  |                |            |         
|Commercial(1)                                                                                         |  | $           | 353,794,571 |            |  | $              | 26,349,403 |          |  |  | 13.0 | % |  |  | 16.1 | %
|Residential                                                                                           |  |             | 176,520,275 |            |  |                | 17,753,261 |          |  |  | 9.0  | % |  |  | 10.5 | %
|Other                                                                                                 |  |             | 102,842,313 |            |  |                | 8,351,967  |          |  |  | 9.5  | % |  |  | 11.9 | %
|Unrealized discounts, net of unamortized
    acquisition cost, on Receivables purchased at a discount |  |             | (11,587,546 | )          |  |                |            |          |  |  |      |   |  |  |      |  
|Accrued interest receivable                                                                           |  |             | 12,613,487  |            |  |                |            |          |  |  |      |   |  |  |      |  
|                                                                                                      |  |             |             |            |  |                |            |          |  |  |      |   |  |  |      |  
|CARRYING VALUE                                                                                        |  | $           | 634,183,100 |            |  | $              | 52,454,631 |          |  |  |      |   |  |  |      |  
|                                                                                                      |  |             |             |            |  |                |            |          |  |  |      |   |  |  |      |  



---



|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The commercial real estate Receivables are
    defined as those generated through the Consolidated Groups
    commercial lending source.                 
|   
|(2) | The principal amounts of real estate Receivables
    subject to delinquent principal or interest is defined as being
    in arrears for more than 90 days.
|   
|(3) | Less than 2% of the real estate Receivables are
    subject to variable interest rates.                                                                   
|   
|(4) | See RECEIVABLE INVESTMENTSYield and
    Discount Considerations above in Item 1.                                                                       

The future maturities of the aggregate amounts of
Commercial Loans (face amount) at September 30, 2002 are as
follows:

|                                      |  |            |             | 
|------------------------------------- |  | ---------- | ----------- | 
|                                      |  | Commercial
|                                      |  | Principal 
|                                      |  |           
|Due in one year or less               |  | $          | 101,709,778 | 
|Due after one year through five years |  |            | 181,714,753 | 
|Due after five years                  |  |            | 70,370,040  | 
|                                      |  |            |             | 
|                                      |  | $          | 353,794,571 | 
|                                      |  |            |             | 

At September 30, 2001, the Consolidated
Group held contracts and mortgage notes Receivables with face
values as follows:

|                                                                                                      |  |             |             |            |  |                |            |          |  |  |      |   |  |  |      |  
|----------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | ---------- |  | -------------- | ---------- | -------- |  |  | ---- | - |  |  | ---- | -
|                                                                                                      |  | Carrying    |             | Delinquent |  | Weighted       |            | Weighted
|                                                                                                      |  | Amount of   |             | Principal  |  | Average Coupon |            | Average 
|Description                                                                                           |  | Receivables |             | Amount(2)  |  | Rate(3)        |            | Yield(4)
|                                                                                                      |  |             |             |            |  |                |            |         
|Commercial(1)                                                                                         |  | $           | 128,259,529 |            |  | $              | 5,742,560  |          |  |  | 13.3 | % |  |  | 14.3 | %
|Residential                                                                                           |  |             | 192,874,853 |            |  |                | 15,856,247 |          |  |  | 9.2  | % |  |  | 10.5 | %
|Other                                                                                                 |  |             | 124,391,414 |            |  |                | 12,539,908 |          |  |  | 9.6  | % |  |  | 13.7 | %
|Unrealized discounts, net of unamortized
    acquisition cost, on Receivables purchased at a discount |  |             | (15,422,770 | )          |  |                |            |          |  |  |      |   |  |  |      |  
|Accrued interest receivable                                                                           |  |             | 7,515,198   |            |  |                |            |          |  |  |      |   |  |  |      |  
|                                                                                                      |  |             |             |            |  |                |            |          |  |  |      |   |  |  |      |  
|CARRYING VALUE                                                                                        |  | $           | 437,618,224 |            |  | $              | 34,138,715 |          |  |  |      |   |  |  |      |  
|                                                                                                      |  |             |             |            |  |                |            |          |  |  |      |   |  |  |      |  



---



|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The commercial real estate Receivables are
    defined as those generated through the Consolidated Groups
    commercial lending source.                 
|   
|(2) | The principal amounts of real estate Receivables
    subject to delinquent principal or interest is defined as being
    in arrears for more than 90 days.

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|    |                                                                                        
|--- | ---------------------------------------------------------------------------------------
|(3) | Less than 2% of the real estate Receivables are
    subject to variable interest rates.
|   
|(4) | See RECEIVABLE INVESTMENTS Yield and
    Discount Considerations above in Item 1.   

The future maturities of the aggregate amounts of
Commercial Loans (face amount) at September 30, 2001 are as
follows:

|                                      |  |            |             | 
|------------------------------------- |  | ---------- | ----------- | 
|                                      |  | Commercial
|                                      |  | Principal 
|                                      |  |           
|Due in one year or less               |  | $          | 35,336,935  | 
|Due after one year through five years |  |            | 86,150,290  | 
|Due after five years                  |  |            | 6,772,304   | 
|                                      |  |            |             | 
|                                      |  | $          | 128,259,529 | 
|                                      |  |            |             | 

Securities Investments

At September 30, 2002, 2001 and 2000, 93.0%,
87.8% and 87.7%, respectively, of the Consolidated Groups
securities investments were held by Western Life.

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The following table outlines the nature and
carrying value of securities investments held by the
Consolidated Group at September 30, 2002:

|                                     |                                      |                 |             |             |  |       |            |            |  |   |             |             |  |  |        |       |  
|------------------------------------ | ------------------------------------ | --------------- | ----------- | ----------- |  | ----- | ---------- | ---------- |  | - | ----------- | ----------- |  |  | ------ | ----- | -
|                                     |                                      | Available- For- |             | Held-To-    |  |       |            |           
|                                     |                                      | Sale Portfolio  |             | Maturity    |  | Total |            | Percentage
|                                     |                                      |                 |             |             |  |       |            |           
|Total Amount                         |                                      | $               | 495,060,527 |             |  | $     | 40,228,594 |            |  | $ | 535,289,121 |             |  |  | 100.00 | %    
|                                     |                                      |                 |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|Invested in:                         |                                      |                 |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|                                     | Fixed Income                         |                 | $           | 451,416,799 |  |       | $          | 40,228,594 |  |   | $           | 491,645,393 |  |  |        | 91.84 | %
|                                     | Equities                             |                 |             | 39,695,014  |  |       |            |           |  |   |             | 39,695,014  |  |  |        | 7.42  |  
|                                     | Venture Capital/ Limited Partnership |                 |             | 3,948,714   |  |       |            |           |  |   |             | 3,948,714   |  |  |        | 0.74  |  
|                                     |                                      |                 |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|                                     |                                      | $               | 495,060,527 |             |  | $     | 40,228,594 |            |  | $ | 535,289,121 |             |  |  | 100.00 | %    
|                                     |                                      |                 |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|Fixed Income:                        |                                      |                 |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|                                     | U.S. Government                      |                 | $           | 219,825     |  |       | $          | 1,004,611  |  |   | $           | 1,224,436   |  |  |        | 0.25  | %
|                                     | Other                                |                 |             | 451,196,974 |  |       |            | 39,223,983 |  |   |             | 490,420,957 |  |  |        | 99.75 |  
|                                     |                                      |                 |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|                                     |                                      | $               | 451,416,799 |             |  | $     | 40,228,594 |            |  | $ | 491,645,393 |             |  |  | 100.00 | %    
|                                     |                                      |                 |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|Other fixed income by rating:        |                                      |                 |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|                                     | AAA                                  |                 | $           | 326,927,562 |  |       | $          | 39,223,983 |  |   | $           | 366,151,545 |  |  |        | 74.65 | %
|                                     | AA                                   |                 |             | 11,812,356  |  |       |            |           |  |   |             | 11,812,356  |  |  |        | 2.41  |  
|                                     | A                                    |                 |             | 4,785,648   |  |       |            |           |  |   |             | 4,785,648   |  |  |        | 0.98  |  
|                                     | BBB                                  |                 |             | 35,309,413  |  |       |            |           |  |   |             | 35,309,413  |  |  |        | 7.20  |  
|                                     | BB                                   |                 |             | 33,846,902  |  |       |            |           |  |   |             | 33,846,902  |  |  |        | 6.90  |  
|                                     | B                                    |                 |             | 8,266,922   |  |       |            |           |  |   |             | 8,266,922   |  |  |        | 1.69  |  
|                                     | Other                                |                 |             | 30,248,171  |  |       |            |           |  |   |             | 30,248,171  |  |  |        | 6.17  |  
|                                     |                                      |                 |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|                                     |                                      | $               | 451,196,974 |             |  | $     | 39,223,983 |            |  | $ | 490,420,957 |             |  |  | 100.00 | %    
|                                     |                                      |                 |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|Other fixed income by market sector: |                                      |                 |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|                                     | Mortgage- and asset-backed           |                 | $           | 431,285,927 |  |       | $          | 39,223,983 |  |   | $           | 470,509,910 |  |  |        | 95.95 | %
|                                     | Finance                              |                 |             | 161,500     |  |       |            |           |  |   |             | 161,500     |  |  |        | 0.03  |  
|                                     | Industrial                           |                 |             | 17,428,147  |  |       |            |           |  |   |             | 17,428,147  |  |  |        | 3.55  |  
|                                     | Utilities                            |                 |             | 2,321,400   |  |       |            |           |  |   |             | 2,321,400   |  |  |        | 0.47  |  
|                                     |                                      |                 |             |             |  |       |            |            |  |   |             |             |  |  |        |      
|                                     |                                      | $               | 451,196,974 |             |  | $     | 39,223,983 |            |  | $ | 490,420,957 |             |  |  | 100.00 | %    
|                                     |                                      |                 |             |             |  |       |            |            |  |   |             |             |  |  |        |      

Unrealized
Losses on Investments

Temporary declines in the fair value of
investments that are available-for-sale are excluded
from earnings and presented as accumulated other comprehensive
income or loss, net of related income taxes. The Consolidated
Group continually monitors its investment portfolio for other
than temporary impairments of its securities. When an other than
temporary decline in value below cost or amortized cost is
identified, the investment is reduced to its fair value, which
becomes the new cost basis of the investment. The amount of
reduction is reported as a realized loss in the statement of
operations. In determining whether the losses are temporary or
other than temporary, the Consolidated Group considers
(1) the length of time and extent to which the fair value
has been less than cost or carrying value, (2) the
circumstances contributing to the decline in fair value
(including a change in interest rates or spreads to benchmarks),
(3) recent performance of the security, (4) the
financial strength of the issuer, and (5) the intent and
ability of the Consolidated Group to retain the investment for a
period of time sufficient to allow for anticipated recovery.
Additionally, for asset-backed investments, the Consolidated
Group also considers the credit rating and determines the amount
of credit support available for the security. At
September 30, 2002, the Consolidated Groups

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investment portfolio had approximately
$3.4 million in unrealized losses that were deemed to be
temporary. To the extent that any losses currently deemed as
temporary are determined to be other than temporary in the
future, the unrealized losses will be reported as realized
losses in future statements of operations.


The following table stratifies the unrealized
losses as of September 30, 2002 by investment category:

|                                      |                               |                |            |                   |  |   |            |            |  
|------------------------------------- | ----------------------------- | -------------- | ---------- | ----------------- |  | - | ---------- | ---------- | -
|                                      |                               | Carrying Value |            | Unrealized Losses
|                                      |                               |                |            |                  
|Corporate bonds                       |                               | $              | 9,916,310  |                   |  | $ | (365,764   | )         
|Mortgage- and-asset-backed securities |                               |                | 79,208,456 |                   |  |   | (2,306,998 | )         
|                                      |                               |                |            |                   |  |   |            |           
|                                      | Total fixed income securities |                |            | 89,124,766        |  |   |            | (2,672,761 | )
|                                      |                               |                |            |                   |  |   |            |           
|Common stock                          |                               |                | 2,420,502  |                   |  |   | (427,147   | )         
|Preferred stock                       |                               |                | 8,902,959  |                   |  |   | (266,625   | )         
|                                      |                               |                |            |                   |  |   |            |           
|                                      | Totals                        |                | $          | 100,448,227       |  |   | $          | (3,366,533 | )
|                                      |                               |                |            |                   |  |   |            |           

The following table stratifies the unrealized
losses as of September 30, 2002 by market sector:

|                                   |                               |                |            |                   |  |   |            |            |  
|---------------------------------- | ----------------------------- | -------------- | ---------- | ----------------- |  | - | ---------- | ---------- | -
|                                   |                               | Carrying Value |            | Unrealized Losses
|                                   |                               |                |            |                  
|Corporate bonds                    |                               | $              | 9,916,310  |                   |  | $ | (365,764   | )         
|Collateralized mortgage obligation |                               |                | 43,109,358 |                   |  |   | (548,976   | )         
|Other asset-backed                 |                               |                | 30,789,919 |                   |  |   | (1,757,131 | )         
|Home equity                        |                               |                | 5,309,179  |                   |  |   | (891       | )         
|                                   |                               |                |            |                   |  |   |            |           
|                                   | Total fixed income securities |                |            | 89,124,766        |  |   |            | (2,672,761 | )
|                                   |                               |                |            |                   |  |   |            |           
|Common stock                       |                               |                | 2,420,502  |                   |  |   | (427,147   | )         
|Preferred stock                    |                               |                | 8,902,959  |                   |  |   | (266,625   | )         
|                                   |                               |                |            |                   |  |   |            |           
|                                   | Totals                        |                | $          | 100,448,227       |  |   | $          | (3,366,533 | )
|                                   |                               |                |            |                   |  |   |            |           

The following table stratifies the unrealized
losses as of September 30, 2002 by credit rating:

|             |        |                |            |                   |  |   |          |            |  
|------------ | ------ | -------------- | ---------- | ----------------- |  | - | -------- | ---------- | -
|             |        | Carrying Value |            | Unrealized Losses
|             |        |                |            |                  
|AAA          |        | $              | 49,544,782 |                   |  | $ | (887,956 | )         
|AA           |        |                | 3,658,679  |                   |  |   | (215,905 | )         
|A            |        |                | 7,565,285  |                   |  |   | (507,286 | )         
|BBB          |        |                | 7,353,817  |                   |  |   | (310,155 | )         
|BB           |        |                | 24,130,531 |                   |  |   | (895,440 | )         
|B            |        |                | 4,130,918  |                   |  |   | (122,372 | )         
|Other        |        |                | 1,643,713  |                   |  |   | (272     | )         
|Common stock |        |                | 2,420,502  |                   |  |   | (427,147 | )         
|             |        |                |            |                   |  |   |          |           
|             | Totals |                | $          | 100,448,227       |  |   | $        | (3,366,533 | )
|             |        |                |            |                   |  |   |          |           

Unrealized losses relating to the investment
grade assets (BBB and higher) are generally due to changes in
interest rates which may include changes in spreads to
benchmarks for a particular sector of the market. To the extent
that unrealized losses in the Consolidated Groups
investment grade portfolio are the result of issues other than
interest rate changes, the investments are evaluated for other
than temporary impairment. At September 30, 2002,
approximately $1.7 million in unrealized losses in the
Consolidated Groups investment grade assets and
approximately $34,000 in non-investment grade assets were due to
investments in airline-related asset-backed securities. In
determining whether these losses were temporary or other than
temporary, the Consolidated Group considered (1) recent
performance of the security, (2) the credit rating of the
security, (3) the amount of credit support available for
the security, (4) circumstances contributing to the decline
in value, (5) the length of time and extent to which the
fair value has been less than cost or carrying

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value, and (6) the intent and ability of the
Consolidated Group to retain the investment for a period of time
sufficient to allow for anticipated recovery.


The following table stratifies the unrealized
losses as of September 30, 2002 by trading class:

|           |        |                |             |                   |  |   |            |            |  
|---------- | ------ | -------------- | ----------- | ----------------- |  | - | ---------- | ---------- | -
|           |        | Carrying Value |             | Unrealized Losses
|           |        |                |             |                  
|Traded     |        | $              | 100,448,227 |                   |  | $ | (3,366,533 | )         
|Non-Traded |        |                |            |                   |  |   |           |           
|           |        |                |             |                   |  |   |            |           
|           | Totals |                | $           | 100,448,227       |  |   | $          | (3,366,533 | )
|           |        |                |             |                   |  |   |            |           

The following table stratifies the unrealized
losses as of September 30, 2002 by length of time the
securities have continuously been in an unrealized loss position:

|                         |                      |                |  |                   |             |  |  |          |            |  
|------------------------ | -------------------- | -------------- |  | ----------------- | ----------- |  |  | -------- | ---------- | -
|                         |                      | Carrying Value |  | Unrealized Losses
|                         |                      |                |  |                  
|Fixed Income Securities: |                      |                |  |                   |             |  |  |         
|                         | Investment Grade     |                |  |                   |             |  |  |          |           
|                         |                      | 0-6 months     |  | $                 | 47,792,042  |  |  | $        | (633,420   | )
|                         |                      | 7-12 months    |  |                   |            |  |  |          |           |  
|                         |                      | 13-18 months   |  |                   | 20,365,693  |  |  |          | (1,736,406 | )
|                         | Non-Investment Grade |                |  |                   |             |  |  |          |           
|                         |                      | 0-6 months     |  |                   | 20,967,031  |  |  |          | (302,935   | )
|Preferred Stock:         |                      |                |  |                   |             |  |  |         
|                         | 0-6 months           |                |  | 8,902,959         |             |  |  | (266,625 | )         
|Common Stock:            |                      |                |  |                   |             |  |  |         
|                         | 0-6 months           |                |  | 2,420,502         |             |  |  | (427,147 | )         
|                         |                      |                |  |                   |             |  |  |         
|                         |                      | Total          |  | $                 | 100,448,227 |  |  | $        | (3,366,533 | )
|                         |                      |                |  |                   |             |  |  |         

The maturities of fixed income investments that
are in an unrealized loss position at September 30, 2002
are as follows:

|                                       |                                                |                |            |                   |  |   |            |            |  
|-------------------------------------- | ---------------------------------------------- | -------------- | ---------- | ----------------- |  | - | ---------- | ---------- | -
|                                       |                                                | Carrying Value |            | Unrealized Losses
|                                       |                                                |                |            |                  
|Due in one year through five years     |                                                | $              | 2,120,885  |                   |  | $ | (99,292    | )         
|Due after five years through ten years |                                                |                | 7,295,425  |                   |  |   | (266,468   | )         
|Due thereafter                         |                                                |                | 500,000    |                   |  |   | (4         | )         
|                                       |                                                |                |            |                   |  |   |            |           
|                                       | Total non-mortgage-and-asset-backed securities |                |            | 9,916,310         |  |   |            | (365,764   | )
|Mortgage-and-asset-backed securities   |                                                |                | 79,208,456 |                   |  |   | (2,306,998 | )         
|                                       |                                                |                |            |                   |  |   |            |           
|                                       | Total fixed income securities                  |                | $          | 89,124,766        |  |   | $          | (2,672,761 | )
|                                       |                                                |                |            |                   |  |   |            |           

The Consolidated Group is authorized by their
respective investment policies to use financial futures
instruments for the purpose of hedging interest rate risk
relative to the securities portfolio or potential trading
situations. In both cases, the futures transaction is intended
to reduce the risk associated with price movements for a balance
sheet asset. Securities may be sold short (the sale
of securities which are not currently in the portfolio and
therefore must be purchased to close out the sale agreement) as
another means of hedging interest rate risk, to benefit from an
anticipated movement in the financial markets. At
September 30, 2002, the Consolidated Group had no
outstanding hedge transactions or open short sales positions.
See Market Risk Management.

Other Receivables

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

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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 whereby
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 which cannot be
immediately converted to cash directly with the issuing
insurance company. Metropolitans source for these
investments is generally private brokers who specialize in these
types of Receivables.


The following table outlines the nature and
carrying value of other Receivables held by the Consolidated
Group at September 30, 2002:

|             |                                   |                |             |            |  |  |        |       |  
|------------ | --------------------------------- | -------------- | ----------- | ---------- |  |  | ------ | ----- | -
|             |                                   | Carrying Value |             | Percentage
|             |                                   |                |             |           
|Invested in: |                                   |                |             |            |  |  |        |      
|             | Lotteries                         |                | $           | 90,190,650 |  |  |        | 70.33 | %
|             | Note receivable from affiliate    |                |             | 13,246,825 |  |  |        | 10.33 |  
|             | Annuities/ Structured settlements |                |             | 18,764,365 |  |  |        | 14.63 |  
|             | Financing leases                  |                |             | 2,203,417  |  |  |        | 1.72  |  
|             | Other                             |                |             | 3,836,098  |  |  |        | 2.99  |  
|             |                                   |                |             |            |  |  |        |      
|             |                                   | $              | 128,241,355 |            |  |  | 100.00 | %    
|             |                                   |                |             |            |  |  |        |      

Real Estate Held for Sale and
Development

From time to time, the Consolidated Group
acquires development properties through foreclosures or direct
purchases from third parties. The development or improvement of
properties is undertaken for the purpose of enhancing values to
increase marketability and to maximize profit potential.

Development properties

The following development properties exceeded 5%
of the Consolidated Groups stockholders equity at
September 30, 2002.

|                              |  |          |            | 
|----------------------------- |  | -------- | ---------- | 
|                              |  | Carrying
|Property Description          |  | Value   
|                              |  |         
|Dillingham Ranch              |  | $        | 20,749,662 | 
|Summit                        |  |          | 13,503,135 | 
|Spokane Valley Plaza          |  |          | 12,307,980 | 
|Broadmoor Property            |  |          | 10,428,115 | 
|Sunset Beach                  |  |          | 10,132,174 | 
|Broadmoor Factory Outlet Mall |  |          | 7,319,784  | 
|Airway Business Centre        |  |          | 4,405,380  | 

Dillingham
Ranch

During fiscal 2002, the Consolidated Group
purchased approximately 2,800 acres on the island of Oahu in
Hawaii. The Consolidated Group has begun subdividing the
waterfront portion of the property generally into 5-acre tracts.
This effort is expected to be completed in fiscal 2003.

The balance of the property, 2,700 acres, is
currently going through a lengthy study and planning process
that is expected to culminate in the Consolidated Group rezoning
and entitling the property around a common theme such as a
private club or an equestrian based community.

The
Summit Property

This property consists of approximately 76.35
acres in downtown Spokane, Washington adjacent to the central
business district and is located along the north bank of the
Spokane River. The property is zoned for

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mixed uses, ranging from medium density
residential to office and retail. A final Environmental Impact
Statement on the proposed project was published in 1993. The
master plan and Shoreline Substantial Development Use Permit
were approved by the City of Spokane in 1995. Metropolitan is
currently exploring options for the development of the
infrastructure of the property.


Spokane
Valley Plaza

This property is located near the Sullivan Road
and Interstate 90 freeway interchange just east of Spokane,
Washington and consists of 28.15 acres of land zoned for
regional commercial use. Currently, the property has 84,000
square feet of leasable space with 83,015 square feet occupied.
Additionally, there is capacity for an additional 59,509 square
feet of leasable space available for development.

Broadmoor
Park Outlet Mall

The Broadmoor Park Outlet Mall is 10.98 acres
located on the north side of Interstate 182 freeway near Pasco,
Washington. The Outlet Mall is approximately 101,000 square feet
and over 52% leased as of September 30, 2002. The Outlet
Mall has not developed as anticipated and to retain tenants,
leases were converted to percentage rents based upon sales.
During 2002 the Consolidated Group began to convert the property
from a factory outlet mall to a neighborhood/regional oriented
retail center. The Consolidated Group believes this conversion
will take approximately 24 months to complete.

Broadmoor
Park General

The remaining 378.03 acres of Broadmoor Park are
zoned for development as hotels, motels, fast food restaurants,
gas stations, a variety of stores, and for development of both
single and multi-family residential housing. Sales in fiscal
2002 totaled approximately 103 acres for approximately
$3.6 million.

Sunset
Beach

This property is 19.1 acres of development
property on the North Shore of Oahu, Hawaii. During fiscal 2002,
Metropolitan finalized the necessary entitlements to develop the
property into a 29-lot residential subdivision in order to begin
to sell the residential lots.

Airway
Business Centre

Airway Business Centre consists of 21.23 acres of
commercial/industrial-zoned property in Airway Heights,
Washington. During 2002, the Consolidated Group submitted to the
City of Airway Heights to rezone the property into a mixed use
Binding Site Plan and establish a development plan. As part of
the rezoning, the Consolidated Group, in conjunction with the
City of Airway Heights, is working to establish a Tax Increment
District on the property. The Consolidated Group believes that
the establishment of the Tax Increment District will stimulate
and encourage growth in the area by creating a competitive edge
over other properties in the vicinity.

Repossessions

In the course of its real estate Receivable
investment activity, the Consolidated Group acquires various
parcels of real estate as a result of foreclosures and/or
voluntary repossessions. It is the Consolidated Groups
general policy to attempt to resell such properties at the
earliest possible time following acquisition. Improvements are
made to certain properties for the purpose of preservation or
restoration to maximize the resale price. The marketing status
of all properties is reviewed at least monthly by a committee
that includes sales and management personnel. Generally,
repossessed properties are resold within one year from the date
of repossession and any losses are reported as a component of
provision for loss on real estate held for sale.

At September 30, 2002, the Consolidated
Group had one repossessed property with a carrying value greater
than 5% of stockholders equity. This property, which had a
carrying value of approximately

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$4.9 million is located in the greater
Orlando, Florida area and is referred to as the Lake Mary Summit
property. This property began to be actively marketed in the
fourth quarter of fiscal year 2002.


The following is a summary of the changes in real
estate held for sale and development for the years ended
September 30, 2002, 2001 and 2000.

|                               |                                 |                          |             |            |  |      |            |            |  |   |            |            | 
|------------------------------ | ------------------------------- | ------------------------ | ----------- | ---------- |  | ---- | ---------- | ---------- |  | - | ---------- | ---------- | 
|                               |                                 |                         
|                               |                                 | Year Ended September 30,
|                               |                                 |                         
|                               |                                 | 2002                     |             | 2001       |  | 2000
|                               |                                 |                          |             |            |  |     
|Balance at beginning of period |                                 | $                        | 85,595,998  |            |  | $    | 74,144,242 |            |  | $ | 85,747,433 |           
|Additions during period:       |                                 |                          |             |            |  |      |            |            |  |   |            |           
|                               | Purchases and development costs |                          |             | 40,774,749 |  |      |            | 14,566,517 |  |   |            | 9,186,324  | 
|                               | Foreclosures                    |                          |             | 21,545,856 |  |      |            | 15,144,972 |  |   |            | 16,608,479 | 
|                               |                                 |                          |             |            |  |      |            |            |  |   |            |           
|Total additions                |                                 |                          | 62,320,605  |            |  |      | 29,711,489 |            |  |   | 25,794,803 |           
|                               |                                 |                          |             |            |  |      |            |            |  |   |            |           
|Deductions during period:      |                                 |                          |             |            |  |      |            |            |  |   |            |           
|                               | Depreciation                    |                          |             | 1,150,528  |  |      |            | 1,099,398  |  |   |            | 1,150,600  | 
|                               | Real estate sold                |                          |             | 37,788,621 |  |      |            | 17,160,335 |  |   |            | 36,247,394 | 
|                               |                                 |                          |             |            |  |      |            |            |  |   |            |           
|Total deductions               |                                 |                          | 38,939,149  |            |  |      | 18,259,733 |            |  |   | 37,397,994 |           
|                               |                                 |                          |             |            |  |      |            |            |  |   |            |           
|Balance at end of period       |                                 | $                        | 108,977,454 |            |  | $    | 85,595,998 |            |  | $ | 74,144,242 |           
|                               |                                 |                          |             |            |  |      |            |            |  |   |            |           

Asset Quality

Servicing, Collection and Delinquency
Experience

Prior to April 2001, Metwest performed the
servicing and collection functions related to the Consolidated
Groups Receivable portfolio. Metwest also serviced the
Receivables of Summit, Old Standard and Old West, as well as
Receivables sold through securitizations.

In April 2001, as a result of Metropolitans
decision to stop performing loan servicing operations, the
Consolidated Group participated with some of its affiliates in a
transaction with a wholly-owned subsidiary of Ocwen Financial
Corporation (Ocwen) (NYSE: OCN), where the servicing
rights to Receivables and foreclosed properties held for sale
were transferred to Ocwen. In October 2001, the Consolidated
Group entered into a subservicing agreement, whereby Ocwen will
provide servicing for the majority of the remaining Receivable
portfolio in addition to the Consolidated Groups future
acquisitions of new Receivables. As the servicer for the
Consolidated Group, Ocwen is responsible for all servicing
related functions ranging from payment processing to the
liquidation of property acquired as a result of foreclosure.
Moodys Investor Service, Inc. (Moodys)
assigned its highest rating, SQ1, to Ocwen as a Primary Servicer
of subprime loans and as a Specialty Servicer. Ocwen carries a
level 2 servicer rating from Fitch IBCA, Inc.
(Fitch). According to Fitch, level 2 servicers have
demonstrated high performance in all relevant categories.
Standard & Poors (S&P) has assigned
its Strong Residential Subprime and Residential Special Servicer
rankings to Ocwen. S&P has also assigned an Above Average
Residential Alternative Servicer ranking to Ocwen for
subordinate lien products. Ocwens primary business is the
servicing and special servicing of nonconforming and subprime
residential and commercial mortgage loans. Ocwen also
specializes in the related development of loan servicing
technology and software for the mortgage and real estate
industries. As of September 30, 2002, Ocwen serviced
approximately 65% of the Consolidated Groups Receivable
portfolio. The remaining 35% was serviced by Metwest.

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The principal amount of the Consolidated
Groups Commercial Loans (as a percentage of total
outstanding Commercial Loans) that were in arrears for more than
90 days as of the following dates were as follows:

|                   |  |            |             |            |  |            |            |  |  |  |      |  
|------------------ |  | ---------- | ----------- | ---------- |  | ---------- | ---------- |  |  |  | ---- | -
|                   |  | Total      |             | Commercial |  |           
|                   |  | Commercial |             | Loans in   |  | Percentage
|                   |  | Loans      |             | arrears    |  | in arrears
|                   |  |            |             |            |  |           
|September 30, 2002 |  | $          | 353,794,571 |            |  | $          | 26,349,403 |  |  |  | 7.45 | %
|September 30, 2001 |  | $          | 128,259,529 |            |  | $          | 5,742,560  |  |  |  | 4.48 | %
|September 30, 2000 |  | $          | 7,460,745   |            |  | $          |           |  |  |  | 0.00 | %

In addition to the amounts included in the table
above at September 30, 2002, there were approximately
$23.9 million in additional delinquent loans that the
Consolidated Group had serious doubts that the borrowers had the
ability to comply with present loan repayment terms, and
therefore may become 90 days delinquent. As of
September 30, 2002, these loans accounted for 6.8% of the
total outstanding Commercial Loans, but were not included in the
table above because they were less than 90 days delinquent.

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

The Problem Loan Review Committee is composed of
representatives from underwriting, risk management, operations,
commercial lending, legal and property development. The
committee meets weekly and reviews all newly defaulted loans,
continuing defaulted loans, loans in foreclosure, loans in
bankruptcy and progress on approved workout plans.

The principal amount of the Consolidated
Groups residential and other Receivables collateralized by
real estate (as a percentage of total residential and other
Receivables collateralized by real estate) 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
|                   |  |                    |             |                   |  |           
|September 30, 2002 |  | $                  | 279,362,588 |                   |  | $          | 26,105,228 |  |  |  | 9.34 | %
|September 30, 2001 |  | $                  | 317,266,267 |                   |  | $          | 28,396,155 |  |  |  | 8.95 | %
|September 30, 2000 |  | $                  | 396,767,867 |                   |  | $          | 26,400,000 |  |  |  | 6.65 | %

The real estate Receivables acquired by the
Consolidated Group are generally A-, B and C credit Receivables.
Management expects higher delinquency rates because Receivables
purchased or originated by the Consolidated Group are typically
not of the same quality as mortgages that are originated for
sale to agencies such as the Federal National Mortgage
Association (Fannie Mae). Management believes that
the

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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. The increase in over
90 days delinquencies as a percentage of outstanding
residential and other real estate Receivables from 8.95% at
September 30, 2001 to 9.34% at September 30, 2002 was
primarily due to the decline in residential and other real
estate Receivables balances resulting from the change in focus
to increase Commercial Loans.


The carrying amount of the Consolidated
Groups other Receivable investments not collateralized by
real estate (as a percentage of total other Receivable
investments) 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
|                   |  |             |             |                   |  |           
|September 30, 2002 |  | $           | 128,241,355 |                   |  | $          | 6,270,822 |  |  |  | 4.89 | %
|September 30, 2001 |  | $           | 176,104,766 |                   |  | $          | 6,834,560 |  |  |  | 3.88 | %
|September 30, 2000 |  | $           | 271,380,430 |                   |  | $          | 4,625,677 |  |  |  | 1.70 | %

Provision and Allowance for Losses on
Receivables

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

|                                                |                                         |      |            |            |   |      |            |            |   |   |            |            |  
|----------------------------------------------- | --------------------------------------- | ---- | ---------- | ---------- | - | ---- | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                                |                                         | 2002 |            | 2001       |   | 2000
|                                                |                                         |      |            |            |   |     
|Beginning balance                               |                                         | $    | 13,509,977 |            |   | $    | 12,983,966 |            |   | $ | 6,855,606  |           
|Provisions                                      |                                         |      | 4,142,146  |            |   |      | 7,515,420  |            |   |   | 12,070,638 |           
|Charge offs:                                    |                                         |      |            |            |   |      |            |            |   |   |            |           
|                                                | Commercial Loans                        |      |            | (1,960,777 | ) |      |            |           |   |   |            |           |  
|                                                | Residential and other real estate loans |      |            | (4,352,344 | ) |      |            | (4,794,882 | ) |   |            | (5,153,536 | )
|                                                | Leases                                  |      |            |           |   |      |            | (2,172,299 | ) |   |            | (788,742   | )
|                                                | Other receivable investments            |      |            |           |   |      |            | (22,228    | ) |   |            |           |  
|                                                |                                         |      |            |            |   |      |            |            |   |   |            |           
|Ending balance                                  |                                         | $    | 11,339,002 |            |   | $    | 13,509,977 |            |   | $ | 12,983,966 |           
|                                                |                                         |      |            |            |   |      |            |            |   |   |            |           
|Charge offs as a percent of average Receivables |                                         |      | 0.91       | %          |   |      | 1.15       | %          |   |   | 0.91       | %         
|Allowance as a percentage of total Receivables  |                                         |      | 1.49       | %          |   |      | 2.17       | %          |   |   | 2.19       | %         

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

|                                        |  |                   |            |            |  |                 |       |   |  |  |        |  
|--------------------------------------- |  | ----------------- | ---------- | ---------- |  | --------------- | ----- | - |  |  | ------ | -
|                                        |  |                   |            | Allocated  |  |                
|                                        |  |                   |            | Allowance  |  |                
|                                        |  | Allocated         |            | as a % of  |  | Loan Category  
|                                        |  | Allowance for     |            | Receivable |  | as a % of Total
|                                        |  | Receivable Losses |            | Category   |  | Receivables    
|                                        |  |                   |            |            |  |                
|2002                                    |  |                   |            |            |  |                 |       |   |  |  |        |  
|Commercial Loans                        |  | $                 | 3,042,495  |            |  |                 | 0.86  | % |  |  | 46.47  | %
|Residential and other real estate loans |  |                   | 5,817,420  |            |  |                 | 2.08  | % |  |  | 36.69  | %
|Leases                                  |  |                   | 600,730    |            |  |                 | 14.21 | % |  |  | 0.55   | %
|Other receivable investments            |  |                   | 500,000    |            |  |                 | 0.40  | % |  |  | 16.29  | %
|Unallocated                             |  |                   | 1,378,357  |            |  |                 | 0.22  | % |  |  | 0.00   | %
|                                        |  |                   |            |            |  |                 |       |   |  |  |        |  
|                                        |  | $                 | 11,339,002 |            |  |                 | 1.49  | % |  |  | 100.00 | %
|                                        |  |                   |            |            |  |                 |       |   |  |  |        |  
|2001                                    |  |                   |            |            |  |                 |       |   |  |  |        |  
|Commercial Loans                        |  | $                 | 2,035,408  |            |  |                 | 1.59  | % |  |  | 20.63  | %
|Residential and other real estate loans |  |                   | 8,222,839  |            |  |                 | 2.59  | % |  |  | 51.04  | %
|Leases                                  |  |                   | 600,730    |            |  |                 | 9.05  | % |  |  | 1.07   | %
|Other receivable investments            |  |                   | 1,667,266  |            |  |                 | 0.98  | % |  |  | 27.26  | %
|Unallocated                             |  |                   | 983,734    |            |  |                 | 0.22  | % |  |  | 0.00   | %
|                                        |  |                   |            |            |  |                 |       |   |  |  |        |  
|                                        |  | $                 | 13,509,977 |            |  |                 | 2.17  | % |  |  | 100.00 | %
|                                        |  |                   |            |            |  |                 |       |   |  |  |        |  
|2000                                    |  |                   |            |            |  |                 |       |   |  |  |        |  
|Commercial Loans                        |  | $                 | 108,399    |            |  |                 | 1.45  | % |  |  | 1.26   | %
|Residential and other real estate loans |  |                   | 9,783,517  |            |  |                 | 2.47  | % |  |  | 66.92  | %
|Leases                                  |  |                   | 776,369    |            |  |                 | 6.37  | % |  |  | 2.06   | %
|Other receivable investments            |  |                   | 1,467,786  |            |  |                 | 0.83  | % |  |  | 29.76  | %
|Unallocated                             |  |                   | 847,895    |            |  |                 | 0.21  | % |  |  | 0.00   | %
|                                        |  |                   |            |            |  |                 |       |   |  |  |        |  
|                                        |  | $                 | 12,983,966 |            |  |                 | 2.19  | % |  |  | 100.00 | %
|                                        |  |                   |            |            |  |                 |       |   |  |  |        |  

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

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

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The Consolidated Group established 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
historical foreclosure and loss experience. The residential and
other Receivable portfolio is comprised of a large group of
smaller-balance homogeneous loans that are collectively
evaluated for impairment. During the fiscal year ended
September 30, 2000, the Consolidated Group revised its
expected foreclosure and loss severity assumptions for the
sub-prime loans that were previously originated by the
Consolidated Group. Originally, the assumptions used for the
sub-prime loans were based on the historical performance of the
Consolidated Groups Receivable portfolio, which were
primarily seller-financed Receivables. The Consolidated Group
used the seller-financed based assumptions because they
anticipated that the sub-prime loans that were being originated
would perform the same as the seller-financed loans. When the
Consolidated Group determined that the expected performance of
the sub-prime loans differed from its initial assumptions, and
such actual performance is not generally known until
12-24 months after origination, it revised the expected
future loss rate accordingly. The Consolidated Group
discontinued its origination of sub-prime loans in January 2001.

The reduction in the ending reserve balance on
residential and other real estate loans during the fiscal year
ended September 30, 2002 was primarily due to the overall
seasoning of the loan portfolio. As the Consolidated Group has
recently focused on Commercial Loan originations, the remaining
real estate Receivable portfolio has been decreasing in size due
to payoffs and maturities. The remaining portfolio, which is
comprised of production from previous years, contains different
loss potential characteristics depending upon the year the loans
were produced (production pool years). Not all production pool
years will experience the same rate of loss over their
respective remaining lives. Pools that have seasoned beyond the
four-year mark generally experience lower future losses than
pools that are less seasoned.

During the fiscal year ended September 30,
2000, an allowance for losses on other Receivable investments
was established as the Consolidated Group began to originate
finance leases. During the fiscal year ended September 30,
2001, the Consolidated Group discontinued lease origination and
does not currently have plans to resume this division.
Additionally, the Consolidated Group established an allowance on
its investments in annuity and structured settlements as the
industry began to focus on state and federal collection laws and
their applicability to annuity and structured settlement
payments.

The reduction in ending allocated allowance
balances for other Receivable investments during the fiscal year
ended September 30, 2002 was due to a positive change in
the federal tax law effecting structured settlement transfers
and the consequential cooperation by certain annuity issuers
with respect to the payment of defaulted, and in some cases
current, structured settlements.

In estimating the amount of credit losses
inherent in the Receivable portfolios, management utilizes
various judgments and assumptions. For Receivables that are
collateral-dependent, the estimated fair market value of the
collateral may deviate significantly from the proceeds received
when the collateral is sold. To mitigate the imprecision
inherent in most estimates of expected credit losses, the
allocated component of the allowance is supplemented by 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 the
Consolidated Groups allowance for losses on real estate
held for sale:

|                  |  |      |            |      |  |      |            |   |  |   |            |  
|----------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                  |  | 2002 |            | 2001 |  | 2000
|                  |  |      |            |      |  |     
|Beginning Balance |  | $    | 3,661,247  |      |  | $    | 2,066,148  |   |  | $ | 2,462,466  |  
|Provisions        |  |      | 2,345,301  |      |  |      | 4,308,205  |   |  |   | 2,817,950  |  
|Charge-Offs       |  |      | (4,008,100 | )    |  |      | (2,713,106 | ) |  |   | (3,214,268 | )
|                  |  |      |            |      |  |      |            |   |  |   |            |  
|Ending Balance    |  | $    | 1,998,448  |      |  | $    | 3,661,247  |   |  | $ | 2,066,148  |  
|                  |  |      |            |      |  |      |            |   |  |   |            |  

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

Market Risk Management

Market risk is defined as the sensitivity of
income and capital to changes in interest rates, equity prices
and other market variables. Market risk is managed within an
overall asset/liability management framework. The Consolidated
Groups Asset/ Liability Committee is responsible for
reviewing and administering its asset/liability management
positions.

Interest rates.Management continually monitors the
interest sensitive income and expense of the Consolidated Group.
Interest sensitive expense is predominantly related to annuity
benefits, and the interest costs of certificates and
collateralized borrowings, while interest sensitive income
includes interest, earned discounts and other income from the
Receivable and investment portfolio. Substantially all of the
Consolidated Groups interest rate risk arises from
instruments, positions and transactions entered into for
purposes other than trading. They include loans, securities,
annuity deposits and long-term debt. Increases or decreases in
interest rates can cause changes in net income and fluctuations
in the fair market value of interest sensitive assets and
liabilities.

Equity prices.The
Consolidated Groups investments in equity securities
expose it to changes in equity prices. It manages this risk on
an integrated basis with other risks through its asset/liability
management strategies. The Consolidated Group also manages
equity price risk through industry and issuer diversification
and asset allocation techniques.

Fair value analysis.As with the impact on operations from changes in interest rates,
the Consolidated Groups fair market value of financial
assets and liabilities is subject to fluctuations in interest
rates. The Consolidated Group monitors the sensitivity of net
interest income and fair market value to changes in interest
rates.

The following table presents, as of
September 30, 2002, the Consolidated Groups estimated
effects of hypothetical increases and decreases in interest
rates on assets and liabilities that are subject to interest
rate risk. It is assumed that the changes occur immediately and
uniformly to each category of instrument containing interest
rate risks. The hypothetical changes in market interest rates do
not reflect what could be deemed best or worst case scenarios.
Variations in market interest rates could produce significant
changes in

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the timing of repayments due to prepayment
options available. For these reasons, actual results will most
likely differ from those reflected in the table that follows.


|                       |                              |                                          |           |           |         |                                             |           |           |         |          |           |           |         |   |           |           |         |   |           |           |         |   |           |           |         | 
|---------------------- | ---------------------------- | ---------------------------------------- | --------- | --------- | ------- | ------------------------------------------- | --------- | --------- | ------- | -------- | --------- | --------- | ------- | - | --------- | --------- | ------- | - | --------- | --------- | ------- | - | --------- | --------- | ------- | 
|                       |                              |                                          |           |           |         |                                            
|                       |                              |                                          |           |           |         | Fair Market Value With Interest Rate Change
|                       |                              |                                          |           | Fair      |         |                                            
|                       |                              | Carrying                                 |           | Market    |         | Decrease                                    |           | Decrease  |         | Increase |           | Increase 
|                       |                              | Amounts                                  |           | Value     |         | 1%                                          |           | 2%        |         | 1%       |           | 2%       
|                       |                              |                                          |           |           |         |                                             |           |           |         |          |           |          
|                       |                              |                                         
|                       |                              | (Dollars in Thousands)                  
|Financial Assets:      |                              |                                          |           |           |         |                                             |           |           |         |          |           |           |         |   |           |           |         |   |           |           |         |   |           |          
|                       | Cash and cash equivalents    |                                          | $         | 68,317    |         |                                             | $         | 68,317    |         |          | $         | 68,317    |         |   | $         | 68,317    |         |   | $         | 68,317    |         |   | $         | 68,317    |        
|                       | Investments:                 |                                          |           |           |         |                                             |           |           |         |          |           |           |         |   |           |           |         |   |           |           |         |   |           |           |        
|                       |                              | Available-for-sale securities            |           |           | 495,061 |                                             |           |           | 495,061 |          |           |           | 506,724 |   |           |           | 519,006 |   |           |           | 483,975 |   |           |           | 473,431 | 
|                       |                              | Held-to maturity securities              |           |           | 40,229  |                                             |           |           | 41,418  |          |           |           | 42,624  |   |           |           | 43,895  |   |           |           | 40,273  |   |           |           | 39,186  | 
|                       |                              | Real estate contracts and mortgage notes |           |           | 621,570 |                                             |           |           | 639,913 |          |           |           | 641,295 |   |           |           | 642,690 |   |           |           | 638,543 |   |           |           | 637,185 | 
|                       |                              | Other receivable investments             |           |           | 128,241 |                                             |           |           | 141,822 |          |           |           | 147,248 |   |           |           | 152,993 |   |           |           | 136,694 |   |           |           | 131,846 | 
|                       |                              | Reinsurance receivable                   |           |           | 148,392 |                                             |           |           | 150,309 |          |           |           | 153,835 |   |           |           | 157,493 |   |           |           | 146,908 |   |           |           | 143,628 | 
|                       |                              |                                          |           |           |         |                                             |           |           |         |          |           |           |         |   |           |           |         |   |           |           |         |   |           |          
|                       |                              | $                                        | 1,501,810 |           |         | $                                           | 1,536,840 |           |         | $        | 1,560,043 |           |         | $ | 1,584,394 |           |         | $ | 1,514,710 |           |         | $ | 1,493,593 |          
|                       |                              |                                          |           |           |         |                                             |           |           |         |          |           |           |         |   |           |           |         |   |           |           |         |   |           |          
|Financial Liabilities: |                              |                                          |           |           |         |                                             |           |           |         |          |           |           |         |   |           |           |         |   |           |           |         |   |           |          
|                       | Annuity reserves             |                                          | $         | 1,225,660 |         |                                             | $         | 1,241,487 |         |          | $         | 1,270,614 |         |   | $         | 1,300,830 |         |   | $         | 1,213,402 |         |   | $         | 1,186,311 |        
|                       | Investment certificates      |                                          |           | 350,744   |         |                                             |           | 351,683   |         |          |           | 359,396   |         |   |           | 367,389   |         |   |           | 344,228   |         |   |           | 337,030   |        
|                       | Debt payable                 |                                          |           | 122,765   |         |                                             |           | 128,709   |         |          |           | 133,078   |         |   |           | 137,730   |         |   |           | 124,601   |         |   |           | 120,735   |        
|                       | Commitments to extend credit |                                          |           | 88,374    |         |                                             |           | 88,374    |         |          |           | 88,374    |         |   |           | 88,374    |         |   |           | 88,374    |         |   |           | 88,374    |        
|                       |                              |                                          |           |           |         |                                             |           |           |         |          |           |           |         |   |           |           |         |   |           |           |         |   |           |          
|                       |                              | $                                        | 1,787,543 |           |         | $                                           | 1,810,253 |           |         | $        | 1,851,462 |           |         | $ | 1,894,323 |           |         | $ | 1,770,605 |           |         | $ | 1,732,450 |          
|                       |                              |                                          |           |           |         |                                             |           |           |         |          |           |           |         |   |           |           |         |   |           |           |         |   |           |          

Gap analysis.A
conventional view of interest rate sensitivity for financial
institutions is the gap report, which indicates the difference
between assets maturing or repricing within a period and total
liabilities maturing or repricing within the same period. In
assigning assets to maturity and repricing categories, the
Consolidated Group takes into consideration expected prepayment
speeds and contractual maturities. The balances reflect expected
amortization of principal and do not take into consideration
reinvestment of cash. Principal prepayments are the amounts of
principal reduction over and above normal amortization. The
Consolidated Group has used prepayment assumptions based on
market estimates and past experience with its current portfolio.
In assigning liabilities to maturity and repricing categories,
the Consolidated Group takes into consideration expected annuity
policy lapse rates based on past experience. Non-rate sensitive
items such as the allowance for loan losses and deferred loan
fees/costs are not included in the table.

The gap information is limited by the fact that
it is a point-in-time analysis. The data reflects conditions and
assumptions as of September 30, 2002. These conditions and
assumptions may not be appropriate at another point in time.
Consequently, the interpretation of the gap information is
subjective.

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|                                                                      |                                                         |                                        |      |             |  |           |       |            |  |       |        |       |  |   |        |       |  |   |        |         | 
|--------------------------------------------------------------------- | ------------------------------------------------------- | -------------------------------------- | ---- | ----------- |  | --------- | ----- | ---------- |  | ----- | ------ | ----- |  | - | ------ | ----- |  | - | ------ | ------- | 
|                                                                      |                                                         |                                       
|                                                                      |                                                         | September 30, 2002 Projected Repricing
|                                                                      |                                                         |                                       
|                                                                      |                                                         | 0-3 months                             |      | 4-12 months |  | 1-5 years |       | Thereafter |  | Total
|                                                                      |                                                         |                                        |      |             |  |           |       |            |  |      
|                                                                      |                                                         |                                       
|                                                                      |                                                         | (dollars in millions)                 
|Interest-Sensitive Assets                                             |                                                         |                                        |      |             |  |           |       |            |  |       |        |       |  |   |        |       |  |   |        |        
|                                                                      | Cash                                                    |                                        | $    | 68.3        |  |           | $     |           |  |       | $      |      |  |   | $      |      |  |   | $      | 68.3    | 
|                                                                      | Real estate contracts and mortgage notes
    receivable |                                        |      | 44.4        |  |           |       | 146.3      |  |       |        | 329.7 |  |   |        | 113.7 |  |   |        | 634.1   | 
|                                                                      | Securities investments                                  |                                        |      | 24.6        |  |           |       | 61.4       |  |       |        | 210.8 |  |   |        | 182.6 |  |   |        | 479.4   | 
|                                                                      | Other                                                   |                                        |      | 9.0         |  |           |       | 24.5       |  |       |        | 118.5 |  |   |        | 48.6  |  |   |        | 200.6   | 
|                                                                      |                                                         |                                        |      |             |  |           |       |            |  |       |        |       |  |   |        |       |  |   |        |        
|                                                                      | Total interest-sensitive assets                         |                                        | $    | 146.3       |  |           | $     | 232.2      |  |       | $      | 659.0 |  |   | $      | 344.9 |  |   | $      | 1,382.4 | 
|                                                                      |                                                         |                                        |      |             |  |           |       |            |  |       |        |       |  |   |        |       |  |   |        |        
|Interest-Sensitive Liabilities                                        |                                                         |                                        |      |             |  |           |       |            |  |       |        |       |  |   |        |       |  |   |        |        
|                                                                      | Life and annuity reserves                               |                                        | $    | 28.5        |  |           | $     | 90.9       |  |       | $      | 549.5 |  |   | $      | 408.4 |  |   | $      | 1,077.3 | 
|                                                                      | Debentures                                              |                                        |      | 12.3        |  |           |       | 44.1       |  |       |        | 283.4 |  |   |        | 15.9  |  |   |        | 355.7   | 
|                                                                      | Debt payable                                            |                                        |      | 14.4        |  |           |       | 10.8       |  |       |        | 58.1  |  |   |        | 39.8  |  |   |        | 123.1   | 
|                                                                      |                                                         |                                        |      |             |  |           |       |            |  |       |        |       |  |   |        |       |  |   |        |        
|                                                                      | Total interest-sensitive liabilities                    |                                        | $    | 55.2        |  |           | $     | 145.8      |  |       | $      | 891.0 |  |   | $      | 464.1 |  |   | $      | 1,556.1 | 
|                                                                      |                                                         |                                        |      |             |  |           |       |            |  |       |        |       |  |   |        |       |  |   |        |        
|Repricing gap                                                         |                                                         | $                                      | 91.1 |             |  | $         | 86.4  |            |  | $     | (232.0 | )     |  | $ | (119.2 | )     |  | $ | (173.7 | )      
|                                                                      |                                                         |                                        |      |             |  |           |       |            |  |       |        |       |  |   |        |       |  |   |        |        
|Cumulative gap                                                        |                                                         | $                                      | 91.1 |             |  | $         | 177.5 |            |  | $     | (54.5  | )     |  | $ | (173.7 | )     |  | $ | (173.7 | )      
|                                                                      |                                                         |                                        |      |             |  |           |       |            |  |       |        |       |  |   |        |       |  |   |        |        
|Cumulative gap as a percentage of total interest
    sensitive assets |                                                         |                                        | 6.59 | %           |  |           | 12.84 | %          |  |       | -3.94  | %     |  |   | -12.57 | %     |  |   | -12.57 | %      
|                                                                      | Total interest sensitive assets                         |                                        |      |             |  |           |       |            |  |       |        |       |  |   |        |       |  |   | $      | 1,382.4 | 
|                                                                      |                                                         |                                        |      |             |  |           |       |            |  |       |        |       |  |   |        |       |  |   |        |        

In the next 12 months, the Consolidated
Groups Gap Analysis indicates a positive gap, meaning that
its interest-sensitive assets are expected to reprice before its
interest sensitive liabilities. In a rising interest rate
environment, the net interest income will tend to increase which
will have a positive impact on results of operations.
Conversely, in a falling interest rate environment, the net
interest income will tend to decrease which will have a negative
impact on results of operations.

After the next year, the Consolidated
Groups Gap Analysis indicates a negative gap, meaning that
its interest-sensitive liabilities are expected to reprice
before its interest-sensitive assets. In a rising interest rate
environment, the net interest income will tend to decrease which
will have a negative impact on results of operations.
Conversely, in a falling interest rate environment, the net
interest income will tend to increase which will have a positive
impact on results of operations.

The Consolidated Groups asset base is
comprised partially of Commercial Loans. Commercial Loans make
up approximately 26% of the interest-sensitive assets as of
September 30, 2002. These assets tend to be short-term in
nature (weighted average maturity is approximately
26 months). These assets contribute to the transition from
a positive gap to a negative gap in the 1-5 year time period.
The Consolidated Group intends to continue to expand its
investments in Commercial Loans. This, along with the management
of the interest sensitive liability portfolio, should enable the
Consolidated Group to effectively monitor and control its
interest-rate sensitivity over time.

Liquidity and Capital Resources

The objective of liquidity management is to
provide funds at an acceptable cost to service liabilities as
they become due and to meet demands for Commercial Loans and
Receivable purchases. Managing liquidity also enables the
Consolidated Group to take advantage of opportunities for
business expansion. The Consolidated Group finances its business
operations and growth primarily through the sale of annuity and
life insurance products, the sale of debt securities and
preferred stock and a secured line of credit agreement in
addition to the maturity of the current Receivable portfolio.

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In January 2001, the Consolidated Group changed
the focus of its Receivable investment strategy away from
acquiring residential real estate loans for securitization
purposes, as it does not intend to participate in any real
estate-backed securitizations in the near future, and began
focusing its Receivable investment activity on acquiring,
originating and holding both residential real estate loans and
Commercial Loans. Historically, proceeds from securitizations
were primarily reinvested in additional securitizable products.
Because securitization proceeds were not primarily used to
acquire and hold residential or Commercial Loans, the
Consolidated Group does not believe the change in investment
strategy away from securitizations will have a negative effect
on its ability to acquire and hold residential and Commercial
Loans.

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

The Consolidated Group anticipates that the
recent change in Western Lifes A.M. Best assigned
rating may result in a slight increase in its cost of funds in
addition to a slight increase in surrender rates as current
policies enter their surrender periods. Before the initial
change in rating, the Consolidated Group changed the focus of
its investment strategy away from acquiring residential real
estate loans for securitization purposes and refocused its
investment activity on acquiring and holding both residential
and commercial real estate loans. The change in focus has
resulted in higher yields on the Consolidated Groups
investments. Therefore, the Consolidated Group expects the
slight increase in its cost of funds will be offset by the
higher yields obtained through its new investment strategy.

To support this change in investment strategy and
in response to the rating change, Metropolitan increased its
capital contributions to Western Life during the fiscal year
ended September 30, 2002 through a $27.6 million
purchase of common and preferred stock. Additionally, to further
increase the capital of Western Life, Western Holding has
registered for sale up to $50.0 million of Series A
preferred stock at September 30, 2002. However, Western
Holding must sell at least 400,000 shares of the preferred stock
to at least 800 qualifying investors before it can complete the
offering. Western Life is also focusing on issuing liabilities
with greater surrender charge protection. Western Life does not
anticipate any further change in its A.M. Best rating in the
coming year.

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, 2001, Western
Lifes capital and surplus levels exceeded the calculated
specified requirements. Recently, Western Life has maintained
adequate levels of capital through the sale of common stock and
preferred stock to Metropolitan. To the extent that Metropolitan
does not maintain adequate levels of liquidity permitting it to
make further capital investments in Western Life, or to the
extent that Western Holding cannot complete its Series A
preferred stock offering, Westerns ability to generate
capital could be adversely affected, which in turn could
negatively affect its ability to increase its investments in
higher risk-adjusted assets such as Commercial Loans, real
estate and equity investments.

Western Life has a secured line of credit
agreement with the Federal Home Loan Bank of Seattle (FHLB).
When an institution becomes a stockholder in the FHLB, it can
borrow from the FHLB at a stock to borrowing ratio of 1 to 20.
At September 30, 2002, Western Life had a stock investment
in the FHLB of

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approximately $5.1 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
September 30, 2002, Western Life had $288.3 million in
eligible collateral with a market value of $296.9 million
and a borrowing potential of $210.1 million, subject to the
purchase of additional stock. Approximately $141.4 million
in securities having a market value of $145.6 million were
pledged to secure the outstanding borrowings to FHLB at
September 30, 2002. At September 30, 2002, Western
Life had approximately $103.0 million in outstanding
borrowings leaving an unused borrowing potential of
approximately $107.1 million, subject to the purchase of
additional stock. During the year ended September 30, 2002,
Western Lifes outstanding borrowings on the secured line
of credit increased $81.0 million. This increase accounted
for approximately 26.5% of the Consolidated Groups net
cash provided by financing activities. In order to increase the
unused borrowing potential, Western Life would be required to
purchase approximately $2.8 million in additional FHLB
stock.


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

Metropolitan engages in public offerings of debt
securities and preferred stock. These investments are typically
offered to the public on a continuous best efforts basis through
MIS, an affiliated company. At September 30, 2002,
Metropolitan had registered for sale up to $150.0 million
of Series III and Series III-A Debenture Bonds. This
debenture bond registration expires April 30, 2003.
Additionally, Metropolitan had registered for sale up to
6,000,000 shares of Series E-7 preferred stock that carry a
$25 issue price for a total preferred stock offering price of
$150.0 million. This preferred stock registration expires
July 31, 2003.

Another source of liquidity is derived from
payments received on Receivables and the sale of real estate. A
decrease in the prepayment rate on Receivables or in the ability
to sell real estate would reduce future cash flows.
Additionally, to increase liquidity, the Consolidated Group may
occasionally sell securities to a broker-dealer under the
provision that the Consolidated Group will buy them back by a
predetermined date for a specific price, often called a reverse
repurchase agreement. At September 30, 2002, the
Consolidated Group had approximately $4.0 million of
outstanding reverse repurchase agreements.

The Consolidated Groups ability to sell
available-for-sale investments for liquidity purposes is
partially affected by the laws of the state of Washington that
limit Western Lifes investments in real estate related
assets to 65% of its statutory assets. Western Life is
restricted from selling non-real estate related assets if, after
the sale, Western Lifes real estate assets would exceed
65% of its statutory assets. However, occasionally Western Life
may acquire real estate related Receivables that qualify as
mortgage-related securities under the Secondary Mortgage Market
Enhancement Act, or SMMEA. SMMEA generally provides that
qualifying loans may be acquired to the same extent that
obligations that are issued by or guaranteed as to principal and
interest by the United States Government, its agencies and the
instrumentalities can be acquired. As a result, Western Life can
acquire qualifying real estate loans in amounts in excess of the
65% limitation. At September 30, 2002, Western Life had
approximately 46% of its statutory admitted assets invested in
real estate related assets that did not qualify as SMMEA
investments.

For statutory purposes, Western Life performs
cash flow testing under seven different rate scenarios. An
annual opinion regarding the adequacy of the cash flow testing
is filed with the insurance departments in the states where
Western Life is licensed as an insurance company. At
December 31, 2001, the results of this cash flow testing
process were satisfactory.

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The following table summarizes the Consolidated
Groups maturity schedule for its current outstanding debt
security obligations (principal and interest), credit lines and
other debt payable and anticipated annual cash dividend
requirements on outstanding preferred stock for the periods
indicated:

|                   |  |                   |         |             |  |              |        |       |  |   |        |  |  |   |         | 
|------------------ |  | ----------------- | ------- | ----------- |  | ------------ | ------ | ----- |  | - | ------ |  |  | - | ------- | 
|                   |  |                   |         | Lines/Other |  | Preferred    |        |      
|Fiscal Year Ending |  | Debentures        |         | Debt        |  | Stock        |        |      
|September 30,      |  | (Debt Securities) |         | Payable     |  | Dividends(1) |        | Total
|                   |  |                   |         |             |  |              |        |      
|2003               |  | $                 | 71,564  |             |  | $            | 30,268 |       |  | $ | 6,634  |  |  | $ | 108,466 | 
|2004               |  |                   | 59,314  |             |  |              | 25,398 |       |  |   | 6,634  |  |  |   | 91,347  | 
|2005               |  |                   | 121,340 |             |  |              | 16,865 |       |  |   | 6,634  |  |  |   | 144,839 | 
|2006               |  |                   | 76,700  |             |  |              | 14,018 |       |  |   | 6,634  |  |  |   | 97,352  | 
|2007               |  |                   | 92,821  |             |  |              | 7,505  |       |  |   | 6,634  |  |  |   | 106,961 | 
|                   |  |                   |         |             |  |              |        |       |  |   |        |  |  |   |         | 
|                   |  | $                 | 421,739 |             |  | $            | 94,054 |       |  | $ | 33,172 |  |  | $ | 548,965 | 
|                   |  |                   |         |             |  |              |        |       |  |   |        |  |  |   |         | 



| |  | 
| |  | 
| |  | 

| |     |                                                          | 
| | --- | -------------------------------------------------------- | 
| | (1) | Based on an assumed dividend rate per annum of
    8.25% | 

Metropolitan expects to fund the retirement of
maturing debt securities with cash flow generated by Receivable
investments, sales of real estate, the issuance of additional
securities or through reinvested debt securities. During the
year ended September 30, 2002, approximately 53% of
Metropolitans debt securities were reinvested at maturity.
Principal payments received from Metropolitans Receivable
portfolio and proceeds from sales of real estate and Receivables
were as follows for the periods indicated (in millions):

|             |  |   |       | 
|------------ |  | - | ----- | 
|Fiscal 2002: |  | $ | 34.8  | 
|Fiscal 2001: |  | $ | 70.6  | 
|Fiscal 2000: |  | $ | 504.5 | 

The decrease in principal payments received from
Metropolitans Receivable portfolio and proceeds from sales
of real estate and Receivables from 2000 was primarily due to a
reduction in its securitization activity.

Additionally, a portion of Western Lifes
annuities may reprice annually which could cause termination of
annuities subject to a surrender charge. In the event of
termination, the expected cash outlays of Western Life will
increase. See Market Risk Management above.

The Consolidated Group had approximately
$88.4 million and $17.0 million of outstanding
commitments to extend credit to commercial borrowers at
September 30, 2002 and 2001, respectively.

During 2002, $1.2110 billion in funds
provided by the Consolidated Groups various liquidity
sources were used to (1) invest $1.0050 billion
primarily in Receivables and investments and (2) fund
$205.6 million in debt maturities, annuity product
surrenders and the payment of dividends.

During 2001, $725.9 million in funds
provided by the Consolidated Groups various liquidity
sources were used to (1) invest $500.8 million
primarily in Receivables and investments and (2) fund
$159.8 million in debt maturities, annuity product
surrenders and the payment of dividends.

During 2000, $1.0638 billion in funds
provided by the Consolidated Groups various liquidity
sources were used to (1) invest $747.3 million
primarily in Receivables and investments and (2) fund
$334.3 million in debt maturities, annuity product
surrenders and the payment of dividends.

The Consolidated Group expects to maintain
adequate levels of liquidity in the foreseeable future through
its sale of annuities, securities offerings, its secured line of
credit, and the maturing of currently held Receivables.

Management believes that cash flow generated from
the Consolidated Groups liquidity sources will be
sufficient to conduct its business and meet its anticipated
obligations as they mature during the next fiscal year. The
Consolidated Group has never defaulted on any of its obligations
since its founding in 1953.

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New Accounting Rules

In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 establishes 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 requires 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 amended SFAS No. 133 to become
effective for all quarters of fiscal years beginning after
June 15, 2000. The implementation of SFAS No. 133, as
amended, did not have a material effect on the Consolidated
Groups financial statements. As part of implementing SFAS
No. 133 on October 1, 2000, the Consolidated Group
reclassified approximately $59.4 million of investments
from held-to-maturity to available-for-sale. The unrealized gain
on the date of transfer was $0.4 million.

In September 2000, the FASB issued SFAS
No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of LiabilitiesA
Replacement of FASB Statement No. 125 (SFAS
No. 140). The implementation of SFAS No. 140 on
April 1, 2001 did not have a material impact on the
Consolidated Groups financial statements.

In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. This statement will
require discontinuing the amortization of goodwill and other
intangible assets with indefinite useful lives. Instead, these
assets will be tested periodically for impairment and written
down to their fair market values as necessary. This statement is
effective for fiscal years beginning after December 15,
2001. The implementation of this statement on October 1,
2002 did not have a material impact on the Consolidated
Groups financial statements.

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

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections. This
statement amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This
statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed
conditions. The provisions of this statement are effective for
financial statements issued on or after May 15, 2002.
Implementation of this statement did not have a material impact
on the Consolidated Groups financial statements.

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which is effective for exit or disposal activities
initiated after December 31, 2002. This statement requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. The provisions of this
statement are effective for exit or disposal activities that are
initiated after December 31, 2002 with early application
encouraged. The Consolidated Group has completed an evaluation
of the effects of this statement and does not believe it will
have a material impact on the Consolidated Groups
financial statements.

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Item 7.A. Quantitative And Qualitative
Disclosures About Market Risk

For quantitative and quantitative information
about market risk of the Consolidated Group, see
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Market Risk
Management under Item 7.




Item 8. Financial Statements And
Supplementary Data

The consolidated financial statements and related
financial information required to be filed are attached to this
Report. Reference is made to page F-1 of this Annual Report for
an index to the consolidated financial statements.




Item 9. Changes In And Disagreements With
Accountants On Accounting And Financial Disclosure

Information called for by Item 304(a) of
Regulation S-K was previously reported by Metropolitan in
its current report on Form 8-K dated June 12, 2001.




PART III




Item 10. Directors And Executive
Officers Of the Registrant

MANAGEMENT

Directors, Executive Officers and Certain
Employees

(Age Information Current as of
September 30, 2002)


|                      |  |     |    |          |  |                                                                 
|--------------------- |  | --- | -- | -------- |  | ----------------------------------------------------------------
|Name                  |  | Age |    | Position
|                      |  |     |    |         
|C. Paul Sandifur, Jr. |  |     | 60 |          |  | President, Chief Executive Officer and Chairman
    of the Board
|B. Elaine Hoskin      |  |     | 48 |          |  | Vice President                                                  
|Reuel Swanson         |  |     | 63 |          |  | Secretary and Director                                          
|John Van Engelen      |  |     | 50 |          |  | President, Western Life                                         
|Gary Brajcich         |  |     | 51 |          |  | Director                                                        
|Harold Erfurth        |  |     | 85 |          |  | Director                                                        
|Irv Marcus            |  |     | 78 |          |  | Director                                                        
|Samuel Smith          |  |     | 62 |          |  | Director                                                        
|William D. Snider     |  |     | 60 |          |  | Director                                                        
|John Trimble          |  |     | 72 |          |  | Director                                                        

All officers are appointed by and serve at the
discretion of the Board of Directors. Directors serve for
one-year terms or until their successor is duly elected and
qualified.

C. Paul Sandifur, Jr.,President, Chief Executive Officer and
Chairman of the Board. Mr. Sandifur became Executive Vice
President in 1980, was elected President in 1981, succeeded his
father as Chief Executive Officer in 1991 and became Chairman of
the Board in 1995. He has been a Director since 1975. Mr.
Sandifur was a real estate salesman with Diversified Properties
in Kennewick, Washington during 1977 and 1978 and then with
Century 21 Real Estate in Kennewick. In June 1979, he became an
associate broker with Red Carpet Realty in Kennewick before
rejoining Metropolitan in 1980. He is a Director and Officer of
most of the subsidiary companies. He is the sole shareholder of
National Summit Corp., which in turn is the sole shareholder of
former subsidiaries of Metropolitan, Summit and Old Standard.
Mr. Sandifur was born in Spokane, Washington, and received
his baccalaureate degree in Psychology from Whitman College in
Walla Walla, Washington. He pursued graduate studies at the
University of California, Berkeley, San Jose State University
and San Francisco State University.

B. Elaine Hoskin,Vice President. Ms. Hoskin joined
Metropolitan in December 1999 as Chief Risk Management Officer.
She was elected Assistant Vice President of Metropolitan in
March of 2000 and Vice

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President in February 2001. From 1993 until
joining Metropolitan, she worked for GE Capital as its Vice
President of Portfolio Management and Underwriting. Prior to
working for GE, she held various positions with the Bank of
America starting in 1978, including Vice President and Senior
Credit Team Manager; First Vice President & Senior Regional
Credit Officer; Vice President and Manager; Vice President,
Corporate Banking; Assistant Vice President, Corporate Banking;
and Account Officer, Corporate Banking. Ms. Hoskin holds a
Bachelor of Arts in German and Psychology from Wellesley College
and a Masters of Business Administration in Finance and
Accounting from Stanford Graduate School of Business in 1978.


Reuel Swanson,Secretary and Director.
Mr. Swanson has worked for Metropolitan since 1960 and has
been a Director since 1969. From 1973 to 1993, Mr. Swanson
was Metropolitans Treasurer. In 1976, he was elected
Corporate Secretary. He is also a Director and Secretary of most
of the subsidiary companies. In 1962, he received a Masters of
Accounts from Kinman Business University. Mr. Swanson also
holds a Bachelor of Science in Business Administration and a
Masters of Business Administration from City University.

John Van Engelen,President, Western United Life
Assurance Company. Mr. Van Engelen joined Metropolitans
insurance subsidiary, Western Life, in 1984 as its underwriting
manager, and shortly thereafter he was appointed Vice
PresidentUnderwriting. From 1987 to 1994, he was Vice
PresidentSales and a Regional Sales Manager. During 1994,
he was appointed President of Western Life. Prior to joining
Western Life, Mr. Van Engelen had worked in the insurance
industry and in corporate and public accounting. He holds the
following certifications: CPA, CFP, CLU, CHFC, and FLMI. He is
also a member of the American Institute of Certified Public
Accountants, Society of Financial Service Professionals,
National Association of Insurance and Financial Advisors, and a
board member of the New Mexico Life and Health Guaranty Fund.
Mr. Van Engelen holds a Bachelor of Business Administration
in Accounting from Boise State University.

Gary Brajcich,Director. Mr. Brajcich was
elected as a Director in 2000. Mr. Brajcich is an attorney
admitted to practice law in the State of Washington. He is a
member of Workland, Witherspoon, PLLC, where he has been
practicing since 1992.

Harold Erfurth,Director. Mr. Erfurth, currently
retired, was a stockbroker, and an independent contractor
selling the securities issued and offered by Metropolitan, from
1972 to 1983. He served as a Director from 1979 to 1994, and was
elected as a Director again in 1996.

Irv Marcus,Director. Mr. Marcus had been an
officer of Metropolitan from 1974 until his retirement in 1995.
At retirement, he was Senior Vice President, a title which he
had held since 1990, and during which time he supervised
Metropolitans Receivable investing operations. He had
previously been a loan officer with Metropolitan and has over
25 years experience in the consumer finance business.
He continues as a Director following his retirement.

Samuel Smith,Ph.D.,
Director. Dr. Smith was elected as a Director in 2000.
Dr. Smith served as President of Washington State
University from 1985-2000 and is currently President Emeritus.
Dr. Smith was Dean of the College of Agriculture at Penn
State University prior to his association with Washington State
University.

William D. Snider,Director. Mr. Snider was elected
as Director for Metropolitan in June 2001. He held the position
as Metropolitans Chief Financial Officer from May 1999
until August 2001. He still maintains his status as Director.
Mr. Snider was the Chairman of Snider Financial Partners
from June of 1997 through December of 1998. From March 1992
until June of 1997, he was the Executive Vice President and
Chief Financial Officer of Finance and Operations of CoBank in
Denver, Colorado. Prior to that, Mr. Snider was Senior Vice
President and Treasury Group Head for Continental Bank
Corporation in Chicago, Illinois. Currently, Mr. Snider is
President of Snider Financial Partners. Mr. Snider received
his Bachelor of Science and his Masters of Business
Administration from the University of Illinois.

John Trimble,Director. Mr. Trimble had been
employed by Metropolitan from 1980 until his retirement in 1995.
His principal area of responsibility was Receivables
underwriting. At retirement he was Vice President. He became a
Director in February 1996.

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Committees of the Board

Audit Committee.The
current members of the Consolidated Groups audit committee
are Messrs. Marcus, Chairman, Brajcich and Trimble. The
audit committee makes recommendations concerning the engagement
of the Consolidated Groups independent public accountants,
reviews with the independent public accountants the plans and
results of the audit engagement, approves professional services
provided by the independent public accountants, reviews the
independence of the independent public accountants, considers
the range of audit and non-audit fees, reviews the Consolidated
Groups corporate compliance procedures and reviews the
adequacy of the Consolidated Groups internal accounting
controls. The Consolidated Groups audit committee had
five meetings during fiscal 2002.




Item 11. Executive
Compensation






EXECUTIVE COMPENSATION


The following table sets forth the aggregate
compensation awarded to, earned by, or paid to
(1) Metropolitans Chief Executive Officer, and
(2) Metropolitans other four most highly compensated
executive officers during 2002 whose total annual compensation
exceeded $100,000 in 2002 (the Named Executive
Officers), all during the fiscal years specified. No
executive officer is a party to, or a participant in, any
pension plan, contract or other arrangement providing for cash
or non-cash forms of remuneration except Metropolitans
401(k) qualified retirement plan adopted as of January 1,
1992, which is available generally to all employees of
Metropolitan, except as described below. The 401(k) Plan
provides for maximum annual company matching contributions equal
to 3% of each participants salary. As of
September 30, 2002, Metropolitan had no stock option plans
in effect.

|                            |                                 |        |      |           |  |             |         |              |  |   |        |        |  |   |   |   |  |  | 
|--------------------------- | ------------------------------- | ------ | ---- | --------- |  | ----------- | ------- | ------------ |  | - | ------ | ------ |  | - | - | - |  |  | 
|                           
|                           
|                           
|SUMMARY COMPENSATION TABLE 
|                           
|                           
|                            |                                 | Bonus/ |      | All Other |  |            
|Name and Principal Position |                                 | Year   |      | Salary    |  | Commissions |         | Compensation |  |  
|                            |                                 |        |      |           |  |             |         |              |  |  
|                           
|C. Paul Sandifur, Jr.       |                                 |        | 2002 |           |  | $           | 500,266 |              |  | $ |       |        |  | $ |  |   |  | 
|                            | Chairman of the Board, Chief    |        |      | 2001      |  |             |         | 500,016      |  |   |        |       |  |   |   |  |  |  | 
|                            | Executive Officer and President |        |      | 2000      |  |             |         | 500,008      |  |   |        | 4,500  |  |   |   |  |  |  | 
|                           
|Tom Turner                  |                                 |        | 2002 |           |  |             | 160,833 |              |  |   | 25,000 |        |  |   |  |   |  | 
|                            | PresidentSummit Securities     |        |      | 2001      |  |             |         | 150,000      |  |   |        | 50,000 |  |   |   |  |  |  | 
|                            |                                 |        |      | 2000      |  |             |         | 125,561      |  |   |        | 50,000 |  |   |   |  |  |  | 
|                           
|Elaine Hoskin               |                                 |        | 2002 |           |  |             | 174,833 |              |  |   | 33,300 |        |  |   |  |   |  | 
|                            | Chief Operations & Risk Officer |        |      | 2001      |  |             |         | 165,417      |  |   |        | 28,000 |  |   |   |  |  |  | 
|                            |                                 |        |      | 2000      |  |             |         | 106,666      |  |   |        |       |  |   |   |  |  |  | 
|                           
|John Van Engelen            |                                 |        | 2002 |           |  |             | 172,000 |              |  |   |       |        |  |   |  |   |  | 
|                            | President, Western Life         |        |      | 2001      |  |             |         | 165,323      |  |   |        |       |  |   |   |  |  |  | 
|                            |                                 |        |      | 2000      |  |             |         | 164,521      |  |   |        |       |  |   |   |  |  |  | 
|                           
|Erik Skaggs                 |                                 |        | 2002 |           |  |             | 133,833 |              |  |   | 40,000 |        |  |   |  |   |  | 
|                            | Vice President                  |        |      | 2001      |  |             |         | 55,507       |  |   |        |       |  |   |   |  |  |  | 
|                            |                                 |        |      | 2000      |  |             |         | 11,507       |  |   |        | 4,000  |  |   |   |  |  |  | 
|                           

The foregoing compensation table does not include
certain fringe benefits made available on a nondiscriminatory
basis to all Metropolitan employees like group health insurance,
dental insurance, long-term disability insurance, vacation and
sick-leave. In addition, Metropolitan makes available certain
non-monetary benefits to certain of its executive officers, with
the aggregate value of these benefits in the case of each
executive officer listed in the above table being less than the
lesser of (1) ten percent of the cash compensation paid to
each such executive officer, or (2) $50,000, and is not included
in the above table.

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Compensation of Directors

All directors (including honorary Directors) of
Metropolitan are paid $500 per meeting. There were five such
meetings during fiscal 2002. In addition, non-employee directors
are reimbursed for travel expenses.

Option Grants

There are currently no outstanding options to
acquire the Consolidated Groups common stock and no
options have been granted to any of the Consolidated
Groups directors or executive officers during the last
three fiscal years.

Compensation Committee Interlocks and Insider
Participation

Metropolitan does not have a formal compensation
committee of the Board of Directors. Executive Officer
compensation, including compensation of the officers of Western
Holding, is determined by C. Paul Sandifur, Jr. and/
or the Human Resources Manager. Mr. Sandifur is the sole
shareholder of National Summit Corporation, which in turn owns
Summit, Old Standard and Old West. Mr. Sandifur determines
the compensation of the executive officers of Summit, but is not
an officer or director of Summit. The Consolidated Group engages
in various transactions with these companies. See CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS under Item 13.

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Item 12. Security Ownership of
Certain Beneficial Owners and Management

The following table sets forth information as to
each class of equity securities of Metropolitan beneficially
owned by (1) each director of Metropolitan,
(2) Metropolitans Chief Executive Officer and the
Named Executive Officers, (3) all directors and executive
officers of Metropolitan as a group, and (4) all persons
known to Metropolitan to be the beneficial owner of 5% or more
of the outstanding shares of voting securities of Metropolitan
as of December 15, 2002. As of December 15, 2002,
there were 97.4075 shares of Metropolitans Class A
common stock outstanding and 3,127,039 shares of all series of
Metropolitans preferred stock outstanding. As of
December 15, 2002, Metropolitan did not have any options or
other securities convertible into common stock or preferred
stock outstanding. The officers and directors of Metropolitan
not listed on the table do not own any equity securities of
Metropolitan.

| |  |                                                        |                     |                |                        |                      |  |            |  |         |  |  |  |         | 
| |  | ------------------------------------------------------ | ------------------- | -------------- | ---------------------- | -------------------- |  | ---------- |  | ------- |  |  |  | ------- | 
|
|
| |  | Number of Shares                                       |                     |               
| |  | Name                                                   |                     | Title of class |                        | Beneficially Owned   |  | % of Class
|
|
| |  | C. Paul Sandifur, Jr.(1)(2)                            |                     |                | Metropolitan Preferred |                      |  |            |  |         |  |  |  |        
| |  |                                                        | 601 W. First Avenue |                |                        | Stock, All Series    |  |            |  | 278,770 |  |  |  | 8.91%   | 
| |  |                                                        | Spokane, WA 99201   |                |                        | Metropolitan Class A |  |            |  |         |  |  |  |         | 
| |  |                                                        |                     |                |                        | Common Stock         |  |            |  | 97.4075 |  |  |  | 100.00% | 
|
| |  | C. Paul Sandifur, Jr. Trustee(1)                       |                     |                | Metropolitan Preferred |                      |  |            |  |         |  |  |  |        
| |  |                                                        | 601 W. First Avenue |                |                        | Stock, All Series    |  |            |  | 30,000  |  |  |  | 0.96%   | 
| |  |                                                        | Spokane, WA 99201   |                |                        | Metropolitan Class A |  |            |  |         |  |  |  |         | 
| |  |                                                        |                     |                |                        | Common Stock         |  |            |  | 52.4667 |  |  |  | 53.86%  | 
|
| |  | Summit Securities, Inc.(2)                             |                     |                | Metropolitan Preferred |                      |  |            |  |         |  |  |  |        
| |  |                                                        | 601 W. First Avenue |                |                        | Stock, All Series    |  |            |  | 248,025 |  |  |  | 7.93%   | 
| |  |                                                        | Spokane, WA 99201   |                |                        | Metropolitan Class A |  |            |  |         |  |  |  |         | 
| |  |                                                        |                     |                |                        | Common Stock         |  |            |  | 9.2483  |  |  |  | 9.49%   | 
|
| |  | Irv Marcus                                             |                     |                | Metropolitan Preferred |                      |  |            |  |         |  |  |  |        
| |  |                                                        |                     |                |                        | Stock, All Series    |  |            |  | 364     |  |  |  | *       | 
| |  |                                                        |                     |                |                        | Metropolitan Class A |  |            |  |         |  |  |  |         | 
| |  |                                                        |                     |                |                        | Common Stock         |  |            |  | 0       |  |  |  | *       | 
|
| |  | Harold Erfurth                                         |                     |                | Metropolitan Preferred |                      |  |            |  |         |  |  |  |        
| |  |                                                        |                     |                |                        | Stock, All Series    |  |            |  | 472     |  |  |  | *       | 
| |  |                                                        |                     |                |                        | Metropolitan Class A |  |            |  |         |  |  |  |         | 
| |  |                                                        |                     |                |                        | Common Stock         |  |            |  | 0       |  |  |  | *       | 
|
| |  | All Officers and Directors as a
    group (21 persons) |                     |                | Metropolitan Preferred |                      |  |            |  |         |  |  |  |        
| |  |                                                        |                     |                |                        | Stock, All Series    |  |            |  | 279,606 |  |  |  | 8.94%   | 
| |  |                                                        |                     |                |                        | Metropolitan Class A |  |            |  |         |  |  |  |         | 
| |  |                                                        |                     |                |                        | Common Stock         |  |            |  | 97.4075 |  |  |  | 100.00% | 
|



---



| |   |              
| | - | -------------
| | * | Less than 1%.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | C. Paul Sandifur, Jr. is trustee of the
    C. Paul Sandifur and J. Evelyn Sandifur irrevocable
    trust and has sole voting and sole investment control over the
    shares of stock held by the trust. The trust beneficiaries are
    C. Paul Sandifur, Jr., Sara E. Quinn and
    William F. Sandifur. Mr. Sandifur also directly owns
    745 shares of preferred stock and 35.6925 shares of Class A
    common stock.
|   
|(2) | Summit Securities, Inc. is a wholly owned
    subsidiary of National Summit Corp., a Delaware corporation,
    which is wholly owned by C. Paul Sandifur, Jr. As a result,
    Mr. Sandifur effectively has sole voting and investment
    control over the shares owned by Summit, and may be deemed the
    beneficial owner of the shares under the rules of the SEC.                                                     

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Item 13. Certain Relationships and
Related Transactions

During the fiscal year ended September 30,
2002, the Consolidated Group had the following transactions with
Summit Securities and its subsidiaries, an affiliated group of
companies.

|                                                                                                                                                |  |      |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | -
|                                                                                                                                                |  | 2002
|                                                                                                                                                |  |     
|Receivable acquisition fees charged to Summit,
    Old Standard and Old West                                                                    |  | $    | 810,998    |  
|Real estate contracts and mortgage notes
    receivable and other receivable investments sold to Summit, Old
    Standard and Old West          |  |      | 51,376,208 |  
|Gains on real estate contracts and mortgage notes
    receivable and other receivable investments sold to Summit, Old
    Standard and Old West |  |      | 3,579,324  |  
|Real estate contracts and mortgage notes
    receivable and other receivable investments purchased from
    Summit or its affiliates            |  |      | 1,404,024  |  
|Minority interest purchased from Summit                                                                                                         |  |      | 2,325,945  |  
|Ceding of annuity premiums to Old Standard                                                                                                      |  |      | 56,527,704 |  
|Policyholder benefits recovered from Old Standard                                                                                               |  |      | 24,884,602 |  
|Annuity servicing fees charged to Old Standard                                                                                                  |  |      | 486,541    |  
|Ceding commissions charged to Old Standard                                                                                                      |  |      | 3,324,726  |  
|Service fees paid to Summit Property Development                                                                                                |  |      | 3,519,206  |  
|Commissions and service fees paid to Metropolitan
    Investment Securities, Inc.                                                               |  |      | 5,408,006  |  
|Servicing and collection fees charged by Metwest
    to Summit and its affiliates                                                               |  |      | 1,063,763  |  
|Administrative services charged by Metropolitan
    to Summit and its affiliates                                                                |  |      | 5,993,827  |  
|Net change in notes payable to Summit and Old
    Standard                                                                                      |  |      | (1,206,161 | )
|Net change in notes receivable from Summit                                                                                                      |  |      | 2,346,025  |  
|Interest paid (received) on notes payable to
    (receivable from) Summit and Old Standard                                                      |  |      | (736,477   | )
|Dividends paid to Summit on preferred stock
    investments                                                                                     |  |      | 204,856    |  

At September 30, 2002 the Consolidated Group
had net receivables from affiliates of approximately
$8.7 million, a note receivable from Summit of
approximately $13.2 million and a note payable to Old
Standard of approximately $3.2 million.

Metropolitan provides Receivable acquisition
services to Summit, Old Standard and Old West for a fee pursuant
to the terms of a Management, Receivable Acquisition and
Servicing Agreement. The fee is based upon yield requirements
established by Summit, Old Standard and Old West. Metropolitan
charges, as its Receivable acquisition service fee, the
difference between the yield requirement and the yield
Metropolitan actually negotiated when the Receivable was
acquired. The fees are recognized as revenues when the related
fees are charged to those companies. During the year ended
September 30, 2002, Metropolitan charged Summit, Old
Standard and Old West fees of approximately $0.8 million.
The service agreements with Summit, Old Standard and Old West
provide an additional source of fee income to Metropolitan. The
agreements are non-exclusive and may be terminated in whole or
part by either party upon notice.

The Consolidated Group and Summit entered into
the following purchase and sale agreements during the fiscal
year ended September 30, 2002.

On March 28, 2002, Western Life agreed to
sell to Old Standard and Old West, at fair value, a 69.20%
undivided beneficial interest in a certain Lottery Trust owned
by Western Life. The purchase price of $11.2 million, which
was derived from future expected cash flows discounted at a
6.957% market rate, resulted in a gain of approximately
$0.6 million. On March 29, 2002, Metropolitan agreed
to sell to Summit the

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remaining participation in certain structured
settlements that Summit acquired from Metropolitan during the
fiscal year ended September 30, 2000. The purchase price of
approximately $4.8 million, which was derived from future
expected cash flows discounted at an 8.5% market rate, resulted
in a gain of approximately $0.2 million.


On August 15, 2002, Western Life agreed to
sell to Old Standard and Old West the remaining interest in a
certain Lottery Trust owned by Western Life. The purchase price
of $6.2 million, which was derived from future expected
cash flows discounted at a 5.527% market rate, resulted in a
gain of approximately $0.7 million. Additionally, on
August 15, 2002, Western Life agreed to sell to Old
Standard and Old West a 95.83% undivided beneficial interest in
a certain Lottery Trust owned by Western Life. The purchase
price of $29.1 million, which was derived from future
expected cash flows discounted at a 5.888% market rate, resulted
in a gain of approximately $2.0 million.

The market rates on the above lottery trust sales
were calculated as 2.0% over the Treasury benchmark as of the
date of the sale, which is consistent with corporate bonds with
similar credit profiles along with recent transactions involving
large blocks of lottery Receivables.

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

Western Life has entered into a reinsurance
agreement with Old Standard, which became effective July 1,
1998. Under this agreement, Western Life reinsured with Old
Standard 75% of the risk on certain annuity products. The
reinsurance agreement is an ongoing arrangement with no stated
expiration or termination date, although each may stop and
restart at their discretion upon providing a 30-day advance
written notice. Western Life receives ceding allowances equal to
the actual commission plus 1.5% of the premium from Old Standard
to compensate Western Life for its annuity issuance costs.
Additionally, Western Life receives a fee from Old Standard for
servicing the reinsured policies of approximately 0.40% annually
on the cash value of the reinsured policies. As of
September 30, 2002, Western Life had $148.3 million of
its annuity policies reinsured with Old Standard.

Summit Property Development provides real estate
development services for a fee. Currently its principal clients
are Metropolitan and Western Life. Such services include sales,
marketing, market analysis, architectural services, design
services, subdividing properties and coordination with
regulatory groups to obtain the approvals which are necessary to
develop a particular property.

MIS sells the publicly registered securities of
Metropolitan, Western Holding and Summit. Metropolitan pays
commissions to MIS for the sale of Metropolitans
securities pursuant to the terms of written Selling Agreements.
The commission rate charged by MIS depends on the type of
security sold, its stated term and whether the security sale
involved a reinvestment by a prior investor or a new investment.

Metwest provides Receivable servicing for a fee
to Summit, Old Standard and Old West. Additionally, Metropolitan
provides accounting, data processing, and other administrative
services to Summit, Old Standard and Old West. During the year
ended September 30, 2001, the Consolidated Group entered
into an agreement with Summit, Old Standard and Old West to
change the methodology for allocating the service fee and
administrative charges to a cost sharing arrangement from a
fixed and calculated fee arrangement. Management believes that
the fixed and calculated fee arrangement that Metropolitan had
previously been operating under did not result in a
reimbursement to Metropolitan of all significant direct expenses
incurred on behalf of its affiliates.

During the fiscal year ended September 30,
2002, Western Life had the following transactions with other
members of the Consolidated Group and Summit Securities, an
affiliated group of companies. Some of the

56



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amounts included below are also included in the
table above relating to transactions of the Consolidated Group
with Summit.


|                                                                                                                                                                |  |      |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | -
|                                                                                                                                                                |  | 2002
|                                                                                                                                                                |  |     
|Real estate contracts and mortgage notes
    receivable and other receivables sold to affiliates                                                                |  | $    | 46,538,090 |  
|Gains on real estate contracts and mortgage notes
    receivable and other receivable instruments sold to Metro,
    Summit, Old Standard, Old West and Metwest |  |      | 3,313,998  |  
|Real estate contracts and mortgage notes
    receivable and other receivable investments purchased from
    affiliates                                          |  |      | 7,146,951  |  
|Ceding of annuity premiums to Old Standard                                                                                                                      |  |      | 56,527,704 |  
|Policyholder benefits recovered from
    Old Standard                                                                                                           |  |      | 24,884,602 |  
|Annuity servicing fees charged to
    Old Standard                                                                                                              |  |      | 486,541    |  
|Ceding commissions charged to Old Standard                                                                                                                      |  |      | 3,324,726  |  
|Service fees paid to Summit Property Development                                                                                                                |  |      | 841,377    |  
|Net interest and dividends paid on preferred
    stock and surplus notes                                                                                        |  |      | 2,747,250  |  
|Real estate contract acquisitions, investment
    servicing and other administrative overhead                                                                   |  |      | 8,485,904  |  
|Net change in indebtedness of affiliates                                                                                                                        |  |      | (957,697   | )
|Interest received on indebtedness of affiliates                                                                                                                 |  |      | 1,687,673  |  
|Issuance of preferred stock                                                                                                                                     |  |      | 10,400,000 |  
|Issuance of common stock                                                                                                                                        |  |      | 17,200,038 |  

At September 30, 2002, Western Life had
non-secured receivables due from affiliates of approximately
$6.3 million.

Several companies are affiliated with Western
Life through common control by C. Paul Sandifur, Jr. As a result
of these relationships, conflicts of interests may arise between
Western Life and its affiliates relating to the allocation of
investments and other business opportunities among the
affiliated companies. When allocating investment opportunities
among the Consolidated Group and its affiliates, management
considers several factors including each companys
availability of cash, regulatory constraints related to the
particular investment, the size of the investment relative to
each companys asset size and other asset/liability
management issues. The final allocation may at times be subject
to management discretion. Although management attempts to
maximize the profitability of each entity, there is no guarantee
that the actual allocation of investments and other business
opportunities among the Consolidated Group and its affiliates
will prove to be in the best interests of all of the affiliated
companies. If the allocation of investments to Western Life
fails to be in its best interests relative to those of its
affiliates, Western Lifes business could be adversely
affected.

When an investment opportunity is presented, the
investment is evaluated and underwritten by Metropolitan. After
successful evaluation and underwriting, Western Life purchases
the investment in its name. In return for services provided by
its parent company, Western Life pays a fee that it believes is
reasonable which results in the payment to Metropolitan of all
significant direct expenses incurred on its behalf.

During the fiscal year ended September 30,
2002, Western Life purchased pools of loans from Metwest, an
affiliate. Occasionally, Metwest originates loans at market
rates and subsequently sells them to Western Life. The sale to
Western Life generally occurs within 90 days of
origination. Due to the short time period between origination
and subsequent purchase, the carrying value approximated fair
value at the time of sale. As a result of Western Lifes
relationship with Metwest, acquisitions of these Receivables are
reported as Receivable investments purchased from affiliates.

57



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Western Life entered into the following purchase
and sale agreements during the fiscal year ended
September 30, 2002:

On March 28, 2002, Western Life agreed to
sell to Old Standard and Old West a 69.20% undivided beneficial
interest in a lottery trust owned by Western Life. The purchase
price of $11.2 million, which was derived from future
expected cash flows discounted at a 6.957% market rate, resulted
in a gain of approximately $0.6 million.

On August 15, 2002, Western Life agreed to
sell to Old Standard and Old West the remaining interest in a
certain Lottery Trust owned by Western Life. The purchase price
of $6.2 million, which was derived from future expected
cash flows discounted at a 5.527% market rate, resulted in a
gain of approximately $0.7 million. Additionally, on
August 15, 2002, Western Life agreed to sell to Old
Standard and Old West a 95.83% undivided beneficial interest in
a certain Lottery Trust owned by Western Life. The purchase
price of $29.1 million, which was derived from future
expected cash flows discounted at a 5.888% market rate, resulted
in a gain of approximately $2.0 million.

The market rates on the above lottery trust sales
were calculated as 2.0% over the Treasury benchmark as of the
date of the sale, which is consistent with corporate bonds with
similar credit profiles along with recent transactions involving
large blocks of lottery Receivables.

Western Life entered into a reinsurance agreement
with Old Standard, which became effective July 1, 1998.
Under this agreement, Western Life reinsured with Old Standard
75% of the risk on various annuity products. The reinsurance
agreement is an ongoing arrangement with no stated expiration or
termination date, although either party may stop and restart at
their discretion upon providing a 30-day advance written notice.
Western Life receives ceding allowances equal to the actual
commission plus 1.5% of the premium from Old Standard to
compensate Western Life for its annuity issuance costs.
Additionally, Western Life receives a fee from Old Standard for
servicing the reinsured policies of approximately 0.40% annually
on the cash value of the reinsured policies.

Summit Property Development provides real estate
development services to Western Life for a fee. These services
may include the following: sales, marketing, market analysis,
architectural services, design services, subdividing properties
and coordination with regulatory groups to obtain the approvals
that are necessary to develop a particular property.

Real estate contract acquisitions, investment
servicing and other administrative services are governed by two
separate inter-company agreements executed between Western Life
and Metropolitan. Western Life believes that the charges
incurred are reasonable and result in the payment to
Metropolitan of all significant direct expenses incurred on
Western Lifes behalf.

Gary D. Brajcich, Esq.s law firm,
Workland & Witherspoon, provided legal services to the
Consolidated Group and its affiliates in the amount of $126,834
for the fiscal year ended September 30, 2002.




PART IV




Item 14. Controls and
Procedures

Our principal executive officer and principal
financial officer have evaluated the effectiveness of our
disclosure controls and procedures, as that term is
defined in Rule 15d-14I of the Securities Exchange Act of
1934 (the Exchange Act), within 90 days of the
filing date of this Annual Report on Form 10-K. 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.

58



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There were no significant changes in our internal
controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation.




Item 15. Exhibits, Financial Statement
Schedules and Reports on Form 8-K.

(a) The following documents are filed as
part of this Report:

1. Financial Statements.



| |                                            
| | -------------------------------------------
| | Included in Part II, Item 8 of this report:

|                                                                                                                 |  |  |  | 
|---------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Report of Independent Auditors                                                                                   |  |  |  | 
|Report of Independent Accountants                                                                                |  |  |  | 
|Consolidated Balance Sheets at September 30,
    2002 and 2001                                                   |  |  |  | 
|Consolidated Statements of Operations for the
    Years Ended September 30, 2002, 2001 and 2000                  |  |  |  | 
|Consolidated Statements of Comprehensive Income
    (Loss) for the Years Ended September 30, 2002, 2001 and 2000 |  |  |  | 
|Consolidated Statements of Stockholders
    Equity for the Years Ended September 30, 2002, 2001 and 2000        |  |  |  | 
|Consolidated Statements of Cash Flows for the
    Years Ended September 30, 2002, 2001 and 2000                  |  |  |  | 
|Notes to Consolidated Financial Statements                                                                       |  |  |  | 

2. Financial Statement
Schedules.

Included in Part IV of this report:

Schedules Required
by Article 7

Schedule ISummary
of Investments other than Investments in Related Parties

Schedule IIISupplementary
Insurance Information


Schedule IVSupplementary
Reinsurance Information


Schedules Required
by Article 5

Schedule IIValuation
and Qualifying Accounts and Reserves

Schedule IVLoans
on Real Estate




| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Other schedules are omitted because of the
    absence of conditions under which they are required or because
    the required information is given in the financial statements or
    notes thereto.

3. Exhibits.

The following is a complete list of exhibits
filed as part of this Form 10-K.

|        |      |             |  |                                                                                                                                                                                                                                                                                 
|------- | ---- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |            
|Number  |      | Description
|        |      |            
|        | 3.01 |             |  | Restated Articles of Incorporation, as amended,
    dated October 22, 2001 (Incorporated by reference to
    Exhibit 4.1 to Metropolitans Registration Statement
    on Form S-2, Registration No. 333-73018, filed
    December 20, 2001).                                    
|        | 3.02 |             |  | Restated Bylaws, as amended on December 26,
    1995 (Incorporated by reference to Exhibit 3(e) to
    Metropolitans Annual Report on Form 10-K for fiscal 1995).                                                                                                              
|        | 4.01 |             |  | Indenture, dated as of October 1999, between
    Metropolitan and U.S. Bank Trust National Association, Trustee
    (Incorporated by reference to Exhibit 4.01 to
    Metropolitans Registration Statement on Form S-2,
    Registration No. 333-88605, filed October 7, 1999).
|        | 4.02 |             |  | Indenture, dated as of July 6, 1979, between
    Metropolitan and Seattle-First National Bank, Trustee
    (Incorporated by reference to Exhibit 4.02 to
    Metropolitans Annual Report on Form 10-K for fiscal 2001).                                                        

59



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|        |       |             |  |                                                                                                                                                                                                                                                                                                         
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 4.03  |             |  | First Supplemental Indenture, dated as of
    October 3, 1980, between Metropolitan and Seattle-First
    National Bank, Trustee. (Incorporated by reference to Exhibit
    4.03 to Metropolitans Annual Report on Form 10-K for
    fiscal 2001).                                                     
|        | 4.04  |             |  | Second Supplemental Indenture, dated as of
    November 12, 1984, between Metropolitan and Seattle-First
    National Bank, Trustee (Incorporated by reference to
    Exhibit 4(d) to Registration No. 2-95146).                                                                                        
|        | 4.05  |             |  | Third Supplemental Indenture, dated as of
    December 31, 1997, between Metropolitan and First Trust
    (Incorporated by reference to Exhibit 4(d) to
    Metropolitans Annual Report on Form 10-K for fiscal
    1997).                                                                             
|        | 4.06  |             |  | Fourth Supplemental Indenture, dated as of
    February 28, 2001, between Metropolitan and U.S. Bank Trust
    National Association (Incorporated by reference to
    Exhibit 4.05 to Metropolitans Registration Statement
    on Form S-2, Registration No. 333-55984, filed
    April 6, 2001).      
|        | 4.07  |             |  | Amended Statement of Rights, Designations and
    Preferences of Variable Rate Preferred Stock, Series C
    (Incorporated by reference to Exhibit 4(g) to Registration
    No. 33-2699).                                                                                                               
|        | 4.08  |             |  | Statement of Rights, Designations and Preferences
    of Variable Rate Preferred Stock, Series D (Incorporated by
    reference to Exhibit 4(a) to Registration
    No. 33-25702).                                                                                                                      
|        | 4.09  |             |  | Statement of Rights, Designations and Preferences
    of Variable Rate Preferred Stock, Series E-1 (Incorporated
    by reference to Exhibit 4(a) to Registration
    No. 33-19238).                                                                                                                    
|        | 4.10  |             |  | Amended Statement of Rights, Designations and
    Preferences of Variable Rate Preferred Stock, Series E-2
    (Incorporated by reference to Exhibit 4(a) to Registration
    No. 33-25702).                                                                                                            
|        | 4.11  |             |  | Statement of Rights, Designations and Preferences
    of Variable Rate Preferred Stock, Series E-3 (Incorporated
    by reference to Exhibit 4(a) to Registration
    No. 33-32586).                                                                                                                    
|        | 4.12  |             |  | Statement of Rights, Designations and Preference
    of Variable Rate Cumulative Preferred Stock, Series E-4
    (Incorporated by reference to Exhibit 4(h) to Registration
    No. 33-40221).                                                                                                          
|        | 4.13  |             |  | Form of Statement of Rights, Designations and
    Preferences of Variable Rate Preferred Stock, Series E-5
    (Incorporated by reference to Exhibit 4(i) to Registration
    No. 33-57396).                                                                                                            
|        | 4.14  |             |  | Statement of Rights, Designations and Preferences
    of Variable Rate Cumulative Preferred Stock, Series E-6
    (Incorporated by reference to Exhibit 4(l) to Registration
    No. 33-51905).                                                                                                         
|        | 4.15  |             |  | Amended and Restated Statement of Rights,
    Designations and Preferences of Variable Rate Cumulative
    Preferred Stock, Series E-7 (Incorporated by reference to
    Exhibit 4.2 to Metropolitans Registration Statement
    on Form S-2, Registration No. 333-73018, filed
    December 20, 2001).
|        | 9.01  |             |  | Irrevocable Trust Agreement (Incorporated by
    reference to Exhibit 9(b) to Registration No. 2-81359).                                                                                                                                                                                                
|        | 10.01 |             |  | Form of Reinsurance Agreement between Western
    Life and Old Standard (Incorporated by reference to
    Exhibit 10(d) to Metropolitans Annual Report on
    Form 10-K for fiscal 1998).                                                                                                              
|        | 10.02 |             |  | Servicing Rights Purchase Agreement among Ocwen
    Federal Bank FSB, Metropolitan and various sellers named
    therein, dated as of April 1, 2001 (Incorporated by
    reference to Exhibit 10.02 to Metropolitans Annual Report
    on Form 10-K for fiscal 2001).                                  
|        | 10.03 |             |  | Amendment No. 1 to Servicing Rights Purchase
    Agreement among Ocwen Federal Bank FSB, Metropolitan and various
    sellers named therein, dated as of May 11, 2001
    (Incorporated by reference to Exhibit 10.03 to
    Metropolitans Annual Report on Form 10-K for fiscal 2001).                
|        | 10.04 |             |  | Servicing Agreement among Ocwen Federal Bank FSB,
    Metropolitan and various owners named therein, dated as of
    April 1, 2001 (Incorporated by reference to Exhibit 10.04
    to Metropolitans Annual Report on Form 10-K for fiscal
    2001).                                                   
|        | 10.05 |             |  | Flow Subservicing Agreement among Ocwen Federal
    Bank FSB, Metropolitan and various owners named therein, dated
    as of September 1, 2001 (Incorporated by reference to
    Exhibit 10.05 to Metropolitans Annual Report on Form 10-K
    for fiscal 2001).                                       
|        | 12.01 |             |  | Statement regarding computation of ratios.                                                                                                                                                                                                                                                              
|        | 21.01 |             |  | Subsidiaries of Metropolitan.                                                                                                                                                                                                                                                                           

(b) Reports on
Form 8-K.

Metropolitan did not file any reports on
Form 8-K during the fourth quarter of 2002.

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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                                                 
| | ------------------------------------------------
| | METROPOLITAN MORTGAGE & SECURITIES CO.,
    INC.

Date: December 26, 2002

| |    |                          
| | -- | -------------------------
| | By | /s/ C. PAUL SANDIFUR, JR.

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

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                               |  |                                                                  |  |                  
|---------------------------------------------- |  | ---------------------------------------------------------------- |  | -----------------
|Signature                                      |  | Title                                                            |  | Date             
|                                               |  |                                                                  |  |                  
|                                              
|/s/ C. PAUL SANDIFUR, JR.C. Paul Sandifur, Jr. |  | Chief Executive Officer, President and Chairman
    of the Board |  | December 26, 2002
|                                              
|/s/ ROBERT A. NESSRobert A. Ness               |  | Controller (Principal Financial Officer)                         |  | December 26, 2002
|                                              
|/s/ REUEL SWANSONReuel Swanson                 |  | Secretary and Director                                           |  | December 26, 2002
|                                              
|/s/ GARY BRAJCICHGary Brajcich                 |  | Director                                                         |  | December 26, 2002
|                                              
|Harold Erfurth                                 |  | Director                                                         |  | December 26, 2002
|                                              
|/s/ IRV MARCUSIrv Marcus                       |  | Director                                                         |  | December 26, 2002
|                                              
|John T. Trimble                                |  | Director                                                         |  | December 26, 2002
|                                              
|/s/ SAMUEL SMITHSamuel Smith                   |  | Director                                                         |  | December 26, 2002
|                                              
|/s/ WILLIAM D. SNIDERWilliam D. Snider         |  | Director                                                         |  | December 26, 2002

61



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CERTIFICATIONS

I, C. Paul Sandifur, Jr., Chief Executive Officer
of Metropolitan Mortgage & Securities Co., Inc., certify
that:

1. I have reviewed this annual report on
Form 10-K of Metropolitan Mortgage & Securities Co.,
Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and
procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;

b) evaluated the effectiveness of the
registrants disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent functions):

a) all significant deficiencies in the
design or operation of internal controls which could adversely
affect the registrants ability to record, process,
summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal controls; and

6. The registrants other certifying
officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: December 30, 2002



| |                          
| | -------------------------
| | /s/ C. PAUL SANDIFUR, JR.
| |                          
| | C. Paul Sandifur, Jr.    
| | Chief Executive Officer  

62



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##### Table of Contents



I, Robert A. Ness, (Principal Financial Officer)
of Metropolitan Mortgage & Securities Co., Inc., certify
that:

1. I have reviewed this annual report on
Form 10-K of Metropolitan Mortgage & Securities Co.,
Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and
procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;

b) evaluated the effectiveness of the
registrants disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent functions):

a) all significant deficiencies in the
design or operation of internal controls which could adversely
affect the registrants ability to record, process,
summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and

b) any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal controls; and

6. The registrants other certifying
officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: December 30, 2002



| |                              
| | -----------------------------
| | /s/ ROBERT A. NESS           
| |                              
| | Robert A. Ness               
| | (Principal Financial Officer)

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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

Years Ended September 30, 2002, 2001 and
2000

|                                                           |  |      |     | 
|---------------------------------------------------------- |  | ---- | --- | 
|                                                           |  | Page
|                                                           |  |     
|Report of Independent Auditors                             |  |      | F-2 | 
|Report of Independent Accountants                          |  |      | F-3 | 
|Consolidated Balance Sheets                                |  |      | F-4 | 
|Consolidated Statements of Operations                      |  |      | F-5 | 
|Consolidated Statements of Comprehensive Income
    (Loss) |  |      | F-6 | 
|Consolidated Statements of Stockholders
    Equity        |  |      | F-7 | 
|Consolidated Statements of Cash Flows                      |  |      | F-8 | 
|Notes to Consolidated Financial Statements                 |  |      | F-9 | 

F-1



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##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

Board of Directors and Stockholders

Metropolitan Mortgage & Securities Co, Inc.


We have audited the accompanying consolidated
balance sheets of Metropolitan Mortgage & Securities Co,
Inc. and subsidiaries as of September 30, 2002 and 2001,
and the related consolidated statements of operations,
comprehensive income (loss), stockholders equity, and cash
flows for the years then ended. Our audits also included the
financial statement schedules as of September 30, 2002 and
2001 and for the years then ended, listed in the Index at
Item 14(a). These financial statements and schedules are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedules based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Metropolitan Mortgage &
Securities Co, Inc. and subsidiaries at September 30, 2002
and 2001, and the consolidated results of their operations and
their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
Also, in our opinion, the related consolidated financial
statement schedules referred to above, when considered in
relation to the basic 2002 and 2001 financial statements taken
as a whole, present fairly in all material respects the
information set forth therein.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

Seattle, Washington

December 13, 2002


F-2



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##### Table of Contents



[PRICEWATERHOUSECOOPER LOGO]


Report of Independent Accountants

The Directors and Stockholders

Metropolitan Mortgage & Securities Co., Inc.


In our opinion, the consolidated statements of
operations, of comprehensive income, of stockholders
equity and of cash flows for the year ended September 30,
2000 (appearing on pages F-5 through F-8 of this Annual
Report on Form 10-K of Metropolitan Mortgage &
Securities Co., Inc. and its subsidiaries) present fairly, in
all material respects, the results of operations and cash flows
of Metropolitan Mortgage & Securities Co., Inc. and its
subsidiaries for the year ended September 30, 2000, in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statements schedules, II, IV and V, listed in the
index appearing under Item 15(a)(2) on pages S-2, S-5, S-6
and S-7, present fairly, in all material respects, the
information set forth therein when read in conjunction with the
related consolidated financial statements. These financial
statements and financial statement schedules are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements and financial statement schedules based on our
audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion. We have not audited the consolidated
financial statements or financial statement schedules of
Metropolitan Mortgage & Securities Co., Inc. and its
subsidiaries for any period subsequent to September 30,
2000.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP


Spokane, Washington

December 28, 2000


F-3



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES
CO., INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2002 and 2001


|                                                         |                                                                                                                                                                             |                                            |               |             |               |   |             |             |               | 
|-------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------- | ----------- | ------------- | - | ----------- | ----------- | ------------- | 
|                                                         |                                                                                                                                                                             | 2002                                       |               | 2001       
|                                                         |                                                                                                                                                                             |                                            |               |            
|ASSETS:                                                 
|                                                        
|Cash and cash equivalents                                |                                                                                                                                                                             | $                                          | 68,317,397    |             |               | $ | 67,912,737  |            
|Investments:                                             |                                                                                                                                                                             |                                            |               |             |               |   |             |            
|                                                         | Trading securities, at fair value ($0 and
    $47,663,176 at cost or amortized cost)                                                                                        |                                            |               |            |               |   |             | 48,832,529  |              
|                                                         | Available-for-sale securities, at fair value
    ($490,006,394 and $318,513,704 at cost or amortized cost),
    includes pledged securities of $113,002,984 and $29,721,472 |                                            |               | 495,060,527 |               |   |             | 311,803,378 |              
|                                                         | Held-to maturity securities, at amortized cost
    ($41,418,206 and $0 at fair value), pledged                                                                              |                                            |               | 40,228,594  |               |   |             |            |              
|                                                         | Accrued interest on investments                                                                                                                                             |                                            |               | 3,195,679   |               |   |             | 2,734,943   |              
|                                                         |                                                                                                                                                                             |                                            |               |             |               |   |             |            
|                                                         |                                                                                                                                                                             | Total investments                          |               |             | 538,484,800   |   |             |             | 363,370,850   | 
|                                                         |                                                                                                                                                                             |                                            |               |             |               |   |             |            
|Receivables:                                             |                                                                                                                                                                             |                                            |               |             |               |   |             |            
|                                                         | Real estate contracts and mortgage notes and
    other receivable investments, net of discounts and origination
    fees                                                    |                                            |               | 762,424,455 |               |   |             | 613,722,990 |              
|                                                         | Less allowance for losses on receivables                                                                                                                                    |                                            |               | (11,339,002 | )             |   |             | (13,509,977 | )            
|                                                         |                                                                                                                                                                             |                                            |               |             |               |   |             |            
|                                                         |                                                                                                                                                                             | Net receivables                            |               |             | 751,085,453   |   |             |             | 600,213,013   | 
|                                                         |                                                                                                                                                                             |                                            |               |             |               |   |             |            
|Other assets:                                            |                                                                                                                                                                             |                                            |               |             |               |   |             |            
|                                                         | Real estate held for sale and development at the
    lower of cost or market, net of allowances of $1,998,448 and
    $3,661,247                                            |                                            |               | 106,979,005 |               |   |             | 81,934,751  |              
|                                                         | Reinsurance receivable                                                                                                                                                      |                                            |               | 148,392,448 |               |   |             | 109,608,025 |              
|                                                         | Deferred costs, net                                                                                                                                                         |                                            |               | 80,412,809  |               |   |             | 66,755,118  |              
|                                                         | Land, buildings and equipment, net                                                                                                                                          |                                            |               | 27,365,485  |               |   |             | 29,411,423  |              
|                                                         | Deferred income tax benefit                                                                                                                                                 |                                            |               | 7,625,033   |               |   |             | 15,133,896  |              
|                                                         | Current income taxes receivable                                                                                                                                             |                                            |               | 14,240,000  |               |   |             | 5,760,179   |              
|                                                         | Other assets, net                                                                                                                                                           |                                            |               | 44,216,370  |               |   |             | 53,921,162  |              
|                                                         |                                                                                                                                                                             |                                            |               |             |               |   |             |            
|                                                         |                                                                                                                                                                             | Total other assets                         |               |             | 429,231,150   |   |             |             | 362,524,554   | 
|                                                         |                                                                                                                                                                             |                                            |               |             |               |   |             |            
|                                                         |                                                                                                                                                                             | Total assets                               |               | $           | 1,787,118,800 |   |             | $           | 1,394,021,154 | 
|                                                         |                                                                                                                                                                             |                                            |               |             |               |   |             |            
|LIABILITIES:                                            
|Life insurance and annuity reserves                      |                                                                                                                                                                             | $                                          | 1,225,660,253 |             |               | $ | 974,261,517 |            
|Debenture bonds and accrued interest                     |                                                                                                                                                                             |                                            | 355,465,932   |             |               |   | 300,367,995 |            
|Debt payable                                             |                                                                                                                                                                             |                                            | 123,138,257   |             |               |   | 39,628,517  |            
|Accounts payable and accrued expenses                    |                                                                                                                                                                             |                                            | 9,574,039     |             |               |   | 36,473,704  |            
|Minority interest in consolidated subsidiaries           |                                                                                                                                                                             |                                            |              |             |               |   | 2,376,931   |            
|                                                         |                                                                                                                                                                             |                                            |               |             |               |   |             |            
|                                                         |                                                                                                                                                                             | Total liabilities                          |               |             | 1,713,838,481 |   |             |             | 1,353,108,664 | 
|                                                         |                                                                                                                                                                             |                                            |               |             |               |   |             |            
|Commitments and contingencies (Notes 3, 5, 8 and
    12) |                                                                                                                                                                             |                                            |               |             |               |   |             |            
|Stockholders equity:                                    |                                                                                                                                                                             |                                            |               |             |               |   |             |            
|                                                         | Preferred stock, liquidation preference
    $80,456,961 and $52,895,730                                                                                                     |                                            |               | 16,570,811  |               |   |             | 14,684,736  |              
|                                                         | Subordinate preferred stock, no par                                                                                                                                         |                                            |               |            |               |   |             |            |              
|                                                         | 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                                                                                                                                                  |                                            |               | 49,836,670  |               |   |             | 26,024,897  |              
|                                                         | Accumulated other comprehensive income (loss)                                                                                                                               |                                            |               | 3,291,285   |               |   |             | (4,474,411  | )            
|                                                         | Retained earnings                                                                                                                                                           |                                            |               | 3,363,303   |               |   |             | 4,459,018   |              
|                                                         |                                                                                                                                                                             |                                            |               |             |               |   |             |            
|                                                         |                                                                                                                                                                             | Total stockholders equity                 |               |             | 73,280,319    |   |             |             | 40,912,490    | 
|                                                         |                                                                                                                                                                             |                                            |               |             |               |   |             |            
|                                                         |                                                                                                                                                                             | Total liabilities and stockholders equity |               | $           | 1,787,118,800 |   |             | $           | 1,394,021,154 | 
|                                                         |                                                                                                                                                                             |                                            |               |             |               |   |             |            

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

F-4



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##### Table of Contents



METROPOLITAN MORTGAGE &
SECURITIES CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

For the Years Ended September 30, 2002,
2001 and 2000


|                                                                           |                                                                                 |                |            |             |             |      |             |            |             |   |             |            |             | 
|-------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | -------------- | ---------- | ----------- | ----------- | ---- | ----------- | ---------- | ----------- | - | ----------- | ---------- | ----------- | 
|                                                                           |                                                                                 | 2002           |            | 2001        |             | 2000
|                                                                           |                                                                                 |                |            |             |             |     
|Revenues:                                                                  |                                                                                 |                |            |             |             |      |             |            |             |   |             |           
|                                                                           | Insurance premiums and annuity considerations                                   |                | $          | 1,766,851   |             |      | $           | 1,971,123  |             |   | $           | 2,406,532  |            
|                                                                           | Interest on receivables                                                         |                |            | 54,334,291  |             |      |             | 41,097,622 |             |   |             | 46,667,677 |            
|                                                                           | Earned discount on receivables and investments                                  |                |            | 35,964,785  |             |      |             | 20,759,904 |             |   |             | 21,451,042 |            
|                                                                           | Other investment income                                                         |                |            | 32,692,438  |             |      |             | 30,561,147 |             |   |             | 29,310,903 |            
|                                                                           | Real estate sales                                                               |                |            | 51,824,050  |             |      |             | 17,501,775 |             |   |             | 40,345,916 |            
|                                                                           | Fees, commissions, service and other income                                     |                |            | 7,368,864   |             |      |             | 14,922,672 |             |   |             | 12,346,870 |            
|                                                                           | Net losses on investments                                                       |                |            | (23,967,820 | )           |      |             | (6,331,479 | )           |   |             | (7,072,739 | )          
|                                                                           | Net gains (losses) on sales of receivables                                      |                |            | 3,931,209   |             |      |             | (1,321,127 | )           |   |             | 26,914,099 |            
|                                                                           |                                                                                 |                |            |             |             |      |             |            |             |   |             |           
|                                                                           |                                                                                 | Total revenues |            |             | 163,914,668 |      |             |            | 119,161,637 |   |             |            | 172,370,300 | 
|                                                                           |                                                                                 |                |            |             |             |      |             |            |             |   |             |           
|Expenses:                                                                  |                                                                                 |                |            |             |             |      |             |            |             |   |             |           
|                                                                           | Insurance policy and annuity benefits                                           |                |            | 53,131,625  |             |      |             | 47,473,339 |             |   |             | 46,122,863 |            
|                                                                           | Interest, net                                                                   |                |            | 31,471,721  |             |      |             | 25,469,271 |             |   |             | 29,134,230 |            
|                                                                           | Cost of real estate sold                                                        |                |            | 37,546,550  |             |      |             | 17,160,335 |             |   |             | 36,247,394 |            
|                                                                           | Provision for losses                                                            |                |            | 6,487,447   |             |      |             | 11,791,775 |             |   |             | 15,997,605 |            
|                                                                           | Reduction in value of mortgage servicing rights                                 |                |            |            |             |      |             |           |             |   |             | 1,306,958  |            
|                                                                           | Salaries and employee benefits                                                  |                |            | 14,998,380  |             |      |             | 23,005,332 |             |   |             | 30,698,838 |            
|                                                                           | Commissions to agents                                                           |                |            | 11,900,919  |             |      |             | 10,933,466 |             |   |             | 11,271,223 |            
|                                                                           | Other operating and underwriting expenses                                       |                |            | 15,321,689  |             |      |             | 19,289,623 |             |   |             | 9,732,327  |            
|                                                                           | Amortization of deferred policy acquisition
    costs, net of costs capitalized |                |            | (12,980,668 | )           |      |             | (1,011,169 | )           |   |             | 3,550,469  |            
|                                                                           |                                                                                 |                |            |             |             |      |             |            |             |   |             |           
|                                                                           |                                                                                 | Total expenses |            |             | 157,823,663 |      |             |            | 154,111,972 |   |             |            | 184,061,907 | 
|                                                                           |                                                                                 |                |            |             |             |      |             |            |             |   |             |           
|Income (loss) before income taxes and minority
    interest                |                                                                                 |                | 6,091,005  |             |             |      | (34,950,335 | )          |             |   | (11,691,607 | )         
|Income tax benefit (provision)                                             |                                                                                 |                | (2,111,644 | )           |             |      | 26,344,215  |            |             |   | 4,093,296   |           
|                                                                           |                                                                                 |                |            |             |             |      |             |            |             |   |             |           
|Income (loss) before minority interest                                     |                                                                                 |                | 3,979,361  |             |             |      | (8,606,120  | )          |             |   | (7,598,311  | )         
|Income of consolidated subsidiaries allocated to
    minority stockholders |                                                                                 |                | (57,671    | )           |             |      | (317,003    | )          |             |   | (3,042      | )         
|                                                                           |                                                                                 |                |            |             |             |      |             |            |             |   |             |           
|Net income (loss)                                                          |                                                                                 |                | 3,921,690  |             |             |      | (8,923,123  | )          |             |   | (7,601,353  | )         
|Preferred stock dividends                                                  |                                                                                 |                | (4,783,627 | )           |             |      | (4,156,762  | )          |             |   | (4,553,322  | )         
|                                                                           |                                                                                 |                |            |             |             |      |             |            |             |   |             |           
|Loss applicable to common stockholders                                     |                                                                                 | $              | (861,937   | )           |             | $    | (13,079,885 | )          |             | $ | (12,154,675 | )         
|                                                                           |                                                                                 |                |            |             |             |      |             |            |             |   |             |           

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

F-5



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)

For the Years Ended September 30, 2002,
2001 and 2000


|                                                          |                                           |                                                                                    |            |           |            |      |            |           |           |   |             |            |            |  
|--------------------------------------------------------- | ----------------------------------------- | ---------------------------------------------------------------------------------- | ---------- | --------- | ---------- | ---- | ---------- | --------- | --------- | - | ----------- | ---------- | ---------- | -
|                                                          |                                           | 2002                                                                               |            | 2001      |            | 2000
|                                                          |                                           |                                                                                    |            |           |            |     
|Net income (loss)                                         |                                           | $                                                                                  | 3,921,690  |           |            | $    | (8,923,123 | )         |           | $ | (7,601,353  | )         
|                                                          |                                           |                                                                                    |            |           |            |      |            |           |           |   |             |           
|Other comprehensive income (loss), net of
    income tax: |                                           |                                                                                    |            |           |            |      |            |           |           |   |             |           
|                                                          | Unrealized gains (losses) on investments: |                                                                                    |            |           |            |      |            |           |           |   |             |            |           
|                                                          |                                           | Unrealized holding gains (losses) arising
    during period(1)                     |            |           | 11,234,454 |      |            |           | 3,342,225 |   |             |            | (7,306,644 | )
|                                                          |                                           | Less: reclassification adjustment for gains
    (losses) included in net income(2) |            |           | (3,468,758 | )    |            |           | 3,897,170 |   |             |            | (768,439   | )
|                                                          |                                           |                                                                                    |            |           |            |      |            |           |           |   |             |           
|                                                          | Net other comprehensive income (loss)     |                                                                                    |            | 7,765,696 |            |      |            | 7,239,395 |           |   |             | (8,075,083 | )         
|                                                          |                                           |                                                                                    |            |           |            |      |            |           |           |   |             |           
|Comprehensive income (loss)                               |                                           | $                                                                                  | 11,687,386 |           |            | $    | (1,683,728 | )         |           | $ | (15,676,436 | )         
|                                                          |                                           |                                                                                    |            |           |            |      |            |           |           |   |             |           



---

|    |                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------
|(1) | Net of related tax of $6,074,628, $1,565,360 and
    ($3,995,851) in 2002, 2001 and 2000, respectively.
|   
|(2) | Net of related tax of ($1,867,792), $2,098,476
    and ($413,775) in 2002, 2001 and 2000, respectively.

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

F-6



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

For the Years Ended September 30, 2002,
2001 and 2000


|                                                                                                    |  |           |            |        |  |            |         |               |  |          |            |       |  |   |             |   |  |   |            |   |  |   |             |  
|--------------------------------------------------------------------------------------------------- |  | --------- | ---------- | ------ |  | ---------- | ------- | ------------- |  | -------- | ---------- | ----- |  | - | ----------- | - |  | - | ---------- | - |  | - | ----------- | -
|                                                                                                    |  |           |            |        |  |            |         | Accumulated   |  |          |            |      
|                                                                                                    |  |           |            |        |  | Additional |         | Other         |  |          |            |      
|                                                                                                    |  | Preferred |            | Common |  | Paid-in    |         | Comprehensive |  | Retained |            |      
|                                                                                                    |  | Stock     |            | Stock  |  | Capital    |         | Income (Loss) |  | Earnings |            | Total
|                                                                                                    |  |           |            |        |  |            |         |               |  |          |            |      
|Balance, October 1, 1999                                                                            |  | $         | 19,099,294 |        |  | $          | 291,167 |               |  | $        | 22,522,036 |       |  | $ | (3,638,723  | ) |  | $ | 33,430,689 |   |  | $ | 71,704,463  |  
|Net loss                                                                                            |  |           |            |        |  |            |         |               |  |          |            |       |  |   |             |   |  |   | (7,601,353 | ) |  |   | (7,601,353  | )
|Net unrealized losses on available-for-sale
    securities, net of income tax benefit of $4,409,626 |  |           |            |        |  |            |         |               |  |          |            |       |  |   | (8,075,083  | ) |  |   |            |   |  |   | (8,075,083  | )
|Cash dividends, common
    ($2,400 per share)                                                       |  |           |            |        |  |            |         |               |  |          |            |       |  |   |             |   |  |   | (283,778   | ) |  |   | (283,778    | )
|Cash dividends, preferred (variable rate)                                                           |  |           |            |        |  |            |         |               |  |          |            |       |  |   |             |   |  |   | (4,553,322 | ) |  |   | (4,553,322  | )
|Redemption and retirement of common stock
    (32 shares)                                           |  |           |            |        |  |            | (72,917 | )             |  |          |            |       |  |   |             |   |  |   | (3,194,555 | ) |  |   | (3,267,472  | )
|Redemption and retirement of preferred stock
    (195,175 shares)                                   |  |           | (1,951,739 | )      |  |            |         |               |  |          | (73,619    | )     |  |   |             |   |  |   |            |   |  |   | (2,025,358  | )
|Sale of variable rate preferred stock, net
    (114,352 shares)                                     |  |           | 1,143,528  |        |  |            |         |               |  |          | 9,815,963  |       |  |   |             |   |  |   |            |   |  |   | 10,959,491  |  
|                                                                                                    |  |           |            |        |  |            |         |               |  |          |            |       |  |   |             |   |  |   |            |   |  |   |             |  
|Balance, September 30, 2000                                                                         |  |           | 18,291,083 |        |  |            | 218,250 |               |  |          | 32,264,380 |       |  |   | (11,713,806 | ) |  |   | 17,797,681 |   |  |   | 56,857,588  |  
|Net loss                                                                                            |  |           |            |        |  |            |         |               |  |          |            |       |  |   |             |   |  |   | (8,923,123 | ) |  |   | (8,923,123  | )
|Net unrealized gains on available-for-sale
    securities, net of income tax of $3,663,836          |  |           |            |        |  |            |         |               |  |          |            |       |  |   | 7,239,395   |   |  |   |            |   |  |   | 7,239,395   |  
|Cash dividends, common
    ($2,668 per share)                                                       |  |           |            |        |  |            |         |               |  |          |            |       |  |   |             |   |  |   | (258,778   | ) |  |   | (258,778    | )
|Cash dividends, preferred (variable rate)                                                           |  |           |            |        |  |            |         |               |  |          |            |       |  |   |             |   |  |   | (4,156,762 | ) |  |   | (4,156,762  | )
|Redemption and retirement of preferred stock
    (377,605 shares)                                   |  |           | (3,776,048 | )      |  |            |         |               |  |          | (7,526,354 | )     |  |   |             |   |  |   |            |   |  |   | (11,302,402 | )
|Sale of variable rate preferred stock, net
    (16,970 shares)                                      |  |           | 169,701    |        |  |            |         |               |  |          | 1,286,871  |       |  |   |             |   |  |   |            |   |  |   | 1,456,572   |  
|                                                                                                    |  |           |            |        |  |            |         |               |  |          |            |       |  |   |             |   |  |   |            |   |  |   |             |  
|Balance, September 30, 2001                                                                         |  |           | 14,684,736 |        |  |            | 218,250 |               |  |          | 26,024,897 |       |  |   | (4,474,411  | ) |  |   | 4,459,018  |   |  |   | 40,912,490  |  
|Net income                                                                                          |  |           |            |        |  |            |         |               |  |          |            |       |  |   |             |   |  |   | 3,921,690  |   |  |   | 3,921,690   |  
|Net unrealized gains on available-for-sale
    securities, net of income tax of $4,206,836          |  |           |            |        |  |            |         |               |  |          |            |       |  |   | 7,765,696   |   |  |   |            |   |  |   | 7,765,696   |  
|Cash dividends, common
    ($2,410 per share)                                                       |  |           |            |        |  |            |         |               |  |          |            |       |  |   |             |   |  |   | (233,778   | ) |  |   | (233,778    | )
|Cash dividends, preferred (variable rate)                                                           |  |           |            |        |  |            |         |               |  |          |            |       |  |   |             |   |  |   | (4,783,627 | ) |  |   | (4,783,627  | )
|Redemption and retirement of preferred stock
    (199,430 shares)                                   |  |           | (1,574,332 | )      |  |            |         |               |  |          | (5,397,435 | )     |  |   |             |   |  |   |            |   |  |   | (6,971,767  | )
|Sale of variable rate preferred stock, net
    (1,350,383 shares)                                   |  |           | 3,460,407  |        |  |            |         |               |  |          | 29,209,208 |       |  |   |             |   |  |   |            |   |  |   | 32,669,615  |  
|                                                                                                    |  |           |            |        |  |            |         |               |  |          |            |       |  |   |             |   |  |   |            |   |  |   |             |  
|Balance, September 30, 2002                                                                         |  | $         | 16,570,811 |        |  | $          | 218,250 |               |  | $        | 49,836,670 |       |  | $ | 3,291,285   |   |  | $ | 3,363,303  |   |  | $ | 73,280,319  |  
|                                                                                                    |  |           |            |        |  |            |         |               |  |          |            |       |  |   |             |   |  |   |            |   |  |   |             |  

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

F-7



---



##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

For the Years Ended September 30, 2002,
2001 and 2000


|                                        |                                                                                                                             |                                                         |                                                                       |                                           |              |             |            |              |             |            |             |              |              |             |            | 
|--------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------- | ------------ | ----------- | ---------- | ------------ | ----------- | ---------- | ----------- | ------------ | ------------ | ----------- | ---------- | 
|                                        |                                                                                                                             | 2002                                                    |                                                                       | 2001                                      |              | 2000       
|                                        |                                                                                                                             |                                                         |                                                                       |                                           |              |            
|Cash flow from operating activities:    |                                                                                                                             |                                                         |                                                                       |                                           |              |             |            |              |             |            |             |             
|                                        | Net income (loss)                                                                                                           |                                                         | $                                                                     | 3,921,690                                 |              |             | $          | (8,923,123   | )           |            | $           | (7,601,353   | )           
|                                        | Adjustments to reconcile net income
    (loss) to net cash from operating activities:                                       |                                                         |                                                                       |                                           |              |             |            |              |             |            |             |              |             
|                                        |                                                                                                                             | Proceeds from sales of trading securities               |                                                                       |                                           | 13,590,118   |             |            |              | 48,644,434  |            |             |              | 33,729,043   |            
|                                        |                                                                                                                             | Proceeds from maturities of trading securities          |                                                                       |                                           | 1,020,171    |             |            |              | 6,425,271   |            |             |              | 1,063,590    |            
|                                        |                                                                                                                             | Acquisition of trading securities                       |                                                                       |                                           | (4,669,460   | )           |            |              | (60,231,847 | )          |             |              | (18,730,626  | )          
|                                        |                                                                                                                             | Earned discount on receivables and investments          |                                                                       |                                           | (35,964,785  | )           |            |              | (20,759,904 | )          |             |              | (21,451,042  | )          
|                                        |                                                                                                                             | Losses (gains) on investments and
    receivables, net  |                                                                       |                                           | 20,036,611   |             |            |              | 7,652,606   |            |             |              | (19,841,360  | )          
|                                        |                                                                                                                             | Gains on sales of real estate                           |                                                                       |                                           | (14,277,500  | )           |            |              | (341,440    | )          |             |              | (4,098,522   | )          
|                                        |                                                                                                                             | Loss on sale of equipment                               |                                                                       |                                           |             |             |            |              | 4,147       |            |             |              | 94,176       |            
|                                        |                                                                                                                             | Provision for losses                                    |                                                                       |                                           | 6,487,447    |             |            |              | 11,791,775  |            |             |              | 15,997,605   |            
|                                        |                                                                                                                             | Depreciation and amortization                           |                                                                       |                                           | 5,179,055    |             |            |              | 5,204,922   |            |             |              | 5,121,515    |            
|                                        |                                                                                                                             | Minority interests                                      |                                                                       |                                           | 57,671       |             |            |              | 317,003     |            |             |              | 3,042        |            
|                                        |                                                                                                                             | Deferred income tax provision (benefit)                 |                                                                       |                                           | 4,206,836    |             |            |              | (29,691,755 | )          |             |              | (4,439,801   | )          
|                                        |                                                                                                                             | Changes in assets and liabilities:                      |                                                                       |                                           |              |             |            |              |             |            |             |              |              |            
|                                        |                                                                                                                             |                                                         | Deferred cost, net                                                    |                                           |              | (13,657,691 | )          |              |             | (1,458,629 | )           |              |              | 1,043,097   |           
|                                        |                                                                                                                             |                                                         | Life insurance and annuity reserves                                   |                                           |              | 56,972,221  |            |              |             | 47,276,005 |             |              |              | 43,325,248  |           
|                                        |                                                                                                                             |                                                         | Compound and accrued interest on debenture bonds
    and debt payable |                                           |              | 7,174,457   |            |              |             | 9,669,120  |             |              |              | (3,042,526  | )         
|                                        |                                                                                                                             |                                                         | Accrued interest on receivables and investments                       |                                           |              | (8,553,274  | )          |              |             | (4,274,815 | )           |              |              | (660,716    | )         
|                                        |                                                                                                                             |                                                         | Other assets                                                          |                                           |              | (12,108,000 | )          |              |             | 16,378,804 |             |              |              | (10,204,234 | )         
|                                        |                                                                                                                             |                                                         | Accounts payable and accrued expenses                                 |                                           |              | (7,224,146  | )          |              |             | 5,818,801  |             |              |              | 2,750,312   |           
|                                        |                                                                                                                             |                                                         | Other, net                                                            |                                           |              | 299,999     |            |              |             | 695,122    |             |              |              | 3,207,303   |           
|                                        |                                                                                                                             |                                                         |                                                                       |                                           |              |             |            |              |             |            |             |             
|                                        |                                                                                                                             |                                                         |                                                                       | Net cash provided by operating activities |              |             | 22,491,420 |              |             |            | 34,196,497  |              |              |             | 16,264,751 | 
|                                        |                                                                                                                             |                                                         |                                                                       |                                           |              |             |            |              |             |            |             |             
|Cash flow from investing activities:    |                                                                                                                             |                                                         |                                                                       |                                           |              |             |            |              |             |            |             |             
|                                        | Principal payments received on real estate
    contracts and mortgage notes receivable and other receivable
    investments |                                                         |                                                                       | 195,289,403                               |              |             |            | 127,813,380  |             |            |             | 180,131,593  |             
|                                        | Proceeds from sales of real estate contracts and
    mortgage notes receivable and other receivable investments             |                                                         |                                                                       | 52,313,831                                |              |             |            | 116,058,868  |             |            |             | 577,307,218  |             
|                                        | Proceeds from sales of real estate                                                                                          |                                                         |                                                                       | 5,072,179                                 |              |             |            | 16,926,185   |             |            |             | 29,531,248   |             
|                                        | Proceeds from maturities of held-to-maturity
    investments                                                                |                                                         |                                                                       | 273,832                                   |              |             |            |             |             |            |             | 7,232,597    |             
|                                        | Proceeds from maturities of available-for-sale
    investments                                                              |                                                         |                                                                       | 56,290,263                                |              |             |            | 15,800,769   |             |            |             | 9,091,783    |             
|                                        | Proceeds from sales of available-for-sale
    investments                                                                   |                                                         |                                                                       | 367,741,287                               |              |             |            | 181,265,965  |             |            |             | 18,288,069   |             
|                                        | Proceeds from sales of mortgage servicing rights                                                                            |                                                         |                                                                       |                                          |              |             |            | 5,712,420    |             |            |             |             |             
|                                        | Proceeds from sales of fixed assets                                                                                         |                                                         |                                                                       |                                          |              |             |            | 1,773,294    |             |            |             |             |             
|                                        | Acquisition of real estate contracts and mortgage
    notes receivable                                                      |                                                         |                                                                       | (309,315,814                              | )            |             |            | (261,721,326 | )           |            |             | (585,067,159 | )           
|                                        | Acquisition of other receivable investments                                                                                 |                                                         |                                                                       | (21,070,047                               | )            |             |            | (13,721,715  | )           |            |             | (65,987,359  | )           
|                                        | Purchases of held-to-maturity investments                                                                                   |                                                         |                                                                       | (40,516,935                               | )            |             |            |             |             |            |             | (298,174     | )           
|                                        | Purchases of available-for-sale investments                                                                                 |                                                         |                                                                       | (591,861,681                              | )            |             |            | (208,889,081 | )           |            |             | (77,939,179  | )           
|                                        | Purchases of and costs associated with real
    estate held for sale and development                                        |                                                         |                                                                       | (40,774,748                               | )            |             |            | (14,566,517  | )           |            |             | (9,186,324   | )           
|                                        | Capital expenditures                                                                                                        |                                                         |                                                                       | (1,396,314                                | )            |             |            | (1,898,502   | )           |            |             | (8,824,369   | )           
|                                        |                                                                                                                             |                                                         |                                                                       |                                           |              |             |            |              |             |            |             |             
|                                        |                                                                                                                             | Net cash provided by (used in) investing
    activities |                                                                       |                                           | (327,954,744 | )           |            |              | (35,446,260 | )          |             |              | 74,279,944   |            
|                                        |                                                                                                                             |                                                         |                                                                       |                                           |              |             |            |              |             |            |             |             
|Cash flow from financing activities:    |                                                                                                                             |                                                         |                                                                       |                                           |              |             |            |              |             |            |             |             
|                                        | Increase (decrease) in borrowings                                                                                           |                                                         |                                                                       | 85,045,000                                |              |             |            | (9,398,701   | )           |            |             | (87,575,602  | )           
|                                        | Repayments of debt payable                                                                                                  |                                                         |                                                                       | (1,853,335                                | )            |             |            | (1,002,591   | )           |            |             | (591,877     | )           
|                                        | Receipts from life and annuity products                                                                                     |                                                         |                                                                       | 300,861,033                               |              |             |            | 149,442,699  |             |            |             | 118,448,928  |             
|                                        | Withdrawals of life and annuity products                                                                                    |                                                         |                                                                       | (113,029,008                              | )            |             |            | (118,301,729 | )           |            |             | (173,791,925 | )           
|                                        | Ceding of life and annuity products to reinsurers                                                                           |                                                         |                                                                       | 24,884,602                                |              |             |            | 9,115,927    |             |            |             | 18,840,441   |             
|                                        | Ceding of life and annuity products from
    reinsurers                                                                     |                                                         |                                                                       | (56,527,704                               | )            |             |            | (1,056,539   | )           |            |             | (27,434,957  | )           
|                                        | Issuance of debenture bonds                                                                                                 |                                                         |                                                                       | 92,912,423                                |              |             |            | 67,369,456   |             |            |             | 96,583,832   |             
|                                        | Repayment of debenture bonds                                                                                                |                                                         |                                                                       | (44,670,868                               | )            |             |            | (15,408,687  | )           |            |             | (53,595,898  | )           
|                                        | Issuance of preferred stock                                                                                                 |                                                         |                                                                       | 32,669,615                                |              |             |            | 1,456,572    |             |            |             | 10,959,491   |             
|                                        | Redemption and retirement of preferred stock                                                                                |                                                         |                                                                       | (6,971,767                                | )            |             |            | (11,302,402  | )           |            |             | (2,025,358   | )           
|                                        | Redemption and retirement of common stock                                                                                   |                                                         |                                                                       |                                          |              |             |            |             |             |            |             | (3,267,472   | )           
|                                        | Repurchase of minority interest                                                                                             |                                                         |                                                                       | (2,434,602                                | )            |             |            |             |             |            |             |             |             
|                                        | Cash dividends                                                                                                              |                                                         |                                                                       | (5,017,405                                | )            |             |            | (4,415,540   | )           |            |             | (4,837,100   | )           
|                                        |                                                                                                                             |                                                         |                                                                       |                                           |              |             |            |              |             |            |             |             
|                                        |                                                                                                                             | Net cash provided by (used in) financing
    activities |                                                                       |                                           | 305,867,984  |             |            |              | 66,498,465  |            |             |              | (108,287,497 | )          
|                                        |                                                                                                                             |                                                         |                                                                       |                                           |              |             |            |              |             |            |             |             
|Net change in cash and cash equivalents |                                                                                                                             |                                                         | 404,660                                                               |                                           |              |             | 65,248,702 |              |             |            | (17,742,802 | )           
|Cash and cash equivalents:              |                                                                                                                             |                                                         |                                                                       |                                           |              |             |            |              |             |            |             |             
|                                        | Beginning of year                                                                                                           |                                                         |                                                                       | 67,912,737                                |              |             |            | 2,664,035    |             |            |             | 20,406,837   |             
|                                        |                                                                                                                             |                                                         |                                                                       |                                           |              |             |            |              |             |            |             |             
|                                        | End of year                                                                                                                 |                                                         | $                                                                     | 68,317,397                                |              |             | $          | 67,912,737   |             |            | $           | 2,664,035    |             
|                                        |                                                                                                                             |                                                         |                                                                       |                                           |              |             |            |              |             |            |             |             

See Note 15 for supplemental cash flow information

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

F-8



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

For the Years Ended September 30, 2002,
2001 and 2000


1.     Summary of
Significant Accounting Policies:

Business and
Organization

Metropolitan Mortgage & Securities Co., Inc.
(the Company and Metropolitan) was
incorporated in the state of Washington in 1953. The
Companys 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 Company has
developed several funding sources. The primary sources include
the issuance of annuity and life products; the issuance of debt
and equity securities; and a collateralized line of credit.

In addition to the Companys Receivable
investments, Western United Life Assurance Company
(Western Life) and, to a lesser extent Metropolitan,
invest funds in securities which predominantly consist of
corporate bonds, U.S. Treasury and government agency
obligations, mortgage-backed securities and other securities.
These investments also include subordinate certificates and
residual interests created out of Receivable securitizations.
The Company also invests in venture capital investments.

The Companys annuity and life products are
issued by Western Life. It is domiciled in the state of
Washington and sells these products through over 1700
independent sales representatives in 16 states, primarily in the
western half of the United States. Western Life intends to
expand its operations in other states as opportunities arise.

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, Old West Life Insurance
& Annuity Company (Old West), Summit Property
Development, Inc. and Metropolitan Investment Securities, Inc.
(MIS). The Affiliated Companies are affiliated with
the Consolidated Group because of the common control of the
Company and the Affiliated Companies by C. Paul Sandifur, Jr.

Principles of
Consolidation

The consolidated financial statements include the
accounts of Metropolitan Mortgage & Securities Co., Inc. and
its majority-owned subsidiaries. Metropolitans significant
subsidiaries include Western United Holding Company, a holding
company and shareholder of Western Life, Consumers Group Holding
Co., Inc., a holding company and shareholder of Consumers
Insurance Co., Inc., an inactive property and casualty insurer,
and Metwest Mortgage Services, Inc., a mortgage loan originator
and servicer. Minority interest represents minority
stockholders proportionate share of the equity in the
Companys consolidated subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation.

Cash and Cash
Equivalents

Cash includes all balances on deposit in banks
and financial institutions. The Company considers all
highly-liquid debt instruments purchased with a remaining
maturity of three months or less to be cash equivalents.
Substantially all cash and cash equivalents are on deposit with
one financial institution and balances often exceed the federal
insurance limit. The Company periodically evaluates the credit
quality of these banks and financial institutions.

F-9



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



1.     Summary of
Significant Accounting Policies (continued)


Investments

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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Trading Securities:Trading securities, consisting
    primarily of equity and mortgage- and asset-backed securities,
    are recorded at fair value based on quoted market value.
    Realized and unrealized gains and losses on these securities are
    included in the consolidated statements of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | Available-for-Sale Securities.Available-for-sale securities,
    consisting primarily of mortgage- and asset-backed securities,
    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. The Company continually monitors its
    investment portfolio for other than temporary impairment of
    securities. When an other than a temporary decline in the value
    below cost or amortized cost is identified, the investment is
    reduced to its fair value, which becomes the new cost basis of
    the investment. The amount of the reduction is reported as a
    realized loss in the statement of income. Any recovery of value
    in excess of the investments new cost basis is recognized
    as a realized gain only on sale, maturity or other disposition
    of the investment. Factors that the Company evaluates in
    determining the existence of an other than temporary decline in
    value include (1) the length of time and extent to which
    the fair value has been less than cost or carrying value,
    (2) the circumstances contributing to the decline in fair
    value (including a change in interest rates or spreads to
    benchmarks), (3) recent performance of the security, (4)
    the financial strength of the issuer, and (5) the intent
    and ability of the Company to retain the investment for a period
    of time sufficient to allow for anticipated recovery.
    Additionally, for asset-backed securities the Company considers
    the security rating and the amount of credit support available
    for the security.
|
| | The Company holds debt securities generated from
    its own securitization transactions. For these securities,
    estimated fair value is derived from expected discounted future
    cash flows. When determining expected future cash flows, the
    Company considers interest rates, estimated prepayment rates,
    collateral value, historical default rates and estimated loss
    severity experienced by the securities. To the extent that
    actual experience is less favorable than the assumptions, an
    impairment in the debt securities could result. The Company
    periodically assesses the assumptions used in valuing the cash
    flows and the related carrying value of these securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | Equity securities include the Companys
    investment in the common stock of the Federal Home Loan Bank of
    Seattle (FHLB Seattle). This stock may only be sold
    to FHLB Seattle or to another member institution; therefore, it
    is restricted and is carried at cost. The carrying value of the
    restricted stock was approximately $5.1 million and
    $2.7 million at September 30, 2002 and 2001,
    respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Held-to-Maturity Securities:Held-to-maturity securities are
    carried at amortized cost. Premiums and discounts on these
    securities are amortized on a specific-identification basis
    using the interest method. The Company has the ability and
    intent to hold these investments until maturity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

Realized gains and losses on investments are
calculated on the specific-identification method and are
recognized in the consolidated statements of operations in the
period in which the investment is sold.

Real Estate Contracts and
Mortgage Notes Receivable

Real estate contracts and mortgage notes
receivable are carried at amortized cost. Discounts originating
at the time of purchase, net of capitalized acquisition costs,
are amortized on an individual contract basis using the level
yield (interest) method over the remaining contractual term
of the receivables. Origination fees, net

F-10



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



1.     Summary of
Significant Accounting Policies (continued)


of direct origination costs, are deferred and
recognized as interest income using the level yield (interest)
method over the contractual term of the receivable.

For commercial development loans, the Company
occasionally negotiates exit fee agreements with the borrower.
To the extent the exit fees do not result in an overall yield to
the Company that is greater than prevailing market rates after
adjusting for the risk, the transaction is accounted for as a
loan. If the transaction results in a yield that is greater than
the prevailing market rates after adjusting for the risk, the
transaction is treated as a loan if the exit fee is less than
50% of the expected residual profits from the development and if
the borrower has an equity investment, substantial to the
project, that is not funded by the Company. If the transaction
meets the requirements to be accounted for as a loan, the exit
fee is amortized into income over the estimated life of the loan
using the level yield method. If the transaction does not meet
the requirements to be treated as a loan, it is accounted for as
an investment in real estate.

Other Receivable
Investments

Other receivable investments (primarily lottery
prizes, annuities and structured settlements) are carried at the
lower of amortized cost or net realizable value. Discounts
originating at the time of purchase, net of capitalized
acquisition costs, are amortized using the level yield
(interest) method on an individual receivable basis over the
remaining contractual term of the receivable.

Real Estate Held for Sale and
Development

Real estate held for sale and development is
stated at the lower of cost or fair value less estimated costs
to sell. The Company principally acquires real estate through
acquisition and foreclosure. Cost is determined by the purchase
price of the real estate or, for real estate acquired by
foreclosure, at the lower of the fair value of the property at
the date of foreclosure less estimated selling costs, or the
carrying value at the date of foreclosure.

Project costs, including interest, associated
with the development of real estate are capitalized and included
in the cost basis of the real estate. During the years ended
September 30, 2002, 2001 and 2000, the Company capitalized
interest of approximately $2.1 million, $1.6 million
and $1.1 million, respectively.

Occasionally, real estate properties are rented,
with the revenue being included in other income and related
costs being charged to expense.

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

Allowance for
Losses

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

F-11



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

1.     Summary of
Significant Accounting Policies (continued)

review of other relevant market information.
When reviewing the most recent appraisal, the Company considers
the type of property, changes in the economic factors of the
region and the underlying appraisal assumptions. If the
estimated fair value of the collateral is less than the carrying
value, an allowance for loss is recognized.

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

Allowances for losses on real estate contracts
and mortgage notes receivable are based on the carrying value of
the receivable, including accrued interest. Accordingly, the
Company accrues interest on delinquent receivables until
foreclosure.

Allowance for Losses on Real Estate Held for
Sale and Development.The allowance
for losses on real estate held for sale and development includes
amounts for estimated losses as a result of impairment in value.
The Company reviews its real estate properties for impairment in
value whenever events or circumstances indicate that the
carrying value of the asset may exceed its fair value. The
carrying value of a repossessed property is determined as of the
date of repossession of the property and is based on the lower
of fair value less selling costs or carrying value at the time
the property was repossessed. For non-commercial properties, an
appraisal is obtained on the foreclosed property to determine
its fair value at time of repossession. For commercial
properties, an appraisal is obtained on the foreclosed property
to determine the fair value only if the most recent appraisal is
more than one year old, otherwise the existing appraisal is
used. Periodically, the Company may not order an updated
appraisal in accordance with its established policies if current
negotiations with a potential purchaser establishes an
indication of value.

Subsequent to repossession (or acquisition in the
case of development properties), if the value of the property
declines such that the expected fair value, less selling costs,
from the disposition of the asset is less than its carrying
value, an impairment is recognized in the statement of
operations.

Reinsurance
Receivable

The Companys life insurance subsidiary has
ceded a portion of certain life insurance annuity reserves and
the related premiums to other companies, including Old Standard
Life Insurance Company (Old Standard), an affiliate.
Such reinsurance permits recovery of losses from reinsurers,
although it does not discharge the primary liability of the
Company as direct insurer of the risk reinsured. Accordingly,
the Company has not removed the related assets and liabilities
from the consolidated balance sheets.

Deferred Costs

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

Since the amortization of deferred policy
acquisition costs is based on the estimated gross profits of the
underlying life and annuity products using current effective
crediting rates, increases in the crediting rate environment may
accelerate the amortization of these costs in the future.

F-12



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



1.     Summary of
Significant Accounting Policies (continued)


Debenture issuance costs, including commissions
and other issuance costs, are deferred. Commission costs are
amortized over the expected average term of the related
debenture bond, which ranges from six months to five years,
using the interest method. Other debenture issuance costs are
amortized over an average four year average term of the related
debenture bond using a straight-line method.

Land, Buildings and
Equipment

Land, buildings and equipment are stated at cost.
Buildings, improvements, furniture and equipment are depreciated
using both straight-line and accelerated methods over their
estimated useful lives which, for buildings and improvements,
range from 5 to 40 years, and for furniture and equipment,
range from three to ten years. Repairs, maintenance and minor
renewals are expensed as incurred. Upon sale or retirement, the
costs and related accumulated depreciation are eliminated from
the accounts and any resulting gain or loss is reflected in
operations. Depreciation expense for the fiscal years ended
September 30, 2002, 2001 and 2000 was approximately
$3.9 million, $4.1 million and $4.0 million,
respectively.

Computer Software
Costs

The Company capitalizes direct costs of
enhancements to computer software operating systems acquired and
modified for internal use to the extent that the functionality
of the software is improved. Total capitalized enhancement costs
net of related amortization were approximately $0.7 million
and $1.9 million at September 30, 2002 and 2001,
respectively. These costs are being amortized over 3- and
10-year periods, depending on the estimated useful life of the
enhancement, using the straight-line method. Due to
technological advancements, it is reasonably possible that the
remaining estimated useful lives could change in the near term.

Policy Loans

Policy loans are carried at the unpaid principal
balance of the loans, and represent borrowings against the cash
surrender value of in-force life insurance policies and annuity
contracts. Policy loans bear interest at rates ranging from
6.00% to 8.00%. Life insurance policy loans may remain
outstanding until the policy is surrendered. Annuity policy
loans are generally due over terms ranging from five to fifteen
years.

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 term.

Recognition of Insurance
Premiums

Revenues for universal life contracts consist of
amounts assessed during the period against policyholders
account balances, primarily for mortality expenses, policy
administration charges and surrender charges. Revenues related
to annuity contracts are recognized over the estimated policy
term. Annuity revenues consist of the charges assessed against
the annuity account balance for services and surrender charges.
Charges for future services are assessed; however, the related
revenue is deferred and recognized in income over the period
benefited using the same assumptions as are used to amortize
deferred policy acquisition costs.

F-13



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



1.     Summary of
Significant Accounting Policies (continued)


Guaranty Fund
Assessments

The Companys life insurance subsidiary is
subject to insurance guaranty laws in the states in which it
writes premiums. These laws provide for assessments against
insurance companies for the benefit of policyholders and
claimants of insolvent life insurance companies. A portion of
these assessments can be offset against the payment of future
premium taxes. However, future changes in state laws could
decrease the amount available for offset. At September 30,
2002 and 2001, the Company had accrued an estimated liability of
approximately $2.0 million and $2.1 million,
respectively, for guaranty fund assessments for known or
anticipated insolvencies. As a result of future industry
insolvencies or changes in the assessment of known insolvencies,
the guaranty fund liability could change in the near term.

Income Taxes

The Company accounts for income taxes using the
liability method, which requires that deferred tax assets and
liabilities be determined based on the expected future income
tax consequences of events that have been recognized in the
financial statements. Deferred tax assets and liabilities are
recognized based on the temporary differences between the
financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in
which the temporary differences are expected to reverse.

The Company files a consolidated federal income
tax return with its subsidiaries. The consolidating companies
have executed a tax allocation agreement. Under the agreement,
the Companies income tax provisions are computed on a
separate return basis and consolidated affiliates receive a
reimbursement to the extent that their losses and other credits
result in a reduction of the consolidated tax liability.

Hedging
Activities

The Company is authorized by its investment
policies to use financial futures instruments for the purpose of
hedging interest rate risk relative to the securities portfolio,
potential trading situations and in anticipation of sales of
real estate contracts and other receivable investments. Futures
transactions are intended to reduce the risk associated with
price movements for a balance sheet asset. Securities may be
sold short (the sale of securities that are not
currently in the portfolio and therefore must be purchased to
close out the sale agreement) as another means of hedging
interest rate risk to benefit from an anticipated movement in
the financial markets. At September 30, 2002 and 2001, the
Company had no open hedging positions.

Off-Balance-Sheet
Instruments

The Company has outstanding commitments to extend
credit to commercial borrowers. Such financial instruments are
recorded in the financial statements when they are funded or
related fees are incurred. Outstanding commitments to extend
credit to commercial borrowers were approximately
$88.4 million and $17.0 million at September 30,
2002 and 2001, respectively.

Estimates

The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from
those estimates.

F-14



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

1.     Summary of
Significant Accounting Policies (continued)

Reclassifications

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

Other Recent Accounting
Pronouncements

In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. This statement will
require discontinuing the amortization of goodwill and other
intangible assets with indefinite useful lives. Instead, these
assets will be tested periodically for impairment and written
down to their fair market values as necessary. This statement is
effective for fiscal years beginning after December 15,
2001. The implementation of this statement on October 1,
2002 did not have a material impact on the consolidated
financial statements.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which is effective for fiscal years beginning
after December 15, 2001. SFAS No. 144 addresses
accounting and reporting of long-lived assets, except goodwill,
that are either held and used or disposed of through sale or
other means. The implementation of this statement on
October 1, 2002 did not have a material impact on the
consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections. This
statement amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This
statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed
conditions. The provisions of this statement are effective for
financial statements issued on or after May 15, 2002. The
implementation of this statement did not have a material impact
on the Companys consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which is effective for exit or disposal activities
initiated after December 31, 2002. This statement requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. The provisions of this
statement are effective for exit or disposal activities that are
initiated after December 31, 2002 with early application
encouraged. The Company has completed an evaluation of the
effects of this statement and does not believe it will have a
material impact on the Companys financial statements.

F-15



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |             
|-- | ------------
|2. | Investments:

A summary of cost and estimated fair values of
investments at September 30, 2002 and 2001 is as follows:

|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|------------------------------------- |  | -------------- | ----------- | ---------- |  | ---------- | --------- | -------------- |  | - | ---------- | - |  | - | ----------- | 
|                                      |  |               
|                                      |  | 2002          
|                                      |  |               
|                                      |  |                |             | Gross      |  | Gross      |           |               
|                                      |  | Cost or        |             | Unrealized |  | Unrealized |           | Estimated Fair
|                                      |  | Amortized Cost |             | Gains      |  | Losses     |           | Value         
|                                      |  |                |             |            |  |            |           |               
|Available-for-Sale                    |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Government-backed bonds               |  | $              | 44,052,033  |            |  | $          | 506,760   |                |  | $ |           |   |  | $ | 44,558,793  | 
|Corporate bonds                       |  |                | 20,030,549  |            |  |            | 246,261   |                |  |   | (365,763   | ) |  |   | 19,911,047  | 
|Mortgage- and asset-backed securities |  |                | 382,394,240 |            |  |            | 6,859,717 |                |  |   | (2,306,998 | ) |  |   | 386,946,959 | 
|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Total fixed maturities                |  |                | 446,476,822 |            |  |            | 7,612,738 |                |  |   | (2,672,761 | ) |  |   | 451,416,799 | 
|Equity securities                     |  |                | 39,580,859  |            |  |            | 807,928   |                |  |   | (693,772   | ) |  |   | 39,695,015  | 
|Venture Capital/ Limited Partnership  |  |                | 3,948,713   |            |  |            |          |                |  |   |           |   |  |   | 3,948,713   | 
|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Totals                                |  | $              | 490,006,394 |            |  | $          | 8,420,666 |                |  | $ | (3,366,533 | ) |  | $ | 495,060,527 | 
|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Held-to-Maturity                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Government-backed bonds               |  | $              | 16,974,765  |            |  | $          | 363,803   |                |  | $ |           |   |  | $ | 17,338,568  | 
|Mortgage- and asset-backed securities |  |                | 23,253,829  |            |  |            | 825,809   |                |  |   |           |   |  |   | 24,079,638  | 
|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Total fixed maturities                |  |                | 40,228,594  |            |  |            | 1,189,612 |                |  |   |           |   |  |   | 41,418,206  | 
|Equity securities                     |  |                |            |            |  |            |          |                |  |   |           |   |  |   |            | 
|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 
|Totals                                |  | $              | 40,228,594  |            |  | $          | 1,189,612 |                |  | $ |           |   |  | $ | 41,418,206  | 
|                                      |  |                |             |            |  |            |           |                |  |   |            |   |  |   |             | 

|                                      |  |                |             |            |  |            |           |                |  |   |             |   |  |   |             | 
|------------------------------------- |  | -------------- | ----------- | ---------- |  | ---------- | --------- | -------------- |  | - | ----------- | - |  | - | ----------- | 
|                                      |  |               
|                                      |  | 2001          
|                                      |  |               
|                                      |  |                |             | Gross      |  | Gross      |           |               
|                                      |  | Cost or        |             | Unrealized |  | Unrealized |           | Estimated Fair
|                                      |  | Amortized Cost |             | Gains      |  | Losses     |           | Value         
|                                      |  |                |             |            |  |            |           |               
|Trading                               |  |                |             |            |  |            |           |                |  |   |             |   |  |   |             | 
|Mortgage- and asset-backed securities |  | $              | 38,331,675  |            |  | $          | 2,502,149 |                |  | $ | (2,219,115  | ) |  | $ | 38,614,709  | 
|Equity securities                     |  |                | 9,331,501   |            |  |            | 886,319   |                |  |   |            |   |  |   | 10,217,820  | 
|                                      |  |                |             |            |  |            |           |                |  |   |             |   |  |   |             | 
|Totals                                |  | $              | 47,663,176  |            |  | $          | 3,388,468 |                |  | $ | (2,219,115  | ) |  | $ | 48,832,529  | 
|                                      |  |                |             |            |  |            |           |                |  |   |             |   |  |   |             | 
|Available-for-Sale                    |  |                |             |            |  |            |           |                |  |   |             |   |  |   |             | 
|Government-backed bonds               |  | $              | 15,018,895  |            |  | $          | 254,535   |                |  | $ |            |   |  | $ | 15,273,430  | 
|Corporate bonds                       |  |                | 32,266,114  |            |  |            | 1,047,491 |                |  |   | (953,550    | ) |  |   | 32,360,055  | 
|Mortgage- and asset-backed securities |  |                | 250,062,901 |            |  |            | 3,699,867 |                |  |   | (7,145,587  | ) |  |   | 246,617,181 | 
|                                      |  |                |             |            |  |            |           |                |  |   |             |   |  |   |             | 
|Total fixed maturities                |  |                | 297,347,910 |            |  |            | 5,001,893 |                |  |   | (8,099,137  | ) |  |   | 294,250,666 | 
|Equity securities                     |  |                | 13,851,173  |            |  |            | 57,634    |                |  |   | (3,028,493  | ) |  |   | 10,880,314  | 
|Venture Capital/ Limited Partnership  |  |                | 7,314,621   |            |  |            |          |                |  |   | (642,223    | ) |  |   | 6,672,398   | 
|                                      |  |                |             |            |  |            |           |                |  |   |             |   |  |   |             | 
|Totals                                |  | $              | 318,513,704 |            |  | $          | 5,059,527 |                |  | $ | (11,769,853 | ) |  | $ | 311,803,378 | 
|                                      |  |                |             |            |  |            |           |                |  |   |             |   |  |   |             | 

F-16



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                        
|-- | -----------------------
|2. | Investments (continued)

The principal amount of mortgage- and
asset-backed securities with required principal or interest
payments being in arrears for more than 90 days was
approximately $4.2 million and $3.2 million at
September 30, 2002 and 2001, respectively.

Approximately $105.3 million and
$29.7 million in available-for-sale securities were pledged
to collateralize the note payable to Federal Home Loan Bank at
September 30, 2002 and 2001. Additionally, all
held-to-maturity securities at September 30, 2002 were also
pledged to collateralize the note payable to Federal Home Loan
Bank. Additionally, approximately $7.7 million in
available-for-sale securities were pledged to guarantee the
obligation of Western Life with respect to remitting tax
withholdings belonging to various lottery trusts and certain
other obligations of Western Life under the trust agreements.

Proceeds from sales of available-for-sale
securities during the years ended September 30, 2002, 2001
and 2000 were approximately $359.9 million,
$181.3 million and $18.3 million, respectively, which
resulted in gross realized gains of approximately
$6.8 million, $6.4 million and $1.4 million and
gross realized losses of approximately $1.5 million,
$4.0 million and $0.2 million during each respective year.

The net change in unrealized gains on trading
securities, recorded in the statements of operations were
approximately $0.7 million, $0.8 million and
$0.3 million during the years ended September 30,
2002, 2001 and 2000, respectively.

During the years ended September 30, 2002,
2001 and 2000, the Company determined that certain
available-for-sale securities, including residual
interests from securitization transactions, had other than
temporary impairments in value. Accordingly, the carrying values
of the securities were decreased by approximately
$29.4 million, $8.7 million and $7.5 million
through a charge to operations.

The following aggregate investments with
individual issuers (excluding U.S. government bonds) held by the
Company at September 30, 2002 and 2001, were in excess of
ten percent of stockholders equity.

|       |                                        |                                         |  |   |            | 
|------ | -------------------------------------- | --------------------------------------- |  | - | ---------- | 
|Issuer |                                        |                                        
|       |                                        |                                        
|2002:  |                                        |                                         |  |  
|       | Mortgage- and asset-backed securities: |                                         |  |   |           
|       |                                        | Freddie Mac                             |  | $ | 52,535,132 | 
|       |                                        | Master Asset Securitization             |  |   | 38,062,661 | 
|       |                                        | Metropolitan Asset Funding, Inc.        |  |   | 35,580,087 | 
|       |                                        | Washington Mutual                       |  |   | 30,239,086 | 
|       |                                        | Residential Funding Mortgage Security I |  |   | 29,750,737 | 
|       |                                        | CS First Boston Mortgage Security Corp. |  |   | 23,811,531 | 
|       |                                        | Metropolitan Trust I                    |  |   | 23,636,146 | 
|       |                                        | Structured Asset Securities             |  |   | 23,237,166 | 
|       |                                        | Wells Fargo Mortgage Backed             |  |   | 21,695,347 | 
|       |                                        | Countrywide Home Loans                  |  |   | 20,106,367 | 
|       |                                        | Morgan Stanley Dean Witter              |  |   | 18,233,573 | 
|       |                                        | Bank of America Mortgage Securities     |  |   | 17,800,247 | 
|       |                                        | Metropolitan Mortgage Funding, Inc.     |  |   | 14,663,884 | 
|       |                                        | ABN Amro Mortgage Corp.                 |  |   | 11,960,048 | 
|       |                                        | Fannie Mae                              |  |   | 11,725,691 | 
|       |                                        | First Horizon Asset Securities          |  |   | 10,280,500 | 

F-17



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                        
|-- | -----------------------
|2. | Investments (continued)

|       |                                        |                                       |  |   |            | 
|------ | -------------------------------------- | ------------------------------------- |  | - | ---------- | 
|Issuer |                                        |                                      
|       |                                        |                                      
|       |                                        | Residential Asset Security Trust      |  |   | 8,240,000  | 
|       |                                        | Secured Principal Trust               |  |   | 7,330,029  | 
|2001:  |                                        |                                       |  |  
|       | Mortgage- and asset-backed securities: |                                       |  |   |           
|       |                                        | Metropolitan Asset Funding, Inc.      |  | $ | 36,948,028 | 
|       |                                        | Metropolitan Trust I                  |  |   | 17,550,184 | 
|       |                                        | Countrywide Home Loans                |  |   | 12,863,070 | 
|       |                                        | Citicorp Mtg. Securities              |  |   | 12,619,898 | 
|       |                                        | Metropolitan Mortgage Funding, Inc.   |  |   | 11,490,845 | 
|       |                                        | GreenTree Home Improvement            |  |   | 10,171,264 | 
|       |                                        | Fannie Mae                            |  |   | 9,705,550  | 
|       |                                        | Team Fleet Financing Corp.            |  |   | 7,789,630  | 
|       |                                        | Continental Airlines                  |  |   | 6,986,855  | 
|       |                                        | First Horizon Asset Securities        |  |   | 6,945,071  | 
|       |                                        | PNC Mortgage Securities Corp.         |  |   | 5,977,583  | 
|       |                                        | Federal Home Loan Banks               |  |   | 5,964,212  | 
|       |                                        | Oakwood Mortgage Investors, Inc.      |  |   | 5,905,313  | 
|       |                                        | US Airways                            |  |   | 5,298,538  | 
|       |                                        | Comed Transitional Funding Trust      |  |   | 5,220,313  | 
|       |                                        | Conseco Finance                       |  |   | 5,159,375  | 
|       |                                        | Pegasus Aviation Lease Securitization |  |   | 4,943,063  | 
|       |                                        | America West Airlines                 |  |   | 4,875,582  | 
|       |                                        | Legal Settlement Trust                |  |   | 4,707,897  | 
|       |                                        | National Car Rental Financing         |  |   | 4,200,000  | 
|       |                                        | Rental Car Finance Corp.              |  |   | 4,200,000  | 
|       |                                        | First USA Credit Card                 |  |   | 4,154,375  | 
|       |                                        | Americredit Automobile                |  |   | 4,055,000  | 

The amortized cost and estimated fair values of
available-for-sale and held-to-maturity securities with fixed
maturities at September 30, 2002, by contractual maturity,
are shown below. Expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.

F-18



---



##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                        
|-- | -----------------------
|2. | Investments (continued)

|                                           |                                                 |                |             |                |  |   |             |            | 
|------------------------------------------ | ----------------------------------------------- | -------------- | ----------- | -------------- |  | - | ----------- | ---------- | 
|                                           |                                                 |                |             | Estimated Fair
|                                           |                                                 | Amortized Cost |             | Value         
|                                           |                                                 |                |             |               
|Available-for-sale securities:             |                                                 |                |             |                |  |   |             |           
|Due in one year or less                    |                                                 | $              | 245,084     |                |  | $ | 245,156     |           
|Due after one year through five years      |                                                 |                | 5,442,802   |                |  |   | 5,389,540   |           
|Due after five years and through ten years |                                                 |                | 13,877,084  |                |  |   | 13,817,630  |           
|Due after ten years                        |                                                 |                | 44,517,612  |                |  |   | 45,017,514  |           
|                                           |                                                 |                |             |                |  |   |             |           
|                                           | Total non mortgage- and asset-backed securities |                |             | 64,082,582     |  |   |             | 64,469,840 | 
|Mortgage- and asset backed securities      |                                                 |                | 382,394,240 |                |  |   | 386,946,959 |           
|                                           |                                                 |                |             |                |  |   |             |           
|                                           |                                                 | $              | 446,476,822 |                |  | $ | 451,416,799 |           
|                                           |                                                 |                |             |                |  |   |             |           
|Held-to-maturity debt securities:          |                                                 |                |             |                |  |   |             |           
|Due in one year or less                    |                                                 | $              |            |                |  | $ |            |           
|Due after one year through five years      |                                                 |                | 1,004,611   |                |  |   | 1,084,850   |           
|Due after five years and through ten years |                                                 |                | 15,970,154  |                |  |   | 16,253,718  |           
|                                           |                                                 |                |             |                |  |   |             |           
|                                           | Total non mortgage- and asset-backed securities |                |             | 16,974,765     |  |   |             | 17,338,568 | 
|Mortgage- and asset backed securities      |                                                 |                | 23,253,829  |                |  |   | 24,079,638  |           
|                                           |                                                 |                |             |                |  |   |             |           
|                                           |                                                 | $              | 40,228,594  |                |  | $ | 41,418,206  |           
|                                           |                                                 |                |             |                |  |   |             |           

Residuals

The activity related to certain mortgage-backed
securities, which represent the Companys residual
interests from its own securitization transactions, for the
years ended September 30, 2002, 2001 and 2000 are as
follows:

|                                                          |  |      |            |      |  |      |            |   |  |   |             |  
|--------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ----------- | -
|                                                          |  | 2002 |            | 2001 |  | 2000
|                                                          |  |      |            |      |  |     
|Carrying Value, beginning of year                         |  | $    | 37,863,050 |      |  | $    | 38,099,719 |   |  | $ | 38,730,415  |  
|Securities retained                                       |  |      |           |      |  |      | 1,824,057  |   |  |   | 11,524,279  |  
|Remittances                                               |  |      | (49,380    | )    |  |      | (1,936,622 | ) |  |   | (1,662,237  | )
|Investment income                                         |  |      | 3,421,232  |      |  |      | 3,136,234  |   |  |   | 3,782,874   |  
|Realized and unrealized fair market value
    adjustments |  |      | (8,089,877 | )    |  |      | (3,260,338 | ) |  |   | (14,275,612 | )
|                                                          |  |      |            |      |  |      |            |   |  |   |             |  
|Carrying value, end of year                               |  | $    | 33,145,025 |      |  | $    | 37,863,050 |   |  | $ | 38,099,719  |  
|                                                          |  |      |            |      |  |      |            |   |  |   |             |  

The Company holds residual securities generated
from its own securitization activities. The fair value of these
securities, which do not have established market prices, are
estimated using expected discounted future cash flows. When
determining expected future cash flows, management considers
interest rates, estimated prepayment rates, historical default
rates and estimated loss severity. During the years ended
September 30, 2002, 2001 and 2000, the Company determined
that certain residual certificates had other than temporary
declines in value. Accordingly, the Company recorded charges to
operations of approximately $13.9 million,
$4.3 million, and $7.5 million respectively,
representing the amount impaired. The declines in value were
primarily the result of higher than expected loss severity and
prepayment rates of the underlying collateral. Management
periodically revises its assumptions, based on current
experience, used in valuing the cash flows and the related
carrying value of securities generated from its securitization
activities.

F-19



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                        
|-- | -----------------------
|2. | Investments (continued)

At September 30, 2002, key economic
assumptions and the sensitivity of the current fair value of
residual cash flows to immediate 10 percent and 20 percent
adverse changes in those assumptions are as follows (dollars in
millions):

|                                           |  |  |             | 
|------------------------------------------ |  |  | ----------- | 
|Fair value                                 |  |  | $33.1       | 
|Weighted-average life (in years)(1)        |  |  | 5.25 - 10.3 | 
|Prepayment speed assumptions(2)            |  |  | 19% - 29%   | 
|Impact on fair value of 10% adverse change |  |  | $1.4        | 
|Impact on fair value of 20% adverse change |  |  | $2.8        | 
|Expected loss rates(3)                     |  |  | 2.4% - 4.4% | 
|Impact on fair value of 10% adverse change |  |  | $0.9        | 
|Impact on fair value of 20% adverse change |  |  | $1.8        | 
|Residual cash flow discount rates          |  |  | 10%         | 
|Impact on fair value of 10% adverse change |  |  | $1.7        | 
|Impact on fair value of 20% adverse change |  |  | $3.3        | 



---



|    |                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Weighted average life until projected call date.                                                                                                              
|   
|(2) | Prepayment speed assumptions are for the next six
    months. Thereafter, the speeds decline in six month intervals
    until reaching 10% during fiscal 2004.
|   
|(3) | As a percent of original pool balance.                                                                                                                        

These sensitivities are hypothetical and should
be used with caution. Changes in fair value based on a ten
percent variation in assumptions generally cannot be
extrapolated because of the relationship of the change in
assumption to the change in fair value may not be linear. Also,
in this table, the effect of a variation in a particular
assumption on the fair value of the residual is calculated
without changing any other assumptions; in reality, changes in
one factor may result in changes in another (for example,
increases in market interest rates may result in lower
prepayments and higher foreclosure rates), which might magnify
or counteract the sensitivities.

Static pool losses are calculated by summing the
actual and projected future credit losses and dividing them by
the original balance of each pool of assets. The following table
summarizes the actual and projected future loss percentages as
of September 30, 2002 for securitizations by year.

|               |  |                        |      |      |  |      |      |   |  |  |      |  
|-------------- |  | ---------------------- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|               |  |                       
|               |  | Real estate contracts 
|               |  | and mortgage notes    
|               |  | receivable securitized
|               |  | in fiscal             
|               |  |                       
|               |  | 1998                   |      | 1999 |  | 2000
|               |  |                        |      |      |  |     
|Actual to date |  |                        | 3.29 | %    |  |      | 2.35 | % |  |  | 2.09 | %
|Projected      |  |                        | 0.43 |      |  |      | 0.78 |   |  |  | 2.10 |  
|               |  |                        |      |      |  |      |      |   |  |  |      |  
|Total          |  |                        | 3.72 | %    |  |      | 3.13 | % |  |  | 4.19 | %
|               |  |                        |      |      |  |      |      |   |  |  |      |  

F-20



---



##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                                               
|-- | ------------------------------------------------------------------------------
|3. | Real Estate Contracts and Mortgage Notes and
    Other Receivable Investments:

Real estate contracts and mortgage notes and
other receivable investments are comprised of the following at
September 30, 2002 and 2001:

|                                                                              |  |      |             |      |  |   |             | 
|----------------------------------------------------------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | 
|                                                                              |  | 2002 |             | 2001
|                                                                              |  |      |             |     
|Real estate contracts and mortgage notes
    receivable                       |  | $    | 634,183,100 |      |  | $ | 437,618,224 | 
|Other receivable investments                                                  |  |      | 128,241,355 |      |  |   | 176,104,766 | 
|                                                                              |  |      |             |      |  |   |             | 
|Real estate contracts and mortgage notes and
    other receivable investments |  | $    | 762,424,455 |      |  | $ | 613,722,990 | 
|                                                                              |  |      |             |      |  |   |             | 

Real Estate Contracts and Mortgage Notes
Receivable

Real estate contracts and mortgage notes
receivable consisted of the following at September 30, 2002
and 2001.

|                                                               |                                        |      |             |             |  |   |             |             | 
|-------------------------------------------------------------- | -------------------------------------- | ---- | ----------- | ----------- |  | - | ----------- | ----------- | 
|                                                               |                                        | 2002 |             | 2001       
|                                                               |                                        |      |             |            
|Commercial(1), face value                                      |                                        | $    | 442,168,177 |             |  | $ | 145,297,542 |            
|Undisbursed portion of commercial                              |                                        |      | (88,373,606 | )           |  |   | (17,038,013 | )          
|                                                               |                                        |      |             |             |  |   |             |            
|                                                               | Commercial, net of undisbursed portion |      |             | 353,794,571 |  |   |             | 128,259,529 | 
|Residential, face value                                        |                                        |      | 176,520,275 |             |  |   | 192,874,853 |            
|Other, face value                                              |                                        |      | 102,842,313 |             |  |   | 124,391,414 |            
|Unrealized discounts, net of unamortized
    acquisition costs |                                        |      | (11,587,546 | )           |  |   | (15,422,770 | )          
|Accrued interest receivable                                    |                                        |      | 12,613,487  |             |  |   | 7,515,198   |            
|                                                               |                                        |      |             |             |  |   |             |            
|Carrying value                                                 |                                        | $    | 634,183,100 |             |  | $ | 437,618,224 |            
|                                                               |                                        |      |             |             |  |   |             |            



| | 
| | 
| | 



| |     |                                                                                                                               
| | --- | ------------------------------------------------------------------------------------------------------------------------------
| | (1) | The commercial real estate Receivables are
    defined as those generated through the Companys commercial
    lending source.

The weighted average interest rates and yields on
the Companys real estate contracts and mortgage notes
receivable as of September 30, 2002 and 2001 are as follows:

|            |  |                  |      |          |  |                  |      |                  |  |          |            |                  |  |  |      |   |  |  |      |   |  |   |            | 
|----------- |  | ---------------- | ---- | -------- |  | ---------------- | ---- | ---------------- |  | -------- | ---------- | ---------------- |  |  | ---- | - |  |  | ---- | - |  | - | ---------- | 
|            |  |                  |      |         
|            |  | 2002             |      | 2001    
|            |  |                  |      |         
|            |  | Weighted         |      | Weighted |  |                  |      | Weighted         |  | Weighted |            |                 
|            |  | average interest |      | average  |  |                  |      | average interest |  | average  |            |                 
|            |  | rate(1)          |      | yield    |  | Delinquencies(2) |      | rate(1)          |  | yield    |            | Delinquencies(2)
|            |  |                  |      |          |  |                  |      |                  |  |          |            |                 
|Commercial  |  |                  | 13.0 | %        |  |                  | 16.1 | %                |  | $        | 26,349,403 |                  |  |  | 13.3 | % |  |  | 14.3 | % |  | $ | 5,742,560  | 
|Residential |  |                  | 9.0  | %        |  |                  | 10.5 | %                |  | $        | 17,753,261 |                  |  |  | 9.2  | % |  |  | 10.5 | % |  | $ | 15,856,247 | 
|Other       |  |                  | 9.5  | %        |  |                  | 11.9 | %                |  | $        | 8,351,967  |                  |  |  | 9.6  | % |  |  | 13.7 | % |  | $ | 12,539,908 | 



| |  | 
| |  | 
| |  | 



| |     |                                                                                                                                                             | 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | (1) | Less than 2% of the receivables are subject to
    variable interest rates as of September 30, 2002 and 2001.                                               | 
|
| | (2) | The principal amount of delinquent receivables
    are receivables with required principal or interest payments
    being in arrears for more than 90 days. | 

F-21



---



##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                                                          
|-- | -----------------------------------------------------------------------------------------
|3. | Real Estate Contracts and Mortgage Notes and Other Receivable
    Investments (continued)

Aggregate amounts of receivable maturities at
their face value using estimated prepayment rates are as follows:

|                                 |      |            |             |                 |  |       |             |            |  |   |             |             | 
|-------------------------------- | ---- | ---------- | ----------- | --------------- |  | ----- | ----------- | ---------- |  | - | ----------- | ----------- | 
|                                 |      |            |             | Residential and |  |      
|Fiscal Year Ending September 30, |      | Commercial |             | Other           |  | Total
|                                 |      |            |             |                 |  |      
|                                 | 2003 |            | $           | 101,709,778     |  |       | $           | 79,124,258 |  |   | $           | 180,834,036 | 
|                                 | 2004 |            |             | 102,540,838     |  |       |             | 65,702,076 |  |   |             | 168,242,914 | 
|                                 | 2005 |            |             | 41,063,173      |  |       |             | 43,530,885 |  |   |             | 84,594,058  | 
|                                 | 2006 |            |             | 21,750,210      |  |       |             | 31,197,179 |  |   |             | 52,947,389  | 
|                                 | 2007 |            |             | 16,360,532      |  |       |             | 21,393,297 |  |   |             | 37,753,829  | 
|Thereafter                       |      |            | 70,370,040  |                 |  |       | 38,414,893  |            |  |   | 108,784,933 |            
|                                 |      |            |             |                 |  |       |             |            |  |   |             |            
|                                 |      | $          | 353,794,571 |                 |  | $     | 279,362,588 |            |  | $ | 633,157,159 |            
|                                 |      |            |             |                 |  |       |             |            |  |   |             |            

The principal balances of individual receivables
by state, in excess of ten percent of stockholders equity
as of September 30, 2002 are as follows:

|           |  |      |            | 
|---------- |  | ---- | ---------- | 
|State      |  | 2002
|           |  |     
|Colorado   |  | $    | 15,000,000 | 
|Florida    |  |      | 15,000,000 | 
|Idaho      |  |      | 14,156,880 | 
|Arizona    |  |      | 12,794,692 | 
|California |  |      | 12,500,000 | 
|Illinois   |  |      | 11,775,000 | 
|California |  |      | 11,393,795 | 
|Michigan   |  |      | 10,725,000 | 
|Arizona    |  |      | 10,491,817 | 
|California |  |      | 10,000,000 | 
|Arizona    |  |      | 9,314,160  | 
|Florida    |  |      | 9,011,027  | 
|California |  |      | 8,987,575  | 
|California |  |      | 8,725,000  | 
|Arizona    |  |      | 8,099,768  | 
|Georgia    |  |      | 7,678,111  | 

F-22



---



##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                                                          
|-- | -----------------------------------------------------------------------------------------
|3. | Real Estate Contracts and Mortgage Notes and
    Other Receivable Investments (continued)

At September 30, 2002, the principal
balances of the Companys real estate contracts and
mortgage notes receivable collateralized by real estate are
concentrated in the following geographic regions:

|                  |  |            |       |             |  |  |       |  
|----------------- |  | ---------- | ----- | ----------- |  |  | ----- | -
|                  |  |            |       | Residential
|                  |  | Commercial |       | and Other  
|                  |  |            |       |            
|Pacific Southwest |  |            | 49.5  | %           |  |  | 25.7  | %
|Southeast         |  |            | 17.7  | %           |  |  | 11.7  | %
|Southwest         |  |            | 16.0  | %           |  |  | 18.1  | %
|Midwest           |  |            | 10.4  | %           |  |  | 5.3   | %
|Pacific Northwest |  |            | 6.4   | %           |  |  | 32.5  | %
|Northeast         |  |            |      |             |  |  | 6.7   | %
|                  |  |            |       |             |  |  |       |  
|                  |  |            | 100.0 | %           |  |  | 100.0 | %
|                  |  |            |       |             |  |  |       |  

The value of real estate properties in these
geographic regions can be affected by changes in the economic
environment of the specific regions. It is reasonably possible
that these values could change in the near term, which would
affect the Companys estimate of its allowance for losses
associated with these receivables.

Other Receivable Investments

Other receivable investments include various cash
flow investments, primarily annuities and lottery prizes.
Annuities are general obligations of the payor, which is
generally an insurance company. Lottery prizes are general
obligations of the insurance company or other entity making the
lottery prize payments. Additionally, when the lottery prizes
are from a state-run lottery, the lottery prizes are often
backed by the general credit of the respective state.

These investments normally are non-interest
bearing and are purchased at a discount sufficient to meet the
Companys investment yield requirements. The weighted
average yield on these receivables at September 30, 2002
and 2001 was approximately 8.6% and 9.5%, respectively. Maturity
dates range from 2002 to 2029.

The following is a reconciliation of the face
value of the other receivable investments to the Companys
carrying value at September 30, 2002 and 2001.

|                                                               |  |      |             |      |  |   |             |  
|-------------------------------------------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | -
|                                                               |  | 2002 |             | 2001
|                                                               |  |      |             |     
|Face value of receivables                                      |  | $    | 171,934,687 |      |  | $ | 252,559,547 |  
|Unrealized discounts, net of unamortized
    acquisition costs |  |      | (43,693,332 | )    |  |   | (76,454,781 | )
|                                                               |  |      |             |      |  |   |             |  
|Carrying value                                                 |  | $    | 128,241,355 |      |  | $ | 176,104,766 |  
|                                                               |  |      |             |      |  |   |             |  

The carrying value of other receivable
investments that were more than 90 days delinquent as of
September 30, 2002 and September 30, 2001 was
$6.3 million and $6.8 million respectively.

During the years ended September 30, 2002,
2001 and 2000, the Company sold approximately
$55.7 million, $4.1 million and $44.3 million,
respectively, of these receivables without recourse to
affiliates and third parties and recognized gains of
approximately $3.9 million, $0.3 million and
$2.2 million, respectively. See note 17 for a
discussion of transactions with affiliates.

The following other receivable investments, by
issuer, were in excess of ten percent of stockholders
equity at September 30, 2002 and 2001.

F-23



---



##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                                                          
|-- | -----------------------------------------------------------------------------------------
|3. | Real Estate Contracts and Mortgage Notes and Other Receivable
    Investments (continued)

|                             |  |   |            | 
|---------------------------- |  | - | ---------- | 
|Issuer                       |  |  
|                             |  |  
|2002:                        |  |   |            | 
|Chester Lottery Trust        |  | $ | 17,560,941 | 
|Corbin Lottery Trust         |  |   | 16,894,580 | 
|Manito Lottery Trust         |  |   | 15,488,585 | 
|Dishman Lottery Trust        |  |   | 14,904,946 | 
|2001:                        |  |   |            | 
|WULA Trust Lotteries 99C     |  | $ | 17,043,511 | 
|California State Agency      |  |   | 13,104,164 | 
|Colorado State Agency        |  |   | 13,091,969 | 
|Arizona State Agency         |  |   | 12,769,931 | 
|WULA Trust Lotteries 97B     |  |   | 9,795,236  | 
|Tri State Agency             |  |   | 5,967,365  | 
|New Jersey State Agency      |  |   | 5,818,934  | 
|Connecticut State Agency     |  |   | 5,684,075  | 
|WULA Trust Lottery Loans 97B |  |   | 5,452,316  | 
|New York State Agency        |  |   | 4,995,647  | 
|Oregon State Agency          |  |   | 4,132,739  | 

Aggregate amounts of contractual maturities of
other receivable investments to be received at their face values
are approximately as follows:

|                   |  |   |             | 
|------------------ |  | - | ----------- | 
|Fiscal Year Ending |  |  
|September 30,      |  |  
|                   |  |  
|2003               |  | $ | 27,226,359  | 
|2004               |  |   | 23,897,200  | 
|2005               |  |   | 20,904,289  | 
|2006               |  |   | 17,826,331  | 
|2007               |  |   | 15,520,270  | 
|Thereafter         |  |   | 66,560,238  | 
|                   |  |   |             | 
|                   |  | $ | 171,934,687 | 
|                   |  |   |             | 



|   |                                     
|-- | ------------------------------------
|4. | Allowance for Losses on Receivables:

The following is a summary of the changes in the
allowance for losses on receivables for the years ended
September 30, 2002, 2001, and 2000.

F-24



---



##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                    
|-- | ---------------------------------------------------
|4. | Allowance for Losses on Receivables
    (continued)

|                  |                                         |      |            |            |   |      |            |            |   |   |            |            |  
|----------------- | --------------------------------------- | ---- | ---------- | ---------- | - | ---- | ---------- | ---------- | - | - | ---------- | ---------- | -
|                  |                                         | 2002 |            | 2001       |   | 2000
|                  |                                         |      |            |            |   |     
|Beginning balance |                                         | $    | 13,509,977 |            |   | $    | 12,983,966 |            |   | $ | 6,855,606  |           
|Provisions        |                                         |      | 4,142,146  |            |   |      | 7,515,420  |            |   |   | 12,070,638 |           
|Charge offs:      |                                         |      |            |            |   |      |            |            |   |   |            |           
|                  | Commercial Loans                        |      |            | (1,960,777 | ) |      |            |           |   |   |            |           |  
|                  | Residential and other real estate loans |      |            | (4,352,344 | ) |      |            | (4,794,882 | ) |   |            | (5,153,536 | )
|                  | Leases                                  |      |            |           |   |      |            | (2,172,299 | ) |   |            | (788,742   | )
|                  | Other receivable investments            |      |            |           |   |      |            | (22,228    | ) |   |            |           |  
|                  |                                         |      |            |            |   |      |            |            |   |   |            |           
|Ending balance    |                                         | $    | 11,339,002 |            |   | $    | 13,509,977 |            |   | $ | 12,983,966 |           
|                  |                                         |      |            |            |   |      |            |            |   |   |            |           

Commercial Loans are individually monitored for
impairment. Commercial loans in arrears for more than
90 days and other loans that the Company considered
impaired totaled approximately $50.3 million and
$5.7 million at September 30, 2002 and 2001,
respectively, with approximately $3.0 million and
$2.0 million established as allowance for losses.

Residential and other real estate receivables are
comprised of a large group of smaller-balance homogeneous loans
that are collectively evaluated for impairment. The Company
establishes a loss allowance 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 historical foreclosure and loss experience.

During the year ended September 30, 2000, an
allowance for losses on other Receivable investments was
established as the Company began to originate finance leases.
During the fiscal year ended September 30, 2001, the
Company discontinued lease origination and does not currently
have plans to resume this division. Additionally, the Company
established an allowance on its investments in annuity and
structured settlements as the industry began to focus on state
and federal collection laws and their applicability to annuity
and structured settlement payments.



|   |                                               
|-- | ----------------------------------------------
|5. | Real Estate Held for Sale and
    Development:

Real estate held for sale and development by
region as of September 30, 2002 is as follows:

|                               |  |             |            |             |  |       |            |  |  |   |             | 
|------------------------------ |  | ----------- | ---------- | ----------- |  | ----- | ---------- |  |  | - | ----------- | 
|                               |  | Development |            | Repossessed |  |      
|Region                         |  | Property    |            | Property    |  | Total
|                               |  |             |            |             |  |      
|Pacific Northwest              |  | $           | 55,121,112 |             |  | $     | 6,742,420  |  |  | $ | 61,863,532  | 
|Pacific Southwest              |  |             | 32,727,247 |             |  |       | 1,635,557  |  |  |   | 34,362,804  | 
|Southeast                      |  |             |           |             |  |       | 6,085,036  |  |  |   | 6,085,036   | 
|Southwest                      |  |             | 1,220,697  |             |  |       | 2,313,766  |  |  |   | 3,534,463   | 
|Northeast                      |  |             |           |             |  |       | 2,414,774  |  |  |   | 2,414,774   | 
|Midwest                        |  |             |           |             |  |       | 716,844    |  |  |   | 716,844     | 
|                               |  |             |            |             |  |       |            |  |  |   |             | 
|Balances at September 30, 2002 |  | $           | 89,069,056 |             |  | $     | 19,908,397 |  |  | $ | 108,977,453 | 
|                               |  |             |            |             |  |       |            |  |  |   |             | 
|Balances at September 30, 2001 |  | $           | 68,086,240 |             |  | $     | 17,509,758 |  |  | $ | 85,595,998  | 
|                               |  |             |            |             |  |       |            |  |  |   |             | 

At September 30, 2002, the Company had
approximately $2.7 million in commitments for construction
associated with the development properties.

The following is a summary of the changes in the
allowance for losses for real estate held for sale and
development for the years ended September 30, 2002, 2001
and 2000.

F-25



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                          
|-- | ---------------------------------------------------------
|5. | Real Estate Held for Sale and Development
    (continued)

|                  |  |               |            |      |  |      |            |   |  |   |            |  
|----------------- |  | ------------- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                  |  |              
|                  |  | September 30,
|                  |  |              
|                  |  | 2002          |            | 2001 |  | 2000
|                  |  |               |            |      |  |     
|Beginning balance |  | $             | 3,661,247  |      |  | $    | 2,066,148  |   |  | $ | 2,462,466  |  
|Provisions        |  |               | 2,345,301  |      |  |      | 4,276,355  |   |  |   | 2,817,950  |  
|Charge-offs       |  |               | (4,008,100 | )    |  |      | (2,681,256 | ) |  |   | (3,214,268 | )
|                  |  |               |            |      |  |      |            |   |  |   |            |  
|Ending balance    |  | $             | 1,998,448  |      |  | $    | 3,661,247  |   |  | $ | 2,066,148  |  
|                  |  |               |            |      |  |      |            |   |  |   |            |  

Loss provisions are calculated as the difference
between the estimated net realizable value and the carrying
value at the measurement date. Any loss on liquidation or
subsequent reduction in the carrying value is charged to
operations through provision for losses. The Company
periodically evaluates its allowance for losses for real estate
held for sale and development to determine its adequacy.



|   |                
|-- | ---------------
|6. | Deferred Costs:

An analysis of deferred costs related to policy
acquisition and debenture issuance for the years ended
September 30, 2002, 2001 and 2000 is as follows:

|                              |                           |             |            |             |   |       |           |            |   |   |            |             |  
|----------------------------- | ------------------------- | ----------- | ---------- | ----------- | - | ----- | --------- | ---------- | - | - | ---------- | ----------- | -
|                              |                           | Policy      |            | Debenture   |   |      
|                              |                           | Acquisition |            | Issuance    |   | Total
|                              |                           |             |            |             |   |      
|Balance at October 1, 1999    |                           | $           | 61,763,753 |             |   | $     | 4,575,833 |            |   | $ | 66,339,586 |            
|                              | Deferred during the year  |             |            | 9,049,531   |   |       |           | 4,478,242  |   |   |            | 13,527,773  |  
|                              | Amortized during the year |             |            | (12,600,000 | ) |       |           | (1,970,870 | ) |   |            | (14,570,870 | )
|                              |                           |             |            |             |   |       |           |            |   |   |            |            
|Balance at September 30, 2000 |                           |             | 58,213,284 |             |   |       | 7,083,205 |            |   |   | 65,296,489 |            
|                              | Deferred during the year  |             |            | 9,961,169   |   |       |           | 3,060,017  |   |   |            | 13,021,186  |  
|                              | Amortized during the year |             |            | (8,950,000  | ) |       |           | (2,612,557 | ) |   |            | (11,562,557 | )
|                              |                           |             |            |             |   |       |           |            |   |   |            |            
|Balance at September 30, 2001 |                           |             | 59,224,453 |             |   |       | 7,530,665 |            |   |   | 66,755,118 |            
|                              | Deferred during the year  |             |            | 10,832,302  |   |       |           | 5,142,240  |   |   |            | 15,974,542  |  
|                              | Amortized during the year |             |            | 2,148,366   |   |       |           | (4,465,217 | ) |   |            | (2,316,851  | )
|                              |                           |             |            |             |   |       |           |            |   |   |            |            
|Balance at September 30, 2002 |                           | $           | 72,205,121 |             |   | $     | 8,207,688 |            |   | $ | 80,412,809 |            
|                              |                           |             |            |             |   |       |           |            |   |   |            |            

During the fiscal years ended September 30,
2002 and 2001, the Company revised its amortization assumptions
on the deferred policy acquisition costs related to the deferred
annuity business (92% of the total DPAC as of September 30,
2002) to reflect the higher yields Western Life expected to be
earned on its commercial real estate loan portfolio and the
expected future crediting rates on the annuity business which
the investments support. The expected future crediting rates are
based primarily on Western Lifes current policy for
re-pricing its existing annuity products assuming a level
interest rate environment. During the years ended
September 30, 2002 and 2001, these revised assumptions
resulted in an increase of approximately $8.8 million and
$4.3 million, respectively, in deferred costs with a
corresponding decrease in the amortization of deferred
acquisition costs. There were no adjustments made during the
year ended September 30, 2000.

F-26



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

7. Land, Buildings and Equipment:

Land, buildings, equipment and related
accumulated depreciation at September 30, 2002 and 2001
consisted of the following:

|                              |  |      |             |      |  |   |             |  
|----------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | -
|                              |  | 2002 |             | 2001
|                              |  |      |             |     
|Land                          |  | $    | 3,973,803   |      |  | $ | 3,879,640   |  
|Buildings and improvements    |  |      | 22,508,938  |      |  |   | 21,941,506  |  
|Furniture and equipment       |  |      | 18,951,259  |      |  |   | 18,344,441  |  
|Equipment under lease         |  |      | 3,155,063   |      |  |   | 4,025,209   |  
|                              |  |      |             |      |  |   |             |  
|                              |  |      | 48,589,063  |      |  |   | 48,190,796  |  
|Less accumulated depreciation |  |      | (21,223,578 | )    |  |   | (18,779,373 | )
|                              |  |      |             |      |  |   |             |  
|                              |  | $    | 27,365,485  |      |  | $ | 29,411,423  |  
|                              |  |      |             |      |  |   |             |  



|   |                                     
|-- | ------------------------------------
|8. | Life Insurance and Annuity Reserves:

Life insurance and annuity reserves are based
upon contractual amounts due to the policyholder, including
credited interest. Annuity contract interest rates ranged from
3.00% to 9.95%, 3.75% to 9.95% and 4.65% to 10.25% during the
years ended September 30, 2002, 2001 and 2000,
respectively. Interest assumptions used to compute life
insurance reserves ranged from 4.5% to 6.5% during each of the
years ended September 30, 2002, 2001 and 2000.

The following is a summary of direct business and
reinsurance transactions ceded to Old Standard and other
reinsurers as of and for the years ended September 30,
2002, 2001 and 2000:

|                                                     |                                       |               |   |               |  |          |   |             |  |  |   |         |  |  |   |               | 
|---------------------------------------------------- | ------------------------------------- | ------------- | - | ------------- |  | -------- | - | ----------- |  |  | - | ------- |  |  | - | ------------- | 
|                                                     |                                       |               |   | Ceded to Old  |  | Ceded to |   |            
|                                                     |                                       | Direct Amount |   | Standard      |  | Others   |   | Net Amount 
|                                                     |                                       |               |   |               |  |          |   |            
|As of and for the year ended
    September 30, 2002: |                                       |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              
|                                                     | Insurance and annuity premiums        |               | $ | 355,623,789   |  |          | $ | 56,527,704  |  |  | $ | 379,859 |  |  | $ | 298,716,226   | 
|                                                     |                                       |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              
|                                                     | Insurance policy and annuity benefits |               | $ | 168,457,365   |  |          | $ | 24,884,602  |  |  | $ | 195,349 |  |  | $ | 143,377,414   | 
|                                                     |                                       |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              
|                                                     | Life insurance and annuity reserves   |               | $ | 1,225,660,253 |  |          | $ | 148,258,177 |  |  | $ | 134,271 |  |  | $ | 1,077,267,805 | 
|                                                     |                                       |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              
|As of and for the year ended
    September 30, 2001: |                                       |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              
|                                                     | Insurance and annuity premiums        |               | $ | 241,592,209   |  |          | $ | 694,544     |  |  | $ | 361,995 |  |  | $ | 240,535,670   | 
|                                                     |                                       |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              
|                                                     | Insurance policy and annuity benefits |               | $ | 211,642,826   |  |          | $ | 9,115,927   |  |  | $ | 635,660 |  |  | $ | 201,891,239   | 
|                                                     |                                       |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              
|                                                     | Life insurance and annuity reserves   |               | $ | 974,261,517   |  |          | $ | 109,459,087 |  |  | $ | 148,938 |  |  | $ | 864,653,492   | 
|                                                     |                                       |               |   |               |  |          |   |             |  |  |   |         |  |  |   |              

F-27



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                                    
|-- | ---------------------------------------------------
|8. | Life Insurance and Annuity Reserves
    (continued)

|                                                     |                                       |               |   |              |  |          |   |             |  |  |   |         |  |  |   |             | 
|---------------------------------------------------- | ------------------------------------- | ------------- | - | ------------ |  | -------- | - | ----------- |  |  | - | ------- |  |  | - | ----------- | 
|                                                     |                                       |               |   | Ceded to Old |  | Ceded to |   |            
|                                                     |                                       | Direct Amount |   | Standard     |  | Others   |   | Net Amount 
|                                                     |                                       |               |   |              |  |          |   |            
|As of and for the year ended
    September 30, 2000: |                                       |               |   |              |  |          |   |             |  |  |   |         |  |  |   |            
|                                                     | Insurance and annuity premiums        |               | $ | 202,911,484  |  |          | $ | 27,434,956  |  |  | $ | 316,978 |  |  | $ | 175,159,550 | 
|                                                     |                                       |               |   |              |  |          |   |             |  |  |   |         |  |  |   |            
|                                                     | Insurance policy and annuity benefits |               | $ | 258,067,904  |  |          | $ | 18,743,525  |  |  | $ | 37,706  |  |  | $ | 239,286,673 | 
|                                                     |                                       |               |   |              |  |          |   |             |  |  |   |         |  |  |   |            
|                                                     | Life insurance and annuity reserves   |               | $ | 886,510,121  |  |          | $ | 111,217,445 |  |  | $ | 160,886 |  |  | $ | 775,131,790 | 
|                                                     |                                       |               |   |              |  |          |   |             |  |  |   |         |  |  |   |            

The Companys life insurance subsidiary has
ceded a portion of certain life insurance risks, annuity
reserves and the related premiums to other companies, including
Old Standard, an affiliate. Such reinsurance permits recovery of
losses from reinsurers although it does not discharge the
primary liability of the Company as direct insurer of the risk
reinsured. The Company is contingently liable for claims on
ceded life insurance business in the event the reinsuring
companies do not meet their obligations under those reinsurance
agreements. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk to
minimize its exposure to significant losses from reinsurer
insolvencies.



|   |                 
|-- | ----------------
|9. | Debenture Bonds:

At September 30, 2002 and 2001, debenture
bonds consisted of the following:

|                              |  |      |             |      |  |   |             | 
|----------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | 
|Annual Interest Rates         |  | 2002 |             | 2001
|                              |  |      |             |     
|5% to 6%                      |  | $    | 8,748,000   |      |  | $ |            | 
|6% to 7%                      |  |      | 10,511,000  |      |  |   | 7,486,000   | 
|7% to 8%                      |  |      | 58,525,000  |      |  |   | 39,780,000  | 
|8% to 9%                      |  |      | 154,909,000 |      |  |   | 136,943,000 | 
|9% to 10%                     |  |      | 86,736,000  |      |  |   | 86,978,000  | 
|                              |  |      |             |      |  |   |             | 
|                              |  |      | 319,429,000 |      |  |   | 271,187,000 | 
|Compound and accrued interest |  |      | 36,036,932  |      |  |   | 29,180,995  | 
|                              |  |      |             |      |  |   |             | 
|                              |  | $    | 355,465,932 |      |  | $ | 300,367,995 | 
|                              |  |      |             |      |  |   |             | 

The weighted-average interest rate on outstanding
debentures was approximately 8.2% and 8.3% at September 30,
2002 and 2001, respectively.

F-28



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                            
|-- | ---------------------------
|9. | Debenture Bonds (continued)

Debenture bonds (including principal and compound
and accrued interest) mature as follows:

|                   |      |   |             |            | 
|------------------ | ---- | - | ----------- | ---------- | 
|Fiscal Year Ending |      |  
|September 30,      |      |  
|                   |      |  
|                   | 2003 |   | $           | 60,502,932 | 
|                   | 2004 |   |             | 43,601,000 | 
|                   | 2005 |   |             | 99,863,000 | 
|                   | 2006 |   |             | 60,822,000 | 
|                   | 2007 |   |             | 74,857,000 | 
|Thereafter         |      |   | 15,820,000  |           
|                   |      |   |             |           
|                   |      | $ | 355,465,932 |           
|                   |      |   |             |           

The Company has a current registration of
$150.0 million of Series III and Series III-A
Debenture Bonds outstanding, of which a face amount of
approximately $117.3 million remained unissued at
September 30, 2002. This current registration expires on
April 30, 2003.

10.     Debt
Payable:

At September 30, 2002 and 2001, debt payable
consisted of the following:

|                                                                                                                                                                                                                                                                              |  |      |             |      |  |   |            | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- |  | - | ---------- | 
|                                                                                                                                                                                                                                                                              |  | 2002 |             | 2001
|                                                                                                                                                                                                                                                                              |  |      |             |     
|Note payable to Federal Home Loan Bank of
    Seattle, interest rates ranging from 2.43% to 7.48%; maturity
    dates ranging from December 2002 to March 2015; collateralized
    by $145.6 million of various pledged securities                                            |  | $    | 103,000,000 |      |  |   |           | 
|Note payable to Federal Home Loan Bank of
    Seattle, interest rates ranging from 6.95% to 7.48%; maturity
    dates ranging from March 2005 to March 2015; collateralized by
    $29.7 million of various pledged securities                                                |  |      |            |      |  | $ | 22,000,000 | 
|Note payable to IDS Life Insurance Company,
    interest at 7.04% per annum; due August 1, 2019;
    collateralized by Metropolitan Financial Center located in
    Spokane, Washington                                                                                       |  |      | 11,375,430  |      |  |   | 11,587,853 | 
|Note payable to Old Standard Life Insurance
    Company, interest at 10.5% per annum; due June 30, 2005;
    collateralized by commercial land located in Pasco, Washington                                                                                                   |  |      | 3,197,355   |      |  |   | 4,403,516  | 
|Real estate contracts and mortgage notes payable,
    interest rates ranging from 5.0% to 11.6%, due in installments
    through 2026; collateralized by senior liens on certain of the
    Companys real estate contracts, mortgage notes and real
    estate held for sale |  |      | 1,146,811   |      |  |   | 1,492,258  | 
|Reverse repurchase agreement with Merrill Lynch,
    interest at 2.5% per annum; due October 7, 2002;
    collateralized by $5.0 million in mortgage backed securities                                                                                                        |  |      | 4,045,000   |      |  |   |           | 
|Accrued interest payable                                                                                                                                                                                                                                                      |  |      | 373,661     |      |  |   | 144,890    | 
|                                                                                                                                                                                                                                                                              |  |      |             |      |  |   |            | 
|                                                                                                                                                                                                                                                                              |  | $    | 123,138,257 |      |  | $ | 39,628,517 | 
|                                                                                                                                                                                                                                                                              |  |      |             |      |  |   |            | 

F-29



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



10.     Debt Payable
(continued)


Aggregate amounts of principal and accrued
interest payments due on debt payable are as follows:

|                     |  |   |             | 
|-------------------- |  | - | ----------- | 
|Fiscal Year          |  |  
|Ending September 30, |  |  
|                     |  |  
|2003                 |  | $ | 24,842,936  | 
|2004                 |  |   | 20,456,092  | 
|2005                 |  |   | 12,687,653  | 
|2006                 |  |   | 10,527,072  | 
|2007                 |  |   | 4,566,608   | 
|Thereafter           |  |   | 50,057,896  | 
|                     |  |   |             | 
|                     |  | $ | 123,138,257 | 
|                     |  |   |             | 

11.     Income
Taxes:

The income tax effects of the temporary
differences giving rise to the Companys deferred tax
assets and liabilities as of September 30, 2002 and 2001
are as follows:

|             |                                                               |      |            |            |  |  |            |            | 
|------------ | ------------------------------------------------------------- | ---- | ---------- | ---------- |  |  | ---------- | ---------- | 
|             |                                                               | 2002 |            | 2001      
|             |                                                               |      |            |           
|Assets:      |                                                               |      |            |            |  |  |            |           
|             | Net operating loss carryforwards                              |      | $          | 25,761,095 |  |  | $          | 26,798,316 | 
|             | Life insurance and annuity reserves                           |      |            | 1,305,470  |  |  |            | 2,467,544  | 
|             | Unrealized loss on investment securities                      |      |            |           |  |  |            | 2,348,614  | 
|             | Realized impairments on investment securities                 |      |            | 9,920,150  |  |  |            |           | 
|             | Allowance for losses on real estate assets                    |      |            | 4,072,635  |  |  |            | 4,958,036  | 
|             | Tax credit carryforwards                                      |      |            | 666,023    |  |  |            | 666,023    | 
|             | Allowances for repossessed real estate                        |      |            | 688,386    |  |  |            | 1,561,575  | 
|             | Guaranty fund liability                                       |      |            | 710,565    |  |  |            | 726,157    | 
|             | Accrued vacation                                              |      |            | 320,989    |  |  |            | 307,943    | 
|             | Office properties and equipment                               |      |            | 789,305    |  |  |            |           | 
|             | Other                                                         |      |            |           |  |  |            | 1,384,002  | 
|             |                                                               |      |            |            |  |  |            |           
|             |                                                               |      | 44,234,618 |            |  |  | 41,218,210 |           
|             |                                                               |      |            |            |  |  |            |           
|Liabilities: |                                                               |      |            |            |  |  |            |           
|             | Deferred policy acquisition costs                             |      |            | 23,985,777 |  |  |            | 19,895,546 | 
|             | Contract acquisition costs and discount yield
    recognition |      |            | 3,727,455  |  |  |            | 3,087,071  | 
|             | Unrealized gain on investment securities                      |      |            | 3,323,892  |  |  |            |           | 
|             | Realized gain on trading securities                           |      |            |           |  |  |            | 409,274    | 
|             | Office properties and equipment                               |      |            |           |  |  |            | 747,215    | 
|             | Other investments                                             |      |            | 4,197,810  |  |  |            | 527,703    | 
|             | Other                                                         |      |            | 1,374,651  |  |  |            | 1,417,505  | 
|             |                                                               |      |            |            |  |  |            |           
|             |                                                               |      | 36,609,585 |            |  |  | 26,084,314 |           
|             |                                                               |      |            |            |  |  |            |           
|             | Net deferred income tax benefit                               |      | $          | 7,625,033  |  |  | $          | 15,133,896 | 
|             |                                                               |      |            |            |  |  |            |           

F-30



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                         
|--- | ------------------------
|11. | Income Taxes (continued)

The Company has performed an analysis of tax
planning strategies that would, if necessary, be implemented to
accelerate taxable amounts to utilize any expiring net operating
losses. This analysis included the ability to sell appreciated
assets that have an underlying appreciation of approximately
$28.2 million. As a result of the Companys analysis,
management believes that the Company will obtain full benefit of
the net deferred tax assets recorded at September 30, 2002.

Following is a reconciliation of the provision
for income taxes to an amount as computed by applying the
statutory federal income tax rate to income before income taxes
for the years ended September 30, 2002, 2001 and 2000:

|                                     |  |      |           |      |  |      |    |   |  |   |             |   |  |  |    |   |  |   |            |   |  |  |    |  
|------------------------------------ |  | ---- | --------- | ---- |  | ---- | -- | - |  | - | ----------- | - |  |  | -- | - |  | - | ---------- | - |  |  | -- | -
|                                     |  |      |           |      |  |     
|                                     |  | 2002 |           | 2001 |  | 2000
|                                     |  |      |           |      |  |     
|                                     |  |      |           |      |  |      |    |   |  |  
|Federal income tax at statutory rate |  | $    | 2,131,852 |      |  |      | 35 | % |  | $ | (12,232,618 | ) |  |  | 35 | % |  | $ | (4,092,063 | ) |  |  | 35 | %
|Reduction in valuation               |  |      |          |      |  |      |    |   |  |   | (14,000,000 | ) |  |  | 40 |   |  |   |           |   |  |  |   |  
|Other                                |  |      | (20,208   | )    |  |      |   |   |  |   | (111,597    | ) |  |  |   |   |  |   | (1,233     | ) |  |  |   |  
|                                     |  |      |           |      |  |      |    |   |  |   |             |   |  |  |    |   |  |   |            |   |  |  |    |  
|Income tax (benefit) provision       |  | $    | 2,111,644 |      |  |      | 35 | % |  | $ | (26,344,215 | ) |  |  | 75 | % |  | $ | (4,093,296 | ) |  |  | 35 | %
|                                     |  |      |           |      |  |      |    |   |  |   |             |   |  |  |    |   |  |   |            |   |  |  |    |  

The components of the income tax provision
(benefit) for the years ended September 30, 2002, 2001
and 2000 are as follows:

|         |  |      |            |      |  |      |             |   |  |   |            |  
|-------- |  | ---- | ---------- | ---- |  | ---- | ----------- | - |  | - | ---------- | -
|         |  | 2002 |            | 2001 |  | 2000
|         |  |      |            |      |  |     
|Current  |  | $    | (1,280,109 | )    |  | $    | 3,347,540   |   |  | $ | 346,505    |  
|Deferred |  |      | 3,391,753  |      |  |      | (29,691,755 | ) |  |   | (4,439,801 | )
|         |  |      |            |      |  |      |             |   |  |   |            |  
|         |  | $    | 2,111,644  |      |  | $    | (26,344,215 | ) |  | $ | (4,093,296 | )
|         |  |      |            |      |  |      |             |   |  |   |            |  

The Companys $26.3 million tax benefit
recorded during the fiscal year ended September 30, 2001,
includes a $14.0 million tax benefit relating to an
investment made in 1999. In total, the investment resulted in
the Company recording a $28.0 million tax benefit, of which
$14.0 million was also recorded as an income tax benefit
during the fiscal year ended September 30, 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 (the Participants) as an investment and
tax strategy. Prior to, and in conjunction with the investment,
the Company received two independent tax opinions relating to
the investment.

The Internal Revenue Service (IRS) has
notified the Participants by general public notice that they
have taken the position that the tax benefits relative to the
investment would be disallowed. The Company has received an
audit notice from the IRS for the tax year in which the tax
benefit attributable to the investment was claimed. However, a
specific review of the Companys investment and related
activity has not yet taken place. At September 30, 2002, the
Company cannot reasonably estimate a loss, if any, associated
with this transaction. In the event of an unfavorable
determination 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 a loss of $28.0 million
plus applicable interest.

F-31



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                         
|--- | ------------------------
|11. | Income Taxes (continued)

At September 30, 2002, the Company and its
subsidiaries had unused net operating loss carryforwards, for
income tax purposes, as follows:

|            |  |               |            |             |  |              |           |  |  |   |            | 
|----------- |  | ------------- | ---------- | ----------- |  | ------------ | --------- |  |  | - | ---------- | 
|            |  | Net Operating |            | Net Capital |  |             
|Expiring in |  | Losses        |            | Losses      |  | Total Losses
|            |  |               |            |             |  |             
|2006        |  | $             | 2,620,959  |             |  | $            |          |  |  | $ | 2,620,959  | 
|2007        |  |               | 6,651,884  |             |  |              |          |  |  |   | 6,651,884  | 
|2008        |  |               | 945,516    |             |  |              |          |  |  |   | 945,516    | 
|2019        |  |               | 11,138,534 |             |  |              |          |  |  |   | 11,138,534 | 
|2020        |  |               | 13,865,289 |             |  |              |          |  |  |   | 13,865,289 | 
|2021        |  |               | 32,355,091 |             |  |              | 6,025,856 |  |  |   | 38,380,947 | 
|            |  |               |            |             |  |              |           |  |  |   |            | 
|            |  | $             | 67,577,273 |             |  | $            | 6,025,856 |  |  | $ | 73,603,129 | 
|            |  |               |            |             |  |              |           |  |  |   |            | 

12.     Contingencies:

The Company self-insures for certain losses
relating to employee medical benefits. The Company has purchased
stop-loss coverage that limits its exposure on individual claims
to $75,000. Accrual of self-insured losses is based upon the
Companys historical experience. As of September 30,
2002 and 2001, the Company had recorded a self-insurance accrual
for $2.0 million and $2.3 million, respectively.

13.     Stockholders
Equity:

A summary of preferred and common shares at
September 30, 2002 and 2001 is as follows:

|                            |          |            |            |                    |  |                    |           |           |  |        |            |            |  |  |           |           |  |   |            |           | 
|--------------------------- | -------- | ---------- | ---------- | ------------------ |  | ------------------ | --------- | --------- |  | ------ | ---------- | ---------- |  |  | --------- | --------- |  | - | ---------- | --------- | 
|                            |          |            |            |                    |  |                   
|                            |          |            |            | Issued and         |  | Issued and        
|                            |          |            |            | Outstanding Shares |  | Outstanding Shares
|                            |          |            |            |                    |  |                   
|                            |          |            |            |                    |  |                   
|                            |          |            |            | 2002               |  | 2001              
|                            |          | Authorized |            |                    |  |                   
|                            |          | Shares     |            | Shares             |  | Amount             |           | Shares    |  | Amount
|                            |          |            |            |                    |  |                    |           |           |  |       
|Preferred Stock             |          |            |            |                    |  |                    |           |           |  |        |            |            |  |  |           |           |  |   |            |          
|                            | Series A |            |            | 750,000            |  |                    |           |          |  |        | $          |           |  |  |           |          |  |   | $          |          | 
|                            | Series B |            |            | 200,000            |  |                    |           |          |  |        |            |           |  |  |           |          |  |   |            |          | 
|                            | Series C |            |            | 1,000,000          |  |                    |           | 241,196   |  |        |            | 2,411,955  |  |  |           | 256,499   |  |   |            | 2,564,993 | 
|                            | Series D |            |            | 1,375,000          |  |                    |           | 283,927   |  |        |            | 2,839,266  |  |  |           | 315,860   |  |   |            | 3,158,602 | 
|                            | Series E |            |            | 15,000,000         |  |                    |           | 2,583,371 |  |        |            | 11,134,137 |  |  |           | 1,395,711 |  |   |            | 8,880,539 | 
|                            | Series G |            |            | 2,000,000          |  |                    |           | 9,723     |  |        |            | 97,229     |  |  |           | 5,100     |  |   |            | 51,004    | 
|                            | Series H |            |            | 3,000,000          |  |                    |           | 8,822     |  |        |            | 88,224     |  |  |           | 2,960     |  |   |            | 29,598    | 
|                            |          |            |            |                    |  |                    |           |           |  |        |            |            |  |  |           |           |  |   |            |          
|                            |          |            | 23,325,000 |                    |  |                    | 3,127,039 |           |  | $      | 16,570,811 |            |  |  | 1,976,130 |           |  | $ | 14,684,736 |          
|                            |          |            |            |                    |  |                    |           |           |  |        |            |            |  |  |           |           |  |   |            |          
|Common Stock                |          |            |            |                    |  |                    |           |           |  |        |            |            |  |  |           |           |  |   |            |          
|                            | Class A  |            |            | 222                |  |                    |           | 97        |  |        | $          | 218,250    |  |  |           | 97        |  |   | $          | 218,250   | 
|                            | Class B  |            |            | 222                |  |                    |           |          |  |        |            |           |  |  |           |          |  |   |            |          | 
|                            |          |            |            |                    |  |                    |           |           |  |        |            |            |  |  |           |           |  |   |            |          
|                            |          |            | 444        |                    |  |                    | 97        |           |  | $      | 218,250    |            |  |  | 97        |           |  | $ | 218,250    |          
|                            |          |            |            |                    |  |                    |           |           |  |        |            |            |  |  |           |           |  |   |            |          
|Subordinate Preferred Stock |          |            | 1,000,000  |                    |  |                    |          |           |  | $      |           |            |  |  |          |           |  | $ |           |          
|                            |          |            |            |                    |  |                    |           |           |  |        |            |            |  |  |           |           |  |   |            |          

F-32



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                 
|--- | --------------------------------
|13. | Stockholders Equity (continued)

The Series E preferred stock has been issued
in the following sub-series:

|           |  |                               |       |                               |  |        |           |     |  |        |            |        |  |   |       |  |  |  |           |  |  |   |           | 
|---------- |  | ----------------------------- | ----- | ----------------------------- |  | ------ | --------- | --- |  | ------ | ---------- | ------ |  | - | ----- |  |  |  | --------- |  |  | - | --------- | 
|           |  |                               |       |                              
|           |  | Issued and Outstanding Shares |       | Issued and Outstanding Shares
|           |  |                               |       |                              
|           |  |                               |       |                              
|           |  | 2002                          |       | 2001                         
|           |  |                               |       |                              
|           |  | Par                           |       | Shares                        |  | Amount |           | Par |  | Shares |            | Amount
|           |  |                               |       |                               |  |        |           |     |  |        |            |       
|Series E-1 |  | $                             | 10.00 |                               |  |        | 422,113   |     |  | $      | 4,221,130  |        |  | $ | 10.00 |  |  |  | 471,547   |  |  | $ | 4,715,475 | 
|Series E-2 |  |                               | 10.00 |                               |  |        | 28,852    |     |  |        | 288,521    |        |  |   | 10.00 |  |  |  | 34,924    |  |  |   | 349,237   | 
|Series E-3 |  |                               | 10.00 |                               |  |        | 69,171    |     |  |        | 691,711    |        |  |   | 10.00 |  |  |  | 84,479    |  |  |   | 844,786   | 
|Series E-4 |  |                               | 10.00 |                               |  |        | 39,591    |     |  |        | 395,912    |        |  |   | 10.00 |  |  |  | 49,457    |  |  |   | 494,565   | 
|Series E-5 |  |                               | 10.00 |                               |  |        | 7,171     |     |  |        | 71,711     |        |  |   | 10.00 |  |  |  | 9,126     |  |  |   | 91,264    | 
|Series E-6 |  |                               | 10.00 |                               |  |        | 56,530    |     |  |        | 565,295    |        |  |   | 10.00 |  |  |  | 69,302    |  |  |   | 693,023   | 
|Series E-7 |  |                               | 2.50  |                               |  |        | 1,959,943 |     |  |        | 4,899,857  |        |  |   | 2.50  |  |  |  | 676,876   |  |  |   | 1,692,189 | 
|           |  |                               |       |                               |  |        |           |     |  |        |            |        |  |   |       |  |  |  |           |  |  |   |           | 
|           |  |                               |       |                               |  |        | 2,583,371 |     |  | $      | 11,134,137 |        |  |   |       |  |  |  | 1,395,711 |  |  | $ | 8,880,539 | 
|           |  |                               |       |                               |  |        |           |     |  |        |            |        |  |   |       |  |  |  |           |  |  |   |           | 

Preferred
Stock

Series A preferred stock has a par value of
$1 per share, is cumulative and the holders thereof are entitled
to receive dividends at the annual rate of 8.5%. Series B
preferred stock is cumulative and the holders thereof are
entitled to receive monthly dividends at the annual rate of two
percentage points over the rate payable on six-month U.S.
Treasury Bills as determined by the Treasury Bill auction last
preceding the monthly dividend declaration. Series C, D and
E-1 preferred stock are also cumulative and the holders thereof
are entitled to receive monthly dividends at an annual rate
equal to the highest of the Treasury Bill Rate, the
Ten Year Constant Maturity Rate or the Twenty
Year Constant Maturity Rate determined immediately prior
to the declaration date. The Board of Directors may, at its sole
option, declare a higher dividend rate; however, dividends shall
be no less than 6% or greater than 14% per annum.
Series E-2, E-3, E-4, E-5, E-6 and E-7 preferred stock are
also cumulative and the holders thereof are entitled to receive
monthly dividends at an annual rate of one-half of one percent
more than the rate in effect for the E-1 series; however,
dividends shall be no less than 6% or greater than 14% per annum.

Series C, D and E-1 preferred stock have a
par value of $10, were sold to the public for $10 and are
callable at the sole option of the Board of Directors at $10.50
per share reduced pro rata to $10.20 per share as of the date
five years from the date of issuance. Series E-2, E-3, E-4,
E-5, and E-6 preferred stock have a par value of $10 per share,
were sold to the public at $100 per share and are callable at
the sole option of the Board of Directors at $100 per share.

On October 22, 2001, the Companys
Board of Directors declared a stock split for the
Series E-7 preferred stock. On November 5, 2001, each
outstanding share of Series E-7 Preferred Stock was
converted into four shares of Series E-7 Preferred Stock.
Accordingly, the par value of each such share was adjusted from
$10.00 per share to $2.50 per share and the liquidation
preference and dividend calculation amount of each such share
was adjusted from $100.00 per share to $25.00 per share to
reflect the split. Additionally, during the fiscal year
September 30, 2002, the Companys Series E-7
preferred stock was listed on the American Stock Exchange under
the symbol MPD.pr. Subsequent to the stock split the
Series E-7 preferred stock has a par value of $2.50 per
share, was sold to the public at $25 per share and is callable
at the sole option of the Board of Directors at $25 per share.

All preferred stock series have liquidation
preferences equal to their issue price, are non-voting and are
senior to the common shares as to dividends. All preferred stock
dividends are based upon the original issue

F-33



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13.                        Stockholders
Equity (continued)

price. Additionally, Series G and H
preferred stock rank are subordinate to Series A, B, C, D
and E preferred stock as to liquidation preference.

Subordinate
Preferred Stock

Subordinate preferred shares, no par value, shall
be entitled to receive dividends as authorized by the Board of
Directors, provided that such dividend rights are subordinate
and junior to all series of preferred stock. Subordinate
preferred shares shall be entitled to distributions in
liquidation in such priority as established by the Board of
Directors prior to the issuance of any such shares. These
liquidation rights shall at all times be subordinate and junior
to all series of preferred stock. At September 30, 2002,
2001 and 2000, no subordinate preferred stock had been issued.

Common
Stock

Class A and B common stock have a par value
of $2,250 per share. Class B is senior to Class A
common stock as to liquidation up to the amount of the original
investment. Any remaining amounts are then distributed pro rata
to Class A and Class B common stockholders.
Class B common stock has no voting rights. All series of
common stock are subordinate in liquidation to all series of
preferred stock.

In April 1998, the Companys Board of
Directors authorized the payment of dividends on the outstanding
Class A common stock. Dividends of $200 per share have been
declared and paid in each subsequent month and will continue
until further action by the Board.

Dividend restrictions are imposed by regulatory
authorities on the insurance subsidiary in which the Company has
a 100% common stock ownership interest. Dividends from the
insurance subsidiary can only be paid out of earned surplus.
Earned surplus includes accumulated statutory basis earnings of
the insurance subsidiary, but excludes surplus arising from
unrealized capital gains or a revaluation of assets. The amount
of the insurance subsidy surplus funds available for dividends
at September 30, 2002 was approximately $5.6 million.

14.     Statutory
Accounting and Regulatory Capital (unaudited):

The Companys life insurance subsidiary,
Western Life, is required to file statutory financial statements
with state insurance regulatory authorities. Accounting
principles used to prepare these statutory financial statements
differ from generally accepted accounting principles
(GAAP). Selected statutory and GAAP

F-34



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



14.     Statutory
Accounting (unaudited) (continued)


financial statement balances for the life
insurance subsidiary as of and for the years ended
September 30, 2002, 2001 and 2000 are as follows:

|                                                        |      |           |   |            |   |  |   |             | 
|------------------------------------------------------- | ---- | --------- | - | ---------- | - |  | - | ----------- | 
|                                                        |      | Statutory |   | GAAP      
|                                                        |      |           |   |           
|Capital and surplus/stockholders equity:               |      |           |   |            |   |  |   |            
|                                                        | 2002 |           | $ | 97,897,498 |   |  | $ | 196,983,093 | 
|                                                        | 2001 |           |   | 73,520,668 |   |  |   | 136,039,538 | 
|                                                        | 2000 |           |   | 61,444,898 |   |  |   | 99,528,648  | 
|Net income (loss):                                      |      |           |   |            |   |  |   |            
|                                                        | 2002 |           | $ | 7,110,173  |   |  | $ | 30,684,546  | 
|                                                        | 2001 |           |   | (120,616   | ) |  |   | 16,361,727  | 
|                                                        | 2000 |           |   | 5,385,593  |   |  |   | 4,387,459   | 
|Unassigned statutory surplus and retained
    earnings: |      |           |   |            |   |  |   |            
|                                                        | 2002 |           | $ | 5,610,259  |   |  | $ | 101,807,062 | 
|                                                        | 2001 |           |   | 9,006,103  |   |  |   | 73,869,766  | 
|                                                        | 2000 |           |   | 14,489,898 |   |  |   | 61,448,289  | 

The National Association of Insurance
Commissioners (the NAIC) adopted the Codification of
Statutory Accounting Principles guidance, which replaced the
current Accounting Practices and Procedures manual as the
NAICs primary guidance on statutory accounting. The
adoption of the Codification guidance on January 1, 2001
resulted in a $1.8 million charge to the Companys
statutory basis capital and surplus. State regulatory
authorities also impose minimum risk-based capital requirements
on insurance enterprises that were developed by the NAIC. The
formulas for determining the amount of risk-based capital
(RBC) specify various weighting factors that are
applied to financial balances or various levels of activity
based on perceived degree of risk. Regulatory compliance is
determined by a ratio of the enterprises regulatory total
adjusted capital, as defined by the NAIC, to its authorized
control level RBC, as defined by the NAIC. Enterprises below
specific trigger points or ratios are classified within certain
levels, each of which requires specified corrective action. At
the last annual review at its statutory reporting period at
December 31, 2001, Western Life s statutory-basis surplus
exceeded the RBC requirements.

Statutory Statements of Accounting Principles
No. 37, Mortgage Loans, requires that all costs
incurred in connection with originating a loan, acquiring
purchased loans or committing to purchase loans be charged to
expense as incurred. The Washington State Insurance Department
has granted Western Life a permitted accounting practice that
differs from NAIC statutory accounting practices. The permitted
practice allows Western Life to capitalize and amortize certain
costs, including underwriting fee charges paid to its parent,
incurred in connection with acquiring purchased loans through
March 31, 1998, except that all such costs shall be
amortized into investment income no later than December 31,
2004. At September 30, 2002, the permitted practice has
resulted in an increase in statutory surplus of approximately
$5.6 million.

Western Life is required to file statutory
financial statements with state insurance regulatory authorities
in its state of domicile. Accounting principles used to prepare
these statutory financial statements differ from

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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

14.     Statutory
Accounting (unaudited) (continued)

generally accepted accounting principles
(GAAP). A reconciliation of GAAP net income to
statutory net income for the years ended September 30,
2002, 2001 and 2000, respectively, is as follows:

|                            |                                                           |      |            |             |   |      |            |             |   |   |           |            |  
|--------------------------- | --------------------------------------------------------- | ---- | ---------- | ----------- | - | ---- | ---------- | ----------- | - | - | --------- | ---------- | -
|                            |                                                           | 2002 |            | 2001        |   | 2000
|                            |                                                           |      |            |             |   |     
|Net Income-GAAP             |                                                           | $    | 30,684,546 |             |   | $    | 16,361,727 |             |   | $ | 4,387,459 |           
|Adjustments to reconcile:   |                                                           |      |            |             |   |      |            |             |   |   |           |           
|                            | Deferred policy acquisition costs                         |      |            | (16,729,885 | ) |      |            | (3,222,197  | ) |   |           | 3,360,555  |  
|                            | State insurance guaranty fund                             |      |            | (215,372    | ) |      |            | 159,644     |   |   |           | 679,022    |  
|                            | Annuity reserves and benefits                             |      |            | 1,335,310   |   |      |            | 2,168,879   |   |   |           | (3,346,757 | )
|                            | Capital gains (losses), IMR and Net Investment
    Income |      |            | (4,356,572  | ) |      |            | (5,468,238  | ) |   |           | (1,639,848 | )
|                            | Federal income taxes                                      |      |            | (3,607,854  | ) |      |            | (10,120,431 | ) |   |           | 1,945,162  |  
|                            |                                                           |      |            |             |   |      |            |             |   |   |           |           
|Net (Loss) Income-Statutory |                                                           | $    | 7,110,173  |             |   | $    | (120,616   | )           |   | $ | 5,385,593 |           
|                            |                                                           |      |            |             |   |      |            |             |   |   |           |           

15.     Supplemental
Disclosures for Statements of Cash Flows:

The following table summarizes interest costs,
net of amounts capitalized and income taxes paid
(refunded) during the years ended September 30, 2002,
2001 and 2000:

|                                     |  |      |            |      |  |      |            |   |  |   |            |  
|------------------------------------ |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                     |  | 2002 |            | 2001 |  | 2000
|                                     |  |      |            |      |  |     
|Interest, net of amounts capitalized |  | $    | 25,072,984 |      |  | $    | 15,912,399 |   |  | $ | 32,135,073 |  
|Income taxes paid (refunded)         |  |      | 1,175,204  |      |  |      | (80,603    | ) |  |   | (1,369,430 | )

Non-cash investing and financing activities of
the Company during the years ended September 30, 2002, 2001
and 2000 are as follows:

|                                                                                                                    |  |      |            |      |  |      |            |  |  |   |            | 
|------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | 
|                                                                                                                    |  | 2002 |            | 2001 |  | 2000
|                                                                                                                    |  |      |            |      |  |     
|Loans to facilitate the sale of real estate held                                                                    |  | $    | 46,751,871 |      |  | $    | 575,590    |  |  | $ | 10,814,668 | 
|Loans to facilitate the sale of other receivable
    investments                                                    |  |      | 3,000,000  |      |  |      |           |  |  |   | 10,900,800 | 
|Transfers between annuity products                                                                                  |  |      | 55,233,008 |      |  |      | 92,705,437 |  |  |   | 85,116,027 | 
|Real estate held for sale and development
    acquired through foreclosure                                          |  |      | 25,553,956 |      |  |      | 17,858,078 |  |  |   | 19,886,147 | 
|Assumption of other debt payable in connection
    with the acquisition of real estate contracts and mortgage notes |  |      |           |      |  |      | 421,482    |  |  |   | 301,069    | 
|Timing difference on settlements of securities
    sales                                                            |  |      |           |      |  |      | 7,810,524  |  |  |   |           | 
|Timing difference on settlements of securities
    purchases                                                        |  |      |           |      |  |      | 19,675,519 |  |  |   |           | 
|Transfer of investments from trading portfolio to
    available-for-sale portfolio                                  |  |      | 38,607,522 |      |  |      | 18,213,101 |  |  |   |           | 
|Transfer of investments from held-to-maturity
    portfolio to available-for-sale portfolio                         |  |      |           |      |  |      | 59,415,992 |  |  |   |           | 
|Securities and mortgage servicing rights retained
    from securitizations                                          |  |      |           |      |  |      | 2,964,809  |  |  |   | 58,336,436 | 

During the fiscal years ended September 30,
2002 and 2001, changes in the Companys investment strategy
affected the classification of trading securities as they no
longer qualified as investments held

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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



15.     Supplemental
Disclosures for Statements of Cash Flows (continued)


principally for the purpose of selling them in
the near term. Accordingly, the Company reclassified
approximately $38.6 million and $18.2 million during
the fiscal years ended September 30, 2002 and 2001,
respectively from trading to available-for-sale. At
September 30, 2002, the Company did not have an active
trading portfolio.

At the date of initial application of SFAS
No. 133, this statement provided that an entity may
transfer any held-to-maturity security into the
available-for-sale category or the trading category.
Accordingly, as part of its implementation of SFAS No. 133
on October 1, 2000, the Company reclassified approximately
$59.4 million of investments from held-to-maturity to
available-for-sale. The unrealized gain on the date of transfer
was $0.4 million and was included in other comprehensive
income.

16.     Business
Segment Reporting:

The Company principally operates in the three
industry segments which encompass: (1) the investing in
real estate contracts and mortgage notes receivables, 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.

The accounting policies of the Companys
business segments are the same as those described in Note 1. All
transactions between segments are eliminated. The Company
allocates certain overhead and operating expenses amongst its
segments.

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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



16.     Business
Segment Reporting (continued)


Information about the Companys separate
business segments and in total as of and for the years ended
September 30, 2002, 2001 and 2000 is as follows:

|                    |                               |           |   |             |   |             |   |               |  |       |   |            |  |  |   |              |   |  |   |               |  
|------------------- | ----------------------------- | --------- | - | ----------- | - | ----------- | - | ------------- |  | ----- | - | ---------- |  |  | - | ------------ | - |  | - | ------------- | -
|                    |                               |           |   |             |   | Property    |   | Intersegment  |  |      
|                    |                               | Investing |   | Insurance   |   | Development |   | Eliminations  |  | Total
|                    |                               |           |   |             |   |             |   |               |  |      
|September 30, 2002: |                               |           |   |             |   |             |   |               |  |       |   |            |  |  |   |              |   |  |   |              
|                    | Revenues                      |           | $ | 17,685,129  |   |             | $ | 113,744,990   |  |       | $ | 37,147,247 |  |  | $ | (4,662,698   | ) |  | $ | 163,914,668   |  
|                    | Income (loss) from operations |           |   | (42,745,965 | ) |             |   | 35,614,719    |  |       |   | 13,222,251 |  |  |   |             |   |  |   | 6,091,005     |  
|                    | Identifiable assets, net      |           |   | 174,050,829 |   |             |   | 1,528,341,658 |  |       |   | 89,207,376 |  |  |   | (4,481,063   | ) |  |   | 1,787,118,800 |  
|                    | Depreciation and amortization |           |   | 3,699,999   |   |             |   | 328,528       |  |       |   | 1,150,528  |  |  |   |             |   |  |   | 5,179,055     |  
|                    | Capital expenditures          |           |   | 1,342,511   |   |             |   | 53,803        |  |       |   |           |  |  |   |             |   |  |   | 1,396,314     |  
|September 30, 2001: |                               |           |   |             |   |             |   |               |  |       |   |            |  |  |   |              |   |  |   |              
|                    | Revenues                      |           | $ | 22,090,617  |   |             | $ | 102,333,828   |  |       | $ | 3,252,794  |  |  | $ | (8,515,602   | ) |  | $ | 119,161,637   |  
|                    | Income (loss) from operations |           |   | (48,914,985 | ) |             |   | 13,779,982    |  |       |   | 184,668    |  |  |   |             |   |  |   | (34,950,335   | )
|                    | Identifiable assets, net      |           |   | 207,505,567 |   |             |   | 1,144,579,418 |  |       |   | 68,081,517 |  |  |   | (26,145,348  | ) |  |   | 1,394,021,154 |  
|                    | Depreciation and amortization |           |   | 3,791,124   |   |             |   | 314,400       |  |       |   | 1,099,398  |  |  |   |             |   |  |   | 5,204,922     |  
|                    | Capital expenditures          |           |   | 659,331     |   |             |   | 1,239,171     |  |       |   |           |  |  |   |             |   |  |   | 1,898,502     |  
|September 30, 2000: |                               |           |   |             |   |             |   |               |  |       |   |            |  |  |   |              |   |  |   |              
|                    | Revenues                      |           | $ | 68,337,656  |   |             | $ | 100,731,881   |  |       | $ | 11,371,595 |  |  | $ | (9,019,340   | ) |  | $ | 171,421,792   |  
|                    | Income (loss) from operations |           |   | (15,311,432 | ) |             |   | 2,717,529     |  |       |   | 902,296    |  |  |   |             |   |  |   | (11,691,607   | )
|                    | Identifiable assets, net      |           |   | 327,088,223 |   |             |   | 1,015,465,069 |  |       |   | 57,138,351 |  |  |   | (146,759,005 | ) |  |   | 1,252,932,638 |  
|                    | Depreciation and amortization |           |   | 3,635,404   |   |             |   | 335,511       |  |       |   | 1,150,600  |  |  |   |             |   |  |   | 5,121,515     |  
|                    | Capital expenditures          |           |   | 8,625,757   |   |             |   | 198,612       |  |       |   |           |  |  |   |             |   |  |   | 8,824,369     |  

17.     Related-Party
Transactions:

During the years ended September 30, 2002,
2001 and 2000, the Company had the following related-party
transactions with Summit Securities, Inc. (Summit)
and other affiliates due to common control of C. Paul
Sandifur, Jr.

|                                                                                                                                                |  |      |            |      |  |      |            |  |  |   |            | 
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | 
|                                                                                                                                                |  | 2002 |            | 2001 |  | 2000
|                                                                                                                                                |  |      |            |      |  |     
|Receivable acquisition fees charged to Summit,
    Old Standard and Old West                                                                    |  | $    | 810,998    |      |  | $    | 924,751    |  |  | $ | 111,090    | 
|Real estate contracts and mortgage notes
    receivable and other receivable investments sold to Summit, Old
    Standard and Old West          |  |      | 51,376,208 |      |  |      | 15,228,343 |  |  |   | 32,874,576 | 
|Gains on real estate contracts and mortgage notes
    receivable and other receivable investments sold to Summit, Old
    Standard and Old West |  |      | 3,579,324  |      |  |      |           |  |  |   | 12,663,429 | 

F-38



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



17.     Related-Party
Transactions (continued)


|                                                                                                                                     |  |      |            |      |  |      |           |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ---------- | ---- |  | ---- | --------- | - |  | - | ---------- | -
|                                                                                                                                     |  | 2002 |            | 2001 |  | 2000
|                                                                                                                                     |  |      |            |      |  |     
|Real estate contracts and mortgage notes
    receivable and other receivable investments purchased from
    Summit or its affiliates |  | $    | 1,404,024  |      |  |      |          |   |  | $ | 8,910,886  |  
|Minority interest purchased from Summit                                                                                              |  |      | 2,325,945  |      |  |      |          |   |  |   |           |  
|Sale of residual interest in securitization to
    Summit                                                                            |  |      |           |      |  |      |          |   |  |   | 1,196,701  |  
|Ceding of annuity premiums to Old Standard                                                                                           |  |      | 56,527,704 |      |  | $    | 694,544   |   |  |   | 27,434,956 |  
|Policyholder benefits recovered from Old Standard                                                                                    |  |      | 24,884,602 |      |  |      | 9,115,927 |   |  |   | 18,743,525 |  
|Annuity servicing fees charged to Old Standard                                                                                       |  |      | 486,541    |      |  |      | 441,703   |   |  |   | 374,964    |  
|Ceding commissions charged to Old Standard                                                                                           |  |      | 3,324,726  |      |  |      | 74,737    |   |  |   | 1,479,000  |  
|Service fees paid to Summit Property Development                                                                                     |  |      | 3,519,206  |      |  |      | 1,144,281 |   |  |   | 1,974,994  |  
|Commissions and service fees paid to Metropolitan
    Investment Securities, Inc.                                                    |  |      | 5,408,006  |      |  |      | 3,022,199 |   |  |   | 4,717,219  |  
|Servicing and collection fees charged by Metwest
    to Summit and its affiliates                                                    |  |      | 1,063,763  |      |  |      | 1,113,909 |   |  |   | 403,573    |  
|Administrative services charged by Metropolitan
    to Summit and its affiliates                                                     |  |      | 5,993,827  |      |  |      | 4,661,305 |   |  |   | 480,682    |  
|Net change in notes payable to Summit and Old
    Standard                                                                           |  |      | (1,206,161 | )    |  |      | (96,484   | ) |  |   | (8,007,289 | )
|Net change in notes receivable from Summit                                                                                           |  |      | 2,346,025  |      |  |      |          |   |  |   | 10,900,800 |  
|Interest paid (received) on notes payable to
    (receivable from) Summit and Old Standard                                           |  |      | (736,477   | )    |  |      | (617,580  | ) |  |   | 1,190,359  |  
|Dividends paid to Summit on preferred stock
    investments                                                                          |  |      | 204,856    |      |  |      | 205,693   |   |  |   | 217,067    |  

At September 30, 2002 and 2001, the Company
had net receivables due from affiliates of $8.7 million and
$3.5 million, respectively. At September 30, 2002 and
2001, the outstanding note receivable from Summit was
approximately $13.2 million and $10.9 million. At
September 30, 2002 and 2001, the outstanding note payable
balance to Old Standard was approximately $3.2 million and
$4.4 million, respectively.

The Company provides receivable acquisition
services to Summit, Old Standard and Old West for a fee pursuant
to the terms of a Management, Receivable Acquisition and
Servicing Agreement. The fee is based upon yield requirements
established by Summit, Old Standard and Old West. Metropolitan
charges, as its receivable acquisition service fee, the
difference between the yield requirement and the yield
Metropolitan actually negotiated when the receivable was
acquired. The agreements are non-exclusive and may be terminated
in whole or part by either party upon notice.

During the year ended September 30, 2000,
the Company sold a participation in certain structured
settlement and lease equipment receivables to Summit at
estimated fair value. Proceeds from the structured settlement
sale of $8.1 million resulted in a gain of approximately
$1.6 million while proceeds from the lease equipment
receivable sale of approximately $5.5 million resulted in a
gain of approximately $0.4 million. The proceeds were
financed in part by a $10.9 million note receivable with
the participated receivables pledged as collateral. During the
fiscal year ended September 30, 2002, Metropolitan agreed
to sell to Summit the remaining interest in the structured
settlements that Summit acquired from Metropolitan during the
fiscal year ended September 30, 2000. The purchase price of
approximately $4.8 million, which was derived from future
expected cash flows discounted at an 8.5% market rate, resulted
in a gain of approximately $0.2 million. The proceeds were
financed in part by increasing the existing note receivable from
the fiscal 2000 sale. The

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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



17.     Related-Party
Transactions (continued)


note balance outstanding at September 30,
2002 relating to these sales was approximately
$13.2 million with $13.3 million of pledged collateral.

On March 28, 2002, Western Life agreed to
sell to Old Standard and Old West a 69.20% undivided beneficial
interest in a certain Lottery Trust owned by Western Life at a
fair value of approximately $11.2 million. The purchase
price, which was derived from future expected cash flows
discounted at a 6.957% market rate, resulted in a gain of
approximately $0.6 million.

On August 15, 2002, Western Life agreed to
sell to Old Standard and Old West the remaining interest in a
certain Lottery Trust owned by Western Life at a fair value of
approximately $6.2 million. The purchase price, which was
derived from future expected cash flows discounted at a 5.527%
market rate, resulted in a gain of approximately
$0.7 million. Additionally, on August 15, 2002,
Western Life agreed to sell to Old Standard and Old West a
95.83% undivided beneficial interest in a certain Lottery Trust
owned by Western Life at a fair value of approximately
$29.1 million. The purchase price, which was derived from
future expected cash flows discounted at a 5.888% market rate,
resulted in a gain of approximately $2.0 million.

The market rates on the above lottery trust sales
were calculated as 2.0% basis points over the Treasury benchmark
on the date of the sale, which is consistent with corporate
bonds with similar credit profiles along with recent
transactions involving large blocks of lottery receivables.

During the year ended September 30, 2000,
the Company sold an $18 million non-interest bearing
contract receivable, collateralized by timber rights in Hawaii
to Summit at estimated fair value using a discount rate of 12%.
The proceeds of $13.2 million resulted in a gain of
$10.7 million.

During the fiscal year ended September 30,
2002, Metropolitan agreed to purchase Summits minority
investment in Consumers Group Holding Company, a subsidiary of
Metropolitan. The purchase price of approximately
$2.3 million was based on an estimated fair value of
Consumers Group Holding of approximately two times the adjusted
book value, discounted to approximately the adjusted book value
due to the minority interest nature of the investment.

Western Life has entered into a reinsurance
agreement with Old Standard, which became effective July 1,
1998. Under this agreement, Western Life may reinsure with Old
Standard 75% of the risk on certain annuity products. The
reinsurance agreement is an ongoing arrangement with no stated
expiration or termination date, although each may stop and
restart at their discretion upon providing a 30-day advance
written notice. Western Life receives ceding allowances equal to
the actual commission plus 1.5% of the premium from Old Standard
to compensate Western Life for its annuity issuance costs.
Additionally, Western Life receives a fee from Old Standard for
servicing the reinsured policies of approximately 0.40% annually
on the cash value of the reinsured policies.

Summit Property Development, Inc., a wholly owned
subsidiary of Summit, provides real estate development services
to the Company for a fee. Such services may include, but are not
limited to the following: sales, marketing, market analysis,
architectural services, design services, subdividing properties
and coordination with regulatory groups to obtain the approvals
which are necessary to develop a particular property.

Metropolitan Investment Securities
(MIS), a securities broker/dealer and member of the
National Association of Securities Dealers, sells the securities
products of Metropolitan and of Summit. Metropolitan pays
commissions to MIS for the sale of Metropolitans
securities pursuant to the terms of a written Selling Agreement.
The commission rate charged by MIS depends on the type of
security sold, its stated term and whether the security sale
involved a reinvestment by a prior investor or a new investment.

F-40



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



17.     Related-Party
Transactions (continued)


Metwest provides Receivable servicing for a fee
to Summit, Old Standard and Old West. Additionally, Metropolitan
provides accounting, data processing, and other administrative
services to Summit, Old Standard and Old West. During the year
ended September 30, 2001, the Company entered into an
agreement with Summit, Old Standard and Old West to change the
methodology for allocating the service fee and administrative
charges to a cost sharing arrangement from a fixed and
calculated fee arrangement. Management believes that the fixed
and calculated fee arrangement that Metropolitan had previously
been operating under did not result in a reimbursement to
Metropolitan of all significant direct expenses incurred on
behalf of its affiliates.

18.     Fair Value of
Financial Instruments:

The following methods and assumptions were used
to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value.
Potential income tax ramifications related to the realization of
unrealized gains and losses that would be incurred in an actual
sale and/or settlement have not been taken into consideration.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Publicly Traded Investment
    SecuritiesFair value is
    determined by quoted market prices.                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Non-Publicly Traded Investment
    SecuritiesFair value is derived
    from quoted market prices for securities with similar
    characteristics and risks or is estimated based upon expected
    discounted future cash flows. When determining expected future
    cash flows, the Company considers interest rates, estimated
    prepayment rates, collateral value and historical default rates
    experienced by the securities.                                                         
|
| | Real Estate Contracts and Mortgage Notes
    ReceivableFor receivables
    (excluding accrued interest receivable), fair value is estimated
    by discounting contractual cash flows adjusted for prepayment
    estimates. The prepayment estimates are based upon internal
    historical data. The discount rate is estimated using rates
    currently offered for receivables of similar characteristics
    that reflect the credit and interest rate risk inherent in the
    receivable.
|
| | Other Receivable
    InvestmentsThe fair value of
    other receivable investments is based on the discounted value of
    contractual cash flows. The discount rate is estimated using the
    rates currently offered for investments with similar credit
    ratings and similar remaining maturities.                                                                                                                                                                                        
|
| | Reinsurance
    ReceivableThe fair value of
    reinsurance receivables is based on the discounted value of
    contractual cash flows. The discount rate is determined using
    the rates currently offered for similar annuity reserves.                                                                                                                                                                                                                                                      
|
| | Life Insurance and Annuity
    ReservesThe fair value of
    annuity reserves is based on the discounted value of contractual
    cash flows. The discount rate is determined using the rates
    currently offered for similar annuity reserves.                                                                                                                                                                                                                                                
|
| | Debenture Bonds and Debt
    PayableThe fair value of
    debenture bonds and debt payable is based on the discounted
    value of contractual cash flows. The discount rate is estimated
    using the rates currently offered for debt with similar
    remaining maturities.                                                                                                                                                                                                                  
|
| | Debt
    PayableThe fair value of debt
    payable is based on the discounted value of contractual cash
    flows. The discount rate is estimated using the rates currently
    offered for debt with similar remaining maturities.                                                                                                                                                                                                                                                              
|
| | Off-Balance-Sheet Financial
    InstrumentsFair value
    approximates the notional amount of commitments to extend credit
    because advances bear current interest rates and are made
    contingent to the borrowers compliance with the existing loan
    agreement.                                                                                                                                                                                                                        

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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



18.     Fair Value of
Financial Instruments (continued)


The estimated fair values of the following
financial instruments as of September 30, 2002 and 2001 are
as follows:

|                       |                                                                                                                     |                               |   |               |             |          |   |               |             |  |   |             |             |  |   |             |             | 
|---------------------- | ------------------------------------------------------------------------------------------------------------------- | ----------------------------- | - | ------------- | ----------- | -------- | - | ------------- | ----------- |  | - | ----------- | ----------- |  | - | ----------- | ----------- | 
|                       |                                                                                                                     |                               |   |              
|                       |                                                                                                                     | 2002                          |   | 2001         
|                       |                                                                                                                     |                               |   |              
|                       |                                                                                                                     | Carrying                      |   |               |             | Carrying |   |              
|                       |                                                                                                                     | Amounts                       |   | Fair Value    |             | Amounts  |   | Fair Value   
|                       |                                                                                                                     |                               |   |               |             |          |   |              
|Financial assets:      |                                                                                                                     |                               |   |               |             |          |   |               |             |  |   |             |             |  |   |            
|                       | Cash and cash equivalents                                                                                           |                               | $ | 68,317,397    |             |          | $ | 68,317,397    |             |  | $ | 68,019,397  |             |  | $ | 68,019,397  |            
|                       | Investments:                                                                                                        |                               |   |               |             |          |   |               |             |  |   |             |             |  |   |             |            
|                       |                                                                                                                     | Trading securities            |   |               |            |          |   |               |            |  |   |             | 48,832,529  |  |   |             | 48,832,529  | 
|                       |                                                                                                                     | Available-for-sale securities |   |               | 495,060,527 |          |   |               | 495,060,527 |  |   |             | 311,803,378 |  |   |             | 311,803,378 | 
|                       |                                                                                                                     | Held-to-maturity securities   |   |               | 40,228,594  |          |   |               | 41,418,206  |  |   |             |            |  |   |             |            | 
|                       | Real estate contracts and mortgage notes
    receivable (including futures contracts used for hedging
    purposes) |                               |   | 621,569,613   |             |          |   | 639,912,705   |             |  |   | 430,103,026 |             |  |   | 464,090,589 |            
|                       | Other receivable investments                                                                                        |                               |   | 128,241,355   |             |          |   | 141,821,831   |             |  |   | 176,104,766 |             |  |   | 195,807,194 |            
|                       | Reinsurance receivable                                                                                              |                               |   | 148,392,448   |             |          |   | 150,308,655   |             |  |   | 109,608,025 |             |  |   | 111,056,188 |            
|Financial liabilities: |                                                                                                                     |                               |   |               |             |          |   |               |             |  |   |             |             |  |   |            
|                       | Life insurance and annuity reserves                                                                                 |                               |   | 1,225,660,253 |             |          |   | 1,241,487,326 |             |  |   | 971,216,178 |             |  |   | 984,048,080 |            
|                       | Debenture bonds principal and compound
    interest                                                                |                               |   | 350,744,281   |             |          |   | 351,682,629   |             |  |   | 296,596,304 |             |  |   | 299,605,362 |            
|                       | Debt payable principal                                                                                             |                               |   | 122,764,596   |             |          |   | 128,708,615   |             |  |   | 39,483,627  |             |  |   | 41,733,763  |            
|                       | Off-balance sheet instruments:                                                                                      |                               |   |               |             |          |   |               |             |  |   |             |             |  |   |             |            
|                       |                                                                                                                     | Commitments to extend credit  |   |               | 88,373,606  |          |   |               | 88,373,606  |  |   |             | 17,038,013  |  |   |             | 17,038,013  | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | LimitationsThe fair value estimates are made at a
    discrete point in time based on relevant market information and
    information about the financial instruments. Because no market
    exists for a significant portion of these financial instruments,
    fair value estimates are based on judgments regarding future
    expected loss experience, current economic conditions, risk
    characteristics of various financial instruments and other
    factors. These estimates are subjective in nature and involve
    uncertainties and matters of significant judgment and,
    therefore, cannot be determined with precision. Changes in
    assumptions could significantly affect the estimates.
    Accordingly, the estimates presented herein are not necessarily
    indicative of what the Company could realize in a current market
    exchange.

19.     Employee
Benefit Plans:

The Company sponsors a Retirement Savings Plan
(the Plan), authorized under Section 401(k) of
the Tax Reform Act of 1986, as amended. This Plan is available
to all employees over the age of 18 upon completion of six
months of service. Prior to January 1, 2002, employees may
defer from 1% to 15% of their compensation in multiples of whole
percentages. Effective January 1, 2002, the plan was
amended to allow employees to defer from 1% to 80% of their
compensation up to the annual maximum amount as determined by
the IRS.

Prior to January 1, 1999, if the Employer
had a net profit for the fiscal year ending within a calendar
year, a match equal to 50% of pre-tax contributions up to 6% of
the participants compensation, was credited to the account
of each active participant on December 31. Effective
January 1, 1999, the plan was amended to modify the
employer match to a discretionary matching contribution equal to
a uniform percentage of the

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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

19.     Employee
Benefit Plans (continued)

amount of the participant contribution, up to 6%
of the participants annual compensation. The uniform
percentage is to be determined annually by the Company. The
Employer may also make additional discretionary contributions
for any plan year. The Companys contributions to the Plan,
net of forfeitures, were approximately $295,000, $0 and $450,000
during the years ended September 30, 2002, 2001 and 2000,
respectively.

20.     Parent
Company Only Financial Statements:

The condensed balance sheets of Metropolitan
Mortgage & Securities Co., Inc. (Metropolitan or
the parent company) at September 30, 2002 and
2001 are as follows:

|                                                                                                 |                                            |      |             |             |  |   |             |             | 
|------------------------------------------------------------------------------------------------ | ------------------------------------------ | ---- | ----------- | ----------- |  | - | ----------- | ----------- | 
|                                                                                                 |                                            | 2002 |             | 2001       
|                                                                                                 |                                            |      |             |            
|ASSETS                                                                                          
|Cash and cash equivalents                                                                        |                                            | $    | 22,624,261  |             |  | $ | 25,439,356  |            
|Investments                                                                                      |                                            |      | 36,463,512  |             |  |   | 43,870,837  |            
|Real estate contracts and mortgage notes
    receivable and other receivable investments, net    |                                            |      | 58,324,065  |             |  |   | 59,899,360  |            
|Real estate held for sale and development, net                                                   |                                            |      | 56,459,905  |             |  |   | 43,412,435  |            
|Allowance for losses on real estate assets and
    other receivable investments                  |                                            |      | (2,679,897  | )           |  |   | (6,704,913  | )          
|Equity in subsidiary companies                                                                   |                                            |      | 252,499,293 |             |  |   | 178,598,484 |            
|Land, buildings and equipment, net                                                               |                                            |      | 22,149,468  |             |  |   | 21,964,263  |            
|Prepaid expenses and other assets, net                                                           |                                            |      | 12,302,858  |             |  |   | 21,137,642  |            
|Receivables from affiliates                                                                      |                                            |      | 15,272,583  |             |  |   | 3,939,817   |            
|                                                                                                 |                                            |      |             |             |  |   |             |            
|                                                                                                 | Total assets                               |      | $           | 473,416,048 |  |   | $           | 391,557,281 | 
|                                                                                                 |                                            |      |             |             |  |   |             |            
|                                                                                                
|LIABILITIES                                                                                     
|Debenture bonds and accrued interest                                                             |                                            | $    | 355,465,932 |             |  | $ | 300,367,995 |            
|Debt payable                                                                                     |                                            |      | 37,837,505  |             |  |   | 36,253,234  |            
|Accounts payable and accrued expenses                                                            |                                            |      | 2,425,546   |             |  |   | 8,344,968   |            
|Deferred underwriting fee income                                                                 |                                            |      | 4,406,746   |             |  |   | 5,678,594   |            
|                                                                                                 |                                            |      |             |             |  |   |             |            
|                                                                                                 | Total liabilities                          |      |             | 400,135,729 |  |   |             | 350,644,791 | 
|                                                                                                 |                                            |      |             |             |  |   |             |            
|                                                                                                
|STOCKHOLDERS EQUITY                                                                            
|Preferred stock, $10 par (liquidation preference,
    $80,456,961 and $52,895,730, respectively) |                                            |      | 16,570,811  |             |  |   | 14,684,736  |            
|Common stock, Class A, $2,250 par, 97 shares
    issued and outstanding                          |                                            |      | 218,250     |             |  |   | 218,250     |            
|Additional paid-in capital                                                                       |                                            |      | 49,836,670  |             |  |   | 26,024,897  |            
|Accumulated other comprehensive income (loss)                                                    |                                            |      | 3,291,285   |             |  |   | (4,474,411  | )          
|Retained earnings                                                                                |                                            |      | 3,363,303   |             |  |   | 4,459,018   |            
|                                                                                                 |                                            |      |             |             |  |   |             |            
|                                                                                                 | Total stockholders equity                 |      |             | 73,280,319  |  |   |             | 40,912,490  | 
|                                                                                                 |                                            |      |             |             |  |   |             |            
|                                                                                                 | Total liabilities and stockholders equity |      | $           | 473,416,048 |  |   | $           | 391,557,281 | 
|                                                                                                 |                                            |      |             |             |  |   |             |            

F-43



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



20.     Parent
Company Only Financial Statements (continued)


Metropolitans condensed statements of
operations for the years ended September 30, 2002, 2001 and
2000 are as follows:

|                                                                                      |                                                         |                |             |             |            |      |             |            |            |   |             |            |            | 
|------------------------------------------------------------------------------------- | ------------------------------------------------------- | -------------- | ----------- | ----------- | ---------- | ---- | ----------- | ---------- | ---------- | - | ----------- | ---------- | ---------- | 
|                                                                                      |                                                         | 2002           |             | 2001        |            | 2000
|                                                                                      |                                                         |                |             |             |            |     
|Revenues:                                                                             |                                                         |                |             |             |            |      |             |            |            |   |             |           
|                                                                                      | Interest and earned discounts                           |                | $           | 14,194,798  |            |      | $           | 9,838,707  |            |   | $           | 22,770,464 |           
|                                                                                      | Dividends from subsidiaries                             |                |             | 3,039,750   |            |      |             | 4,042,750  |            |   |             | 3,306,031  |           
|                                                                                      | Fees, commissions, service and other income             |                |             | 14,417,091  |            |      |             | 13,560,446 |            |   |             | 11,087,452 |           
|                                                                                      | Real estate sales                                       |                |             | 18,965,642  |            |      |             | 3,008,487  |            |   |             | 11,656,536 |           
|                                                                                      | Net gains (losses) on investments and
    receivables   |                |             | (10,933,771 | )          |      |             | (8,399,556 | )          |   |             | 15,530,417 |           
|                                                                                      |                                                         |                |             |             |            |      |             |            |            |   |             |           
|                                                                                      |                                                         | Total revenues |             |             | 39,683,510 |      |             |            | 22,050,834 |   |             |            | 64,350,900 | 
|                                                                                      |                                                         |                |             |             |            |      |             |            |            |   |             |           
|Expenses:                                                                             |                                                         |                |             |             |            |      |             |            |            |   |             |           
|                                                                                      | Interest, net                                           |                |             | 31,812,569  |            |      |             | 26,352,234 |            |   |             | 29,867,377 |           
|                                                                                      | Cost of real estate sold                                |                |             | 15,956,122  |            |      |             | 2,990,482  |            |   |             | 14,334,711 |           
|                                                                                      | Provision for losses on real estate assets              |                |             | 1,046,271   |            |      |             | 5,215,553  |            |   |             | 3,064,156  |           
|                                                                                      | Reduction in valuation of mortgage servicing
    rights |                |             |            |            |      |             |           |            |   |             | 1,306,958  |           
|                                                                                      | Salaries and employee benefits                          |                |             | 11,218,746  |            |      |             | 13,642,527 |            |   |             | 18,602,278 |           
|                                                                                      | Other operating expenses                                |                |             | 16,124,648  |            |      |             | 15,238,543 |            |   |             | 8,686,250  |           
|                                                                                      |                                                         |                |             |             |            |      |             |            |            |   |             |           
|                                                                                      |                                                         | Total expenses |             |             | 76,158,356 |      |             |            | 63,439,339 |   |             |            | 75,861,730 | 
|                                                                                      |                                                         |                |             |             |            |      |             |            |            |   |             |           
|Loss from operations before income taxes and
    equity in net income of subsidiaries |                                                         |                | (36,474,846 | )           |            |      | (41,388,505 | )          |            |   | (11,510,830 | )         
|Income tax benefit                                                                    |                                                         |                | 12,728,709  |             |            |      | 17,407,063  |            |            |   | 4,037,507   |           
|                                                                                      |                                                         |                |             |             |            |      |             |            |            |   |             |           
|Loss before equity in undistributed net income of
    subsidiaries                    |                                                         |                | (23,746,137 | )           |            |      | (23,981,442 | )          |            |   | (7,473,323  | )         
|Equity in undistributed net income of subsidiaries                                    |                                                         |                | 27,667,827  |             |            |      | 15,058,319  |            |            |   | (128,030    | )         
|                                                                                      |                                                         |                |             |             |            |      |             |            |            |   |             |           
|Net income (loss)                                                                     |                                                         | $              | 3,921,690   |             |            | $    | (8,923,123  | )          |            | $ | (7,601,353  | )         
|                                                                                      |                                                         |                |             |             |            |      |             |            |            |   |             |           

F-44



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

20.     Parent
Company Only Financial Statements (continued)

Metropolitans condensed statements of cash
flows for the years ended September 30, 2002, 2001 and 2000
are as follows:

|                                               |                                                                                                                                                |                                                         |            |             |             |      |            |             |            |   |            |              |             |  
|---------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------- | ----------- | ----------- | ---- | ---------- | ----------- | ---------- | - | ---------- | ------------ | ----------- | -
|                                               |                                                                                                                                                | 2002                                                    |            | 2001        |             | 2000
|                                               |                                                                                                                                                |                                                         |            |             |             |     
|Cash flows from operating activities:          |                                                                                                                                                |                                                         |            |             |             |      |            |             |            |   |            |             
|                                               | Net income (loss)                                                                                                                              |                                                         | $          | 3,921,690   |             |      | $          | (8,923,123  | )          |   | $          | (7,601,353   | )          
|                                               | Adjustments to reconcile net income (loss) to net
    cash from operating activities                                                           |                                                         |            | 8,861,097   |             |      |            | 10,791,951  |            |   |            | (12,718,340  | )          
|                                               |                                                                                                                                                |                                                         |            |             |             |      |            |             |            |   |            |             
|                                               |                                                                                                                                                | Net cash provided by (used in) operating
    activities |            |             | 12,782,787  |      |            |             | 1,868,828  |   |            |              | (20,319,693 | )
|                                               |                                                                                                                                                |                                                         |            |             |             |      |            |             |            |   |            |             
|Cash flows from investing activities:          |                                                                                                                                                |                                                         |            |             |             |      |            |             |            |   |            |             
|                                               | Principal payments on real estate contracts and
    mortgage notes receivable and other receivable investments                                 |                                                         |            | 10,063,643  |             |      |            | 48,446,408  |            |   |            | 26,761,779   |            
|                                               | Proceeds from sales of real estate contracts and
    mortgage notes receivable, other receivable investments and
    mortgage servicing rights |                                                         |            | 5,783,805   |             |      |            | 11,112,554  |            |   |            | 471,101,431  |            
|                                               | Acquisition of real estate contracts and mortgage
    notes and other receivable investments                                                   |                                                         |            | (9,560,891  | )           |      |            | (51,773,575 | )          |   |            | (424,071,180 | )          
|                                               | Proceeds from real estate sales                                                                                                                |                                                         |            | 18,965,642  |             |      |            | 11,080,946  |            |   |            | 6,656,536    |            
|                                               | Proceeds from sales of investments                                                                                                             |                                                         |            | 48,635,732  |             |      |            | 10,083,594  |            |   |            | 2,851,755    |            
|                                               | Proceeds from maturities of investments                                                                                                        |                                                         |            | 5,460,881   |             |      |            | 300,000     |            |   |            | 2,853,094    |            
|                                               | Purchase of investments                                                                                                                        |                                                         |            | (51,835,815 | )           |      |            | (14,537,583 | )          |   |            | (9,305,976   | )          
|                                               | Additions to real estate held for sale and
    development                                                                                     |                                                         |            | (26,684,514 | )           |      |            | (13,183,585 | )          |   |            | (6,446,107   | )          
|                                               | Capital expenditures                                                                                                                           |                                                         |            | (1,682,474  | )           |      |            | (80,049     | )          |   |            | (1,234,890   | )          
|                                               | Net change in investment in and advances to
    subsidiaries                                                                                   |                                                         |            | (85,233,575 | )           |      |            | (7,740,969  | )          |   |            | (29,586,939  | )          
|                                               |                                                                                                                                                |                                                         |            |             |             |      |            |             |            |   |            |             
|                                               |                                                                                                                                                | Net cash provided by (used in) investing
    activities |            |             | (86,087,566 | )    |            |             | (6,292,259 | ) |            |              | 39,579,503  |  
|                                               |                                                                                                                                                |                                                         |            |             |             |      |            |             |            |   |            |             
|Cash flows from financing activities:          |                                                                                                                                                |                                                         |            |             |             |      |            |             |            |   |            |             
|                                               | Net borrowings from (repayments to) banks and
    others                                                                                       |                                                         |            | 1,567,686   |             |      |            | (8,871,513  | )          |   |            | (70,970,199  | )          
|                                               | Issuance of debenture bonds                                                                                                                    |                                                         |            | 92,912,423  |             |      |            | 67,369,456  |            |   |            | 96,583,832   |            
|                                               | Issuance of preferred stock                                                                                                                    |                                                         |            | 32,669,615  |             |      |            | 1,456,572   |            |   |            | 10,959,491   |            
|                                               | Repayment of debenture bonds                                                                                                                   |                                                         |            | (44,670,868 | )           |      |            | (15,408,687 | )          |   |            | (53,595,898  | )          
|                                               | Cash dividends                                                                                                                                 |                                                         |            | (5,017,405  | )           |      |            | (4,415,540  | )          |   |            | (4,837,100   | )          
|                                               | Redemption and retirement of stock                                                                                                             |                                                         |            | (6,971,767  | )           |      |            | (11,302,402 | )          |   |            | (5,292,830   | )          
|                                               |                                                                                                                                                |                                                         |            |             |             |      |            |             |            |   |            |             
|                                               |                                                                                                                                                | Net cash provided by (used in) financing
    activities |            |             | 70,489,684  |      |            |             | 28,827,886 |   |            |              | (27,152,704 | )
|                                               |                                                                                                                                                |                                                         |            |             |             |      |            |             |            |   |            |             
|Net change in cash and cash equivalents        |                                                                                                                                                |                                                         | (2,815,095 | )           |             |      | 24,404,455 |             |            |   | (7,892,894 | )           
|Cash and cash equivalents at beginning of year |                                                                                                                                                |                                                         | 25,439,356 |             |             |      | 1,034,901  |             |            |   | 8,927,795  |             
|                                               |                                                                                                                                                |                                                         |            |             |             |      |            |             |            |   |            |             
|Cash and cash equivalents at end of year       |                                                                                                                                                | $                                                       | 22,624,261 |             |             | $    | 25,439,356 |             |            | $ | 1,034,901  |             
|                                               |                                                                                                                                                |                                                         |            |             |             |      |            |             |            |   |            |             

F-45



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



20.     Parent
Company Only Financial Statements (continued)


Non-cash investing and financing activities not
included in Metropolitans condensed statements of cash
flows for the years ended September 30, 2002, 2001 and 2000
are as follows:

|                                                                                                                                             |  |      |           |      |  |      |           |  |  |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | ---------- | -
|                                                                                                                                             |  | 2002 |           | 2001 |  | 2000
|                                                                                                                                             |  |      |           |      |  |     
|Loans to facilitate the sale of real estate                                                                                                  |  | $    |          |      |  | $    | 575,590   |  |  | $ | 5,000,000  |  
|Loan to facilitate sale of other receivable
    investments                                                                                  |  |      | 3,000,000 |      |  |      |          |  |  |   | 6,467,302  |  
|Real estate acquired through foreclosure                                                                                                     |  |      | 2,601,947 |      |  |      | 3,822,005 |  |  |   | 2,031,563  |  
|Debt assumed with acquisition of real estate
    contracts and mortgage notes and debt assumed upon foreclosure
    of real estate contracts |  |      |          |      |  |      | 43,587    |  |  |   | 94,805     |  
|Change in net unrealized gains (losses) on
    investments                                                                                   |  |      | 7,765,696 |      |  |      | 3,342,225 |  |  |   | (7,306,644 | )
|Securities and mortgage servicing rights retained
    from securitization prefunding                                                         |  |      |          |      |  |      | 2,964,809 |  |  |   | 16,562,917 |  

Accounting policies followed in the preparation
of the preceding condensed financial statements of Metropolitan
(parent company only) are the same as those policies described
in the consolidated financial statements except that the equity
method was used in accounting for the investments in and net
income from subsidiaries.

At September 30, 2002 and 2001,
Metropolitans debt payable consists of the following:

|                                                                                                                                                                                                                                                                              |  |      |            |      |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                                                                                                                                                                                                                                                              |  | 2002 |            | 2001
|                                                                                                                                                                                                                                                                              |  |      |            |     
|Note payable to Old Standard Life Insurance
    Company, interest at 10.5% per annum; due June 30, 2005;
    collateralized by commercial land located in
    Pasco, Washington                                                                                               |  | $    | 3,197,355  |      |  | $ | 4,403,516  |  
|Note payable to Western United Life Assurance
    Company, interest at 7.75% per annum, due December 27,
    2015; collateralized by commercial property located in
    Pasco Washington                                                                                      |  |      | 7,968,092  |      |  |   | 8,507,426  |  
|Note payable to Western United Life Assurance
    Company, interest at 10.5% per annum; due January 1, 2015;
    collateralized by commercial property located in
    Spokane Washington                                                                                      |  |      | 10,953,838 |      |  |   | 11,372,201 |  
|Note payable to IDS Life Insurance Company,
    interest at 7.04% per annum; due August 1, 2019;
    collateralized by Metropolitan Financial Center located in
    Spokane, Washington                                                                                       |  |      | 11,375,430 |      |  |   | 11,587,853 |  
|Real estate contracts and mortgage notes payable,
    interest rates ranging from 5.0% to 11.6%, due in installments
    through 2026; collateralized by senior liens on certain of the
    Companys real estate contracts, mortgage notes and real
    estate held for sale |  |      | 300,230    |      |  |   | 382,285    |  
|Reverse repurchase agreement with Merrill Lynch,
    interest at 2.5% per annum; due October 7, 2002;
    collateralized by $5.0 million in mortgage backed securities                                                                                                        |  |      | 4,045,000  |      |  |   |           |  
|Prepaid interest                                                                                                                                                                                                                                                              |  |      | (2,440     | )    |  |   | (47        | )
|                                                                                                                                                                                                                                                                              |  |      |            |      |  |   |            |  
|                                                                                                                                                                                                                                                                              |  | $    | 37,837,505 |      |  | $ | 36,253,234 |  
|                                                                                                                                                                                                                                                                              |  |      |            |      |  |   |            |  

F-46



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



20.     Parent
Company Only Financial Statements (continued)


Aggregate amounts of principal payments due on
the parent companys debt payable are expected to be as
follows:

|                   |      |   |            |           | 
|------------------ | ---- | - | ---------- | --------- | 
|Fiscal Year Ending |      |  
|September 30,      |      |  
|                   |      |  
|                   | 2003 |   | $          | 5,387,165 | 
|                   | 2004 |   |            | 1,461,411 | 
|                   | 2005 |   |            | 4,775,804 | 
|                   | 2006 |   |            | 1,705,626 | 
|                   | 2007 |   |            | 1,843,888 | 
|Thereafter         |      |   | 22,663,611 |          
|                   |      |   |            |          
|                   |      | $ | 37,837,505 |          
|                   |      |   |            |          

At September 30, 2002 and 2001,
Metropolitans debenture bonds payable consisted of the
following:

|                              |  |      |             |      |  |   |             | 
|----------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | 
|Annual Interest Rates         |  | 2002 |             | 2001
|                              |  |      |             |     
|5% to 6%                      |  | $    | 8,748,000   |      |  | $ |            | 
|6% to 7%                      |  |      | 10,511,000  |      |  |   | 7,486,000   | 
|7% to 8%                      |  |      | 58,525,000  |      |  |   | 39,780,000  | 
|8% to 9%                      |  |      | 154,909,000 |      |  |   | 136,943,000 | 
|9% to 10%                     |  |      | 86,736,000  |      |  |   | 86,978,000  | 
|                              |  |      |             |      |  |   |             | 
|                              |  |      | 319,429,000 |      |  |   | 271,187,000 | 
|Compound and accrued interest |  |      | 36,036,932  |      |  |   | 29,180,995  | 
|                              |  |      |             |      |  |   |             | 
|                              |  | $    | 355,465,932 |      |  | $ | 300,367,995 | 
|                              |  |      |             |      |  |   |             | 

The weighted average interest rate on outstanding
debentures was approximately 8.2% and 8.3% at September 30,
2002 and 2001, respectively.

Maturities of the parent companys debenture
bonds are as follows:

|                   |      |   |             |            | 
|------------------ | ---- | - | ----------- | ---------- | 
|Fiscal Year Ending |      |  
|September 30,      |      |  
|                   |      |  
|                   | 2003 |   | $           | 60,502,932 | 
|                   | 2004 |   |             | 43,601,000 | 
|                   | 2005 |   |             | 99,863,000 | 
|                   | 2006 |   |             | 60,822,000 | 
|                   | 2007 |   |             | 74,857,000 | 
|Thereafter         |      |   | 15,820,000  |           
|                   |      |   |             |           
|                   |      | $ | 355,465,932 |           
|                   |      |   |             |           

F-47



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

20.     Parent
Company Only Financial Statements (continued)

Metropolitan had the following related-party
transactions with its various subsidiaries and affiliated
entities:

|                                            |                                       |      |            |           |  |      |            |           |  |   |           |           | 
|------------------------------------------- | ------------------------------------- | ---- | ---------- | --------- |  | ---- | ---------- | --------- |  | - | --------- | --------- | 
|                                            |                                       | 2002 |            | 2001      |  | 2000
|                                            |                                       |      |            |           |  |     
|Dividends received:                         |                                       |      |            |           |  |      |            |           |  |   |           |          
|                                            | Western United Life Assurance Company |      | $          | 2,747,250 |  |      | $          | 3,502,750 |  |   | $         | 2,766,031 | 
|                                            | Metwest Mortgage Services, Inc.       |      |            | 540,000   |  |      |            | 540,000   |  |   |           | 540,000   | 
|                                            |                                       |      |            |           |  |      |            |           |  |   |           |          
|                                            |                                       | $    | 3,287,250  |           |  | $    | 4,042,750  |           |  | $ | 3,306,031 |          
|                                            |                                       |      |            |           |  |      |            |           |  |   |           |          
|Dividends paid to Summit Securities, Inc.   |                                       | $    | 204,856    |           |  | $    | 205,693    |           |  | $ | 217,067   |          
|Fees, commissions, service and other income |                                       | $    | 13,383,466 |           |  | $    | 10,951,692 |           |  | $ | 9,328,936 |          
|Interest income                             |                                       | $    | 1,666,675  |           |  | $    | 2,918,229  |           |  | $ | 4,150,997 |          

Historically, Metropolitan has charged various
subsidiaries and affiliated entities for underwriting fees
related to contracts sold to these entities. Amounts charged to
subsidiaries are deferred and recognized as income over the
estimated life of the contracts. Amounts amortized into service
fee income were approximately $1.3 million,
$1.2 million and $2.4 million for the years ended
September 30, 2002, 2001 and 2000, respectively.

The underwriting fees are based upon a yield
requirement established by the purchasing entity. In the case of
Western Life, one of Metropolitans subsidiaries, beginning
in 1994 and ending March 31, 1998, the yield requirement
established by Western Life had been guaranteed by Metropolitan
and an intercompany reserve was established to support the
guarantee. Metropolitan remains liable to Western Life for any
losses in excess of the reserve. In connection with its
guarantee, Western Life has holdbacks of $1.8 million,
$2.7 million and $1.4 million at September 30,
2002, 2001 and 2000, respectively. The guarantee by Metropolitan
has been eliminated with respect to all receivables sold to
Western Life after March 31, 1998.

Income Taxes

The Consolidated Groups $26.3 million
tax benefit recorded during the fiscal year ended
September 30, 2001, includes a $14.0 million tax
benefit relating to an investment that Metropolitan entered into
in conjunction with Western Life in 1999. In total, the
investment resulted in the Consolidated Group recording a
$28.0 million tax benefit, of which $14.0 million was also
recorded as an income tax benefit during the fiscal year ended
September 30, 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, the
Consolidated Group received two independent tax opinions
relating to the investment.

The Internal Revenue Service (IRS) has
notified the participants by general public notice that they
have taken the position that the tax benefits relative to the
investment would be disallowed. The Consolidated Group has
received an audit notice from the IRS for the tax year in which
the tax benefit attributable to the investment was claimed.
However, a specific review of the Consolidated Groups
investment and related activity has not yet taken place. At
September 30, 2002, the Consolidated Group cannot
reasonably estimate a loss, if any, associated with this
transaction. In the event of an unfavorable determination
relative to the investment, the earnings of the Consolidated
Group would be adversely affected by the amount disallowed,
including interest if applicable. If wholly disallowed, the
potential earnings effect would be a loss of $28.0 million
plus applicable interest.

Additionally, in conjunction with the investment,
Metropolitan and Western Life executed a supplement to their
Federal Tax Sharing Agreement allowing Western Life to recover
from Metropolitan up to

F-48



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##### Table of Contents



METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

20.     Parent
Company Only Financial Statements (continued)

$11.2 million, plus applicable interest, in
federal income tax benefits derived from this investment that
are not otherwise utilized by Western Life. Any amounts that may
be disallowed, up to $11.2 million plus applicable
interest, are recoverable by Western Life from Metropolitan
under the terms of the supplement to the Federal Tax Sharing
Agreement.

21.     Supplementary
Financial Information (unaudited):

Supplementary financial information of the
Company for each three month period (September 30,
June 30, March 31 and December 31) of the years
ended September 30, 2002 and 2001 are as follows:

|                                                    |  |                        |        |      |  |       |        |          |  |           |        |      |  |       |        |          |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        |  
|--------------------------------------------------- |  | ---------------------- | ------ | ---- |  | ----- | ------ | -------- |  | --------- | ------ | ---- |  | ----- | ------ | -------- |  | - | ------ | - |  | - | ------ | - |  | - | ------- | - |  | - | ------ | -
|                                                    |  |                       
|                                                    |  | Three months ended    
|                                                    |  |                       
|                                                    |  | September              |        | June |  | March |        | December |  | September |        | June |  | March |        | December
|                                                    |  | 2002                   |        | 2002 |  | 2002  |        | 2001     |  | 2001      |        | 2001 |  | 2001  |        | 2000    
|                                                    |  |                        |        |      |  |       |        |          |  |           |        |      |  |       |        |         
|                                                    |  |                       
|                                                    |  | (Dollars in thousands)
|CONSOLIDATED STATEMENTS OF OPERATIONS DATA:         |  |                        |        |      |  |       |        |          |  |           |        |      |  |       |        |          |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        |  
|Revenues                                            |  | $                      | 68,883 | (1)  |  | $     | 34,677 |          |  | $         | 25,232 |      |  | $     | 35,123 |          |  | $ | 35,994 |   |  | $ | 27,854 |   |  | $ | 21,344  |   |  | $ | 33,921 |  
|                                                    |  |                        |        |      |  |       |        |          |  |           |        |      |  |       |        |          |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        |  
|Income (loss) before minority interest              |  |                        | 10,204 |      |  |       | 366    |          |  |           | (6,736 | )    |  |       | 146    |          |  |   | 4,481  |   |  |   | 5,380  |   |  |   | (14,205 | ) |  |   | (4,262 | )
|(Income) loss allocated to minority interest        |  |                        |       |      |  |       |       |          |  |           | 31     |      |  |       | (89    | )        |  |   | (93    | ) |  |   | (358   | ) |  |   | 123     |   |  |   | 11     |  
|                                                    |  |                        |        |      |  |       |        |          |  |           |        |      |  |       |        |          |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        |  
|Net income (loss)                                   |  |                        | 10,204 | (2)  |  |       | 366    | (3)      |  |           | (6,705 | )(4) |  |       | 57     |          |  |   | 4,388  |   |  |   | 5,022  |   |  |   | (14,082 | ) |  |   | (4,251 | )
|Preferred stock dividends                           |  |                        | (1,530 | )    |  |       | (1,268 | )        |  |           | (1,050 | )    |  |       | (936   | )        |  |   | (845   | ) |  |   | (1,019 | ) |  |   | (1,132  | ) |  |   | (1,161 | )
|                                                    |  |                        |        |      |  |       |        |          |  |           |        |      |  |       |        |          |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        |  
|Income (loss) applicable to
    common stockholders |  | $                      | 8,674  |      |  | $     | (902   | )        |  | $         | (7,755 | )    |  | $     | (879   | )        |  | $ | 3,543  |   |  | $ | 4,003  |   |  | $ | (15,214 | ) |  | $ | (5,412 | )
|                                                    |  |                        |        |      |  |       |        |          |  |           |        |      |  |       |        |          |  |   |        |   |  |   |        |   |  |   |         |   |  |   |        |  



---



|    |                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes real estate sales of $37.6 million.                                                                                                                                                                                        
|   
|(2) | Includes gains on real estate sales of
    $9.5 million, net of tax; reversal of previously amortized
    deferred policy acquisition costs of $3.9 million, net of
    tax; and investment impairments of $7.2 million, net of tax.
|   
|(3) | Includes reversal of previously amortized
    deferred policy acquisition costs of $1.8 million, net of
    tax; and investment impairments of $4.0 million, net of tax.                                                            
|   
|(4) | Includes investment impairments of
    $6.3 million, net of tax.                                                                                                                                                                    

F-49



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##### Table of Contents



SCHEDULE I

METROPOLITAN MORTGAGE & SECURITIES
CO., INC.

SUMMARY OF INVESTMENTS


OTHER THAN INVESTMENTS IN RELATED
PARTIES


September 30, 2002

|                                          |                                                             |                |               |              |  |                |             |             |  |   |               |             | 
|----------------------------------------- | ----------------------------------------------------------- | -------------- | ------------- | ------------ |  | -------------- | ----------- | ----------- |  | - | ------------- | ----------- | 
|Column A                                  |                                                             | Column B       |               | Column C     |  | Column D      
|                                          |                                                             |                |               |              |  |               
|                                          |                                                             |                |               |              |  | Amount At     
|                                          |                                                             |                |               |              |  | Which Shown on
|Types of Investments                      |                                                             | Amortized Cost |               | Market Value |  | Balance Sheet 
|                                          |                                                             |                |               |              |  |               
|FIXED MATURITIES                          |                                                             |                |               |              |  |                |             |             |  |   |               |            
|Investments:                              |                                                             |                |               |              |  |                |             |             |  |   |               |            
|                                          | U.S. Government and Government Agencies and
    Authorities |                | $             | 61,026,798   |  |                | $           | 61,897,361  |  |   | $             | 61,533,558  | 
|                                          | Corporate Bonds                                             |                |               | 20,030,549   |  |                |             | 19,911,047  |  |   |               | 19,911,047  | 
|                                          | Mortgage and Asset Backed Bonds                             |                |               | 405,648,069  |  |                |             | 411,026,597 |  |   |               | 410,200,788 | 
|                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            
|TOTAL FIXED MATURITIES                    |                                                             | $              | 486,705,416   |              |  | $              | 492,835,005 |             |  | $ | 491,645,393   |            
|                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            
|Equity Securities                         |                                                             | $              | 39,580,859    |              |  | $              | 39,695,015  |             |  | $ | 39,695,015    |            
|                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            
|Venture Capital/ Limited Partnerships     |                                                             | $              | 3,948,713     |              |  | $              | 3,948,713   |             |  | $ | 3,948,713     |            
|                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            
|Receivables                               |                                                             | $              | 762,424,455   |              |  |                |             |             |  | $ | 762,424,455   |            
|Less Allowance for Losses on Receivables  |                                                             |                | (11,339,002   | )            |  |                |             |             |  |   | (11,339,002   | )          
|                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            
|NET RECEIVABLES                           |                                                             | $              | 751,085,453   |              |  |                |             |             |  | $ | 751,085,453   |            
|                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            
|REAL ESTATE HELD FOR SALE AND DEVELOPMENT |                                                             | $              | 106,979,005   |              |  |                |             |             |  | $ | 106,979,005   |            
|                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            
|OTHER ASSETSPOLICY LOANS                 |                                                             | $              | 20,238,963    |              |  |                |             |             |  | $ | 20,238,963    |            
|                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            
|TOTAL INVESTMENTS                         |                                                             | $              | 1,408,538,409 |              |  |                |             |             |  | $ | 1,413,592,542 |            
|                                          |                                                             |                |               |              |  |                |             |             |  |   |               |            

S-1



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##### Table of Contents



SCHEDULE II

METROPOLITAN MORTGAGE & SECURITIES
CO., INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES


Years Ended September 30, 2002, 2001 and
2000

|                                                                                                                        |      |            |   |            |  |             |   |             |  |  |   |           |  |  |   |            | 
|----------------------------------------------------------------------------------------------------------------------- | ---- | ---------- | - | ---------- |  | ----------- | - | ----------- |  |  | - | --------- |  |  | - | ---------- | 
|                                                                                                                        |      |            |   | Additions  |  | Deductions  |   |            
|                                                                                                                        |      | Balance at |   | Charges to |  | and         |   |            
|                                                                                                                        |      | Beginning  |   | Costs and  |  | Accounts    |   | Balance at 
|Description                                                                                                             |      | of Year    |   | Expenses   |  | Written Off |   | End of Year
|                                                                                                                        |      |            |   |            |  |             |   |            
|Allowance for probable losses on receivables                                                                            |      |            |   |            |  |             |   |             |  |  |   |           |  |  |   |           
|                                                                                                                        | 2002 |            | $ | 13,509,977 |  |             | $ | 4,142,146   |  |  | $ | 6,313,121 |  |  | $ | 11,339,002 | 
|                                                                                                                        | 2001 |            |   | 12,983,966 |  |             |   | 7,515,420   |  |  |   | 6,989,409 |  |  |   | 13,509,977 | 
|                                                                                                                        | 2000 |            |   | 6,855,606  |  |             |   | 12,070,638  |  |  |   | 5,942,278 |  |  |   | 12,983,966 | 
|Allowance for probable losses on real estate held
    for sale deducted from real estate held for sale in balance sheet |      |            |   |            |  |             |   |             |  |  |   |           |  |  |   |           
|                                                                                                                        | 2002 |            | $ | 3,661,247  |  |             | $ | 2,345,301   |  |  | $ | 4,008,100 |  |  | $ | 1,998,448  | 
|                                                                                                                        | 2001 |            |   | 2,066,148  |  |             |   | 4,276,355   |  |  |   | 2,681,256 |  |  |   | 3,661,247  | 
|                                                                                                                        | 2000 |            |   | 2,462,466  |  |             |   | 2,817,950   |  |  |   | 3,214,268 |  |  |   | 2,066,148  | 

S-2



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##### Table of Contents



SCHEDULE III

Page 1 of 2


METROPOLITAN MORTGAGE & SECURITIES
CO., INC. AND SUBSIDIARIES

SUPPLEMENTARY INSURANCE INFORMATION


|                   |                              |             |   |                   |  |          |   |               |  |  |   |   |  |  |   |   | 
|------------------ | ---------------------------- | ----------- | - | ----------------- |  | -------- | - | ------------- |  |  | - | - |  |  | - | - | 
|                   |                              | Deferred    |   | Future Policy     |  |          |   | Other Policy 
|                   |                              | Policy      |   | Benefits, Losses, |  |          |   | Claims and   
|                   |                              | Acquisition |   | Claims and Loss   |  | Unearned |   | Benefits     
|                   |                              | Cost        |   | Expense           |  | Premiums |   | Payable      
|                   |                              |             |   |                   |  |          |   |              
|September 30, 2002 |                              |             |   |                   |  |          |   |               |  |  |   |   |  |  |   |  
|                   | Life Insurance and Annuities |             | $ | 72,205,121        |  |          | $ | 1,077,267,805 |  |  | $ |  |  |  | $ |  | 
|                   |                              |             |   |                   |  |          |   |               |  |  |   |   |  |  |   |  
|September 30, 2001 |                              |             |   |                   |  |          |   |               |  |  |   |   |  |  |   |  
|                   | Life Insurance and Annuities |             | $ | 59,224,453        |  |          | $ | 864,653,492   |  |  | $ |  |  |  | $ |  | 
|                   |                              |             |   |                   |  |          |   |               |  |  |   |   |  |  |   |  
|September 30, 2000 |                              |             |   |                   |  |          |   |               |  |  |   |   |  |  |   |  
|                   | Life Insurance and Annuities |             | $ | 58,213,284        |  |          | $ | 775,131,790   |  |  | $ |  |  |  | $ |  | 
|                   |                              |             |   |                   |  |          |   |               |  |  |   |   |  |  |   |  

S-3



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##### Table of Contents



SCHEDULE III

Page 2 of 2


METROPOLITAN MORTGAGE & SECURITIES
CO., INC. AND SUBSIDIARIES

SUPPLEMENTARY INSURANCE INFORMATION


|                   |                              |         |   |                |  |            |   |              |  |           |   |            |  |  |   |            |   |  |   |           | 
|------------------ | ---------------------------- | ------- | - | -------------- |  | ---------- | - | ------------ |  | --------- | - | ---------- |  |  | - | ---------- | - |  | - | --------- | 
|                   |                              |         |   |                |  | Benefit    |   | Amortization |  |          
|                   |                              |         |   |                |  | Claims,    |   | of Deferred  |  |          
|                   |                              |         |   |                |  | Losses and |   | Policy       |  | Other    
|                   |                              | Premium |   | Net Investment |  | Settlement |   | Acquisition  |  | Operating
|                   |                              | Revenue |   | Income         |  | Expenses   |   | Costs        |  | Expenses 
|                   |                              |         |   |                |  |            |   |              |  |          
|September 30, 2002 |                              |         |   |                |  |            |   |              |  |           |   |            |  |  |   |            |   |  |   |          
|                   | Life Insurance and Annuities |         | $ | 1,766,851      |  |            | $ | 101,052,439  |  |           | $ | 53,131,625 |  |  | $ | (2,148,366 | ) |  | $ | 4,005,786 | 
|                   |                              |         |   |                |  |            |   |              |  |           |   |            |  |  |   |            |   |  |   |          
|September 30, 2001 |                              |         |   |                |  |            |   |              |  |           |   |            |  |  |   |            |   |  |   |          
|                   | Life Insurance and Annuities |         | $ | 1,971,123      |  |            | $ | 72,362,198   |  |           | $ | 47,473,339 |  |  | $ | 8,950,000  |   |  | $ | 4,430,486 | 
|                   |                              |         |   |                |  |            |   |              |  |           |   |            |  |  |   |            |   |  |   |          
|September 30, 2000 |                              |         |   |                |  |            |   |              |  |           |   |            |  |  |   |            |   |  |   |          
|                   | Life Insurance and Annuities |         | $ | 2,406,532      |  |            | $ | 65,958,630   |  |           | $ | 46,122,863 |  |  | $ | 12,600,000 |   |  | $ | 3,251,656 | 
|                   |                              |         |   |                |  |            |   |              |  |           |   |            |  |  |   |            |   |  |   |          

S-4



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##### Table of Contents



SCHEDULE IV

Page 1 of 2


METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES

LOANS ON REAL ESTATE


September 30, 2002

At September 30, 2002, the Company held
contracts and mortgage notes Receivables with a face values as
follows:

|                                                                                                      |  |             |             |            |  |                |            |          |  |  |      |   |  |  |      |  
|----------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | ---------- |  | -------------- | ---------- | -------- |  |  | ---- | - |  |  | ---- | -
|                                                                                                      |  | Carrying    |             | Delinquent |  | Weighted       |            | Weighted
|                                                                                                      |  | Amount of   |             | Principal  |  | Average Coupon |            | Average 
|Description                                                                                           |  | Receivables |             | Amount(2)  |  | Rate(3)        |            | Yield   
|                                                                                                      |  |             |             |            |  |                |            |         
|Commercial(1)                                                                                         |  | $           | 353,794,571 |            |  | $              | 26,349,403 |          |  |  | 13.0 | % |  |  | 16.1 | %
|Residential                                                                                           |  |             | 176,520,275 |            |  |                | 17,753,261 |          |  |  | 9.0  | % |  |  | 10.5 | %
|Other                                                                                                 |  |             | 102,842,313 |            |  |                | 8,351,967  |          |  |  | 9.5  | % |  |  | 11.9 | %
|Unrealized discounts, net of unamortized
    acquisition cost, on Receivables purchased at a discount |  |             | (11,587,546 | )          |  |                |            |          |  |  |      |   |  |  |      |  
|Accrued interest receivable                                                                           |  |             | 12,613,487  |            |  |                |            |          |  |  |      |   |  |  |      |  
|                                                                                                      |  |             |             |            |  |                |            |          |  |  |      |   |  |  |      |  
|CARRYING VALUE                                                                                        |  | $           | 634,183,100 |            |  | $              | 52,454,631 |          |  |  |      |   |  |  |      |  
|                                                                                                      |  |             |             |            |  |                |            |          |  |  |      |   |  |  |      |  



---

|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The commercial real estate Receivables are
    defined as those generated through the Companys commercial
    lending source.                            
|   
|(2) | The principal amounts of real estate Receivables
    subject to delinquent principal or interest is defined as being
    in arrears for more than 90 days.
|   
|(3) | Approximately 1% of the real estate Receivables
    are subject to variable interest rates.                                                               

The future maturities of the aggregate amounts of
Commercial Receivables (face amount) are as follows:

|                                      |  |            |             | 
|------------------------------------- |  | ---------- | ----------- | 
|                                      |  | Commercial
|                                      |  | Principal 
|                                      |  |           
|Due in one year or less               |  | $          | 101,709,778 | 
|Due after one year through five years |  |            | 181,714,753 | 
|Due after five years                  |  |            | 70,370,040  | 
|                                      |  |            |             | 
|                                      |  | $          | 353,794,571 | 
|                                      |  |            |             | 

S-5



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##### Table of Contents



SCHEDULE IV

Page 2 of 2


METROPOLITAN MORTGAGE & SECURITIES
CO., INC. AND SUBSIDIARIES

LOANS ON REAL ESTATE


|                                                                                                 |  |                          |             |      |  |      |             |  |  |   |             | 
|------------------------------------------------------------------------------------------------ |  | ------------------------ | ----------- | ---- |  | ---- | ----------- |  |  | - | ----------- | 
|                                                                                                 |  |                         
|                                                                                                 |  | Year Ended September 30,
|                                                                                                 |  |                         
|                                                                                                 |  | 2002                     |             | 2001 |  | 2000
|                                                                                                 |  |                          |             |      |  |     
|Balance at beginning of period                                                                   |  | $                        | 437,618,224 |      |  | $    | 395,977,788 |  |  | $ | 539,525,957 | 
|Additions during period                                                                          |  |                          |             |      |  |      |             |  |  |   |             | 
|New Receivablescash                                                                             |  |                          | 309,315,814 |      |  |      | 261,721,326 |  |  |   | 585,067,159 | 
|Loans to facilitate the sale of real estate
    heldnon cash                                    |  |                          | 46,751,871  |      |  |      | 575,590     |  |  |   | 10,814,668  | 
|Assumption of other debt payable in conjunction
    with acquisition of new Receivablesnon cash |  |                          |            |      |  |      | 421,482     |  |  |   | 301,069     | 
|Earned discount amortization                                                                     |  |                          | 30,226,437  |      |  |      | 9,169,752   |  |  |   | 3,386,295   | 
|                                                                                                 |  |                          |             |      |  |      |             |  |  |   |             | 
|Total additions                                                                                  |  |                          | 386,294,122 |      |  |      | 271,888,150 |  |  |   | 599,569,191 | 
|                                                                                                 |  |                          |             |      |  |      |             |  |  |   |             | 
|Deductions during period                                                                         |  |                          |             |      |  |      |             |  |  |   |             | 
|Collections of principalcash                                                                    |  |                          | 157,862,169 |      |  |      | 96,571,446  |  |  |   | 144,134,761 | 
|Cost of Receivables sold                                                                         |  |                          |            |      |  |      | 110,791,159 |  |  |   | 575,278,992 | 
|Foreclosuresnon cash                                                                            |  |                          | 31,867,077  |      |  |      | 22,885,109  |  |  |   | 23,703,607  | 
|                                                                                                 |  |                          |             |      |  |      |             |  |  |   |             | 
|Total deductions                                                                                 |  |                          | 189,729,246 |      |  |      | 230,247,714 |  |  |   | 743,117,360 | 
|                                                                                                 |  |                          |             |      |  |      |             |  |  |   |             | 
|Balance at end of period                                                                         |  | $                        | 634,183,100 |      |  | $    | 437,618,224 |  |  | $ | 395,977,788 | 
|                                                                                                 |  |                          |             |      |  |      |             |  |  |   |             | 

S-6



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##### Table of Contents



SCHEDULE V

METROPOLITAN MORTGAGE & SECURITIES CO.,
INC. AND SUBSIDIARIES

SUPPLEMENTARY REINSURANCE
INFORMATION


|                   |                         |              |   |             |  |           |   |            |  |            |   |   |  |  |   |             |  |  |   |   | 
|------------------ | ----------------------- | ------------ | - | ----------- |  | --------- | - | ---------- |  | ---------- | - | - |  |  | - | ----------- |  |  | - | - | 
|                   |                         |              |   |             |  | Assumed   |   |            |  | Percentage
|                   |                         |              |   | Ceded to    |  | From      |   |            |  | of Amount 
|                   |                         |              |   | Other       |  | Other     |   |            |  | Assumed   
|Year Ended         |                         | Gross Amount |   | Companies   |  | Companies |   | Net Amount |  | to Net    
|                   |                         |              |   |             |  |           |   |            |  |           
|September 30, 2002 |                         |              |   |             |  |           |   |            |  |            |   |   |  |  |   |             |  |  |   |  
|                   | Life Insurance in Force |              | $ | 234,636,728 |  |           | $ | 31,255,290 |  |            | $ |  |  |  | $ | 203,381,438 |  |  | $ |  | 
|                   | PremiumsLife Insurance |              | $ | 1,619,002   |  |           | $ | 322,403    |  |            | $ |  |  |  | $ | 1,296,599   |  |  | $ |  | 
|September 30, 2001 |                         |              |   |             |  |           |   |            |  |            |   |   |  |  |   |             |  |  |   |  
|                   | Life Insurance in Force |              | $ | 244,702,038 |  |           | $ | 33,711,514 |  |            | $ |  |  |  | $ | 210,990,524 |  |  | $ |  | 
|                   | PremiumsLife Insurance |              | $ | 1,698,983   |  |           | $ | 332,611    |  |            | $ |  |  |  | $ | 1,366,372   |  |  | $ |  | 
|September 30, 2000 |                         |              |   |             |  |           |   |            |  |            |   |   |  |  |   |             |  |  |   |  
|                   | Life Insurance in Force |              | $ | 259,975,571 |  |           | $ | 37,594,536 |  |            | $ |  |  |  | $ | 222,381,035 |  |  | $ |  | 
|                   | PremiumsLife Insurance |              | $ | 1,766,947   |  |           | $ | 308,923    |  |            | $ |  |  |  | $ | 1,458,024   |  |  | $ |  | 

S-7



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##### Table of Contents



EXHIBIT INDEX

|        |       |             |  |                                                                                                                                                                                                                                                                                                         
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 3.01  |             |  | Restated Articles of Incorporation, as amended,
    dated October 22, 2001 (Incorporated by reference to
    Exhibit 4.1 to Metropolitans Registration Statement
    on Form S-2, Registration No. 333-73018, filed
    December 20, 2001).                                                            
|        | 3.02  |             |  | Restated Bylaws, as amended on December 26,
    1995 (Incorporated by reference to Exhibit 3(e) to
    Metropolitans Annual Report on Form 10-K for fiscal 1995).                                                                                                                                      
|        | 4.01  |             |  | Indenture, dated as of October 1999, between
    Metropolitan and U.S. Bank Trust National Association, Trustee
    (Incorporated by reference to Exhibit 4.01 to
    Metropolitans Registration Statement on Form S-2,
    Registration No. 333-88605, filed October 7, 1999).                        
|        | 4.02  |             |  | Indenture, dated as of July 6, 1979, between
    Metropolitan and Seattle-First National Bank, Trustee
    (Incorporated by reference to Exhibit 4.02 to
    Metropolitans Annual Report on Form 10-K for fiscal 2001).                                                                                
|        | 4.03  |             |  | First Supplemental Indenture, dated as of
    October 3, 1980, between Metropolitan and Seattle-First
    National Bank, Trustee. (Incorporated by reference to Exhibit
    4.03 to Metropolitans Annual Report on Form 10-K for
    fiscal 2001).                                                     
|        | 4.04  |             |  | Second Supplemental Indenture, dated as of
    November 12, 1984, between Metropolitan and Seattle-First
    National Bank, Trustee (Incorporated by reference to
    Exhibit 4(d) to Registration No. 2-95146).                                                                                        
|        | 4.05  |             |  | Third Supplemental Indenture, dated as of
    December 31, 1997, between Metropolitan and First Trust
    (Incorporated by reference to Exhibit 4(d) to
    Metropolitans Annual Report on Form 10-K for fiscal
    1997).                                                                             
|        | 4.06  |             |  | Fourth Supplemental Indenture, dated as of
    February 28, 2001, between Metropolitan and U.S. Bank Trust
    National Association (Incorporated by reference to
    Exhibit 4.05 to Metropolitans Registration Statement
    on Form S-2, Registration No. 333-55984, filed
    April 6, 2001).      
|        | 4.07  |             |  | Amended Statement of Rights, Designations and
    Preferences of Variable Rate Preferred Stock, Series C
    (Incorporated by reference to Exhibit 4(g) to Registration
    No. 33-2699).                                                                                                               
|        | 4.08  |             |  | Statement of Rights, Designations and Preferences
    of Variable Rate Preferred Stock, Series D (Incorporated by
    reference to Exhibit 4(a) to Registration
    No. 33-25702).                                                                                                                      
|        | 4.09  |             |  | Statement of Rights, Designations and Preferences
    of Variable Rate Preferred Stock, Series E-1 (Incorporated
    by reference to Exhibit 4(a) to Registration
    No. 33-19238).                                                                                                                    
|        | 4.10  |             |  | Amended Statement of Rights, Designations and
    Preferences of Variable Rate Preferred Stock, Series E-2
    (Incorporated by reference to Exhibit 4(a) to Registration
    No. 33-25702).                                                                                                            
|        | 4.11  |             |  | Statement of Rights, Designations and Preferences
    of Variable Rate Preferred Stock, Series E-3 (Incorporated
    by reference to Exhibit 4(a) to Registration
    No. 33-32586).                                                                                                                    
|        | 4.12  |             |  | Statement of Rights, Designations and Preference
    of Variable Rate Cumulative Preferred Stock, Series E-4
    (Incorporated by reference to Exhibit 4(h) to Registration
    No. 33-40221).                                                                                                          
|        | 4.13  |             |  | Form of Statement of Rights, Designations and
    Preferences of Variable Rate Preferred Stock, Series E-5
    (Incorporated by reference to Exhibit 4(i) to Registration
    No. 33-57396).                                                                                                            
|        | 4.14  |             |  | Statement of Rights, Designations and Preferences
    of Variable Rate Cumulative Preferred Stock, Series E-6
    (Incorporated by reference to Exhibit 4(l) to Registration
    No. 33-51905).                                                                                                         
|        | 4.15  |             |  | Amended and Restated Statement of Rights,
    Designations and Preferences of Variable Rate Cumulative
    Preferred Stock, Series E-7 (Incorporated by reference to
    Exhibit 4.2 to Metropolitans Registration Statement
    on Form S-2, Registration No. 333-73018, filed
    December 20, 2001).
|        | 9.01  |             |  | Irrevocable Trust Agreement (Incorporated by
    reference to Exhibit 9(b) to Registration No. 2-81359).                                                                                                                                                                                                
|        | 10.01 |             |  | Form of Reinsurance Agreement between Western
    Life and Old Standard (Incorporated by reference to
    Exhibit 10(d) to Metropolitans Annual Report on
    Form 10-K for fiscal 1998).                                                                                                              
|        | 10.02 |             |  | Servicing Rights Purchase Agreement among Ocwen
    Federal Bank FSB, Metropolitan and various sellers named
    therein, dated as of April 1, 2001 (Incorporated by
    reference to Exhibit 10.02 to Metropolitans Annual Report
    on Form 10-K for fiscal 2001).                                  
|        | 10.03 |             |  | Amendment No. 1 to Servicing Rights Purchase
    Agreement among Ocwen Federal Bank FSB, Metropolitan and various
    sellers named therein, dated as of May 11, 2001
    (Incorporated by reference to Exhibit 10.03 to
    Metropolitans Annual Report on Form 10-K for fiscal 2001).                



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                  
|------- | ----- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.04 |             |  | Servicing Agreement among Ocwen Federal Bank FSB,
    Metropolitan and various owners named therein, dated as of
    April 1, 2001 (Incorporated by reference to Exhibit 10.04
    to Metropolitans Annual Report on Form 10-K for fiscal
    2001).            
|        | 10.05 |             |  | Flow Subservicing Agreement among Ocwen Federal
    Bank FSB, Metropolitan and various owners named therein, dated
    as of September 1, 2001 (Incorporated by reference to
    Exhibit 10.05 to Metropolitans Annual Report on Form 10-K
    for fiscal 2001).
|        | 12.01 |             |  | Statement regarding computation of ratios.                                                                                                                                                                                                                       
|        | 21.01 |             |  | Subsidiaries of Metropolitan.