table ofcontents      

2002 ANNUALREVIEW

KENTUCKY INVESTORS,INC.

Board of Directors &Corporate Officers.................................................   2

Letter to our Stockholders.......................................................................   3

Corporate Officers ofSubsidiaries...........................................................   6

Graphs..................................................................................................11

Management's Discussionand Analysis..................................................13

Selected FinancialData..........................................................................27

Report of IndependentAuditors.............................................................27

Consolidated FinancialStatements.........................................................28

Notes to ConsolidatedFinancial Statements...........................................32

Stock Prices and AnnualMeeting...........................................................50

Picture ofCompany founder Harry Lee Waterfield and wife Laurawelcome the early Investors Heritage family to the companyconvention in 1964 appears on this page.

board of directors &corporate officers

Harry Lee Waterfield II,Chairman of the Board, President and Chief ExecutiveOfficer

Frankfort,Kentucky

BOARD OFDIRECTORS

Harold Glenn Doran, Boardof Directors, Dover, Tennessee

Gordon C. Duke, Board ofDirectors, Frankfort, Kentucky

Howard L. Graham, Board ofDirectors, Retired Vice President, Corporate Services,

Frankfort,Kentucky

Robert M. Hardy, Jr.,Board of Directors, Vice President and General Counsel,

Frankfort,Kentucky

Dr. Jerry F. Howell, Jr.,Board of Directors, Morehead, Kentucky

David W. Reed , Board ofDirectors, Gilbertsville,Kentucky       

Helen S. Wagner, Board ofDirectors, Owensboro, Kentucky

CORPORATEOFFICERS

Raymond L. Carr, ChiefFinancial Officer, Vice President, Frankfort, Kentucky

Jane S. Jackson, AssistantSecretary, Frankfort, Kentucky

Jimmy R. McIver,Treasurer, Frankfort, Kentucky

Nancy W. Walton, FirstVice President, Frankfort, Kentucky

Wilma C. Yeary, Secretary,Frankfort, Kentucky

Ernst & Young LLP,Independent Auditors

letter to ourstockholders

Following record earningsin 2001, Kentucky Investors Inc.'s net earnings (before thecumulative effect of the change in accounting principle)decreased  41% to $2,228,000 in 2002. This decrease was a result of lower than expectedinvestment income due to the low interest rate environment of 2002,additional premium taxes and administrative costs caused by recordinsurance sales, and higher than expected early deathclaims. 

 

Total assets increased$36.3 million to $427,041,000.  The low interest ratesavailable on new investments limited investment income growth to anincrease of $135,000 totaling $18,463,000 at year-end2002. Total revenues increased$3,099,000 or 4% over year-end 2001 to $73,487,000.  An 8%increase in death and other benefits led to a total benefits andexpenses increase of 9%.  Earnings would have been close to2001 levels had interest rates been near our projections. 

Stockholders’ equityincreased 25% to $53,628,000, primarily due to the increased marketvalue of our bonds.  Book value per share increased from$37.89 to $46.90.  Kentucky Investors has historically paid amodest dividend to shareholders and once again declared a $.38 pershare dividend for 2003.  To help increase or limit reductionin the statutory surplus of InvestorsHeritage Life caused by fourteen years of record sales,we have maintained the dividend at this rate for several years.

 

In lastyear’sLetter to Stockholders, Inoted that during 2002 we would be reviewing key products,including their mortality experience, and the effect of the economyon these products and the resulting effect on KentuckyInvestors’ financials.  As a result of this review, weadjusted interest rates on existing products to reflect theinterest yield drop on new investments and we designed newproducts.  The new products were introduced to our salesassociates during the first quarter of 2003.  These changeswill enable Investors Heritage Life to be more profitable andsuccessfully maintain its commitment to our markets. 

               

Wecontinue to monitor and review products and performanceregularly.  We have invested in software that allowsmanagement to not only review products by line and their effect onthe company as a whole, but to also review profitability by state,region, district and individual sales associates aswell.   Management will be able to react quickly toexploit strengths and improve weaknesses.  Distributing thisinformation to our sales associates will enable all of us tocontinue to grow and protect our mutual clients and our mutualinterests. 

                

Sales in the FinancialServices market are greatly affected by economic conditionsand the changing climate regarding the type ofproducts sold.  2002 sales in this market were below our goal,but not significantly lower considering current marketconditions.  Through new product development and partnershipswith other life companies and agencies, we made sound progress inour efforts to establish a strong position for future sales in thismarket. 

letter to ourstockholders

During 2002, KentuckyInvestors, Inc. invested in First Benefit Capital Corporation, alife insurance holding company organized in Louisiana.  We hope to see positive results with the successful capitalizationof First Benefit Capital.   We also invested in astrategic

partnership with CherokeeNational Life Insurance Company, a subsidiary of American UnitedLife Insurance Company, and we anticipate positive results fromthis relationship.  During the fourth quarter of 2002,Investors Heritage Life completed the purchase and merger of RegalLife Insurance Company of Baltimore, Maryland.  We are nowlicensed in Maryland and have access to an existing sales forcethat we hope will help us launch life insurance sales in thatstate.  Investors Heritage Life is now authorized to transactbusiness in thirty states. 

Our strategic allianceswith other companies in sales, administration, and productofferings beneficial to our sales associates continue to beimportant parts of our business.   These are areas wewill continue to develop in the future. 

Last year corporateAmerica experienced two of the largest bankruptcies inhistory.  Following the Enron and Worldcom debacles, theFederal government hastily reacted to the scandals by passing theSarbanes-Oxley Act that mandates many additional procedures inpreparing and reporting corporate financial statements and relateddocumentation.  This law, among other requirements, makes itnecessary for SEC registered corporations to expand documentationand evaluation of the effectiveness of internal controls andprocedures for financial reporting and requires the externalauditor to attest to management's assertion as to the effectivenessof such controls annually.  While many changes have alreadybeen implemented, we will be working during the remainder of 2003to ensure that our companies are in compliance with these new lawsand regulations.  The corporate scandals of 2002 will addsignificant costs to Kentucky Investors and corporations throughoutthe country during 2003. 

While we monitor andcontrol our regular overhead expenses, we have little controlover taxes and regulatory expenses that seem to spiral upwardcontinually, and we have no control over the nationaleconomy.     However, we try tomanage to these factors.  Lower interest rates on newinvestments require us to act accordingly.  

The sales organization ofInvestors Heritage Life is very strong.  We have built solidrelationships with funeral directors, bankers and traditional lifeagents.  The recent changes were made with the long term goodof all our clients in mind and will enable us to meet ourobligations and to be an enduring player in our markets.

                                                            

More details about theactivity of the Company and our year-end results for 2002 arepresented in the Management's Discussion and Analysis on Pages13-26.  I encourage you to review these pages for a morecomplete understanding of your company and itsoperation.

 

In June 2002, Howard LeeGraham, Vice President of Corporate Services, retired after almostthirty-seven years of service to Kentucky Investors and InvestorsHeritage Life.  In July 2002, Mr. Graham was elected to theBoard of Directors of both companies,

letter to ourstockholders

filling the unexpired termof Jerry Howell, Sr.  Mr. Graham's knowledge of our companiesand his accounting expertise will be of great value to ourBoards.  We greatly appreciate his many years of full timeservice and look forward to his continued advice andcounsel. 

 

Upon the retirement of Mr.Graham, Raymond Carr, Vice President, Administrative Operations,was named Chief Financial Officer of the companies.  WhitneyWaterfield was promoted to Vice President of Marketing Services,Communications, and Office Services of Investors HeritageLife.   Cara Ballinger was promoted to Assistant VicePresident, Accounting, of Investors Heritage Life.

Family has been a toppriority for the Kentucky Investors companies since the founding byHarry Lee Waterfield & his wife Laura.  We strive tocreate a satisfying and friendly work environment.  Thesuccess of this philosophy is evident in our employee retentionrate.  70% of our employees have been with the companies fiveyears or more and 21% have been a part of the Kentucky Investorsfamily for more than 20 years.  Therefore our staff isexperienced and dedicated allowing us to better serve our insureds,sales associates and the many family operated businesses that sellour products.  Our employees, officers and sales associatesare the key to our success.  This year we’d like topresent the corporate officers to our stockholders.  They arepictured here in non-business settings providing a glimpse of theiroutside interests.  They join me in thanking our stockholdersfor your support, the Board of Directors for their advice andguidance and our sales associates and employees for their dedicatedwork each year. 

**HLWsignature**

meet our officers

**Harry Lee WaterfieldII**is pictured on the golf course withhis youngest son Garth.  Harry Lee has spent most of his freetime encouraging and coaching Garth and his other children Whitney,Ryan and Harry Lee III (Tres) in their many sportsendeavors. 

**RaymondCarr**ispictured with his three favorite girls, wife Becky, daughtersKendall and Blair.  Besides being one of the most devotedfathers & husbands we know, he finds time to financially guidethe Frankfort Christian Church & their recent buildingprojects.    

**RickCalvert**is pictured with hisgrandchildren Savannah, Bailey and Haden.  He enjoys hisgrandchildren’s visits and often entertains them with rideson the tractor. 

**MichaelDudgeon**is pictured with his wifeLaurie, daughter Kathleen, son Tate & dog Hank.  Michaeland Laurie are both loyal University of Kentucky fans and arealready training Kathleen & Tate to root for theWildcats. 

meet our officers

**RobHardy**is pictured with his daughterHallie and her AAU teammates.  He has spent many yearscoaching junior high basketball teams including Hallie’s andhis son Houston’s.  Rob is also an excellent golfer andenjoys golfing with his wife Lisbon. 

**DougHippe**and his wife Diana are avidantique collectors.  Doug is pictured with an1891 whiskey jug, an ice cream freezer salesman's sample,a 1902 Western Clock Co. brass clock, a wall thermometer of TheHome Insurance Company, org. 1853, and a late 1800's gaslamp.

**JulieHunsinger**is pictured onher back deck with her husband Dick Mink, stepson Shane, and dogMerlin.  She spends her free time gardening (with help fromMerlin), golfing, and rooting for Shane's baseballteam. 

**JaneJackson** met her husband Larry in 1974 while bothwere working at Investors Heritage.  Larry worked at InvestorsHeritage Printing until they married in 1976.  Their daughterMeaghan currently attends the University of Kentucky and worked atInvestors Heritage during two summer breaks. 

**JimmyMcIver**and his wife Nancy share a love of the outdoors.  They arepictured at the Department of Fish & Wildlife where Nancyworks.  They have attended the Department’s FebruaryWeekend Eagle Watch for the past five years.

**DonPhilpot** began riding motorcycles in college. He didn’t ride for many years while raising his family. Ten years ago with his children grown and his wife Mary Lou’spermission he began riding again.  Don is pictured with hisfourth Harley Davidson. 

**BobbyRussell**and his wife Debbie have been walking together for 14 years andlog 15 miles a week.  Their dog Pepper joins them for outsidewalks, but during inclement weather, they use thetreadmill. 

**Dr. LawrenceSprecher**has an internal medicinepractice in Frankfort, Ky.  He, his wife and three childrenall enjoy riding horses on their “hobby” farm and arevery active in their church. 

**NancyWalton**is pictured with daughter Maryand granddaughter Laura.  Nancy actively participates in hercommunity.  Currently sheserves on boards of the Salvation Army, LexingtonTheological Seminary and First Christian Church.  Nancy’s husband Dan, other grandchildren Rudy,Kathleen & Tate also keep her busy.

**WhitneyWaterfield**and her husband DavidNofsinger purchased a run-down, old house in 1999 and have beenrenovating ever since.  Whitney loves to cook and they enjoyentertaining.  They are expecting their first child inOctober.

**JaneWise**and her husband Pete arededicated to their church and working with the VanMinistry.   With the van they are able to bring childrenand adults to services who would otherwise not havetransportation.   They are also involved with theHispanic Ministry.

**WilmaYeary**has many interests and hobbies,one of which is traveling with family and friends.  She willtravel on very short notice or spend months in planning atrip.  While enjoying all modes of transportation sheparticularly enjoys cruise ships.

##### corporateofficers of subsidiaries

**Pictures of  thefollowing corporate officers of subsidiaries appear on thispage:**

****

**Harry Lee WaterfieldII,**Chairman, President andChief Executive Officer IFPH

Raymond L. Carr Chief Financial Officer I Vice President AdministrativeOperations I

Rick CalvertVice President P

Michael F. Dudgeon, Jr.Vice President Financial Services I HVice President F

I  Investors HeritageLife Insurance Company

F  Investors HeritageFinancial Services Group, Inc.

P  Investors HeritagePrinting, Inc.

H  Investors HeritageLife Insurance Company Board Member
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##### corporateofficers of subsidiaries

**Pictures of  thefollowing corporate officers of subsidiaries appear on thispage:**

**Robert M. Hardy,Jr.**Vice President andGeneral Counsel IH Vice President, LegalF

  N. DouglasHippe****Vice President, Accounting I

Julie HunsingerVice President & Chief ActuaryI

Jane S. JacksonAssistant Secretary I, SecretaryFP

Lawrence J. Sprecher,M.D.Medical Director I

I  Investors HeritageLife Insurance Company

F  Investors HeritageFinancial Services Group, Inc.

P  Investors HeritagePrinting, Inc.

H  Investors HeritageLife Insurance Company Board Member

##### corporateofficers of subsidiaries

**Pictures of  thefollowing corporate officers of subsidiaries appear on thispage:**

**Jimmy R. McIverTreasurer IFP**

Don R. PhilpotVice President, Agency I

Bobby R. RussellVice President, Human ResourcesI

Lawrence J. Sprecher,M.D.Medical Director I

I  Investors HeritageLife Insurance Company

F  Investors HeritageFinancial Services Group, Inc.

P  Investors HeritagePrinting, Inc.

H  Investors HeritageLife Insurance Company Board Member

                      

##### corporateofficers of subsidiaries

**Pictures of  thefollowing corporate officers of subsidiaries appear on thispage:**

**Nancy W. WaltonV**ice President,Underwriting I

Whitney C.WaterfieldVice President, Marketing &Communications, & Office Services I

L. Jane WiseVice President, Policy Services I

Wilma C. YearySecretary I

I  Investors HeritageLife Insurance Company

F  Investors HeritageFinancial Services Group, Inc.

P  Investors HeritagePrinting, Inc.

H  Investors HeritageLife Insurance Company Board Member
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**InvestorsHeritage Life Insurance Company Yearly Premium ProductionGrowth**

A graphappears on this page showing the yearly production growth forInvestors Heritage.  This graph shows the productionbreakdown: 2002 - $38,207,398; 2001 - $34,729,599; 2000 -$32,448,492; 1999 - $30,975,700; 1998 -$28,442,443; 1997 -$27,237,530; 1996 - $22,362,542; 1995 - $17,288,702; 1994 -$14,463,449; 1993 – $12,600,405. 

**Distribution ofMortgage Loans**

December 31,2002

A pie chart appear on thispage showing the Distribution of Mortgage Loans.  This chartshows the following breakdown:  Retail: 57.4%; OfficeProperties: 16.0%; Other: 12.4%; Apartments: 4.7%; Industrial:6.9%; Residential (1-4 Families): 2.6%. 

graphs

****

**Distribution of FixedIncome Assets**

December 31,2002

A pie chart appears onthis page showing the Distribution of Fixed Income Assets. The chart shows the following breakdown: Corporate: 48.2%;Mortgage-Backed Securities: 16.7%; Government: 18.7%; Foreigns: -7.1%; Asset-Backed Securities: 4.6%; States & PoliticalSubdivisions: 4.7%. 

**Distribution ofCorporate Bonds**

December 31,2002

A pie chart appears onthis page showing the Distribution of Corporate Bonds.  Thechart shows the following breakdown: Industrial and Miscellaneous:46.5%; Bank and Finance: 35.5%; Utilities: 18.0%. 

management’s discussion &analysis****

****

**ORGANIZATIONAL STRUCTURE**

Kentucky Investors, Inc.is the parent company of Investors Heritage Life Insurance Company,Investors Heritage Financial Services Group, Inc., InvestorsHeritage Printing, Inc., and is the sole member of FamilyAssignment Services, LLC.   Kentucky Investors and eachsubsidiary are domiciled in the Commonwealth ofKentucky.

Management’sDiscussion and Analysis (“MD&A”) of financialcondition and results of operations addresses the financialcondition of the Company at December 31, 2002 as compared withDecember 31, 2001 and 2000, and the results of its operations foreach of the three years.  The supplementary financialinformation should be read in conjunction with the consolidatedfinancial statements and related notes, all of which are integralparts of the following analysis of the Company’s results ofoperations and financial position.

**CONSOLIDATION**

The accompanyingconsolidated financial statements of Kentucky Investors include theaccounts of its respective wholly owned subsidiaries, afterelimination of intercompany transactions. However, approximatelyninety-nine percent (99%) of Kentucky Investors' operations aregenerated by Investors Heritage Life.  We will be referring toKentucky Investors and its subsidiaries as the“Company”.

**CONTINUED EXPANSIONAND NEW AFFILIATIONS**

The Company has beenexpanding its market share in the preneed funeral market for thelast several years. The result has been consistent premium growthin the states that were targeted for preneed production. Investors Heritage Life received authorization to transact businessin Maryland in 2002.  During the fourth quarter of 2002,Investors Heritage Life acquired all of the issued and outstandingstock of Regal Life Insurance Company, a Maryland life insurancecompany, from its parent, Bankers Independent Insurance Company andmerged Regal Life into Investors Heritage Life.  The mergerand acquisition was approved by both the Maryland and KentuckyDepartments of Insurance.  The acquisition was effectiveSeptember 30, 2002 and the merger was effective December 31,2002.  While this was not a large transaction, it has severalpromising marketing opportunities and will provide an additionalrevenue stream.  For additional discussion of thistransaction, see Note B to the Consolidated FinancialStatements.

Investors HeritageFinancial continues to operate under marketing agreements withInvestors Heritage Life.  This arrangement has proven to besuccessful and enabled Investors Heritage Financial and InvestorsHeritage Life to continue utilizing their expertise in themarketing and administration of credit insurance products. Further, Investors Heritage Financial enables Investors HeritageLife to offer mortgage protection and ordinary life insuranceproducts through financial institutions.  Additionally,Investors Heritage Financial has entered into marketingrelationships with other unaffiliated insurance companies toprovide products that Investors Heritage Life does notcurrently

management’s discussion& analysis

offer.  To furthersolidify one such relationship, the Company acquired 400,000 sharesof Cherokee National Life Insurance Company, a subsidiary ofAmerican United Life Insurance Company, in exchange for theCompany’s non-recourse promissory note in the amount of$4,000,000.  For additional discussion regarding thistransaction, see Note B to the Consolidated Financial Statements.The note is due June 28, 2007 and interest will be paid quarterlyat a rate equal to the prime rate.  Cherokee National stockdividends will be paid quarterly and the dividend rate will beequal to the prime rate.  No interest is due on the noteunless dividends have been paid.  During December 2002, the400,000 shares of Cherokee National common stock were exchanged for400,000 shares of Series A preferred stock of CherokeeNational.

During the first quarterof 2002, the Board of Directors of the Company directed that aproposed amendment to the Articles of Incorporation to authorizethe issuance of 8,000,000 shares of a new class of undesignated,non-voting preferred stock be submitted to the shareholders at theannual meeting.  On May 9, 2002, at the annual meeting ofshareholders, the proposed amendment was approved.  The Boardof Directors will establish and designate different series withinthe new class of preferred stock and fix and determine the relativerights and preferences of the new series.  The primary purposeof these new shares is to provide additional flexibility to raisecapital and/or facilitate acquisitions or other transactions. To date no shares have been issued and the Company has no currentplans to issue any shares.

During September 2002, theCompany authorized the formation of Family Assignment Services, LLCto provide funding for at-need funerals.  Family Assignment isa single member, limited liability corporation organized under thelaws of the Commonwealth of Kentucky.  Kentucky Investors isthe sole member of the LLC.  Funding by Family Assignment issecured by assignments of verified incontestable life insurancepolicies issued by unaffiliated companies.  The funds areadvanced to funeral homes for services provided for theinsured.  Upon receipt of death benefits from the insurancecompany, the principal balance of the debt is reduced and interestand fees are recorded.  This service is provided to funeralhomes that do not have the manpower to complete necessary paperworkto process the insurance claim.

**CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES**

The Company’sdiscussion and analysis of its financial condition and results ofoperations are based on its consolidated financial statements,which have been prepared in accordance with accounting principlesgenerally accepted in the United States.  Preparation of thesefinancial statements requires the Company to make estimates andjudgments that affect the reported amounts of assets, liabilitiesand revenues and expenses.  On an on-going basis, the Companyevaluates its estimates, including those related to investments,deferred acquisition costs, present value of future profits, policyliabilities, income taxes, regulatory requirements, contingenciesand litigation.  The Company bases such estimates onhistorical experience and other assumptions believed to bereasonable under the circumstances, the results of which form thebasis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual

management’s discussion& analysis

results may differ fromthese estimates under different assumptions or conditions. The Company believes the following accounting policies, judgmentsand estimates are critical to the preparation of its consolidatedfinancial statements.

***Investment in Debtand Equity Securities and Mortgage Loans***

The Company holds debt andequity interests in a variety of companies.  Additionally, theCompany originates, underwrites and manages mortgage loans. The Company records an investment impairment charge when itbelieves an investment has experienced a decline in value that isother than temporary.  Future adverse changes in marketconditions, poor operating results of underlying investments anddefaults on mortgage loan payments could result in losses or aninability to recover the current carrying value of the investments,thereby possibly requiring an impairment charge in thefuture.

***Deferred AcquisitionCosts and Present Value of Future Profits***

At December 31, 2002, thecombined balance of our deferred acquisition costs and presentvalue of future profits (“PVFP”) was $24,846,247. The recovery of these costs is dependent on the futureprofitability of the related business.  Each year, we evaluatethe recoverability of the unamortized balance of the deferredacquisition costs and PVFP.  We consider estimated futuregross profits or future premiums, expected mortality or morbidity,interest earned and credited rates, persistency and expenses indetermining whether the balance is recoverable.  If wedetermine a portion of the unamortized balance is not recoverable,it is charged to amortization expense.  The assumptions we useto amortize and evaluate the recoverability of the deferredacquisition costs and PVFP involve significant judgment.  Asignificant revision to these assumptions will impact futurefinancial results.

***PolicyLiabilities***

Establishing liabilities(and related intangible assets) for the Company’slong-duration insurance contracts requires making variousassumptions, including policyholder persistency, mortality rates,investment yields, discretionary benefit increases, new businesspricing, and operating expense levels.  The Company evaluateshistorical experience for these factors when assessing the need forchanging current assumptions.  However, since many of thesefactors are interdependent and subject to short-term volatilityduring the long-duration contract period, substantial estimates andjudgment are required.  Accordingly, if actual experienceemerges differently from that assumed, material financial statementadjustments could be required.

****

**FINANCIALSTRENGTH**

The quality of ourinvestment portfolio and the current level of shareholders' equitycontinue to provide a sound financial base as we strive to expandour marketing system to offer competitive, quality products. Although investment income was down considerably due to economicconditions and lower yielding investments, the investmentportfolio

management’s discussion& analysis

remains stable asevidenced by the increase in unrealized appreciation of investmentsof $9,695,000 from 2001 to 2002.  Please see INVESTMENTS,LIQUIDITY AND FUND RESTRICTIONS for a more detaileddiscussion. 

**BUSINESSSEGMENTS    **

   

Statement of FinancialAccounting Standard ("SFAS") No. 131 requires a "managementapproach" in the presentation of business segments based on howmanagement internally evaluates the operating performance of itsbusiness units.  The segment data that follows has beenprepared in accordance with SFAS No. 131.   Please referto Note J to the Consolidated Financial Statements for additionalinformation regarding segment data.

***REVENUES***

Overall revenues were$73,487,000, $70,388,000, and $65,427,000 in 2002, 2001 and 2000,respectively.  The increases were due primarily to our growthas a provider of quality preneed and burial products, growth ininvested assets due to increased sales of the preneed and burialproducts, and affiliations with other life insurers that market ourpreneed products through partnership arrangements.  Netinvestment income increased 1% or $135,000 in 2002 from 2001. The 2001 increase over 2000 was 8% or $1,310,000.  Whileinvested assets increased approximately $39,697,000 during 2002,lower yield rates on new asset purchases and the change inamortization schedules of mortgage-backed securities due to higherthan anticipated pre-payments greatly impacted the rate of returnon our investment portfolio.  A discussion of the changes bybusiness segments follows.

***Preneed & BurialProducts***segment includes both lifeand annuity products sold by funeral directors or affiliated agentsto fund prearranged funerals or simply to provide theinsured’s final expenses.

Revenues for the Preneed& burial products business segment were 6% or $3,051,000 higherin 2002 than 2001. The 2001 increase over 2000 was also 6% or$2,958,000.  

New premium productionincreased approximately 12% in 2002 over 2001.  New premiumscollected during 2002, 2001 and 2000 were $37,532,000, $33,598,000,and $30,794,000, respectively. During 2002, Investors Heritagefocused on fifteen states for developing the preneedmarket. Significant premium volume wasproduced in the following states: North Carolina (32% of the totalnew preneed premiums collected in 2002), Kentucky (19% of the totalnew preneed premiums collected in 2002), Virginia (11% of the totalnew preneed premiums collected in 2002), and Georgia (11% of thetotal new preneed premiums collected in 2002).  Other statesshowing significant gains were South Carolina (26% increase over2001), Indiana (26% increase over 2001), and Tennessee (9% increaseover 2001).  The table below provides the detail of premiumgrowth for the top ten producing states for thissegment.

management’s discussion& analysis
| **Preneed Premium Production** |
|--------------------------------|
| **First Year and Single**      |
| **12/31/2002**                 |  |  |  |  |  |  |
|                                |  |  |  |  |  |  |
|                                |  | **2002** |  | **2001** |  | **2000** |
| NorthCarolina                  | $ |      11,999,302 |  $ |      11,496,432 |  $ |      11,235,948 |
| Kentucky                       |  |       7,315,486 |  |       5,738,353 |  |        5,255,477 |
| Virginia                       |  |       4,026,360 |  |       2,727,219 |  |        2,164,222 |
| Georgia                        |  |       4,025,817 |  |       4,162,695 |  |        3,359,763 |
| Tennessee                      |  |       2,663,792 |  |       2,437,107 |  |         2,570,202 |
| SouthCarolina                  |  |       1,988,020 |  |       1,575,449 |  |        1,844,828 |
| Indiana                        |  |       1,528,945 |  |       1,212,997 |  |        1,284,444 |
| Michigan                       |  |       1,347,364 |  |       1,657,071 |  |           650,428 |
| Ohio                           |  |          675,657 |  |           539,342 |  |           511,846 |
| Mississippi                    |  |          461,909 |  |          407,593 |  |           192,371 |
| All OtherStates                |  |       1,499,401 |  |       1,643,953 |  |        1,724,687 |
| **   TOTAL**         | $ |      37,532,053 |  $ |      33,598,211 |  $ |      30,794,216 |

During 2000, InvestorsHeritage Life entered into a strategic partnership with Key LifeInsurance Company of Indianapolis, Indiana, an experienced preneedinsurer in Michigan.  Key Life utilizes the endorsement of theMichigan Funeral Directors Association to market Investors HeritageLife preneed products in that state. 

Management plans tocontinue to develop the preneed funeral market, however, as aresult of implementing our new product, we do not anticipatesignificant growth in single premium production for 2003 over2002.  It is anticipated that increases will be derived fromhigher production in the states noted above and from expansion intoPennsylvania and Maryland.

Net investment income forthis segment increased $75,000 or 1%, in 2002 compared to 2001 and$1,473,000 or 13%, in 2001 compared to 2000.  While we didexperience an increase over 2001, it was much lower than theincrease in the prior year due to the lower yield rates we arereceiving on new asset purchases and lower rates of return on ourinvestment portfolio. 

New strategic partnershipsand affiliations continued to be developed during 2002.  Twohighly rated life insurers are marketing Investors Heritage Lifeproducts on a fee basis. The Company previously had a partnershipwith Family Assistance Service, Inc., a firm that provides anat-need financing program and an accounts receivable/cashmanagement system for funeral homes. Family Assistance experiencedsome difficulties during the last two quarters of 2002 and iscurrently in the process of reorganizing and securing new bankingrelationships.  Family Assignment was formed to strengthen ourrelationship with funeral home clients as well as offer a serviceto potential clients that do not currently sell our products. Through December 31, 2002, the program has advanced a total of$2,052,000 in credit, of which $1,663,900 was repaid, leaving anoutstanding balance of

management’s discussion& analysis

$388,100 atyear-end.   Family Assignment received fees totaling$27,317 during 2002 for approved loans.

The Legacy Protector andLegacy Preferred product series was developed in 2002 to replacethe current Legacy 2000 series by early 2003.  These new plansare designed to help combat a challenging economic environment andincreased mortality anti-selection.  In general, commissionsare slightly lower, guaranteed benefits have been moved furtherfrom issue, reserves have been adjusted to better reflectexperience, and an underwritten plan has beenadded. 

The Heritage Final Expenseplan replaced the Legacy 2000 Final Expense series in late 2001 andis marketed through funeral homes and independent agencies. Investors Heritage Life entered into a reinsurance agreement withMunich American Reassurance Company to reduce initial surplusstrain and provide more level future profits.  Pursuant to theterms of the reinsurance agreement, the Heritage Final Expenseproducts are reinsured on an 80/20 quota share basis with InvestorsHeritage Life retaining 20% of each risk up to a maximum of $5,000on any one life.  Sales were 20% above expected, with firstyear mortality less than 50% of projected*. *

***Traditional &Universal Life Products*******segment includes traditional life,group life, annuities (primarily qualified) and universal lifeproducts.

Revenues for 2002, 2001and 2000 were $13,484,000, $13,401,000, and $13,007,000,respectively. New premiums collected during 2002, 2001 and 2000were $2,585,000, $2,595,000, and $2,313,000, respectively. Investors Heritage Financial markets traditional insurance productsthrough banks and other financial institutions.  CurrentlyInvestors Heritage Financial services approximately 285 financialinstitutions and other retail outlets contracted through InvestorsHeritage Life.  Investors Heritage Financial had a successfulyear recruiting new accounts.  Twenty-nine new bank ordinaryaccounts were added during 2002, including sixteen accountsrecruited by Cherokee National and American UnitedLife.**

In addition to InvestorsHeritage Life products, we have expanded the portfolio of productsavailable to our regular ordinary insurance agents by makingavailable products of other unaffiliated companies.  For anumber of years, outlets were provided for our agents who hadsubstandard business that Investors Heritage Life would notaccept.  Beginning in the last quarter of 2001, InvestorsHeritage Financial was able to provide second to die policies,substandard life policies, larger term policies and healthinsurance products through other unaffiliated insurance companiesthat insure these types of risks.  Investors HeritageFinancial receives a fee for providing those services and theoutlook for increased fee income from this marketing opportunity ispositive.

A new decreasing termmortgage life product, the Comprehensive Asset Protection Plan(“CAPP”) will be sold in financial institutionsbeginning March 1, 2003.  This life insurance product has anaccelerated living benefit rider that pays a percentage of theface

management’s discussion& analysis

amount in the event ofcertain critical illnesses.  CAPP is being introduced througha strategic partnership with American United Life and CherokeeNational.  It will be marketed through their joint financialinstitutions sales team.  We are reinsuring the CAPP producton a 60/40 basis with Optimum Re, with Investors Heritage Liferetaining 40% of each risk.

Net investment income forthis segment decreased $36,000 or 1%, in 2002 compared to 2001 andincreased $119,000 or 3%, in 2001 compared to 2000.   Thedecrease in net investment income compared to 2001 is due to theoverall lower yield rates and rate of return on our investmentportfolio.

***Credit Insurance& Administrative Services***segmentincludes the marketing and administration of credit life and creditaccident and health insurance products.  Credit insurancepremiums written during 2002, 2001 and 2000 were $11,411,000,$13,244,000, and $15,455,000, respectively.  Managementbelieves the continued decline in credit insurance premiums isdirectly related to a decrease in loan demand.  All of therelated underwriting risk is being reinsured 100% with major,well-known life companies, Munich American Reassurance Company andThe Canada Life Assurance Company. In addition, Investors HeritageFinancial has obtained reinsurance relationships for InvestorsHeritage Life with three other companies, Life Investors InsuranceCompany, American United Life Insurance Company and UniversalGuaranty Life Insurance Company.  Each of these agreementsgenerates marketing and retention fees, but not administrationfees.  

Revenues for this segmentwere $246,000, $395,000, and $423,000 for 2002, 2001 and 2000,respectively.  The decline in Revenues is primarily due to thesluggish economy which results in decreased loan demand and fewercredit insurance sales.

****

***Corporate &Other***segment consists of corporateaccounts measured primarily by stockholders' paid-in capital,contributed surplus, earned surplus, property and equipment andother minor business lines which include group annuities and groupand individual accident and health products.

Revenues from this segmentwere $3,219,000 in 2002, $3,105,000 in 2001 and $1,468,000 in2000.  Included in revenues were realized capital gains(losses) that were $887,000, 1,099,000, and ($599,000) in 2002,2001 and 2000, respectively.  Fixed maturity bonds that hadreached their optimum value were sold during 2002.   Therealized gains and the overall increase in the asset base are theprimary reasons for the higher revenues for 2002.

***OPERATINGRESULTS***

The Company's Net income(before cumulative effect of change in accounting principle) for2002 decreased $1,557,000 or 41% from 2001 and for 2001 increased$2,278,000 or 151% from 2000.  The decrease in 2002 net incomewhen compared to 2001 came primarily from higher operating expensesand a lower yield on invested assets.  A higher regulatoryburden, including the effects of compliance with the Sarbanes-OxleyAct, the

management’s discussion& analysis

Gramm-Leach-Bliley Act,the USA PATRIOT Act, and anti-fraud legislation was responsible formost of the increase in operating expenses.  Further, the rateof return on our investment portfolio has decreased approximately0.5% due to lower yield rates on new asset purchases and the changein the amortization schedules of mortgage-backed securities due tohigher than anticipated pre-payments.

SFAS No. 142“Goodwill and Other Intangible Assets” was adoptedduring the first quarter of 2002.  This resulted in anafter-tax charge of $970,862 during the first quarter of 2002related to the impairment of goodwill.  The goodwill wasassociated with the 1981 and 1982 acquisitions of InvestorsHeritage Life Insurance Company of the South and CommercialTravelers Life Insurance Company, respectively.  The charge isreported separately in the Company’s Consolidated Statementsof Income as a “Cumulative Effect of Change in AccountingPrinciple”.  After the charge, the Goodwill balance atDecember 31, 2002 is $-0-.  Under the new accountingstandards, there will no longer be a charge for normal amortizationof goodwill.

Earnings per share, beforethe cumulative effect of the change in accounting principle, were$1.96 in 2002.  Earnings per share in 2001 and 2000 were $3.33and $1.31, respectively.

***Preneed & BurialProducts***pre-tax income (Income fromoperations before federal income tax and the cumulative effect of achange in accounting principle) was $631,000, $2,205,000 and$1,358,000 for 2002, 2001 and 2000, respectively.  Thedecrease in pre-tax income in 2002 was due to causes discussedabove.   The improvement in pre-tax income for 2001 wasthe result of active management of the investment portfolio andreduced levels of relative policyholder benefits and expensesrelated to in force business. 

Current market conditions,including competitive pricing for this segment and the low interestrate environment, will continue to narrow profits generated fromnew sales unless corrective actions are taken.  In response tothese trends, the Legacy Protector and Legacy Preferred productseries will replace the current Legacy 2000 preneed program in thefirst quarter of 2003.  This new product series is designed tohelp control investment income pressures and recent increases inmortality anti-selection.  In general, commissions areslightly lower, guaranteed benefits have been moved further fromissue, reserves have been adjusted to better reflect experience,and an underwritten plan has been added.

***Traditional &Universal Life Products***pre-taxincome was $770,000, $1,467,000 and $667,000 in 2002, 2001 and2000, respectively.  The decrease in pre-tax income in 2002was primarily due to causes discussed above.  Favorablemortality during 2001 was the primary reason for the higher incomeduring that year.

***Credit InsuranceProducts & Administrative Services***pre-tax income was $27,000, $72,000, and $113,000 for 2002,2001 and 2000, respectively. Investors Heritage Life has reinsured100% of the credit insurance risks for the past few years whilegenerating revenues by servicing and administering the business forour reinsurers.  Because this segment is fee-based, itsperformance is in direct relation to generated revenues.  Thedecrease in revenues in 2002 accounts for the lower pre-tax gainand ismanagement’s discussion& analysis

 

caused by the sluggisheconomy which decreases loan demand and consequently demand forcredit insurance.  Credit insurance sales have also slowed dueto new federal banking guidelines regarding predatory lending andthe sale of credit insurance in conjunction with a real estatemortgage.  In addition, several states, including Kentucky,have enacted or are considering predatory lending laws whichprohibit the financing of single premium credit insurance as partof a real estate mortgage transaction.

***Corporate &Other***pre-tax income was $1,353,000,$1,479,000, and $106,000 for 2002, 2001 and 2000,respectively.  Pre-tax realized capital gains (losses) were$887,000, $1,099,000, and ($599,000) for 2002, 2001 and 2000,respectively and were the primary contributors to the fluctuationsfor this business segment. 

**INVESTMENTS,LIQUIDITY AND FUND RESTRICTIONS**

The Company's investmentportfolio continues to provide financial stability.  It ismanagement's opinion that the Company has adequate cash flows bothon a long-term and short-term basis as evidenced by theConsolidated Statements of Cash Flows presented in this AnnualReview. The Company's cash flows were derived from insurancepremiums and investments. Management anticipates these cash flowsto experience steady growth due to the profitability of all foursubsidiaries.

During 2002, InvestorsHeritage Financial's seventh full year of operation, revenues were$474,000, down 10% or $53,000 compared to 2001, and dividends inthe aggregate amount of $331,000 were paid to KentuckyInvestors.  Revenues from Investors Heritage Printing were$504,000 in 2002, down 1% compared to $510,000 in 2001, andInvestors Heritage Printing paid $20,000 in dividends to KentuckyInvestors in 2002.  Management of Investors Heritage Printingwill continue to work to improve revenues from unaffiliated sourcesas well as to provide printing services for Investors HeritageLife.  Revenues from all of these sources constituteapproximately 1% of our overall Revenues in 2002 and management isworking on the continued growth and profitability of both InvestorsHeritage Financial and Investors Heritage Printing.

Management is not aware ofany commitments or unusual events that could materially affect theCompany's capital resources.  During the fourth quarter of2000, Kentucky Investors borrowed $2,000,000 on a long-term basisand an additional $400,000 was borrowed during the second quarterof 2001. Kentucky Investors utilized $200,000 of the loan amount toreduce debt to Investors Heritage Life and $1,800,000 was loaned toInvestors Heritage Life in exchange for a surplus note.  Theremainder of the loan proceeds were used for general corporatepurposes (See Note F to the Consolidated Financial Statements). OnJune 28, 2002, the Company entered into a long-term debt agreementwith Cherokee National in the amount of $4,000,000, with interestto be paid quarterly, at a rate equal to the prime rate, and due onJune 28, 2007.  The funds were used to purchase 400,000 sharesof Cherokee National common stock valued at $4,000,000.  InDecember 2002, those shares of common stock were exchanged for400,000 shares of Series A preferred stock of CherokeeNational.  In addition, Family Assignment establisheda

management’s discussion& analysis

$2,000,000 line of creditwith Farmers Bank and Capital Trust Company, Frankfort, Kentucky,for the purpose of funding at-need funerals secured by theassignment of verified, incontestable life insurancepolicies.  At year end, the principle balance on this line ofcredit was $338,000.  There was no other short-term externaldebt.

Other than the itemsdisclosed in Note I to the Consolidated Financial Statements andthe increased regulatory reporting requirements which generallyincrease administrative expenses, management is not aware of anycurrent recommendations by any regulatory authority which ifimplemented would have any material effect on the Company'sliquidity, capital resources or operations.**  ** TheNational Association of Insurance Commissioners has formed aworking group and several states are reviewing statutes andregulations dealing with small face amount life insurance policies.Proposals range from requiring disclosures for policyholders torequiring small face amount policies to be paid up when premiumspaid equal some specified multiple of the death benefits.  Theworking group has proposed a model disclosure act and while severalstates are considering the model, to date it has not been adoptedin any of the states.  To the extent that a statute orregulation is adopted that puts a limit on the amount of premiumsthat can be collected on a small face amount policy, it wouldpotentially limit the ages at which we would issue such a policyand require us to increase premiums for all policyholders. Because regulators are generally in the process of relinquishingtheir authority to regulate rates on other types of insurance andbecause life insurance rates have never been regulated, it isunlikely that regulators would decide to regulate rates for lifeinsurance polices at this time.  However, if such rateregulation occurs, it will negatively impact some of the productswe sell and some of the markets in which we operate, specificallythe preneed and burial markets.

The Company will continueto explore various opportunities, including mergers andacquisitions and purchasing blocks of business from othercompanies, which may dictate a need for either long-term orshort-term debt.  There are no restrictions as to use of fundsexcept the restriction on Investors Heritage Life as to the paymentof cash dividends to shareholders which is discussed in more detailin Note H to the Consolidated Financial Statements.

Since inception, we havemaintained a sound, conservative investment strategy.  Thefixed income portfolio of public bonds is managed by an independentportfolio manager, Conning Asset Management Company.  As ofDecember 31, 2002, 88.2% of the Company's total invested assets aremanaged by Conning pursuant to specific investment guidelines whichhave been approved by the Board of Directors.  The primaryinvestment objectives have been to maintain the quality andintegrity of the fixed income portfolio while improving the totalreturn on investments.  These goals were originallyaccomplished by methodically diversifying the portfolio and theyhave been maintained over the last 14 years.

The fixed income portfoliois diversified among sectors.  The market value and theStandard & Poor's average quality rating of this portfolio asof December 31, 2002 are $278,945,000 and AA, respectively. At year-end 2002 the fixed income portfolio was allocated asfollows:  48.2% - corporate; 18.7% - government; 16.7% -mortgage-backed

management’s discussion& analysis

securities; 7.1% -foreign; 4.6% - asset-backed securities; and 4.7% - states andpolitical subdivisions.  Within the corporate bond sector, theportfolio is also diversified with 35.5% of that sector invested inbank and finance, 46.5% in industrial and miscellaneous, and 18.0%in utilities.  Pie charts showing the Distribution of FixedIncome Assets and Distribution of Corporate Bonds are located onpage 12.

The fixed income portfolioalso includes $46,726,000 (at fair value) of mortgage-backedsecurities ("MBS"), which represents 14.6% of total invested assetsand 16.7% of the fixed income portfolio.  MBS havehistorically added value to the portfolio and Conning has providedthe expertise to purchase MBS with the confidence that the creditshave been properly analyzed and that the investment properly suitsthe Company's asset and liability needs.

There have been concernsexpressed by rating agencies, various regulators and otherconstituencies regarding investments in MBS by insurers and otherfinancial institutions.  Although these highly ratedsecurities provide excellent credit quality, their liquidity riskmust be monitored.  Except for one commercial-backed mortgageof approximately $1,390,000, all of the collateral of the MBS ownedare guaranteed by the Government National Mortgage Association("GNMA"), Federal National Mortgage Association ("FNMA") or FederalHome Loan Mortgage Corporation ("FHLMC").

The FNMA and FHLMCsecurities are structured either as publicly traded collateralizedmortgage obligations ("CMO") or pass-throughs.  Unlike mostcorporate or real estate debt, the primary concern with an MBS isthe uncertainty of timing of cash flows due to prepaymentassumptions rather than the possibility of loss ofprincipal.

CMO holdings representapproximately 54% of the total MBS portfolio.  In accordancewith Emerging Issues Task Force Issue 99-20, “Recognition ofInterest Income and Impairment of Purchased and Retained BeneficialInterests in Securitized Financial Assets” (“EITF99-20”), when these securities are purchased at a discount orpremium, the income yield will vary with changes in prepaymentspeeds due to the change in accretion of discount or amortizationof premium, as well as the timing of the basic principal andinterest cash flows.  The overall impact of the CMO’svariability in yields on the portfolio is not significant inrelation to the yield and cash flows of the total investedassets.  More importantly, the investment portfolio has noexposure to more volatile, high-risk CMO’s, such as thosestructured to share in residual cash flows.  Except for onesequential pay CMO of approximately $907,000, the CMO’s heldare either planned amortization class ("PAC") bonds, or supportclass ("SUP") bonds, both of which are structured to provide morecertain cash flows to the investor and therefore have reducedprepayment risk.  Based on our analysis of the investmentportfolio, there are no impairment issues with respect to ourCMO’s under the provisions of EITF 99-20.

Pass-throughs comprise theremainder of MBS owned representing approximately 46% of the totalMBS portfolio.  Pass-throughs are GNMA, FNMA or FHLMCguaranteed MBS

  which, simplystated, pass through interest and principal payments to theinvestors in accordance with their respective ownershippercentage.

Additionally, the Companyalso engages in commercial and residential mortgage lending withapproximately 97.4% of these investments in commercialproperties.  All mortgage loans are originated in-house andall loans are secured by first mortgages on the real estate. Loan to value ratios of 80% or less and debt service coverage fromexisting cash flows of 115% or higher are generally required. The Company minimizes credit risk in its mortgage loan portfoliothrough various methods, including stringently underwriting theloan request, maintaining small average loan balances, reviewingits larger mortgage loans on an annual basis and diversifying theportfolio by property type.  The average loan balance is$407,131 and the average loan to value is 46.4%.  The largestloan currently held is $1,104,545.  The Company has$24,021,000 invested in mortgage loans, which represents 7.5% oftotal invested assets.  The portfolio is diversified acrossvarious property types as follows:  16% - office; 57.4% -retail; 6.9% -industrial; 2.6% - 1 to 4 family; 4.7% - apartments;and 12.4% - other.  A pie chart showing the Distribution ofMortgage Loans is located on page 11.

Over the last severalyears we have methodically reduced the concentration of mortgageloans on properties located in Kentucky in order to diversify ourportfolio geographically. We are familiar with our mortgage loanmarkets and are not aware of any negative factors or trends whichwould have a material impact on the local economies where themortgage loan properties are located. The Company has beensuccessful in adding value to the total investment portfoliothrough its mortgage loan originations due to the fact that yieldsrealized from the mortgage loan portfolio are from 43 to 480 basispoints higher than yields realized from fixed incomeinvestments.  Value has also been added because the mortgageloan portfolio has consistently performed well.  As ofDecember 31, 2002, the Company had no non-performing mortgageloans, which would include loans past due 90 days or more, loans inprocess of foreclosure, restructured loans and real estate acquiredthrough foreclosure. 

The strength of ourliquidity is found in our conservative approach in the productdevelopment area and in the strength and stability of our fixedincome portfolio and our mortgage loans.  For 2002, the fixedincome investments were 100% investment grade as rated by Standard& Poor's, up 0.4% from 2001.  None of the Company's fixedincome assets are in default.   Liquidity is also managed byladdering maturities of our fixed income portfolio.  Theaverage duration of our fixed income investments is 5 years withapproximately $7,549,000 due within 12 months and approximately$49,833,000 due within the following 4 years.  Historicallymanagement has anticipated that all such investments will be helduntil maturity.  However, one of the responsibilities of ourindependent portfolio manager is to constantly monitor the creditrating of our fixed income investments to determine if ratingchanges of any investment requires action by management.  Asexplained in detail in Note A to the Consolidated FinancialStatements, all fixed income securities and all marketable equitysecurities are classified as available-for-sale and are carried atfair value.

management’s discussion& analysis****

****

**MARKET RISKEXPOSURES**

Measuring market risk is akey function of our asset/liability management process.  Totest financial risk and investment strategy, the Company performsan asset adequacy analysis each year.  Dynamic models of bothassets and liabilities are created to project financial resultsunder several shifts in the current interest rateenvironment.  Results show that the Company's exposure to arelative 10% increase or decrease in the interest rates prevalentat December 31, 2002 is a net loss of less than$500,000. 

Items taken into accounton the asset side include prepayment and liquidity risks, assetdiversification and quality considerations.  On the liabilityside, interest crediting strategies and policyholder and agentbehavior (lapses, loans, withdrawals and premium flow) aredynamically modeled in relationship to the particular interest rateenvironment tested.  Although the Company is careful to ensurethat these assumptions are consistent with the best available data,interest-sensitive cash flows cannot be forecast with certainty andcan deviate significantly from the assumptions made.  Becauseasset and liability durations are continually changing as newpolicyholder contracts are issued and as new investments are addedto the portfolio, the Company manages its balance sheet on anongoing basis and its net exposure to changes in interest rates mayvary over time. 

In addition to thesedynamic modeling techniques, the Company closely monitors its ownbusiness segments with respect to product performance and agentbehavior.  To that end, during 2002 we implemented a newsystem to assist in monitoring these areas.  This new toolwill allow management to quickly isolate areas of strength andweakness and to take appropriate and timely action to exploit thestrengths and improve the weaknesses. 

**REGULATORYMATTERS**

The statutory capital andsurplus of Investors Heritage Life increased $561,000 and$2,403,000 in 2002 and 2001, respectively.  During 2001,Kentucky adopted the National Association of InsuranceCommissioners’ Accounting Practices and Procedures, theresults of which were reported as the cumulative effect of changesin accounting principles involving a direct increase to surplus of$845,000.

Investors Heritage Lifeproduced a $303,000 statutory operating gain in 2002 compared to$1,022,000 for 2001.    The primary reasons for thedecrease in statutory operating gain from 2001 to 2002 are reducedinvestment income due to lower interest rates, higher operatingexpenses, and higher state premium taxes.  For additionaldiscussion on statutory accounting practices refer to Note I to theConsolidated Financial Statements*.*

****

management’s discussion& analysis

****

**FORWARD LOOKINGINFORMATION**

****

The Company cautionsreaders regarding certain forward-looking statements contained inthis report and in any other statements made by, or on behalf of,the Company, whether or not in future filings with the Securitiesand Exchange Commission (the "SEC"). Forward-looking statements arestatements not based on historical information and which relate tofuture operations, strategies, financial results or otherdevelopments. Statements using verbs such as "expect","anticipate", "believe" or words of similar import generallyinvolve forward-looking statements. Without limiting the foregoing,forward-looking statements include statements which represent theCompany's beliefs concerning future levels of sales and redemptionsof the Company's products, investment spreads and yields or theearnings and profitability of the Company's activities.

Forward-looking statementsare necessarily based on estimates and assumptions that areinherently subject to significant business, economic andcompetitive uncertainties and contingencies, many of which arebeyond the Company's control and many of which are subject tochange. These uncertainties and contingencies could cause actualresults to differ materially from those expressed in anyforward-looking statements made by, or on behalf of, the Company.Whether or not actual results differ materially fromforward-looking statements may depend on numerous foreseeable andunforeseeable factors and developments. Some of these may benational in scope, such as general economic conditions, changes intax laws and changes in interest rates. Some may be related to theinsurance industry generally, such as pricing competition,regulatory developments, industry consolidation and the effects ofcompetition in the insurance business from other insurancecompanies and other financial institutions operating in theCompany's market area and elsewhere. Others may relate to theCompany specifically, such as credit, volatility and other risksassociated with the Company's investment portfolio. The Companycautions that such factors are not exclusive. The Company disclaimsany obligation to update forward-looking information.

selected financial data &report of independent auditors

** **

**(000’s omittedexcept for Earnings and Cash Dividends Per Share)**
|                                                                                         | **   2002** | **   2001**                     | **    2000** | **    1999** | **   1998** |
|-----------------------------------------------------------------------------------------|-----------------------|-------------------------------------------|-----------------------------|-----------------------------|-----------------------|
|                                                                                         |                       |                                           |                             |                             |                       |
| Totalrevenue                               | $   73,487  | $   70,388                      | $   65,427        | $   62,772        | $   57,708  |
| Total benefits andexpenses                                               | 70,705                |   65,165                        | 63,183                      | 57,920                      | 53,698                |
| Netincome              | 1,257                 |      3,784            | 1,506                       | 2,379                       | 1,975                 |
| Earnings per share,diluted                                     | 1.10                  |       3.33       | 1.31                        | 2.79                        | 2.34                  |
| Totalassets                 | 427,041               | 390,778                                   | 365,936                     | 291,215                     | 288,369               |
| Totalliabilities                                     | 373,413               | 347,851                                   | 328,681                     | 260,186                     | 243,673               |
| Debt                                                 | 6,702                 |     2,688                  | 2,229                       | 264                         | 407                   |
| Cash dividends pershare                                                                 | .38                   |        ..38 | .38                         | .38                         | .38                   |

The Board of Directors andStockholders

Kentucky Investors,Inc.

           We have audited the accompanying consolidated balance sheets ofKentucky Investors, Inc. as of December 31, 2002 and 2001, and therelated consolidated statements of income, stockholders’equity, and cash flows for each of the three years in the periodended December 31, 2002. These financial statements are theresponsibility of the Company's management.  Ourresponsibility is to express an opinion on these financialstatements based on our audits.

           We conducted our audits in accordance with auditing standardsgenerally accepted in the United States.  Those standardsrequire that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free ofmaterial misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in thefinancial statements.  An audit also includes assessing theaccounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our audits provide a reasonablebasis for our opinion.

           In our opinion, the consolidated financial statements referred toabove present fairly, in all material respects, the consolidatedfinancial position of Kentucky Investors, Inc. at December 31, 2002and 2001, and the consolidated results of their operations andtheir cash flows for each of the three years in the period endedDecember 31, 2002, in conformity with accounting principlesgenerally accepted in the United States. 

           As discussed in Note A to the consolidated financialstatements, in 2002 the Company changed its method of accountingfor goodwill.

                                                                                                           **E&Y Signature**

Cincinnati,Ohio

March 7, 2003

| **KENTUCKYINVESTORS, INC.**                                                                                             |
|-------------------------------------------------------------------------------------------------------------------------|
| **CONSOLIDATED BALANCE SHEETS**                                                                                         |
| **DECEMBER31, 2002 AND 2001**                                                                                           |
|                                                                                                                         |  |  |  |  |
| **ASSETS**                                                                                                              |  | **2002** |  | **2001** |
| ** INVESTMENTS**                                                                                                   |  |  |  |  |
|     Securities available-for-sale, at fair value:                                                   |  |  |  |  |
|         Fixedmaturities (amortized cost: 2002- $254,389,964; 2001-$235,124,000) | $ |  278,944,643 |  $ |  243,831,823 |
|         Equitysecurities (cost: 2002 - $5,568,607; 2001-$845,735)                    |  |      6,218,242 |  |      1,605,888 |
|     Mortgage loans on real estate                                                                   |  |    24,020,718 |  |    24,710,790 |
|     Policy loans                                                                                    |  |      8,128,488 |  |      7,909,681 |
|     Other long-term investments                                                                     |  |         769,847 |  |         409,658 |
|     Short-term investments                                                                          |  |         920,000 |  |         837,560 |
|     Total investments                                                                               | $ |  319,001,938 |  $ |  279,305,400 |
|                                                                                                                         |  |  |  |  |
|     Cash and cash equivalents                                                                       |  |      7,773,597 |  |      6,432,594 |
|     Accrued investment income                                                                       |  |      4,330,320 |  |      4,019,947 |
|     Due and deferred premiums                                                                       |  |      4,753,111 |  |      4,544,329 |
|     Deferred acquisition costs                                                                      |  |    24,271,942 |  |    24,930,081 |
|     Present value of future profits                                                                 |  |         574,305 |  |         514,585 |
|     Leased property under capital leases                                                            |  |         315,332 |  |         449,033 |
|     Property and equipment                                                                          |  |      1,896,028 |  |      1,766,657 |
|     Goodwill                                                                                        |  |                      - |  |         970,862 |
|     Other assets                                                                                    |  |      1,113,985 |  |      1,140,337 |
|     Amounts recoverable from reinsurers                                                             |  |    63,010,331 |  |    66,704,355 |
|                                                                                                                         | $ |  427,040,889 |  $ |  390,778,180 |
|                                                                                                                         |  |  |  |  |
| **LIABILITIES ANDSTOCKHOLDERS' EQUITY**                                                                                 |  |  |  |  |
| ** LIABILITIES**                                                                                                   |  |  |  |  |
|     Policy liabilities:                                                                             |  |  |  |  |
|         Benefit reserves                                                        | $ |  325,336,298 |  $ |  306,419,302 |
|         Unearned premium reserves                                               |  |    18,968,936 |  |    21,550,803 |
|         Policy claims                                                           |  |      1,968,219 |  |      2,607,661 |
|         Other policyholders' funds:                                             |  |  |  |  |
|         Dividend and endowment accumulations                                    |  |      1,137,015 |  |      1,117,342 |
|         Reserves for dividends and endowments and other                         |  |         902,506 |  |         923,804 |
|            Total policy liabilities                              | $ |  348,312,974 |  $ |    332,618,912 |
|        Federal income taxes                                                          |  |    11,356,823 |  |      6,233,425 |
|        Obligations under capital leases                                              |  |         315,346 |  |         443,544 |
|         Notespayable                                                                 |  |      6,386,638 |  |      2,244,074 |
|         Otherliabilities                                                             |  |      7,041,358 |  |      6,310,572 |
|            Total liabilities                                     | $ |  373,413,139 |  $ |  347,850,527 |
|                                                                                                                         |  |  |  |  |
| **  STOCKHOLDERS'EQUITY**                                                                                          |  |  |  |  |
|         Commonstock (shares issued:  2002-1,143,390;2001-1,132,960)             | $ |      1,143,390 |  $ |      1,132,960 |
|        Paid-in surplus                                                               |  |      8,495,833 |  |      8,413,332 |
|        Accumulated other comprehensive income                                        |  |    15,432,098 |  |      5,737,351 |
|        Retained earnings                                                             |  |    28,556,429 |  |    27,644,010 |
|            Total stockholders' equity                            | $ |    53,627,750 |  $ |    42,927,653 |
|                                                                                                                         | $ |  427,040,889 |  $ |  390,778,180 |
|                                                                                                                         |  |  |  |  |
| See notesto consolidated financial statements.                                                                          |
| **KENTUCKYINVESTORS, INC.**                                    |   |
|----------------------------------------------------------------|--------|
| **CONSOLIDATED STATEMENTS OF INCOME**                          |   |
| **FOR THEYEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**        |   |
|                                                                |        | **2002** |  | **2001** |  | **2000** |   |
| **REVENUE**                                                    |        |  |  |  |  |  |   |
|     Premiums andother considerations                 | $      |   53,064,178 |  $ |   49,830,549 |  $ |   47,939,399 |   |
|    Investmentincome, net of expenses                 |        |   18,462,764 |  |   18,327,345 |  |   17,017,723 |   |
|    Realized gain(loss) on investments, net           |        |        886,736 |  |     1,099,079 |  |       (599,238) |   |
|    Otherincome                                       |        |     1,072,999 |  |     1,130,682 |  |     1,069,180 |   |
|     Total revenue                          | $      |   73,486,677 |  $ |   70,387,655 |  $ |   65,427,064 |   |
|                                                                |        |  |  |  |  |  |   |
| **BENEFITS ANDEXPENSES**                                       |        |  |  |  |  |  |   |
|    Death andother benefits                           | $      |   32,675,295 |  $ |   30,243,587 |  $ |   26,629,623 |   |
|    Guaranteedannual endowments                       |        |        687,191 |  |        714,194 |  |        746,215 |   |
|    Dividends topolicyholders                         |        |        699,130 |  |        711,318 |  |        716,426 |   |
|    Increase inbenefit reserves and unearned premiums |        |   21,068,460 |  |   18,748,848 |  |   20,400,433 |   |
|    Acquisitioncosts deferred                         |        |    (8,442,124) |  |    (8,697,446) |  |    (8,526,224) |   |
|    Amortizationof deferred acquisition costs         |        |     8,052,931 |  |     7,391,695 |  |     7,213,058 |   |
|   Commissions                                        |        |     5,242,529 |  |     5,987,291 |  |     5,998,730 |   |
|    Otherinsurance expenses                           |        |   10,721,858 |  |   10,065,349 |  |   10,005,106 |   |
|     Total benefits and expenses            | $      |   70,705,270 |  $ |   65,164,836 |  $ |   63,183,367 |   |
|                                                                |        |  |  |  |  |  |   |
| **INCOME BEFORE FEDERALINCOME TAX**                            |        |  |  |  |  |  |   |
| **  AND CUMULATIVEEFFECT OF**                             |        |  |  |  |  |  |   |
| **  CHANGE INACCOUNTING PRINCIPLE**                       | $      |     2,781,407 |  $ |     5,222,819 |  $ |     2,243,697 |   |
|                                                                |        |  |  |  |  |  |   |
|    Provision forincome taxes:                        |        |  |  |  |  |  |   |
|     Current                                | $      |        439,736 |  $ |        438,478 |  $ |          65,330 |   |
|     Deferred                               |        |        114,000 |  |     1,000,000 |  |        672,000 |   |
|                                                                | $      |        553,736 |  $ |     1,438,478 |  $ |        737,330 |   |
|                                                                |        |  |  |  |  |  |   |
| **INCOME BEFORECUMULATIVE EFFECT OF**                          |        |  |  |  |  |  |   |
| **   CHANGE INACCOUNTING PRINCIPLE**                 | $      |     2,227,671 |  $ |     3,784,341 |  $ |     1,506,367 |   |
|                                                                |        |  |  |  |  |  |   |
| **CUMULATIVE EFFECT OFCHANGE IN ACCOUNTING**                   |        |  |  |  |  |  |   |
| **  PRINCIPLE**                                      | $      |       (970,862) |  $ |                    - |  $ |                    - |   |
|                                                                |        |  |  |  |  |  |   |
| **NETINCOME**                                                  | $      |     1,256,809 |  $ |     3,784,341 |  $ |     1,506,367 |   |
|                                                                |        |  |  |  |  |   |   |
| **BASIC NET EARNINGS PERSHARE**                                |        |  |  |  |  |  |   |
|   Before cumulativeeffect of change in                    |        |  |  |  |  |  |   |
|     accounting principle                   | $      |              1.96 | $ |              3.33 | $ |              1.31 |   |
|   Cumulative effectof change in accounting principle      |        |             (0.85) |  |                    - |  |                    - |   |
|                                                                | $      | 1.11 | $ | 3.33 | $ | 1.31 |   |
| **DILUTIVE NET EARNINGSPER SHARE**                             |        |  |  |  |  |  |   |
|   Before cumulativeeffect of change in                    |        |  |  |  |  |  |   |
|     accounting principle                   | $      |              1.95 | $ |              3.33 | $ |              1.31 |   |
|   Cumulative effectof change in accounting principle      |        |             (0.85) |  |                    - |  |                    - |   |
|                                                                | $      | 1.10 | $ | 3.33 | $ | 1.31 |   |
|                                                                |        |  |  |  |  |  |   |
| See notesto consolidated financial statements.                 |   |
| **KENTUCKYINVESTORS, INC.**                                    |
| **CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY**             |
| **FOR THEYEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**        |
|                                                                |        |  |  |  |  | **Accumulated** |  |  |  |  |
|                                                                |        |  |  |  |  | **Other** |  |  |  | **Total** |
|                                                                |        | **Common** |  | **Paid-in** |  | **Comprehensive** |  | **Retained** |  | **Stockholders'** |
|                                                                |        | **Stock** |  | **Surplus** |  | **Income(Loss)** |  | **Earnings** |  | **Equity** |
|                                                                |        |  |  |  |  |  |  |  |  |  |
| **BALANCE, JANUARY 1,2000**                                    | $      | 1,154,880 | $ | 8,499,592 | $ | (2,313,784) | $ | 23,688,187 | $ | 31,028,875 |
|                                                                |        |  |  |  |  |  |  |  |  |  |
| **Comprehensiveincome:**                                       |        |  |  |  |  |  |  |  |  |  |
|   Netincome                                               |        |  |  |  |  |  |  | 1,506,367 |  | 1,506,367 |
|   Change in netunrealized appreciation                    |        |  |  |  |  |  |  |  |  |  |
|     on available-for-sale securities       |        |  |  |  |  | 5,315,191 |  |  |  | 5,315,191 |
|     Total comprehensive income             |        |  |  |  |  |  |  |  |  | 6,821,558 |
| Cash dividend                                                  |        |  |  |  |  |  |  | (470,133) |  | (470,133) |
| Issuance of common stock,net                                   |        | 2,731 |  | 37,851 |  |  |  | (7,320) |  | 33,262 |
| Share exchangetransaction                                      |        | (6,288) |  | (138,337) |  |   |  | (14,619) |  | (159,244) |
|                                                                |        |  |  |  |  |  |  |  |  |  |
| **BALANCE, DECEMBER 31,2000**                                  | $      | 1,151,323 | $ | 8,399,106 | $ | 3,001,407 | $ | 24,702,482 | $ | 37,254,318 |
|                                                                |        |  |  |  |  |  |  |  |  |  |
| **Comprehensiveincome:**                                       |        |  |  |  |  |  |  |  |  |  |
|   Netincome                                               |        |  |  |  |  |  |  | 3,784,341 |  | 3,784,341 |
|   Change in netunrealized appreciation                    |        |  |  |  |  |  |  |  |  |  |
|     on available-for-sale securities       |        |  |  |  |  | 2,735,944 |  |  |  | 2,735,944 |
|     Total comprehensive income             |        |  |  |  |  |  |  |  |  | 6,520,285 |
| Cash dividend                                                  |        |  |  |  |  |  |  | (470,928) |  | (470,928) |
| Issuance of common stock,net                                   |        | (18,363) |  | 14,226 |  |  |  | (363,399) |  | (367,536) |
| Share exchangetransaction                                      |        |   |  |   |  |   |  | (8,486) |  | (8,486) |
|                                                                |        |  |  |  |  |  |  |  |  |  |
| **BALANCE, DECEMBER 31,2001**                                  | $      | 1,132,960 | $ | 8,413,332 | $ | 5,737,351 | $ | 27,644,010 | $ | 42,927,653 |
|                                                                |        |  |  |  |  |  |  |  |  |  |
| **Comprehensiveincome:**                                       |        |  |  |  |  |  |  |  |  |  |
|   Netincome                                               |        |  |  |  |  |  |  | 1,256,809 |  | 1,256,809 |
|   Change in netunrealized appreciation                    |        |  |  |  |  |  |  |  |  |  |
|     on available-for-sale securities       |        |  |  |  |  | 9,694,747 |  |  |  | 9,694,747 |
|     Total comprehensive income             |        |  |  |  |  |  |  |  |  | 10,951,556 |
| Cash dividend                                                  |        |  |  |  |  |  |  | (466,251) |  | (466,251) |
| Issuance of common stock,net                                   |        | 10,430 |  | 82,501 |  |  |  | 116,512 |  | 209,443 |
| Share exchangetransaction                                      |        |   |  |   |  |   |  | 5,349 |  | 5,349 |
|                                                                |        |  |  |  |  |  |  |  |  |  |
| **BALANCE, DECEMBER 31,2002**                                  | $      | 1,143,390 | $ | 8,495,833 | $ | 15,432,098 | $ | 28,556,429 | $ | 53,627,750 |
|                                                                |        |  |  |  |  |  |  |  |  |  |
| See notesto consolidated financial statements.                 |
| **KENTUCKYINVESTORS, INC.**                                       |
|-------------------------------------------------------------------|
| **CONSOLIDATED STATEMENTS OF CASHFLOWS**                          |
| **FOR THEYEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**           |
|                                                                   |  |  |  |  |  |  |
|                                                                   |  | **2002** |  | **2001** |  | **2000** |
| **OPERATINGACTIVITIES**                                           |  |  |  |  |  |  |
| Net income                                                        | $ |     1,256,809 |   $ |     3,784,341 |   $ |     1,506,367 |
| Adjustments to reconcilenet income                                |  |  |  |  |  |  |
|   to net cashprovided by operating activities:               |  |  |  |  |  |  |
| Realized loss (gain) oninvestments                                |  |       (886,736) |  |    (1,099,079) |  |        599,238 |
| Provision for deferredfederal income taxes                        |  |        114,000 |  |     1,000,000 |  |        672,000 |
| Net adjustment for premiumand discount on investments             |  |          23,344 |  |       (100,118) |  |          85,974 |
| Depreciation and otheramortization                                |  |        501,647 |  |        564,023 |  |        541,140 |
| Net realized loss ongoodwill impairment                           |  |        970,862 |  |                    - |  |                    - |
| Change in minorityinterest and other                              |  |                    - |  |                    - |  |       (159,244) |
| Change in operating assetsand liabilities:                        |  |  |  |  |  |  |
| Accrued investmentincome                                          |  |       (310,373) |  |       (192,976) |  |       (362,794) |
| Due and deferredpremiums                                          |  |       (208,782) |  |          56,733 |  |         (49,651) |
| Amortization of deferredacquisition costs                         |  |     8,052,931 |  |     7,391,695 |  |     7,213,058 |
| Policy acquisition costsdeferred                                  |  |    (8,442,124) |  |     (8,697,446) |  |    (8,526,224) |
| Amount recoverable fromreinsurers                                 |  |     3,694,024 |  |     2,698,862 |  |          69,538 |
| Benefitreserves                                                   |  |   17,614,367 |  |   16,950,702 |  |   20,495,926 |
| Policy claims                                                     |  |       (639,442) |  |          37,279 |  |        557,990 |
| Other policyholderfunds                                           |  |           (1,625) |  |        155,242 |  |          55,296 |
| Federal incometax                                                 |  |          15,133 |  |          13,854 |  |         (24,110) |
| Other assets and otherliabilities                                 |  |        490,605 |  |     2,428,514 |  |        155,186 |
|                                                                   |  |  |  |  |  |  |
| **NET CASH PROVIDED BYOPERATING ACTIVITIES**                      | $ |   22,244,640 |   $ |   24,991,626 |   $ |   22,829,690 |
|                                                                   |  |  |  |  |  |  |
| **INVESTINGACTIVITIES**                                           |  |  |  |  |  |  |
| Securitiesavailable-for-sale:                                     |  |  |  |  |  |  |
| Purchases                                                         | $ |  (67,659,091) |   $ |  (65,117,220) |   $ |  (31,984,036) |
| Sales andmaturites                                                |  |   44,539,001 |  |   47,167,587 |  |   14,481,063 |
| Otherinvestments:                                                 |  |  |  |  |  |  |
| Cost ofacquisition                                                |  |    (4,260,590) |  |    (5,319,589) |  |    (9,477,581) |
| Sales andmaturities                                               |  |     4,289,226 |  |     5,395,255 |  |     2,601,078 |
| Considerations fromassumption of Franklin American                |  |  |  |  |  |  |
| Life Insurance Companypolicy obligations                          |  |                    - |  |                    - |  |     6,303,944 |
| Net additions to propertyand equipment                            |  |       (418,701) |  |       (522,069) |  |       (187,129) |
|                                                                   |  |  |  |  |  |  |
| **NET CASH USED BYINVESTING ACTIVITIES**                          | $ |  (23,510,155) |   $ |  (18,396,036) |   $ |  (18,262,661) |
| **FINANCINGACTIVITIES**                                           |  |  |  |  |  |  |
| Receipts from universallife policies creditied to                 |  |  |  |  |  |  |
| policyholder accountbalances                                      | $ |     6,749,207 |   $ |     5,082,705 |   $ |     3,308,407 |
| Return of policyholderaccount balances on universal life policies |  |    (8,028,445) |  |    (7,975,758) |  |    (8,542,770) |
| Proceeds from notespayable                                        |  |     4,142,564 |  |        244,074 |  |     2,000,000 |
| Issuances of commonstock                                          |  |        209,443 |  |       (367,536) |  |          33,262 |
| Dividends                                                         |  |       (466,251) |  |       (470,928) |  |       (470,133) |
|                                                                   |  |  |  |  |  |  |
| **NET CASH PROVIDED BY(USED BY) FINANCING ACTIVITIES**            | $ |     2,606,518 |   $ |    (3,487,443) |   $ |    (3,671,234) |
| **INCREASE INCASH**                                               | $ |     1,341,003 |   $ |     3,108,147 |   $ |        895,795 |
| Cash and cash equivalentsat beginning of year                     |  |     6,432,594 |  |     3,324,447 |  |     2,428,652 |
| **CASH AND CASHEQUIVALENTS AT END OF YEAR**                       | $ |     7,773,597 |   $ |     6,432,594 |   $ |     3,324,447 |
|                                |  |  |  |  |  |  |
| See notesto consolidated financial statements.                    |  |  |  |  |  |  |

notes to consolidatedfinancials

****

**NOTE  A - Natureof Operations and Accounting Policies**

Kentucky Investors, Inc.is the holding company of Investors Heritage Life InsuranceCompany, Investors Heritage Printing, Inc., a printing company,Investors Heritage Financial Services Group, Inc., an insurancemarketing company and is the sole member of Family AssignmentServices, LLC, a limited liability company that provides advancefunding of funerals in exchange for the irrevocable assignment oflife insurance policies from other nonaffiliated companies. These entities are collectively hereinafter referred to as the"Company". Ninety-nine percent of Kentucky Investors operations aregenerated by Investors Heritage Life.

The Company's operationsinvolve the sale and administration of various insurance andannuity products, including, but not limited to, participating,non-participating, whole life, limited pay, universal life, annuitycontracts, credit life, credit accident and health and groupinsurance policies.  The principal markets for the Company'sproducts are in the Commonwealths of Kentucky and Virginia, and thestates of North Carolina, South Carolina, Ohio, Indiana, Florida,Tennessee, Illinois, Georgia, West Virginia, Arizona, Michigan,Mississippi and Texas.

**Basis ofPresentation:**  The accompanyingconsolidated financial statements of Kentucky Investors andsubsidiaries have been prepared in accordance with accountingprinciples generally accepted in the United States(“GAAP”).

**Use ofEstimates:**  The preparation offinancial statements requires management to make estimates andassumptions that affect the amounts reported in the financialstatements and accompanying notes.  Actual results coulddiffer from those estimates.

**Principles ofConsolidation:**  The consolidatedfinancial statements include the wholly-owned subsidiaries ofKentucky Investors, which are Investors Heritage Life and itssubsidiary, Investors Underwriters, Inc., Investors HeritagePrinting, Investors Heritage Financial and Family Assignment. Intercompany transactions are eliminated in the Company'sconsolidated financial statements.

**Investments:**  Inaccordance with Statement of Financial Accounting Standards(“SFAS”) No. 115, "Accounting for Certain Investmentsin Debt and Equity Securities", the Company classifies all fixedmaturities and equity securities as available-for-sale.  UnderSFAS No. 115, securities classified as available-for-sale arecarried at fair value with appreciation (depreciation) relating totemporary market value changes recorded as an adjustment to othercomprehensive income net of federal income taxes.

Premiums and discounts onfixed maturity investments are amortized into income using theinterest method.  Anticipated prepayments on mortgage-backedsecurities are considered in the determination of the effectiveyield on such securities.  If a differencenotes to consolidated financials

notes to consolidatedfinancials

arises between anticipatedprepayments and actual prepayments, the carrying value of theinvestment is adjusted with a corresponding charge or credit tointerest income.

Realized gains and losseson the sale of investments are determined based upon the specificidentification method and include provisions forother-than-temporary impairments where appropriate.

Mortgage loans, Policyloans and Other long-term investments are carried at unpaidbalances.  Short-term investments represent securities withmaturity dates within one year but exceeding three months. These securities are carried at amortized cost.

Cash equivalents includemoney market funds on deposit at various financial institutionswith contractual maturity dates within three months at the time ofpurchase.

**Deferred AcquisitionCosts:**  Commissions and otheracquisition costs which vary with and are primarily related to theproduction of new business are deferred and amortized over the lifeof the related policies (refer to Revenues and Expenses discussedlater regarding amortization methods).  Recoverability ofdeferred acquisition costs is evaluated annually by comparing thecurrent estimate of the present value of expected pretax futureprofits to the unamortized asset balance.  If such currentestimate is less than the existing balance, the difference ischarged to expense.

****

**Property andEquipment:**  Property and equipmentis carried at cost less accumulated depreciation, using principallythe straight-line method.  Accumulated depreciation onproperty and equipment was $4,186,699 and $4,003,312 at December31, 2002 and 2001, respectively.

**CapitalLeases:**During 2002 the Company enteredinto three capital leases for office equipment and an autolease.  Total lease payments for 2002, 2001 and 2000 relatingto new and previously existing capital leases were $210,956,$214,284 and $186,826, respectively. Future minimum lease paymentsfor 2003, 2004 and 2005 are $171,289, $133,578 and $27,803,respectively.  The present value of net minimum lease paymentsat December 31, 2002 was $315,346, which is equal to the totalfuture minimum lease payments of $332,669 less imputed interest of$17,323. Accumulated amortization on the leased property was$296,689 and $546,513 at December 31, 2002 and 2001,respectively.

****

**Goodwill:**  Inaccordance with Statement of Financial Accounting Standards(“SFAS”) No. 142, "Goodwill and Other IntangibleAssets" which eliminates the amortization of goodwill and otheracquired intangible assets with indefinite economic useful lives,the Company ceased amortization of goodwill as of January 1,2002.  The Company performed the requisite transitionalimpairment tests for those assets as of January 1, 2002 and$970,862 of goodwill associated with the 1981 acquisition ofInvestors Heritage of the South and the 1982 acquisition ofCommercial Travelers Life Insurance

notes to consolidatedfinancials

Company, was written offand recorded as a cumulative effect of a change in accountingprinciple in the first quarter of 2002.  Previously, goodwillwas being amortized over forty years using the straight-linemethod.  Accumulated amortization was $1,277,908 at December31, 2001.

A reconciliation of thepreviously reported 2001 and 2000 statements of income informationto pro forma amounts that reflect the elimination of amortizationof goodwill is presented below:
|                         |   | **2001**                                   |   |                               |   |                               |  |               | **2000**                                   |   |                               |   |                               |
|-------------------------|---|--------------------------------------------|---|-------------------------------|---|-------------------------------|--|---------------|--------------------------------------------|---|-------------------------------|---|-------------------------------|
|                         |   |                                            |   | **Per Share**                 |   |                               |  | **Per Share** |
|                         |   | **Amount**                                 |   | **Basic**                     |   | **Diluted**                   |  |               | **Amount**                                 |   | **Basic**                     |   | **Diluted**                   |
| Net income,as reported  | $ |   3,784,341                           | $ |      3.33 | $ |      3.33 |  | $             |   1,506,367                           | $ |      1.31 | $ |      1.31 |
| Amortizationof goodwill |   |       48,545 |   |      0.04 |   |      0.04 |  |               |       48,545 |   |      0.04 |   |      0.04 |
| Pro formanet income     | $ |   3,832,886                           | $ |      3.37 | $ |      3.37 |  | $             |   1,554,912                           | $ |      1.35 | $ |      1.35 |

**Present Value of FutureProfits:**  Present value of futureprofits represents the estimated value assigned to the insurance inforce of the assumed policy obligations at the date ofacquisition.  The assigned value is amortized over theexpected remaining life of the insurance in force (whichapproximates a weighted average of 8 years).  Accumulatedamortization was $208,356 and $129,741 at December 31, 2002 and2001, respectively.  Annual amortization in each of thefollowing five years will be approximately $91,600.

**Benefit Reserves andPolicyholder Deposits:**  Reserves ontraditional life and accident and health insurance products arecalculated using the net level premium method based upon estimatedfuture investment yields, mortality, withdrawals and otherassumptions, including dividends on participating policies. The assumptions used for prior year issues are locked in. Currentyear issues are reserved for using updated assumptions determinedby reviewing the Company's past experience and include a provisionfor possible unfavorable deviation.

Benefit reserves andpolicyholder deposits on universal life and investment-typeproducts are determined by using the retrospective deposit methodand represent the policy account value before consideration ofsurrender charges.  In addition, unearned revenues areincluded as a part of the benefit reserve.

The mortality assumptionsfor regular ordinary business are based on the 1955-60 Basic Table,Select and Ultimate, for plans issued prior to 1982, the 1965-70Basic Table, Select and Ultimate, for plans issued in 1982 through1984, the 1975-80 Basic Table, Select and Ultimate, for plansissued after 1984 and on the Company's experience for final expenseplans.

**Reinsurance:**  TheCompany assumes and cedes reinsurance under various agreementsproviding greater diversification of business, allowing managementto control exposure to potential losses arising from large risks,and providing additional capacity for growth. 

notes to consolidatedfinancials

Amounts recoverable fromreinsurers are estimated in a manner consistent with the relatedliabilities associated with the reinsured policies.  Inaccordance with SFAS No. 113, "Accounting and Reporting forReinsurance of Short-Duration and Long-Duration Contracts",reserves ceded to reinsurers of $61,605,973 and $65,748,887 atDecember 31, 2002 and 2001, respectively, are shown gross on theCompany's balance sheet.

****

**Unearned PremiumReserves:**  Credit life unearnedpremium reserves are calculated for level and reducing coverageusing the monthly pro rata and Rule of 78's methods,respectively.  Credit accident and health unearned premiumreserves are determined based upon the Rule of 78's.

**PolicyClaims:**  Policy claims are based onreported claims plus estimated incurred but not reported claimsdeveloped from trends of historical data applied to currentexposure.

****

**Other Policyholders'Funds:**  Other policyholders' fundsconsist primarily of dividends and endowments left on deposit atinterest.

**ParticipatingPolicies: **Participating businessapproximates 7% of ordinary life insurance in force. Participating dividends are accrued as declared by the Board ofDirectors of Investors Heritage Life.  The liability forfuture policy benefits for participating policies was determinedbased on the Net Level Premium Reserve Method, 3% interest, and the1941 CSO Mortality and 1958 CSO Mortality tables.  Allguaranteed benefits were considered in calculating thesereserves.  Deferred acquisition costs are amortized inproportion to expected gross profits.  The average assumedinvestment yields used in determining expected gross profits rangedfrom 3.56% to 9.17% (for the current and all future years anassumed investment yield of 6.80% was utilized).

**Federal IncomeTaxes:**  The Company utilizes theliability method in accordance with SFAS No. 109, "Accounting forIncome Taxes", to account for income taxes.  Under suchmethod, deferred tax assets and liabilities are determined based ondifferences between the financial reporting and the tax bases ofassets and liabilities and are measured using the enacted taxrates.

**Revenues andExpenses:**  Revenues on traditionallife and accident and health insurance products consist of directand assumed premiums reported as earned when due.  Liabilitiesfor future policy benefits, including unearned premium reserves onaccident and health policies and unreleased profits on limited-paylife policies, are provided and acquisition costs are amortized byassociating benefits and expenses with earned premiums to recognizerelated profits over the life of the contracts.  Acquisitioncosts are amortized over the premium paying period using the netlevel premium method.  Traditional life insurance products aretreated as long duration contracts since they are ordinary wholelife insurance products which generally remain in force for thelifetime of the insured.  The accident and health insuranceproducts are treated as long duration contracts because they arenon-cancelable.

notes to consolidatedfinancials

Revenues for universallife and investment-type products consist of investment income andpolicy charges for the cost of insurance and policy initiation andadministrative fees.  Expenses include interest credited topolicy account balances, actual administrative expenses and benefitpayments in excess of policy account balances.

Deferred acquisition costsrelated to universal life and investment-type products areamortized as a uniform percentage of each year's expected grossprofits, over the life of the policies.  Amortization isunlocked for significant changes in expected versus actual grossprofits, including the effects of realized gains orlosses.

**Common Stock andEarnings per Share:**  The par valueper share is $1.00 with 4,000,000 shares authorized. Earnings pershare of common stock were computed based on the weighted averagenumber of common shares outstanding during eachyear.    Cash dividends per share were $.38 in 2002,2001 and 2000.

A reconciliation fromBasic Earnings per share (“EPS”) to Diluted EPS is asfollows:
|                                                             |  |                                                                                             | **Income**       |                                                                                             | **Shares**       |                                                                                              | **Per Share Amount**                                       |
|-------------------------------------------------------------|--|---------------------------------------------------------------------------------------------|------------------|---------------------------------------------------------------------------------------------|------------------|----------------------------------------------------------------------------------------------|------------------------------------------------------------|
| **December31, 2002**                                        |  |                                                                                             |                  |                                                                                             |                  |                                                                                              |                                                            |
| *BasicEPS*                                                  |  |                                                                                             |                  |                                                                                             |                  |                                                                                              |                                                            |
| Incomeavailable to common stockholders                      |  | $                                                                                           |   1,256,809 |                                                                                             |   1,136,512 | $                                                                                            |          1.11 |
| Dilutiveeffect of common equivalent shares of stock options |  |                - |                  |        1,560                                             |                  |               -   |
|                                                             |  |                                                                                             |                  |                                                                                             |                  |                                                                                              |                                                            |
| *DilutedEPS*                                                |  |                                                                                             |                  |                                                                                             |                  |                                                                                              |                                                            |
| Incomeavailable to common stockholders                      |  | $                                                                                           | 1,256,809        |                                                                                             | 1,138,072        | $                                                                                            |          1.10 |
|                                                             |  |                                                                                             |                  |                                                                                             |                  |                                                                                              |                                                            |
| **December31, 2001**                                        |  |                                                                                             |                  |                                                                                             |                  |                                                                                              |                                                            |
| *BasicEPS*                                                  |  |                                                                                             |                  |                                                                                             |                  |                                                                                              |                                                            |
| Incomeavailable to common stockholders                      |  | $                                                                                           |   3,784,341 |                                                                                             |   1,136,634 | $                                                                                            |          3.33 |
| Dilutiveeffect of common equivalent shares of stock options |  |                - |                  |                - |                  |              -    |
|                                                             |  |                                                                                             |                  |                                                                                             |                  |                                                                                              |                                                            |
| *DilutedEPS*                                                |  |                                                                                             |                  |                                                                                             |                  |                                                                                              |                                                            |
| Incomeavailable to common stockholders                      |  | $                                                                                           | 3,784,341        |                                                                                             | 1,136,634        | $                                                                                            |          3.33 |
|                                                             |  |                                                                                             |                  |                                                                                             |                  |                                                                                              |                                                            |
| **December31, 2000**                                        |  |                                                                                             |                  |                                                                                             |                  |                                                                                              |                                                            |
| *BasicEPS*                                                  |  |                                                                                             |                  |                                                                                             |                  |                                                                                              |                                                            |
| Incomeavailable to common stockholders                      |  | $                                                                                           |   1,506,367 |                                                                                             |   1,148,302 | $                                                                                            |          1.31 |
| Dilutiveeffect of common equivalent shares of stock options |  |                - |                  |                - |                  |              -    |
|                                                             |  |                                                                                             |                  |                                                                                             |                  |                                                                                              |                                                            |
| *DilutedEPS*                                                |  |                                                                                             |                  |                                                                                             |                  |                                                                                              |                                                            |
| Incomeavailable to common stockholders                      |  | $                                                                                           | 1,506,367        |                                                                                             | 1,148,302        | $                                                                                            |          1.31 |

notes to consolidatedfinancials

****

**Accumulated OtherComprehensive Income (Loss):**SFAS No. 130,"Reporting Comprehensive Income", requires unrealized gains orlosses on available-for-sale securities to be included in othercomprehensive income.  The reclassification amounts (net of34% tax) for the years ended December 31, 2002, 2001 and 2000 aresummarized as follows:
|                                            |   | **2002**  |   | **2001**    |   | **2000**  |
|--------------------------------------------|---|-----------|---|-------------|---|-----------|
|                                            |   |           |   |             |   |           |
| Netunrealized gain arising during period   | $ | 8,986,462 | $ | 3,825,612   | $ | 4,629,104 |
| Reclassification adjustment for net(gains) |   |           |   |             |   |           |
|  losses included in net income        |   | 708,285   |   | (1,089,668) |   | 686,087   |
| Netunrealized gain on certain              |   |           |   |             |   |           |
|  securities                           | $ | 9,694,747 | $ | 2,735,944   | $ | 5,315,191 |

**  NOTE  B -Acquisitions**

Effective September 30,2002, Investors Heritage Life acquired all of the issued andoutstanding stock of Regal Life Insurance Company, a Maryland lifeinsurance company, from its parent, Bankers Independent InsuranceCompany.  On December 31, 2002, Regal was merged intoInvestors Heritage Life.  The acquisition and merger wereapproved by both the Maryland and Kentucky Departments ofInsurance.  The acquisition was accounted for under thepurchase accounting method as prescribed by SFAS 141“Business Combinations”.  The gross acquisitionprice was approximately $560,000, subject to adjustments to bedetermined within 180 days from the effective date of thetransaction.  The difference between the fair values of assetsreceived and liabilities assumed was recorded as the present valueof future profits (“PVFP”), representing theactuarially determined present value of anticipated profits to berealized from the business, using a risk-adjusted discountrate.

On June 28, 2002, theCompany acquired 400,000 shares of Cherokee National Life InsuranceCompany of Macon, Georgia, a subsidiary of American United LifeInsurance Company, in exchange for the Company’s non-recoursepromissory note in the amount of $4,000,000.  The note is dueJune 28, 2007 and interest will be paid quarterly at a rate equalto the prime rate.  Cherokee National stock dividends will bepaid quarterly and the dividend rate will be the same as theinterest rate on the note.  No interest is due on the noteunless dividends have been paid.  During December 2002, the400,000 shares of common stock of Cherokee National were exchangedfor 400,000 shares of Series A preferred stock of CherokeeNational.

notes to consolidatedfinancials

Effective April 1, 2000,Investors Heritage Life assumed the covered obligations of FranklinAmerican Life Insurance Company through an assumption reinsuranceagreement with the liquidator of Franklin American, the NationalOrganization of Life and Health Guaranty Associations ("NOLHGA")and participating life and health insurance guarantyassociations.  The gross acquisition price was approximately$4,400,000.  The difference between the fair values of assetsreceived and liabilities assumed was recorded as PVFP, representingthe actuarially determined present value of anticipated profits tobe realized from the business, using a risk-adjusted discountrate.

In conjunction with theassumption reinsurance agreement, Investors Heritage Life enteredinto a coinsurance agreement with Scottish Annuity & LifeInsurance Company (Cayman) Ltd. whereby Investors Heritage Lifeceded 85% of the assumed policy obligations from FranklinAmerican.  Pursuant to this arrangement, Investors HeritageLife eliminated the portion of PVFP associated with the cededbusiness.  Benefit reserves ceded to Scottish and included inthe amounts recoverable from reinsurers equaled $36,725,063 and$38,367,934 at December 31, 2002 and 2001, respectively.  Anescrow account has been established by Scottish to secure InvestorsHeritage Life’s ceded benefit obligations.  The Companyreceived $160,573 and $172,552 of fee income associated with thisreinsurance agreement in 2002 and 2001, respectively.

**NOTE  C -Investments**

The Company limits creditrisk by emphasizing investment grade securities and by diversifyingits investment portfolio among government and corporate bonds andmortgage loans.  The Company manages its fixed incomeportfolio to diversify between and within industry sectors. Mortgage loans, exclusive of insured or guaranteed mortgages, areissued at loan to value ratios not exceeding 80 percent. Approximately $9,328,452 of the loans outstanding at December 31,2002 were to borrowers located in Kentucky.  All loans aresecured by a first mortgage on the property.

notes to consolidatedfinancials

Investments inavailable-for-sale securities are summarized as follows:
|                                   |   |                                   |         | **Gross**                                   |         | **Gross**                                                                                                           |         |                                   |
|-----------------------------------|---|-----------------------------------|---------|---------------------------------------------|---------|---------------------------------------------------------------------------------------------------------------------|---------|-----------------------------------|
| **2002**                          |   | **Amortized**                     |         | **Unrealized**                              |         | **Unrealized**                                                                                                      |         | **Fair**                          |
|                                   |   | **Cost**                          |         | **Gains**                                   |         | **Losses**                                                                                                          |         | **Value**                         |
| **Available-for-salesecurities:** |   |                                   |         |                                             |         |                                                                                                                     |         |                                   |
| U.S. governmentobligations        | $ |   47,498,780            |  $ |    4,676,135                 |  $ |                    - |  $ |   52,174,915            |
| States and politicalsubdivisions  |   |   12,102,887            |         |       937,243 |         |                    - |         |   13,040,130            |
| Corporate                         |   |  133,425,181                 |         |  13,886,038                            |         |        208,777                                                                   |         |  147,102,442                 |
| Foreign                           |   |   17,408,784            |         |    2,492,539                 |         |                    - |         |   19,901,323            |
| Mortgage-backedsecurities         |   |   43,954,332            |         |    2,810,044                 |         |          38,543                                                        |         |   46,725,833            |
| Total fixed maturitysecurities    | $ |  254,389,964                 |  $ |  24,801,999                            |  $ |        247,320                                                                   |  $ |  278,944,643                 |
| Equitysecurities                  |   |     5,568,607 |         |       665,994 |         |          16,359                                                        |         |     6,218,242 |
| Total                             | $ |  259,958,571                 |  $ |  25,467,993                            |  $ |        263,679                                                                   |  $ |  285,162,885                 |
|                                   |   |                                   |         |                                             |         |                                                                                                                     |         |                                   |
|                                   |   |                                   |         | **Gross**                                   |         | **Gross**                                                                                                           |         |                                   |
| **2001**                          |   | **Amortized**                     |         | **Unrealized**                              |         | **Unrealized**                                                                                                      |         | **Fair**                          |
|                                   |   | **Cost**                          |         | **Gains**                                   |         | **Losses**                                                                                                          |         | **Value**                         |
| **Available-for-salesecurities:** |   |                                   |         |                                             |         |                                                                                                                     |         |                                   |
| U.S. governmentobligations        | $ | 27,470,643                        | $       | 1,176,394                                   | $       | 40,110                                                                                                              | $       | 28,606,927                        |
| States and politicalsubdivisions  |   | 4,103,505                         |         | 38,529                                      |         | 59,864                                                                                                              |         | 4,082,170                         |
| Corporate                         |   | 122,176,799                       |         | 5,401,938                                   |         | 957,552                                                                                                             |         | 126,621,185                       |
| Foreign                           |   | 17,934,805                        |         | 1,082,710                                   |         | 43,336                                                                                                              |         | 18,974,179                        |
| Mortgage-backedsecurities         |   | 63,438,248                        |         | 2,209,361                                   |         | 100,247                                                                                                             |         | 65,547,362                        |
| Total fixed maturitysecurities    | $ | 235,124,000                       | $       | 9,908,932                                   | $       | 1,201,109                                                                                                           | $       | 243,831,823                       |
| Equitysecurities                  |   | 845,735                           |         | 766,093                                     |         | 5,940                                                                                                               |         | 1,605,888                         |
| Total                             | $ | 235,969,735                       | $       | 10,675,025                                  | $       | 1,207,049                                                                                                           | $       | 245,437,711                       |

In accordance with SFASNo. 115, net unrealized gains for investments classified asavailable-for-sale are shown, net of the effect on deferred incometaxes and deferred policy acquisition costs assuming that theappreciation had been realized.  A summary follows:
|                                                | **December 31** |                    |
|------------------------------------------------|-----------------|--------------------|
|                                                |                 | **2002**           |  | **2001** |
| Netunrealized appreciation on                  |                 |                    |  |  |
|  available-for sale securities            | $               |   25,204,314  | $ |    9,467,976 |
|  Adjustment to deferred acquisition costs |                 |   (1,822,351) |  |      (775,021) |
|  Deferred income taxes                    |                 |   (7,949,865) |  |   (2,955,604) |
| Netunrealized appreciation on                  |                 |                    |  |  |
|  available-for sale securities            | $               |   15,432,098  | $ |    5,737,351 |

notes to consolidatedfinancials

The amortized cost andfair value of debt securities at December 31, 2002 by contractualmaturity, are presented below.  Expected maturities willdiffer from contractual maturities because borrowers may have theright to call or prepay obligations with or without call orprepayment penalties.
|                                       |   | **Available-for-Sale**             |
|---------------------------------------|---|------------------------------------|
|                                       |   | **Amortized**                      |  | **Fair** |
|                                       |   | **Cost**                           |  | **Value** |
| Due in one year orless                | $ |      7,548,782 | $ |      7,673,207 |
| Due after one year throughfive years  |   | 49,833,324                         |  | 53,786,044 |
| Due after five yearsthrough ten years |   | 112,095,107                        |  | 124,924,516 |
| Due after tenyears                    |   | 40,958,419                         |  | 45,835,043 |
| Due at multiple maturitydates         |   | 43,954,332                         |  | 46,725,833 |
| Total                                 | $ | 254,389,964                        | $ | 278,944,643 |

Proceeds during 2002, 2001and 2000 from sales and maturities of investments inavailable-for-sale securities were $44,539,001, $47,167,587 and$14,481,063, respectively.  Gross gains of $1,073,458,$1,673,704 and $853,970 and gross losses of $365,173, $584,036 and$1,540,057 were realized on those sales during 2002, 2001 and 2000,respectively.

Presented below isinvestment information, including the accumulated and annual changein net unrealized investment gain or loss.  Additionally, thetable below shows the annual change in net unrealized investmentgain (loss) and the amount of realized investment gain (loss) ondebt and equity securities for the years ended December 31, 2002,2001 and 2000:
|                                                                 |   | **2002**                                                                                                            |   | **2001**                                                                                                            |   | **2000**                                          |
|-----------------------------------------------------------------|---|---------------------------------------------------------------------------------------------------------------------|---|---------------------------------------------------------------------------------------------------------------------|---|---------------------------------------------------|
| **Change in unrealizedinvestment gain (loss):**                 |   |                                                                                                                     |   |                                                                                                                     |   |                                                   |
| **   Available-for-sale:**                            |   |                                                                                                                     |   |                                                                                                                     |   |                                                   |
|   Debtsecurities                                           | $ |   15,846,856                                                                                              | $ |     4,244,779                                                                                   | $ |     8,401,634                 |
|   Equitysecurities                                         |   |       (110,518)                                                                       |   |        238,906                                                                   |   |       (692,231)     |
| **Realized investmentgain (loss):**                             |   |                                                                                                                     |   |                                                                                                                     |   |                                                   |
| ** Available-for-sale:**                                   |   |                                                                                                                     |   |                                                                                                                     |   |                                                   |
|   Debtsecurities                                           | $ |        708,285                                                                   | $ |     1,089,668                                                                                   | $ |    (1,461,834)                     |
|   Equitysecurities                                         |   |                    - |   |                    - |   |        775,747 |
|                                                                 |   |                                                                                                                     |   |                                                                                                                     |   |                                                   |
| Major categories ofinvestment income are summarized as follows: |   |                                                                                                                     |   |
|                                                                 |   |                                                                                                                     |   |                                                                                                                     |   |                                                   |
|                                                                 |   | **2002**                                                                                                            |   | **2001**                                                                                                            |   | **2000**                                          |
| Fixedmaturities                                                 | $ |   16,396,086                                                                                              | $ |   16,183,339                                                                                              | $ |   14,829,680                            |
| Mortgage loans on realestate                                    |   |     1,976,301                                                                                   |   |     2,043,664                                                                                   |   |     1,763,981                 |
| Other                                                           |   |        903,114                                                                   |   |        904,321                                                                   |   |     1,022,273                 |
|                                                                 | $ |   19,275,501                                                                                              | $ |   19,131,324                                                                                              | $ |   17,615,934                            |
| Investmentexpenses                                              |   |        812,737                                                                   |   |        803,979                                                                   |   |        598,211 |
|                                                                 | $ |   18,462,764                                                                                              | $ |   18,327,345                                                                                              | $ |   17,017,723                            |

The Company is required tohold assets on deposit for the benefit of policyholders inaccordance with statutory rules and regulations.  At December31, 2002 and 2001, these required deposits had book values of$23,326,983 and $23,657,924, respectively.

**NOTE  D - FairValues of Financial Instruments**

The following disclosureof the estimated fair values of financial instruments is made inaccordance with the requirements of SFAS No. 107, "Disclosuresabout Fair Value of Financial Instruments".  The estimatedfair value amounts have been determined using available marketinformation and appropriate valuation methodologies.  However,considerable judgment was necessarily required to interpret marketdata to develop these estimates.  Accordingly, the estimatesare not necessarily indicative of the amounts which could berealized in a current market exchange.  The use of differentmarket assumptions or estimation methodologies may have a materialeffect on the fair value amounts.

****
|                                               |   | **DECEMBER 31**                                   |   |                                                   |   |                                                   |
|-----------------------------------------------|---|---------------------------------------------------|---|---------------------------------------------------|---|---------------------------------------------------|
|                                               |   | **2002**                                          |   |                                                   |   | **2001**                                          |  |  |
|                                               |   | **Carrying**                                      |   | **Fair**                                          |   | **Carrying**                                      |  | **Fair** |
|                                               |   | **Value**                                         |   | **Value**                                         |   | **Value**                                         |  | **Value** |
| **Assets:**                                   |   |                                                   |   |                                                   |   |                                                   |  |  |
|   Fixedmaturities                        | $ |   278,944,643                                | $ |   278,944,643                                | $ |   243,831,823                                | $ |   243,831,823 |
|  Equity securities                       |   |      6,218,242                |   |      6,218,242                |   |      1,605,888                |  |      1,605,888 |
|  Mortgage loans on real estate:          |   |                                                   |   |                                                   |   |                                                   |  |  |
|     Commercial                 |   |    23,393,096                           |   |    23,631,418                           |   |    23,574,150                           |  |    23,226,006 |
|     Residential                |   |        627,622 |   |        634,165 |   |      1,136,640                |  |      1,129,473 |
|  Policy loans                            |   |      8,128,488                |   |      8,128,488                |   |      7,909,681                |  |      7,909,681 |
|   Otherlong-term investments             |   |        769,847 |   |        769,847 |   |        409,658 |  |        409,658 |
|  Short-term investments                  |   |        920,000 |   |        920,000 |   |        837,560 |  |        837,560 |
|   Cashand cash equivalents               |   |      7,773,597                |   |      7,773,597                |   |      6,432,594                |  |      6,432,594 |
|  Accrued investment income               |   |      4,330,320                |   |      4,330,320                |   |      4,019,947                |  |      4,019,947 |
|                                               |   |                                                   |   |                                                   |   |                                                   |  |  |
| **Liabilities:**                              |   |                                                   |   |                                                   |   |                                                   |  |  |
|  Policyholder deposits                   |   |                                                   |   |                                                   |   |                                                   |  |  |
|     (Investment-typecontracts) | $ |    80,921,788                           | $ |    76,535,835                           | $ |    79,689,179                           | $ |    75,152,860 |
|  Policy claims                           |   |      1,968,219                |   |      1,968,219                |   |      2,607,661                |  |      2,607,661 |
|  Obligations under capital leases        |   |        315,346 |   |        315,346 |   |        443,544 |  |        443,544 |
|   Notespayable                           |   |      6,386,638                |   |      6,386,638                |   |      2,244,074                |  |      2,244,074 |

****

The following methods andassumptions were used in estimating the “fair value”disclosures for financial instruments in the accompanying financialstatements and notes thereto:

notes to consolidatedfinancials

Cash and cash equivalents,short-term investments, policy loans, accrued investment income andother long-term investments:  The carrying amounts reportedfor these financial instruments approximate their fairvalues.

Fixed maturities andEquity securities:  The fair values for fixed maturities andequity securities (including redeemable preferred stocks) are basedon quoted market prices.

Mortgage loans on realestate:  The fair values for mortgage loans are estimatedusing discounted cash flow analyses, using the actual spot rateyield curve in effect at December 31.

Investment-typecontracts:  The fair values for the liabilities underinvestment-type insurance contracts are calculated as surrendervalues on these contracts.

Policy claims, obligationsunder capital leases and notes payable:  The carrying amountsreported for these liabilities approximate their fairvalue.

The fair values forinsurance contracts other than investment contracts are notrequired to be disclosed under SFAS No. 107.

****

**NOTE  E - FederalIncome Tax**

Deferred income taxesreflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes. Significant components of the Company’s deferred taxliabilities and assets as of December 31 are as follows:
|                                                            |   | **2002**                                       |   | **2001**                                      |
|------------------------------------------------------------|---|------------------------------------------------|---|-----------------------------------------------|
| **Deferredtax liabilities:**                               |   |                                                |   |                                               |
|  Policy acquisition costs                             | $ |       5,878,363  | $ |       6,134,819 |
|   Netunrealized gain on available-for-sale securities |   |       7,949,865  |   |       2,955,604 |
|  Other                                                |   |        2,442,377 |   |       2,206,297 |
|     Total deferred taxliabilities           | $ |      16,270,605            | $ |      11,296,720           |
|                                                            |   |                                                |   |                                               |
| **Deferredtax assets:**                                    |   |                                                |   |                                               |
|  Benefit reserves                                     | $ |       3,399,056  | $ |       3,271,919 |
|  Other                                                |   |       1,542,579  |   |       1,791,376 |
|     Total deferred taxassets                | $ |       4,941,635  | $ |       5,063,295 |
|     Net deferred taxliabilities             | $ |      11,328,970            | $ |       6,233,425 |

notes to consolidatedfinancials

The reconciliation ofincome tax attributable to operations computed at the federalstatutory tax rate to income tax expense is:
|                                       | **2002** |  | **2001** |  | **2000** |
|---------------------------------------|----------|--|----------|--|----------|
|                                       |          |  |          |  |          |
| Statutoryfederal income tax rate      | 34.0%    |  | 34.0%    |  | 34.0%    |
| Small lifeinsurance company deduction | (13.2%)  |  | (10.1%)  |  | 0.0%     |
| Other                                 | (0.9%)   |  | 3.6%     |  | (1.1%)   |
|                                       |          |  |          |  |          |
|  Effective income tax rate       | 19.9%    |  | 27.5%    |  | 32.9%    |

****

At December 31, 2002,approximately $4,000,000 of the Retained earnings of the Companyrepresents earnings prior to 1984 which accumulated in an accountknown as policyholders' surplus, which was not subject to incometaxation.  In certain circumstances, including ifdistributions are made to stockholders in excess of approximately$30,800,000, the Company could be subject to additional federalincome tax unrelated to its normal taxable income.  Noprovision for such income tax has been made at December 31,2002.

The Company made incometax payments of $393,200, $441,850 and $272,364 in 2002, 2001 and2000, respectively.

****

**NOTE  F - NotesPayable**

On June 28, 2002, theCompany entered into a long-term debt agreement with CherokeeNational in the amount of $4,000,000, with interest to be paidquarterly, at a rate equal to the prime rate, and due on June 28,2007.  The funds were used to purchase 400,000 shares ofCherokee National common stock valued at $4,000,000.  InDecember 2002, the 400,000 shares of common stock were exchangedfor 400,000 shares of Series A preferred stock.  The interestrate was 4.25% at December 31, 2002.  Interest expense andinterest paid on this note was $95,000 in 2002.

On September 30, 2002,Family Assignment entered into a long-term debt agreement withFarmers Bank and Capital Trust Co., Frankfort, Kentucky, byestablishing a line of credit in the amount of $2,000,000 withinterest to be paid monthly at a rate equal to the prime rate anddue September 30, 2003.  At December 31, 2002, $387,000 wasoutstanding on this note.  The purpose of this line of creditis to provide advance funding for funerals in exchange for anirrevocable assignment of life insurance policies from otherunaffiliated insurance companies.  The interest rate was 4.25%at December 31, 2002.  Interest expense and interest paid onthe note was $5,534 in 2002. 

On December 27, 2000, theCompany entered into a long-term debt agreement with Fifth ThirdBank in the amount of $2,000,000, at an interest rate of 8.5%, dueon December 27, 2005.  The funds were used to retire notespayable and to issue a surplus note to its subsidiary, InvestorsHeritage Life.  On May 1, 2001, the Company borrowed anadditional $400,000 on the note and the interest rate was adjustedto 1% under the prime

notes to consolidatedfinancials

rate.  The interestrate was 3.25% at December 31, 2002.  Interest expense andinterest paid on the note was $79,563 and $141,073 in 2002 and2001, respectively.

****

**NOTE  G - EmployeeBenefit Plans**

The Company participatesin a noncontributory retirement plan which covers substantially allemployees.  Benefits are based on years of service and thehighest consecutive 60 months average earnings within the last 120months of credited service.  Benefits are funded based onactuarially-determined amounts.

The following tablesprovide additional details for the Company on a consolidatedbasis. 
|                                                      |   | **2002**                                                                                                            |   | **2001**                                                                                                            |   | **2000**                                                     |
|------------------------------------------------------|---|---------------------------------------------------------------------------------------------------------------------|---|---------------------------------------------------------------------------------------------------------------------|---|--------------------------------------------------------------|
| **Change inbenefit obligation:**                     |   |                                                                                                                     |   |                                                                                                                     |   |                                                              |
|  Benefit obligation at beginning of year        | $ |      8,067,143                                                                                  | $ |      7,403,251                                                                                  | $ |      6,792,209                           |
|  Service cost                                   |   |        367,179                                                                   |   |        326,978                                                                   |   |        291,466            |
|  Interest cost                                  |   |        618,180                                                                   |   |        576,221                                                                   |   |        525,402            |
|  Actuarial loss                                 |   |        344,727                                                                   |   |        523,024                                                                   |   |         206,174           |
|  Benefits paid                                  |   |         (54,837)                                                            |   |       (762,331)                                                                       |   |       (412,000)                |
|  Benefit obligation at end of year              | $ |      9,342,392                                                                                  | $ |      8,067,143                                                                                  | $ |      7,403,251                           |
|                                                      |   |                                                                                                                     |   |                                                                                                                     |   |                                                              |
| **Change inplan assets:**                            |   |                                                                                                                     |   |                                                                                                                     |   |                                                              |
|   Fairvalue of plan assets at beginning of year | $ |      6,265,084                                                                                  | $ |      6,127,941                                                                                  | $ |      5,855,055                           |
|  Actual return on plan assets                   |   |        545,567                                                                   |   |        528,534                                                                   |   |        372,886            |
|  Employer contribution                          |   |        580,008                                                                   |   |        370,940                                                                   |   |        312,000            |
|  Benefits paid                                  |   |         (54,837)                                                            |   |       (762,331)                                                                       |   |       (412,000)                |
|   Fairvalue of plan assets at end of year       | $ |      7,335,822                                                                                  | $ |      6,265,084                                                                                  | $ |      6,127,941                           |
|                                                      |   |                                                                                                                     |   |                                                                                                                     |   |                                                              |
|  Funded status                                  | $ |     (2,006,570)                                                                                      | $ |     (1,802,059)                                                                                      | $ |     (1,275,310)                               |
|  Unrecognized net actuarial loss                |   |       1,929,279                                                                                 |   |      1,738,773                                                                                  |   |      1,298,935                           |
|  Unrecognized transition asset                  |   |                    - |   |                    - |   |         (34,143)     |
|  Unrecognized prior service credit              |   |         (56,161)                                                            |   |         (91,264)                                                            |   |       (126,367)                |
|  Accrued pension cost                           | $ |       (133,452)                                                                       | $ |       (154,550)                                                                       | $ |       (136,885)                |
|                                                      |   |                                                                                                                     |   |                                                                                                                     |   |                                                              |
| **Components of net periodic benefitcost:**          |   |                                                                                                                     |   |                                                                                                                     |   |                                                              |
|  Service cost                                   | $ |        367,179                                                                   | $ |        326,978                                                                   | $ |        291,466            |
|  Interest cost                                  |   |        618,180                                                                   |   |        576,221                                                                   |   |         525,402           |
|  Expected return on plan assets                 |   |       (563,858)                                                                       |   |       (551,111)                                                                       |   |       (525,433)                |
|  Recognized net loss                            |   |        172,512                                                                   |   |        105,763                                                                   |   |          68,830 |
|  Amortization of prior service credit           |   |         (35,103)                                                            |   |         (35,103)                                                            |   |         (35,103)     |
|  Amortization of transition asset               |   |                    - |   |         (34,143)                                                            |   |         (34,144)     |
|   Netperiodic benefit cost                      | $ |        558,910                                                                   | $ |        388,605                                                                   | $ |        291,018            |

notes to consolidatedfinancials

The discount rate used indetermining the actuarial present value of the projected benefitobligation was 7% in 2002 and 7.25% in 2001.  The rate ofincrease in future compensation levels was 4% for 2002 and 5% for2001 and 2000.  The expected long-term rate of return on planassets was 9% in 2002, 2001 and 2000.  At December 31, 2002,plan assets consist of an immediate participation group retirementannuity contract (a deposit administration contract) that iscomprised of funds held in a general account of Investors HeritageLife, which has a contract value of $6,610,422, and 31,000 sharesof the Company’s common stock with a fair value of$725,400.  The common stock of the Company is stated at fairvalue based upon quoted bid prices on the last day of the Planyear.

The Company also sponsorsa 401(k) defined contribution plan, which was amended on November27, 2002 to adopt the provisions of a 403(b) plan.  AtDecember 31, 2002 and 2001, plan assets consisted entirely of theCompany’s common stock, although employees have the option toinvest in select mutual funds.  The Company matches 100% ofemployee contributions invested in the Company’s stock. At December 31, 2002, the plan held Company stock of 297,734 shareswith a fair value of $6,966,975.  At December 31, 2001, theplan held Company stock of 273,000 shares with a fair value of$6,142,505.  Matching contributions to the plan expensed for2002, 2001 and 2000 were $273,745, $258,186 and $218,041,respectively.  Dividends paid to the plan on Company stockwere $105,244, $100,971 and $95,219 in 2002, 2001 and 2000,respectively.

****

**NOTE  H -Stockholders' Equity and Dividend Restrictions**

Statutory restrictionslimit the amount of dividends which may be paid by InvestorsHeritage Life.  Generally, dividends during any year may notbe paid, without prior regulatory approval, in excess of the lesserof (a) 10 percent of statutory stockholders' equity as of thepreceding December 31, or (b) statutory net income for thepreceding year.  In addition, dividends are limited to theamount of unassigned surplus reported for statutory purposes, whichwas $9,554,673 at December 31, 2002.

The Company's 1999 stockoption and stock appreciation rights plan became effective as ofSeptember 16, 1999. The 1999 plan authorizes the Company's board togrant non-qualified stock options and stock appreciation rights tothe Company's and its subsidiaries' key employees and non-employeedirectors. The Company authorized for issuance a total of 250,000shares of common stock under the 1999 plan and granted options topurchase 75,000 shares of common stock at $23.00 per share, all ofwhich vested on September 24, 2001.  None of the options havebeen exercised as of December 31, 2002 and options to purchase9,000 shares were terminated during 2002 because they were notexercised in a timely manner

Prior to 2002, the Companyaccounted for this plan under the recognition and measurementprovisions of APB Opinion No. 25, *Accounting for Stock Issued toEmployees,* and related Interpretations.  The Companyrecognized $26,400 of

notes to consolidatedfinancials

compensation expense in2002 relative to the outstanding options, as the market value ofthe Company’s stock exceeded the exercise price of theoptions.  No stock-based employee compensation cost wasreflected in 2001 or 2000 net income, as all options granted underthose plans had an exercise price less than or equal to the marketvalue of the underlying common stock at those dates. Effective January 1, 2002, the company adopted the fair valuerecognition provisions of FASB Statement No. 123, *Accounting forStock-Based Compensation* as amended by FASB Statement No. 148,*Accounting for Stock-Based Compensation—Transition andDisclosure*.* * The adoption of these statements hadno impact on the Company’s financialstatements.**

**NOTE  I -Statutory Accounting Practices**

Investors Heritage Life isdomiciled in the Commonwealth of Kentucky and prepares itsstatutory-basis financial statements in accordance with accountingpractices prescribed or permitted by the Kentucky Department ofInsurance (the "Department").  Effective January 1, 2001,Kentucky adopted the National Association of InsuranceCommissioners’ statutory accounting practices as the basis ofits statutory accounting practices.  The revised practiceschanged, to some extent, prescribed statutory accounting practicesand resulted in changes to the accounting practices that InvestorsHeritage Life uses to prepare its statutory-basis financialstatements.  The primary statutory changes affecting InvestorsHeritage Life were the establishment of deferred income taxes,recognition of realized losses for investment impairments which aredeemed other than temporary, and recognition of an estimate foranticipated guaranty fund assessments and premium tax offsetsrelated to future insolvencies.  As of January 1, 2001,Investors Heritage Life reported the cumulative effect of changesin accounting principles related to the adoption of codification asa direct increase in surplus of $844,536.

Investors Heritage Life'sstatutory-basis capital and surplus was $15,469,029 and $14,907,971at December 31, 2002 and 2001, respectively.  Statutory-basisnet income (loss) was $399,728, $1,295,706 and $(335,535) for 2002,2001 and 2000, respectively.

****
|  |
|--|

notes to consolidatedfinancials

**NOTE  J - Segmentand Reinsurance Data**

SFAS No. 131, "Disclosuresabout Segments of an Enterprise and Related Information", requiresa "management approach" (how management internally evaluates theoperating performance of its business units) in the presentation ofbusiness segments. The segment data that follows has been preparedin accordance with SFAS No. 131.

The Company operates infour segments as shown in the following table.  All segmentsinclude both individual and group insurance.  Identifiablerevenues, expenses and assets are assigned directly to theapplicable segment.  Net investment income and invested assetsare generally allocated to the insurance and the corporate segmentsin proportion to policy liabilities and stockholders' equity,respectively.  Certain assets, such as property and equipmentand leased property under capital leases, are assigned to theCorporate segment.  Goodwill has been allocated to theinsurance lines based upon the mix of business of companiesacquired. Results for the parent company, Investors HeritagePrinting, Investors Heritage Financial, and Family Assignment,after elimination of intercompany amounts, are allocated to theCorporate segment.
|                                                 |   | **2002**                                                                                                      |   | **2001**                                                                                                      |   | **2000**                                                                                           |
|-------------------------------------------------|---|---------------------------------------------------------------------------------------------------------------|---|---------------------------------------------------------------------------------------------------------------|---|----------------------------------------------------------------------------------------------------|
|                                                 |   |                                                                                                               |   | **(000's omitted)**                                                                                           |   |
| **Revenue:**                                    |   |                                                                                                               |   |                                                                                                               |   |                                                                                                    |
|  Preneed and burial products               | $ | 56,538                                                                                                        | $ | 53,487                                                                                                        | $ | 50,529                                                                                             |
|  Traditional and universal life products   |   | 13,484                                                                                                        |   | 13,401                                                                                                        |   | 13,007                                                                                             |
|  Credit insurance products and             |   |                                                                                                               |   |                                                                                                               |   |                                                                                                    |
|      administrativeservices |   | 246                                                                                                           |   | 395                                                                                                           |   | 423                                                                                                |
|  Corporate and other                       |   | 3,219                                                                                                         |   | 3,105                                                                                                         |   | 1,468                                                                                              |
|                                                 | $ | 73,487                                                                                                        | $ | 70,388                                                                                                        | $ | 65,427                                                                                             |
|                                                 |   |                                                                                                               |   |                                                                                                               |   |                                                                                                    |
| **Pre-taxincome from operations:**              |   |                                                                                                               |   |                                                                                                               |   |                                                                                                    |
|  Preneed and burial products               | $ | 631                                                                                                           | $ | 2,205                                                                                                         | $ | 1,358                                                                                              |
|  Traditional and universal life products   |   | 770                                                                                                           |   | 1,467                                                                                                         |   | 667                                                                                                |
|  Credit insurance products and             |   |                                                                                                               |   |                                                                                                               |   |                                                                                                    |
|      administrativeservices |   | 27                                                                                                            |   | 72                                                                                                            |   | 113                                                                                                |
|  Corporate and other                       |   |            1,353                                       |   |            1,479                                       |   |               106            |
|                                                 | $ | 2,781                                                                                                         | $ | 5,223                                                                                                         | $ | 2,244                                                                                              |
|                                                 |   |                                                                                                               |   |                                                                                                               |   |                                                                                                    |
| **Assets:**                                     |   |                                                                                                               |   |                                                                                                               |   |                                                                                                    |
|  Preneed and burial products               | $ | 247,633                                                                                                       | $ | 231,778                                                                                                       | $ | 216,149                                                                                            |
|  Traditional and universal life products   |   | 72,203                                                                                                        |   | 70,690                                                                                                        |   | 69,361                                                                                             |
|  Credit insurance products and             |   |                                                                                                               |   |                                                                                                               |   |                                                                                                    |
|      administrativeservices |   |          22,119                                                  |   |          26,222                                                  |   |          27,413                                       |
|  Corporate and other                       |   | 85,086                                                                                                        |   | 62,088                                                                                                        |   | 53,013                                                                                             |
|                                                 | $ | 427,041                                                                                                       | $ | 390,778                                                                                                       | $ | 365,936                                                                                            |
|                                                 |   |                                                                                                               |   |                                                                                                               |   |                                                                                                    |
| **Amortization and depreciationexpense:**       |   |                                                                                                               |   |                                                                                                               |   |                                                                                                    |
|  Preneed and burial products               | $ | 6,658                                                                                                         | $ | 5,689                                                                                                         | $ | 5,514                                                                                              |
|  Traditional and universal life products   |   | 1,475                                                                                                         |   | 1,820                                                                                                         |   | 1,789                                                                                              |
|  Credit insurance products and             |   |                                                                                                               |   |                                                                                                               |   |                                                                                                    |
|      administrativeservices |   |                   2 |   |                   4 |   |                 11 |
|  Corporate and other                       |   | 420                                                                                                           |   | 443                                                                                                           |   | 440                                                                                                |
|                                                 | $ | 8,555                                                                                                         | $ | 7,956                                                                                                         | $ | 7,754                                                                                              |

****
|  |
|--|

Total premiums cededamounted to $15,639,041, $17,402,598 and $19,371,941 in 2002, 2001and 2000, respectively, and commissions and expense allowancesreceived were $7,111,893, $8,164,277 and $8,992,753 in 2002, 2001and 2000, respectively. Unearned premium reserves were reduced by$18,930,351 and $21,510,347 at December 31, 2002 and 2001,respectively, for credit-related reinsurance transactions. Benefitrecoveries associated with the Company's ceded reinsurancecontracts were $10,797,949, $10,287,905 and $7,786,428 in 2002,2001 and 2000, respectively. The Company remains contingentlyliable on all ceded insurance should any reinsurer be unable tomeet their obligations. Assumed reinsurance premiums were$3,005,190, $2,526,269 and $2,374,686 in 2002, 2001 and 2000,respectively.

****

**NOTE  K -Contingent Liabilities**

The Company is named as adefendant in a number of legal actions arising primarily fromclaims made under insurance policies. Management and its legalcounsel are of the opinion that the settlement of those actionswill not have a material adverse effect on the financial positionor results of operations.

In most of the states inwhich the Company is licensed to do business, guaranty fundassessments may be taken as a credit against premium taxes over afive year period.  These assessments, brought about by theinsolvency of life and health insurers, are levied at thediscretion of the various state guaranty fund associations to coverassociation obligations.  It is management's opinion that theeffect of any future assessments would not be material on thefinancial position or results of operations of the Company becauseof the use of premium tax off-sets.

notes to consolidatedfinancials

****

**NOTE L - QuarterlyFinancial Data (Unaudited)**

The following tables showthe unaudited quarterly financial data for the Company.
| **2002**                         |   | **1st Quarter**                                                                          |   | **2nd Quarter**                                                                          | **3rd Quarter** |                                                                                          | **4th Quarter** |
|----------------------------------|---|------------------------------------------------------------------------------------------|---|------------------------------------------------------------------------------------------|-----------------|------------------------------------------------------------------------------------------|-----------------|
|                                  |   |                                                                                          |   |                                                                                          |                 |                                                                                          |                 |  |
| Premiums                         | $ |     13,894,768                                                            | $ |     13,660,126                                                            | $               |     12,945,156                                                            | $               |     12,564,128 |
| Totalrevenue                     |   |     18,927,486                                                            |   |     18,864,044                                                            |                 |     18,105,020                                                            |                 |     17,590,127 |
| Net income(loss)                 |   |       (320,106)                                            |   |         531,112                                  |                 |         417,919                                  |                 |         627,884 |
| Basicearnings (loss) per share   |   | (0.28)                                                                                   |   | 0.47                                                                                     |                 | 0.37                                                                                     |                 | 0.55 |
| Dilutedearnings (loss) per share |   | (0.28)                                                                                   |   | 0.47                                                                                     |                 | 0.37                                                                                     |                 | 0.55 |
|                                  |   |                                                                                          |   |                                                                                          |                 |                                                                                          |                 |  |
| **2001**                         |   | **1st Quarter**                                                                          |   | **2nd Quarter**                                                                          |                 | **3rd Quarter**                                                                          |                 | **4th Quarter** |
|                                  |   |                                                                                          |   |                                                                                          |                 |                                                                                          |                 |  |
| Premiums                         | $ | 12,320,718                                                                               | $ | 12,897,136                                                                               | $               | 12,723,215                                                                               | $               | 11,889,480 |
| Totalrevenue                     |   | 17,180,515                                                                               |   | 17,807,407                                                                               |                 | 18,037,007                                                                               |                 | 17,362,726 |
| Netincome                        |   | 692,176                                                                                  |   | 794,815                                                                                  |                 | 948,761                                                                                  |                 | 1,348,589 |
| Basicearnings per share          |   | 0.60                                                                                     |   | 0.71                                                                                     |                 | 0.73                                                                                     |                 | 1.29 |
| Dilutedearnings per share        |   |               0.60 |   |               0.71 |                 |               0.73 |                 |               1.29 |

stock information

OTC BULLETIN BOARDMARKET QUOTATIONS

                                   **2002 Market Price Range**

           

                                   March           June              Sept.                Dec.

                                   22.50-23.00      23.00-26.50      24.50-23.10      23.30-23.85                  

****

**KIILogo**                    2002 Annual Dividend Per Share - $.38

                                   __________________________________

               

**2001 Market PriceRange**

March             June                Sept.                Dec.

20.50-20.63     19.80-20.50      19.80-20.70      20.70-22.50

2001 Annual Dividend PerShare - $.38

__________________________________

           

The stock of KentuckyInvestors is quoted on the OTC Bulletin Board. The quotationsreflect inter-dealer prices, without retail mark-up, mark-down orcommission, and may not represent actual transactions. The symbolfor Kentucky Investors is KINV.

The 2003 cash dividend tobe paid to its stockholders by Kentucky Investors on April 7, 2003is $.38 per share.

**ANNUALMEETING**

****

The 2003 meeting ofshareholders of Kentucky Investors is scheduled for 11 a.m. on May8, 2003 at the company auditorium, Second and Shelby Streets,Frankfort, Kentucky.

**FORM10-K**

A copy of the Form 10-KAnnual Report to the Securities and Exchange Commission for theCompany can be obtained upon request to the Secretary.

**TRANSFERAGENT**

Investors Heritage LifeInsurance Company

Stock TransferDepartment

P.O. Box 717

Frankfort, Kentucky40602-0717

(800) 422-2011, ext.1009

(502) 209-1009