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                                 United States
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                               ----------------

                                   FORM 10-K

                               ----------------

(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, 1998

                                      OR

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   EXCHANGE ACT OF 1934

                 For the transition period from       to
 
                        Commission file number 0-22041

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

             Washington                                   91-0609840 
       (State of incorporation)                        IRS Employer No.

   601 West First Avenue Spokane, WA                      99201-5015
    (Address of Principal executive                       (Zip Code)
               offices)

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

       Securities registered pursuant to Section 12(b) of the Act: None

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

                            Preferred Stock Series:
              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
              Variable Rate Cumulative Preferred Stock, Series E-7
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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  [_]

  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)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]

  The voting stock of the registrant is not 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 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.

  The number of shares of the Registrant's Class A Common Stock outstanding as
of December 1, 1998 was 130.

                   Documents incorporated by reference: None
 
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                                    PART I
 
Item 1. Business.
 
                             ORGANIZATIONAL CHART
                          (as of September 30, 1998)
 
                             [CHART APPEARS HERE]
 
  The above chart lists Metropolitan Mortgage & Securities Co., Inc.'s
("Metropolitan") principal operating subsidiaries and their ownership
(together with Metropolitan the "Consolidated Group").
 
  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 Co.,
Inc.
 
  Consumers Insurance Co., Inc.: Inactive property and casualty insurer, its
principal business activity is being a shareholder of Western United Life
Assurance Company.
 
  Western United Life Assurance Company: Metropolitan's largest active
subsidiary and the largest active company within the Consolidated Group, is
engaged in investing in Receivables and other investments principally funded
by annuity contract sales and life insurance policies.
 
  Metwest Mortgage Services, Inc.: Performs loan origination, collection and
servicing functions for the Consolidated Group and others. It is an FHA/HUD
licensed servicer and lender and is licensed as a Fannie Mae seller/servicer.
--------
*  The remaining 3.5% of Consumers Group Holding Co., Inc. is owned by Summit
   Securities, Inc., an affiliate of Metropolitan.
 
                                       1
<PAGE>
 
                               BUSINESS OVERVIEW
 
GENERAL
 
  Metropolitan was established in 1953. Through growth and acquisitions it has
developed into a diversified institution with assets exceeding $1 billion. Its
principal subsidiaries are Western United Life Assurance Company ("Western
United"), an annuity and life insurance company, and Metwest Mortgage
Services, Inc. ("Metwest"), a Receivable servicer and loan originator. The
Consolidated Group had 603 full time equivalent employees at September 30,
1998.
 
  The Consolidated Group'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 Receivables primarily consist of real estate contracts
and promissory notes collateralized by first position liens on real estate.
The Consolidated Group predominantly invests in Receivables where the borrower
or the collateral does not qualify for conventional financing or the seller or
the buyer chose to use non-conventional financing. This market is commonly
referred to as the non-conventional market. Obligors on the Consolidated
Group's real estate Receivables includes A-, B and C credit quality obligors.
See "RECEIVABLE INVESTMENTS." In addition to investing in existing
Receivables, the Consolidated Group began originating non-conventional, A-, B
and C credit borrower loans during late fiscal 1996 through Metwest. See
"RECEIVABLE INVESTMENTS--Receivable Acquisitions--Loan Originations Sources."
Metropolitan and its subsidiaries also acquire other types of Receivables,
including, but not limited to, lottery prizes, structured settlements and
annuities. See "RECEIVABLE INVESTMENTS--Receivables Acquisitions--Lotteries,
Structured Settlements and Annuities Sources."
 
  All Receivables are purchased at prices calculated to provide a desired
yield. Often, in order to obtain the desired yield, a Receivable will be
purchased at a discount from its face amount or at a discount from its present
value. See "RECEIVABLE INVESTMENTS--Yield and Discount Considerations." The
Consolidated Group strives to achieve a positive spread between its
investments and its cost of funds.
 
  Metwest performs Receivable servicing and collections for itself,
Metropolitan and Western United, as well as other entities. See "RECEIVABLE
INVESTMENTS--Servicing and Collection Procedures, and Delinquency Experience."
Also see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" under Item 13.
 
  In addition to the Consolidated Group's Receivable investments, Western
United 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 security hedging investments and subordinate
certificates and residual interests created out of Receivable securitizations.
See "SECURITIES INVESTMENTS" and "RECEIVABLE INVESTMENTS--Receivable Sales."
 
  The Consolidated Group has developed several funding sources. These sources
include collateralized lines of credit; the sale of Receivables, including
sales through securitizations; Receivable investment income; the issuance of
annuity and life insurance policies; the sale of debentures and preferred
stock; the sale of real estate; and securities portfolio earnings. See "
SECURITIES INVESTMENTS--Method of Financing."
 
  Metropolitan also sells and, through the services of Summit Property
Development, Inc. ("Summit PD"), an affiliate of Metropolitan, develops real
estate primarily as the result of repossessions of property securing
Receivables or in exchange for property securing Receivables that have been
repossessed. In addition, Metropolitan is the developer of a timeshare resort,
Lawai Beach Resort, located on Kauai, Hawaii, and certain other developments.
See "REAL ESTATE DEVELOPMENT."
 
  The Consolidated Group provides services to certain affiliated entities (the
"Affiliated Companies") for a fee and engages in various business transactions
with these entities. The Affiliated Companies are National Summit Corp. and
its principal subsidiaries which include Summit Securities, Inc. ("Summit"),
Old Standard Life Insurance Company ("Old Standard"), Old West Life Insurance
& Annuity Company ("Old West"),
 
                                       2
<PAGE>
 
Summit PD and Metropolitan Investment Securities, Inc. ("MIS"). The Affiliated
Companies are affiliated with the Consolidated Group because of the common
control of the Consolidated Group and the Affiliated Companies by C. Paul
Sandifur, Jr. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" under
Item 13.
 
FACTORS AFFECTING FUTURE OPERATING RESULTS
 
  The provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act"), became effective in December 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:
 
Rising interest rates could      If interest rates rise, profitability and the
negatively effect the          fair value of equity of the Consolidated Group
profitability and the fair     could decline. Higher interest rates could
value of equity of the         cause interest expenses to increase faster than
Consolidated Group             it will cause interest revenues to increase,
                               because more liabilities than financial assets
                               are scheduled to reprice or mature for the
                               Consolidated Group during the fiscal year that
                               began on October 1, 1998.
 
Falling interest rates could     If interest rates fall, the profitability and
negatively effect the          the fair value of equity of the Consolidated
profitability and the fair     Group may decline because of refinancing of
value of equity of the         Receivables. When interest rates fall,
Consolidated Group             borrowers have an incentive to refinance their
                               Receivables by taking out new loans at a lower
                               rate of interest and repaying existing loans
                               having a higher rate of interest in full.
                               Because the Receivables with the higher rate of
                               interest may be repaid early, the interest
                               earned by the Consolidated Group may decline.
 
Dependence on the sale or        The Consolidated Group currently sells and
securitization of              securitizes pools of Receivables and intends to
Receivables                    continue to sell and securitize pools of
                               Receivables. Several factors affect the
                               Consolidated Group's ability to securitize or
                               sell pools of Receivables, including conditions
                               in the securities markets generally, conditions
                               in the asset-backed securities markets
                               specifically, the credit quality of the
                               Receivables, compliance of the Consolidated
                               Group's Receivables with the eligibility
                               requirements established by the securitization
                               documents and the absence of any material
                               downgrading or withdrawal of ratings given to
                               securities issued in the Consolidated Group's
                               previous securitizations. The Consolidated
                               Group's financial performance and growth
                               prospects may be adversely effected if they
                               cannot favorably sell or securitize
                               Receivables, or if they are completely unable
                               to sell or securitize Receivables.
 
                                       3
<PAGE>
 
Residual and subordinate         The Consolidated Group owns subordinated and
interests in securitizations   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 based on assumptions,
                               including anticipated prepayments, defaults and
                               losses of the securitized Receivables. If those
                               assumptions are inaccurate, the Consolidated
                               Group will have overvalued these interests on
                               its balance sheet, overstated income and will
                               earn less income than was anticipated.
 
Risk that foreclosure on         Foreclosure, bankruptcy and other similar
mortgages will delay or        proceedings used to enforce mortgage loans are
reduce payments on             generally subject to principals of equity which
Receivables                    are designed to relieve the indebted party from
                               the legal effect of such 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 principal 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.
 
Real estate used as              Most of the Receivables purchased by the
collateral to cover losses     Consolidated Group are collateralized by real
on Receivables may be          estate to provide collateral if a borrower
inadequate                     defaults on such borrower's mortgage. The real
                               estate used as collateral may be insufficient
                               to cover any loss in the event of foreclosure.
                               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 values, zoning,
                               land use, environmental laws and other legal
                               restrictions, including restrictions on the
                               timing and methods of foreclosure.
 
Risk of default on               The Consolidated Group purchases some
Receivables not                Receivables that are not collateralized, such
collateralized                 as annuities, lottery prizes, structured
                               settlements or other investments. In these
                               cases, since the Consolidated Group does not
                               have collateral in a specific asset, it relies
                               instead upon a promise to pay from an insurance
                               company, a state government or other entity.
                               There is a risk that the payor will not keep
                               its promise to pay and will default.
 
Underwriting may                 Metropolitan underwrites the Receivables that
insufficiently evaluate the    are purchased by the Consolidated Group. Many
risk of losses on              of the purchased receivables were originated by
Receivables                    sellers and other non-institutional lenders.
                               Therefore, the underwriting standards used to
                               originate such loans may have been less strict
                               than the standards that are typically used when
                               underwriting conventional mortgage loans.
                               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, there is no
                               assurance that these underwriting procedures
                               will be effective.
 
 
                                       4
<PAGE>
 
Insurance subsidiary             At September 30, 1998, approximately 77% of
earnings may be unavailable    the Consolidated Group's assets were held by
for dividends and fees         its insurance subsidiary, Western United.
                               Insurance company regulations restrict the way
                               in which an insurance company can transfer
                               assets and the amount of money that can be paid
                               out in dividends by the insurance company. To
                               use money for dividends, the insurance company
                               must obtain permission from the insurance
                               commissioner in the state of domicile of the
                               insurance company. These restrictions on the
                               ability to declare dividends and transfers of
                               assets could have an adverse effect on
                               Metropolitan's financial performance and
                               ability to meet its debt obligations and
                               preferred stock dividend payments.
 
Dependence on future             The Consolidated Group earns revenue
offerings to meet              primarily from Receivable and other
obligations                    investments, the sale of annuities and life
                               insurance, the sale or securitization of
                               Receivables, the sale of debentures and the
                               sale of preferred stock. The cash flows from
                               the existing assets has been adequate during
                               the past five years to satisfy the demand for
                               payment of maturing debentures and to pay
                               preferred stock dividends. However, the
                               Consolidated Group's ability to repay
                               debentures and preferred stock dividends that
                               become due in the future and other outstanding
                               obligations depends in part on the success of
                               future public offerings of debentures and
                               preferred stock.
 
An increase in life              An increase in the termination rate of
insurance and annuity          annuity contracts and life insurance policies
termination rates may          would tend to decrease the earnings of Western
decrease earnings              United. If terminations increase, costs would
                               increase because the insurance subsidiaries
                               would have to expense the unamortized deferred
                               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
                               effected by several factors, including changes
                               in interest rates, competition and changes in
                               tax and other regulations. Management cannot
                               predict the future rate of termination of life
                               insurance and annuity policies.
 
Environmental conditions and     The Consolidated Group acquires properties in
regulations                    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 liable for
                               the costs of removal or remediation of
                               hazardous or toxic substances on, under, in or
                               near the effected property. While the
                               Consolidated Group tries to avoid acquiring
                               properties or Receivables collateralized by
                               properties which may be contaminated, the
                               Consolidated Group may sustain significant
                               losses due to such liability.
 
The Consolidated Group may       The government can place a lien on
be liable for environmental    environmentally contaminated property to
clean-up on real estate        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 if they own real
                               property subject to
 
                                       5
<PAGE>
 
                               these liens, or indirectly if they participate
                               in a securitization of property and have a role
                               in the day-to-day management of the facility or
                               property. Environmental assessments to
                               determine whether certain properties are
                               contaminated are rarely performed by the
                               Consolidated Group, and even where they are
                               performed, there is no guarantee that the
                               Consolidated Group will be insulated from
                               liability for an environmental condition.
 
Conflicts of interest among      Certain officers and directors of companies
related companies              affiliated with the Consolidated Group are also
                               employees of the Consolidated Group. In
                               addition, the Consolidated Group provides
                               services to affiliated companies. These factors
                               may lead to conflicts of interest such as which
                               company receives a particular securities sale
                               and how Receivables are distributed among or
                               between separate companies. Old Standard and
                               Old West may compete with the Consolidated
                               Group in acquiring Receivables and for the sale
                               of annuities. Also, the Consolidated Group may
                               compete with Summit for the sale of securities.
 
Year 2000 compliance             The Year 2000 problem arises from the use by
                               software developers of two digits rather than
                               four to denote year dates in software programs,
                               computer hardware operating systems and
                               microprocessor based embedded controls in
                               automated equipment. As a result, information
                               systems that operate date sensitive software or
                               automated equipment that contains date
                               sensitive microprocessors may interpret "00" to
                               signify 1900 rather than 2000, thereby
                               impairing the ability of the information
                               systems or automated equipment to correctly
                               calculate, sequence or recognize dates. This
                               could result in serious malfunctions or
                               complete failures of affected systems,
                               including an inability to process transactions,
                               issue securities or checks, or engage in other
                               normal business activities.
 
                                 We are conducting tests on our internally
                               developed and supported software, hardware and
                               facilities systems for Year 2000 compliance and
                               are reviewing and working with outside vendors
                               regarding compliance on ancillary systems and
                               services involved with our business operations.
                               Additionally, we are developing contingency
                               plans in the event that a Year 2000 related
                               problem or failure occurs. We believe that we
                               will be compliant prior to the year 2000.
                               However, in the event that there are computer
                               problems arising out of a failure of such
                               efforts our business operations could be
                               negatively impacted since the conduct of our
                               business in relationship to purchasing
                               Receivables, servicing or administering the
                               Receivables, the sale and administration of
                               annuities, life insurance and the sale and
                               administration of securities all rely heavily
                               on computer programs and systems for processing
                               our business transactions.
 
                                       6
<PAGE>
 
                            RECEIVABLE INVESTMENTS
 
INTRODUCTION
 
  Metropolitan has been investing in Receivables for its own account for over
forty years. Metropolitan also provides Receivable acquisition and
underwriting services to its subsidiary, Western United, and to Old Standard,
Old West and Summit. See "--Management and Receivable Acquisition Services."
Also see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" under Item 13. The
evaluation, underwriting and closing operations are performed at
Metropolitan's headquarters in Spokane, Washington. The following information
describes the Consolidated Group's Receivable acquisition and underwriting
procedures undertaken on its behalf by Metropolitan as of September 30, 1998.
These practices may be amended, supplemented and changed at any time at the
discretion of the Consolidated Group.
 
  Unless otherwise indicated in this section and in the sections entitled
"SECURITIES INVESTMENTS" and "REAL ESTATE DEVELOPMENT," or unless the context
otherwise requires, references to a year (e.g. 1998) refer to the fiscal year
ended September 30 of that year.
 
 Types of Receivables
 
  The Consolidated Group's Receivable acquisitions include two principal types
of Receivables: 1) Receivables collateralized by real estate (both the
acquisition of existing loans and the origination of loans principally
involving residential properties) and 2) alternative cash flows consisting of
lottery prizes, structured settlements, annuities and other cash flows.
 
 Secondary Mortgage Markets
 
  The market for the acquisition of existing real estate Receivables is
commonly referred to as the secondary mortgage market. The secondary mortgage
market includes individual Receivables which are held and sold by individual
investors. These Receivables are typically the result of seller-financed sales
of real estate. The secondary mortgage market also includes the sale and
resale of pools of Receivables which can be seller financed, or originated or
acquired by a financial institution. The Consolidated Group acquires both
individual and to a lesser extent pools of Receivables.
 
 Receivable Acquisition Volume
 
  Metropolitan's Receivable acquisition activities (total activities for
itself and for others), grew from approximately $382.1 million in 1996, to
$390.0 million in 1997 and $494.3 million in 1998. During 1998, the average
monthly acquisition volume was approximately $41.2 million. At the same time,
Metropolitan's median closing time decreased to approximately 13 days by
September 30, 1998, in comparison to 14 days in 1997 and 20 days in 1996.
Management considers closing time to be an important factor in a seller's
decision to sell a Receivable to Metropolitan.
 
RECEIVABLES ACQUISITIONS
 
  Metropolitan has developed marketing techniques, sources and underwriting
practices for each of its different types of Receivables. In general, the real
estate Receivables acquired or originated by the Consolidated Group consist of
non-conventional (A-, B and C credit grade) loans. These types of Receivables
possess characteristics which differ from 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. This type of lending requires that the lender focus on the quality
of the collateral as the ultimate recourse in the event of the borrower's
default and also, to a lesser extent, the ability of the borrower to repay.
 
 Individual Receivable Acquisitions
 
  Historically, the majority of the Consolidated Group's real estate
Receivables were acquired 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 who own and wish to sell a
Receivable.
 
                                       7
<PAGE>
 
  Metropolitan's acquisition strategy is designed to provide flexible
structuring and pricing alternatives to the real estate Receivable seller as
well as short closing times. Metropolitan believes these are key factors to
Metropolitan's ability to attract and purchase such Receivables. In order to
enhance its position in this market, Metropolitan has implemented the
following acquisition strategies: 1) centralizing acquisition activities, 2)
expanding the use of Metropolitan's Receivable submission software,
BrokerNet(R), 3) implementing flexible and strategic pricing and closing
programs, and 4) designing and implementing broker incentive 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.
 
 Pool Acquisition Sources
 
  Approximately $32 million or 8% of total real estate Receivables acquired
during fiscal 1998 were acquisitions of pools of real estate Receivables
through Metropolitan's capital markets department. These portfolios of real
estate Receivables may be seller originated, or institutionally originated.
They may be acquired from brokers, banks, savings and loan organizations,
mortgage brokerage firms or other financial institutions.
 
  Over the years, Metropolitan has built relationships with several brokers
and lenders who provide a regular flow of potential acquisitions to the
capital markets department. In addition, other brokers learn about
Metropolitan through word of mouth and contact Metropolitan directly. Finally,
some leads on loan pools are generated by direct calls to lending institutions
or brokers.
 
  The capital markets department acquisitions are typically negotiated through
direct contact with the selling broker or the portfolio departments at the
various selling institutions or acquired through bidding at an auction. The
closing costs per loan for institutional acquisitions are frequently lower
than private secondary mortgage market acquisitions. However, the investment
yield generally is lower for institutional acquisitions than for private
market acquisitions.
 
  Metropolitan has recently hired additional sales and support staff and is
exploring new marketing methods in an attempt to continue to increase its
institutional pool purchase activities.
 
 Loan Originations Sources
 
  During the last quarter of fiscal 1996, Metropolitan's subsidiary, Metwest,
began originating first priority lien residential mortgage loans, both with
fixed and adjustable interest rates. Metwest is currently licensed for such
mortgage loans as a lender, or is exempt from licensing, in twenty-nine
states.
 
  Metwest originates real estate loans through licensed mortgage brokers who
submit loan applications on behalf of a borrower. Before Metwest will enter
into a broker agreement, the mortgage broker must demonstrate that it is
properly licensed, experienced and knowledgeable in lending.
 
  During 1998, Metwest originated an average of approximately 101 real estate
loans per month including loans made to facilitate the resale of repossessed
real estate. This volume was below original projections. In an effort to
increase this volume, Metwest is making both procedural and staffing
revisions. Also, Metwest has continued to develop new pricing programs for
loan originations. There can be no assurance that these efforts will increase
origination volume.
 
 Correspondent Lending Sources
 
  Beginning in 1997, Metropolitan began acquiring real estate loans through
loan correspondent agreements. Under these agreements Metropolitan agrees to
purchase loans at a specified yield immediately after their origination, so
long as the loans comply with Metropolitan's specified underwriting
guidelines. Many of these loans are insured by a primary mortgage guaranty
insurance policy. In addition, loan correspondents may also submit loans which
do not meet established underwriting guidelines for individual evaluation and
pricing, which is done by Metwest. Each correspondent makes standard
representations and warranties with respect to each loan
 
                                       8
<PAGE>
 
and has certain limited repurchase obligations. Metropolitan has added staff
to support growth in its correspondent lending activities. There can be no
assurance that these efforts will increase correspondent lending volumes.
 
 Real Estate Receivable Underwriting
 
  Metropolitan's loan correspondent underwriting guidelines and Metwest's real
estate loan origination guidelines apply criteria which include (i) evaluating
the borrower's credit, which may include credit scores, income and debt to
income ratios; (ii) obtaining and reviewing a current appraisal of the
collateral; (iii) evaluating the property type; (iv) comparing the loan amount
to the collateral value; and (v) evaluating the economics of the region where
the collateral is located. For certain, but not all, loans with higher loan-
to-value ratios mortgage insurance is required. In addition, title insurance
in an amount equal to the Receivable balance at the time of our acquisition is
generally obtained. Generally, a lower credit rating would result in a higher
required down payment, higher collateral value to loan amount and/or a higher
interest rate or yield, which is obtained through a discounted purchase price.
Unlike the seller financed real estate Receivables purchased in the private
secondary mortgage market, the real estate loans originated by Metwest,
certain pool acquisitions and the loans purchased through Metropolitan's loan
correspondent program have standardized documentation and terms. In addition,
the real estate Receivables acquired or originated for inclusion in
securitization pools generally have more stringent underwriting guidelines
than other acquired or originated real estate loans.
 
 Lotteries, Structured Settlements and Annuities Sources
 
  Metropolitan also negotiates the purchase of Receivables which are not
collateralized by real estate, such as structured settlements, annuities and
lottery prizes. The lottery prizes generally arise out of state operated
lottery games which are typically paid in annual installments to the prize
winner. The structured settlements generally arise out of the settlement of
legal disputes where the prevailing party is awarded a sum of money, payable
over a period of time, generally through the creation of an annuity. Other
annuities generally consist of investments which cannot be cashed in directly
with the issuing insurance company. Metropolitan's source for these
investments is generally private brokers who specialize in these types of
Receivables.
 
 Lotteries, Structured Settlements and Annuities Underwriting
 
  In the case of all annuity purchases, Metropolitan's underwriting guidelines
generally include a review of: (1) an application for sale of structured
benefits which requests certain information regarding (i) the annuitant,
including current employment, (ii) the annuity policy, and (iii) the nature of
the claim and injuries sustained in connection with the structured settlement;
(2) a copy of the executed settlement agreement or judgment, if applicable;
and (3) a copy of the executed annuity policy together with any qualified
assignments. In certain circumstances Metropolitan waives certain of these
submission requirements if, in its sole best judgment, it determines that the
failure to have those documents would not impair the acquiring company's
interest in the structured settlement. Upon submission of the file, the
closing department will obtain a credit report regarding the annuitant and the
most current credit rating of the annuity issuer. Furthermore, Metropolitan
will conduct a Uniform Commercial Code ("UCC") search by county or state where
applicable, 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.
 
  When underwriting a structured settlement, Metropolitan will review the
credit report, the annuitant's completed purchase application, the results of
the UCC search, and the terms of the settlement and annuity policy, among
other things. Metropolitan will not knowingly purchase settlements paid to a
trust containing a spendthrift clause nor will it purchase settlements where
the payments are the annuitant's sole source of income, where the loss of
income would significantly damage the livelihood of the annuitant or where the
payments are used exclusively for the payment of medical necessities.
Metropolitan will not purchase payments from a minor without a court order
approving the transaction or from annuitants who are currently members of the
armed forces or from annuitants that do not otherwise have the legal capacity
to contract without a court order. Metropolitan will not purchase settlements
from annuitants that evidence a pattern of fraudulent behavior. In
 
                                       9
<PAGE>
 
underwriting a structured settlement, Metropolitan will confirm that the
settlement is not a workers compensation settlement agreement or retirement or
pension benefit.
 
  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 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, in order to sell a state lottery prize the winner must
obtain a court order permitting the sale. In those states, Metropolitan
requires a certified copy of the court order.
 
 Other Receivables
 
  Metropolitan continually seeks opportunities in new Receivable markets.
Metropolitan currently has Receivable programs involving the acquisition of
conservation reclamation programs, farm subsidies and similar cash flows.
These programs account for a minimal amount of Metropolitan's current and
projected Receivable acquisition volume. However, Metropolitan always remains
open to new opportunities that may arise for the acquisition of new types of
Receivables.
 
YIELD AND DISCOUNT CONSIDERATIONS
 
  Metropolitan negotiates all Receivable acquisitions at prices calculated to
provide a desired yield. Often this results in a purchase price less than the
Receivable's unpaid balance, or less than its present value (assuming a fixed
discount rate). The difference between the unpaid balance or present value and
the purchase price is the "discount." The amount of the discount will vary in
any given transaction depending upon the Consolidated Group's yield
requirements 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.
 
  For Receivables of all types, the discounts originating at the time of
purchase, net of capitalized acquisition costs, are amortized on an individual
basis using the level yield (interest) method over the remaining contractual
term of the Receivable.
 
  A greater effective yield can also be achieved through negotiating
amendments to the Receivable agreements. These amendments may involve
adjusting the interest rate and/or monthly payments, extension of financing in
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.
 
CURRENT MIX OF RECEIVABLE INVESTMENT HOLDINGS
 
  The Consolidated Group's investments in Receivables is concentrated in
Receivables collateralized by first priority liens on single-family
residential property. Management believes that this concentration in
residential real estate presents a lower credit risk than a portfolio
predominantly collateralized by commercial property or unimproved land. It
also believes that much of the risk in the portfolio is further dissipated by
the large number of relatively small Receivables, the geographic dispersion of
the collateral and the collateral value to investment amount requirements.
 
  At the time of acquisition, the face value of Receivables collateralized by
real estate generally range in size from approximately $15,000 to $300,000.
During 1998, the average real estate Receivable balance at the time of
acquisition by the Consolidated Group was approximately $58,000. See "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS--Note 3" under Item 8.
 
  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.
 
                                      10
<PAGE>
 
  The following charts present information regarding type of real estate
collateral, geographical distribution and lien priority of the Consolidated
Group's portfolio of outstanding real estate Receivables as of September 30,
1998.
 
PIE CHARTS SHOWING BREAKDOWNS OF RECEIVABLES BY TYPE, SECURITY POSITION, AND
ASSET TYPE:

1. Distribution of Receivables By Collateral Type (September 30, 1998)

   Residential                                              74%
   Commercial                                               14%
   Farms, Land, Other                                       12%

2. Distribution of Receivables (collateralized by real estate) by Security
   Position (September 30, 1998)

   First Lien Position                                      99%
   Second Lien or Lower Position                             1%

3. Distribution of Assets as a Percentage of Total Assets

   Cash and Cash Equivalents                                 3%
   Securities Investments                                   13%

   Receivables Collateralized by Real Estate                50%
   Other Receivables (structured settlements, lotteries 
     and annuities)                                         16%
   Real Estate Held                                          7%

   Deferred Costs                                            6%
   Other                                                     5% 
 
 
 
 
 
 
 
                                      11
<PAGE>
 
                 METROPOLITAN MORTGAGE & SECURITIES CO., INC.


     GRAPH SHOWING MAP OF THE UNITED STATES AND DISTRIBUTION OF RECEIVABLE 
INVESTMENTS BY STATE:

This graph contains a map of the United States which identifies the percent of 
distribution by state of the principal amount of Receivable investments 
(collaterialized by real estate) as of September 30, 1998, for the states with 
1% or more invested:

The following amounts are shown for the following states:

Washington........................  15%
California........................  12%
Texas.............................  10%
Arizona...........................   9%
Florida...........................   7%
Oregon............................   6%
New York..........................   5%
New Mexico........................   4%
Alaska............................   3%
Idaho.............................   3%
Colorado..........................   2%
Montana...........................   2%
Nevada............................   2%
Utah..............................   2%
Arkansas..........................   1%
Connecticut.......................   1%
Georgia...........................   1%
Hawaii............................   1%
Illinois..........................   1%
Indiana...........................   1%
Maryland..........................   1%
Massachusetts.....................   1%
Michigan..........................   1%
Minnesota.........................   1%
Missouri..........................   1%
New Jersey........................   1%
North Carolina....................   1%
Ohio..............................   1%
Oklahoma..........................   1%
Pennsylvania......................   1%
South Carolina....................   1%
Virginia..........................   1%


                       PERCENTAGE DISTRIBUTION BY STATE
     OF THE PRINCIPLE AMOUNT OF RECEIVABLES COLLATERALIZED BY REAL ESTATE
                           AS OF SEPTEMBER 30, 1998


               STATES NOT SHOWING A PERCENTAGE HAVE LESS THAN 1%
 
 
                                       12 
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
                             LOANS ON REAL ESTATE
                              SEPTEMBER 30, 1998
 
  At September 30, 1998, the Consolidated Group held first priority liens
associated with contracts and mortgage note receivables with a face value of
approximately $615 million (99%) and second or lower priority liens of
approximately $9 million (1%). Approximately 29% of the face value of the
Consolidated Group's real estate Receivables are collateralized by properties
located in the Pacific Northwest (Washington, Alaska, Idaho, Montana and
Oregon), approximately 24% by properties located in the Pacific Southwest
(California, Arizona and Nevada), approximately 10% in the Southeast (Florida,
Georgia, North Carolina and South Carolina), approximately 9% in the North
Atlantic (New York, Pennsylvania, New Jersey, Connecticut and Maryland) and
approximately 13% by properties located in the Southwest (Texas and New
Mexico). The face value of the real estate Receivables range principally from
$15,000 to $300,000 with 96 real estate Receivables, aggregating approximately
$53 million, in excess of this range. No individual contract or note is in
excess of 0.4% of the total carrying value of real estate Receivables and less
than 5% of the contracts and notes are subject to variable interest rates.
Contractual interest rates principally range from 6% to 13% per annum with
approximately 94% of the face value of these Receivables within this range.
The weighted average contractual interest rate on these real estate
Receivables at September 30, 1998 is approximately 9.4%. Maturity dates range
from 1998 to 2028.
 
<TABLE>
<CAPTION>
                                      Interest     Carrying    Delinquent  Non Accrual  Number of
                          Number of     Rates     Amount of     Principal   Principal  Non Accrual
    Description          Receivables Principally Receivables     Amount      Amount    Receivables
    -----------          ----------- ----------- ------------  ----------- ----------- -----------
<S>                      <C>         <C>         <C>           <C>         <C>         <C>
RESIDENTIAL
First Mortgage greater than
 $100,000...................      945       6-13%    $150,451,934  $ 7,589,733 $1,623,481       8
First Mortgage greater than
 $50,000....................     1984       6-13%     131,054,371    7,982,302        --       --
First Mortgage less than
 $50,000....................     7730       6-13%     173,825,947   10,109,264        --       --
Second or Lower greater than
 $100,000...................        4        8-9%         455,540          --         --       --
Second or Lower greater than
 $50,000....................       14       7-10%       1,047,682          --         --       --
Second or Lower less than
 $50,000....................      219       6-13%       3,328,275      151,457        --       --
COMMERCIAL
First Mortgage greater than
 $100,000...................      265       6-13%      57,868,536    3,405,491        --       --
First Mortgage greater than
 $50,000....................      250       6-13%      17,772,894      724,282        --       --
First Mortgage less than
 $50,000....................      364       6-13%       9,480,915      454,429        --       --
Second or Lower greater than
 $100,000...................        6       8-10%       2,292,282      177,947        --       --
Second or Lower greater than
 $50,000....................        7       9-12%         553,297          --         --       --
Second or Lower less than
 $50,000....................       16       8-12%         530,875          --         --       --
FARM, LAND AND OTHER
First Mortgage greater than
 $100,000...................      115       8-13%      22,834,543    1,496,631    224,068       1
First Mortgage greater than
 $50,000....................      181       6-13%      12,343,223      218,562        --       --
First Mortgage less than
 $50,000....................    3,123       6-13%      39,211,108    1,679,952        --       --
Second or Lower greater than
 $100,000...................      --          --%             --           --         --       --
Second or Lower greater than
 $50,000....................        3       8-10%         224,849          --         --       --
Second or Lower less than
 $50,000....................       20       8-12%         274,866        9,950        --       --
Unrealized discounts,
 net of unamortized
 acquisition costs, on
 Receivables purchased
 at a discount..............                          (19,729,926)
Accrued Interest
 Receivable.................                           10,357,112
                                                     ------------  ----------- ----------
CARRYING VALUE..............                         $614,178,323  $34,000,000 $1,847,549
                                                     ============  =========== ==========
</TABLE>
 
  The principal amounts of Receivables subject to delinquent principal or
interest is defined as being in arrears for more than three months.
 
                                      13
<PAGE>
 
  The future contractual maturities of the aggregate amounts of Receivables
(face amount) are as follows:
 
<TABLE>
<CAPTION>
                          Residential  Commercial    Farm, Land,      Total
                           Principal    Principal  Other Principal  Principal
                          ------------ ----------- --------------- ------------
<S>                       <C>          <C>         <C>             <C>
October 1998 September
 2001.................... $ 46,603,474 $13,932,981   $15,651,071   $ 76,187,526
October 2001 September
 2003....................   32,911,059   9,283,321     7,264,059     49,458,439
October 2003 September
 2005....................   31,569,559   8,913,569     7,920,438     48,403,566
October 2005 September
 2008....................   47,500,753  12,951,272     9,569,276     70,021,301
October 2008 September
 2013....................   73,473,113  17,654,657    13,190,462    104,318,232
October 2013 September
 2018....................   41,266,554   5,441,008     9,095,150     55,802,712
October 2018 Thereafter..  186,839,237  20,321,991    12,198,133    219,359,361
                          ------------ -----------   -----------   ------------
                          $460,163,749 $88,498,799   $74,888,589   $623,551,137
                          ============ ===========   ===========   ============
</TABLE>
 
                                       14
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
                             LOANS ON REAL ESTATE
                              SEPTEMBER 30, 1997
 
  At September 30, 1997, the Consolidated Group held first priority liens
associated with contracts and mortgage note receivables with a face value of
approximately $520.6 million (99%) and second or lower priority liens of
approximately $7.6 million (1%). Approximately 28% of the face value of the
Consolidated Group's real estate Receivables are collateralized by properties
located in the Pacific Northwest (Washington, Alaska, Idaho, Montana and
Oregon), approximately 20% by properties located in the Pacific Southwest
(California, Arizona and Nevada), approximately 9% in the Southeast (Florida,
Georgia, North Carolina and South Carolina), approximately 9% in the North
Atlantic (New York, Pennsylvania, New Jersey, Connecticut and Maryland) and
approximately 17% by properties located in the Southwest (Texas and New
Mexico). The face value of the real estate Receivables range principally from
$15,000 to $300,000 with 56 real estate Receivables, aggregating approximately
$34.7 million, in excess of this range. No individual contract or note is in
excess of 0.5% of the total carrying value of real estate Receivables, and
less than 4% of the contracts and notes are subject to variable interest
rates. Contractual interest rates principally range from 6% to 13% per annum
with approximately 89% of the face value of these Receivables within this
range. The weighted average contractual interest rate on these real estate
Receivables at September 30, 1997 is approximately 9.4%. Maturity dates range
from 1997 to 2027.
 
<TABLE>
<CAPTION>
                                           Interest     Carrying    Delinquent  Non Accrual  Number of 
                               Number of     Rates     Amount of     Principal   Principal  Non Accrual
    Description               Receivables Principally Receivables     Amount      Amount    Receivables
    -----------               ----------- ----------- ------------  ----------- ----------- -----------
<S>                           <C>         <C>         <C>           <C>         <C>         <C>         
RESIDENTIAL
First Mortgage greater than
 $100,000...................       509       6-13%    $ 78,734,868  $ 7,535,954 $1,506,750       9
First Mortgage greater than
 $50,000....................     1,580       6-13%     107,372,840    6,765,551        --       --
First Mortgage less than
 $50,000....................     8,687       6-13%     181,186,443   13,178,218        --       --
Second or Lower greater than
 $100,000...................         4       8-11%         659,050      156,878        --       --
Second or Lower greater than
 $50,000....................         7       7-12%         480,016       65,686        --       --
Second or Lower less than
 $50,000....................       220       6-13%       3,337,545       96,903        --       --
COMMERCIAL
First Mortgage greater than
 $100,000...................       209       6-13%      48,492,725    3,887,374    482,817       2
First Mortgage greater than
 $50,000....................       182       6-13%      13,199,135      677,704        --       --
First Mortgage less than
 $50,000....................       317       6-13%       7,917,653      262,922        --       --
Second or Lower greater than
 $100,000...................         4       5-11%       1,559,883          --         --       --
Second or Lower greater than
 $50,000....................         5       7-12%         407,624          --         --       --
Second or Lower less than
 $50,000....................        10       8-11%         303,122          --         --       --
FARM, LAND AND OTHER
First Mortgage greater than
 $100,000...................        84       8-15%      27,214,026    1,326,710        --       --
First Mortgage greater than
 $50,000....................       178       6-13%      11,513,233      313,881        --       --
First Mortgage less than
 $50,000....................     2,487       6-13%      45,195,703    1,620,079        --       --
Second or Lower greater than
 $100,000...................         1         14%         100,000      100,000        --       --
Second or Lower greater than
 $50,000....................         3       9-10%         227,634          --         --       --
Second or Lower less than
 $50,000....................        30       9-12%         306,057       12,140        --       --
Unrealized discounts,
 net of unamortized
 acquisition costs, on
 Receivables purchased
 at a discount..............                           (24,642,792)
Accrued Interest
 Receivable.................                             9,299,336
                                                      ------------  ----------- ----------
CARRYING VALUE..............                          $512,864,101  $36,000,000 $1,989,567
                                                      ============  =========== ==========
</TABLE>
 
  The principal amounts of Receivables subject to delinquent principal or
interest is defined as being in arrears for more than three months.
 
                                      15
<PAGE>
 
  The future contractual maturities of the aggregate amounts of Receivables
(face amount) are as follows:
 
<TABLE>
<CAPTION>
                          Residential  Commercial    Farm, Land,      Total
                           Principal    Principal  Other Principal  Principal
                          ------------ ----------- --------------- ------------
<S>                       <C>          <C>         <C>             <C>
October 1997 September
 2000.................... $ 40,400,913 $11,167,553   $22,990,756   $ 74,559,222
October 2000 September
 2002....................   33,771,278   9,163,174     9,742,636     52,677,088
October 2002 September
 2004....................   32,216,791   6,381,830     6,795,393     45,394,014
October 2004 September
 2007....................   46,889,093  11,374,072    12,310,724     70,573,889
October 2007 September
 2012....................   68,260,410  13,429,000    16,920,159     98,609,569
October 2012 September
 2017....................   44,494,614   5,288,840     6,384,637     56,168,091
October 2017 Thereafter..  105,737,663  15,075,673     9,412,348    130,225,684
                          ------------ -----------   -----------   ------------
                          $371,770,762 $71,880,142   $84,556,653   $528,207,557
                          ============ ===========   ===========   ============
</TABLE>
 
                                       16
<PAGE>
 
  The following tables present certain statistical information regarding the
Consolidated Group's Receivable investment activity during the three fiscal
years ended September 30, 1998.
 
<TABLE>
<CAPTION>
                                                        Year Ended or at
                                                         September 30,
                                                   ----------------------------
                                                     1998      1997      1996
                                                   --------  --------  --------
                                                     (Dollars in Thousands)
<S>                                                <C>       <C>       <C>
DISCOUNTED REAL ESTATE RECEIVABLES PURCHASED
 DURING PERIOD
  Number.........................................     5,263     5,919     4,969
  Average Face Amount............................  $     58  $     51  $     52
  Face Amount....................................  $307,170  $300,450  $256,486
  Unrealized Discounts, Net of Acquisition Costs.   (11,208)  (16,918)  (24,718)
  Underlying Obligations Assumed(1)..............      (707)   (1,810)   (3,634)
                                                   --------  --------  --------
                                                   $295,255  $281,722  $228,134
                                                   ========  ========  ========
DISCOUNTED REAL ESTATE RECEIVABLES OUTSTANDING AT
 END OF PERIOD
  Number.........................................    11,468    10,733    13,358
  Face Amount....................................  $509,736  $442,958  $548,538
  Unrealized Discounts, Net of Unamortized
   Acquisition Costs.............................   (19,730)  (24,643)  (38,607)
                                                   --------  --------  --------
  Net Balance....................................  $490,006  $418,315  $509,931
                                                   --------  --------  --------
TOTAL REAL ESTATE RECEIVABLES OUTSTANDING AT END
 OF PERIOD(2)
  Number.........................................    15,246    14,517    20,573
                                                   --------  --------  --------
  Face Amount Discounted Receivables.............  $509,736  $442,958  $548,538
  Face Amount Originated Receivables.............   113,815    85,250   132,641
                                                   ========  ========  ========
  Total Outstanding Receivables..................   623,551   528,208   681,179
  Unrealized Discounts Net of Unamortized
   Acquisition Costs.............................   (19,730)  (24,643)  (38,607)
  Accrued Interest Receivable....................    10,357     9,299     8,361
                                                   --------  --------  --------
 Net Balance.....................................  $614,178  $512,864  $650,933
                                                   ========  ========  ========
Average Net Balance per Receivable (Excluding
 Accrued Interest)...............................  $   39.6  $   34.7  $   31.2
Average Annual Yield on Discounted and Originated
 Receivables(3)..................................      10.6%     11.5%     11.9%
</TABLE>
--------
(1) Consisting of pre-existing first lien position Receivables which remain
    when the Consolidated Group invests in second lien position Receivables.
 
(2) Approximately 18% of the portfolio at September 30, 1998, 16% of the
    portfolio at September 30, 1997 and 19% of the portfolio at September 30,
    1996 represented financing for resales of repossessed properties and other
    originated Receivables.
 
(3) Yield on real estate Receivables represent gross interest and earned
    discount revenues, net of amortized acquisition costs, prior to any
    overhead allocation and losses recorded following foreclosure. The reasons
    for changes in yield are (i) fluctuations in the rate of actual
    prepayments; (ii) securitization and sale of Receivables; (iii) the
    changing mix of Receivable purchases between those originated from
    Metropolitan's network of offices and those purchased in bulk; (iv) the
    amortization of the existing portfolio; and (v) the amount of discount on
    Receivables purchased.
 
  At September 30, 1998, the average contractual interest rate on Receivables
collateralized by real estate (weighted by principal balances) was
approximately 9.4%.
 
                                      17
<PAGE>
 
SERVICING AND COLLECTION PROCEDURES, AND DELINQUENCY EXPERIENCE
 
  The servicing and collection of Receivables of all types owned by the
Consolidated Group is performed by Metwest. Metwest also services the
Receivables of Summit, Old Standard, and Old West, as well as Receivables sold
through securitizations. Metwest uses a flexible computer software program,
Sanchez, to monitor and service the Receivables. The Consolidated Group
considers consistent and timely collection activity to be critical to
successful servicing and minimization of foreclosure losses for its
Receivables portfolio.
 
  Fees for providing servicing and collection services to Metropolitan and
Western United had no impact on the results of operations of the Consolidated
Group during fiscal 1998 as they are eliminated in the consolidated financial
statements. Fees for providing servicing and collection services to the trusts
holding securitized pools and to Summit, Old Standard and Old West were
approximately $2,928,000, before deducting amortization and valuation of
servicing rights of approximately $2,089,000, during fiscal 1998. These
charges to parties outside the Consolidated Group provide an additional source
of income to the Consolidated Group.
 
  The principal amount of Receivables collateralized by real estate held by
the Consolidated Group (as a percentage of the total outstanding principal
amount of Receivables) which was in arrears for more than ninety days at the
end of the following fiscal years was:
 
<TABLE>
      <S>                                                                   <C>
      1998................................................................. 5.5%
      1997................................................................. 6.8%
      1996................................................................. 3.9%
</TABLE>
 
  The real estate Receivables purchased or originated by the Consolidated
Group are A-, B and C credit Receivables. Accordingly, in comparison to
conventional "A" credit lenders, higher delinquency rates are expected which
Management believes are generally offset by higher yields and the value of the
underlying collateral. As a result, Management believes losses from resales of
repossessed properties are generally lower than might otherwise be expected
given the delinquency rates. In addition, the Consolidated Group is
compensated for the risk associated with delinquencies through Receivable
yields that are greater than those typically available through the
conventional, "A", credit lending markets. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Provision for
Losses on Real Estate Assets" under Item 7.
 
  Once a real estate Receivable payment becomes five days delinquent, the
Receivable is reported to a front-end collector who may place a collection
call to the payor. Generally, if a payment becomes seven days past due, a late
notice will automatically be sent to the payor notifying the payor of the
delinquency and the applicable late charge. When 10 days delinquent, the
Receivable will be assigned to a collector who will attempt to make verbal
contact with the payor no later than the twenty-ninth day of delinquency. The
collector works closely with a more senior collector in a team environment. If
no satisfactory arrangement is made by the twenty-second day of delinquency a
pre-litigation (demand) letter will be sent to the payor. Additionally at the
thirtieth day of delinquency the senior collector for that team will attempt
to make contact with the payor. If verbal contact or satisfactory arrangements
are not made by the forty-fifth day, a decision matrix is used to determine
whether to forward the file: (i) to the loan modification center for a workout
solicitation or acceleration; (ii) to the foreclosure department; or (iii) to
the pre-foreclosure committee for review to determine the best method for
solving the delinquency (either through additional workout attempts or through
foreclosure). Generally, for those loans for which verbal contact has been
made, a collector will work with the borrower to bring the loan current, or
refer the loan to the loan modification center for a work out.
 
  When a lottery, structured settlement, or annuity becomes delinquent,
Metwest attempts to commence collection efforts within four days from a missed
payment. Generally, these collection efforts consist of sending a letter to
the Receivable seller and following up with telephone contact. If these steps
have not resolved the delinquency, legal action to enforce payment is
commenced within approximately two weeks from the date of delinquency.
 
                                      18
<PAGE>
 
ALLOWANCE FOR LOSSES ON REAL ESTATE ASSETS
 
  The Consolidated Group establishes an allowance for expected losses on real
estate assets (both Receivables collateralized by real estate and repossessed
real estate). This allowance is based upon a statistical valuation or
traditional appraisal of the Consolidated Group's real estate holdings for
each delinquent Receivable having a principal balance greater than $100,000.
In addition, the Consolidated Group calculates an allowance for losses on
delinquent Receivables having a principal balance below the $100,000 threshold
based upon its historical loss experience. The Consolidated Group reviews the
results of its resales of repossessed real estate to identify any market
trends and to document the Group's historical experience on such sales. The
Consolidated Group adjusts its allowance for losses requirement, as
appropriate, based upon such observed trends in delinquencies and resales. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Provision for Losses on Real Estate Assets" under Item 7.
 
  The following table outlines the Consolidated Group's changes in the
allowance for losses on real estate assets:
<TABLE>
<CAPTION>
                                            1998         1997         1996
                                         -----------  -----------  -----------
  <S>                                    <C>          <C>          <C>
    Beginning Balance..................  $12,327,098  $10,192,584  $ 8,116,065
    Provisions.........................    6,199,297    8,131,101    6,360,072
    Charge-Offs........................   (7,525,777)  (5,996,587)  (4,283,553)
                                         -----------  -----------  -----------
    Ending Balance.....................  $11,000,618  $12,327,098  $10,192,584
                                         ===========  ===========  ===========
    Percentage of Ending Balance of
     Allowances to Outstanding Real
     Estate Assets.....................          1.6%         2.1%         1.4%
                                         ===========  ===========  ===========
    Ratio of Net Charge-Offs to Average
     Real Estate Assets Outstanding
     During the Period.................          1.2%         0.9%         0.6%
                                         ===========  ===========  ===========
</TABLE>
 
REPOSSESSIONS
 
  In the course of its 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 its
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 which includes
both sales personnel and management. Generally, repossessed properties are
resold within one year from the date of repossession.
 
  The carrying value of a repossessed property is determined as of the date of
repossession of the property. It is based on a statistical valuation, a price
opinion from a broker and/or an appraisal by a licensed independent appraiser
or by one of Metropolitan's licensed staff appraisers either at the time the
Receivable was purchased or at the time the property was repossessed. The
current market value of real estate owned having a remaining balance in excess
of $300,000 will be re-determined if the most recent current market value
determination is more than 24 months old. Real estate owned with an
outstanding loan equity balance of $300,000 or less is not required to be re-
determined provided management is satisfied as to the value of such property.
 
                                      19
<PAGE>
 
  The following table presents specific information about the Consolidated
Group's repossessed properties with carrying values of $100,000 or more which
were held at September 30, 1998 and/or September 30, 1997. The carrying values
of certain properties may reflect additional costs incurred, such as taxes and
improvements, when such costs are estimated to be recoverable from the sale of
the repossessed property.
 
<TABLE>
<CAPTION>
                          Carrying   Carrying        Market                Total
  Property Type/State      Value      Value          Value      Year of     Rent
        Location          9/30/97    9/30/98        9/30/98   Foreclosure Received
  -------------------    ---------- ----------     ---------- ----------- --------
<S>                      <C>        <C>        <C> <C>        <C>         <C>
Land, California........ $  117,000 $  117,000     $  130,000    1994     $
14 Unit Apartment Bldg,
 Washington.............    108,000    Sold      A               1996
House, California.......    270,000    Sold      B               1997
House, California.......    148,647    Sold      C               1997
House, California.......    133,200    Sold      D               1997
House, California.......    107,260    Sold      E               1997
House, Missouri.........    151,921    Sold      F               1997
House, New Jersey.......    132,715    Sold      G               1997
House, Nevada...........    147,723    Sold      H               1997
House, New York.........    167,495    Sold      I               1997
House, Oregon...........    180,000    178,200        198,000    1997
Motel, Pennsylvania.....    225,000    Sold      J               1997
Land, South Dakota......    468,238    Sold      K               1997
House, Texas............    419,679    Sold      L               1997
House, Texas............    134,567    Sold      M               1997
House, Texas............    107,100    Sold      N               1997
House, Washington.......    114,408    Sold      O               1997
House, New Jersey.......               102,051        113,390    1998
House, California.......               103,410        114,900    1998
House, Oregon...........               104,999        116,666    1998
Land, California........               107,672        119,635    1998
Land, Arizona...........               108,495        120,550    1998
Condo, Florida..........               116,100        129,000    1998
Land, California........               117,000        130,000    1998
RV Park, New Mexico.....               117,037        130,041    1998
House, California.......               121,908        135,454    1998
House, Idaho............               123,750        137,500    1998
House, Washington.......               131,563        146,182    1998
House, Texas............               134,910        149,900    1998
House, California.......               151,200        168,000    1998
House, California.......               153,607        170,674    1998
House, Oregon...........               178,200        198,000    1998
Commercial, New York....               209,295        232,550    1998       6,800
Commercial, New York....               218,633        242,925    1998       1,011
Commercial, Virginia....               224,100        249,000    1998
Commercial, Florida.....               241,711        268,568    1998
Land, Washington........               247,719        275,243    1998
Land, Florida...........               282,843        314,270    1998
House, California.......               290,156        322,395    1998
House, Pennsylvania.....               292,500        325,000    1998
Commercial, Washington..               517,505        575,006    1998      88,000
Commercial, California..               999,509      1,110,565    1998         869
                         ---------- ----------     ----------             -------
                         $3,132,952 $5,691,072     $6,323,414             $96,680
                         ========== ==========     ==========             =======
</TABLE>
 
 
                                      20
<PAGE>
 
  The sales prices of the referenced properties were as follow:
 
<TABLE>
                    <C>                                                  <S>
                    $  125,400                                             A
                       300,000                                             B
                       149,500                                             C
                       149,000                                             D
                        97,000                                             E
                       200,000                                             F
                        95,000                                             G
                       110,000                                             H
                       181,300                                             I
                       250,000                                             J
                       590,000                                             K
                       480,000                                             L
                       180,000                                             M
                       122,500                                             N
                       143,772                                             O
                    ----------
                    $3,173,472
                    ==========
</TABLE>
  For information regarding the Consolidated Group's activity in properties
held for development, see "REAL ESTATE DEVELOPMENT. "
 
MANAGEMENT AND RECEIVABLE ACQUISITION SERVICES
 
  Metropolitan provides management and Receivable acquisition services to its
subsidiaries and to Summit, Old Standard and Old West. The Receivable
acquisitions satisfy underwriting and yield requirements established by the
purchasing company. The difference between the yield requirement and the yield
which Metropolitan actually negotiates is retained by Metropolitan as its
compensation for providing acquisition services in all cases except with
respect to Western United as of April 1, 1998.
 
  In the case of Western United, beginning in 1994 and ending March 31, 1998,
the yield requirement established by Western United had been guaranteed by
Metropolitan and an intercompany reserve was established to support the
guarantee. Because of the guarantee and the corresponding decrease in risk,
Western United's stated yield requirement was relatively lower than that
required by Old Standard and Old West. The reserve established in 1998 on
purchases of $122.0 million, including origination expenses, net of purchase
discount was $4.89 million. Metropolitan remains liable to Western United for
any losses in excess of the reserve. While this charge had the effect of
reducing the Receivable yield of the insurance subsidiary, there was a
corresponding positive effect on the fee earned by Metropolitan. With the
elimination of these intercompany guarantees and yield adjustments in
consolidation, the yields recognized by the Consolidated Group are the same as
though there were no guarantee or yield adjustments. The guarantee by
Metropolitan has been eliminated with respect to all Receivables sold to
Western United after March 31, 1998.
 
  The excess yield retained by Metropolitan is amortized into Metropolitan's
income over the same period and in the same amount as it is amortized into
expenses by Western United. During 1998, 1997 and 1996, Metropolitan charged
Western United fees of approximately $10.4 million, $20.1 million, and $29.4
million, respectively. The 1998, 1997, and 1996 charges were before loss
reserves of $4.89 million, $9.53 million, and $12.54 million, respectively.
Underwriting fees charged to Summit, Old Standard and Old West are recognized
as revenues when the related fees are charged to those companies. During 1998,
Metropolitan charged Summit, Old Standard and Old West fees of $268,000,
$464,000 and $168,000, respectively. The service agreements with Western
United have no effect upon the consolidated financial results of the
Consolidated Group. The service agreements with companies outside the
Consolidated Group, including Summit, Old Standard and Old West provide fee
income to Metropolitan. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"
under Item 13.
 
                                      21
<PAGE>
 
RECEIVABLE SALES
 
  The Consolidated Group sells pools of Receivables when it considers it
profitable to do so. Such sales generally occur through one of two methods:
(1) securitization or (2) direct sales. Management believes that, in addition
to the profits which may be earned, the sale of Receivables provides a number
of benefits including allowing the Consolidated Group to diversify its funding
base, provide liquidity and may provide lower cost of funds. The sale of
Receivables allows the Consolidated Group to continue to expand its investing
activities without increasing its total asset size.
 
  Generally, a securitization involves the sale of certain specified
Receivables to a bankruptcy remote single purpose trust. The trust issues
certificates which represent an undivided ownership interest in the
Receivables transferred to the trust. Typically the certificates consist of
several different classes, which include classes of senior certificates, a
class of residual interests certificates, and may also include intermediate
classes of subordinated certificates. The rights of the senior certificate
holders can be enhanced through several methods which include subordination of
the rights of the subordinate and residual interests to receive distributions,
or through the establishment of a reserve fund. In connection with
securitizations, the senior certificates are sold to investors, which are
generally institutional investors. The companies which sell their Receivables
to the trust receive a cash payment representing their respective interest in
the sales price for the senior certificates and any subordinate certificates
sold. The selling companies may also receive an interest in any unsold
subordinate certificates and an interest in any residual interest. Such
interests are generally apportioned based upon the respective companies
contribution of Receivables to the pool of Receivables sold to the trust.
 
  Through September 30, 1998, the Consolidated Group (principally Metropolitan
and Western United) has participated as a co-sponsor in four real estate
Receivable securitizations with affiliates, Summit, Old Standard and Old West.
The affiliates' percentage of each securitization has been less than
approximately 10% in each transaction. In each securitization, Metropolitan
has used either futures contracts or securities "short sales" to hedge or
protect the profits for all or a portion of the transaction. The price to the
affiliates at settlement for each securitization includes their proportionate
share of hedging transactions related to each securitization. See "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS--Note 1" under Item 8.
 
  In the typical securitization structure, the Receivable payments are
distributed first to the senior certificates, then to the subordinated
certificates, if any, and finally to the residual interests. As a result, the
residual interest is the interest first affected by any loss due to the
failure of the Receivables to pay as scheduled. The holders of the residual
interest value such interest in their respective financial statements based
upon certain assumptions regarding anticipated losses and prepayments. To the
extent actual prepayments and losses are greater or less than the assumptions,
the companies holding the residual interests will experience a loss or gain.
 
  In the securitizations in which the Consolidated Group has participated, the
rights of the senior certificate holders were enhanced through subordinating
the rights of subordinate and residual interests to receive distributions with
respect to the mortgage loans. The selling companies initially retained their
respective residual interests. At September 30, 1998, the value of residual
interests held by the Consolidated Group was $24.5 million.
 
  In addition to sales through securitizations, the Consolidated Group sells
pools of Receivables directly to purchasers. These sales are typically without
recourse, except that for a period of time the selling company is generally
required to repurchase or replace any Receivables which do not conform to the
representations and warranties made at the time of sale.
 
  During the year ended September 30, 1998, the Consolidated Group sold
portfolios of real estate Receivables through both direct sales and
securitizations with proceeds of approximately $195.6 million and gains of
$11.6 million. During that same period, the Consolidated Group sold other
Receivables with proceeds of approximately $33.8 million and gains of $2.2
million.
 
  During the year ended September 30, 1997, the Consolidated Group sold
portfolios of real estate Receivables through both direct sales and
securitizations with proceeds of approximately $382.7 million and
 
                                      22
<PAGE>
 
gains of $21.7 million. During that same period, the Consolidated Group sold
other Receivables with proceeds of approximately $7.8 million and gains of
$37,000.
 
  During the year ended September 30, 1996, the Consolidated Group sold
portfolios of real estate Receivables through securitizations with proceeds of
approximately $113.0 million and gains of $7.8 million. During that same
period, the Consolidated Group sold other Receivables with proceeds of
approximately $73.8 million and gains of $4.1 million.
 
  All lottery acquisitions are currently purchased by trusts which are owned
by the company interested in acquiring the corresponding Receivables. These
trusts are designed to facilitate any potential future resale of these assets.
 
                     LIFE INSURANCE AND ANNUITY OPERATIONS
 
INTRODUCTION
 
  One of the Consolidated Group's principal subsidiaries is Western United.
Western United was incorporated in Washington State in 1963. As of September
30, 1998, Western United owned approximately $940 million in assets, or
approximately 77% of the Consolidated Group's total assets. Based on its
admitted statutory assets at December 31, 1997, Western United ranks sixth in
size among the life insurance companies domiciled in the State of Washington.
 
  Western United markets its annuity and life insurance products through
approximately 1,400 independent sales representatives under contract. These
representatives may also sell life insurance and/or annuity products for other
companies. Western United is licensed as an insurer in the States of Alaska,
Arizona, Hawaii, Idaho, Indiana, Montana, Nebraska, Nevada, North Dakota,
Oregon, South Dakota, Texas, Utah, Washington, and Wyoming. During 1997 (the
most recent year for which statistical information is available), Western
United's annuity market share was 3.4%, ranking it fifth in production, in the
six states in which approximately 85% of its annuity business was produced:
Washington, Oregon, Idaho, Montana, North Dakota and Utah.
 
  Management intends to expand the operations of Western United into other
states as opportunities arise, which may include the acquisition of other
existing insurance companies. Western United currently has insurance license
applications pending in the States of New Mexico and Oklahoma.
 
  Western United is a member of the Insurance Market Standards Association,
which is an association established to promote ethical insurance marketing
standards among its members.
 
  Western United may invest up to 65% of its statutory assets in real estate
related Receivables. The balance of Western United'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 "SECURITIES INVESTMENTS" and "REGULATION."
 
  Generally, loans which are acquired through the institutional secondary
mortgage market qualify as "mortgage related securities" pursuant to the
Secondary Mortgage Market Enhancement Act (SMMEA). SMMEA generally provides
that qualifying loans may be acquired to the same extent that obligations
which are issued by or guaranteed as to principal and interest by the United
States Government, its agencies and instrumentalities can be acquired. As a
result, Western United can acquire qualifying real estate Receivables in
amounts which exceed the above referenced 65% limitation. Such acquisitions
are also exempt from other state insurance regulations including loan to value
and appraisal regulations.
 
ANNUITIES
 
  Western United has actively marketed single and flexible premium deferred
annuities since 1980. During the past three calendar years, over 98% of
Western United's direct premiums were derived from annuity sales.
 
                                      23
<PAGE>
 
  Western United's annuities also qualify as investments under several tax
advantaged programs.
 
  Western United prices its new annuity products and renewals in order to
achieve a positive spread between its annuity costs and available Receivable
investments while also considering current annuity market rates of interest
and competitive pressures. Flexible and single premium annuities are offered
with surrender charges for periods varying from one year to ten years.
 
  Western United is currently developing several new annuity product types.
One of the new products which has recently been developed and will be sold
beginning early in fiscal 1999 is an equity-indexed annuity. The interest
which is credited on this product will vary based upon how a selected equity
index, the S&P 500R, performs. This product type is designed to meet the needs
of investors who are reluctant to make long-term fixed interest annuity
investments during the current economic period of relatively lower interest
rates.
 
  At September 30, 1998, deferred policy acquisition costs were approximately
8.4% of life and annuity reserves. Increasing termination rates may have an
adverse impact on Western United's earnings through requiring faster
amortization of these costs. Management believes that this potentially adverse
impact is mitigated by annuity interest spreads, which are anticipated to be
about 200 basis points. This spread analysis is shown in the following table,
which applies to the results of Western United during the past three calendar
years, based on insurance regulatory report filings:
 
<TABLE>
<CAPTION>
                                                                      Three Year
                                                    1997  1996  1995   Average
                                                    ----  ----  ----  ----------
<S>                                                 <C>   <C>   <C>   <C>
Net Investment Earnings Rate....................... 7.71% 8.15% 8.30%    8.05%
Average Credited Interest Rate..................... 6.03% 6.03% 6.06%    6.04%
Spread............................................. 1.68% 2.12% 2.24%    2.01%
</TABLE>
 
  During fiscal 1998, 1997, and 1996, amortization of deferred policy
acquisition costs was $10.0 million, $9.4 million, and $9.1 million,
respectively. All calculations have been reviewed by an actuary.
 
  Annuity lapse rates are calculated by dividing cash outflows related to
partial and full surrenders, periodic payments and death benefits by average
annuity reserves. For the calendar years 1997, 1996 and 1995, lapse rates were
16.9%, 14.7%, and 18.9%, respectively. Based upon results for the nine months
ended September 30, 1998, lapse rates were 20.0%.
 
LIFE INSURANCE
 
  During the year ended September 30, 1998, approximately 2% of Western
United's statutory direct premiums were derived from the sale of interest
sensitive whole life insurance and term life insurance policies. As of
September 30, 1998, the face amount of life insurance policies written and
outstanding totaled $260,538,000, net of amounts 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 (i.e.
the frequency of claims resulting from deaths of policyholders). Although
Western United's mortality rates to date have been lower than expected, higher
credited interest rates and higher issuing expenses combined with low volume
have resulted in lower profits than those experienced with its annuity
products.
 
                                      24
<PAGE>
 
  The following table sets forth certain key financial information regarding
the Consolidated Group's life insurance subsidiary.
 
<TABLE>
<CAPTION>
                                                 Year Ended at September 30,
                                                 ------------------------------
                                                   1998      1997       1996
                                                 --------  --------  ----------
                                                    (Dollars in Thousands)
<S>                                              <C>       <C>       <C>
Insurance In Force
  Individual Life..............................  $308,191  $330,205  $  354,371
  Less Ceded to other Companies................   (47,653)  (52,328)    (58,679)
                                                 --------  --------  ----------
                                                 $260,538  $277,877  $  295,692
                                                 ========  ========  ==========
Life Insurance Premiums........................  $  3,123  $  3,352  $    3,355
Less Ceded Premiums............................      (323)     (352)       (355)
                                                 --------  --------  ----------
Net Life Insurance Premiums....................  $  2,800  $  3,000  $    3,000
                                                 ========  ========  ==========
Net Investment Income..........................  $ 62,453  $ 65,760  $   65,561
                                                 ========  ========  ==========
Benefits, Claim Losses and Settlement Expenses.  $ 48,098  $ 50,455  $   48,301
                                                 ========  ========  ==========
Deferred Policy Acquisition Costs..............  $ 67,167  $ 69,730  $   71,933
                                                 ========  ========  ==========
Reserves for Future Policy Benefits, Losses,
 Claims and Loss Expenses......................  $800,849  $825,369  $  837,366
                                                 ========  ========  ==========
Total Assets...................................  $939,910  $953,249  $1,128,237
                                                 ========  ========  ==========
Capital and Surplus............................  $ 89,618  $ 86,230  $   81,606
                                                 ========  ========  ==========
</TABLE>
 
REINSURANCE
 
  Reinsurance is the practice whereby an insurance company enters into
agreements (termed "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.
 
 Annuity Reinsurance
 
  Western United has entered into two separate reinsurance agreements with Old
Standard. The first of those two agreements became effective January 23, 1997
and was terminated with respect to additional premiums on September 30, 1997.
Under this first agreement, Western United reinsured with Old Standard 75% of
the risk on six different annuity products and the premiums ceded were
approximately $28.0 million. Western United received ceding allowances equal
to expected commission plus 1.0% of premium, which was approximately $1.6
million.
 
  The second of the two agreements became effective July 1, 1998 and remained
in effect at September 30, 1998. Under this second agreement, Western United
reinsured with Old Standard 75% of the risk on 15 different annuity products
and the premiums ceded through September 30, 1998 were approximately $25.4
million. Western United received ceding allowances equal to actual commission
plus 1.5% of premium, which was approximately $1.3 million through September
30, 1998.
 
  These agreements allow Western United to continue its market presence and
relationship with its insurance agents while moderating its rate of growth.
Under its contractual terms, the second 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. It is expected that approximately $50 million will be ceded under this
treaty during fiscal 1999. Western United receives a fee from Old Standard for
servicing the reinsured policies, which fee is 40 basis points annually on the
cash value of the reinsured policies.
 
                                      25
<PAGE>
 
 Life Policy Reinsurance
 
  Western United reinsured $47,653,000 of life insurance risk at September 30,
1998 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 $308,191,000. Western United is a party to seventeen
separate reinsurance treaties with seven reinsurance companies. The largest
treaty is with Lincoln National Life Insurance Company and provided, at
September 30, 1998, approximately $23,217,000 of reinsurance coverage. The
majority of the remaining coverage is with Business Mens Assurance Company of
America and Phoenix Home Life Mutual Insurance Company. Total life policy
reinsurance premiums paid by Western United during the fiscal year ended
September 30, 1998 were approximately $323,000.
 
RESERVES
 
  Western United's reserves for both annuities and life insurance are
actuarially determined and prescribed by its state of domicile and other
states in which it does business through laws which are designed to protect
annuity contract owners and policy owners. The amount of these reserves
required for compliance with state law are reviewed by an actuary. These
reserves are amounts which, at certain assumed rates, are calculated to be
sufficient to meet Western United's future obligations under annuity contacts
and life insurance policies currently in force. At September 30, 1998, such
reserves were $800,849,000. Reserves are recalculated each year to reflect
amounts of reinsurance in force, issue ages of new policy holders, duration of
policies and variations in policy terms. Since such reserves are based on
actuarial assumptions, no representation is made that ultimate liability will
not exceed these reserves.
 
INSURANCE ACCOUNTING PRACTICES
 
  Western United is required to file statutory financial statements with its
state of domicile, Washington. Accounting principles used to prepare its
statutory financial statement differ from generally accepted accounting
principles ("GAAP"). A reconciliation of GAAP net income to statutory net
income for the years ended September 30, 1998, 1997 and 1996, respectively, is
as follows:
 
<TABLE>
<CAPTION>
                                                1998        1997        1996
                                             ----------  ----------  ----------
<S>                                          <C>         <C>         <C>
Net Income--GAAP............................ $3,576,495  $4,051,900  $3,076,252
Adjustments to reconcile:
  Deferred policy acquisition costs.........  1,884,429     717,718    (774,906)
  State insurance guaranty fund.............   (168,840)    110,290     257,686
  Annuity reserves and benefits.............   (653,420) (2,714,024)   (304,688)
  Capital gains and IMR amortization........ (5,272,116)   (379,910)    336,258
  Allowance for losses......................  5,464,639   5,166,518   3,046,274
  Federal income taxes...................... (2,179,558)   (140,864)  1,587,522
  Other.....................................        --          --          (39)
                                             ----------  ----------  ----------
Net Income--Statutory....................... $2,651,629  $6,811,628  $7,224,359
                                             ==========  ==========  ==========
</TABLE>
 
                                      26
<PAGE>
 
                            SECURITIES INVESTMENTS
 
  At September 30, 1998, 1997, and 1996, 80.3%, 84.5%, and 94.3%,
respectively, of the Consolidated Group's securities investments were held by
Western United.
 
  The following table outlines the nature and carrying value of securities
investments held by Western United at September 30, 1998:
 
<TABLE>
<CAPTION>
                                     Available-   Held-to-
                           Trading    For-Sale    Maturity
                          Portfolio   Portfolio   Portfolio     Total     Percentage
                         ----------- ----------- ----------- ------------ ----------
                                           (Dollars in Thousands)
<S>                      <C>         <C>         <C>         <C>          <C>
Total Amount............ $29,751,047 $21,184,034 $81,544,856 $132,479,937   100.0%
                         =========== =========== =========== ============   =====
% Invested in:
  Fixed Income.......... $29,751,047 $21,179,980 $81,544,856 $132,475,883   100.0%
  Equities..............         --        4,054         --         4,054     0.0%
                         ----------- ----------- ----------- ------------   -----
                         $29,751,047 $21,184,034 $81,544,856 $132,479,937   100.0%
                         =========== =========== =========== ============   =====
% Fixed Income:
  Taxable............... $29,751,047 $21,179,980 $81,544,856 $132,475,883   100.0%
  Non-taxable...........         --          --          --           --      0.0%
                         ----------- ----------- ----------- ------------   -----
                         $29,751,047 $21,179,980 $81,544,856 $132,475,883   100.0%
                         =========== =========== =========== ============   =====
% Taxable:
  Government/Agency..... $       --  $ 5,010,350 $47,006,308 $ 52,016,658    39.0%
  Corporate.............  29,751,047  16,169,630  34,538,548   80,459,225    61.0%
                         ----------- ----------- ----------- ------------   -----
                         $29,751,047 $21,179,980 $81,544,856 $132,475,883   100.0%
                         =========== =========== =========== ============   =====
% Corporate Bonds:
  AAA................... $ 6,381,738 $       --  $20,202,243 $ 26,583,981    33.0%
  AA....................         --          --      998,389      998,389     1.0%
  A.....................         --    8,418,990     997,436    9,416,426    12.0%
  BBB...................   9,242,814   4,219,789   1,998,950   15,461,553    19.0%
  Below Investment
   Grade................  14,126,495   3,530,851  10,341,530   27,998,876    35.0%
                         ----------- ----------- ----------- ------------   -----
                         $29,751,047 $16,169,630 $34,538,548 $ 80,459,225   100.0%
                         =========== =========== =========== ============   =====
% Corporate:
  Mortgage-backed....... $29,751,047 $ 2,960,124 $28,443,985 $ 61,155,156    76.0%
  Asset-backed..........         --    2,967,090   2,099,788    5,066,878     6.0%
  Finance...............         --    7,243,240   3,994,775   11,238,015    14.0%
  Industrial............         --    2,999,176         --     2,999,176     4.0%
  Utility...............         --          --          --           --      0.0%
                         ----------- ----------- ----------- ------------   -----
                         $29,751,047 $16,169,630 $34,538,548 $ 80,459,225   100.0%
                         =========== =========== =========== ============   =====
</TABLE>
 
  Investments of Western United are subject to the direction and control of an
investment committee appointed by its Board of Directors. All such investments
must comply with applicable state insurance laws and regulations. See
"REGULATION."
 
  Metropolitan is authorized by its Board of Directors 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. See "RECEIVABLE INVESTMENTS--Receivable Sales." At
 
                                      27
<PAGE>
 
September 30, 1998 and 1997, the Consolidated Group had no open hedging
positions relative to hedging its securities portfolio, but did have
outstanding hedging transactions relating to its securitizations.
 
  During the twelve month period ended September 30, 1995, the Consolidated
Group engaged in hedging activities to protect a portion of its held-to-
maturity securities portfolio from a potential increase in interest rates. The
portfolio being protected by the hedge position generally improved in value
due to a decrease in interest rates while the position in financial futures
contracts declined in value by approximately $1.6 million. This loss is being
amortized using the interest method over the remaining life of the securities
which were being covered by the financial futures position, a total term of
approximately eight years.
 
  The Consolidated Group purchases collateralized mortgage obligations
("CMO's") for its investment portfolio. Such purchases have been limited to
tranches that perform in concert with the underlying mortgages (i.e.,
improving in value with falling interest rates and declining in value with
rising interest rates). The Consolidated Group has not invested in "derivative
products" that have been structured to perform in a way that magnifies the
normal impact of changes in interest rates or in a way dissimilar to the
movement in value of the underlying securities. At September 30, 1998, the
Consolidated Group was not a party to any derivative financial instruments
relative to its CMO investment portfolio.
 
  At September 30, 1998, amounts in the trading portfolio on a consolidated
basis, at market, were $55.9 million. At September 30, 1998, 1997 and 1996,
amounts in the available-for-sale portfolio on a consolidated basis were $26.0
million, $36.6 million, and $38.6 million, respectively. The available-for-
sale portfolio had net unrealized losses of approximately $496,000 at
September 30, 1998, $759,000 at September 30, 1997, and $946,000 at September
30, 1996. In the held-to-maturity portfolio, net unrealized gains were
approximately $3,359,000 at September 30, 1998, while net unrealized losses
were approximately $1,019,000 at September 30, 1997, and $5,548,000 at
September 30, 1996. See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Note 2"
under Item 8.
 
METHOD OF FINANCING
 
  The Consolidated Group finances its business operations and growth with
collateralized lines of credit, the proceeds from the sale and securitization
of Receivables, Receivable cash flows, the sale of life insurance and annuity
products, the sale of debentures and preferred stock, the sale of real estate
and securities portfolio earnings. In this regard, Metropolitan engages in a
substantially continuous public offering of debt securities ("Debentures") and
preferred stock while Western United markets annuities and life insurance
policies. See "LIFE INSURANCE AND ANNUITY OPERATIONS."
 
  The following table presents information regarding the Debentures issued by
the Consolidated Group:
 
<TABLE>
<CAPTION>
                                                       As of September 30
                                                   ----------------------------
                                                     1998      1997      1996
                                                   --------  --------  --------
                                                     (Dollars in Thousands)
<S>                                                <C>       <C>       <C>
Principal Amount Outstanding...................... $175,273  $159,169  $163,034
Compound and Accrued Interest.....................   22,932    26,045    29,140
                                                   --------  --------  --------
TOTAL............................................. $198,205  $185,214  $192,174
                                                   ========  ========  ========
Weighted Average Interest Rate....................     7.96%     7.99%     8.18%
                                                   ========  ========  ========
Range of Interest Rates...........................    5%-11%    5%-11%    5%-11%
                                                   ========  ========  ========
</TABLE>
 
  Substantially all of the Debentures outstanding at September 30, 1998 will
mature during the five-year period ending September 30, 2003. Management
expects to fund net retirements of Debentures maturing during that period with
cash flow generated by Receivable investments, sales of real estate and
issuances of securities. During the year ended September 30, 1998,
approximately 66% of Metropolitan's Debentures were reinvested at
 
                                      28
<PAGE>
 
maturity. Principal payments received from the Consolidated Group's Receivable
portfolio and proceeds from sales of real estate and Receivables were as
follows for the periods indicated:
 
<TABLE>
      <S>                                                           <C>
      Fiscal 1998:................................................. $377,613,000
      Fiscal 1997:................................................. $511,692,000
      Fiscal 1996:................................................. $302,474,000
</TABLE>
 
  Redemption of preferred stock exceeded issuances and reinvestments of
dividends by $1,516,000 in 1998. Proceeds of preferred stock issuances less
redemptions were $1,241,000 in 1997, and $1,765,000 in 1996. The liquidation
preference of outstanding preferred stock at September 30, 1998 was
$49,201,000. Preferred shareholders are entitled to monthly distributions at a
variable rate based on the rates on various maturities of U.S. Treasury
obligations. The average monthly distribution rate during fiscal 1998 was
7.29%. Preferred stock distributions paid by Metropolitan were $3,732,000 in
1998, $4,113,000 in 1997, and $3,868,000 in 1996.
 
  The following table summarizes Metropolitan's anticipated annual cash
principal and interest obligations on Debentures, credit lines and other debt
payable and anticipated annual cash dividend requirements on preferred stock
for the indicated periods based on outstanding debt and securities at
September 30, 1998, assuming no reinvestments of maturing Debentures:
 
<TABLE>
<CAPTION>
   Fiscal Year
      Ending                                                  Credit Lines/  Preferred
    September                                                  Other Debt      Stock
       30,                                         Debentures    Payable    Dividends(1)  Total
   -----------                                     ---------- ------------- ------------ --------
                                                               (Dollars in Thousands)
    <S>                                            <C>        <C>           <C>          <C>
     1999.......................................    $ 57,172    $125,679      $ 3,855    $186,706
     2000.......................................      52,328         424        3,855      56,607
     2001.......................................      10,919         226        3,855      15,000
     2002.......................................      42,015         307        3,855      46,177
     2003.......................................      49,838         198        3,855      53,891
                                                    --------    --------      -------    --------
                                                    $212,272    $126,834      $19,275    $358,381
                                                    ========    ========      =======    ========
</TABLE>
--------
 (/1/Based)on an assumed dividend rate per annum of 7.8%.
 
  In addition to these contractual cash flow requirements, a certain amount of
Western United's annuities may reprice annually which could cause termination
of such annuities subject to a surrender charge. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Asset/Liability
Management" under Item 7. Management believes that cash flows will remain
adequate during the next year to satisfy all obligations Metropolitan owes to
holders of its securities.
 
  In addition to the above sources of funds, the Consolidated Group also
obtains funds through the sale and repurchase of Receivables in accordance
with a nonrecourse committed facility with NationsBanc Mortgage Capital
Corporation ("NationsBanc"). Pursuant to the terms of the Facility,
Metropolitan and Metwest may sell loans in an aggregate amount not to exceed
$200 million from time to time to NationsBanc for an agreed upon advance rate
and shall repurchase such receivables at a specified price on a specified
date. The Facility matures on March 24, 1999, and accrues interest at LIBOR
plus 1%. The amount advanced at September 30, 1998, of $118,342,972, including
accrued interest at 6.625% per annum, is collateralized by real estate
contracts and mortgage notes receivable held for sale with a carrying value of
approximately $122,129,000.
 
 
                                      29
<PAGE>
 
                            REAL ESTATE DEVELOPMENT
 
LAWAI BEACH RESORT

 
 Description
 
  Metropolitan is the owner and developer of Lawai Beach Resort on the island
of Kauai, Hawaii. Metropolitan also owns other condominium units adjoining the
resort and another subsidiary, the Southshore Corporation, which owns a
restaurant property adjacent to the Lawai Beach Resort.
 
  Lawai Beach Resort is located on 8.7 acres of deeded ocean-front property on
the south shore of Kauai near the area known as Poipu Beach. It consists of
three four-story buildings containing a total of 170 residential condominium
units. Related amenities include swimming pools, tennis courts, a 180 car
parking garage, exercise facilities and a sewage treatment plant. Construction
costs were financed entirely with Metropolitan's internally generated funds
and the property remains unencumbered by external debt. Metropolitan's total
investment (carrying value) in Lawai Beach Resort as of September 30, 1998 was
approximately $4,585,000.
 
  Additional properties owned by Metropolitan, all of which adjoin the Lawai
Beach Resort, include 11 condominium units in the Prince Kuhio Condominiums
with an aggregate carrying value of approximately $901,000 a four-plex
condominium timeshare building with 3 weekly intervals remaining and a
carrying value of approximately $12,000 and a restaurant site with a carrying
value (land and building) of approximately $3,479,000 as of September 30,
1998. The restaurant is currently operated by Pacific Cafe. Rental income from
the restaurant was approximately $367,000 in 1998.
 
 Marketing
 
  Metropolitan engaged an affiliate of the Shell Group, Chicago, Illinois,
Shell-Lawai ("Shell"), to provide management services and sell timeshare units
at Lawai Beach. In 1996, timeshare sales totaled approximately $22.8 million
for monthly average sales of $1.9 million. In 1997, timeshare sales totaled
approximately $13.8 million for monthly average sales of over $1.1 million. In
1998, timeshare sales totaled approximately $10.8 million for monthly average
sales of over $0.9 million. Management believes that the sales decrease in
1998 and 1997 was primarily due to increased competition, principally due to
the addition of several new time share resorts within the Poipu area of Kauai.
Although there can be no assurance that sales will continue at the present
pace, if the present pace does continue, the remaining approximately 480
timeshare interval weeks will be completely sold by approximately June of
1999.
 
 Additional Information
 
  The tables below set forth additional historical information about the
timeshare sales and revenue of Lawai Beach Resort. It is Metropolitan's
intention to sell the timeshares at favorable prices in order to convert the
inventory into cash or other interest earning assets.
 
<TABLE>
<CAPTION>
                                         For the Years Ended September 30,
                                       ---------------------------------------
                                          1998          1997          1996
                                       -----------  ------------  ------------
<S>                                    <C>          <C>           <C>
TIMESHARE SALES
  Number of Sales.....................         756           909         1,441
  Amount of Sales..................... $10,760,405  $ 13,837,687  $ 22,799,107
  Costs...............................  (3,696,622)   (3,930,281)   (8,051,102)
  Expenses............................  (6,799,648)  (11,116,543)  (15,480,230)
                                       -----------  ------------  ------------
  Profit(Loss)........................ $   264,135  $ (1,209,137) $   (732,225)
                                       ===========  ============  ============
WHOLEUNIT CONDOMINIUM SALES
  Number of Units.....................           4           --            --
  Amount of Sales..................... $   898,075  $        --   $        --
  Costs...............................    (655,039)          --            --
  Expenses............................         --
                                       -----------  ------------  ------------
  Operating Profit.................... $   243,036  $        --   $        --
                                       ===========  ============  ============
</TABLE>
 
                                      30
<PAGE>
 
 Receivable Financing
 
  Most purchasers of timeshare weeks at Lawai Beach Resort finance a portion
of the purchase price through Metropolitan, subject to approved credit. On
September 29, 1997, Metropolitan sold approximately $29.7 million in time
share Receivables, through a securitization. As of September 30, 1998,
Metropolitan's outstanding Lawai Beach Resort timeshare Receivables balance
was approximately $6.0 million. The loan delinquency rate (based on the
principal balances of loans more than ninety days in arrears) on that date was
approximately 15%.
 
SKIER'S EDGE RESORT
 
  As of October 1, 1997, Metropolitan owned approximately 127 timeshare use
periods at Skier's Edge, a timeshare condominium located near Breckenridge,
Colorado. All remaining timeshare use periods in the project were sold during
1998. Approximately 18 acres of undeveloped land adjoining the resort is
currently listed for sale and has a carrying value of $160,000 as of September
30, 1998. Total sales for 1998 were approximately $608,000.
 
OTHER DEVELOPMENT PROPERTIES
 
  In addition to the resort properties described above, the Consolidated Group
(principally Metropolitan) is engaged in the development of various other
properties. These development properties were generally acquired in the
ordinary course of business, generally through repossessions. In addition, the
Consolidated Group may acquire property for development. These acquisitions
may include properties adjoining properties presently owned by the
Consolidated Group in order to enhance the value of the original parcel, or
may include the acquisition of properties unrelated to existing holdings. The
development or improvement of properties is undertaken for the purposes of
enhancing values, to increase salability and to maximize profit potential.
 
  Substantially all of the Development activity is performed for the
Consolidated Group by Summit Property Development, a subsidiary of Summit.
During 1998, approximately $1.8 million in fees were paid to Summit Property
Development for property development activities.
 
  Significant development property sales activities for 1998 and plans for
1999 are described below. There can be no assurance that the Consolidated
Group will be successful in its 1999 development and sales plans and the
Consolidated Group may modify its plans at its sole discretion.
 
THE LIBERTY LAKE PROPERTIES
 
  Located just east of Spokane, Washington near Liberty Lake, this land was
acquired by Metropolitan between 1989 and 1997 primarily utilizing repossessed
properties as consideration. During fiscal 1998, the property included one
residential development parcel and one business parcel, which is described
more fully below. The area where these parcels are located includes
residential, commercial and industrial properties including a business park.
 
  Liberty Lake Center (formerly MeadowWood Business Park Phase II): Liberty
Lake Center includes 17.12 acres of industrial-zoned property acquired by
exchange in 1990. During June 1997, Metropolitan exercised its option to
purchase 62.10 acres at $10,500 per acre. An additional 19.26 acres were
purchased from Olivetti North America in December 1996. Also, 6.40 acres of
former railroad right-of-way was purchased from Spokane County in 1996. This
brings the total land area of Liberty Lake Center (excluding subsequently
dedicated road right-of-ways) to 100.24 acres.
 
  A Final Binding Site Plan was filed on the property in July 1997. Three
sales closed in fiscal 1998. WAM Enterprises purchased 3.42 acres for
telemarketer Dakotah Direct, Inc. as a call center for $469,274. Doty/Scott
Investments purchased 2.93 acres for a medical facility for $511,136 and
purchased an additional 2.87 acres for $468,815. There currently is a sale
pending for 5.13 acres to Fore Investments and a pending build-to-suit for
 
                                      31
<PAGE>
 
Bergen Brunswig Medical Corporation with an option to purchase additional
acreage for a total of 6.45 acres. At September 30, 1998, the carrying value
of the remaining property was $6,929,437. The undiscounted cash flow appraised
value as of September 30, 1998 was $7,650,000.
 
  MeadowWood Residential: This residential parcel, The Glen, consisted of 37
acres of which 32 acres were sold in February, 1996 for $755,000. At September
30, 1998, Metropolitan's carrying value for the remaining five acres was
$150,919 with a pending sale of $162,000 for the remaining 5 acre parcel.
 
THE SUMMIT PROPERTY
 
  This property consists of approximately 76.35 acres in downtown Spokane
adjacent to the central business district and is located along the north bank
of the Spokane River. It contains several parcels which were purchased between
1982 and 1996. The property is zoned for mixed use 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. Demolition of several vacant buildings located on the property was
completed in 1998. At September 30, 1998, the carrying value of the property
was $12,242,862.
 
AIRWAY BUSINESS CENTRE
 
  Airway Business Centre (the "Center") consists of two phases of
commercial/industrial-zoned property. The property is located in the City of
Airway Heights, Washington approximately 10 miles west of downtown Spokane.
The project is part of a 440 acre parcel originally purchased in 1979.
 
  Phase one of the Centre had a final binding site plan consisting of 13 lots
with a total area of 47.24 acres, approved in 1994. The property has
approximately one-quarter mile of frontage on U.S. Highway 2, a regional
east/west transportation route. Current improvements to the property include
the extension of private streets within the western portion of the project, a
right-turn access off of Highway 2, utility extensions to serve interior
parcels and a traffic signal at the project's main intersection.
 
  Genuine Parts Company purchased 1.15 acres for $157,000. There is a pending
sale to Empire Ford Dealership for 10.43 acres for $950,000 and one to SLR
Properties for .81 acres for $135,000. The carrying value of phase one as of
September 30, 1998 was $2,560,309.
 
  Phase two of the Centre has a final binding site plan approved in 1997. This
portion included the extension of two public streets to serve the project. A
total of 45.19 acres of the project have an approved binding site plan, while
21.23 acres await city approval of further subdivision. The carrying value as
of September 30, 1998 was $676,239. The carrying value for the entire project
as of September 30, 1998 was $3,236,548.
 
SPOKANE VALLEY PLAZA
 
  The property is located near the Sullivan Road and Interstate 90 freeway
interchange just east of Spokane and consists of 33 acres of land zoned for
commercial use. The property was acquired in 1990 using repossessed property
as consideration. County approval for a 348,000 square foot shopping center
was received in 1991. During 1996, Metropolitan sold a 12.85 acre portion of
this parcel to Wal-Mart for $2,798,351. As part of the consideration for the
sale, Metropolitan entered into a co-development agreement to develop on-site
infrastructure at a cost to Metropolitan of approximately $900,000. An
additional 2.75 acres was sold to Toys R Us in June 1997. The sales price was
$1,256,860. During 1998, the following contracts have been entered into with
occupancy and closings to take place in fiscal 1999:
 
  Leases
 
  China King Buffet--8,040 square feet at $13.00 per square foot
  Corral West Ranchwear--7,080 square feet at $10.00 per square foot
  Michael's--23,462 square feet at $11.00 per square foot
 
                                      32
<PAGE>
 
  Purchases
 
  Farmers & Merchants Bank--18,357 square feet at $14.00 per square foot
($256,998)
  Vaughn/McGann (Arby's)--28,000 square feet at $18.00 per square foot
($504,000)
 
  The carrying value as of September 30, 1998 was $7,132,272. The appraised
value of this property as of October 1, 1998 was $10,053,800.
 
BROADMOOR PARK (PASCO)
 
  This property, acquired through repossession in 1988, consists of 368 acres
of land, at a freeway interchange in Pasco, Washington. The property was zoned
in 1994 for mixed residential and commercial use. Water and sewer have been
extended to the property. Access to the property has been improved by
construction of interior roads.
 
  Broadmoor Park Outlet Mall: The Broadmoor Park Outlet Mall is 24.5 acres
located on the north side of Interstate 182 freeway. The Mall is 107,000
square feet and over 86% leased as of September 30, 1998. The carrying value
of the property as of September 30, 1998 is $9,961,064. The appraised value
was $13,325,000 as of December 15, 1995. Lease payments from the initial
tenants commenced in August, 1995. The mall generated approximately $695,000
of rental income in 1996, approximately $1,001,000 in 1997, and approximately
$919,000 in 1998.
 
  Broadmoor Park General: The remaining 344 acres of Broadmoor Park is 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 and civic uses. During March of 1998, Sandy Heights RV
Park purchased 10.34 acres for $425,000 and a facility built for lease in 1997
for Dakotah Direct, a national telemarketing firm, was sold for $1,200,000.
The carrying value as of September 30, 1998 was $7,959,386, including
facilities built and held for lease. The appraised value as of September 30,
1998 was $12,795,000.
 
  Two new facilities were constructed on the property by Metropolitan in 1997,
of which one facility was sold in 1998. The second facility was built for
lease to Broadmoor RV and Truck Center. The project was completed and opened
for business in June, 1997. Monthly lease payments are $10,000. Subsequently,
Broadmoor RV and Truck Center leased 1.00 acre.
 
PUYALLUP
 
  This property is approximately 20 acres of land zoned for commercial and
multi-family development in Puyallup, Pierce County, Washington and is located
adjacent to a major shopping area. The marketability of this property is
currently being impacted by sewer capacity issues. The city of Puyallup has
indicated that the property can be fully served by city utilities by the fall
of 1999. At September 30, 1998, the carrying value was $1,568,194. Its
appraised value was $1,740,000 as of September 30, 1996. This property is
currently under contract for a pending sale in the amount of $2,000,000 which
is expected to occur in the first half of calendar year 1999.
 
EVERETT
 
  This property is a 98 acre parcel of land zoned for industrial use located
adjacent to Boeing's Paine Field plant at Everett, Washington. Studies of
utility services, access requirements and environmental issues are ongoing as
are discussions with several parties to sell and/or jointly develop the
property. At September 30, 1998, the carrying value of the property was
$5,065,638. The appraised value was $7,635,000 as of September 30, 1996.
 
RENTON
 
  This property is approximately 35 acres. It is characterized by heavily
vegetated terrain and is zoned for residential use. The City of Renton has
annexed and rezoned the property increasing its density from just over
 
                                      33
<PAGE>
 
100 residential units to over 200 residential units. At September 30, 1998,
the carrying value in the property was $3,232,970. The appraised value was
$3,425,000 as of September 30, 1997.
 
  Risks associated with holding these properties for development include
possible adverse changes in zoning and land use regulations and local economic
changes, each of which could preclude development or resale. Because most of
the properties are located in Washington State, which is currently
experiencing relatively stable economic conditions, a regional economic
downturn could have a material negative impact on Metropolitan's ability to
timely develop and sell a significant portion of them.
 
  The appraised value of substantially unimproved land is subject to a number
of assumptions. Actual sales results may differ substantially from such
appraisals. There can be no assurance that the sales prices as indicated by
the appraisals will be realized.
 
  The total development property sales was approximately $3.2 million during
fiscal 1998.
 
  The following table presents additional information about the Consolidated
Group's investments in and sales of real estate held for sale and development:
 
<TABLE>
<CAPTION>
                                                     Year Ended or at
                                                       September 30,
                                               -------------------------------
                                                 1998       1997       1996
                                               ---------  ---------  ---------
                                                  (Dollars in Thousands)
<S>                                            <C>        <C>        <C>
REAL ESTATE HELD FOR SALES AND DEVELOPMENT
  Investment Property Held for Sale and
   Development................................ $  45,207  $  47,413  $  48,175
  Real Estate Acquired in Satisfaction of Debt
   and Foreclosures in Process................    44,507     34,389     36,158
                                               ---------  ---------  ---------
  Net Balance................................. $  89,714  $  81,802  $  84,333
                                               =========  =========  =========
SUMMARY OF CHANGES
  Balance at Beginning of Year................ $  81,802  $  84,333  $  91,105
  Additions and Improvements:
   Condominiums...............................     7,628     11,664     18,795
   Repossessed and Development Real Estate....    33,035     22,460     21,392
   Depreciation...............................    (2,171)    (4,986)    (3,048)
  Cost of Real Estate Sold:
   Condominium Units..........................   (11,756)   (16,028)   (23,531)
   Real Estate................................   (18,824)   (15,641)   (20,380)
                                               ---------  ---------  ---------
Balance at End of Year........................ $  89,714  $  81,802  $  84,333
                                               =========  =========  =========
GAIN (LOSS) ON SALE OF REAL ESTATE
  Condominiums:
   Sales...................................... $  12,267  $  14,719  $  22,799
   Unit Costs.................................    (4,608)    (4,486)    (8,051)
   Associated Selling Costs...................    (7,148)   (11,542)   (15,480)
                                               ---------  ---------  ---------
  Condominium-Gain (Loss).....................       511     (1,309)      (732)
                                               =========  =========  =========
  Real Estate:
   Sales......................................    20,011     16,701     22,849
   Equity Basis...............................   (18,824)   (15,641)   (20,380)
                                               ---------  ---------  ---------
   Real Estate-Gain...........................     1,187      1,060      2,469
                                               ---------  ---------  ---------
   Total Gain(Loss) on Sale of Real Estate.... $   1,698  $    (249) $   1,737
                                               =========  =========  =========
</TABLE>
 
                                      34
<PAGE>
 
                                  COMPETITION
 
  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. In the private secondary mortgage
market, the largest single competitors are subsidiaries of much larger
companies while the largest number of competitors are a multitude of
individual investors. In all areas of Receivable acquisitions, the
Consolidated Group competes with financial institutions, many of which are
larger, have access to more resources and greater name recognition. Management
believes the primary competitive factors are the amounts offered and paid to
Receivable sellers and the speed in which the processing and funding of the
transaction can be completed. Competitive advantages enjoyed by the
Consolidated Group include (i) its access to markets throughout the United
States; (ii) Metropolitan's BrokerNet software; (iii) its flexibility in
structuring Receivable acquisitions; (iv) its long history in the business;
and (v) its in-house capabilities for processing and funding transactions. 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. Management believes the Consolidated Group to be one of the largest
investors in such seller-financed Receivables in the United States.
 
  Metropolitan competes with other investors in its lottery, structured
settlement and annuity acquisitions. Competitive forces have substantially
decreased the yields available on new lottery acquisitions, structured
settlements and annuities.
 
  Metwest competes with other lending institutions in its loan origination
program, pool acquisition program and its correspondent lending program. The
lending market is a multi-billion dollar market including competitors with
vastly greater resources, economies of scale and name recognition. Metwest and
Metropolitan believe that their flexible underwriting and pricing guidelines
enhance their ability to compete in these markets. To date, Metwest's growth
in these activities has been below projections. Management has implemented
several new programs in an effort to expand these activities. See "RECEIVABLE
INVESTMENTS." There can be no assurance that these programs will be successful
in expanding these activities nor that they will be profitable if expanded.
 
  Metropolitan and Western United compete in the secondary market as sellers
of pools of receivables (both direct sales and sales through securitization).
This market is a multi-billion dollar market and includes competitors with
access to greater resources, greater volumes and economies of scale, and
better name recognition.
 
  Metropolitan's securities products face competition for investors from other
securities issuers, many of which are much larger and have greater name
recognition.
 
  The life insurance and annuity business is highly competitive. Western
United 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.
Western United's management believes that it is in an advantageous position in
this regard because of its earning capability through investments in
Receivables compared to that of most other life insurance companies. Western
United has been assigned a rating of "B" ("Good") by A.M. Best Co., a
nationally recognized insurance company rating organization. Best bases its
rating on a number of complex financial ratios, the length of time a company
has been in business, the nature, quality, and liquidity of investments in its
portfolio, depth and experience of management and various other factors.
Best's ratings are supplied primarily for the benefit of policyholders and
insurance agents.
 
                                  REGULATION
 
  The Consolidated Group is subject to laws of the State of Washington which
regulate "debenture companies" because it obtains capital for its business
activities, in part, through offerings of debt securities to residents of the
State of Washington. These laws are collectively referred to as the Debenture
Company Act of 1973, as amended (the "Act") and are administered by the
Securities Division of the State Department of Financial Institutions (the
"Department").
 
                                      35
<PAGE>
 
  Designed to protect the interests of investors, the Act limits the amount of
debt securities that Metropolitan may issue by requiring that debenture
companies maintain certain ratios of net worth to outstanding debt securities.
The required ratio decreases as the amount of outstanding debt securities
increases. The highest ratio of 20% must be maintained by debenture companies
with $1,000,000 or less in debt securities outstanding, the ratio of 10% must
be maintained by debenture companies with anywhere between $1,000,000 and
$100,000,000 in debt securities outstanding and the lowest ratio of 5% must be
maintained by debenture companies with debt securities outstanding exceeding
$100,000,000. At September 30, 1998, Metropolitan's required net worth for
this purpose was approximately $15,010,000, while its actual net worth
(stockholders' equity) was approximately $58,757,000. The Act also requires
that 50% of the required net worth amount be maintained in cash or other
liquid assets.
 
  In addition, the Act limits equity investments by Metropolitan in a single
project or subsidiary to the greater of net worth or 10% of assets; aggregate
equity investments, with certain exceptions, to 20% of assets; loans to any
single borrower, with certain exceptions, to 2.5% of assets; and investments
in unsecured loans to 20% of assets. Other provisions of the Act prohibit
Metropolitan from issuing more than 50% of its debentures for terms of two
years or less; prohibit transfer of control of Metropolitan without regulatory
approval; prohibit common control of another debenture company, bank or trust
company; and prohibit officers, directors and controlling shareholders from
directly or indirectly borrowing funds of Metropolitan and from participating
in certain other preferential transactions with it. Metropolitan is required
to notify its debentureholders in writing fifteen to forty-five days in
advance of the maturity dates of their investments and to provide all
debentureholders with copies of its annual financial statements. The Act also
provides for periodic examinations of the accounts, books and records of
debenture companies such as Metropolitan to ascertain compliance with the law.
Finally, the Act and other applicable laws and regulations provide the
Department with authority to take regulatory enforcement actions in the event
of a violation of such laws and regulations.
 
  Metropolitan's aggregate principal amount of outstanding debentures,
including accrued and compound interest, and its aggregate amount of preferred
stock outstanding currently are limited to $250,000,000, by the terms of the
securities sales permits issued by the Department pending improvement in
Metropolitan's ratio of earnings to its fixed charges and preferred stock
dividends. For the purposes of this calculation, the earnings of subsidiaries
are excluded unless actually paid to Metropolitan as dividends. These
limitations have restricted Metropolitan's ability to sell debentures and
preferred stock during the period that will end January 31, 1999. It is
expected, however, that Metropolitan will discuss with the Department an
increase in the securities limitation during 1999. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
Liquidity and Capital Resources" under Item 7.
 
  All areas of the Consolidated Group's Receivable acquisition and servicing
activities are highly regulated by federal and state laws designed principally
to protect the payor. 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 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.
 
  Metropolitan is subject to certain federal and Hawaii state laws and
regulations governing timeshare marketing procedures, licensing requirements
and interest rates. Hawaii also requires the registration and periodic renewal
of timeshare condominium projects prior to the commencement or continuation of
sales in the state. The law also provides timeshare purchasers with a seven-
day right of rescission following execution of an agreement to purchase.
 
  Western United and Metropolitan are subject to the Insurance Holding Company
Act as administered by the Office of the State Insurance Commissioner of the
State of Washington. This act regulates transactions between insurance
companies and their affiliates. It requires that Metropolitan provide
notification to the Insurance Commissioner of certain 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.
 
                                      36
<PAGE>
 
  Western United is subject to extensive regulation and supervision by the
Office of the State Insurance Commissioner of the State of Washington 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 things as 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. Such regulations are intended to protect annuity
contractholders and insurance policy owners rather than investors in an
insurance company.
 
  All states in which Western United 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.
 
  The net amounts expensed by Western United for guaranty fund assessments and
charged to operations for the years ended September 30, 1998, 1997, and 1996
were $149,000, $480,000, and $900,000, respectively. These estimates were
based on information provided by the National Organization of Life and Health
Insurance Guaranty Associations regarding insolvencies occurring during 1988
through 1996. Management does not believe that the amount of future
assessments associated with known insolvencies after 1996 will be material to
its financial condition or results of operations. During the year ended
September 30, 1998, Western United reduced its total estimate of these future
net losses by $320,000 based upon updated information from the National
Organization of Life and Health Guaranty Associations. During the year ended
September 30, 1997, Western United reduced its estimate of these losses by
$401,000 based upon updated information from the National Organization of Life
and Health Guaranty Associations. During the years ended September 30, 1996
and 1995, Western United did not make an adjustment based on updated
information. These estimates are subject to future revisions based upon the
ultimate resolution of the insolvencies and resultant losses. Management
cannot reasonably estimate the additional effects, if any, upon its future
assessments pending the resolution of the above described insolvencies. The
amount of guaranty fund assessment that was originally accrued in 1993 has
been recorded net of a 6.00% discount rate applied to the estimated payment
term of approximately seven years. The remaining unamortized discount
associated with this accrual was approximately $372,000 at September 30, 1998.
At September 30, 1998, the discounted amount of estimated future guaranty fund
assessments was approximately $3,565,000.
 
  Dividend restrictions are imposed by regulatory authorities on Western
United. The unrestricted statutory surplus of Western United totaled
approximately $7,738,000 as of September 30, 1998, $8,597,000 as of September
30, 1997, and $5,567,000 as of September 30, 1996. The principal reasons for
the decrease in statutory surplus during 1998 was because the statutory net
income of $2.6 million was offset by direct charges to surplus of $2.9 million
for unrealized losses and $.05 million for an asset valuation reserve
increase.
 
  For statutory purposes, Western United's capital and surplus and its ratio
of capital and surplus to admitted assets were as follows for the dates
indicated:
 
<TABLE>
<CAPTION>
                                                            As of December
                                                 As of            31,
                                             September 30, -------------------
                                                 1998      1997   1996   1995
                                             ------------- -----  -----  -----
<S>                                          <C>           <C>    <C>    <C>
Capital and Surplus(Millions)...............     $50.9     $52.2  $50.1  $46.2
Ratio of Capital and Surplus to Admitted
 Assets.....................................       5.7%      5.6%   5.4%   5.3%
</TABLE>
 
  Although the State of Washington requires only $4,000,000 in capital and
surplus to conduct insurance business, Western United has attempted to
maintain a capital and surplus ratio of at least 5% which management considers
adequate for regulatory and rating purposes.
 
                                      37
<PAGE>
 
  In 1993, Washington State enacted the Risk Based Capital Model law which
requires an insurance company to maintain minimum amounts of capital and
surplus based on complex calculations of risk factors that encompass the
invested assets and business activities of the insurance company. Western
United's capital and surplus levels exceeded the calculated minimum
requirements at its statutory reporting period ended December 31, 1997.
 
Item 2. Properties.
 
  On November 14, 1997, Metropolitan acquired an office building containing
approximately 200,000 square feet located at 601 West First Avenue, Spokane,
Washington, approximately three blocks from its previous headquarters.
Metropolitan moved its headquarters to this building in fiscal 1998.
Approximately 35% of the building is currently leased by other tenants.
 
Item 3. Legal Proceedings.
 
  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.
 
                                      38
<PAGE>
 
                                    PART II
 
Item 5. Market For The Registrant's Common Equity And Related Stockholder
Matters
 
  1. (a) Market Information: There is no market for the Registrant's common
         stock.
 
     (b) Holders: There were 5 holders of Common Stock as of September 30, 1998.
 
     (c) Dividends: The Registrant declared dividends on its Common Stock during
         the last two fiscal     years ending September 30, 1998 as follows:
 
<TABLE>
<CAPTION>
              1998         1997
            --------       ----
            <S>            <C>
            $156,489       $ 0
</TABLE>
 
   At the date of this Form 10-K, the Registrant has 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.
 
                                       39
<PAGE>
 
Item 6. Selected Financial Data
 
                     SELECTED CONSOLIDATED FINANCIAL DATA
 
  The consolidated financial data shown below as of September 30, 1998 and
1997 and for the years ended September 30, 1998, 1997 and 1996 (other than the
ratio 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,
1996, 1995 and 1994 and for the years ended September 30, 1995 and 1994 have
been derived from audited consolidated financial statements not included
herein.
 
<TABLE>
<CAPTION>
                                         Year Ended September 30,
                          ----------------------------------------------------------
                             1998        1997        1996        1995        1994
                          ----------  ----------  ----------  ----------  ----------
                             (Dollars in Thousands Except Per Share Amounts)
<S>                       <C>         <C>         <C>         <C>         <C>
CONSOLIDATED STATEMENTS
 OF INCOME DATA:
Revenues................  $  155,955  $  155,135  $  156,672  $  138,107  $  138,186
                          ==========  ==========  ==========  ==========  ==========
Income before minority
 interest ..............  $   10,453  $    9,791  $    8,146  $    6,376  $    5,702
Income allocated to
 minority interests.....        (126)       (123)       (108)        (73)       (224)
                          ----------  ----------  ----------  ----------  ----------
Net income..............      10,327       9,668       8,038       6,303       5,478
Preferred stock
 dividends..............      (3,732)     (4,113)     (3,868)     (4,038)     (3,423)
                          ----------  ----------  ----------  ----------  ----------
Income applicable to
 Common stockholders....  $    6,595  $    5,555  $    4,170  $    2,265  $    2,055
                          ==========  ==========  ==========  ==========  ==========
Ratio of earnings to
 fixed charges..........        1.75        1.77        1.46        1.35        1.29
Ratio of earnings to
 fixed charges and
 preferred stock
 dividends(2)...........        1.37        1.31        1.14        1.03        1.04
PER COMMON SHARE
 DATA(1):
Income applicable to
 common stockholders(3).  $   50,728  $   42,733  $   32,073  $   17,288  $   14,996
                          ==========  ==========  ==========  ==========  ==========
Weighted average number
 of common shares
 outstanding(1).........         130         130         130         131         137
                          ==========  ==========  ==========  ==========  ==========
Cash dividends per
 common share...........  $    1,200  $       --  $       --  $    3,800  $      675
                          ==========  ==========  ==========  ==========  ==========
CONSOLIDATED BALANCE
 SHEET DATA:
Total assets............  $1,226,665  $1,112,389  $1,282,659  $1,078,468  $1,063,290
Debentures, line of
 credit advances, other
 debt payable and
 securities sold, not
 owned..................     323,908     190,131     363,427     226,864     261,500
Stockholders' equity....      58,757      54,113      46,343      40,570      32,625
</TABLE>
--------
(1) All information retroactively reflects the reverse common stock split of
    2,250:1 which occurred during the fiscal year ended September 30, 1994.
 
(2) The consolidated ratio of earnings to fixed charges and preferred stock
    dividends was 1.37, 1.31, 1.14, 1.03, and 1.04 for the years ended
    September 30, 1998, 1997, 1996, 1995, and 1994, respectively.
    Assuming no benefit from the earnings of its subsidiaries with the
    exception of direct dividend payments, the ratio of earnings to fixed
    charges and preferred dividends for Metropolitan alone was 1.10, 1.01,
    1.11, 1.05, and 1.34 for the years ended September 30, 1998, 1997, 1996,
    1995, and 1994, respectively.
 
    The consolidated ratio of earnings to fixed charges excluding preferred
    stock dividends was as follows for the years ended September 30, 1998--
    1.75; 1997--1.77; 1996--1.46; 1995--1.35; and 1994--1.29. The ratio of
    earnings to fixed charges excluding preferred stock dividends for
    Metropolitan, assuming no benefit from the earnings of its subsidiaries
    with the exception of direct dividend payments was 1.40, 1.36, 1.48, 1.40,
    and 1.36 for the years ended September 30, 1998, 1997, 1996, 1995, and
    1994, respectively.
 
(3) Earnings per common share, basic and diluted, are computed by deducting
    preferred stock dividends from net income and dividing the result by the
    weighted average number of shares of common stock outstanding. There were
    no common stock equivalents or potentially dilutive securities outstanding
    during any year presented.
 
                                      40
<PAGE>
 
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, 1998.
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
INTRODUCTION
 
  The Consolidated Group's net income after income taxes and minority interest
was approximately $10.3 million for the fiscal year ended September 30, 1998
as compared to $9.7 million and $8.0 million for the comparable 1997 and 1996
periods, respectively. The increase in 1998 over 1997 was primarily
attributable to a net increase of $623,000 in realized gains from sales of
investments and Receivables, an increase of $1.9 million in gains from real
estate sales, an increase of $2.1 million in fees, commissions, service and
other income, and a decrease of $1.9 million in the provision for losses on
real estate assets, being offset by a $727,000 decrease in net interest
sensitive income and expense, an increase of $4.8 million in other operating
expenses, including salaries and benefits, commissions to agents, general
operating expenses and capitalized costs, net of amortization and an increase
of $406,000 in income taxes and income allocated to minority stockholders. The
increase in 1997 over 1996 was primarily attributable to a net increase of
$9.3 million in realized gains from sales of investments and Receivables, an
increase of $219,000 in net interest sensitive income and expense, an increase
of $397,000 in fees, commissions, service and other income, being offset by a
$2.0 million decrease in gains from real estate sales, an increase of $1.8
million in the provision for losses on real estate assets, an increase of $3.7
million in other operating expenses, including salaries and benefits,
commissions to agents, general operating expenses and capitalized costs, net
of amortization and an increase of $850,000 in income taxes and income
allocated to minority stockholders.
 
  The Consolidated Group implements its primary investment goal to maximize
its risk-adjusted rate of return by investing in non-conventional real estate
Receivables. Non-conventional Receivables are typically Receivables not
originated by a regulated financial institution and not underwritten to FNMA
or FHA underwriting guidelines. Normally, either the borrower or the
collateral will not meet sufficient FNMA or FHA underwriting guidelines to
qualify for conventional financing and the seller will be required to provide
the financing to complete the sale or the buyer or seller chose non-
conventional financing. These "seller-financed Receivables" or "seller take-
back Receivables" are the types of non-conventional Receivables normally
acquired by the Consolidated Group. Because borrowers in this market may have
blemished credit records and the Consolidated Group is not able to receive
income/employment information, the Consolidated Group's underwriting practices
focus more strongly on the collateral value as the ultimate source for
repayment. In conjunction with its investment in non-conventional Receivables,
while higher delinquency rates are expected, the Consolidated Group believes
this risk is generally offset by the value of the underlying collateral
relative to the Consolidated Group's investment therein and the superior
yields over conventional financing.
 
  During the three-year period ended September 30, 1998, the Consolidated
Group operated in an environment of downward fluctuations in interest rate
levels with rates decreasing in 1998 after being relatively stable in 1997 and
after trending upward in 1996 following a declining trend in late 1995. Over
the three-year period, the general decrease in interest rate levels positively
impacted earnings and increased the fair value of the portfolio of
predominantly fixed rate investments. A portion of this improvement in value
was recognized with the realization of gains from the sale of investment
securities and Receivables of $21.8 million, $21.2 million, and $11.9 million
in 1998, 1997 and 1996, respectively. The net effect of the sales was to
recognize the present value of future income from the Receivables sold and to
reduce future income to the extent that the proceeds from sales were invested
at lower rates of return. For further information concerning the investment
portfolio see "LIFE INSURANCE AND ANNUITY OPERATIONS" and "SECURITIES
INVESTMENTS" under Item 1. The Receivable portfolio also experienced higher
than normal prepayments during the periods of declining rates which increased
income by triggering the recognition of unamortized discounts at an
accelerated rate.
 
                                      41
<PAGE>
 
  During 1996, construction on a major timeshare development project in Kauai,
Hawaii was completed. At completion, approximately $21.4 million had been
invested in the final phase. The final phase consisted primarily of the Banyan
building of which approximately 350 of the available 3050 timeshare weeks
remained unsold at September 30, 1998. The sales price of each timeshare week
is projected to range between $14,000 and $18,000 with an expected sellout of
the remaining timeshare weeks by late 1999. See "REAL ESTATE DEVELOPMENT--
Lawai Beach Resort" under Item 1.
 
  Net income in 1998, 1997, 1996, 1995, and 1994 was sufficient to cover fixed
charges including preferred stock dividend requirements. After considering the
effects of potentially non-recurring income items such as the gains from sales
of investments, Receivables and real estate, the 1998 income would have been
insufficient to cover fixed charges by approximately $14.0 million.
Additionally, the elimination of similar items in 1997, 1996 and 1995 would
have resulted in insufficient earnings to cover fixed charges by approximately
$13.0 million, $9.7 million, and $6.8 million, respectively. See "SELECTED
CONSOLIDATED FINANCIAL DATA" under Item 6.
 
REVENUES AND EXPENSES
 
  Revenues for the Consolidated Group of $156.0 million for 1998 showed a $0.9
million increase from the $155.1 million reported in the prior year. Revenues
of $155.1 million for the fiscal year ended September 30, 1997 showed a slight
decrease from the $156.7 million reported for 1996. The increase in 1998 was
primarily attributable to a $2.1 million increase in fees, commissions,
service and other income, a $8.5 million increase in gains on investments and
a $900,000 increase in real estate sales being offset by a decrease of
$2.6 million from interest related revenues and a $7.9 million decrease in
gains on sales of Receivables. The slight decrease in 1997 was primarily
attributable to the $9.0 million increase in gains on sales of Receivables and
the $3.0 million increase from interest related revenues being more than
offset from the $14.2 million decrease in real estate sales revenues.
 
  Expenses of operation for the Consolidated Group were $140.0 million, $140.3
million, and $144.3 million for fiscal years ended September 30, 1998, 1997,
and 1996, respectively. The slight decrease in expenses in 1998 over 1997 was
primarily the result of a decrease of $2.4 million in the cost of insurance
policy and annuity benefits, a decrease of $1.9 million in the provision for
losses on real estate assets and a $1.1 million decrease in the cost of real
estate sold being offset by increased salaries and benefits of $4.7 million
and increased commissions to agents of $400,000. The decrease in expenses in
1997 over 1996 was primarily the result of a $12.2 million decrease in cost of
real estate sold being only partially offset by an increase of $2.2 million in
the cost of insurance policy and annuity benefits, an increase of $0.6 million
in interest expense, an increase of $1.8 million in the provision for losses
on real estate assets, and a $3.7 million increase in other operating
expenses, including salaries and benefits, commissions to agents, general
operating expenses and capitalized costs, net of amortization.
 
INTEREST SENSITIVE INCOME AND EXPENSE
 
  Management monitors interest sensitive income and expense as it manages the
objectives for the financial results of operations. Interest sensitive income
consists of interest on Receivables, earned discount on Receivables, insurance
revenues and other investment interest. Interest sensitive expense consists of
interest expense on borrowed money and insurance policy and annuity benefits.
 
  The Consolidated Group is in a "liability sensitive" position in that its
interest sensitive liabilities reprice or mature more quickly than do its
interest sensitive assets. Consequently, in a rising interest rate
environment, the net return from interest sensitive assets and liabilities
will tend to decrease. Conversely, in a falling interest rate environment, the
net return from interest sensitive assets and liabilities will tend to
improve. As with the impact on operations from changes in interest rates, the
Consolidated Group's Net Present Value ("NPV") of financial assets and
liabilities is subject to fluctuations in interest rates. The Consolidated
Group continually monitors the sensitivity of net income and NPV of its
financial assets and liabilities to changes in interest rates.
 
                                      42
<PAGE>
 
  NPV is calculated based on the net present value of estimated cash flows
utilizing market prepayment assumptions and market rates of interest provided
by independent broker quotations and other public sources.
 
  Computation of forecasted effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and redemptions of debentures, and should be not
relied upon as indicative of actual future results.
 
  The following table presents, as of September 30, 1998, the Consolidated
Group's estimate of the change in the NPV of the financial assets and
liabilities of the Consolidated Group if interest rate levels generally were
to increase or decrease by 1% and 2%, respectively. These calculations, which
are highly subjective and technical, may differ from actual results. See "
Asset/Liability Management."
 
<TABLE>
<CAPTION>
                                       Fair Value With Interest Rate Change
                         -----------------------------------------------------------------
                          Carrying     Fair     Decrease   Decrease   Increase   Increase
                          Amounts     Value        1%         2%         1%         2%
                         ---------- ---------- ---------- ---------- ---------- ----------
                                              (Dollars in Thousands)
<S>                      <C>        <C>        <C>        <C>        <C>        <C>
FINANCIAL ASSETS:
Cash and cash
 equivalents............ $   31,733 $   31,733 $   31,733 $   31,733 $   31,733 $   31,733
Investments.............    164,891    168,251    171,949    179,457    158,251    151,999
Real estate contracts
 and
 mortgage notes ........    603,821    649,258    671,754    695,685    628,083    608,128
Mortgage servicing
 rights.................      6,292      6,292      6,480      6,679      6,114      5,945
Other receivable
 investments............    200,774    213,277    224,710    237,040    202,666    192,808
                         ---------- ---------- ---------- ---------- ---------- ----------
                         $1,007,511 $1,068,811 $1,106,626 $1,150,594 $1,026,847 $  990,613
                         ========== ========== ========== ========== ========== ==========
FINANCIAL LIABILITIES:
Annuity reserves........ $  800,849   $800,849 $  827,885 $  856,203 $  775,028 $  750,359
Debentures payable......    195,470    200,884    197,919    200,412    193,063    190,697
Advances under line of
 credit.................    118,343    118,343    118,343    118,343    118,343    118,343
Debt payable............      7,255      7,305      7,346      7,438      7,166      7,078
                         ---------- ---------- ---------- ---------- ---------- ----------
                         $1,121,917 $1,127,381 $1,151,493 $1,182,390 $1,093,600 $1,066,474
                         ========== ========== ========== ========== ========== ==========
</TABLE>
 
  Net interest sensitive income was $27.3 million for the fiscal year ended
September 30, 1998. The comparable results for 1997 and 1996 were $28.0
million and $27.8 million, respectively. Interest rates for 1998 were
relatively stable in the beginning of such fiscal year with rates declining as
the fiscal year closed. Interest rates for 1997 were relatively stable with
slightly increasing rates in the beginning of such fiscal year and declining
rates as the fiscal year closed. Interest rates in 1996 remained relatively
stable with slightly increasing rates as the fiscal year closed. Also
contributing to the changes in net interest sensitive income was the
capitalization of approximately $0.6 million, $0.5 million and $2.5 million
for the years 1998, 1997 and 1996, respectively, of interest costs associated
with various real estate development projects owned by the Consolidated Group.
 
  The calculations of present value have certain shortcomings. The discount
rates utilized for Receivables and investment securities are based on
estimated market interest rate levels of similar receivables and securities
nationwide, with prepayment levels generally assumed based on global
statistics. The unique characteristics of the Consolidated Group's Receivables
and investment securities may not necessarily parallel those assumed in the
model, and therefore, would likely result in different discount rates,
prepayment experiences, and present values. The discount rates utilized for
debentures, annuity reserves and debt payable are based upon valuable
alternative types and sources of funds which are not necessarily indicative of
the present value of such instruments. The present values are determined based
on the discounted cash flows over the remaining estimated lives of the
financial instruments and assumes that the resulting cash flows are reinvested
in financial instruments with virtually identical terms. The total measurement
of the Consolidated Group's exposure to interest rate risk as presented in the
above table may not be representative of the actual values which might result
from a higher or lower interest rate environment. A higher or lower interest
rate environment will most likely result in different
 
                                      43
<PAGE>
 
investment and borrowing strategies by the Consolidated Group designed to
mitigate the effect on the value of, and the net earnings generated from, the
Consolidated Group's net assets from any change in interest rates.
 
REAL ESTATE SALES
 
  The Consolidated Group is in the real estate market due primarily to its
repossession of properties following Receivable defaults and its investment in
a major timeshare development project in Kauai, Hawaii. See "REAL ESTATE
DEVELOPMENT" under Item 1.
 
  At September 30, 1998, excluding timeshare development property,
approximately 77% of real estate owned by the Consolidated Group is located in
the Pacific Northwest (Alaska, Washington, Oregon, Idaho, Montana), which has
experienced a stronger and more stable economy than many areas of the nation
in the past several years. Consequently, management believes that the sale of
these assets will be largely dependent on the attractiveness of the Pacific
Northwest marketplace. Of the property owned in the Pacific Northwest,
approximately $12.9 million is invested in commercial developments with
approximately $46.4 million invested in undeveloped or partially developed
land.
 
  The Consolidated Group is engaged in the development of various properties
acquired in the course of its business through repossession or as investment
property. The development or improvement of properties is undertaken for the
purpose of enhancing values to increase salability and to maximize profit
potential.
 
  Real estate sales exceeded real estate costs by $1.7 million in 1998. Real
estate costs exceeded real estate sales by $249,000 in 1997, while sales
exceeded costs by $1.7 million in 1996. Included in these results are sales of
timeshare units with a net gain of $0.5 million in 1998 and net losses of $1.3
million and $0.7 million in 1997 and 1996, respectively. Metropolitan has
engaged an affiliate of the Shell Group, Chicago, Illinois, Shell-Lawai
("Shell") to provide management services and sell timeshare units at Lawai
Beach. See "REAL ESTATE DEVELOPMENT--Lawai Beach Resort" under Item 1. This
agreement provides for a fixed fee to Shell plus an incentive fee based upon
future sales after a base amount of cash flow is generated by the property.
Sales of timeshare units at Lawai Beach in 1998, 1997, and 1996 were
approximately $10.8 million, $13.8 million, and $22.8 million, respectively.
 
  Real estate sales, including timeshare unit sales, totaled $32.3 million for
1998, $31.4 million for 1997, and $45.6 million for 1996. The Consolidated
Group's total investment in repossessed real estate was $44.5 million at
September 30, 1998, $34.4 million at September 30, 1997, and $36.2 million at
September 30, 1996. The aggregate investment in real estate held for sale and
development increased to $89.7 million at September 30, 1998 from $81.8
million at September 30, 1997 which decreased from $84.3 million at September
30, 1996. The increase from 1997 to 1998 is primarily attributable to the
increased investment in repossessed real estate. The decrease from 1996 to
1997 is primarily attributable to the unit costs for sales in the timeshare
project in Kauai, Hawaii. In addition to timeshare unit development, the
Consolidated Group is in the general business of holding and developing
property for sale. The largest investments in such activities at September 30,
1998 were a $12.2 million development located in downtown Spokane adjacent to
the central business district and a $10.0 million factory outlet mall
development located in Pasco, Washington. See "REAL ESTATE DEVELOPMENT--Other
Development Properties" under Item 1.
 
  Gains or losses on real estate sold, excluding timeshare units, are a
function of several factors. Management's experience with the most significant
of these factors during the last three fiscal years is set forth below:
 
<TABLE>
<CAPTION>
                                                          For the Fiscal Year
                                                          Ended September 30,
                                                        -----------------------
                                                         1998    1997    1996
                                                        ------- ------- -------
                                                        (Dollars in Thousands)
<S>                                                     <C>     <C>     <C>
Amount of delinquencies over three months at fiscal
 year end.............................................. $34,000 $36,000 $26,500
Amount of foreclosures during the fiscal year.......... $27,049 $14,977 $14,271
Amount of foreclosed real estate held for sale at
 fiscal year end....................................... $44,507 $34,389 $36,158
Gain on sale of real estate during the fiscal year..... $ 1,187 $ 1,060 $ 2,469
</TABLE>
 
                                      44
<PAGE>
 
  The principal amount of Receivables in arrears for more than ninety days as
of September 30, 1998, 1997 and 1996 was 5.5%, 6.8%, and 3.9%, respectively,
stated as a percentage of the total outstanding principal amount of
Receivables. See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Note 3" under
Item 8. Improving the Consolidated Group's collection procedures, reducing
delinquencies and reducing real estate held for sale and development,
including repossessed property, continue to be ongoing goals of management.
 
  The decrease in delinquencies from 1997 to 1998 of approximately $2.0
million was primarily the result of an overall decrease in the general
delinquency rate for all Receivables including timeshare Receivables. The
increase of approximately $9.5 million from 1996 to 1997 was primarily the
result of a higher delinquency rate on timeshare Receivables and an overall
increase in the general delinquency rate for all Receivables. The Consolidated
Group believes the allowance for real estate losses to be adequate, and
accordingly the Consolidated Group has decreased the allowance for loss on
real estate assets associated with Receivables from $9.5 million at September
30, 1997 to $8.7 million at September 30, 1998.
 
PROVISION FOR LOSSES ON REAL ESTATE ASSETS
 
  During the years ended September 30, 1998, 1997 and 1996, the Consolidated
Group provided $6.2 million, $8.1 million, and $6.4 million, respectively, for
losses on real estate assets. At September 30, 1998, 1997 and 1996, the
Consolidated Group had aggregate allowances for losses on real estate assets
of $11.0 million, $12.3 million, and $10.2 million, respectively, on real
estate assets of $704 million, $595 million, and $735 million, respectively.
See "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Note 3" and "--Note 6" under
Item 8.
 
NON-INTEREST INCOME AND EXPENSE
 
  Non-interest income, composed of "Fees, Commissions, Services, and Other
Income" was $6.8 million for the fiscal year ended September 30, 1998, $4.7
million for the fiscal year ended September 30, 1997, and $4.3 million for the
fiscal year ended September 30, 1996. Income sources include service fees and
late charges in connection with Receivables, charges for loan servicing and
other services provided to outside affiliated companies, and rents,
commissions and other revenues primarily associated with the Lawai Beach
Resort, Kauai, Hawaii. The increase from 1996 to 1997 and again from 1997 to
1998 was primarily attributable to additional fees associated with the
retained servicing rights on the Receivable securitizations.
 
  Non-interest expense consists of all non-interest expenses except the cost
of real estate sold and the provision for losses on real estate assets. Non-
interest expense was $35.5 million for the year ended September 30, 1998
compared to $30.6 million for the year ended September 30, 1997 and $26.9
million for the comparable period in 1996. The increase in non-interest
expense of $4.9 million in 1998 over 1997 was primarily attributable to
increased salaries and benefits of $4.7 million and increased commissions to
agents of $0.4 million, being offset by a reduction of $0.2 million in other
operating expenses. The increase in cost of $3.7 million in 1997 over 1996 was
primarily attributable to an increase of $3.6 million in salaries and benefits
and a decrease of $3.0 million in capitalized costs, net of amortization being
only partially offset by a $2.8 million reduction in commissions to agents.
 
NET GAINS (LOSSES) ON INVESTMENTS AND RECEIVABLES
 
  The Consolidated Group invests in securities and Receivables as well as real
estate investment properties. The Consolidated Group adopted SFAS No. 115 on
September 30, 1993 and since that time has classified its investments in debt
and equity securities as either "trading," "available-for-sale" or "held-to-
maturity." From time to time, gains or losses are recognized on trading
positions and securities classified as "available-for-sale" may be sold at a
gain or a loss. Net gains from the mark-to-market adjustment of trading
securities, including residual certificates and sale of investments were $8.0
million in 1998. Net losses from the sale and mark-to-market adjustment of
investments were $0.5 million in 1997 and $0.8 million in 1996. See
"SECURITIES
 
                                      45
<PAGE>
 
INVESTMENTS" under Item 1. The Consolidated Group purchases Receivables
collateralized by real estate, lottery prizes structured settlements, and
annuities. See "RECEIVABLE INVESTMENTS" under Item 1 and "NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS--Note 3" and "--Note 7" under Item 8. Such
assets are generated through the ongoing production operations of the
Consolidated Group. At times, Receivables that have increased in value,
primarily from a decreasing interest rate environment, or which exceed
internal demand, may be remarketed either through whole loan sales or
securitizations. See "RECEIVABLE INVESTMENTS--Receivable Sales" under Item 1.
Net gains from the sale of Receivables were $13.8 million, $21.7 million, and
$12.7 million for the fiscal years ended September 30, 1998, 1997, and 1996,
respectively.
 
ASSET/LIABILITY MANAGEMENT
 
  The Consolidated Group is subject to interest rate risk because most of its
assets and liabilities are financial in nature. Generally, the Consolidated
Group's financial assets (primarily cash and cash equivalents, Receivables and
fixed income investments) reprice more slowly than the Consolidated Group's
financial liabilities (primarily securities sold, not owned, debentures and
annuities). In a rising rate environment, this mismatch will tend to reduce
earnings, while in a falling rate environment, earnings will tend to increase.
During fiscal 1999, approximately $329.5 million of interest sensitive assets
are expected to reprice or mature. These assets consist of approximately
$215.8 million of Receivables, $82.0 million of fixed income investments and
$31.7 million of cash and cash equivalents. For liabilities, most of the
balance of life insurance and annuity contracts may be repriced during 1999.
Management estimates this amount at $591.1 million. In addition, approximately
$50.5 million of debentures and $124.3 million of other debt, including line
of credit advances, will mature or reprice during that period. At September
30, 1998, these estimates result in interest sensitive liabilities in excess
of interest sensitive assets of approximately $436.4 million, or a ratio of
interest sensitive liabilities to interest sensitive assets of approximately
233%.
 
  The Consolidated Group is able to manage this liability to asset mismatch of
approximately 2.3:1 by the fact that approximately 76% of the interest
sensitive liabilities are life insurance and annuity contracts which are
subject to surrender charges. These contracts have surrender charges that
apply for as long as nine years, but with decreasing amounts during such term.
At the option of the Consolidated Group, these contracts are subject to annual
repricing. In periods of declining interest rates, this feature is beneficial
as it allows the Consolidated Group to reprice its liabilities at lower market
rates of interest. In periods of increasing interest rates, such liabilities
are protected by surrender charges of approximately $9.3 million at September
30, 1998. Depending on the remaining surrender charges, the Consolidated Group
has the option to extend any interest rate increase over a two to three year
period, thereby making it not generally economical for an annuitant to pay the
surrender charge in order to receive payment in lieu of accepting a rate of
interest that is lower than current market rates of interest. As a result, the
Consolidated Group may respond more slowly to increases in market interest
rate levels thereby diminishing the impact of the current mismatch in the
interest sensitivity ratio. Additionally, through Receivable securitizations,
the Consolidated Group has increased its ability to increase liquidity to
manage the liability to asset mismatch. If necessary, the proceeds from the
securitization could be used to payoff maturing liabilities.
 
EFFECT OF INFLATION
 
  During the three-year period ended September 30, 1998, moderate inflation
rates have had a generally positive impact on the Consolidated Group's
operations. This impact has primarily been indirect in that the level of
inflation tends to impact interest rates on both the Consolidated Group's
assets and liabilities. See " Interest Sensitive Income and Expense." However,
both interest rate levels in general and the cost of the Consolidated Group's
funds and the return on its investments are influenced by additional factors
such as the level of economic activity and competitive or strategic product
pricing issues. The net effect of the combined factors on the earnings of the
Consolidated Group has been a slight decrease over the three-year period in
the positive spread between the rate of return on interest earning assets less
the cost of interest bearing liabilities. Inflation has not had a material
effect on the Consolidated Group's operating expenses. Increases in operating
expenses have resulted principally from increased product volumes or other
business considerations.
 
                                      46
<PAGE>
 
  Revenues from real estate sold are influenced in part by inflation, as real
estate values have historically fluctuated with the rate of inflation.
However, management is unable to quantify the effect of inflation in this
respect with any degree of accuracy.
 
NEW ACCOUNTING RULES
 
  In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," ("SFAS 121") was issued. SFAS 121 requires certain long-
lived assets, such as the Consolidated Group's real estate assets, be reviewed
for impairment in value whenever events or circumstances indicate that the
carrying value of an asset may not be recoverable. In performing the review,
if expected future undiscounted cash flows from the use of the asset or the
fair value, less selling costs, from the disposition of the asset is less than
its carrying value, an impairment loss is to be recognized. The Consolidated
Group adopted this new standard on October 1, 1996. The adoption of SFAS 121
did not have a material effect on the consolidated financial statements.
 
  In June 1996, Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125") was issued. SFAS 125 provides
accounting and reporting standards based on a consistent application of a
financial components approach that focuses on control. Under this approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered and derecognizes
liabilities when extinguished. This statement provides consistent standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. SFAS 125 is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after
December 31, 1996. The application of the provisions of SFAS 125 effective
January 1, 1997 did not have a material effect on the Consolidated Group's
financial condition, results of operations or cash flows.
 
  In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," ("SFAS 128") was issued. SFAS 128 establishes standards
for computing and presenting earnings per share ("EPS") and simplifies the
existing standards. This standard replaces the presentation of primary EPS
with a presentation of basic EPS. It also requires the dual presentation of
basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator
of the diluted EPS computation. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods
and requires restatement of all prior-period EPS data presented. The
application of the provisions of SFAS 128 did not have a material effect on
the Consolidated Group's presentation of earnings per share disclosures.
 
  In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS 130") was issued. SFAS 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This Statement requires that all items
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. This Statement does
not require a specific format for the financial statement, but requires an
enterprise to display an amount representing total comprehensive income for
the period in the financial statements. This Statement requires an enterprise
to classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. This Statement is effective for
fiscal years beginning after December 15, 1997. The Consolidated Group
believes that the application of this Statement will not have a material
effect on the presentation of its consolidated financial statements.
 
  In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," ("SFAS
131") was issued. SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and
 
                                      47
<PAGE>
 
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This Statement supersedes Statement of
Financial Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report information about
major customers. This Statement is effective for financial statements for
periods beginning after December 15, 1997. The Consolidated Group has not yet
assessed the effect of the disclosures of its business segments.
 
  In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments (SOP 97-3). SOP 97-3 applies to
all entities that are subject to guaranty-fund and other insurance-related
assessments. Assessments covered by this SOP include any charge mandated by
statute or regulatory authority that is related directly or indirectly to
underwriting activities (including self-insurance), except for income taxes
and premium taxes. SOP 97-3 is effective for financial statements for fiscal
years beginning after December 15, 1998. The Consolidated Group does not
believe that the application of SOP 97-3 will have a material effect on its
consolidated financial statements.
 
  In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use, (SOP 98-1). SOP 98-1 provides guidance
on accounting for the costs of computer software by identifying the
characteristics of internal-use software. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998. The Consolidated Group does not
believe that the application of this Statement will have a material effect on
its financial statements.
 
  In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133")
was issued. SFAS 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. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999, however, earlier application is
encouraged as of the beginning of any fiscal quarter. The Consolidated Group
has not yet determined the effect of SFAS 133 on its consolidated financial
statements.
 
  In October 1998, the FASB issued Statement of Financial Accounting Standards
No. 134, "Accounting for Mortgage-Banking Enterprise" which requires that
after the securitzation of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities
or other retained interests based on its ability and intent to sell or hold
those investments. This Statement conforms the subsequent accounting for
securities retained after the securitization of mortgage loans by a mortgage
banking enterprise with the subsequent accounting for securities retained
after the securitization of other types of assets by a non-mortgage banking
enterprise. This Statement is effective for the first fiscal quarter beginning
after December 15, 1998. The Consolidated Group has not yet determined the
effect of the application of this statement on its consolidated financial
statements.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Consolidated Group's sources of liquidity are tied to its ability to
renew, maintain or obtain additional sources of cash. The Consolidated Group
has successfully met these requirements during the past three years and has
continued to invest funds generated by operations, financing activities,
Receivables and investments.
 
  Cash provided by operating activities was $22.5 million in 1998 and $185.9
million in 1996, while cash used in operating activities was $102.1 million in
1997. Cash utilized by the Consolidated Group in its investing activities was
$111.6 million in 1998 and $186.7 million in 1996, while cash provided by its
investing activities was $226.1 million in 1997. Cash provided by financing
activities was $61.8 million in 1998 and $3.3 million in 1996, while cash
utilized by the Consolidated Group in its financing activities was $100.3
million in 1997. These
 
                                      48
<PAGE>
 
cash flows have resulted in year-end cash and cash equivalent balances of
$31.7 million in 1998, $58.9 million in 1997, and $35.2 million in 1996. Cash
and cash equivalents decreased by $27.2 million in 1998 over 1997. In 1998,
Receivable acquisitions of $494.3 million, $17.0 million in acquisition and
costs associated with real estate held for sale and development and $69.0
million used to fund life and annuity withdrawals less receipts were financed
by proceeds from Receivable sales, securitizations and principal payments of
$356.2 million, $61.6 million in proceeds from sales of real estate and from
maturities and sales less purchases of investments, an increase in short-term
borrowings of $120.9 million, $16.1 million in proceeds from the issuance of
debenture bonds less repayments and other cash proceeds of $25.5 million from
operating activities. Cash and cash equivalents increased by $23.7 million in
1997 over 1996. In 1997, Receivable acquisitions of $390.0 million, $22.8
million in acquisition and costs associated with real estate held for sale and
development and $58.6 million used to fund life and annuity withdrawals less
receipts were financed by proceeds from Receivable sales, securitizations and
principal payments of $498.9 million, $9.4 million in proceeds from sales of
real estate and from maturities and sales less purchases of investments and
other cash proceeds of $30.5 million from operating activities. At September
30, 1998, management considers its cash and cash equivalent funds combined
with its other sources of funds to be adequate to finance any required debt
retirements or planned asset additions.
 
  The State of Washington regulates the total amount of debentures and
preferred stock that Metropolitan can have outstanding. During the offering
that became effective in Washington on February 26, 1998, Metropolitan was
authorized to have no more than $250.0 million in outstanding debentures,
including accrued and compounded interest, and outstanding preferred stock.
See "REGULATION" under Item 1. At September 30, 1998, Metropolitan had total
outstanding debentures of approximately $198.2 million and total outstanding
preferred stock at liquidation value of approximately $49.2 million. During
the three offerings which expired January 31, 1998, 1997 and 1996, the
aggregate debenture and preferred stock permits varied from approximately
$251-$296 million. These regulatory limitations did not cause any material
adverse impact on liquidity during 1994 through 1998; however, Metropolitan
did forego various investment opportunities which could have been made if they
could have been funded by the additional sales of debentures and preferred
stock.
 
  During 1999, anticipated principal, interest and dividend payments on
outstanding debentures, other debt payments and preferred stock distributions
are expected to be approximately $186.7 million. During 1998, the principal
portion of the payments received on the Consolidated Group's Receivables and
proceeds from sales of real estate and Receivables was $377.6 million. A
decrease in the prepayment rate on these Receivables or the ability to sell or
securitize Receivables would reduce future cash flows from Receivables and
might adversely affect the Consolidated Group's ability to meet its principal,
interest and dividend payments.
 
  The Consolidated Group expects to maintain adequate levels of liquidity in
the foreseeable future by continuing its securities offerings, annuity sales
and the sale and securitization of Receivables. At September 30, 1998, cash or
cash equivalents were $31.7 million, or 2.6% of total assets. As of September
30, 1998, the Consolidated Group had no cash or cash equivalents restricted
from general corporate use. Including trading securities, securities that are
available for sale and excluding restricted cash equivalents, total liquidity
was approximately $114 million, $130 million, and $74 million as of September
30, 1998, 1997 and 1996, respectively, or 9.3%, 11.7%, and 5.8% of total
assets, respectively.
 
  Access to new "capital markets" through Receivable securitizations has
allowed the Consolidated Group to both increase liquidity and accelerate
earnings through the gains recorded on the securitizations. The increased
ability to improve liquidity will enable the Consolidated Group to accept
certain asset/liability mismatches which have historically been beneficial to
the Consolidated Group when they have been able to finance higher earning
longer term assets with lower cost of funds associated with shorter term
liabilities.
 
  For statutory purposes, Western United performs cash flow testing under
seven different rate scenarios. The results of these tests are filed annually
with the Insurance Commissioner of the State of Washington. At the end of
calendar year 1997, the results of this cash flow testing process were
satisfactory.
 
  Metropolitan alone used approximately $7.5 million in cash in operations in
1998. Investing activities used net cash of approximately $128.9 million.
Funds provided included $241.9 million from proceeds from sales and
 
                                      49
<PAGE>
 
principal payments of Receivables and real estate, $2.0 million from
investment sales and maturities and $20.2 million from a reduction in
investment and advances to subsidiaries. Funds used included $362.4 million
for the purchase of Receivables, $17.9 million in capital expenditures, $0.9
million for the purchase of investments and $11.8 million in additions to real
estate held. Net cash provided by financing activities in 1998 of $133.4
million included $65.0 million in new debenture sales and net borrowings of
$122.5 million, which were offset by repayment of debentures of $48.9 million,
redemption of preferred stock, net of new issuance, of $1.5 million and $3.9
million in dividend payments.
 
  Metropolitan alone used approximately $30.7 million in cash in operations in
1997. Investing activities provided net cash of approximately $27.0 million.
Funds provided included $176.2 million from proceeds from sales and principal
payments of Receivables and real estate, $6.9 million from investment
maturities and $11.2 million from a reduction in investment and advances to
subsidiaries. Funds used included $139.6 million for the purchase of
Receivables, $4.1 million for the purchase of investments and $21.7 million in
additions to real estate held. Net cash provided by financing activities in
1997 of $5.3 million included $38.5 million in new debenture sales, net
borrowings of $11.8 million and issuance of preferred stock, net of
redemption, of $1.2 million, which were offset by repayment of debentures of
$42.4 million and $4.1 million in preferred stock dividend payments.
 
  Metropolitan alone generated approximately $20.8 million in cash from
operations in 1996. Net cash of approximately $23.5 million was used in
investing activities. Funds used included $32.2 million for the purchase of
Receivables, $11.7 million for the purchase of investments and $17.2 million
in additions to real estate held. An additional $16.3 million was used for
investment in and advances to subsidiaries. Funds provided from investing
activities included $24.3 from the sale of Receivables and $12.5 million of
principal payments on such Receivables. Additional funds of $9.2 million from
proceeds on sales of real estate and $9.1 million from the sale and maturities
of investments were received. Net cash used in financing activities in 1996 of
$8.4 million included $22.9 million repayment of debentures and $3.9 million
in preferred dividend payments, which were offset by new debenture sales of
$9.1 million, issuance of preferred stock, net of redemption, of $1.8 million
and net borrowings from banks and others of $7.5 million.
 
  At September 30, 1998, Metropolitan had approximately $749,000 in
construction commitments associated with its real estate development projects.
Additionally, Metropolitan had no knowledge of any environmental liabilities
associated with any of its real estate asset investments. During the year
ended September 30, 1997, Metropolitan entered into an agreement to acquire a
new corporate headquarters building in Spokane, Washington. The transaction,
which closed in the first quarter of fiscal 1998, carried a purchase price of
approximately $11.7 million. Additionally, the Consolidated Group incurred
approximately $4 million in capital expenditures for renovation of the
building in 1998.
 
  Management believes that cash flow generated from the Consolidated Group's
operating activities and financing activities will be sufficient to conduct
its business and meet its anticipated obligations as they mature during the
next fiscal year. Metropolitan has never defaulted on any of its obligations
since its founding in 1953.
 
YEAR 2000 DISCLOSURE
 
  The Consolidated Group is aware of the potential effect that the year 2000
and the new century may have on computer hardware, computer software and
applications and embedded micro-controllers in non-computer equipment
(collectively "Information Technology"). The problem is insuring that the
Consolidated Group is "Year 2000 Compliant" meaning that the Information
Technology is able to (i) process date and time data accurately and (ii)
calculate, compare and sequence from, into and between the twentieth and
twenty-first centuries, the years 1999, 2000 and leap years.
 
  The Consolidated Group and its affiliates share many software, hardware,
facilities and other systems. Therefore, the Consolidated Group's Year 2000
efforts are a combined and coordinated effort among all companies within the
Consolidated Group and its affiliates. The following are statements regarding
the Year 2000
 
                                      50
<PAGE>
 
compliance of the Consolidated Group. The information below has not been
independently verified by the Consolidated Group, other than statements
relating to the Consolidated Group.
 
 State of Readiness
 
  The Consolidated Group has established a Year 2000 task force which has
developed an action plan for addressing issues related to the Year 2000.
Management currently contemplates that the plan, with the exception of the
contingency plan, will be substantially completed by August 1, 1999. The
contingency plan is expected to be substantially completed by December 1,
1999, but will continue to be revised thereafter as needed in order to
maintain an effective contingency plan. The action plan includes the following
phases:
 
  .  Inventory--Identify all internal and external systems and services that
     may utilize date sensitive information.
 
  .  Assessment--Determine whether each system or service meets the
     Consolidated Group's definition of Year 2000 Compliance and assess the
     potential business impact of non-compliance.
 
  .  Renovation--Modify and/or replace any systems or services that do not
     satisfy the Consolidated Group's definition of Year 2000 Compliance.
 
  .  Certification--Obtain certification that each system or service meets
     the definition of compliance.
 
  .  Training--Develop and implement any training and procedural changes to
     ensure correct data-entry.
 
  .Contingency Planning--Develop and implement contingency plans against
  possible failures.
 
  The plan includes a timeline for the completion of each of the phases and
components of the work within each phase. Many of the different phases have
overlapping timelines and are therefore progressing simultaneously; therefore
the status of progress on any particular phase is difficult to assess at any
point in time. The Year 2000 task force generally meets weekly to coordinate
its efforts as well as to monitor progress.
 
  The status of the Consolidated Group's Year 2000 efforts are regularly
monitored by the internal auditor. In addition, during the first quarter of
calendar 1999, the Consolidated Group intends to engage a third party to
provide an external evaluation of its Year 2000 action plan and the status of
the preparations of the Consolidated Group at that time.
 
  The Consolidated Group has begun the testing of its internally developed and
supported software applications, hardware and facilities systems. Testing to
date has not produced any results which were not able to be resolved. The
testing continues to be substantially on track with the Year 2000 action plan
timeline.
 
  The Consolidated Group is requesting vendor documentation certifying Year
2000 compliance with respect to third party software applications, third party
services, equipment and facilities related systems. Certain equipment and
facilities systems which have been identified as higher priority are also
being tested for compliance, where testing is possible. To date, the
Consolidated Group has not received any indication from any third party that a
mission critical system or service will not be able to be certified by them as
Year 2000 compliant. The Year 2000 task force is monitoring and tracking
projected certification dates from third party providers.
 
  The Consolidated Group has begun the development of a Year 2000 contingency
plan to address potential Year 2000 related failures. There can be no
assurance that this contingency plan, or that the Year 2000 action plan will
be able to prevent a material disruption of the Consolidated Group's business.
 
 Expected Costs of Remediation
 
  Prior to fiscal 1998, the Consolidated Group did not track Year 2000 related
costs. The Consolidated Group and its affiliates has developed a Year 2000
budget of approximately $1.3 million for the fiscal year commencing
 
                                      51
<PAGE>
 
October 1, 1998. Certain of these costs will be charged to or reimbursed by
the affiliated companies, and certain of these costs will be paid by the
Consolidated Group with respect to their respective costs associated with the
Year 2000 action plan. The predominant components of both past and future
costs consist of soft costs related to employee time and resource allocations
rather than direct costs such as the acquisition of new software.
 
 Risks
 
  The Consolidated Group, as a financial institution, relies heavily upon
computers and information technology systems to acquire, service and sell
Receivables as well as for its securities and insurance sales activities. The
Consolidated Group faces extensive Year 2000 related risks. The order within
which these risks are presented is not intended as a prioritization of the
potential risks nor an exhaustive identification of the risks. These risks
include, but are not limited to the following:
 
  .  unavailability of electrical power or telecommunication systems supplied
     by third parties;
 
  .  inability of obligors on the Receivables to access their funds to make
     required payments;
 
  .  inability of the mail systems or wire transfer systems performed by
     third parties to deliver such payments;
 
  .  inability of banks to process those payments;
 
  .  failure of any of the software/hardware systems which the Consolidated
     Group uses to track insurance products, securities products or acquire,
     service and sell Receivables;
 
  .  inability of the Consolidated Group to access its own funds or to make
     wire transfers or otherwise make payments on its obligations due to
     internal or third party (generally banking) system failures; and
 
  .  inability of the Consolidated Group to process data accurately or timely
     for general business management purposes, regulatory reporting purposes
     or other purposes.
 
 Contingency Plans
 
  The Consolidated Group has commenced the development of a contingency plan
but has not finalized such a plan to date. Development of contingency plans
for mission critical items is the first and top priority of the contingency
planning phase. Where appropriate and feasible, the plan will also address
alternatives for internally developed systems as well as externally developed
ones, and will include steps to implement transition to an alternative system.
The plan will include trigger dates for implementing alternative solutions
prior to the Year 2000, where system testing or third party documentation
indicates that a system is not and will not be compliant. There can be no
assurance that this contingency plan, or that the Year 2000 action plan will
be able to prevent a material disruption of the Consolidated Group's business.
 
Item 7.A. Quantitative And Qualitative Disclosures About Market Risk
 
  For quantitative information about market risk of the Registrant, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Interest Sensitive Income and Expense" under Item 7.
 
  For qualitative information about market risk of the Registrant, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Asset/Liability 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 Report for an index to the consolidated financial statements.
 
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
 
  None.
 
                                      52
<PAGE>
 
                                   PART III
 
Item 10. Directors And Executive Officers Of Registrant
 
                                  MANAGEMENT
 
              Directors, Executive Officers and Certain Employees
              (Age Information Current as of September 30, 1998)
 
<TABLE>
<CAPTION>
          Name           Age                           Position
          ----           ---                           --------
<S>                      <C> <C>
C. Paul Sandifur, Jr.*..  56 President, CEO and Chairman of the Board
Bruce J. Blohowiak*.....  44 Executive Vice President, Corporate Counsel And Director
Michael Kirk*...........  46 Senior Vice President/Production
Steven Crooks*..........  52 Vice President, Controller and Acting Chief Financial Officer
Jon McCreary............  30 Acting Treasurer
Reuel Swanson...........  59 Secretary and Director
John Van Engelen........  45 President, Western United
Cameron E. Williams**...     Chief Financial Officer
Irv Marcus..............  74 Director
Robert J. Thomson.......  30 Vice President--Operations
Charles H. Stolz........  90 Director
John Trimble............  68 Director
Harold Erfurth..........  81 Director
Neal Fosseen............  89 Honorary Director
</TABLE>
--------
*  Member of Executive Committee
** Resigned before 1998 fiscal year end
 
  Directors and officers are elected to one-year terms.
 
  C. Paul Sandifur, Jr. 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.
 
  Bruce J. Blohowiak joined Metropolitan's legal staff in 1979 and became its
Corporate Counsel in 1986. In 1987, he became an Assistant Vice President and
was appointed a Vice President in 1990. In 1995 he was named Executive Vice
President and Chief Operating Officer. He is also a Vice President of Western
United. A member of the Washington State bar, Mr. Blohowiak received his J. D.
degree from Gonzaga University School of Law in 1979.
 
  Michael Kirk joined Metropolitan as a Receivable Contract Buyer in 1982. He
later became a member of the underwriting committee. He was elected Assistant
Vice President in 1990, Vice President in 1992 and became Senior Vice
President-Production in 1995.
 
  Steven Crooks has been employed in Metropolitan's accounting department
since 1972. He became Controller and Assistant Vice President in 1990, Vice
President in 1994, and Acting Chief Financial Officer in 1996. Mr. Crooks has
been a Washington licensed Certified Public Accountant since 1974.
 
  Reuel Swanson has worked for Metropolitan since 1960 and has been a Director
since 1969. From 1972 to 1975, Mr. Swanson was Metropolitan's Treasurer. In
1976, he became Secretary. He is also a Director and Secretary of most of the
subsidiary companies.
 
                                      53
<PAGE>
 
  Jon McCreary joined Metropolitan in 1993 as a Treasury Analyst and is
currently the Acting Treasurer. Mr. McCreary has six years experience in
portfolio management, financial analysis and accounting. He has previously
been employed by Electronic Data Systems as a Financial Analyst and Public
Utility District No. 2 of Grant County as an Accountant. Mr. McCreary is a
CFA, CPA and CMA and holds a BS in Finance from Central Washington University.
 
  John Van Engelen joined Metropolitan's insurance subsidiary, Western United
in 1984 as its underwriting manager, and shortly thereafter was appointed Vice
President-Underwriting. From 1987-1994, he was the marketing manager. During
1994, he was appointed President. Prior to working for Western United, he had
worked in the insurance industry and in corporate and public accounting. He
holds the following certifications CPA, CFP, CLU, CHFC, FLMI.
 
  Robert J. Thomson joined Metropolitan in 1995 as Chief Auditor and, in
addition, became its Compliance Officer in 1996. In 1997, Mr. Thomson was
named Vice President--Operations and, as such, is responsible for overseeing
the servicing and processing of the Receivables. Prior to joining
Metropolitan, from 1991 through 1995, Mr. Thomson was an Assistant Vice
President and Senior Examiner at West One Bancorp. Mr. Thomson is a licensed
CPA and holds a B.A. in Accounting and Finance from the University of Idaho.
 
  Cameron E. Williams resigned as the Chief Financial Officer of Metropolitan
before the 1998 fiscal year. He had previously been employed by Security
Pacific Corporation as a Chief Financial and Administrative Officer.
 
  Irv 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.
 
  Charles H. Stolz has been a Director of Metropolitan since 1953. Mr. Stolz
was one of the founders of Metropolitan. He is a licensed public accountant
and has been a realtor for over 25 years. He is a former Chairman of the
Washington State Real Estate Commission and President of the Spokane Board of
Realtors.
 
  John 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.
 
  Harold Erfurth was a stockbroker, and 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.
 
  Neal Fosseen was elected Honorary Director of Metropolitan in 1995. As an
Honorary Director, he is not entitled to vote at board meetings. Mr. Fosseen
was mayor of Spokane from 1960-1967. He has over 30 years of experience in
banking and finance.
 
Item 11. Executive Compensation
 
                            EXECUTIVE COMPENSATION
 
  The following table sets forth the aggregate compensation paid by
Metropolitan during the fiscal years specified to its Chief Executive Officer
and the other four most highly compensated executive officers. All other
executive officers of Metropolitan received less than $100,000 in compensation
during the year ended September 30, 1998. 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. See
"EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN
 
                                      54
<PAGE>
 
CONTROL ARRANGEMENTS." The 401(k) Plan provides for maximum annual company
matching contributions equal to 3% of each participant's salary. As of
September 30, 1998, Metropolitan had no stock option plans in effect.
 
                          SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                       (c)
                      (a)                       (b)   Salary         (d)
          Name and Principal Position           Year   ($)    Bonus/Commissions
          ---------------------------           ---- -------- -----------------
<S>                                             <C>  <C>      <C>
C. Paul Sandifur, Jr. ......................... 1998 $316,734
 Chief Executive Officer                        1997 $150,000
                                                1996 $147,145

Bruce Blohowiak................................ 1998 $171,250
 Executive Vice President, Chief Operations     1997 $126,667
 Officer and General Counsel                    1996 $105,000

Michael Kirk................................... 1998 $118,333     $ 65,557
 Senior Vice President-Production               1997 $ 85,000     $103,021
                                                1996 $ 85,000     $ 91,867

John Van Engelen............................... 1998 $121,678     $ 40,422
 President, Western United                      1997 $102,000     $ 39,581
                                                1996 $105,500     $ 19,747

Cameron E. Williams** ......................... 1998 $126,201
 Chief Financial Officer                        1997 $
                                                1996 $
</TABLE>
--------
** Mr. Williams joined Metropolitan in 1998 and resigned prior to 1998 fiscal
   year end
 
                           COMPENSATION OF DIRECTORS
 
  Directors (including honorary Directors) of Metropolitan are paid $500 per
meeting. There were seven such meetings during fiscal 1998.
 
               EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT 
                      AND CHANGE IN CONTROL ARRANGEMENTS

  Metropolitan has executed employment contracts with the following executive
officers.
 
<TABLE>
<CAPTION>
                                           Effective
  Name                                        Date      Term Ends   Compensation
  ----                                    ------------ ------------ ------------
<S>                                       <C>          <C>          <C>
Bruce Blohowiak.......................... June 1, 1997 May 31, 2002   $400,000
Jon McCreary............................. June 1, 1997 May 31, 2002   $250,000
Michael Kirk............................. June 1, 1997 May 31, 2002   $354,406
Cameron E. Williams**....................
</TABLE>
--------
** Resigned prior to 1998 fiscal year end
 
  These agreements provide that should the officer continue employment for the
designated term, the officer shall receive the designated compensation in a
lump sum at the end of the term. The agreements include non-compete provisions
and non-disclosure of trade secret provisions.
 
                                      55
<PAGE>
 
          COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
  Metropolitan does not have a formal compensation committee of the Board of
Directors. Executive Officer compensation is determined by C. Paul Sandifur,
Jr., Bruce J. Blohowiak and/or the Human Resources Manager. There are no
compensation committee interlocks between the above described individuals and
another entity's compensation committee. None of the above described
individuals serve as an executive officer of another entity outside the
Consolidated Group. Mr. Sandifur is the sole shareholder of National Summit
Corporation, which in turn owns Summit, Old Standard and Old West. The
Consolidated Group engages in various transactions with these companies. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" under Item 13.
 
Item 12. Security Ownership Of Certain Beneficial Owners And Management
 
                            OWNERSHIP OF MANAGEMENT
 
  The following table sets forth certain information as to each class of
equity securities of Metropolitan and its subsidiaries beneficially owned by
Metropolitan officers and directors as of September 30, 1998.
 
<TABLE>
<CAPTION>
                                                         Number of
                                                           Shares
                                                        Beneficially
   Name                              Title of class        Owned      % of Class
   ----                          ---------------------- ------------  ----------
<S>                              <C>                    <C>           <C>
C. Paul Sandifur, Jr...........  Metropolitan Preferred
 601 West First Avenue            Stock, All Series            277        0.06%
 Spokane, WA 99201               Metropolitan Class A
                                  Common Stock             35.6925       27.37%
C. Paul Sandifur, Jr. .........  Metropolitan Class A
  Trustee(1)                      Common Stock             82.4667(1)    63.24%
 601 West First Avenue
 Spokane, WA 99201
Summit Securities, Inc.(2).....  Metropolitan Preferred
 601 West First Avenue            Stock, All Series        248,025(2)     5.30%
 Spokane, WA 99201               Metropolitan Class A
                                  Common Stock              9.2483(2)     7.09%
Irv Marcus.....................  Metropolitan Preferred
 601 West First Avenue            Stock, All Series            406        0.01%
 Spokane, WA 99201               Metropolitan Class A
                                  Common Stock              1.0000        0.77%
Bruce J. Blohowiak.............  Metropolitan Class A
 601 West First Avenue            Common Stock              2.0000        1.53%
 Spokane, WA 99201
Charles H. Stolz...............  Metropolitan Preferred
 601 West First Avenue            Stock, All Series         19,477        0.40%
 Spokane, WA 99201
All Officers and Directors as a
 group.........................  Metropolitan Preferred
                                  Stock, All Series        268,185        5.77%
                                  Metropolitan Class A
                                  Common Stock            130.4075      100.00%
</TABLE>
 
                                      56
<PAGE>
 
--------
(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 these shares of stock. The trust beneficiaries are C. Paul Sandifur,
    Jr., Mary L. Sandifur and William F. Sandifur.
 
(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 these shares.
 
                            PRINCIPAL SHAREHOLDERS
 
  The following table sets forth information with respect to the beneficial
owners of more than five percent of Metropolitan's voting stock as of
September 30, 1998.
 
<TABLE>
<CAPTION>
                                                    Shares of Class A
 Name and Address                                     Common Stock    % of Class
 ----------------                                   ----------------- ----------
<S>                                                 <C>               <C>
C. Paul Sandifur, Jr...............................      35.6925        27.37%
 601 West First Avenue
 Spokane, WA 99201
C. Paul Sandifur, Jr...............................      82.4667        63.24%
 Trustee(1)
Summit Securities, Inc.............................       9.2483         7.09%
 601 West First Avenue
 Spokane, WA 99201
</TABLE>
--------
(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 these shares of stock. The trust beneficiaries are C. Paul Sandifur,
    Jr., Mary L. Sandifur and William F. Sandifur.
 
Item 13. Certain Relationships And Related Transactions
 
                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
TRANSACTIONS WITH AND BETWEEN METROPOLITAN AND SUBSIDIARIES
 
  In the normal course of business, Metropolitan and its subsidiaries engage
in intercompany transactions. All subsidiaries are wholly owned by
Metropolitan except Western United, in which Metropolitan owns 24.5% directly
and 96.5% indirectly. See "ORGANIZATIONAL CHART" under Item 1.
 
  During the three-year period ended September 30, 1998, Western United
purchased some of its Receivables from Metropolitan at Metropolitan's cost. In
these transactions, Western United paid Metropolitan $45,631,483 for
Receivables with aggregate outstanding principal balances of $45,931,914.
 
  Metropolitan is compensated for Receivable acquisition services it provides
to Western United. In 1998, 1997, and 1996, respectively, Metropolitan
received Receivable acquisition compensation of $10.4 million, $20.1 million,
and $29.4 million from Western United. The amounts for 1998, 1997 and 1996 are
gross amounts before a loss reserve of $4.89 million in 1998, $9.53 million in
1997, and $12.54 million in 1996 which was provided by Metropolitan. The
amounts of the Receivable acquisition compensation were determined based on
the adjustment necessary to convert Receivables purchased by Western United
utilizing Metropolitan's services to a defined fair market yield. The effect
was to reduce Western United's effective yields on the purchased Receivables
to approximately 8.1% in 1998, 8.5% in 1997, and 8.2% in 1996. Management
believes the adjusted yields represent the yields which Western United could
achieve by purchasing similar Receivables in arms-length transactions with
unrelated vendors. In addition, Metropolitan charges Western United for
management services,
 
                                      57
<PAGE>
 
Receivable collection services and rental of offices and equipment. These
charges have no effect on the Consolidated Financial Statements, but create
fee income for Metropolitan when presented alone. See "NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS--Note 25" under Item 8.
 
  Metwest provides Receivable servicing and collection for Metropolitan and
Western United. See "RECEIVABLE INVESTMENTS--Servicing and Collection
Procedures, and Delinquency Experience" under Item 1.
 
  In the normal course of its business, Western United loans cash to
Metropolitan and Metwest. These loans, when made, are generally collateralized
by Receivables or real property. At September 30, 1998, there were $14.0
million in loans outstanding.
 
  From time to time, since December of 1979, Metropolitan has made loans to
Consumers Group Holding Co. for purposes of increasing the capital and surplus
of Consumers and Western United. As of September 30, 1998, these loans
outstanding totaled $3,710,000 and currently bear no interest.
 
TRANSACTIONS WITH AFFILIATES
 
  In the normal course of business, Metropolitan engages in transactions with
companies which were former subsidiaries and which are currently affiliated
through the common control of C. Paul Sandifur, Jr.
 
  Metropolitan Investment Securities (MIS), a broker-dealer and former
subsidiary of Metropolitan, sells the publicly registered securities of
Metropolitan and Summit. Metropolitan paid commissions to MIS for the sale of
Metropolitan's securities pursuant to the terms of written Selling Agreements.
During the fiscal years ended September 30, 1998, 1997 and 1996, Metropolitan
paid commissions to MIS in the amounts of $2,342,779, $1,151,637, and
$203,946, on sales of debt securities in the amounts of $65,048,869,
$38,510,520, and $9,125,303, respectively. During the fiscal years ended
September 30, 1998, 1997 and 1996, Metropolitan paid commissions to MIS in the
amounts of $0, $0, and $8,216, respectively. Additionally, in 1998, 1997 and
1996, Metropolitan paid commissions to MIS in the amounts of $105,296,
$155,473, and $156,918 on sales of preferred stock through an in-house trading
list.
 
  Metropolitan provides management and receivable acquisition services for a
fee to Summit, Old Standard and Old West. During 1998, such fees were
approximately $1.6 million. See "RECEIVABLE INVESTMENTS-- Management and
Receivable Acquisition Services" under Item 1.
 
  Metwest provides Receivable collection services for a fee to Summit, Old
Standard and Old West. During 1998, such fees were approximately $501,000. See
"RECEIVABLE INVESTMENTS--Servicing and Collection Procedures, and Delinquency
Experience" under Item 1.
 
  Management believes that the terms of the service agreements are at least as
favorable as could have been obtained from non-affiliated parties.
 
  Western United has entered into two separate reinsurance agreements with Old
Standard. The first of those two agreements became effective January 23, 1997
and was terminated with respect to additional premiums on September 30, 1997.
Under this first agreement, Western reinsured with Old Standard 75% of the
risk on six different annuity products and the premiums ceded were
approximately $28.0 million. Western received ceding allowances equal to
expected commission plus 1.0% of premium, which was approximately $1.6
million.
 
  The second of the two agreements became effective July 1, 1998 and remained
in effect at September 30, 1998. Under this second agreement, Western
reinsured with Old Standard 75% of the risk on 15 different annuity products
and the premiums ceded through September 30, 1998 were approximately $25.4
million. Western received ceding allowances equal to actual commission plus
1.5% of premium, which was approximately $1.3 million through September 30,
1998.
 
                                      58
<PAGE>
 
  These agreements allow Western United to continue its market presence and
relationship with its insurance agents while moderating its rate of growth.
Under its contractual terms, the second 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. It is expected that approximately $50 million will be ceded under this
treaty during fiscal 1999. Western receives a fee from Old Standard for
servicing the reinsured policies, which fee is 40 basis points annually on the
cash value of the reinsured policies.
 
  Metropolitan's and Western United's property development activities are
provided by Summit Property Development. The Consolidated Group paid Summit
Property Development $1.8 million in development fees during fiscal 1998. See
"REAL ESTATE DEVELOPMENT" under Item 1.
 
                                      59
<PAGE>
 
                                    PART IV
 
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
 
 (a) 1. Financial Statements
 
  Included in Part II, Item 8 of this report:
 
  Report of Independent Accountants
  Consolidated Balance Sheets at September 30, 1998 and 1997
  Consolidated Statements of Income for the Years Ended September 30, 1998,
  1997, and l996
  Consolidated Statements of Stockholders' Equity for the Years Ended
  September 30, 1998, 1997, and 1996
  Consolidated Statements of Cash Flows for the Years Ended September 30,
  1998, 1997, and l996
  Notes to Consolidated Financial Statements
 
 (a) 2. Financial Statement Schedules
 
  Included in Part IV of this report:
 
  Report of Independent Accountants on Financial Statement Schedules
 
  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.
 
 (a) 3. Exhibits
 
<TABLE>
 <C>        <S>
      3(a). Restated Articles of Incorporation, as amended, dated November 30,
            1987 (Incorporated by Reference to Exhibit 3(a) to Metropolitan's
            Annual Report on Form 10-K for fiscal 1987).
      3(b). Amendment to Articles of Incorporation dated November 5, 1991
            (Incorporated by Reference to Exhibit 3(c) to Registration No. 33-
            40220).
      3(c). Amendment to Articles of Incorporation dated September 20, 1992
            (Incorporated by Reference to Exhibit 3(c) to Metropolitan's Annual
            Report on Form 10-K for fiscal 1992).
      3(d). Restated Bylaws, as amended to December 26, 1995 (Incorporated by
            Reference to Exhibit 3(e) to Form 10-K for Period Ending September
            30, 1995).
      4(a). Indenture, dated as of July 6, 1979, between Metropolitan and
            Seattle-First National Bank, Trustee (Incorporated by Reference to
            Exhibit 3 to Metropolitan's Annual Report on Form 10-K for fiscal
            1979).
      4(b). First Supplemental Indenture, dated as of October 3, 1980, between
            Metropolitan and Seattle-First National Bank, Trustee (Incorporated
            by Reference to Exhibit 4 to Metropolitan's Annual Report on Form
            10-K for fiscal 1980).
      4(c). 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(d). 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).
</TABLE>
 
                                      60
<PAGE>
 
 (a) 3. Exhibits--(cont"d)
 
<TABLE>
 <C>          <S>
        4(e). 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(f). 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(g). 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(h). 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(i). 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(j). 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(k). 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(l). 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(m). Statement of Rights, Designations and Preferences of Variable
              Rate Cumulative Preferred Stock, Series E-7 (Incorporated by
              Reference to Exhibit 4(d) to Amendment 1 to Registration No. 333-
              19755).
           9. Irrevocable Trust Agreement (Incorporated by Reference to Exhibit
              9(b) to Registration No. 2-81359).
       10(a). Employment Agreement between Metropolitan Mortgage and Securities
              Co., Inc. and Bruce Blohowiak (Incorporated by Reference to
              Exhibit 10(a) to Metropolitan's Annual Report on Form 10-K for
              fiscal 1997).
       10(b). Employment Agreement between Metropolitan Mortgage and Securities
              Co., Inc. and Michael Kirk (Incorporated by Reference to Exhibit
              10(b) to Metropolitan's Annual Report on Form 10-K for fiscal
              1997).
       10(c). Employment Agreement between Metropolitan Mortgage and Securities
              Co., Inc. and Jon McCreary (Incorporated by Reference to Exhibit
              10(c) to Metropolitan's Annual Report on Form 10-K for fiscal
              1997).
      *10(d). Form of Reinsurance Agreement between Western United Life
              Assurance Company and Old Standard Life Insurance Company.
         *11. Statement indicating computation of earnings per common share.
         *12. Statement regarding computation of ratios.
          21. Subsidiaries of Registrant (Incorporated by Reference to Exhibit
              21 to Metropolitan's Annual Report on Form 10-K for fiscal 1997).
         *27. Financial Data Schedule.
</TABLE>
--------
* Filed herewith.
 
 (b) Reports on Form 8-K
 
  Metropolitan did not file any Current Reports on Form 8-K for the fourth
quarter of fiscal year 1998.
 
                                       61
<PAGE>
 
                                  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.
 
                                            /s/ C. Paul Sandifur, Jr.
                                          _______________________________
                                          C. Paul Sandifur, Jr., Chief
                                           Executive Officer
 
Date: January 13, 1999
 
  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 in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
             Signature                           Title                    Date
             ---------                           -----                    ----
<S>                                  <C>                           <C>
    /s/ C. Paul Sandifur, Jr.                                       January 13, 1999
------------------------------------
       C. Paul Sandifur, Jr.         President, Director and
                                      Chief Executive Officer

      /s/ Bruce J. Blohowiak                                        January 13, 1999
------------------------------------
         Bruce J. Blohowiak          Chief Operating Officer,
                                      Executive Vice President
                                      and Director

        /s/ Steven Crooks                                           January 13, 1999
------------------------------------
           Steven Crooks             Controller and Vice
                                      President

        /s/ Reuel Swanson                                           January 13, 1999
------------------------------------
           Reuel Swanson             Secretary and Director


          /s/ Irv Marcus                                            January 13, 1999
------------------------------------
             Irv Marcus              Director


         /s/ Harold Erfurth                                         January 13, 1999
------------------------------------
           Harold Erfurth            Director


          /s/ John Trimble                                          January 13, 1999
------------------------------------
            John Trimble             Director


        /s/ Charles H. Stolz                                        January 13, 1999
------------------------------------
          Charles H. Stolz           Director
</TABLE>
 
                                      62
<PAGE>
 
                   Index to Consolidated Financial Statements
                 Years Ended September 30, 1998, 1997 and 1996
 
<TABLE>
<CAPTION>
                                                                          Page
                                                                        --------
<S>                                                                     <C>
Report of Independent Accountants......................................      F-2
Consolidated Balance Sheets............................................      F-3
Consolidated Statements of Income......................................      F-4
Consolidated Statements of Stockholders' Equity........................      F-5
Consolidated Statements of Cash Flows..................................      F-6
Notes to Consolidated Financial Statements............................. F-7-F-44
</TABLE>
 
                                      F-1
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
The Directors and Stockholders
Metropolitan Mortgage & Securities Co., Inc.
 
  In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Metropolitan
Mortgage & Securities Co., Inc. and its subsidiaries (the Company) as of
September 30, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1998,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards 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 the
opinion expressed above.
 
  As discussed in Note 1, the Company changed its methods of accounting for
the transfer and servicing of financial assets in fiscal 1997 and impaired
loans in fiscal 1996.
 
                                             /s/ PricewaterhouseCoopers LLP
                                          -------------------------------------
                                               PricewaterhouseCoopers LLP
 
November 20, 1998, except Note 24, as to which the date
 is December 29, 1998
 
                                      F-2
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                          September 30, 1998 and 1997
 
<TABLE>
<CAPTION>
                                                     1998            1997
                                                --------------  --------------
<S>                                             <C>             <C>
Assets:
Cash and cash equivalents...................... $   31,733,362  $   58,924,958
Investments:
  Trading securities, at market................     55,865,875      34,477,091
  Available-for-sale securities, at market.....     25,988,789      36,621,351
  Held-to-maturity securities, at amortized
   cost........................................     83,036,525     113,730,535
  Accrued interest on investments..............      1,646,527       1,516,739
                                                --------------  --------------
    Total cash and investments.................    198,271,078     245,270,674
                                                --------------  --------------
Real estate contracts and mortgage notes
 receivable, net, including real estate
 contracts and mortgage notes receivable held
 for sale of approximately $159,855,000 in
 1998..........................................    614,178,323     512,864,101
Real estate held for sale and development,
 including foreclosed real estate received in
 satisfaction of debt of $44,506,871 and
 $34,388,973...................................     89,713,967      81,802,266
                                                --------------  --------------
    Total real estate assets...................    703,892,290     594,666,367
Less allowance for losses on real estate
 assets........................................    (11,000,618)    (12,327,098)
                                                --------------  --------------
    Net real estate assets.....................    692,891,672     582,339,269
                                                --------------  --------------
Other receivable investments, net..............    200,773,533     164,534,354
                                                --------------  --------------
Other assets:
  Deferred costs, net..........................     71,262,489      72,503,095
  Land, buildings and equipment, net...........     25,889,102       9,408,578
  Mortgage servicing rights, net...............      6,292,375       5,767,607
  Other assets, net............................     31,284,532      32,565,883
                                                --------------  --------------
    Total other assets.........................    134,728,498     120,245,163
                                                --------------  --------------
    Total assets............................... $1,226,664,781  $1,112,389,460
                                                ==============  ==============
Liabilities:
  Life insurance and annuity reserves.......... $  800,848,929  $  825,368,988
  Debenture bonds and accrued interest.........    198,205,294     185,213,688
  Advances under line of credit................    118,342,972
  Debt payable.................................      7,359,339       4,917,779
  Accounts payable and accrued expenses,
   including payable to affiliates.............     18,687,539      19,114,354
  Deferred income taxes........................     22,725,052      22,029,778
  Minority interest in consolidated
   subsidiaries................................      1,738,887       1,632,139
                                                --------------  --------------
    Total liabilities..........................  1,167,908,012   1,058,276,726
                                                --------------  --------------
Commitments and contingencies (Notes 5, 9, 11
 and 12)
Stockholders' equity:
  Preferred stock, (liquidation preference
   $49,200,583 and $50,729,084)................     19,454,071      20,954,141
  Subordinate preferred stock, no par Common
   stock, Class A, $2,250 par, 130 shares
   issued and outstanding......................        293,417         293,417
  Common stock, Class B, $2,250 par Additional
   paid-in capital.............................     18,580,051      18,596,231
  Retained earnings............................     21,109,849      14,536,114
  Net unrealized losses on investments.........       (680,619)       (267,169)
                                                --------------  --------------
    Total stockholders' equity.................     58,756,769      54,112,734
                                                --------------  --------------
    Total liabilities and stockholders' equity. $1,226,664,781  $1,112,389,460
                                                ==============  ==============
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-3
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
             for the years ended September 30, 1998, 1997 and 1996
 
<TABLE>
<CAPTION>
                                             1998         1997         1996
                                         ------------  -----------  -----------
<S>                                      <C>           <C>          <C>
Revenues:
  Insurance premiums...................  $  2,800,000  $ 3,000,000  $ 3,000,000
  Interest on receivables..............    50,997,190   55,645,799   58,529,828
  Earned discount on receivables.......    25,288,312   21,848,947   18,036,075
  Other investment income..............    15,937,128   17,323,222   15,291,496
  Real estate sales....................    32,277,672   31,419,810   45,648,264
  Fees, commissions, service and other
   income..............................     6,832,513    4,697,766    4,300,381
  Gains (losses) on investments, net...     8,000,392     (494,877)    (821,481)
  Gains on sales of receivables, net...    13,822,102   21,693,999   12,687,616
                                         ------------  -----------  -----------
    Total revenues.....................   155,955,309  155,134,666  156,672,179
                                         ------------  -----------  -----------
Expenses:
  Insurance policy and annuity
   benefits............................    48,098,422   50,454,970   48,301,010
  Interest, net........................    19,663,254   19,374,968   18,787,655
  Cost of real estate sold.............    30,579,511   31,669,166   43,910,654
  Provision for losses on real estate
   assets..............................     6,199,297    8,131,101    6,360,072
  Salaries and employee benefits.......    18,415,723   13,762,940   10,199,812
  Commissions to agents................     8,171,329    7,743,437   10,574,049
  Other operating and underwriting.....     6,337,089    6,932,014    6,958,938
  Amortization of deferred costs, net
   of costs capitalized (capitalized
   deferred costs, net of
   amortization).......................     2,562,817    2,202,882     (801,825)
                                         ------------  -----------  -----------
    Total expenses.....................   140,027,442  140,271,478  144,290,365
                                         ------------  -----------  -----------
Income before income taxes and minority
 interest..............................    15,927,867   14,863,188   12,381,814
Provision for income taxes.............    (5,475,416)  (5,072,512)  (4,235,469)
                                         ------------  -----------  -----------
Income before minority interest........    10,452,451    9,790,676    8,146,345
Income of consolidated subsidiaries
 allocated to minority stockholders....      (125,748)    (122,365)    (108,681)
                                         ------------  -----------  -----------
Net income.............................    10,326,703    9,668,311    8,037,664
Preferred stock dividends..............    (3,732,047)  (4,112,988)  (3,868,148)
                                         ------------  -----------  -----------
Income applicable to common
 stockholders..........................  $  6,594,656  $ 5,555,323  $ 4,169,516
                                         ============  ===========  ===========
Basic and diluted income per share
 applicable to common stockholders.....  $     50,728  $    42,733  $    32,073
                                         ============  ===========  ===========
Weighted average number of shares of
 common stock
 outstanding...........................           130          130          130
                                         ============  ===========  ===========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-4
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
             for the years ended September 30, 1998, 1997 and 1996
 
<TABLE>
<CAPTION>
                                                Additional   Net Unrealized
                           Preferred    Common    Paid-in    Gains (Losses)  Retained
                             Stock      Stock     Capital    on Investments  Earnings
                          -----------  -------- -----------  -------------- -----------
<S>                       <C>          <C>      <C>          <C>            <C>
Balance, September 30,
 1995...................  $21,627,106  $293,417 $14,917,782    $(829,417)   $ 4,561,554
Net income..............                                                      8,037,664
Net change in unrealized
 losses on available-
 for-sale securities,
 net of income tax
 benefit of $83,247.....                                        (161,606)
Cash dividends,
 preferred (variable
 rate)..................                                                     (3,868,148)
Redemption and
 retirement of preferred
 stock (32,330 shares)..     (323,301)              (47,433)
Sale of variable rate
 preferred stock, net
 (21,439 shares)........      214,393             1,921,321
                          -----------  -------- -----------    ---------    -----------
Balance, September 30,
 1996...................   21,518,198   293,417  16,791,670     (991,023)     8,731,070
Net income..............                                                      9,668,311
Net change in unrealized
 losses on available-
 for-sale securities,
 net of income tax
 provision of $372,891..                                         723,854
Cash dividends,
 preferred (variable
 rate)..................                                                     (4,112,988)
Redemption and
 retirement of preferred
 stock (78,635 shares)..     (786,346)             (196,043)
Sale of variable rate
 preferred stock, net
 (22,229 shares)........      222,289             2,000,604
Contingent sales price
 on subsidiary
 previously sold to
 related party..........                                                        249,721
                          -----------  -------- -----------    ---------    -----------
Balance, September 30,
 1997...................   20,954,141   293,417  18,596,231     (267,169)    14,536,114
Net income..............                                                     10,326,703
Net change in unrealized
 losses on available-
 for-sale securities,
 net of income tax
 benefit of $212,989....                                        (413,450)
Cash dividends, common
 ($1,200 per share).....                                                       (156,489)
Cash dividends,
 preferred (variable
 rate)..................                                                     (3,732,047)
Redemption and
 retirement of preferred
 stock (170,284 shares).   (1,702,843)           (1,841,144)
Sale of variable rate
 preferred stock, net
 (20,277 shares)........      202,773             1,824,964
Contingent sales price
 on subsidiary
 previously sold to
 related party..........                                                        135,568
                          -----------  -------- -----------    ---------    -----------
Balance, September 30,
 1998...................  $19,454,071  $293,417 $18,580,051    $(680,619)   $21,109,849
                          ===========  ======== ===========    =========    ===========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-5
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
             for the years ended September 30, 1998, 1997 and 1996
 
<TABLE>
<CAPTION>
                                        1998           1997           1996
                                    -------------  -------------  -------------
<S>                                 <C>            <C>            <C>
Cash flows from operating activi-
 ties:
 Net income.......................  $  10,326,703  $   9,668,311  $   8,037,664
 Adjustments to reconcile net in-
  come to net cash from operating
  activities:
   Proceeds from sales of trading
    securities....................      7,961,675        102,065     67,093,831
   Proceeds from maturities of
    trading securities............        907,206
   Acquisition of trading securi-
    ties..........................    (22,392,318)   (15,423,102)   (67,448,595)
   Gains on investments and re-
    ceivables, net................    (21,822,494)   (21,199,122)   (11,866,135)
   (Gains) losses on sales of real
    estate........................     (1,698,161)       249,356     (1,737,610)
   Provision for losses on real
    estate assets.................      6,199,297      8,131,101      6,360,072
   Provision for losses on other
    assets........................         72,000         42,995         70,500
   Depreciation and amortization..      4,496,663      6,738,395      4,617,664
   Minority interests.............        125,748        122,365        108,681
   Deferred income tax provision..        695,274      4,067,586      3,640,356
   Changes in assets and liabili-
    ties:
     Deferred costs, net..........      1,240,606      2,027,266         (8,558)
     Life insurance and annuity
      reserves....................     44,490,782     46,638,177     45,782,339
     Compound and accrued interest
      on debentures...............     (3,112,623)    (3,094,352)     4,642,760
     Securities sold, not owned...                  (132,652,334)   132,652,334
     Other, net...................     (4,947,820)    (7,536,786)    (6,089,670)
                                    -------------  -------------  -------------
      Net cash from operating ac-
       tivities...................     22,542,538   (102,118,079)   185,855,633
                                    -------------  -------------  -------------
Cash flows from investing activi-
 ties:
 Change in restricted cash and
  cash equivalents................                   132,652,334   (132,652,334)
 Principal payments on real estate
  contracts and mortgage notes re-
  ceivable........................    113,702,441    100,359,493    107,702,333
 Principal payments on other re-
  ceivable investments............     13,099,743      8,090,734      6,049,097
 Proceeds from sales of real es-
  tate contracts and mortgage
  notes receivable and other re-
  ceivable investments............    229,397,266    390,425,927    182,177,259
 Acquisition of real estate con-
  tracts and mortgage notes re-
  ceivable........................   (413,325,154)  (317,169,828)  (282,313,300)
 Acquisition of other receivable
  investments.....................    (80,961,649)   (72,853,425)   (99,804,805)
 Proceeds from sales of real es-
  tate............................     21,413,545     12,815,547      6,545,323
 Proceeds from maturities of held-
  to-maturity investments.........     30,530,666     10,919,094      2,598,081
 Proceeds from maturities of
  available-for-sale investments..      8,752,353     12,222,624     37,496,910
 Purchases of held-to-maturity in-
  vestments.......................                       (99,625)   (12,181,445)
 Proceeds from sales of available-
  for-sale investments............      1,769,954     22,556,364     31,686,315
 Purchases of available-for-sale
  investments.....................       (888,713)   (49,021,401)    (4,138,391)
 Purchases of and costs associated
  with real estate held for sale
  and development.................    (17,031,884)   (22,765,164)   (28,499,006)
 Capital expenditures.............    (18,039,964)    (1,989,246)    (1,369,802)
                                    -------------  -------------  -------------
      Net cash from investing ac-
       tivities...................   (111,581,396)   226,143,428   (186,703,765)
                                    -------------  -------------  -------------
Cash flows from financing activi-
 ties:
 Increase (decrease) in
  borrowings......................  $ 120,899,347  $ (32,588,375) $  11,353,125
 Repayments of debt payable.......       (876,255)    (2,614,991)    (2,060,440)
 Receipts from life and annuity
  products........................     88,921,513     88,267,227    112,894,347
 Withdrawals of life and annuity
  products........................   (135,346,826)  (119,212,557)  (103,026,731)
 Ceding of life and annuity prod-
  ucts to reinsurers..............    (22,585,528)   (27,689,967)
 Issuance of debenture bonds......     65,048,869     38,510,520      9,125,303
 Repayment of debenture bonds.....    (48,944,640)   (42,376,231)   (22,906,185)
 Issuance of preferred stock......      2,027,737      2,222,893      2,135,714
 Redemption and retirement of pre-
  ferred stock....................     (3,543,987)      (982,389)      (370,734)
 Cash dividends...................     (3,888,536)    (4,112,988)    (3,868,148)
 Receipt of contingent sale price
  for subsidiary sold to related
  party...........................        135,568        249,721
                                    -------------  -------------  -------------
      Net cash from financing ac-
       tivities...................     61,847,262   (100,327,137)     3,276,251
                                    -------------  -------------  -------------
Net change in cash and cash equiv-
 alents...........................    (27,191,596)    23,698,212      2,428,119
Cash and cash equivalents:
 Beginning of year................     58,924,958     35,226,746     32,798,627
                                    -------------  -------------  -------------
 End of year......................  $  31,733,362  $  58,924,958  $  35,226,746
                                    =============  =============  =============
</TABLE>
 
See Note 19 for supplemental cash flow information.
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                      F-6
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             for the years ended September 30, 1998, 1997 and 1996
 
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.
 
  Metropolitan engages, nationwide, in the business of acquiring, holding,
selling, originating and servicing receivables. These receivables include real
estate contracts and mortgage notes collateralized by first position liens on
residential real estate. Metropolitan also invests in receivables consisting
of real estate contracts and mortgage notes collateralized by second and lower
position liens, structured settlements, annuities, lottery prizes and other
investments. The receivables collateralized by real estate are typically non-
conventional because they are originated as the result of seller financing or
they are originated by lenders who specialize in borrowers with impaired
credit histories or non-conventional properties. In addition to receivables,
the Company invests in U.S. Treasury obligations, corporate bonds and other
securities.
 
  The Company invests in receivables and securities using funds generated from
the sale and securitization of receivables, collateralized borrowings,
receivable cash flows, the sale of annuities, debentures and preferred stock,
the sale of real estate and securities portfolio earnings.
 
  Metropolitan provides receivable acquisition, management and collection
services, for a fee, to its subsidiaries and affiliates.
 
  Metropolitan owns various properties acquired through repossession and other
sources. These properties are held for sale and/or development.
 
  Metropolitan is effectively controlled by C. Paul Sandifur, Jr. through
common stock ownership and voting control.
 
 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 Life Assurance
Company, a life insurance company, 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
 
  The Company considers all highly-liquid debt instruments purchased with a
remaining maturity of three months or less to be cash equivalents. Cash
includes all balances on deposit in banks and financial institutions. The
Company periodically evaluates the credit quality of these banks and financial
institutions. Substantially all cash and cash equivalents are on deposit with
one financial institution and balances often exceed the federal insurance
limit.
 
                                      F-7
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Investments
 
  The Company has classified 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 consist primarily of pass-through
  certificates that are retained in connection with the Company's
  securitization transactions and are recorded at market value.
 
    The subordinated certificates retained from a securitization transaction
  are recorded at fair value based on independent market quotes.
 
    The Company initially records residual interests from securitization
  transactions at their allocated cost based upon the present value of the
  interest in the cash flows retained by the Company after considering
  various economic factors, including interest rates, collateral value and
  estimates of the value of future cash flows using expected loss and
  prepayment assumptions, discounted at a market yield. The fair value of
  these securities is determined based on interest rates, actual prepayment
  rates, collateral value and historical default rates experienced by the
  securities.
 
    Other trading securities are recorded at fair value based upon
  independent market quotes.
 
    Realized and unrealized gains and losses on these securities are included
  in the consolidated statements of income.
 
    Available-for-Sale Securities: Available-for-sale securities, consisting
  primarily of government-backed bonds, corporate and utility bonds, and
  mortgage- and asset-backed securities, are carried at market value.
  Unrealized gains and losses on these securities are presented as a separate
  component of stockholders' equity, net of related deferred income taxes.
 
    Held-to-Maturity Securities: Held-to-maturity securities, consisting
  primarily of government-backed, corporate and utility bonds and mortgage-
  and asset-backed 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
income in the period in which the investment is sold.
 
  For other than a temporary decline in the value of a common stock, preferred
stock or publicly traded bond below cost or amortized cost, the investment is
reduced to its net realizable value, which becomes the new cost basis of the
investment. The amount of the reduction is reported as a loss in the
consolidated statement of income. Any recovery of market value in excess of
the investment's new cost basis is recognized as a realized gain only upon
sale, maturity or other disposition of the investment. Factors which the
Company evaluates in determining the existence of an other than temporary
decline in value include the length of time and extent to which market value
has been less than cost; the financial condition and near-term prospects of
the issuer; and the intent and ability of the Company to retain its investment
for the anticipated period of recovery in market value.
 
 Real Estate Contracts and Mortgage Notes Receivable
 
  Real estate contracts and mortgage notes receivable held for investment
purposes 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.
 
                                      F-8
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Real Estate Contracts and Mortgage Notes Receivable, Held for Sale
 
  Real estate contracts and mortgage notes receivable held for sale are
carried at the lower of cost (outstanding principal adjusted for net discounts
and capitalized acquisition costs) or market value, determined on an aggregate
basis by major type of receivable. Gains or losses on such sales are
recognized utilizing the aggregation method for financial reporting and income
tax purposes at the time of sale. Interest on these receivables is included in
interest income during the period held for sale. Deferred net discounts and
capitalized acquisition costs are recognized at the time the related
receivables are sold to third-party investors or securitized through transfer
to a trust.
 
  Effective January 1, 1997, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 125 (SFAS No. 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", as amended by SFAS No. 127, "Deferral of the Effective Date of
Certain Provisions of SFAS No. 125". SFAS No. 125 provides accounting and
reporting standards based on a consistent application of a financial-
components approach that focuses on control. Under this approach, after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered and derecognizes liabilities when
extinguished. This statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. The application of the provisions of SFAS No. 125 did not have a
material effect on the Company's financial condition, results of operations or
cash flows.
 
 Real Estate Held for Sale and Development
 
  Real estate held for sale and development is stated at the lower of cost or
fair value less estimated costs to sell. The Company principally acquires real
estate through acquisition and foreclosure. Cost is determined by the purchase
price of the real estate or, for real estate acquired by foreclosure, at the
lower of (a) the fair value of the property at the date of foreclosure less
estimated selling costs, or (b) cost (net unpaid receivable carrying value).
 
  Project costs, including interest, associated with the development of real
estate are capitalized and included in the cost basis of the real estate.
 
  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 on Real Estate Assets
 
  The established allowances for losses on real estate contracts and mortgage
notes receivable include amounts for estimated probable losses on receivables
determined in accordance with the provisions of Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended. The adoption of this new standard on October 1, 1995, did
not have a material effect on the Company's consolidated financial statements.
 
  Specific allowances are established for delinquent receivables with net
carrying values in excess of $100,000, as necessary. Additionally, the Company
establishes allowances, based on prior delinquency and loss experience, for
currently performing receivables and smaller delinquent receivables.
Allowances for losses are
 
                                      F-9
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
based on the net carrying values of the receivables, including accrued
interest. Accordingly, the Company accrues interest on delinquent receivables
until foreclosure, unless the principal and accrued interest on the
receivables exceed the fair value of the collateral, net of estimated selling
costs. The Company obtains new or updated appraisals on collateral for
appropriate delinquent receivables, and adjusts the allowance for losses, as
necessary, such that the net carrying value does not exceed net realizable
value.
 
  The established allowance for losses on real estate held for sale and
development includes amounts for estimated losses as a result of an impairment
in value of the real property. The Company reviews its real estate properties
for impairment in value whenever events or circumstances indicate that the
carrying value of the asset may not be recoverable. In performing the review,
if expected future undiscounted cash flows from the use of the asset or the
fair value, less selling costs, from the disposition of the asset is less than
its carrying value, an impairment loss is recognized. As a result of changes
in the real estate markets in which these assets are located, it is reasonably
possible that the carrying values could be reduced in the near term.
 
 Other Receivable Investments
 
  Other receivable investments are carried at amortized cost. 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.
 
 Deferred Costs
 
  Deferred policy acquisition costs, consisting of commissions to agents and
other insurance underwriting and annuity policy costs are deferred. Costs that
are estimated not to be recoverable from surrender charges are amortized as a
constant percentage of the estimated gross realized and unrealized profits
associated with the policies in force.
 
  Debenture issuance costs, including commissions to sales representatives and
other issuance costs are deferred. These costs are amortized over the expected
term of the related debenture bond, which ranges from 6 months to 5 years,
using the interest method.
 
  Changes in the amount or timing of estimated gross profits on policies in
force or the expected term of debenture bonds will result in adjustments to
the cumulative amortization of the related costs.
 
 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 3 to 10 years. Repairs, maintenance and minor renewals are charged to
expense 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.
 
 Mortgage Servicing Rights
 
  Mortgage servicing rights are recorded at the lower of cost or the present
value of future net servicing cash flows. Such rights are amortized in
proportion to and over the period of expected net servicing income.
 
  Management periodically evaluates the estimates and assumptions used in
determining the carrying values of mortgage servicing rights and the
amortization thereon. Such carrying values are reduced to estimated future
discounted net servicing cash flows when the valuation indicates the carrying
value is impaired. For purposes of
 
                                     F-10
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
measuring impairment, the rights are stratified based primarily on remaining
term, prepayment and interest rate risks. The amount of impairment recognized
is the amount by which the capitalized mortgage servicing rights for a stratum
exceed their fair value. As a result of increased prepayment experience, the
carrying value of mortgage servicing rights could be reduced in the near term.
 
 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. At September 30, 1998, total
enhancement costs of approximately $8,146,000 have been capitalized. These
costs are being amortized over 5- and 10-year periods, depending on the
estimated useful life of the enhancement, using the straight-line method.
Accumulated amortization of these costs was $3,905,000 and $3,010,000 at
September 30, 1998 and 1997, respectively. Due to technological advancements,
it is reasonably possible that the remaining estimated useful lives could
change in the near term.
 
  The Company will be required to make further enhancements to its computer
software operating systems to enable recognition of the new century. The
program codes within the operating systems currently store only a two digit
character for the year in which transactions occur. The modification of these
program codes to store four digit years will occur in the near term. The costs
of these modifications, which are estimated to be approximately $1,300,000
during the year ending September 30, 1999, will be charged to operations as
incurred.
 
  In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 provides guidance
on accounting for the costs of internal-use computer software. SOP 98-1 is
effective for fiscal years beginning after December 15, 1998. The Company does
not believe that the application of this Statement will have a material effect
on its financial statements.
 
 Policy Loans
 
  Policy loans are carried at the unpaid principal balance of the loans and
are included in other assets on the consolidated balance sheet.
 
 Life Insurance and Annuity Reserves
 
  Premiums for universal life insurance contracts and annuities are reported
as life insurance and annuity reserves under the deposit method. Reserves for
universal life insurance and annuities are equal to the sum of the account
balances including credited interest and deferred service charges. Based on
past experience, consideration is given in actuarial calculations to the
number of policyholder and annuitant deaths that might be expected, policy
lapses, surrenders and terminations. As a result in 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 Life Insurance and Annuity Revenues
 
  Revenues for universal life contracts are recognized upon assessment. These
revenues consist of charges to policyholders, primarily for mortality expenses
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-11
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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. As of September 30, 1998 and 1997, the Company has accrued an
estimated liability for guaranty fund assessments for known insolvencies net
of estimated recoveries through premium tax offsets. As a result of future
insolvencies or changes in the assessment of known insolvencies, the guaranty
fund liability could change in the near term.
 
  In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments (SOP 97-3). SOP 97-3 applies to
all entities that are subject to guaranty fund and other insurance-related
assessments. Assessments covered by this SOP include any charge mandated by
statute or regulatory authority that is related directly or indirectly to
underwriting activities (including self-insurance), except for income taxes
and premium taxes. SOP 97-3 is effective for financial statements for fiscal
years beginning after December 15, 1998. The Company does not believe that the
application of SOP 97-3 will have a material effect on its consolidated
financial statements.
 
 Interest Costs
 
  Interest costs associated with the development of real estate projects are
capitalized. During the years ended September 30, 1998, 1997 and 1996, the
Company capitalized interest of $611,144, $520,969 and $2,468,411,
respectively.
 
 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
includable affiliates. 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.
 
 Income Per Share
 
  Income per share--basic is computed by dividing income applicable to common
stockholders by the weighted-average number of common shares outstanding
during the period. Income per share--diluted is computed by dividing income
applicable to common stockholders by the weighted-average number of common
shares outstanding increased by the additional common shares that would have
been outstanding if potentially dilutive common shares had been issued. There
were no potentially dilutive common shares outstanding during any of the three
years in the period ended September 30, 1998.
 
  The income per share disclosures have been made in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No.
128), which was applied by the Company in the year ended September 30, 1998.
In accordance with SFAS No. 128, all prior income per share data has been
restated to
 
                                     F-12
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
conform to this presentation. Basic and diluted income per share amounts for
periods prior to 1998 are identical in amount to primary and fully diluted
income per share amounts that were previously presented.
 
 Comprehensive Income
 
  In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS No. 130), was issued. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This Statement requires an enterprise to
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. This Statement is effective for
fiscal years beginning after December 15, 1997. The Company does not believe
that the application of this Statement will have a material effect on the
presentation of its financial statements.
 
 Hedging Activities
 
  The Company is authorized by its Board of Directors, subject to certain
limitations, to use financial futures instruments for the purpose of hedging
interest rate risk relative to the securities portfolio and in anticipation of
sales and securitizations of real estate contracts and other receivable
investments.
 
  The Company also purchases collateralized mortgage obligations (CMOs), pass-
through certificates and other mortgage- and asset-backed securities for its
investment portfolio. Such purchases have been limited to tranches that
perform in concert with the underlying mortgages or assets; i.e., improving in
value with falling interest rates and declining in value with rising interest
rates. The Company has not invested in "derivative products" that have been
structured to perform in a way that magnifies the normal impact of changes in
interest rates or in a way dissimilar to the movement in value of the
underlying securities.
 
  The Company uses future contracts to hedge against interest rate risk
arising from real estate contracts and mortgage notes receivable held for
sale. Gains and losses on interest rate futures are deferred and included in
the carrying value of the related hedged assets. The unrealized gains and
losses are amortized over the estimated lives of the related assets as a yield
adjustment. Upon settlement of the assets being hedged, deferral accounting is
discontinued and the resultant gain or loss is realized in operations. At
September 30, 1998, the Company had open hedge positions on 310 futures
contracts on U.S. treasury notes with a notional value of approximately
$41 million, resulting in deferred losses of approximately $1,550,000, which
were used to hedge interest rate risk on real estate contracts and mortgage
notes receivable that were held for sale.
 
  Unrealized gains or losses associated with financial future contracts that
meet the hedge criteria are deferred and recognized when the effects of
changes in interest rate on the hedged asset are recognized. The deferred
unrealized gains or losses are classified in the same category as the items
being hedged.
 
  In fiscal 1996, the Company sold U.S. Treasury securities, which it did not
own, to provide an economic hedge for the anticipated securitization of real
estate contracts and mortgage notes receivable which was completed in November
1996. At September 30, 1996, the Company was obligated to deliver U.S.
Treasury securities with a market value of approximately $132,652,000. During
the year ended September 30, 1996, the Company recognized a loss of
approximately $820,000 associated with this obligation. The Company recognized
an additional loss of approximately $1,680,000 during the year ended September
30, 1997 upon delivery of the securities.
 
  In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133),
was issued. SFAS No. 133 establishes accounting and
 
                                     F-13
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
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. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999, however, earlier
application is encouraged. The Company has not yet determined the effect of
the implementation of SFAS No. 133 on its financial statements.
 
 Interest Rate Risk
 
  The results of operations of the Company may be materially and adversely
affected by changes in prevailing economic conditions, including rapid changes
in interest rates. The Company's financial assets (primarily real estate
contracts and mortgage notes receivable, other receivables and investment
securities) and liabilities (primarily annuity contracts and debenture bonds)
are subject to interest rate risk. In the year ending September 30, 1999,
approximately $766,000,000 of the Company's financial liabilities will reprice
or mature as compared to approximately $329,000,000 of its financial assets,
resulting in a mismatch of approximately $437,000,000.
 
  This structure is beneficial in periods of declining interest rates;
however, may result in declining net interest income during periods of rising
interest rates. Of the financial liabilities scheduled to reprice or mature,
approximately 76% are annuity contracts which are subject to surrender
charges. Management is aware of the sources of interest rate risk and
endeavors to actively monitor and manage its interest rate risk, although
there can be no assurance regarding the management of interest rate risk in
future periods.
 
 Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles 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 financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
 
 Reclassifications
 
  Certain amounts in the 1997 and 1996 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.
 
                                     F-14
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
2. INVESTMENTS:
 
  A summary of carrying and estimated market values of investments at
September 30, 1998 and 1997 is as follows:
 
<TABLE>
<CAPTION>
                                                     1998
                             -----------------------------------------------------
                                           Gross       Gross         Estimated
                              Amortized  Unrealized Unrealized     Market Values
           Trading              Costs      Gains      Losses     (Carrying Values)
           -------           ----------- ---------- -----------  -----------------
   <S>                       <C>         <C>        <C>          <C>
   Pass-through
    certificates...........  $48,393,152 $7,720,384 $  (247,661)    $55,865,875
                             =========== ========== ===========     ===========
<CAPTION>
                                           Gross       Gross     Estimated Market
                              Amortized  Unrealized Unrealized    Values (Carrying
      Available for Sale        Costs      Gains      Losses          Values)
      ------------------     ----------- ---------- -----------  -----------------
   <S>                       <C>         <C>        <C>          <C>
   Government-backed bonds.  $ 9,749,745 $  101,756                 $ 9,851,501
   Corporate bonds.........   10,124,513    118,930 $    (1,026)     10,242,417
   Mortgage- and asset-
    backed securities......    6,609,314    270,040    (988,537)      5,890,817
                             ----------- ---------- -----------     -----------
   Total fixed maturities..   26,483,572    490,726    (989,563)     25,984,735
   Equity securities.......        1,592      2,462                       4,054
                             ----------- ---------- -----------     -----------
     Totals................  $26,485,164 $  493,188 $  (989,563)    $25,988,789
                             =========== ========== ===========     ===========
<CAPTION>
                              Amortized
                                Costs      Gross       Gross
                              (Carrying  Unrealized Unrealized   Estimated Market
       Held-to-Maturity        Values)     Gains      Losses          Values
       ----------------      ----------- ---------- -----------  -----------------
   <S>                       <C>         <C>        <C>          <C>
   Government-backed bonds.  $48,497,962 $2,714,507 $(1,287,443)    $49,925,026
   Corporate bonds.........    2,995,502     13,774                   3,009,276
   Utility bonds...........      999,273      3,835                   1,003,108
   Mortgage- and asset-
    backed securities......   30,543,788  2,409,071    (494,248)     32,458,611
                             ----------- ---------- -----------     -----------
     Totals................  $83,036,525 $5,141,187 $(1,781,691)    $86,396,021
                             =========== ========== ===========     ===========
</TABLE>
 
                                     F-15
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
<TABLE>
<CAPTION>
                                                     1997
                             ------------------------------------------------------
                                            Gross       Gross         Estimated
                              Amortized   Unrealized Unrealized     Market Values
           Trading              Costs       Gains      Losses     (Carrying Values)
           -------           ------------ ---------- -----------  -----------------
   <S>                       <C>          <C>        <C>          <C>
   Pass-through
    certificates...........   $33,427,969 $1,050,000 $     (878)     $34,477,091
                             ============ ========== ===========    ============
<CAPTION>
                                            Gross       Gross         Estimated
                              Amortized   Unrealized Unrealized     Market Values
      Available-for-Sale        Costs       Gains      Losses     (Carrying Values)
      ------------------     ------------ ---------- -----------  -----------------
   <S>                       <C>          <C>        <C>          <C>
   Government-backed bonds.  $ 11,722,759 $    8,353 $  (144,090)   $ 11,587,022
   Corporate bonds.........    11,158,910               (164,016)     10,994,894
   Utility bonds...........     2,999,471                 (5,207)      2,994,264
   Mortgage- and asset-
    backed securities......    11,498,068    236,344    (694,787)     11,039,625
                             ------------ ---------- -----------    ------------
   Total fixed maturities..    37,379,208    244,697  (1,008,100)     36,615,805
   Equity securities.......         1,592      3,954                       5,546
                             ------------ ---------- -----------    ------------
     Totals................  $ 37,380,800 $  248,651 $(1,008,100)   $ 36,621,351
                             ============ ========== ===========    ============
<CAPTION>
                              Amortized
                                Costs       Gross       Gross
                              (Carrying   Unrealized Unrealized   Estimated Market
       Held-to-Maturity        Values)      Gains      Losses          Values
       ----------------      ------------ ---------- -----------  -----------------
   <S>                       <C>          <C>        <C>          <C>
   Government-backed bonds.  $ 59,201,790 $   16,315 $(1,369,896)   $ 57,848,209
   Corporate bonds.........     5,493,662                (72,391)      5,421,271
   Utility bonds...........     3,997,395                (67,070)      3,930,325
   Mortgage- and asset-
    backed securities......    45,037,688    766,094    (291,899)     45,511,883
                             ------------ ---------- -----------    ------------
     Totals................  $113,730,535 $  782,409 $(1,801,256)   $112,711,688
                             ============ ========== ===========    ============
</TABLE>
 
  The activity related to the pass-through certificates, which represent the
Company's residual interests from securitization transactions, for the years
ended September 30, 1998, 1997 and 1996 is as follows:
 
<TABLE>
<CAPTION>
                                              1998         1997         1996
                                           -----------  -----------  ----------
   <S>                                     <C>          <C>          <C>
   Carrying value, beginning of year...... $18,809,877  $ 3,873,740  $      --
   Securities retained....................   5,184,816   11,050,818   3,514,974
   Sales..................................  (4,953,937)
   Remittances............................  (1,561,191)    (170,412)
   Investment income......................   2,941,646    3,005,731     358,766
   Fair market value adjustments..........   4,050,000    1,050,000
                                           -----------  -----------  ----------
   Carrying value, end of year............ $24,471,211  $18,809,877  $3,873,740
                                           ===========  ===========  ==========
</TABLE>
 
  Although the Company believes it has made reasonable estimates of the fair
value of the residual interests likely to be realized, the rate of prepayments
and the amount of defaults utilized by the Company are estimates and actual
experience may vary. Higher than anticipated rates of prepayments or losses
would require the Company to reduce the fair value of the residual interests,
adversely impacting earnings.
 
  The Company assumes prepayment rates and defaults based upon the seasoning
of its existing securitization receivable portfolio. As of September 30, 1998
and 1997, the Company's underlying assumptions used in determining the fair
value of its residual interests are as follows:
 
    Estimated annual prepayment rate: 15.0% to 23.0% based on actual
  experience;
 
                                     F-16
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
    Default reserve: 1.25% of the amount initially securitized;
 
    Annual discount rate: 12.0% to 15.0% to determine the present value of
  cash flows from pass-through certificates.
 
  Through September 30, 1998, actual cash flows from the Company's
securitization trusts have either met or exceeded management's expectations.
 
  Proceeds from sales of available-for-sale securities during the years ended
September 30, 1998, 1997 and 1996 were $1,769,954, $22,556,364 and
$31,686,315, respectively, which resulted in gross realized gains of $39,964,
$498,208 and $89,040 and gross realized losses of $14,727, $20,598 and $86,969
during each respective year.
 
  During the year ended September 30, 1998, the Company determined that
certain available-for-sale and held-to-maturity asset-backed securities had an
other than temporary impairment in value. Accordingly, the carrying value of
the securities was decreased by approximately $1,400,000, representing the
amount permanently impaired, through a charge to operations. Other than the
securities with an other than temporary impairment in value, all other bonds,
pass-through certificates and mortgage- and asset-backed securities held at
September 30, 1998 were performing in accordance with their terms.
 
  During the year ended September 30, 1996, in accordance with a Special
Report issued by the Financial Accounting Standards Board, the Company
reassessed and reclassified held-to-maturity debt securities with a carrying
value of approximately $72,500,000 to the available-for-sale classification.
At the date of the transfer, the debt securities were valued at fair value of
approximately $72,000,000. The difference between the carrying value and fair
value of the reclassified debt securities at the date of transfer of
approximately $500,000 was recognized in the net unrealized losses on
investments component of stockholders' equity.
 
  During the year ended September 30, 1995, the Company entered into financial
futures contracts to hedge its interest rate risk on certain held-to-maturity
debt securities with remaining contractual terms of approximately eight years
against a potential increase in interest rates. Interest rates declined,
resulting in a realized loss of $1,600,000 associated with such contracts. The
hedging loss has been deferred and is being amortized over the contractual
term of the hedged debt securities using the interest method. The remaining
unamortized hedging loss at September 30, 1998 and 1997 was approximately
$1,046,000 and $1,228,000, respectively.
 
  During the year ended September 30, 1994, the Company transferred
approximately $79,000,000 of investments from the available-for-sale portfolio
to the held-to-maturity portfolio. At the date of transfer, these investments
had net unrealized losses of approximately $1,060,000 before income taxes.
These unrealized losses are being amortized over the term of the investments
transferred using the interest method. At September 30, 1998, the remaining
unamortized loss of approximately $316,000, net of deferred income taxes, is
reported as a reduction of stockholders' equity.
 
                                     F-17
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The following individual investments (excluding U.S. government bonds) held
by the Company at September 30, 1998 and 1997, were in excess of ten percent
of stockholders' equity.
 
<TABLE>
<CAPTION>
                                                                     Carrying
                                Issuer                                Amount
                                ------                              -----------
   <S>                                                              <C>
   1998:
     Mortgage- and asset-backed securities:
       Residential Funding Mortgage Securities (four issues)....... $11,658,090
       Chase Mortgage Finance Corp. (seven issues).................   7,141,308
     Pass-through certificates:
       Metropolitan Asset Funding, Inc. (fourteen issues)..........  47,613,828
       Tryon Mortgage Funding, Inc. (two issues)...................   7,071,011
   1997:
     Mortgage- and asset-backed securities:
       Residential Funding Mortgage Securities (four issues)....... $16,215,058
       Chase Mortgage Finance Corp. (seven issues).................  10,516,239
       Prudential Home Mortgage Securities (three issues)..........   6,398,086
       Countrywide Funding Corp. (three issues)....................   5,909,140
     Pass-through certificates:
       Metropolitan Asset Funding, Inc. (twelve issues)............  27,959,473
       Tryon Mortgage Funding, Inc. (three issues).................   6,517,618
</TABLE>
 
  The amortized costs and estimated market values of available-for-sale and
held-to-maturity debt securities at September 30, 1998, by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay obligations
with or without call or prepayment penalties.
 
<TABLE>
<CAPTION>
                                                                     Estimated
                                                         Amortized    Market
                                                           Cost        Value
                                                        ----------- -----------
   <S>                                                  <C>         <C>
   Available-for-sale debt securities:
     Due in one year or less........................... $ 6,292,529 $ 6,301,021
     Due after one year through five years.............  13,583,321  13,796,951
                                                        ----------- -----------
                                                         19,875,850  20,097,972
     Mortgage-- and asset-backed bonds.................   6,609,314   5,890,817
                                                        ----------- -----------
                                                        $26,485,164 $25,988,789
                                                        =========== ===========
<CAPTION>
                                                                     Estimated
                                                         Amortized    Market
                                                           Cost        Value
                                                        ----------- -----------
   <S>                                                  <C>         <C>
   Held-to-maturity debt securities:
     Due in one year or less........................... $   100,154 $   102,875
     Due after one year through five years.............  52,231,602  53,662,704
     Due after five years through ten years............     160,981     171,831
                                                        ----------- -----------
                                                         52,492,737  53,937,410
     Mortgage-- and asset-backed bonds.................  30,543,788  32,458,611
                                                        ----------- -----------
                                                        $83,036,525 $86,396,021
                                                        =========== ===========
</TABLE>
 
  The Company intends to maintain an available-for-sale portfolio which may be
shifted between investments of differing types and maturities to attempt to
maximize market returns without assuming unacceptable levels of
 
                                     F-18
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
credit risk. Future purchases assigned to the held-to-maturity portfolio will
be to replace maturing investments, or increase the overall size of the
portfolio while maintaining its overall composition.
 
3. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE:
 
  Real estate contracts and mortgage notes receivable include mortgages
collateralized by property located throughout the United States. At September
30, 1998, the Company held first position liens associated with real estate
contracts and mortgage notes receivable with a face value of approximately
$614,800,000 (99% of its total portfolio) and second or lower position liens
of approximately $8,750,000 (1% of its total portfolio).
 
  The Company's real estate contracts and mortgage notes receivable at
September 30, 1998 and 1997 are collateralized by property concentrated in the
following geographic areas:
 
<TABLE>
<CAPTION>
                                                                       1998  1997
                                                                       ----  ----
   <S>                                                                 <C>   <C>
   Pacific Northwest (Alaska, Idaho, Montana, Oregon and Washington).   29%   28%
   Pacific Southwest (Arizona, California and Nevada)................   24    20
   Southwest (New Mexico and Texas)..................................   13    17
   North Atlantic (Connecticut, Maryland, New Jersey, New York and
    Pennsylvania)....................................................    9     9
   Southeast (Florida, Georgia, North Carolina and South Carolina)...   10     9
   Other.............................................................   15    17
                                                                       ---   ---
                                                                       100%  100%
                                                                       ===   ===
</TABLE>
 
  The value of real estate properties in these geographic regions will be
affected by changes in the economic environment of that region. 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.
 
  The face value of the real estate contracts and mortgage notes receivable
range principally from $15,000 to $300,000. At September 30, 1998, the Company
had 96 receivables aggregating approximately $53,300,000 which had face values
in excess of $300,000. No individual receivable is in excess of 0.4% of the
total carrying value of real estate contracts and mortgage notes receivable,
and less than 5% of the receivables are subject to variable interest rates.
Contractual interest rates for 94% of the face value of receivables fall
within a range from 6% to 13% per annum. The weighted average contractual
interest rate on these receivables at September 30, 1998 is approximately
9.4%. Maturity dates range from 1998 to 2028.
 
  The following is a reconciliation of the face value of real estate contracts
and mortgage notes receivable to the Company's carrying value at September 30,
1998 and 1997.
 
<TABLE>
<CAPTION>
                                                        1998          1997
                                                    ------------  ------------
   <S>                                              <C>           <C>
   Face value of discounted receivables............ $509,735,611  $442,958,303
   Face value of originated receivables............  113,815,526    85,249,254
   Unrealized discounts, net of unamortized
    acquisition costs..............................  (19,729,926)  (24,642,792)
   Accrued interest receivable.....................   10,357,112     9,299,336
                                                    ------------  ------------
   Carrying value.................................. $614,178,323  $512,864,101
                                                    ============  ============
</TABLE>
 
  The originated receivables are collateralized primarily by first position
liens and result from loans made by the Company, some of which were made to
facilitate the sale of its repossessed property. No unrealized discounts are
attributable to originated receivables.
 
                                     F-19
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The principal amount of receivables with required principal or interest
payments being in arrears for more than three months was approximately
$34,000,000 and $36,000,000 at September 30, 1998 and 1997, respectively.
 
  Sales of receivables with net carrying values of approximately $26,759,000,
$106,885,000 and $54,388,000 were sold without recourse to various financial
institutions resulting in gains of approximately $989,000, $2,243,000 and
$2,645,000 in fiscal 1998, 1997 and 1996, respectively.
 
  Aggregate amounts of contractual maturities of receivables at their face
value are as follows:
 
<TABLE>
<CAPTION>
      Fiscal Year
        Ending
     September 30,
     -------------
     <S>                                                           <C>
       1999....................................................... $ 19,914,000
       2000.......................................................   21,869,000
       2001.......................................................   24,015,000
       2002.......................................................   26,373,000
       2003.......................................................   28,961,000
       Thereafter.................................................  502,419,137
                                                                   ------------
                                                                   $623,551,137
                                                                   ============
</TABLE>
 
  Actual repayments of receivables will likely differ from contractual amounts
due to prepayments.
 
4. REAL ESTATE CONTRACTS AND MORTGAGE NOTES RECEIVABLE, HELD FOR SALE:
 
  The Company acquires certain real estate contracts and mortgage notes
receivable for the purpose of sale or securitization.
 
  The Company entered into securitization transactions during the years ended
September 30, 1998, 1997 and 1996. The Company participates in these
securitization transactions with its subsidiaries and affiliates. These
receivables are structured in classes by credit rating and transferred to a
trust, which sells pass-through certificates to third parties. These
securitizations are recorded as sales of receivables and gains, net of
transaction expenses, are recognized in the consolidated statements of income
as each class is sold.
 
  During the years ended September 30, 1998, 1997 and 1996, proceeds from
securitization transactions were approximately $167,809,000, $273,539,000 and
$112,975,000, respectively, and resulted in gains of approximately
$10,502,000, $19,414,000 and $7,798,000, respectively. The gains realized
during the years ended September 30, 1998, 1997 and 1996 included
approximately $2,463,000, $4,642,000 and $2,290,000, respectively, associated
with the estimated fair value of the mortgage servicing rights retained on the
pool. The fair value of these rights was determined based on the estimated
present value of future net servicing cash flows, including float interest and
late fees, adjusted for anticipated prepayments. The Company evaluates
possible impairment in its mortgage servicing rights by similar type of loan,
and to the extent that carrying value for a stratum exceeds its estimated fair
value, an impairment loss is recognized. It is reasonably possible that actual
prepayment experience could exceed the estimated prepayment factor in the near
term, which would result in a reduction in the carrying value of retained
mortgage servicing rights.
 
  Of the receivables securitized, the Company has retained an investment in
certain classes of the securities having a fair value of approximately
$49,484,000 and $34,477,000 at September 30, 1998 and 1997, respectively.
These securities were transferred to the Company's investment portfolio and
classified as trading securities.
 
  In October 1998, the FASB issued Statement of Financial Accounting Standards
No. 134, "Accounting for Mortgage-Banking Enterprise" which requires that
after the securitization of mortgage loans held for sale, an
 
                                     F-20
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
entity engaged in mortgage banking activities classify the resulting mortgage-
backed securities or other retained interests based on its ability and intent
to sell or hold those investments. This Statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans
by a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a non-mortgage
banking enterprise. This Statement is effective for the first fiscal quarter
beginning after December 15, 1998. The Company has not yet determined the
effect of the application of this statement on its financial statements.
 
 
                                     F-21
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
5. REAL ESTATE HELD FOR SALE AND DEVELOPMENT:
 
  A detail of the Company's real estate held for sale and development by state
as of September 30, 1998 is as follows:
 
<TABLE>
<CAPTION>
                                       Single-    Multi-
                                       Family     Family
         State              Land      Dwelling   Dwelling Commercial  Condominium    Total
         -----           ----------- ----------- -------- ----------- ----------- -----------
<S>                      <C>         <C>         <C>      <C>         <C>         <C>
Alabama................. $    34,900 $    85,561                                  $   120,461
Alaska..................      36,755      34,094                      $    80,790     151,639
Arizona.................     564,753     595,894          $    54,000               1,214,647
Arkansas................                 185,727               96,149      82,620     364,496
California..............   1,360,486   2,379,692            1,141,169      23,390   4,904,737
Colorado................     160,000     150,061                           67,000     377,061
Delaware................                  59,740                                       59,740
District of Columbia....                  57,998                                       57,998
Florida.................     431,167     949,604 $23,486      268,568     441,071   2,113,896
Georgia.................                 150,906               21,494                 172,400
Hawaii..................                  49,900            3,479,096   5,497,484   9,026,480
Idaho...................      33,900     608,649                                      642,549
Illinois................      12,000                                                   12,000
Indiana.................                 123,511                                      123,511
Iowa....................                 191,238                                      191,238
Kansas..................                  31,262               39,862                  71,124
Maine...................      26,349                                                   26,349
Maryland................                  84,837                                       84,837
Massachusetts...........                  50,273                                       50,273
Michigan................                 368,477                                      368,477
Minnesota...............                 183,431                                      183,431
Mississippi.............      37,088                                                   37,088
Missouri................      50,565     194,575  48,003                   48,769     341,912
Montana.................      20,472     280,555                                      301,027
Nevada..................      14,864      37,508                                       52,372
New Hampshire...........                  98,000                                       98,000
New Jersey..............      47,205     463,559                                      510,764
New Mexico..............      50,757     548,132              130,041                 728,930
New York................      32,301     791,608              578,436      17,000   1,419,345
North Carolina..........                  38,000                          106,092     144,092
Ohio....................                  25,000                                       25,000
Oklahoma................      26,645     218,085                                      244,730
Oregon..................                 516,254                                      516,254
Pennsylvania............      32,400     674,179                                      706,579
South Carolina..........                  88,915                                       88,915
South Dakota............                  16,058                                       16,058
Tennessee...............                                                   95,685      95,685
Texas...................     109,906   2,523,370               94,722     181,136   2,909,134
Utah....................                  63,787                                       63,787
Vermont.................      13,836                                                   13,836
Virginia................      24,610     173,628  26,164      249,000                 473,402
Washington..............  46,264,390   1,390,211           12,910,482              60,565,083
Wisconsin...............                  44,630                                       44,630
                         ----------- ----------- -------  ----------- ----------- -----------
Balances at September
 30, 1998............... $49,385,349 $14,526,909 $97,653  $19,063,019 $ 6,641,037 $89,713,967
                         =========== =========== =======  =========== =========== ===========
Balances at September
 30, 1997............... $42,717,651 $ 8,153,274 $        $19,250,702 $11,680,639 $81,802,266
                         =========== =========== =======  =========== =========== ===========
</TABLE>
 
                                     F-22
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
  At September 30, 1998, the Company had approximately $66,000,000 invested in
real estate development projects and approximately $749,000 in commitments for
construction associated with these projects.
 
6. ALLOWANCE FOR LOSSES ON REAL ESTATE ASSETS:
 
  The following is a summary of the changes in the allowance for losses on
real estate assets for the years ended September 30, 1998, 1997 and 1996.
 
<TABLE>
<CAPTION>
                                             1998         1997         1996
                                          -----------  -----------  -----------
     <S>                                  <C>          <C>          <C>
     Beginning balance................... $12,327,098  $10,192,584  $ 8,116,065
     Provisions..........................   6,199,297    8,131,101    6,360,072
     Charge-offs.........................  (7,525,777)  (5,996,587)  (4,283,553)
                                          -----------  -----------  -----------
     Ending balance...................... $11,000,618  $12,327,098  $10,192,584
                                          ===========  ===========  ===========
</TABLE>
 
  At September 30, 1998 and 1997, the net investment in real estate contracts
and mortgage notes receivable for which impairment has been recognized was
approximately $1,992,000 and $1,919,000, respectively, of which approximately
$362,000 and $331,000, respectively, representing the amounts by which the
respective net carrying value of the receivable exceeds the fair value of the
collateral, has been specifically included in the allowance for losses on real
estate assets.
 
  During the years ended September 30, 1998 and 1997, the average recorded
investment in impaired receivables was approximately $1,732,000 and
$1,663,000, respectively. Interest income of approximately $163,000, $156,000
and $212,000 was recognized on these receivables during the years ended
September 30, 1998, 1997 and 1996, respectively, during the period in which
they were impaired.
 
7. 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 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 constant yield on these receivables at September 30, 1998 and
1997 was approximately 9.03% and 8.94%, respectively. Maturity dates range
from 1999 to 2026.
 
  The following is a reconciliation of the face value of the other receivable
investments to the Company's carrying value at September 30, 1998 and 1997.
 
<TABLE>
<CAPTION>
                                                      1998           1997
                                                  -------------  -------------
   <S>                                            <C>            <C>
   Face value of receivables..................... $ 318,756,442  $ 265,087,029
   Unrealized discounts, net of unamortized
    acquisition costs............................  (117,982,909)  (100,552,675)
                                                  -------------  -------------
   Carrying value................................ $ 200,773,533  $ 164,534,354
                                                  =============  =============
</TABLE>
 
  All such receivables were performing in accordance with their contractual
terms at September 30, 1998.
 
                                     F-23
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  During the years ended September 30, 1998, 1997 and 1996, the Company sold
approximately $31,623,000, $7,722,000 and $27,853,000, respectively, of these
receivables without recourse and recognized gains of approximately $2,218,000,
$37,000 and $1,882,000, respectively.
 
  The following other receivable investments, by obligor, were in excess of
ten percent of stockholders' equity at September 30, 1998 and 1997.
 
<TABLE>
<CAPTION>
                                                                     Aggregate
                                                                     Carrying
   Issuer                                                             Amount
   ------                                                           -----------
   <S>                                                              <C>
   1998:
    California State Agency........................................ $21,757,390
    New York State Agency..........................................  15,822,029
    Arizona State Agency...........................................  11,015,505
    New Jersey State Agency........................................  10,492,977
    Pennsylvania State Agency......................................   8,813,126
    Colorado State Agency..........................................   8,002,035
    Tri-State Agency...............................................   7,451,919
    Oregon State Agency............................................   6,991,363
   1997:
    California State Agency........................................ $27,991,509
    New York State Agency..........................................  16,940,146
    Oregon State Agency............................................  12,439,539
    New Jersey State Agency........................................  11,348,481
    Arizona State Agency...........................................  11,249,875
    Colorado State Agency..........................................   8,515,139
    Pennsylvania State Agency......................................   8,163,646
    Tri-State Agency...............................................   7,934,432
    Michigan State Agency..........................................   7,875,106
</TABLE>
 
  Aggregate amounts of contractual maturities of other receivable investments
to be received at their face values are as follows:
 
<TABLE>
<CAPTION>
   Fiscal Year Ending
    September 30,
   ------------------
   <S>                                                              <C>
     1999.......................................................... $ 35,997,000
     2000..........................................................   35,881,000
     2001..........................................................   33,736,000
     2002..........................................................   31,171,000
     2003..........................................................   27,711,000
     Thereafter....................................................  154,260,442
                                                                    ------------
                                                                    $318,756,442
                                                                    ============
</TABLE>
 
                                     F-24
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
8. DEFERRED COSTS:
 
  An analysis of deferred costs related to policy acquisition and debenture
issuance for the years ended September 30, 1998, 1997 and 1996 is as follows:
 
<TABLE>
<CAPTION>
                                           Policy      Debenture
                                        Acquisition    Issuance       Total
                                        ------------  -----------  ------------
<S>                                     <C>           <C>          <C>
Balance at September 30, 1995.......... $ 71,131,059  $ 3,390,744  $ 74,521,803
Deferred during the year:
  Commissions..........................    6,503,580      191,064     6,694,644
  Other expenses.......................    3,438,804      402,360     3,841,164
                                        ------------  -----------  ------------
Total deferred.........................   81,073,443    3,984,168    85,057,611
Amortized during the year..............   (9,140,559)  (1,386,691)  (10,527,250)
                                        ------------  -----------  ------------
Balance at September 30, 1996..........   71,932,884    2,597,477    74,530,361
Deferred during the year:
  Commissions..........................    4,000,805    1,283,612     5,284,417
  Other expenses.......................    3,229,197      277,257     3,506,454
                                        ------------  -----------  ------------
Total deferred.........................   79,162,886    4,158,346    83,321,232
Amortized during the year..............   (9,432,884)  (1,385,253)  (10,818,137)
                                        ------------  -----------  ------------
Balance at September 30, 1997..........   69,730,002    2,773,093    72,503,095
Deferred during the year:
  Commissions..........................    4,434,324    2,412,994     6,847,318
  Other expenses.......................    3,002,859      374,760     3,377,619
                                        ------------  -----------  ------------
Total deferred.........................   77,167,185    5,560,847    82,728,032
Amortized during the year..............  (10,000,000)  (1,465,543)  (11,465,543)
                                        ------------  -----------  ------------
Balance at September 30, 1998.......... $ 67,167,185  $ 4,095,304  $ 71,262,489
                                        ============  ===========  ============
</TABLE>
 
  The amortization of deferred policy acquisition costs, which is based on the
estimated gross profits of the underlying life and annuity products, could be
changed significantly in the near term due to changes in the interest rate
environment. As a result, the recoverability of these costs may be adversely
affected in the near term.
 
9. LAND, BUILDINGS AND EQUIPMENT:
 
  Land, buildings, equipment and related accumulated depreciation at September
30, 1998 and 1997 consisted of the following:
 
<TABLE>
<CAPTION>
                                                         1998          1997
                                                     ------------  ------------
   <S>                                               <C>           <C>
   Land............................................. $  2,778,274  $    561,794
   Buildings and improvements.......................   20,786,169     7,014,199
   Furniture and equipment..........................   14,142,554    12,169,392
                                                     ------------  ------------
                                                       37,706,997    19,745,385
   Less accumulated depreciation....................  (11,817,895)  (10,336,807)
                                                     ------------  ------------
     Totals......................................... $ 25,889,102  $  9,408,578
                                                     ============  ============
</TABLE>
 
                                     F-25
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  During the year ended September 30, 1998, the Company acquired a new
corporate headquarters building in Spokane, Washington for a purchase price of
approximately $11.7 million. Additionally, the Company incurred approximately
$4 million of capital expenditures for the renovation of the new corporate
headquarters building.
 
10. MORTGAGE SERVICING RIGHTS:
 
  The following is an analysis of the mortgage servicing right activity for
the years ended September 30, 1998, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                              1998         1997        1996
                                           -----------  ----------  -----------
<S>                                        <C>          <C>         <C>
Beginning balance......................... $ 5,767,607  $1,524,551  $       --
Additions.................................   2,613,144   5,104,362    2,807,686
Amortization..............................  (2,088,376)   (861,306)  (1,283,135)
                                           -----------  ----------  -----------
Ending balance............................ $ 6,292,375  $5,767,607  $ 1,524,551
                                           ===========  ==========  ===========
</TABLE>
 
  The servicing of securitized pools of receivables are subject to "Pooling
and Servicing Agreements." In accordance with the terms of the various
agreements, the Company collects payments from the individual borrowers and
remits such payments to the trustee of the pool. The Company is obligated to
make cash advances with respect to delinquent principal and interest payments
on any receivable to the extent that the Company determines the advances to be
recoverable. Subject to certain conditions, the Company has the option to
purchase from the mortgage pool any receivable which is 90 days or more
delinquent or to sell any receivable in a commercially reasonable manner if
such a sale would produce a greater recovery than the liquidation of the
mortgaged property.
 
  As compensation for its services, the Company is entitled to retain, from
amounts collected on the receivables, service fees that range from .50% to
 .75% per annum of the scheduled principal balance of the receivable pool as of
the first day of the month. The agreements also entitle the Company to receive
all late payment fees, prepayment penalties, assumption fees and other similar
charges and all investment income earned on amounts collected prior to their
remittance to the trustee or other third party.
 
11. LIFE INSURANCE AND ANNUITY RESERVES:
 
  Life insurance and annuity reserves are based upon contractual amounts due
to the policy holder, including credited interest. Annuity contract interest
rates ranged from 4.35% to 9.85%, 4.35% to 10.10% and 4.25% to 10.65% during
the years ended September 30, 1998, 1997 and 1996, respectively. Interest
assumptions used to compute life insurance reserves ranged from 4.5% to 6.5%
during each of the years ended September 30, 1998 and 1997.
 
  The Company's life insurance subsidiary has ceded a portion of certain life
insurance risks and the related premiums to other companies. These insurance
transactions permit the Company's life insurance subsidiary to recover defined
portions of losses from claims on life insurance policies issued. The
reinsured risks are treated as though they are risks for which the Company's
life insurance subsidiary is not liable. Life insurance reserves, as reported
in these financial statements, do not include reserves on the ceded business.
The face value of life insurance policies ceded to other companies was
approximately $47,653,000 and $52,328,000 at September 30, 1998 and 1997,
respectively. Life insurance premiums ceded were $323,104, $352,311 and
$354,830 during the years ended September 30, 1998, 1997 and 1996,
respectively. 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.
 
                                     F-26
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Beginning in fiscal 1997, the Company's life insurance subsidiary has ceded
a portion of its annuity reserves and related premiums to Old Standard Life
Insurance Company (OSL), an affiliated entity. The reinsured annuity deposits
are treated as liabilities for which the Company's life insurance subsidiary
is not liable, and accordingly, annuity reserves, as reported in these
financial statements, do not include reserves on the ceded business. Annuity
premiums ceded under this arrangement were approximately $25,449,000 and
$28,007,000 during the years ended September 30, 1998 and 1997, respectively,
and the ceded reserve was approximately $52,787,000 and $28,359,000 at
September 30, 1998 and 1997, respectively. The life insurance subsidiary is
contingently liable for claims on ceded annuity business in the event OSL is
unable to meet its obligation under the reinsurance agreement.
 
12. GUARANTY FUND ASSESSMENTS:
 
  All states in which the Company's life insurance subsidiary operates have
laws requiring solvent life insurance companies to pay 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.
 
  The net amounts expensed by the Company's life insurance subsidiary for
guaranty fund assessments and amounts estimated to be assessed for the years
ended September 30, 1998, 1997 and 1996 were approximately $149,000, $480,000
and $900,000, respectively. The Company's estimate of these liabilities is
based upon updated information from the National Organization of Life and
Health Insurance Guaranty Associations regarding insolvencies occurring during
the years 1988 through 1996. These estimates are subject to future revisions
based upon the ultimate resolution of the insolvencies and resultant losses.
As a result of these uncertainties, the Company's estimate of future
assessments could change in the near term. The Company does not believe that
the amount of future assessments associated with known insolvencies after 1996
will be material to its financial condition or results of operations. At
September 30, 1998, the amount of estimated future guaranty fund assessments
of approximately $3,565,000 has been recorded, which is net of a 6.00%
discount rate applied to the estimated payment term of approximately seven
years. The remaining unamortized discount associated with this accrual was
approximately $372,000 at September 30, 1998.
 
13. DEBENTURE BONDS:
 
  At September 30, 1998 and 1997, debenture bonds consisted of the following:
 
<TABLE>
<CAPTION>
   Annual Interest Rates                                  1998         1997
   ---------------------                              ------------ ------------
   <S>                                                <C>          <C>
   5% to 6%.......................................... $      1,000 $     64,000
   6% to 7%..........................................    7,854,000    5,366,000
   7% to 8%..........................................   46,504,000   49,022,000
   8% to 9%..........................................  117,332,000  100,665,000
   9% to 10%.........................................    1,867,000    2,084,000
   10% to 11%........................................    1,715,000    1,968,000
                                                      ------------ ------------
                                                       175,273,000  159,169,000
   Compound and accrued interest.....................   22,932,294   26,044,688
                                                      ------------ ------------
                                                      $198,205,294 $185,213,688
                                                      ============ ============
</TABLE>
 
  The weighted-average interest rate on outstanding debentures was
approximately 8.0% at September 30, 1998 and 1997.
 
                                     F-27
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Debenture bonds (including principal and compound and accrued interest)
mature as follows:
 
<TABLE>
<CAPTION>
   Fiscal Year Ending
    September 30,
   ------------------
   <S>                                                              <C>
   1999............................................................ $ 50,525,000
   2000............................................................   41,426,000
   2001............................................................    7,449,000
   2002............................................................   33,555,000
   2003............................................................   39,553,000
   Thereafter......................................................   25,697,294
                                                                    ------------
                                                                    $198,205,294
                                                                    ============
</TABLE>
 
  At September 30, 1998, as required by Washington State regulation,
Metropolitan could not have more than an aggregate total of $250,000,000 in
outstanding debentures (including accrued and compound interest) and
outstanding preferred stock (based on original sales price). At September 30,
1998, the Company had total outstanding debentures of approximately
$198,205,000 and total outstanding preferred stock of approximately
$49,201,000.
 
14. ADVANCES UNDER LINE OF CREDIT:
 
  The Company has a nonrecourse committed facility with NationsBanc Mortgage
Capital Corporation in the authorized amount of $200,000,000, with interest at
LIBOR plus 1%, maturing on March 24, 1999. The amount advanced at September
30, 1998 of $118,342,972, including accrued interest at 6.625% per annum, is
collateralized by real estate contracts and mortgage notes receivable held for
sale with a carrying value of approximately $122,129,000.
 
15. DEBT PAYABLE:
 
  At September 30, 1998 and 1997, debt payable consisted of the following:
 
<TABLE>
<CAPTION>
                                                             1998       1997
                                                          ---------- ----------
   <S>                                                    <C>        <C>
   Reverse repurchase agreements with Seattle Northwest,
    interest at 5.57% per annum; due on October 1, 1998;
    collateralized by $2,900,000 in U.S. Treasury bonds.  $2,892,750
   Note payable to Summit Securities, Inc., interest at
    11.0% per annum; due on June 30, 1999;
    collateralized by $3,200,000 in structured
    settlement agreements...............................   2,560,000
   Reverse repurchase agreements with Seattle Northwest,
    interest at 6.15% per annum; due on October 2, 1997;
    collateralized by $2,900,000 in U.S. Treasury bonds.             $2,896,375
   Real estate contracts and mortgage notes payable,
    interest rates ranging from 3.0% to 11.6%, due in
    installments through 2016; collateralized by senior
    liens on certain of the Company's real estate
    contracts, mortgage notes and real estate held for
    sale................................................   1,802,680  1,988,843
   Accrued interest payable.............................     103,909     32,561
                                                          ---------- ----------
                                                          $7,359,339 $4,917,779
                                                          ========== ==========
</TABLE>
 
                                     F-28
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Aggregate amounts of principal and accrued interest payments due on debt
payable are as follows:
 
<TABLE>
<CAPTION>
    Fiscal Year
       Ending
   September 30,
   -------------
   <S>                                                               <C>
    1999............................................................ $5,940,000
    2000............................................................    326,000
    2001............................................................    151,000
    2002............................................................    241,000
    2003............................................................    150,000
   Thereafter.......................................................    551,339
                                                                     ----------
                                                                     $7,359,339
                                                                     ==========
</TABLE>
 
16. INCOME TAXES:
 
  The Company files a consolidated federal income tax return with all of its
subsidiaries.
 
  The income tax effects of the temporary differences giving rise to the
Company's deferred tax assets and liabilities as of September 30, 1998 and 1997
are as follows:
 
<TABLE>
<CAPTION>
                                                                 1998
                                                        -----------------------
                                                          Assets    Liabilities
                                                        ----------- -----------
   <S>                                                  <C>         <C>
   Allowance for losses on real estate assets.......... $ 2,621,973
   Allowances for repossessed real estate..............   1,220,875
   Deferred contract acquisition costs and discount
    yield recognition..................................             $ 7,154,906
   Office properties and equipment.....................               2,014,695
   Deferred policy acquisition costs...................              27,407,445
   Life insurance and annuity reserves.................   4,971,432
   Guaranty fund liability.............................   1,121,876
   Investments.........................................     413,354
   Tax credit carryforwards............................     612,098
   Other...............................................     193,790
   Net operating loss carryforwards....................   2,696,596
                                                        ----------- -----------
   Total deferred income taxes......................... $13,851,994 $36,577,046
                                                        =========== ===========
<CAPTION>
                                                                 1997
                                                        -----------------------
                                                          Assets    Liabilities
                                                        ----------- -----------
   <S>                                                  <C>         <C>
   Allowance for losses on real estate assets.......... $ 3,249,751
   Allowances for repossessed real estate..............     964,234
   Deferred contract acquisition costs and discount
    yield recognition..................................             $13,464,592
   Office properties and equipment.....................               1,820,852
   Deferred policy acquisition costs...................              22,714,853
   Life insurance and annuity reserves.................   7,920,469
   Guaranty fund liability.............................   1,325,299
   Investments.........................................     238,796
   Tax credit carryforwards............................   1,692,052
   Other...............................................               2,143,518
   Net operating loss carryforwards....................   2,723,436
                                                        ----------- -----------
   Total deferred income taxes......................... $18,114,037 $40,143,815
                                                        =========== ===========
</TABLE>
 
                                      F-29
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  No valuation allowance has been established to reduce deferred tax assets as
it is more likely than not that these assets will be realized due to the
future reversals of existing taxable temporary differences. Realization is
dependent on the generation of sufficient taxable income prior to expiration
of the net operating loss carryforwards. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
 
  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, 1998, 1997 and 1996:
 
<TABLE>
<CAPTION>
                                                  1998       1997       1996
                                               ---------- ---------- ----------
   <S>                                         <C>        <C>        <C>
   Federal income taxes at statutory rate..... $5,415,475 $5,053,484 $4,209,817
   State taxes and other......................     59,941     19,028     25,652
                                               ---------- ---------- ----------
   Income tax provision....................... $5,475,416 $5,072,512 $4,235,469
                                               ========== ========== ==========
</TABLE>
 
  The components of the provision for income taxes for the years ended
September 30, 1998, 1997 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                   1998       1997       1996
                                                ---------- ---------- ----------
   <S>                                          <C>        <C>        <C>
   Current..................................... $4,780,142 $1,004,926 $  595,113
   Deferred....................................    695,274  4,067,586  3,640,356
                                                ---------- ---------- ----------
                                                $5,475,416 $5,072,512 $4,235,469
                                                ========== ========== ==========
</TABLE>
 
  At September 30, 1998, the Company and its subsidiaries had unused net
operating loss carryforwards, for income tax purposes, as follows:
 
<TABLE>
<CAPTION>
                                                                         Net
                                                                      Operating
   Expiring in                                                          Losses
   -----------                                                        ----------
   <S>                                                                <C>
   2005.............................................................. $1,373,094
   2006..............................................................  5,612,555
   2007..............................................................    945,516
                                                                      ----------
                                                                      $7,931,165
                                                                      ==========
</TABLE>
 
  At September 30, 1998, the Company has alternative minimum tax credits of
approximately $1,150,000 and general business tax credit carryforwards of
approximately $612,000 available to reduce regular income taxes payable. The
general business tax credit carryforwards begin to expire in 2004.
 
                                     F-30
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
17. STOCKHOLDERS' EQUITY:
 
    A summary of preferred and common shares at September 30, 1998 and 1997
  is as follows:
 
<TABLE>
<CAPTION>
                                              Issued and Outstanding Shares
                                       -------------------------------------------
                                               1998                  1997
                            Authorized --------------------- ---------------------
                              Shares    Shares     Amount     Shares     Amount
                            ---------- --------- ----------- --------- -----------
   <S>                      <C>        <C>       <C>         <C>       <C>
   Preferred Stock
     Series A..............   750,000        --  $       --        --  $       --
     Series B..............   200,000        --          --        --          --
     Series C.............. 1,000,000    389,885   3,898,847   413,554   4,135,540
     Series D.............. 1,375,000    574,307   5,743,070   637,627   6,376,266
     Series E.............. 5,000,000    981,215   9,812,154 1,044,233  10,442,335
                            ---------  --------- ----------- --------- -----------
                            8,325,000  1,945,407 $19,454,071 2,095,414 $20,954,141
                            =========  ========= =========== ========= ===========
   Common Stock
     Class A...............       222        130 $   293,417       130 $   293,417
     Class B...............       222        --          --        --          --
                            ---------  --------- ----------- --------- -----------
                                  444        130 $   293,417       130 $   293,417
                            =========  ========= =========== ========= ===========
   Subordinate Preferred
    Stock.................. 1,000,000        --  $       --        --  $       --
                            =========  ========= =========== ========= ===========
</TABLE>
 
  The Series E preferred stock has been issued in the following sub-series:
 
<TABLE>
<CAPTION>
                                             Issued and Outstanding Shares
                                        ----------------------------------------
                                               1998                1997
                                        ------------------ ---------------------
                                        Shares    Amount    Shares     Amount
                                        ------- ---------- --------- -----------
   <S>                                  <C>     <C>        <C>       <C>
   Series E-1.......................... 650,699 $6,506,986   713,401 $ 7,134,008
   Series E-2..........................  42,299    422,994    45,154     451,541
   Series E-3.......................... 101,419  1,014,191   107,000   1,069,996
   Series E-4..........................  58,479    584,786    62,500     625,005
   Series E-5..........................  12,549    125,495    13,672     136,721
   Series E-6..........................  89,968    899,682    95,130     951,303
   Series E-7..........................  25,802    258,020     7,376      73,761
                                        ------- ---------- --------- -----------
                                        981,215 $9,812,154 1,044,233 $10,442,335
                                        ======= ========== ========= ===========
</TABLE>
 
 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.
 
                                     F-31
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Series B, 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 proratably 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, E-6 and
E-7 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.
 
  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 price.
 
  At September 30, 1998, as required by state regulation, the amount of the
Company's aggregate total outstanding preferred stock and debentures was
limited (see Note 13).
 
 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, 1998
and 1997, 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 96.5% or greater stock ownership
interest. These restrictions are limited to the unassigned statutory surplus
of the insurance subsidiary which totaled approximately $7,738,000 at
September 30, 1998 (see Note 18).
 
                                     F-32
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
18. STATUTORY ACCOUNTING:
 
  The Company's life insurance subsidiary 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 the
GAAP financial statement balances for the life insurance subsidiary as of and
for the years ended September 30, 1998, 1997 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                         Statutory     GAAP
                                                        ----------- -----------
   <S>                                                  <C>         <C>
   Stockholders' equity:
     1998.............................................. $50,893,450 $89,617,766
     1997..............................................  51,751,693  86,229,626
     1996..............................................  48,721,922  81,605,742
   Net income:
     1998.............................................. $ 2,651,629 $ 3,576,495
     1997..............................................   6,811,628   4,051,900
     1996..............................................   7,224,359   3,076,252
   Unassigned statutory surplus and retained earnings:
     1998.............................................. $ 7,738,450 $46,462,766
     1997..............................................   8,596,693  43,074,626
     1996..............................................   5,566,922  38,450,742
</TABLE>
 
  Under applicable Washington State Insurance laws and regulations, the
Company's life insurance subsidiary is required to maintain minimum levels of
surplus, determined in accordance with statutory accounting practices, in the
aggregate amount of $150,000. The Revised Code of Washington defines surplus
as "the excess of statutory assets over statutory liabilities, accounting for
the par value of capital stock as a liability." At September 30, 1998, the
Company's life insurance subsidiary was in compliance with this requirement.
 
  The National Association of Insurance Commissioners (NAIC) recently
completed the process of codifying statutory accounting practices, the result
of which is expected to constitute the only source of "prescribed" statutory
accounting practices. Accordingly, that project will likely change, to some
extent, prescribed statutory accounting practices that insurance enterprises
use to prepare their statutory financial statements. Written approval was
received from the Insurance Department of the state of Washington to
capitalize, through March 31, 1998, the underwriting fees charged to the life
insurance subsidiary by Metropolitan and to amortize these fees as an
adjustment of the yield on acquired receivables. Statutory accounting
practices prescribed by the state of Washington do not describe the accounting
required for this type of transaction. As of September 30, 1998, this
permitted accounting practice increased statutory surplus by approximately
$26,540,000 over what it would have been had prescribed practices disallowed
this accounting treatment.
 
  The regulatory authorities 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. The
estimated RBC measure of the insurance subsidiary at September 30, 1998 was
above the minimum standards.
 
                                     F-33
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
19. SUPPLEMENTAL DISCLOSURES FOR STATEMENTS OF CASH FLOWS:
 
  The following table summarizes interest costs, net of amounts capitalized
and income taxes paid during the years ended September 30, 1998, 1997 and
1996:
 
<TABLE>
<CAPTION>
                                             1998         1997        1996
                                          -----------  ----------- -----------
   <S>                                    <C>          <C>         <C>
   Interest, net of amounts capitalized.. $22,704,300  $22,588,759 $12,653,377
   Income taxes..........................   5,060,178    5,006,812   2,503,482
 
  Non-cash investing and financing activities of the Company during the years
ended September 30, 1998, 1997 and 1996 are as follows:
 
<CAPTION>
                                             1998         1997        1996
                                          -----------  ----------- -----------
   <S>                                    <C>          <C>         <C>
   Loans to facilitate the sale of real
    estate held.......................... $10,864,127  $18,604,263 $39,102,941
   Transfers between annuity products....  41,954,744   20,899,096  17,051,327
   Real estate held for sale and
    development acquired through
    foreclosure..........................  27,048,940   14,977,384  14,270,520
   Assumption of other debt payable in
    connection with the acquisition of
    real estate contracts and mortgage
    notes................................     690,093    1,638,727   3,633,657
   Change in net unrealized (losses)
    gains on investments, net............    (413,450)     723,854    (161,606)
   Transfer of investments from
    available-for-sale portfolio to
    trading securities portfolio.........               17,958,970
   Transfer of investment from held-to-
    maturity portfolio to available-for-
    sale portfolio.......................                           72,572,322
</TABLE>
 
20. 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. 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.
 
                                     F-34
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Information about the Company's separate business segments and in total as
of and for the years ended September 30, 1998, 1997 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                      Property    Intersegment
                          Investing     Insurance    Development   Elimination       Total
                         ------------ -------------- -----------  -------------  --------------
<S>                      <C>          <C>            <C>          <C>            <C>
September 30, 1998:
 Revenues............... $ 55,047,900 $   95,094,548 $17,051,189  $ (11,238,328) $  155,955,309
 Income (loss) from op-
  erations..............   11,890,255      6,062,643  (2,025,031)                    15,927,867
 Identifiable assets,
  net...................  408,340,047    944,943,849  66,876,206   (193,495,321)  1,226,664,781
 Depreciation and amor-
  tization..............    2,022,965        303,028   2,170,670                      4,496,663
 Capital expenditures...   17,957,462         76,377       6,125                     18,039,964
September 30, 1997:
 Revenues............... $ 46,236,369 $   96,621,416 $19,305,764  $  (7,028,883) $  155,134,666
 Income (loss) from op-
  erations..............   14,548,441      6,850,975  (6,536,228)                    14,863,188
 Identifiable assets,
  net...................  250,167,675    958,432,546  66,566,307   (162,777,068)  1,112,389,460
 Depreciation and amor-
  tization..............    1,528,939        223,848   4,985,608                      6,738,395
 Capital expenditures...    1,977,251         11,995                                  1,989,246
September 30, 1996:
 Revenues............... $ 37,093,527 $   92,893,077 $33,948,826  $  (7,063,061) $  156,872,369
 Income (loss) from op-
  erations..............    9,869,632      6,080,155  (3,567,973)                    12,381,814
 Identifiable assets,
  net...................  237,724,744  1,133,741,015  68,148,987   (156,955,928)  1,282,658,818
 Depreciation and amor-
  tization..............    1,388,222        181,093   3,048,349                      4,617,664
 Capital expenditures...    1,325,151         44,651                                  1,369,802
</TABLE>
 
  In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," (SFAS
No. 131) was issued. SFAS No. 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. This
Statement supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report information about
major customers. This Statement is effective for financial statements for
periods beginning after December 15, 1997. The Company has not yet determined
the effect that the application of this Statement will have on its
consolidated financial statements.
 
                                     F-35
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
21. RELATED-PARTY TRANSACTIONS:
 
  During the years ended September 30, 1998, 1997 and 1996, the Company had
the following related-party transactions with Summit Securities, Inc. (Summit)
and other affiliates:
 
<TABLE>
<CAPTION>
                                              1998        1997        1996
                                           ----------- ----------- -----------
   <S>                                     <C>         <C>         <C>
   Real estate contracts and mortgage
    notes receivable and other receivable
    investments sold to Summit, OSL and
    Old West Annuity & Life Insurance
    Company (OWAL)........................ $36,268,548 $63,980,678 $45,734,241
   Direct reinsurance premiums ceded to
    OSL...................................  25,448,535  28,006,722
   Contract acquisition costs charged to
    Summit, OSL and OWAL on sale of real
    estate contracts and mortgage notes
    receivable and other receivable
    investments, including management
    underwriting fees.....................     899,999   3,384,572   1,753,206
   Service fees paid to Summit Property
    Development...........................   1,844,026   1,845,207   2,038,202
   Commissions and service fees paid to
    Metropolitan Investment Securities,
    Inc...................................   2,448,075   1,307,110     369,080
   Dividends paid to Summit on stock
    investments...........................     214,354     240,267     200,256
   Real estate contracts and mortgage
    notes receivable and other receivable
    investments purchased from Summit or
    its affiliates........................   9,350,960   3,815,973
   Servicing and collection fees charged
    by Metwest to Summit and its
    affiliates............................     500,832     341,000
   Note payable to Summit.................   2,560,000
   Interest paid on note payable to
    Summit................................      80,028
</TABLE>
 
  At September 30, 1998 and 1997, the Company had payables due to affiliates
of $10,829,461 and $741,518, respectively, related primarily to advance
payments on receivable acquisitions and reinsurance transactions.
 
22. 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 determined based
  upon quoted market prices for securities with similar characteristics and
  risks.
 
    Real Estate Contracts and Mortgage Notes Receivable--For receivables
  (excluding accrued interest receivable), 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 loan. For
  residential mortgage notes, fair value is estimated by discounting
  contractual cash flows adjusted for prepayment estimates. The prepayment
  estimates are based upon internal historical data.
 
    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.
 
                                     F-36
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
    Futures Contracts--The fair value of futures contracts is determined by
  quoted market prices for settlement of the contracts.
 
    Mortgage Servicing Rights--The fair value of mortgage servicing rights is
  based on the discounted value of contractual servicing income using
  estimated prepayment rates of the related serviced receivables.
 
    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.
 
    Other Financial Assets and Liabilities--The carrying amount of financial
  instruments in these classifications, including insurance policy loans
  approximates fair value. Policy loans are charged interest on a variable
  rate subject to current market conditions, thus carrying amounts
  approximate fair value.
 
  The estimated fair values of the following financial instruments as of
September 30, 1998 and 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                                  1998
                                                        ------------------------
                                                          Carrying
                                                          Amounts    Fair Value
                                                        ------------ -----------
   <S>                                                  <C>          <C>
   Financial assets:
     Cash and cash equivalents........................  $ 31,733,362 $31,733,362
     Investments:
       Trading securities.............................    55,865,875  55,865,875
       Available-for-sale securities..................    25,988,789  25,988,789
       Held-to-maturity securities....................    83,036,525  86,396,021
     Real estate contracts and mortgage notes
      receivable (including futures contracts used for
      hedging purposes)...............................   603,821,211 649,257,843
     Other receivable investments.....................   200,773,533 213,276,722
     Mortgage servicing rights........................     6,292,375   6,292,375
   Financial liabilities:
     Debenture bonds--principal and compound interest.   195,469,708 200,884,219
     Debt payable--principal..........................   125,598,402 125,648,336
</TABLE>
 
<TABLE>
<CAPTION>
                                                                1997
                                                      -------------------------
                                                        Carrying
                                                        Amounts     Fair Value
                                                      ------------ ------------
   <S>                                                <C>          <C>
   Financial assets:
     Cash and cash equivalents....................... $ 58,924,458 $ 58,924,958
     Investments:
       Trading securities............................   34,477,091   34,477,091
       Available-for-sale securities.................   36,621,351   36,621,351
       Held-to-maturity securities...................  113,730,535  112,711,688
     Real estate contracts and mortgage notes
      receivable.....................................  503,564,765  527,951,852
     Other receivable investments....................  164,534,354  170,809,066
   Financial liabilities:
     Debenture bonds--principal and compound
      interest.......................................  182,546,047  187,109,699
     Debt payable--principal.........................    4,885,218    4,934,939
</TABLE>
 
  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
 
                                     F-37
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
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.
 
23. 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 21 upon completion of six months of
service in which he or she has completed 500 hours of service. Employees may
defer from 1% to 15% of their compensation in multiples of whole percentages.
 
  The Company matches contributions equal to 50% of pre-tax contributions up
to a maximum of 6% of compensation. This match is made only if the Company had
a net profit during the preceding fiscal year. The Company's contributions to
the Plan were approximately $224,000, $110,000 and $93,000 during the years
ended September 30, 1998, 1997 and 1996, respectively.
 
24. SUBSEQUENT EVENTS:
 
  On November 24, 1998, the Company participated in a securitization
transaction with its affiliates. The Company contributed real estate contracts
and mortgage notes receivable with a face value of approximately $182,414,000
to the pool and realized a pre-tax gain of approximately $9,069,000.
 
  On December 29, 1998, the Company closed a securitization transaction of
other receivable investments. The Company securitized other receivables with
an aggregate future value of approximately $37,828,000 and realized a pre-tax
gain of approximately $1,962,000.
 
                                     F-38
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
25. PARENT COMPANY ONLY FINANCIAL STATEMENTS:
 
  The condensed balance sheets of Metropolitan Mortgage & Securities Co., Inc.
("Metropolitan" or the "parent company") at September 30, 1998 and 1997 are as
follows:
 
<TABLE>
<CAPTION>
                                                         1998          1997
                                                     ------------  ------------
<S>                                                  <C>           <C>
                      ASSETS
Cash and cash equivalents..........................  $  3,331,341  $  6,395,707
Investments........................................    32,022,744    28,186,682
Real estate contracts and mortgage notes receivable
 and other receivable investments, net.............   202,008,048    60,562,209
Real estate held for sale and development, net.....    53,726,746    68,816,344
Allowance for losses on real estate assets.........    (8,889,707)  (10,220,537)
Equity in subsidiary companies.....................    99,601,333    99,088,985
Land, buildings and equipment, net.................    26,660,321    10,280,724
Prepaid expenses and other assets, net.............    20,586,556    10,770,248
Accounts and notes receivable, net.................       524,796     7,836,274
Receivables from affiliates........................    18,483,277    19,210,838
                                                     ------------  ------------
  Total assets.....................................  $448,055,455  $300,927,474
                                                     ============  ============
                    LIABILITIES
Debenture bonds and accrued interest...............  $198,205,294  $185,213,688
Advances under line of credit......................   118,342,972
Debt payable.......................................    29,465,246    25,131,716
Accounts payable and accrued expenses..............    16,726,165     4,818,165
Deferred underwriting fee income...................    26,559,009    31,651,171
                                                     ------------  ------------
  Total liabilities................................   389,298,686   246,814,740
                                                     ============  ============
               STOCKHOLDERS' EQUITY
Preferred stock, $10 par (liquidation preference,
 $49,200,583 and $50,729,084, respectively)........    19,454,071    20,954,141
Common stock, Class A, $2,250 par..................       293,417       293,417
Additional paid-in capital.........................    18,580,051    18,596,231
Retained earnings..................................    21,109,849    14,536,114
Net unrealized losses on investments...............      (680,619)     (267,169)
                                                     ------------  ------------
Total stockholders' equity.........................    58,756,769    54,112,734
                                                     ------------  ------------
Total liabilities and stockholders' equity.........  $448,055,455  $300,927,474
                                                     ============  ============
</TABLE>
 
                                     F-39
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Metropolitan's condensed statements of income for the years ended September
30, 1998, 1997 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                            1998         1997         1996
                                         -----------  -----------  -----------
<S>                                      <C>          <C>          <C>
Revenues:
  Interest and earned discounts......... $17,587,674  $12,895,522  $ 8,303,775
  Fees, commissions, service and other
   income...............................  18,638,026   25,607,641   28,567,964
  Real estate sales.....................  17,822,870   18,127,105   23,499,363
  Net gains on investments and
   receivables..........................  14,194,350    8,211,741    2,357,010
                                         -----------  -----------  -----------
    Total revenues......................  68,242,920   64,842,009   62,728,112
                                         -----------  -----------  -----------
Expenses:
  Interest, net.........................  20,818,307   17,995,578   15,630,068
  Cost of real estate sold..............  17,298,334   19,118,802   22,266,024
  Provision for losses on real estate
   assets...............................   4,041,334    7,255,824    4,578,315
  Salaries and employee benefits........  14,413,335   12,396,324   12,085,532
  Other operating expenses..............   4,249,390    3,810,812    1,523,541
                                         -----------  -----------  -----------
    Total expenses......................  60,820,700   60,577,340   56,083,480
                                         -----------  -----------  -----------
Income from operations before income
 taxes and equity in net income of
 subsidiaries...........................   7,422,220    4,264,669    6,644,632
Income tax provision....................  (2,578,267)  (1,455,746)  (2,268,916)
                                         -----------  -----------  -----------
Income before equity in net income of
 subsidiaries...........................   4,843,953    2,808,923    4,375,716
Equity in net income of subsidiaries....   5,482,750    6,859,388    3,661,948
                                         -----------  -----------  -----------
Net income.............................. $10,326,703  $ 9,668,311  $ 8,037,664
                                         ===========  ===========  ===========
</TABLE>
 
                                     F-40
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Metropolitan's condensed statements of cash flows for the years ended
September 30, 1998, 1997 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                         1998           1997           1996
                                     -------------  -------------  ------------
   <S>                               <C>            <C>            <C>
   Cash flows from operating
    activities:
     Net income....................  $  10,326,703  $   9,668,311  $  8,037,664
     Adjustments to reconcile net
      income to net cash from
      operating activities.........    (17,815,622)   (40,384,815)   12,717,338
                                     -------------  -------------  ------------
       Net cash from operating
        activities.................     (7,488,919)   (30,716,504)   20,755,002
                                     -------------  -------------  ------------
   Cash flows from investing
    activities:
     Principal payments on real
      estate contracts and mortgage
      notes receivable and other
      receivable investments.......     26,532,257     18,604,302    12,480,667
     Proceeds from sales of real
      estate contracts and mortgage
      notes receivable and other
      receivable investments.......    208,388,900    153,354,821    24,297,171
     Acquisition of real estate
      contracts and mortgage notes
      and other receivable
      investments..................   (362,448,218)  (139,609,748)  (32,175,162)
     Proceeds from real estate
      sales........................      6,958,743      4,250,277     9,221,958
     Proceeds from sales of
      investments..................      1,094,788                    3,294,326
     Proceeds from maturities of
      investments..................        922,309      6,922,604     5,800,000
     Purchase of investments.......       (888,713)    (4,097,601)  (11,689,836)
     Additions to real estate held
      for sale and development.....    (11,814,327)   (21,681,182)  (17,191,856)
     Capital expenditures..........    (17,879,532)    (1,930,595)   (1,271,041)
     Net change in investment in
      and advances to subsidiaries.     20,195,480     11,164,783   (16,293,198)
                                     -------------  -------------  ------------
       Net cash from investing
        activities.................   (128,938,313)    26,977,661   (23,526,971)
                                     -------------  -------------  ------------
   Cash flows from financing
    activities:
     Net borrowings (repayments)
      from banks and others........    122,527,855     11,815,877     7,497,807
     Issuance of debenture bonds...     65,048,869     38,510,520     9,125,303
     Issuance of preferred stock...      2,027,737      2,222,893     2,135,714
     Repayment of debenture bonds..    (48,944,640)   (42,376,231)  (22,906,185)
     Cash dividends................     (3,888,536)    (4,112,988)   (3,868,148)
     Redemption and retirement of
      stock........................     (3,543,987)      (982,389)     (370,734)
     Receipt of contingent sale
      price for subsidiary sold to
      related party................        135,568        249,721
                                     -------------  -------------  ------------
       Net cash from financing
        activities.................    133,362,866      5,327,403    (8,386,243)
                                     -------------  -------------  ------------
   Net change in cash and cash
    equivalents....................     (3,064,366)     1,588,560   (11,158,212)
   Cash and cash equivalents at
    beginning of year..............      6,395,707      4,807,147    15,965,359
                                     -------------  -------------  ------------
   Cash and cash equivalents at end
    of year........................  $   3,331,341  $   6,395,707  $  4,807,147
                                     =============  =============  ============
</TABLE>
 
                                     F-41
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED 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, 1998,
1997 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                             1998         1997        1996
                                          -----------  ----------- -----------
   <S>                                    <C>          <C>         <C>
   Loans to facilitate the sale of real
    estate............................... $10,864,127  $13,976,828 $14,277,405
   Real estate acquired through
    foreclosure..........................   7,331,974    2,152,887     198,454
   Transfer of investments from
    available-for-sale portfolio to
    trading securities portfolio.........                  576,377
   Debt assumed with acquisition of real
    estate contracts and mortgage notes
    and debt assumed upon foreclosure of
    real estate contracts................      82,911      165,744
   Change in net unrealized gains
    (losses) on investments..............    (413,450)     723,854    (161,606)
   Increase in assets and liabilities
    associated with liquidation of
    subsidiary:
     Real estate contracts and mortgage
      notes
      receivable.........................                           30,052,954
     Real estate held for sale...........                           27,915,041
     Allowance for losses on real estate
      assets.............................                            1,107,129
     Land, building and equipment, net...                               15,518
     Other assets........................                            1,911,314
     Accounts receivable.................                            2,963,966
     Debt payable........................                               13,948
     Accounts payable and accrued
      expenses...........................                            2,759,214
     Investments in and advances to
      subsidiaries.......................                           58,978,502
</TABLE>
 
  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.
 
  Metropolitan has a nonrecourse committed facility with NationsBanc Mortgage
Capital Corporation in the authorized amount of $200,000,000, with interest at
LIBOR plus 1%, maturing on March 24, 1999. The amount advanced at September
30, 1998 of $118,342,972, including accrued interest at 6.625% per annum, is
collateralized by real estate contracts and mortgage notes receivable held for
sale with a carrying value of approximately $122,129,000.
 
                                     F-42
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  At September 30, 1998 and 1997, Metropolitan's debt payable consists of the
following:
 
<TABLE>
<CAPTION>
                                                            1998        1997
                                                         ----------- -----------
   <S>                                                   <C>         <C>
   Revolving line of credit, interest at 8.75% per
    annum, due December 31, 1998; collateralized by
    certain of the Company's real estate contracts and
    mortgage notes.....................................  $14,000,000 $12,000,000
   Notes payable to Summit Securities, Inc., interest
    at 11.0% per annum; due on June 30, 1999;
    collateralized by $3,200,000 in structured
    settlement agreements..............................    2,560,000
   Reverse repurchase agreement with Seattle Northwest,
    interest at 5.57% per annum, due October 1, 1998;
    collateralized by $2,900,000 in U.S. Treasury
    bonds..............................................    2,892,750   2,896,375
   Real estate contracts and mortgage notes payable,
    interest rates ranging from 3% to 10.9%, due in
    installments through 2016; collateralized by senior
    liens on certain of the Company's real estate
    contracts, mortgage notes and real estate held for
    sale...............................................    9,931,661  10,220,242
   Accrued interest payable............................       80,835      15,099
                                                         ----------- -----------
                                                         $29,465,246 $25,131,716
                                                         =========== ===========
</TABLE>
 
  Aggregate amounts of principal payments due on the parent company's debt
payable are expected to be as follows:
 
<TABLE>
<CAPTION>
    Fiscal Year
      Ending
   September 30,
   -------------
   <S>                                                              <C>
    1999........................................................... $19,974,000
    2000...........................................................     356,000
    2001...........................................................     364,000
    2002...........................................................     336,000
    2003...........................................................     368,000
   Thereafter......................................................   8,067,246
                                                                    -----------
                                                                    $29,465,246
                                                                    ===========
</TABLE>
 
  At September 30, 1998 and 1997, Metropolitan's debenture bonds payable
consisted of the following:
 
<TABLE>
<CAPTION>
   Annual Interest Rates                                  1998         1997
   ---------------------                              ------------ ------------
   <S>                                                <C>          <C>
   5% to 6%.......................................... $      1,000 $     64,000
   6% to 7%..........................................    7,854,000    5,366,000
   7% to 8%..........................................   46,504,000   49,022,000
   8% to 9%..........................................  117,332,000  100,665,000
   9% to 10%.........................................    1,867,000    2,084,000
   10% to 11%........................................    1,715,000    1,968,000
                                                      ------------ ------------
                                                       175,273,000  159,169,000
   Compound and accrued interest.....................   22,932,294   26,044,688
                                                      ------------ ------------
                                                      $198,205,294 $185,213,688
                                                      ============ ============
</TABLE>
 
                                      F-43
<PAGE>
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  Maturities of the parent company's debenture bonds are as follows:
 
<TABLE>
<CAPTION>
    Fiscal Year
      Ending
   September 30,
   -------------
   <S>                                                             <C>
    1999.......................................................... $ 50,525,000
    2000..........................................................   41,426,000
    2001..........................................................    7,449,000
    2002..........................................................   33,555,000
    2003..........................................................   39,553,000
   Thereafter.....................................................   25,697,294
                                                                   ------------
                                                                   $198,205,294
                                                                   ============
</TABLE>
 
  Metropolitan had the following related-party transactions with its various
subsidiaries and affiliated entities:
 
<TABLE>
<CAPTION>
                                               1998        1997        1996
                                            ----------- ----------- -----------
   <S>                                      <C>         <C>         <C>
   Dividends received:
    Metropolitan Mortgage & Securities Co.
     of Alaska............................. $   892,000 $ 2,134,000 $ 1,243,950
    Western United Life Assurance Company..                             441,510
    Beacon Properties, Inc.................                             185,000
    Consumers Group Holding Co., Inc.......     526,000     962,580   1,880,450
    Broadmore Park Factory Outlet, Inc.....                 200,000      85,000
                                            ----------- ----------- -----------
                                            $ 1,418,000 $ 3,296,580 $ 3,835,910
                                            =========== =========== ===========
   Fees, commissions, service and other
    income................................. $17,453,679 $25,628,142 $26,969,251
   Interest income.........................   3,013,354     894,995   1,858,521
</TABLE>
 
  Metropolitan charged various subsidiaries and affiliated entities for
underwriting fees of $10,373,000 in 1998, $20,068,000 in 1997 and $29,362,000
in 1996 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 $10,121,720 in
1998, $17,432,885 in 1997 and $18,323,435 in 1996.
 
  The underwriting fees are based upon a yield requirement established by the
purchasing entity. For contracts acquired to sell to Western United Life
Assurance Co. (Western United), one of Metropolitan's subsidiaries, the yield
is guaranteed by Metropolitan. In connection with its guarantee, Metropolitan
has holdbacks of $4,892,000 and $9,528,000 at September 30, 1998 and 1997,
respectively.
 
                                     F-44
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
                       ON FINANCIAL STATEMENT SCHEDULES
 
The Directors and Stockholders
Metropolitan Mortgage & Securities Co., Inc.
 
  Our report on the consolidated financial statements of Metropolitan Mortgage
& Securities Co., Inc. and subsidiaries is included in Item 8 herein. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedules listed in Item 14 of this Form 10-K.
 
  In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
 
                                             /s/ PricewaterhouseCoopers LLP
                                          -------------------------------------
                                               PricewaterhouseCoopers LLP
 
Spokane, Washington
November 20, 1998
 
                                     F-45
<PAGE>
 
                                                                      SCHEDULE I
 
                  METROPOLITAN MORTGAGE & SECURITIES CO., INC.
                             SUMMARY OF INVESTMENTS
                   OTHER THAN INVESTMENTS IN RELATED PARTIES
 
                               September 30, 1998
 
<TABLE>
<CAPTION>
            Column A                 Column B       Column C       Column D
          -------------           --------------  ------------ ----------------
                                                                  Amount At
                                    Amortized        Market      Which Shown
       Type of Investments             Cost          Value     on Balance Sheet
       -------------------        --------------  ------------ ----------------
<S>                               <C>             <C>          <C>
FIXED MATURITIES
Investments:
  U.S. Government and Government
   Agencies and Authorities...... $   58,247,707  $ 59,776,527  $   58,349,463
  Corporate Bonds................     13,120,015    13,251,693      13,237,919
  Utility Bonds..................        999,273     1,003,108         999,273
  Mortgage and Asset Backed Bonds
   and Pass Through Certificates.     85,546,254    94,215,303      92,300,480
                                  --------------  ------------  --------------
TOTAL FIXED MATURITIES........... $  157,913,249  $168,246,631  $  164,887,135
                                  ==============  ============  ==============
Equity Securities................ $        1,592  $      4,054  $        4,054
                                  ==============  ============  ==============
Real Estate Contracts and
 Mortgage Notes Receivables...... $  614,178,323                $  614,178,323
Real Estate Held for Sale and
 Development (Including
 $44,506,871 Acquired in
 Satisfaction of Debt)...........     89,713,967                    89,713,967
                                  --------------                --------------
Total Real Estate Assets.........    703,892,290                   703,892,290
Less Allowances for Losses on
 Real Estate Assets..............    (11,000,618)                  (11,000,618)
                                  --------------                --------------
NET REAL ESTATE ASSETS........... $  692,891,672                $  692,891,672
                                  ==============                ==============
OTHER RECEIVABLE INVESTMENTS..... $  200,773,533                $  200,773,533
                                  ==============                ==============
OTHER ASSETS--POLICY LOANS....... $   18,271,784                $   18,271,784
                                  ==============                ==============
TOTAL INVESTMENTS................ $1,069,851,830                $1,076,828,178
                                  ==============                ==============
</TABLE>
 
                                      F-46
<PAGE>
 
                                                                     SCHEDULE II
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 
                 Years Ended September 30, 1998, 1997, and 1996
 
<TABLE>
<CAPTION>
                                            Additions   Deductions
                                           (Reductions)    and
                                Balance at  Charged to   Accounts    Balance
                                Beginning   Costs and    Written      at End
          Description            of Year     Expenses      Off       of Year
          -----------           ---------- ------------ ----------  ----------
<S>                             <C>        <C>          <C>         <C>
Allowance for probable losses
 on real estate contracts and
 mortgage notes deducted from
 real estate assets in balance
 sheet
  1998......................... $9,491,116  $3,239,676  $4,052,203  $8,678,589
  1997.........................  7,945,561   4,051,975   2,506,420   9,491,116
  1996.........................  6,276,183   3,295,694   1,626,316   7,945,561
Allowance for probable losses
 on real estate held for sale
 from real estate assets in
 balance sheet
  1998......................... $2,835,982  $2,959,621  $3,473,574  $2,322,029
  1997.........................  2,247,023   4,079,126   3,490,167   2,835,982
  1996.........................  1,839,882   3,064,378   2,657,237   2,247,023
Allowance for losses on
 accounts and notes receivable
 deducted from other assets in
 balance sheet
  1998......................... $   66,974  $   72,000  $   20,846  $  118,128
  1997.........................    180,954      42,995     156,975      66,974
  1996.........................     77,039      70,500     (33,415)    180,954
</TABLE>
 
                                      F-47
<PAGE>
 
                                                                    SCHEDULE III
                                                                     Page 1 of 2
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
                      SUPPLEMENTARY INSURANCE INFORMATION
 
<TABLE>
<CAPTION>
                                         Future Policy
                              Deferred      Benefits                 Other
                               Policy    Losses, Claims          Policy Claims
                             Acquisition    and Loss    Unearned and Benefits
                                Cost        Expenses    Premiums    Payable
                             ----------- -------------- -------- -------------
<S>                          <C>         <C>            <C>      <C>
September 30, 1998
 Life Insurance and
 Annuities.................. $67,167,185  $800,848,929   $  --      $  --
September 30, 1997
 Life Insurance and
 Annuities.................. $69,730,002  $825,368,988   $  --      $  --
September 30, 1996
 Life Insurance and
 Annuities.................. $71,932,884  $837,366,108   $  --      $  --
</TABLE>
 
                                      F-48
<PAGE>
 
                                                                    SCHEDULE III
                                                                     Page 2 of 2
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
                      SUPPLEMENTARY INSURANCE INFORMATION
 
<TABLE>
<CAPTION>
                                                Benefits   Amortization
                                                 Claims    of Deferred
                                       Net     Losses and     Policy      Other
                         Premium   Investment  Settlement  Acquisition  Operating
                         Revenue     Income     Expenses      Costs      Expenses
                        ---------- ----------- ----------- ------------ ----------
<S>                     <C>        <C>         <C>         <C>          <C>
September 30, 1998
 Life Insurance and
 Annuities............. $2,800,000 $62,452,734 $48,098,422 $10,000,000  $3,393,667
September 30, 1997
 Life Insurance and
 Annuities............. $3,000,000 $65,759,676 $50,454,970 $ 9,432,884  $3,635,756
September 30, 1996
 Life Insurance and
 Annuities............. $3,000,000 $65,560,704 $48,301,010 $ 9,140,559  $4,352,018
</TABLE>
 
                                      F-49
<PAGE>
 
                                                                    SCHEDULE IV
                                                                    Page 1 of 3
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
                             LOANS ON REAL ESTATE
 
                              September 30, 1998
 
  At September 30, 1998, the Consolidated Group held first priority liens
associated with contracts and mortgage note receivables with a face value of
approximately $615 million (99%) and second or lower priority liens of
approximately $9 million (1%). Approximately 29% of the face value of the
Consolidated Group's real estate Receivables are collateralized by properties
located in the Pacific Northwest (Washington, Alaska, Idaho, Montana and
Oregon), approximately 24% by properties located in the Pacific Southwest
(California, Arizona and Nevada), approximately 10% in the Southeast (Florida,
Georgia, North Carolina and South Carolina), approximately 9% in the North
Atlantic (New York, Pennsylvania, New Jersey, Connecticut and Maryland) and
approximately 13% by properties located in the Southwest (Texas and New
Mexico). The face value of the real estate Receivables range principally from
$15,000 to $300,000 with 96 real estate Receivables, aggregating approximately
$53 million, in excess of this range. No individual contract or note is in
excess of 0.4% of the total carrying value of real estate Receivables and less
than 5% of the contracts and notes are subject to variable interest rates.
Contractual interest rates principally range from 6% to 13% per annum with
approximately 94% of the face value of these Receivables within this range.
The weighted average contractual interest rate on these real estate
Receivables at September 30, 1998 is approximately 9.4%. Maturity dates range
from 1998 to 2028.
 
<TABLE>
<CAPTION>
                                                                                New
                                       Interest     Carrying     Delinquent   Account    Number of
                           Number of     Rates      Amount of     Principal  Principal  Non Accural
      Description         Receivables Principally  Receivables     Amount      Amount   Receivables
      -----------         ----------- ----------- -------------  ----------- ---------- -----------
<S>                       <C>         <C>         <C>            <C>         <C>        <C>
RESIDENTIAL
First Mortgage greater 
 than $100,000..........       945       6-13%    $ 150,451,934  $ 7,589,733 $1,623,481          8
First Mortgage greater 
 than $50,000...........     1,984       6-13%      131,054,371    7,982,302        --         --
First Mortgage less 
 than $50,000...........     7,730       6-13%      173,825,947   10,109,264        --         --
Second or Lower greater 
 than $100,000..........         4        8-9%          455,540          --         --         --
Second or Lower greater
 than $50,000...........        14       7-10%        1,047,682          --         --         --
Second or Lower less
 than $50,000...........       219       6-13%        3,328,275      151,457        --         --
COMMERCIAL
First Mortgage greater
 than $100,000..........       265       6-13%       57,868,536    3,405,491        --         --
First Mortgage greater
 than $50,000...........       250       6-13%       17,772,894      724,282        --         --
First Mortgage less
 than $50,000...........       364       6-13%        9,480,915      454,429        --         --
Second or Lower greater 
 than $100,000..........         6       8-10%        2,292,282      177,947        --         --
Second or Lower greater
 than $50,000...........         7       9-12%          553,297          --         --         --
Second or Lower less
 than $50,000...........        16       8-12%          530,875          --         --         --
FARM, LAND AND OTHER
First Mortgage greater
 than $100,000..........       115       8-13%       22,834,543    1,406,631    224,068          1
First Mortgage greater
 than $50,000...........       181       6-13%       12,343,223      218,562        --         --
First Mortgage less
 than $50,000...........     3,123       6-13%       39,211,108    1,679,952        --         --
Second or Lower greater
 than $100,000..........       --          --%              --           --         --         --
Second or Lower greater
 than $50,000...........         3       8-10%          224,849          --         --         --
Second or Lower less
 than $50,000...........        20       8-12%          274,866        9,950        --         --
Unrealized discounts,
 net of unamortized
 acquisition costs, on
 Receivables purchased
 at a discount..........                            (19,729,926)
Accrued Interest Receiv-
 able...................                             10,357,112
                                                  -------------  ----------- ----------
CARRYING VALUE..........                          $ 614,178,323  $34,000,000 $1,847,549
                                                  =============  =========== ==========
</TABLE>
 
  The principal amounts of Receivables subject to delinquent principal or
interest is defined as being in arrears for more than three months.
 
                                     F-50
<PAGE>
 
                                                                     SCHEDULE IV
                                                                     Page 2 of 3
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
                              LOANS ON REAL ESTATE
 
                               September 30, 1998
 
  The future contractual maturities of the aggregate amounts of Receivables
(face amount) are as follows:
 
<TABLE>
<CAPTION>
                                                        Farm, Land,
                               Residential  Commercial     Other       Total
                                Principal    Principal   Principal   Principal
                               ------------ ----------- ----------- ------------
<S>                            <C>          <C>         <C>         <C>
October 1998--September 2001.  $ 46,603,474 $13,932,981 $15,651,071 $ 76,187,526
October 2001--September 2003.    32,911,059   9,283,321   7,264,059   49,458,439
October 2003--September 2005.    31,569,559   8,913,569   7,920,438   48,403,566
October 2005--September 2008.    47,500,753  12,951,272   9,569,276   70,021,301
October 2008--September 2013.    73,473,113  17,654,657  13,190,462  104,318,232
October 2013--September 2018.    41,266,554   5,441,008   9,095,150   55,802,712
October 2018--Thereafter.....   186,839,237  20,321,991  12,198,133  219,359,361
                               ------------ ----------- ----------- ------------
                               $460,163,749 $88,498,799 $74,888,589 $623,551,137
                               ============ =========== =========== ============
</TABLE>
 
                                      F-51
<PAGE>
 
                                                                     SCHEDULE IV
                                                                     Page 3 of 3
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
 
                              LOANS ON REAL ESTATE
 
                               September 30, 1998
 
<TABLE>
<CAPTION>
                                        For the Years Ended September 30, 1998
                                        --------------------------------------
                                            1998         1997         1996
                                        ------------ ------------ ------------
<S>                                     <C>          <C>          <C>
Balance at beginning of period......... $512,864,101 $650,933,330 $587,493,614
                                        ------------ ------------ ------------
Additions during period
New Receivables--cash..................  413,325,154  317,169,828  282,313,300
Loans to facilitate the sale of real
 estate held--non cash.................   10,864,127   18,604,263   39,102,941
Assumption of other debt payable in
 conjunction with acquisition of new
 Receivables--non cash.................      690,093    1,638,727    3,633,657
Increase in accrued interest...........    3,605,376    2,231,416    2,109,831
                                        ------------ ------------ ------------
Total additions........................  428,484,750  339,644,234  327,159,729
                                        ------------ ------------ ------------
Deductions during period
Collections of principal--cash.........  113,702,441  100,359,493  107,702,333
Cost of Receivables sold...............  183,952,437  361,009,441  141,636,670
Foreclosures--non cash.................   29,515,650   16,344,529   14,381,010
                                        ------------ ------------ ------------
Total deductions.......................  327,170,528  477,713,463  263,720,013
                                        ------------ ------------ ------------
Balance at end of period............... $614,178,323 $512,864,101 $650,933,330
                                        ============ ============ ============
</TABLE>
 
                                      F-52
<PAGE>
 
                                                                      SCHEDULE V
 
         METROPOLITAN MORTGAGE & SECURITIES CO., INC. AND SUBSIDIARIES
                     SUPPLEMENTARY REINSURANCE INFORMATION
 
<TABLE>
<CAPTION>
                                                    Assumed               Percentage
                                        Ceded to     From                 of Amount
                            Gross        Other       Other       Net       Assumed
       Year Ended           Amount     Companies   Companies    Amount      to Net
       ----------        ------------ ------------ --------- ------------ ----------
<S>                      <C>          <C>          <C>       <C>          <C>
September 30, 1998
  Life Insurance in
   Force................ $308,191,000 $ 47,653,000    $--    $260,538,000     --
  Premiums
    Life Insurance...... $  3,123,104 $    323,104    $--    $  2,800,000     --
September 30, 1997
  Life Insurance in
   Force................ $330,205,000 $ 52,328,000    $--    $277,877,000     --
  Premiums
    Life Insurance...... $  3,352,311 $    352,311    $--    $  3,000,000     --
September 30, 1996
  Life Insurance in
   Force................ $354,371,000 $ 58,679,000    $--    $295,692,000     --
  Premiums
    Life Insurance...... $  3,354,830 $    354,830    $--    $  3,000,000    --
</TABLE>
 
                                      F-53