##### Table of Contents



Securities and Exchange Commission

Washington, D. C. 20549


FORM 10-K

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934   
|  |  |                                                                                         
|  |  | For the fiscal year ended December 31, 2002                                             
|  |  |                                                                                         
|  |  | OR                                                                                      
|  |  |                                                                                         
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to

Commission File Number 2-39729

Cotton States Life Insurance Company




(Exact name of registrant as specified in its charter)


|                        |  |                    
|----------------------- |  | -------------------
|Georgia                 |  | 58-0830929         
|                        |  |                    
|(State of incorporation |  | (I.R.S. Employer   
|and jurisdiction)       |  | Identification No.)

|                                                     |  |           
|---------------------------------------------------- |  | ----------
|244 Perimeter Center Parkway, N.E., Atlanta, Georgia |  | 30346     
|                                                     |  |           
|(Address of principal executive offices)             |  | (Zip code)

Registrants telephone number, including area code: (404) 391-8600

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

NONE

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

EXEMPT-UNDER SECTION 12(g)(2)(G)

Indicate by check mark whether the registrant has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and has been subject to the filing requirements for at
least the past 90 days.

YES [X]     NO [  ]

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 126-2)

YES [  ]      NO [X]

The aggregate market value of voting stock held by non-affiliates was
$38,797,911 based on the closing price of $9.18 on February 1, 2003, as
reported on the NASDAQ National Market.

As of February 1, 2003, there were 6,328,737 shares of registrants common
stock outstanding.

The Exhibit Index is located on Page 59

The total number of pages in this document is 65

1



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TABLE OF CONTENTS



|                                                                |  |  |  |  |  |  |  | 
|--------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                                         
|PART II                                                        
|PART III                                                       
|PART IV                                                        
|REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES
|SIGNATURES                                                     
|Certification Pursuant to Registrants                          
|Certification Pursuant to Registrants                          
|EX-11 Computation of Per Share Earnings                        
|EX-21 Subsidiaries of the Registrant                           
|EX-23.1 Consent of Auditors                                    
|EX-23.2 Consent of Public Accountants                          



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##### Table of Contents






PART I

ITEM 1. BUSINESS

General

Cotton States Life Insurance Company (the Company) was organized under
the laws of the State of Georgia in 1955. The Company is currently licensed to
transact business in Alabama, Florida, Georgia, Kentucky, Louisiana,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia. The
Company currently markets only individual life insurance, payroll deduction
life insurance, guaranteed issue and simplified issue life insurance and
individual annuities.

On February 21, 2002, the Company filed notice of its intent to withdraw
its multi-line exclusive agents from Kentucky primarily due to losses incurred
by the Companys affiliate, Cotton States Mutual Insurance Company. Without
objection from the Kentucky Department of Insurance, the Companys withdrawal
plan was accepted pursuant to Kentucky insurance regulations.

In July of 1989, the Company formed CSI Brokerage Services, Inc. (CSI).
CSI brokers insurance products for the Companys exclusive agents not offered
by the Companys affiliated property and casualty companies.

In November of 1989, the Company acquired 60% of the outstanding common
stock of Cotton States Marketing Resources, Inc. (CSMR). During 1992, the
Company acquired the remaining 40% of CSMRs stock. CSMR brokers through the
Companys exclusive agents other insurance companies life and accident and
health products not underwritten by the Company.

Financial Information About Industry Segments

The Companys operations can be grouped into three major segments: (i)
individual life insurance, (ii) guaranteed issue and simplified issue life
insurance, and (iii) brokerage operations. These segments are differentiated
primarily by their respective methods of distribution and the nature of related
products, as the Companys operations in each segment are concentrated within
its southeastern states geographic market. Individual life insurance products
are distributed through the Companys multi-line exclusive agents, guaranteed
issue and simplified issue products are distributed through independent agents
as well as exclusive agents, and brokerage operations involve third party
products distributed through the Companys exclusive and independent agents.
The Company does not group items on the consolidated balance sheet into
segments, nor does it analyze those items by segment when making management
decisions. The Company allocates net investment income and net realized gains
to its individual life insurance and guaranteed issue and simplified issue life
insurance segments based on the ratio of each segments reserves to total
reserves. Net investment income and net realized gains for the Companys
brokerage segment is based on actual amounts earned by its brokerage
subsidiaries.

2



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##### Table of Contents



|                                                                |                                                   |                                    |            |            |            |      |           |            |            |  |            |            |            | 
|--------------------------------------------------------------- | ------------------------------------------------- | ---------------------------------- | ---------- | ---------- | ---------- | ---- | --------- | ---------- | ---------- |  | ---------- | ---------- | ---------- | 
|                                                                |                                                   |                                    |            | 2002       |            | 2001 |           | 2000      
|                                                                |                                                   |                                    |            |            |            |      |           |           
|Individual life insurance:                                      |                                                   |                                    |            |            |            |      |           |            |            |  |            |           
|                                                                | Premiums                                          |                                    | $          | 19,347,710 |            |      |           | 18,658,255 |            |  |            | 17,816,354 |           
|                                                                | Net investment income                             |                                    |            | 8,857,310  |            |      |           | 9,458,445  |            |  |            | 9,403,578  |           
|                                                                | Realized investment gains                         |                                    |            | 935,571    |            |      |           | 24,969     |            |  |            | 160,104    |           
|                                                                |                                                   |                                    |            |            |            |      |           |            |            |  |            |           
|                                                                |                                                   | Total revenue                      |            |            | 29,140,591 |      |           |            | 28,141,669 |  |            |            | 27,380,036 | 
|                                                                | Policyholder benefits and claims                  |                                    |            | 9,478,267  |            |      |           | 8,821,942  |            |  |            | 8,139,214  |           
|                                                                | Interest credited                                 |                                    |            | 5,904,423  |            |      |           | 5,527,001  |            |  |            | 5,198,089  |           
|                                                                | Amortization of deferred policy acquisition costs |                                    |            | 2,084,635  |            |      |           | 3,248,281  |            |  |            | 2,273,031  |           
|                                                                | Other operating expenses                          |                                    |            | 5,143,895  |            |      |           | 5,257,470  |            |  |            | 4,830,481  |           
|                                                                |                                                   |                                    |            |            |            |      |           |            |            |  |            |           
|                                                                |                                                   | Total benefits and expenses        |            |            | 22,611,220 |      |           |            | 22,854,694 |  |            |            | 20,440,815 | 
|                                                                |                                                   |                                    |            |            |            |      |           |            |            |  |            |           
|                                                                |                                                   | Segment profit before income taxes |            |            | 6,529,371  |      |           |            | 5,286,975  |  |            |            | 6,939,221  | 
|                                                                |                                                   |                                    |            |            |            |      |           |            |            |  |            |           
|Guaranteed issue and simplified issue life insurance:           |                                                   |                                    |            |            |            |      |           |            |            |  |            |           
|                                                                | Premiums                                          |                                    |            | 12,438,241 |            |      |           | 10,529,996 |            |  |            | 8,106,634  |           
|                                                                | Net investment income                             |                                    |            | 952,774    |            |      |           | 775,780    |            |  |            | 540,200    |           
|                                                                | Realized investment gains                         |                                    |            | 101,134    |            |      |           | 2,532      |            |  |            | 9,670      |           
|                                                                |                                                   |                                    |            |            |            |      |           |            |            |  |            |           
|                                                                |                                                   | Total revenue                      |            |            | 13,492,149 |      |           |            | 11,308,308 |  |            |            | 8,656,504  | 
|                                                                | Policyholder benefits and claims                  |                                    |            | 9,332,175  |            |      |           | 7,656,444  |            |  |            | 5,728,786  |           
|                                                                | Amortization of deferred policy acquisition costs |                                    |            | 1,676,350  |            |      |           | 1,218,431  |            |  |            | 941,079    |           
|                                                                | Other operating expenses                          |                                    |            | 2,001,826  |            |      |           | 1,913,723  |            |  |            | 1,427,835  |           
|                                                                |                                                   |                                    |            |            |            |      |           |            |            |  |            |           
|                                                                |                                                   | Total benefits and expenses        |            |            | 13,010,351 |      |           |            | 10,788,598 |  |            |            | 8,097,700  | 
|                                                                |                                                   |                                    |            |            |            |      |           |            |            |  |            |           
|                                                                |                                                   | Segment profit before income taxes |            |            | 481,798    |      |           |            | 519,710    |  |            |            | 558,804    | 
|                                                                |                                                   |                                    |            |            |            |      |           |            |            |  |            |           
|Brokerage:                                                      |                                                   |                                    |            |            |            |      |           |            |            |  |            |           
|                                                                | Brokerage commissions                             |                                    |            | 4,242,470  |            |      |           | 4,190,482  |            |  |            | 4,197,173  |           
|                                                                | Net investment income                             |                                    |            | 18,880     |            |      |           | 48,397     |            |  |            | 147,003    |           
|                                                                | Realized investment gains                         |                                    |            |           |            |      |           |           |            |  |            | 236,160    |           
|                                                                |                                                   |                                    |            |            |            |      |           |            |            |  |            |           
|                                                                |                                                   | Total revenue                      |            |            | 4,261,350  |      |           |            | 4,238,879  |  |            |            | 4,580,336  | 
|                                                                | Operating expenses                                |                                    |            | 966,955    |            |      |           | 1,106,448  |            |  |            | 1,154,992  |           
|                                                                |                                                   |                                    |            |            |            |      |           |            |            |  |            |           
|                                                                |                                                   | Segment profit before income taxes |            |            | 3,294,395  |      |           |            | 3,132,431  |  |            |            | 3,425,344  | 
|                                                                |                                                   |                                    |            |            |            |      |           |            |            |  |            |           
|Combined segment profit before income taxes                     |                                                   |                                    | 10,305,564 |            |            |      | 8,939,116 |            |            |  | 10,923,369 |           
|Group life insurance and individual
accident and health results |                                                   |                                    | (35,819    | )          |            |      | (74,560   | )          |            |  | (70,097    | )         
|                                                                |                                                   |                                    |            |            |            |      |           |            |            |  |            |           
|Income before Federal income taxes                              |                                                   | $                                  | 10,269,745 |            |            |      | 8,864,556 |            |            |  | 10,853,272 |           
|                                                                |                                                   |                                    |            |            |            |      |           |            |            |  |            |           

Narrative Description of Business Segments

(i) Individual Life

The major forms of individual life insurance offered by the Company
include universal life, graded premium whole life, participating whole life,
term insurance, various supplemental riders including, but not limited to,
accidental death, disability waiver and guaranteed insurability, and disability
income riders. These products are sold by the Companys 272 multi-line
exclusive agents in Alabama, Florida, Georgia, and Tennessee.

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The Company offers its insurance through multi-line exclusive agents who
also write all lines of property and casualty insurance offered by Cotton
States Mutual Insurance Company (Mutual) and its subsidiary, Shield Insurance
Company (Shield) (collectively, the Cotton States Group). See Item 13 of
this report for an explanation of the relationship between the Company, Mutual,
and Shield. Multi-line exclusive agents are under contract to the Company,
Mutual, and Shield, and are paid on a commission basis. The Companys
multi-line exclusive agents are located in the following states:

|      |  |                  |     |      |  |       |     |  |  |  |           |  |  | 
|----- |  | ---------------- | --- | ---- |  | ----- | --- |  |  |  | --------- |  |  | 
|      |  | Number of Agents |     |      |  |       |     | 
|      |  |                  |     |      |  |       |     | 
|      |  | December 31,     |     |      |  |       |     | 
|      |  |                  |     |      |  |       |     | 
|      |  | 2002             |     | 2001 |  | State |     | 
|      |  |                  |     |      |  |       |     | 
|      |  |                  | 52  |      |  |       | 54  |  |  |  | Alabama   |  |  | 
|      |  |                  | 24  |      |  |       | 24  |  |  |  | Florida   |  |  | 
|      |  |                  | 169 |      |  |       | 163 |  |  |  | Georgia   |  |  | 
|      |  |                  | 27  |      |  |       | 25  |  |  |  | Tennessee |  |  | 
|      |  |                  |     |      |  |       |     |  |  |  |           |  |  | 
|Total |  |                  | 272 |      |  |       | 266 |  |  |  |           |  |  | 
|      |  |                  |     |      |  |       |     |  |  |  |           |  |  | 

Unless the need for a medical examination is indicated by the application
or an investigation, the Company writes individual life insurance based on age
without requiring blood and specimen in the following maximum amounts:

|            |       |                   |        |         |  | 
|----------- | ----- | ----------------- | ------ | ------- |  | 
|Age Group   |       | Maximum Insurance
|            |       |                  
|            | 0-17  |                   | $      | 100,000 | 
|            | 18-40 |                   |        | 74,999  | 
|            | 41-50 |                   |        | 50,000  | 
|51 and over |       |                   | 25,000 |        

As of December 31, 2002, less than 2.4% of the Companys individual life
premiums were represented by what the Company believes to be substandard risks.
Substandard life insurance risks are accepted by the Company at increased
rates. The Company has no fixed maximum on the size of substandard policies
and will entertain any application on which it can obtain reinsurance which it
believes to be adequate.

The Company, as do others in the insurance industry, reinsures with other
companies portions of the individual life insurance policies it underwrites.
Reinsurance enables an insurance company to write a policy in an amount larger
than the risk it desires to assume. A contingent liability exists on insurance
ceded to the reinsurer which might become a liability of the Company in the
event that the reinsurer fails to meet its obligations under the reinsurance
treaty.

The Company presently retains, with respect to individual life policies,
generally no more than $100,000 of insurance on any one life, which may be
reduced, depending upon the age and the physical classification of the insured.
All accidental death riders are 100% reinsured.

(ii) Guaranteed Issue and Simplified Issue Whole Life Insurance

The Company offers Guaranteed Issue and Simplified Issue whole life
insurance through its multi-line agency force and approximately 4,300
independent agents. The independent agents sell these products in all states
in which the Company is licensed to conduct business.

Both plans are level-premium, cash value permanent life insurance products
issued from $2,500 to $35,000 face amounts. Both plans are frequently used by
individuals to cover final expenses. They are designed to be sold as companion
plans using a simple application and no medical exams or tests. If all health
questions asked of the applicant by the Company can be answered NO, the
Simplified Issue policy may be issued. Otherwise, the Guaranteed Issue policy
will be issued.

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Guaranteed Issue whole life is available for issue ages 46-80. The death
benefit in policy years one through three is limited to a return of premium
plus 10%. However, the full death benefit is payable in all years in case of
accidental death. After three years, the full death benefit is payable for any
cause of death.

Simplified Issue whole life is available for issue ages 0-80. The full
death benefit is payable from the issue date.

(iii) Brokerage

The Company owns two brokerage subsidiaries, CSI and CSMR. CSI provides
the Company with commission income from brokerage agreements with other
property and casualty insurance carriers. These carriers supply the Companys
multi-line agents with property and casualty products that the Companys
affiliated property and casualty companies do not underwrite, such as
non-standard auto insurance, crop hail insurance, multi-peril crop insurance,
mobile home insurance, poultry house insurance and flood insurance.

Approximately 74% of CSIs brokerage revenues come from the sale of
non-standard auto insurance through two carriers. Approximately 8% of CSIs
revenue comes from the sale of crop hail and multi-peril crop insurance through
one carrier.

CSMR provides the Company with commission income from brokerage agreements
with other life and health insurance companies. These companies supply the
Companys multi-line agents with life and health products that the Company does
not choose to underwrite, such as individual major-medical policies, impaired
risk life insurance, first to die life insurance, and group life and health
insurance. CSMR has contracted with approximately 4,300 independent agents to
write the Companys Guaranteed Issue and Simplified Issue whole life insurance.
Approximately 56% of CSMRs brokerage revenues come from the sale of life and
health insurance through four carriers.

Regulation

The Company, like other insurance companies, is subject to regulation and
supervision by the states in which it transacts business. The insurance laws
of these states confer upon supervisory authorities broad administrative powers
relating to (i) the regulation and revocation of licenses to transact business,
(ii) the regulation of trade practices, (iii) the licensing of agents, (iv) the
approval of the form and content of policies and advertising, (v) the
depositing of securities for the benefit of policyholders, (vi) the type and
amount of investments permitted, and (vii) the maintenance of specified
reserves and capital for the protection of policyholders. In general,
insurance laws and regulations are designed primarily to protect policyholders
rather than shareholders.

The Company is also required under these laws to file detailed annual
reports with the supervisory agencies in each of the states in which it does
business. Under the rules of the National Association of Insurance
Commissioners (NAIC), the Companys records are examined periodically by one
or more of the state supervisory agencies.

Employees

In addition to its principal officers, the Company shares 124 salaried
employees with Shield and Mutual. The Company pays an allocated portion of the
shared employees salaries, either based upon the Companys premium income in
relation to the premium income of Mutual and Shield or the actual time expended
on each companys affairs. The Company and its subsidiaries also have 33
salaried employees who work on a full-time basis in its home office, where all
administrative functions, such as underwriting, billing and collection of
premiums, are centralized and from which all sales activities are directed.
None of the Companys employees is subject to a collective bargaining
agreement. The Company believes its employee relations are good.

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Competition

The Company operates in a highly competitive industry. It competes with a
large number of stock and mutual insurance companies. Larger stock and mutual
insurance companies may have a competitive advantage in that they have greater
financial and human resources that enable them to offer more diversified lines
of coverage and develop new products faster. Mutual companies may also have an
additional advantage compared to stock insurers because all profits of mutual
companies accrue to the policyholders. In order to keep pace with trends in
the industry, the Company introduces new products with premium rates and
benefits that it believes are competitive with the industry.

The Company has certain advantages that it believes better enables it to
keep its premium rates competitive with similar policies offered by competing
companies, including the following:



| | 1. |  | The Company offers most of its insurance through the same
agents who write property and casualty insurance for Mutual and
Shield. The sale of insurance through the same agents who sell
property and casualty insurance enables the Company to incur less
agency development and sales expense than is customary in the
industry;
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Because the Companys agents can provide customers with
coverage for all major lines of individual insurance they may
utilize account selling. Account selling enables insureds to
contact one agent regarding their total insurance needs; and                                                                                 
|
| | 3. |  | The Company shares certain facilities, equipment and
personnel with Mutual and Shield. The Company believes that
sharing these expenses has a favorable impact on the ratio of
expenses to premium income and enables the Company to enjoy
economies of scale.                                                                    

ITEM 2. PROPERTIES

The Company, Mutual, and Shield occupy offices located at 244 Perimeter
Center Parkway, Atlanta, Georgia. The building is owned by a general
partnership composed of Mutual and Gold Kist Inc. (Gold Kist). The Company
has no ownership interest in the partnership. The facility consists of a
three-story office building containing approximately 260,000 square feet of
space of which the Company, Mutual and Shield share approximately 90,000 square
feet. The Company believes that the facility is suitable to its business.
Rental expense is allocated to the Company based on its proportionate share of
square footage occupied.

ITEM 3. LEGAL PROCEEDINGS

The Company is a defendant in various actions incidental to the conduct of
its business. While the ultimate outcome of these matters cannot be estimated
with certainty, management does not believe the actions are reasonably likely
to result in a material loss to the Company.

The Company has reached partial settlement regarding $900,000 in
reinsurance coverage. A lawsuit was initiated by the Company in the third
quarter of 2001. To date the Company has received $475,000 and continues to
seek additional recoveries against the reinsurance brokers through already
existing legal channels. The remaining amount outstanding is included in
Reinsurance receivable on the consolidated balance sheet.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

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PART II

ITEM 5. MARKET FOR THE COMPANYS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

On January 1, 2003, there were approximately 1,900 shareholders of the
Companys common stock.
The stock (symbol CSLI) is traded over-the-counter on the NASDAQ National
Market System. Price history as provided by NASDAQ and dividends declared
during the past two years are presented below:

|     |                |  |                 |       |          |  |          |       |  |  |  |     | 
|---- | -------------- |  | --------------- | ----- | -------- |  | -------- | ----- |  |  |  | --- | 
|     |                |  | Stock Price (1) |       | Dividend
|     |                |  | High            |       | Low      |  | Declared
|     |                |  |                 |       |          |  |         
|2002 |                |  |                 |       |          |  |          |       |  |  |  |    
|     | First Quarter  |  | $               | 10.50 |          |  |          | 9.41  |  |  |  | .04 | 
|     | Second Quarter |  |                 | 10.55 |          |  |          | 9.45  |  |  |  | 04  | 
|     | Third Quarter  |  |                 | 10.14 |          |  |          | 7.72  |  |  |  | 04  | 
|     | Fourth Quarter |  |                 | 10.10 |          |  |          | 8.25  |  |  |  | 04  | 
|2001 |                |  |                 |       |          |  |          |       |  |  |  |    
|     | First Quarter  |  | $               | 15.50 |          |  |          | 9.25  |  |  |  | 04  | 
|     | Second Quarter |  |                 | 12.97 |          |  |          | 10.95 |  |  |  | 04  | 
|     | Third Quarter  |  |                 | 12.00 |          |  |          | 8.30  |  |  |  | 04  | 
|     | Fourth Quarter |  |                 | 9.65  |          |  |          | 8.98  |  |  |  | 04  | 



---

|(1) |  | The prices presented above are sale prices which represent price between
broker-dealers and do not include mark-ups or mark-downs or any commission
to the broker-dealer. Therefore, the prices presented above do not
reflect prices in actual transactions.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

EQUITY COMPENSATION PLAN INFORMATION

The following table gives information about Common Stock that may be
issued upon the exercise of options, warrants, and rights under all existing
equity compensation plans as of December 31, 2002.

|                                                           |  |                     |         |                     |  |                  |      |                    |  |                     |         | 
|---------------------------------------------------------- |  | ------------------- | ------- | ------------------- |  | ---------------- | ---- | ------------------ |  | ------------------- | ------- | 
|                                                           |  |                     |         |                     |  |                  |      |                    |  | Number of          
|                                                           |  |                     |         |                     |  |                  |      |                    |  | securities         
|                                                           |  |                     |         |                     |  |                  |      |                    |  | remaining available
|                                                           |  |                     |         |                     |  |                  |      |                    |  | for future issuance
|                                                           |  |                     |         |                     |  |                  |      |                    |  | under equity       
|                                                           |  | Number of           |         |                     |  |                  |      | compensation plans
|                                                           |  | securities to be    |         |                     |  |                  |      | (excluding        
|                                                           |  | issued upon         |         | Weighted-average    |  | securities      
|                                                           |  | exercise of         |         | exercise price of   |  | reflected in 1st
|Plan Category                                              |  | outstanding options |         | outstanding options |  | column)         
|                                                           |  |                     |         |                     |  |                 
|Equity compensation
plans approved by
security holders     |  |                     | 104,532 |                     |  | $                | 4.69 |                    |  |                     | 512,647 | 
|Equity compensation
plans not approved
by security holders |  |                     | N/A     |                     |  |                  | N/A  |                    |  |                     | N/A     | 
|Total                                                      |  |                     | 104,532 |                     |  | $                | 4.69 |                    |  |                     | 512,647 | 

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ITEM 6. SELECTED FINANCIAL DATA

|                                                                      |  |                                  |             |               |  |               |             |               |  |               |             |      |  |  |             |  |  |  |             | 
|--------------------------------------------------------------------- |  | -------------------------------- | ----------- | ------------- |  | ------------- | ----------- | ------------- |  | ------------- | ----------- | ---- |  |  | ----------- |  |  |  | ----------- | 
|                                                                      |  | Ten-Year Selected Financial Data |             |               |  |              
|                                                                      |  |                                  |             |               |  |              
|                                                                      |  |                                  |             |               |  | 2001          |             | 2000          |  | 1999          |             | 1998 | 
|                                                                      |  | 2002                             |             | (As Restated) |  | (As Restated) |             | (As Restated) |  | (As Restated) |            
|                                                                      |  |                                  |             |               |  |               |             |               |  |              
|As of December 31                                                     |  |                                  |             |               |  |               |             |               |  |               |             |      |  |  |             |  |  |  |             | 
|Total assets                                                          |  | $                                | 261,810,004 |               |  |               | 234,780,338 |               |  |               | 211,300,570 |      |  |  | 190,516,318 |  |  |  | 180,773,289 | 
|                                                                      |  |                                  |             |               |  |               |             |               |  |               |             |      |  |  |             |  |  |  |             | 
|Total liabilities                                                     |  | $                                | 180,439,595 |               |  |               | 162,135,020 |               |  |               | 147,029,701 |      |  |  | 134,565,951 |  |  |  | 125,857,189 | 
|                                                                      |  |                                  |             |               |  |               |             |               |  |               |             |      |  |  |             |  |  |  |             | 
|Total shareholders equity                                            |  | $                                | 81,370,409  |               |  |               | 72,645,318  |               |  |               | 64,270,869  |      |  |  | 55,950,367  |  |  |  | 54,916,100  | 
|                                                                      |  |                                  |             |               |  |               |             |               |  |               |             |      |  |  |             |  |  |  |             | 
|Book value per share                                                  |  | $                                | 12.86       |               |  |               | 11.47       |               |  |               | 10.13       |      |  |  | 8.84        |  |  |  | 8.63        | 
|                                                                      |  |                                  |             |               |  |               |             |               |  |               |             |      |  |  |             |  |  |  |             | 
|Closing price per share                                               |  | $                                | 9.54        |               |  |               | 9.60        |               |  |               | 11.50       |      |  |  | 8.63        |  |  |  | 14.88       | 
|                                                                      |  |                                  |             |               |  |               |             |               |  |               |             |      |  |  |             |  |  |  |             | 
|Years ended December 31                                               |  |                                  |             |               |  |               |             |               |  |               |             |      |  |  |             |  |  |  |             | 
|Premiums                                                              |  | $                                | 33,092,092  |               |  |               | 30,220,737  |               |  |               | 26,816,523  |      |  |  | 23,302,097  |  |  |  | 19,935,354  | 
|                                                                      |  |                                  |             |               |  |               |             |               |  |               |             |      |  |  |             |  |  |  |             | 
|Net investment income,
realized investment gains
and brokerage income |  | $                                | 15,108,138  |               |  |               | 14,500,606  |               |  |               | 14,693,886  |      |  |  | 13,555,085  |  |  |  | 12,365,999  | 
|                                                                      |  |                                  |             |               |  |               |             |               |  |               |             |      |  |  |             |  |  |  |             | 
|Total revenue                                                         |  | $                                | 48,200,230  |               |  |               | 44,721,343  |               |  |               | 41,510,409  |      |  |  | 36,857,182  |  |  |  | 32,301,353  | 
|                                                                      |  |                                  |             |               |  |               |             |               |  |               |             |      |  |  |             |  |  |  |             | 
|Benefits and expenses                                                 |  | $                                | 37,930,485  |               |  |               | 35,856,787  |               |  |               | 30,657,137  |      |  |  | 26,673,847  |  |  |  | 21,916,010  | 
|                                                                      |  |                                  |             |               |  |               |             |               |  |               |             |      |  |  |             |  |  |  |             | 
|Net income                                                            |  | $                                | 7,308,874   |               |  |               | 6,445,672   |               |  |               | 7,606,215   |      |  |  | 7,327,945   |  |  |  | 7,240,585   | 
|                                                                      |  |                                  |             |               |  |               |             |               |  |               |             |      |  |  |             |  |  |  |             | 
|Basic net income per share                                            |  | $                                | 1.15        |               |  |               | 1.02        |               |  |               | 1.20        |      |  |  | 1.16        |  |  |  | 1.13        | 
|                                                                      |  |                                  |             |               |  |               |             |               |  |               |             |      |  |  |             |  |  |  |             | 
|Diluted net income per share                                          |  | $                                | 1.13        |               |  |               | .99         |               |  |               | 1.18        |      |  |  | 1.14        |  |  |  | 1.10        | 
|                                                                      |  |                                  |             |               |  |               |             |               |  |               |             |      |  |  |             |  |  |  |             | 
|Dividends per share                                                   |  | $                                | .160        |               |  |               | .160        |               |  |               | .160        |      |  |  | .160        |  |  |  | .160        | 
|                                                                      |  |                                  |             |               |  |               |             |               |  |               |             |      |  |  |             |  |  |  |             | 

|                                                                      |  |      |             |      |  |      |             |      |  |      |             |  |  |  |             |  |  |  |             | 
|--------------------------------------------------------------------- |  | ---- | ----------- | ---- |  | ---- | ----------- | ---- |  | ---- | ----------- |  |  |  | ----------- |  |  |  | ----------- | 
|                                                                      |  | 1997 |             | 1996 |  | 1995 |             | 1994 |  | 1993
|                                                                      |  |      |             |      |  |      |             |      |  |     
|As of December 31                                                     |  |      |             |      |  |      |             |      |  |      |             |  |  |  |             |  |  |  |             | 
|Total assets                                                          |  | $    | 165,337,309 |      |  |      | 148,824,187 |      |  |      | 139,381,979 |  |  |  | 124,412,468 |  |  |  | 116,237,515 | 
|                                                                      |  |      |             |      |  |      |             |      |  |      |             |  |  |  |             |  |  |  |             | 
|Total liabilities                                                     |  | $    | 115,941,296 |      |  |      | 105,910,335 |      |  |      | 99,694,942  |  |  |  | 90,855,648  |  |  |  | 85,285,402  | 
|                                                                      |  |      |             |      |  |      |             |      |  |      |             |  |  |  |             |  |  |  |             | 
|Total shareholders equity                                            |  | $    | 49,396,013  |      |  |      | 42,913,852  |      |  |      | 39,687,037  |  |  |  | 33,556,820  |  |  |  | 30,952,113  | 
|                                                                      |  |      |             |      |  |      |             |      |  |      |             |  |  |  |             |  |  |  |             | 
|Book value per share                                                  |  | $    | 7.72        |      |  |      | 6.71        |      |  |      | 6.23        |  |  |  | 5.28        |  |  |  | 5.10        | 
|                                                                      |  |      |             |      |  |      |             |      |  |      |             |  |  |  |             |  |  |  |             | 
|Closing price per share                                               |  | $    | 15.25       |      |  |      | 7.60        |      |  |      | 4.80        |  |  |  | 3.63        |  |  |  | 3.20        | 
|                                                                      |  |      |             |      |  |      |             |      |  |      |             |  |  |  |             |  |  |  |             | 
|Years ended December 31                                               |  |      |             |      |  |      |             |      |  |      |             |  |  |  |             |  |  |  |             | 
|Premiums                                                              |  | $    | 17,620,184  |      |  |      | 15,400,543  |      |  |      | 15,061,541  |  |  |  | 15,128,529  |  |  |  | 13,535,407  | 
|                                                                      |  |      |             |      |  |      |             |      |  |      |             |  |  |  |             |  |  |  |             | 
|Net investment income,
realized investment gains
and brokerage income |  | $    | 11,308,794  |      |  |      | 9,458,474   |      |  |      | 8,814,035   |  |  |  | 7,597,136   |  |  |  | 7,271,267   | 
|                                                                      |  |      |             |      |  |      |             |      |  |      |             |  |  |  |             |  |  |  |             | 
|Total revenue                                                         |  | $    | 28,928,978  |      |  |      | 24,859,017  |      |  |      | 23,875,576  |  |  |  | 22,725,665  |  |  |  | 20,806,674  | 
|                                                                      |  |      |             |      |  |      |             |      |  |      |             |  |  |  |             |  |  |  |             | 
|Benefits and expenses                                                 |  | $    | 20,451,884  |      |  |      | 18,735,863  |      |  |      | 18,548,121  |  |  |  | 18,333,697  |  |  |  | 18,149,664  | 
|                                                                      |  |      |             |      |  |      |             |      |  |      |             |  |  |  |             |  |  |  |             | 
|Net income                                                            |  | $    | 6,304,558   |      |  |      | 4,832,577   |      |  |      | 4,070,871   |  |  |  | 3,303,024   |  |  |  | 2,435,355   | 
|                                                                      |  |      |             |      |  |      |             |      |  |      |             |  |  |  |             |  |  |  |             | 
|Basic net income per share                                            |  | $    | .99         |      |  |      | .76         |      |  |      | .64         |  |  |  | .54         |  |  |  | .40         | 
|                                                                      |  |      |             |      |  |      |             |      |  |      |             |  |  |  |             |  |  |  |             | 
|Diluted net income per share                                          |  | $    | .96         |      |  |      | .74         |      |  |      | .63         |  |  |  | .51         |  |  |  | .39         | 
|                                                                      |  |      |             |      |  |      |             |      |  |      |             |  |  |  |             |  |  |  |             | 
|Dividends per share                                                   |  | $    | .126        |      |  |      | .102        |      |  |      | .072        |  |  |  | .060        |  |  |  | .051        | 
|                                                                      |  |      |             |      |  |      |             |      |  |      |             |  |  |  |             |  |  |  |             | 

Note: All share and per share amounts have been adjusted for the following stock splits:

|             |  |              
|------------ |  | -------------
|October 1995 |  | five-for-four
|April 1997   |  | five-for-four
|January 1998 |  | three-for-two

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##### Table of Contents



ITEM 7  MANAGEMENTS DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Statements made in the following discussion that state the Companys or
managements intentions, hopes, beliefs, expectations or predictions of the
future are forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements which represent the Companys
beliefs concerning future levels of sales and redemption of the Companys
products, investment spreads and yields, or the earnings and profitability of
the Companys activities, and the sufficiency of the Companys cash flows for
liquidity purposes.

Forward-looking statements are necessarily based on estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Companys control
and many of which are subject to change. These uncertainties and contingencies
could cause actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. Whether or
not actual results differ materially from forward-looking statements may depend
on numerous foreseeable and unforeseeable developments. Some may be national
in scope, such as general economic conditions, the possibility of war, changes
in tax law and changes in interest rates. Some may be related to the insurance
industry generally, such as pricing competition, regulatory developments and
industry consolidation. Others may relate to the Company specifically, such as
credit, volatility and other risks associated with the Companys investment
portfolio. Investors are also directed to consider other risks and
uncertainties discussed in documents filed by the Company with the Securities
and Exchange Commission. If the Companys assumptions and estimates are
incorrect or do not come to fruition, or if the Company does not achieve all of
these key factors, then the Companys actual performance could vary materially
from the forward-looking statements made herein. The Company disclaims any
obligation to update any forward-looking information.

Results of Operations
(Dollars in thousands)

|                                                     |                  |                                 |        |        |        |          |        |        |        |          |    |   |    |   |       |        |        |  |    |   |    |  
|---------------------------------------------------- | ---------------- | ------------------------------- | ------ | ------ | ------ | -------- | ------ | ------ | ------ | -------- | -- | - | -- | - | ----- | ------ | ------ |  | -- | - | -- | -
|Premiums                                             |                  | 2002                            |        | 2001   |        | Increase |        | 2000   |        | Increase
|                                                     |                  |                                 |        |        |        |          |        |        |        |         
|Guaranteed issue and simplified
issue life insurance |                  | $                               | 12,438 |        |        |          | 10,530 |        |        |          | 18 | % |    |   | 8,107 |        |        |  | 30 | %
|Individual life insurance:                           |                  |                                 |        |        |        |          |        |        |        |          |    |   |    |   |       |        |        |  |    |  
|                                                     | Traditional life |                                 |        | 6,776  |        |          |        | 6,285  |        |          |    | 8 | %  |   |       | 6,057  |        |  |    | 4 | % 
|                                                     | Universal life   |                                 |        | 12,572 |        |          |        | 12,373 |        |          |    | 2 | %  |   |       | 11,759 |        |  |    | 5 | % 
|                                                     |                  |                                 |        |        |        |          |        |        |        |          |    |   |    |   |       |        |        |  |    |  
|                                                     |                  | Total individual
life insurance |        |        | 19,348 |          |        |        | 18,658 |          |    |   | 4  | % |       |        | 17,816 |  |    |   | 5  | %
|                                                     |                  |                                 |        |        |        |          |        |        |        |          |    |   |    |   |       |        |        |  |    |  
|Other lines                                          |                  |                                 | 1,306  |        |        |          | 1,033  |        |        |          | 26 | % |    |   | 894   |        |        |  | 16 | %
|                                                     |                  |                                 |        |        |        |          |        |        |        |          |    |   |    |   |       |        |        |  |    |  
|                                                     |                  | Total premiums                  |        | $      | 33,092 |          |        |        | 30,221 |          |    |   | 10 | % |       |        | 26,817 |  |    |   | 13 | %
|                                                     |                  |                                 |        |        |        |          |        |        |        |          |    |   |    |   |       |        |        |  |    |  

Guaranteed issue and simplified issue life insurance premiums continued to show
significant growth for the three year period from 2000 to 2002, primarily as a
result of sustained production by the Companys independent agency force which
had approximately 4,300 agents under contract at December 31, 2002 compared to
approximately 4,400 in 2001 and approximately 3,900 in 2000. This product is
also distributed by the Companys multi-line exclusive agents and is available
for purchase over the Internet at the Companys home page
(www.cottonstatesinsurance.com).

Individual life insurance products are principally sold by the Companys
exclusive agent producers. Growth in individual life premiums largely reflects
an increase in production of the Companys participating whole
life product.

9



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##### Table of Contents



The exclusive agency force of 272 as of December 31, 2002 compares to 266 as of
the same date in 2001 and 252 in 2000. Other premiums consist of the Companys
participation in a Federally sponsored group life pool and income from a closed
block of individual accident and health business.

Investment Income and Realized Gains and Losses

The Company uses its positive cash flow primarily to purchase debt and equity
securities. Net investment income decreased 4% in 2002 compared to 2001,
increased 2% in 2001 compared to 2000, and increased 9% in 2000 compared to
1999. The decrease in 2002 is primarily a result of a decrease in the
annualized average yield to 5.9% compared to 6.7% for 2001 and 7.2% for 2000,
which occurred as a result of lower interest rates. The decreases in average
yields are partially offset by growth in the average investment portfolio.

Due to favorable market conditions caused by lower interest rates, the Company
realized net gains of approximately $2,900,000, $28,000, and $406,000 in 2002,
2001, and 2000, respectively, from the sale of fixed maturity and equity
securities.

During 2002 the Company sold a security out of its held-to-maturity portfolio
due to evidence of a significant deterioration in the issuers
creditworthiness. At the time of sale the security had an amortized cost of
$499,768. The Company realized a loss of $49,768 on the transaction.

During the second quarter of 2002 the Company realized a pre-tax investment
loss of $850,000 from the write-down of the carrying value of a WorldCom, Inc.
debt security. This write-down was the result of the Company determining that
an other-than-temporary impairment had occurred. This debt security was
subsequently disposed of in the third quarter of 2002 at an additional loss of
$41,000.

During the third quarter of 2002 the Company realized a pre-tax investment loss
of $120,000 from the write-down of the carrying value of Intel common stock.
This write-down was the result of the Company determining that an
other-than-temporary impairment had occurred.

During the fourth quarter of 2002 the Company realized a pre-tax investment
loss of $460,000 from the write-down of the carrying value of ten equity
securities and a pre-tax investment loss of $418,000 from the write-down of the
Companys investment in a limited partnership. These write-downs were the
result of the Company determining that an other-than-temporary impairment had
occurred.

Brokerage Commissions

Exclusive agents sell products that the Cotton States Group does not underwrite
(both life and property and casualty) but are provided through the Companys
brokerage operations, and for which the Company receives override commission.
Brokerage commissions for 2002 were flat as compared to 2001 due to decreased
override commissions on the sale of multi-peril crop and crop hail products.
This decrease in brokerage commissions was partially offset by an 11% increase
in commissions on the sale of non-standard automobile policies. Brokerage
commissions were flat in 2001 as compared to 2000 due to decreased override
commissions on the sale of life products. Brokerage commissions increased 10%
in 2000 compared to 1999 due primarily to increased sales of non-standard
automobile policies.

10



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##### Table of Contents



Benefits and Claims

Life benefits and claims, including reserve increases on traditional life and
guaranteed issue and simplified issue products are as follows (dollars in
thousands):

|                                      |                                 |                           |       |          |        |        |     |         |    |          |       |         |        |      |     |          |    |   |       |       |        |  |     |    |    |  
|------------------------------------- | ------------------------------- | ------------------------- | ----- | -------- | ------ | ------ | --- | ------- | -- | -------- | ----- | ------- | ------ | ---- | --- | -------- | -- | - | ----- | ----- | ------ |  | --- | -- | -- | -
|                                      |                                 |                           |       | 2002     |        | 2001   |     | 2000   
|                                      |                                 |                           |       |          |        |        |     |        
|                                      |                                 |                           |       | Benefits |        |        |     |         |    | Benefits |       |         |        |      |     | Benefits |    |   |       |      
|                                      |                                 |                           |       | and      |        | % of   |     | and     |    | % of     |       | and     |        | % of
|Benefits and Claims                   |                                 | Claims                    |       | Premium  |        | Claims |     | Premium |    | Claims   |       | Premium
|                                      |                                 |                           |       |          |        |        |     |         |    |          |       |        
|Guaranteed issue and
simplified issue |                                 | $                         | 9,332 |          |        |        | 75  | %       |    | $        | 7,656 |         |        |      | 73  | %        |    | $ | 5,729 |       |        |  | 71  | % 
|Individual life insurance:            |                                 |                           |       |          |        |        |     |         |    |          |       |         |        |      |     |          |    |   |       |       |        |  |     |   
|                                      | Traditional life                |                           |       | 4,772    |        |        |     | 70      | %  |          |       | 4,622   |        |      |     | 73       | %  |   |       | 4,261 |        |  |     | 70 | % 
|                                      | Universal life                  |                           |       | 4,706    |        |        |     | 37      | %  |          |       | 4,201   |        |      |     | 34       | %  |   |       | 3,878 |        |  |     | 33 | % 
|                                      |                                 |                           |       |          |        |        |     |         |    |          |       |         |        |      |     |          |    |   |       |       |        |  |     |   
|                                      | Total individual life insurance |                           |       | 9,478    |        |        |     | 49      | %  |          |       | 8,823   |        |      |     | 47       | %  |   |       | 8,139 |        |  |     | 46 | % 
|Other benefits and claims             |                                 |                           | 1,307 |          |        |        | 100 | %       |    |          | 1,073 |         |        |      | 104 | %        |    |   | 932   |       |        |  | 104 | % 
|                                      |                                 |                           |       |          |        |        |     |         |    |          |       |         |        |      |     |          |    |   |       |       |        |  |     |   
|                                      |                                 | Total Benefits and Claims |       | $        | 20,117 |        |     |         | 61 | %        |       | $       | 17,552 |      |     |          | 58 | % |       | $     | 14,800 |  |     |    | 55 | %
|                                      |                                 |                           |       |          |        |        |     |         |    |          |       |         |        |      |     |          |    |   |       |       |        |  |     |   

Benefits and claims, as a percentage of premium, fluctuate within a normal
range reflecting volatility in mortality, changes in mix of business, and age
of policyholders. Guaranteed issue and simplified issue experience for the
three year period is consistent with the Companys future expectations for
those products as the block of business matures. Individual life benefits
increased in 2002 compared to 2001 due to higher traditional life reserve
increases, which were the result of an overall improvement in persistency.
Death benefits for 2002 were consistent with managements expectations. Death
benefits in 2001 compared to 2000 slightly exceeded managements expectations
due to an unusual increase in mortality during the first quarter of 2001.

Due to the Companys small size, quarterly fluctuations, even when they remain
within the normal range, will affect the total benefits and claims for the
fiscal year. In addition, the Companys general policy is to retain, with
respect to individual life policies, generally no more than $100,000 of
insurance on any one life and has also routinely purchased annual aggregate
stop loss reinsurance coverage in excess of 120% of expected mortality. The
Company did not experience any material impact on reinsurance costs as a result
of the events of September 11, 2001.

The Company has reached partial settlement regarding $900,000 in reinsurance
coverage. A lawsuit was initiated in the third quarter of 2001. To date, the
Company has received $475,000 and continues to seek additional recoveries
against reinsurance brokers through already existing legal channels. The
remaining amount outstanding is included in reinsurance receivable on the
consolidated balance sheet.

Other benefits and claims consist of participation in a Federally sponsored
group life pool and benefits on a closed block of individual accident and
health business.

Interest Credited to Policyholders

Interest credited to universal life contracts increased 7% in 2002 as compared
to 2001 and 6% in 2001 as compared to 2000 reflecting growth in universal life
policy accumulations. The annual interest rate credited to policyholders of
universal life contracts was 6.25% for the first nine months of 2002 and for
the years
2001 and 2000. Effective October 1, 2002 the annual rate credited to
policyholders changed to 5.75%.

11



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##### Table of Contents



Amortization of Policy Acquisition Costs and Operating Expenses

The amortization of policy acquisition costs as a percentage of premium was 11%
in 2002 compared to 15% in 2001 and 12% in 2000. Amortization for 2002 is
slightly better than the Companys expected range of 12-14% and reflects better
than expected mortality in the universal life line of business and a decrease
in the annual interest rate credited to policyholders. The amortization of
policy acquisition costs for 2002 and 2000 reflect a favorable adjustment from
updating actuarial assumptions. This adjustment represented a slow down of
amortization as a result of higher estimated future profits from the
improvement in mortality levels on universal life products. The after tax
effect on net income for 2002 was $186,000 or $.03 per share and for 2000 was
$429,000 or $.07 per share. Amortization in 2001 reflects higher lapses in the
traditional lines of business which reflects increased term rate competition in
the market place.

Operating expenses as a percentage of premiums were 25% for 2002 compared to
28% in 2001 and 2000. The Company experienced some expense savings in 2002
primarily due to the reduction of certain performance based compensation costs.

Income Tax Expense

The effective tax rate for 2002 was 29% compared to 27% in 2001 and 30% in
2000. The two percentage point increase from 2001 to 2002 is the result of a
decrease in the allowable small company deduction. The three percentage point
decrease from 2000 to 2001 is the result of an increase in the allowable small
company deduction.

|                                      |                                 |      |       |       |  |            |       |       |  |            |     |    |   |   |       |            |  |  |     |     |   
|------------------------------------- | ------------------------------- | ---- | ----- | ----- |  | ---------- | ----- | ----- |  | ---------- | --- | -- | - | - | ----- | ---------- |  |  | --- | --- | --
|Net Income                            |                                 |      |       |       |  |            |       |       |  | Percentage |     |    |   |   |       | Percentage
|                                      |                                 |      |       |       |  |            |       |       |  | Increase   |     |    |   |   |       | Increase  
|(dollars in thousands)                |                                 | 2002 |       | 2001  |  | (Decrease) |       | 2000  |  | (Decrease)
|                                      |                                 |      |       |       |  |            |       |       |  |           
|Guaranteed issue and simplified issue |                                 | $    | 355   |       |  | $          | 397   |       |  |            | (11 | )% |   | $ | 413   |            |  |  | (4  | )% 
|Individual life insurance:            |                                 |      |       |       |  |            |       |       |  |            |     |    |   |   |       |            |  |  |     |    
|                                      | Traditional                     |      |       | 1,477 |  |            |       | 763   |  |            |     | 94 | % |   |       | 1,107      |  |  |     | (31 | )%
|                                      | Universal life                  |      |       | 3,329 |  |            |       | 3,276 |  |            |     | 2  | % |   |       | 3,875      |  |  |     | (16 | )%
|                                      |                                 |      |       |       |  |            |       |       |  |            |     |    |   |   |       |            |  |  |     |    
|                                      | Total individual life insurance |      |       | 4,806 |  |            |       | 4,039 |  |            |     | 19 | % |   |       | 4,982      |  |  |     | (19 | )%
|Brokerage operations                  |                                 |      | 2,174 |       |  |            | 2,067 |       |  |            | 5   | %  |   |   | 2,260 |            |  |  | (9  | )% 
|Other lines                           |                                 |      | (26   | )     |  |            | (57   | )     |  |            | 54  | %  |   |   | (49   | )          |  |  | (16 | )% 
|                                      |                                 |      |       |       |  |            |       |       |  |            |     |    |   |   |       |            |  |  |     |    
|Net Income                            |                                 | $    | 7,309 |       |  | $          | 6,446 |       |  |            | 13  | %  |   | $ | 7,606 |            |  |  | (15 | )% 
|                                      |                                 |      |       |       |  |            |       |       |  |            |     |    |   |   |       |            |  |  |     |    

Continued growth in premiums, mortality that was consistent with managements
expectations, and lower operating expenses accounted primarily for the improved
results in 2002 compared to 2001. In addition, 2002 and 2000 results reflect a
favorable adjustment to the amortization of policy acquisition costs resulting
from updating actuarial assumptions. 2001 results reflect higher mortality
experienced in the first quarter in comparison to the prior year, resulting in
a decrease in the Companys net income.

Critical Accounting Policies

The accounting policies described below are those the Company considers
critical in preparing its consolidated financial statements. These policies
include significant estimates made by management using information available at
the time the estimates are made. However, as described below, these estimates
could change materially if different information or assumptions were used.

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Insurance Related Assets and Liabilities

The Company establishes an insurance related asset for deferred policy
acquisition costs, and insurance related liabilities for future policy benefits
and claims relating to its insurance policies under contract. Such asset and
liabilities are developed using actuarial principles and assumptions which
consider a number of factors, including: investment yields, withdrawal rates,
mortality and morbidity which are described in the Notes to the Consolidated
Financial Statements (Notes). As described in the Notes, the Company
accounts for its traditional individual life insurance policies using a net
level premium method and assumptions as to the factors enumerated above and as
disclosed in Note 5. Generally, the Companys earnings in any given calendar
year will not be impacted by differences in emerging experience on its
traditional individual business unless such differences are severe enough to
call into question the profitability of the entire block of traditional life
business. The Company does, however, experience fluctuations in its earnings
as a result of current mortality experience differing from that expected in any
given year. During 2002, 2001, and 2000, the Company experienced emerged
mortality of 88%, 89%, and 84% of expected, respectively, related to its
traditional individual life insurance business. The Company routinely
purchases annual aggregate stop loss reinsurance coverage which limits
experience to 120% of expected mortality in any one year.

Further, as described in the Notes, the Company accounts for its
interest-sensitive and universal life insurance policies and annuities under
the provisions of Statement of Financial Accounting Standards (SFAS) No. 97,
Accounting and Reporting by Insurance Enterprises for Certain Long-Duration
Contracts and for Realized Gains and Losses from the Sale of Investments.SFAS
No. 97 requires the remeasurement of the Companys deferred acquisition costs
each period in a manner that amortizes such deferred costs as a level
percentage of actual emerged profit over the expected gross profits. Expected
gross profits are primarily influenced by estimated future mortality,
investment gains, and expense margins.

Each period, the Company estimates the relevant factors, based primarily on its
emerging experience and uses this information to determine the assumptions
underlying its asset and liability calculations. An extensive degree of
judgment is used in this estimation process.

Any adjustments to prior period claim liabilities are included in the benefit
expense of the period in which the need for the adjustment becomes known.

Fixed Income and Equity Securities

The Company has procedures in place to monitor all debt and equity securities
for possible other-than-temporary impairments. Securities are tracked
comparing both unrealized losses as a percentage of original cost and the
length of time the security has been below a predetermined percentage of cost.
Monthly discussions are held with Companys investment managers to gather
information and documentation as to their outlook for future recovery of the
securities making the Companys watch list. As of December 31, 2002 there
were no debt or equity securities whose unrealized losses would be deemed by
management to be other-than-temporary impairments that have not been recorded.

Accounting for Income Taxes

The Company accounts for income taxes using the asset and liability method
prescribed by SFAS No. 109, Accounting for Income Taxes.Under the asset and
liability method of SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities,
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which these temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.

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Income tax expense recognized by the Company in any one year is impacted by the
extent to which the
Company qualifies for the small life company deduction. The small life company
deduction is 60% of life insurance company taxable income up to a maximum
taxable income of $3 million. This deduction is phased out on taxable income
above $3 million up to and including a maximum of $15 million. To the extent,
if any, that the Companys taxable income exceeds $3 million, its effective
Federal income tax rate will increase.

Liquidity and Capital Resources

Cash Flow

The Companys insurance operations generated positive cash flows in excess of
its immediate needs during 2002. Cash flows provided by operations were $17.0
million in 2002, $15.5 million in 2001, and $11.5 million in 2000. Operating
cash flow is primarily used to purchase debt securities. The Company received
proceeds of $14.3 million from investment maturities and repayments in 2002,
adding to available cash flows. Such proceeds were $10.5 million in 2001 and
$7.2 million in 2000. When market opportunities arise, the Company disposes of
selected debt securities available for sale in an attempt to improve future
investment yields and/or improve duration matching of our assets and
liabilities. Therefore, dispositions before maturity can vary significantly
from year to year. Proceeds from sales prior to maturity were $108.6 million
in 2002, $50.4 million in 2001 and $3.5 million in 2000.

The Companys principal financing activity is payment of dividends to the
Companys shareholders. Dividends are normally declared quarterly and must be
approved by the Board of Directors. Under regulatory requirements, the amount
of dividends that may be paid in 2003 by the Company to its shareholders
without prior regulatory approval is approximately $3.0 million.

Other than noted above, the Company does not have any debt, lease obligations,
purchase obligations, lines of credit, guarantees, off-balance sheet
arrangements, trading activities involving non-exchange traded contracts
accounted for at fair value or relationships with persons or entities that
derive benefits from a non-independent relationship with the Company or the
Companys related parties.

Liquidity

Liquidity pertains to a companys ability to meet the demand for cash
requirements of its business operations and financial obligations. The
Companys two sources of short-term liquidity include its positive cash flow
from operations and its portfolio of marketable securities as described above.
The Company believes that these sources are sufficient to meet its liquidity
needs in 2003.

Investments

Since December 31, 2002, there has not been a material change in mix or credit
quality of the Companys investment portfolio. All bond purchases have been
available for sale and over 91% of the holdings at December 31, 2002 and 86%
in 2001 are rated A or better by Standard & Poors Corporation. For all
fixed maturities, 9% in 2002 and 14% in 2001 are rated BBB. Ratings of BBB and
higher are considered investment grade by the rating services. Due to the
improvement in bond market conditions, the Company experienced an increase in
the fair value of bonds of approximately $4,487,000 in 2002.

The amortized cost and estimated fair value of debt securities at December 31,
2002, by contractual maturity, are shown on the following page. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.

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|                     |                                       |       |   |            |             |            |  |            |             | 
|-------------------- | ------------------------------------- | ----- | - | ---------- | ----------- | ---------- |  | ---------- | ----------- | 
|                     |                                       |       |   | Amortized  |             | Estimated 
|                     |                                       |       |   | cost       |             | fair value
|                     |                                       |       |   |            |             |           
|Held for investment: |                                       |       |   |            |             |            |  |           
|                     | Due in one year or less               |       | $ | 3,700,704  |             |            |  | 3,756,596  |            
|                     | Due after one year through five years |       |   | 3,347,471  |             |            |  | 3,567,777  |            
|                     |                                       |       |   |            |             |            |  |           
|                     |                                       | Total |   | $          | 7,048,175   |            |  |            | 7,324,373   | 
|                     |                                       |       |   |            |             |            |  |           
|Available for sale:  |                                       |       |   |            |             |            |  |           
|                     | Due in one year or less               |       | $ | 5,001,454  |             |            |  | 5,062,150  |            
|                     | Due after one year through five years |       |   | 36,750,298 |             |            |  | 38,022,347 |            
|                     | Due after five years through 10 years |       |   | 50,454,365 |             |            |  | 53,287,645 |            
|                     | Due after 10 years                    |       |   | 22,072,272 |             |            |  | 22,774,676 |            
|                     | Mortgage-backed securities            |       |   | 31,880,950 |             |            |  | 33,160,588 |            
|                     |                                       |       |   |            |             |            |  |           
|                     |                                       | Total |   | $          | 146,159,339 |            |  |            | 152,307,406 | 
|                     |                                       |       |   |            |             |            |  |           

Mortgage Loans

The Companys mortgage loan policy limits the amounts of loans to no more than
80% of the collateral value on residential loans and no more than 75% of the
collateral value on commercial loans. The Company grants loans only to
employees (excluding officers and directors) and agents.

The geographic distribution of the loan portfolio is:

|                |  |              |    |                        |  |              |  |              |       |  |  |  |       | 
|--------------- |  | ------------ | -- | ---------------------- |  | ------------ |  | ------------ | ----- |  |  |  | ----- | 
|                |  |              |    |                        |  |              |  | Book Value  
|Number of Loans |  |              |    |                       
|                |  |              |    | (dollars in thousands)
|December 31,    |  | December 31, |    |                        |  | December 31, |  | December 31,
|2002            |  | 2001         |    | State                  |  | 2002         |  | 2001        
|                |  |              |    |                        |  |              |  |             
|2               |  |              | 3  |                        |  | Alabama      |  | $            | 100   |  |  |  | 113   | 
|6               |  |              | 6  |                        |  | Florida      |  |              | 283   |  |  |  | 320   | 
|25              |  |              | 30 |                        |  | Georgia      |  |              | 937   |  |  |  | 1,239 | 
|                |  |              |    |                        |  |              |  |              |       |  |  |  |       | 
|33              |  |              | 39 |                        |  |              |  | $            | 1,320 |  |  |  | 1,672 | 
|                |  |              |    |                        |  |              |  |              |       |  |  |  |       | 

Three loans representing $102,000 in principal are over 30 days delinquent.
The loan-to-value ratio on delinquent loans is 21%.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141
Business Combinations. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations with a closing date after June
30, 2001. This statement eliminates the pooling-of-interest method of
accounting for business combinations. SFAS No. 141 also includes guidance on
the initial recognition and measurement of goodwill and other intangible assets
in a business combination. The Financial Accounting Standards Board has also
issued SFAS No. 142 Goodwill and Other Intangible Assets which supersedes
Opinion 17 Intangible Assets, and is effective for fiscal years beginning
after December 15, 2001. SFAS No. 142 addresses how goodwill and other
intangible assets should be accounted for in financial statements upon
acquisition and how these items should be accounted for subsequent to
acquisition. The Companys adoption of SFAS Nos. 141 and 142 did not affect
the Companys results of operations or financial position.

The Financial Accounting Standards Board also issued SFAS No. 143 Accounting
for Asset Retirement Obligations, which is effective for fiscal years
beginning after June 15, 2002, with early adoption encouraged. SFAS No. 143
applies to legal obligations associated with the retirement of long-lived
assets

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that result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees.
The adoption of SFAS No. 143 did not affect the Companys results of operations
or financial position.

The Financial Accounting Standards Board also issued SFAS No. 144 Accounting
for the Impairment or Disposal of Long-Lived Assets which supercedes SFAS No.
121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, and the accounting and reporting provisions of APB
Opinion No. 30 Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, and is effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 establishes a single
accounting model for the disposal of long-lived assets. The adoption of SFAS
No. 144 did not affect the Companys results of operations or financial
position.

The Financial Accounting Standards Board also issued SFAS No. 145 Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections, which is effective for financial statements issued
after May 15, 2002. The adoption of SFAS No. 145 did not affect the Companys
results of operations or financial position.

In July 2002, the Financial Accounting Standards Board issued SFAS No. 146
Accounting for Costs Associated with Exit or Disposal Activities, which is to
be applied prospectively to exit or disposal activities initiated after
December 31, 2002. The adoption of SFAS No. 146 is not expected to affect the
Companys results of operations or financial position.

In October 2002, the Financial Accounting Standards Board issued SFAS No. 147
Acquisitions of Certain Financial Institutions, which is effective October 1,
2002. The adoption of SFAS No. 147 did not affect the Companys results of
operations or financial position.

In November 2002 the Financial Accounting Standards Board issued Interpretation
No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, for which accounting
requirements are effective for guarantees issued or modified after December 31,
2002 and disclosure requirements are effective for financial statements issued
after December 15, 2002. The adoption of Interpretation No. 45 did not, and is
not expected to, affect the Companys results of operations or financial
position.

In December 2002, the Financial Accounting Standards Board issued SFAS No. 148
Accounting for Stock-Based Compensation  Transition and Disclosure, which is
effective for financial statements issued after December 15, 2002. The
adoption of SFAS No. 148 did not affect the Companys results of operations or
financial position.

Effective January 1, 2001, the State of Georgia adopted the National
Association of Insurance Commissioners Codification of Statutory Accounting
Practices. The impact on the Companys statutory surplus upon adoption of the
codification standards was not material.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Credit Risk

Credit risk is the risk that issuers of securities owned by the Company will
default, or other parties, including reinsurers, which owe the Company money,
will not pay. The Company attempts to minimize these risks by following a
conservative investment strategy and by contracting with reinsuring companies
that meet high standards for rating criteria and other qualifications. The
Company invests principally in government, governmental agency and high quality
corporate bonds having an A rating or better. The fixed maturity portfolio had
an average rating of AA- as rated by Standard & Poors Corporation at December
31, 2002.

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##### Table of Contents



Interest Rate Risk

Interest rate risk is the risk that interest rates will change and cause a
decrease in the value of an insurers investments. The Companys fixed
maturity investments are subject to interest rate risk. The Company seeks to
manage the impact of interest rate fluctuation through cash flow modeling,
which attempts to match the maturity schedule of its assets with expected
payout of its liabilities. Liabilities for interest sensitive products are
carried at full account value. The fixed maturity portfolio at December 31,
2002 and December 31, 2001 had an effective duration of 4.1 years and 4.2
years, respectively.

The table below summarizes the Companys interest rate risk and shows the
effect of a hypothetical 100 and 200 basis point increase/decrease in interest
rates on the fair values of the fixed investment portfolio. The selection of
100 and 200 basis point increases/decreases in interest rates should not be
construed as a prediction by the Companys management of future market events,
but rather, to illustrate the potential impact of such events. These
calculations may not fully capture the impact of the changes in the ratio of
long-term rates to short-term rates.

|                                       |  |                        |          |                   |  |                     |  |                |         |                     |  |             
|-------------------------------------- |  | ---------------------- | -------- | ----------------- |  | ------------------- |  | -------------- | ------- | ------------------- |  | ------------
|                                       |  |                        |          |                   |  |                     |  |                |         |                     |  | Hypothetical
|                                       |  |                        |          |                   |  |                     |  | Estimated Fair |         | Percentage Increase
|                                       |  |                        |          |                   |  | Estimated Change in |  | Value After    |         | (Decrease) In      
|                                       |  | Estimated Value        |          | Interest Rates    |  | Hypothetical Change |  | Shareholders' 
|                                       |  | December 31, 2002      |          | (bp-Basis Points) |  | in Interest Rates   |  | Equity        
|                                       |  |                        |          |                   |  |                     |  |               
|                                       |  | (dollars in thousands) |          |                   |  |                     |  |                |         |                    
|Fixed Maturities  Held for Investment |  |                        | $7,324   |                   |  | 200 bp decrease     |  |                | 7,430   |                     |  | N/A         
|                                       |  |                        |          |                   |  | 100 bp decrease     |  |                | 7,386   |                     |  | N/A         
|                                       |  |                        |          |                   |  | 100 bp increase     |  |                | 7,298   |                     |  | N/A         
|                                       |  |                        |          |                   |  | 200 bp increase     |  |                | 7,254   |                     |  | N/A         
|Fixed Maturities  Available           |  |                        | $152,307 |                   |  | 200 bp decrease     |  |                | 164,931 |                     |  | 15.5%       
|for Sale                               |  |                        |          |                   |  | 100 bp decrease     |  |                | 158,278 |                     |  | 7.3%        
|                                       |  |                        |          |                   |  | 100 bp increase     |  |                | 146,847 |                     |  | (6.7)%      
|                                       |  |                        |          |                   |  | 200 bp increase     |  |                | 141,009 |                     |  | (13.9)%     

The following table shows a comparison of average assumed interest rates for
policy reserves and investment yields, based on amortized costs, for the three
years ended December 31.

Comparison of Interest Rates for Policy Reserves
and Investment Yields
(Net of investment expenses)

|                              |                                      |  |      |     |      |  |      |     |   |  |     |     |  
|----------------------------- | ------------------------------------ |  | ---- | --- | ---- |  | ---- | --- | - |  | --- | --- | -
|                              |                                      |  | 2002 |     | 2001 |  | 2000
|                              |                                      |  |      |     |      |  |     
|Policies issued during year:  |                                      |  |      |     |      |  |      |     |   |  |     |    
|                              | Required interest on policy reserves |  |      | 6.5 | %    |  |      | 6.7 | % |  |     | 6.7 | %
|                              | New money yield on investments       |  |      | 4.5 | %    |  |      | 5.4 | % |  |     | 7.2 | %
|Policies inforce during year: |                                      |  |      |     |      |  |      |     |   |  |     |    
|                              | Required interest on policy reserves |  |      | 6.1 | %    |  |      | 6.2 | % |  |     | 6.2 | %
|Net investment yield          |                                      |  | 5.9  | %   |      |  | 6.7  | %   |   |  | 7.2 | %  

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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets

|                                         |                                                                                                                                                                                                                                                              |                                                                             |                                       |                                      |            |              |             |             |            |             |  | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------- | ------------------------------------- | ------------------------------------ | ---------- | ------------ | ----------- | ----------- | ---------- | ----------- |  | 
|                                         |                                                                                                                                                                                                                                                              |                                                                             |                                       |                                      |            | December 31,
|                                         |                                                                                                                                                                                                                                                              |                                                                             |                                       |                                      |            |             
|                                         |                                                                                                                                                                                                                                                              |                                                                             |                                       |                                      |            |              |             |             |            | 2001       
|                                         |                                                                                                                                                                                                                                                              | 2002                                                                        |                                       | (As Restated)                       
|                                         |                                                                                                                                                                                                                                                              |                                                                             |                                       |                                     
|                                         |                                                                                                                                                                                                                                                              |                                                                             |                                       | ASSETS                               |            |              |             |             |            |             |  | 
|Investments:                             |                                                                                                                                                                                                                                                              |                                                                             |                                       |                                      |            |              |             |            
|                                         | Fixed maturities, held for investment, at amortized
cost (fair value of $7,324,373 in 2002 and $11,960,104 in 2001)                                                                                                                                          |                                                                             | $                                     | 7,048,175                            |            |              |             | 11,552,200  |           
|                                         | Fixed maturities, available for sale, at fair value (amortized
cost of $146,159,339 in 2002 and $130,303,801 in 2001)                                                                                                                                        |                                                                             |                                       | 152,307,406                          |            |              |             | 131,964,810 |           
|                                         | Equity securities, at fair value (cost of $2,984,720 in 2002
and $3,673,660 in 2001)                                                                                                                                                                         |                                                                             |                                       | 2,519,895                            |            |              |             | 3,471,722   |           
|                                         | First mortgage loans on real estate                                                                                                                                                                                                                          |                                                                             |                                       | 1,320,330                            |            |              |             | 1,671,989   |           
|                                         | Policy loans                                                                                                                                                                                                                                                 |                                                                             |                                       | 10,425,612                           |            |              |             | 9,661,247   |           
|                                         | Other invested assets                                                                                                                                                                                                                                        |                                                                             |                                       | 582,000                              |            |              |             | 1,000,000   |           
|                                         |                                                                                                                                                                                                                                                              |                                                                             |                                       |                                      |            |              |             |            
|                                         |                                                                                                                                                                                                                                                              |                                                                             | Total investments                     |                                      |            | 174,203,418  |             |             |            | 159,321,968 | 
|Cash and cash equivalents                |                                                                                                                                                                                                                                                              |                                                                             | 18,913,861                            |                                      |            |              | 13,187,601  |            
|Accrued investment income                |                                                                                                                                                                                                                                                              |                                                                             | 2,406,298                             |                                      |            |              | 2,592,977   |            
|Amounts receivable, principally premiums |                                                                                                                                                                                                                                                              |                                                                             | 3,777,671                             |                                      |            |              | 3,298,052   |            
|Amount due from reinsurers               |                                                                                                                                                                                                                                                              |                                                                             | 4,263,828                             |                                      |            |              | 4,233,046   |            
|Deferred policy acquisition costs        |                                                                                                                                                                                                                                                              |                                                                             | 57,686,410                            |                                      |            |              | 51,660,808  |            
|Federal income tax receivable            |                                                                                                                                                                                                                                                              |                                                                             | 98,457                                |                                      |            |              |            |            
|Other assets                             |                                                                                                                                                                                                                                                              |                                                                             | 460,061                               |                                      |            |              | 485,886     |            
|                                         |                                                                                                                                                                                                                                                              |                                                                             |                                       |                                      |            |              |             |            
|                                         |                                                                                                                                                                                                                                                              | $                                                                           | 261,810,004                           |                                      |            |              | 234,780,338 |            
|                                         |                                                                                                                                                                                                                                                              |                                                                             |                                       |                                      |            |              |             |            
|                                         |                                                                                                                                                                                                                                                              |                                                                             |                                       | LIABILITIES AND SHAREHOLDERS EQUITY |            |              |             |             |            |             |  | 
|Policy liabilities and accruals:         |                                                                                                                                                                                                                                                              |                                                                             |                                       |                                      |            |              |             |            
|                                         | Future policy benefits                                                                                                                                                                                                                                       |                                                                             | $                                     | 160,424,107                          |            |              |             | 145,737,310 |           
|                                         | Policy claims and benefits payable                                                                                                                                                                                                                           |                                                                             |                                       | 3,241,343                            |            |              |             | 2,196,620   |           
|                                         |                                                                                                                                                                                                                                                              |                                                                             |                                       |                                      |            |              |             |            
|                                         |                                                                                                                                                                                                                                                              |                                                                             | Total policy liabilities and accruals |                                      |            | 163,665,450  |             |             |            | 147,933,930 | 
|Federal income taxes:                    |                                                                                                                                                                                                                                                              |                                                                             |                                       |                                      |            |              |             |            
|                                         | Current                                                                                                                                                                                                                                                      |                                                                             |                                       |                                     |            |              |             | 332,624     |           
|                                         | Deferred                                                                                                                                                                                                                                                     |                                                                             |                                       | 11,181,184                           |            |              |             | 8,205,251   |           
|Other liabilities                        |                                                                                                                                                                                                                                                              |                                                                             | 5,592,961                             |                                      |            |              | 5,663,215   |            
|                                         |                                                                                                                                                                                                                                                              |                                                                             |                                       |                                      |            |              |             |            
|                                         |                                                                                                                                                                                                                                                              |                                                                             | Total liabilities                     |                                      |            | 180,439,595  |             |             |            | 162,135,020 | 
|                                         |                                                                                                                                                                                                                                                              |                                                                             |                                       |                                      |            |              |             |            
|Shareholders equity:                    |                                                                                                                                                                                                                                                              |                                                                             |                                       |                                      |            |              |             |            
|                                         | Common stock of $1 par value. Authorized 20,000,000 shares;
issued: 6,929,347 shares in 2002 and 6,917,722 shares in 2001;
outstanding: 6,328,737 shares in 2002 and 6,335,428 shares in 2001;
restricted: 174,843 shares in 2002 and 163,218 shares in 2001 |                                                                             |                                       | 6,929,347                            |            |              |             | 6,917,722   |           
|                                         | Additional paid-in capital                                                                                                                                                                                                                                   |                                                                             |                                       | 3,434,018                            |            |              |             | 3,443,995   |           
|                                         | Accumulated other comprehensive income, net of tax                                                                                                                                                                                                           |                                                                             |                                       | 3,226,975                            |            |              |             | 818,720     |           
|                                         | Retained earnings                                                                                                                                                                                                                                            |                                                                             |                                       | 72,035,550                           |            |              |             | 65,746,656  |           
|                                         | Less:                                                                                                                                                                                                                                                        |                                                                             |                                       |                                      |            |              |             |             |           
|                                         |                                                                                                                                                                                                                                                              | Unearned compensation  restricted stock                                    |                                       |                                      | (764,543   | )            |             |             | (858,781   | )          
|                                         |                                                                                                                                                                                                                                                              | Treasury stock, at cost (425,767 shares in 2002 and
419,076 shares in 2001) |                                       |                                      | (3,490,938 | )            |             |             | (3,422,994 | )          
|                                         |                                                                                                                                                                                                                                                              |                                                                             |                                       |                                      |            |              |             |            
|                                         |                                                                                                                                                                                                                                                              |                                                                             | Total shareholders equity            |                                      |            | 81,370,409   |             |             |            | 72,645,318  | 
|                                         |                                                                                                                                                                                                                                                              |                                                                             |                                       |                                      |            |              |             |            
|                                         |                                                                                                                                                                                                                                                              | $                                                                           | 261,810,004                           |                                      |            |              | 234,780,338 |            
|                                         |                                                                                                                                                                                                                                                              |                                                                             |                                       |                                      |            |              |             |            

See accompanying notes to consolidated financial statements.

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##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings

|                                                                      |                                                   |                             |            |                          |            |      |           |            |            |  |            |            |            | 
|--------------------------------------------------------------------- | ------------------------------------------------- | --------------------------- | ---------- | ------------------------ | ---------- | ---- | --------- | ---------- | ---------- |  | ---------- | ---------- | ---------- | 
|                                                                      |                                                   |                             |            | Years ended December 31,
|                                                                      |                                                   |                             |            |                         
|                                                                      |                                                   |                             |            | 2002                     |            | 2001 |           | 2000      
|                                                                      |                                                   |                             |            |                          |            |      |           |           
|Revenue:                                                              |                                                   |                             |            |                          |            |      |           |            |            |  |            |           
|                                                                      | Premiums                                          |                             | $          | 33,092,092               |            |      |           | 30,220,737 |            |  |            | 26,816,523 |           
|                                                                      | Net investment income                             |                             |            | 9,828,964                |            |      |           | 10,282,623 |            |  |            | 10,090,780 |           
|                                                                      | Realized investment gains                         |                             |            | 1,036,704                |            |      |           | 27,501     |            |  |            | 405,933    |           
|                                                                      | Brokerage commissions                             |                             |            | 4,242,470                |            |      |           | 4,190,482  |            |  |            | 4,197,173  |           
|                                                                      |                                                   |                             |            |                          |            |      |           |            |            |  |            |           
|                                                                      |                                                   | Total
revenue               |            |                          | 48,200,230 |      |           |            | 44,721,343 |  |            |            | 41,510,409 | 
|                                                                      |                                                   |                             |            |                          |            |      |           |            |            |  |            |           
|Benefits and expenses:                                                |                                                   |                             |            |                          |            |      |           |            |            |  |            |           
|                                                                      | Benefits and claims                               |                             |            | 20,117,169               |            |      |           | 17,551,824 |            |  |            | 14,800,123 |           
|                                                                      | Interest credited                                 |                             |            | 5,904,423                |            |      |           | 5,527,001  |            |  |            | 5,198,089  |           
|                                                                      | Amortization of deferred policy acquisition costs |                             |            | 3,760,985                |            |      |           | 4,466,712  |            |  |            | 3,214,110  |           
|                                                                      | Operating expenses                                |                             |            | 8,147,908                |            |      |           | 8,311,250  |            |  |            | 7,444,815  |           
|                                                                      |                                                   |                             |            |                          |            |      |           |            |            |  |            |           
|                                                                      |                                                   | Total
benefits and expenses |            |                          | 37,930,485 |      |           |            | 35,856,787 |  |            |            | 30,657,137 | 
|                                                                      |                                                   |                             |            |                          |            |      |           |            |            |  |            |           
|Income before Federal income taxes                                    |                                                   |                             | 10,269,745 |                          |            |      | 8,864,556 |            |            |  | 10,853,272 |           
|                                                                      |                                                   |                             |            |                          |            |      |           |            |            |  |            |           
|Federal income taxes:                                                 |                                                   |                             |            |                          |            |      |           |            |            |  |            |           
|                                                                      | Current                                           |                             |            | 1,421,156                |            |      |           | 1,461,027  |            |  |            | 2,114,917  |           
|                                                                      | Deferred                                          |                             |            | 1,539,715                |            |      |           | 957,857    |            |  |            | 1,132,140  |           
|                                                                      |                                                   |                             |            |                          |            |      |           |            |            |  |            |           
|                                                                      |                                                   | Total
federal income taxes  |            |                          | 2,960,871  |      |           |            | 2,418,884  |  |            |            | 3,247,057  | 
|                                                                      |                                                   |                             |            |                          |            |      |           |            |            |  |            |           
|Net
income                                                            |                                                   | $                           | 7,308,874  |                          |            |      | 6,445,672 |            |            |  | 7,606,215  |           
|                                                                      |                                                   |                             |            |                          |            |      |           |            |            |  |            |           
|Basic income per share of
common stock                                |                                                   | $                           | 1.15       |                          |            |      | 1.02      |            |            |  | 1.20       |           
|                                                                      |                                                   |                             |            |                          |            |      |           |            |            |  |            |           
|Diluted income per share of
common stock                              |                                                   | $                           | 1.13       |                          |            |      | 0.99      |            |            |  | 1.18       |           
|                                                                      |                                                   |                             |            |                          |            |      |           |            |            |  |            |           
|Weighted-average number of shares used in
computing income per share: |                                                   |                             |            |                          |            |      |           |            |            |  |            |           
|                                                                      | Basic                                             |                             |            | 6,337,387                |            |      |           | 6,342,817  |            |  |            | 6,345,687  |           
|                                                                      |                                                   |                             |            |                          |            |      |           |            |            |  |            |           
|                                                                      | Diluted                                           |                             |            | 6,494,667                |            |      |           | 6,519,933  |            |  |            | 6,466,069  |           
|                                                                      |                                                   |                             |            |                          |            |      |           |            |            |  |            |           

See accompanying notes to consolidated financial statements.

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##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Shareholders Equity

|                                               |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |            |            |            | 
|---------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------------------------------------ | -------------------------- | ---------- | ------------------------ | ---------- | ------------- | ---------- | ------------- | ---------- | ---- | ---------- | ---------- | ---------- | 
|                                               |                                                                                                    |                                      |                            |            | Years ended December 31,
|                                               |                                                                                                    |                                      |                            |            |                         
|                                               |                                                                                                    |                                      |                            |            |                          |            |               |            | 2001          |            | 2000
|                                               |                                                                                                    |                                      |                            |            | 2002                     |            | (As Restated) |            | (As Restated)
|                                               |                                                                                                    |                                      |                            |            |                          |            |               |            |              
|Common stock:                                  |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|                                               | Balance at beginning of year                                                                       |                                      | $                          | 6,917,722  |                          |            |               | 6,870,283  |               |            |      | 6,830,073  |           
|                                               | Restricted stock activity, net                                                                     |                                      |                            | 11,625     |                          |            |               | 47,439     |               |            |      | 40,210     |           
|                                               |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|                                               | Balance at end of year                                                                             |                                      |                            | 6,929,347  |                          |            |               | 6,917,722  |               |            |      | 6,870,283  |           
|                                               |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|Additional paid-in capital:                    |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|                                               | Balance at beginning of year                                                                       |                                      |                            | 3,443,995  |                          |            |               | 2,917,628  |               |            |      | 2,615,899  |           
|                                               | Treasury shares issued (acquired)                                                                  |                                      |                            | 16,227     |                          |            |               |           |               |            |      | (83,304    | )         
|                                               | Compensatory directors stock options granted                                                      |                                      |                            | 94,500     |                          |            |               | 84,575     |               |            |      | 75,700     |           
|                                               | Restricted stock activity, net                                                                     |                                      |                            | (147,942   | )                        |            |               | 441,792    |               |            |      | 257,790    |           
|                                               | Tax benefit arising from issuance of
restricted stock                                              |                                      |                            | 27,238     |                          |            |               |           |               |            |      | 51,543     |           
|                                               |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|                                               | Balance at end of year                                                                             |                                      |                            | 3,434,018  |                          |            |               | 3,443,995  |               |            |      | 2,917,628  |           
|                                               |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|Accumulated other comprehensive income (loss): |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|                                               | Balance at beginning of year                                                                       |                                      |                            | 818,720    |                          |            |               | (1,715,931 | )             |            |      | (3,466,876 | )         
|                                               | Change in unrealized gains:                                                                        |                                      |                            |            |                          |            |               |            |               |            |      |            |           
|                                               |                                                                                                    | Unrealized gains during year         |                            |            | 4,224,171                |            |               |            | 4,582,686     |            |      |            | 3,313,133  |           
|                                               |                                                                                                    | Deferred taxes                       |                            |            | (1,436,218               | )          |               |            | (1,558,113    | )          |      |            | (1,126,466 | )         
|                                               |                                                                                                    | Deferred acquisition cost adjustment |                            |            | (379,698                 | )          |               |            | (489,922      | )          |      |            | (435,722   | )         
|                                               |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|                                               |                                                                                                    | Other comprehensive income           |                            |            | 2,408,255                |            |               |            | 2,534,651     |            |      |            | 1,750,945  |           
|                                               |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|                                               | Balance at end of year                                                                             |                                      |                            | 3,226,975  |                          |            |               | 818,720    |               |            |      | (1,715,931 | )         
|                                               |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|Retained earnings:                             |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|                                               | Balance at beginning of year                                                                       |                                      |                            | 65,746,656 |                          |            |               | 60,320,092 |               |            |      | 53,732,985 |           
|                                               | Net income                                                                                         |                                      |                            | 7,308,874  |                          |            |               | 6,445,672  |               |            |      | 7,606,215  |           
|                                               | Dividends of $.16 per share in 2002,
2001, and 2000                                                |                                      |                            | (1,019,980 | )                        |            |               | (1,019,108 | )             |            |      | (1,019,108 | )         
|                                               |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|                                               | Balance at end of year                                                                             |                                      |                            | 72,035,550 |                          |            |               | 65,746,656 |               |            |      | 60,320,092 |           
|                                               |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|Unearned compensation  restricted stock:      |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|                                               | Balance at beginning of year                                                                       |                                      |                            | (858,781   | )                        |            |               | (794,276   | )             |            |      | (362,458   | )         
|                                               | Shares awarded                                                                                     |                                      |                            | (463,920   | )                        |            |               | (489,231   | )             |            |      | (490,964   | )         
|                                               | Shares forfeited                                                                                   |                                      |                            | 506,605    |                          |            |               |           |               |            |      |           |           
|                                               | Compensation expense recorded                                                                      |                                      |                            | 51,553     |                          |            |               | 424,726    |               |            |      | 59,146     |           
|                                               |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|                                               | Balance at end of year                                                                             |                                      |                            | (764,543   | )                        |            |               | (858,781   | )             |            |      | (794,276   | )         
|                                               |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|Treasury stock:                                |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|                                               | Balance at beginning of year                                                                       |                                      |                            | (3,422,994 | )                        |            |               | (3,326,927 | )             |            |      | (3,399,256 | )         
|                                               | Cost of shares purchased (12,100 shares in 2002, 10,000
shares in 2001, and 24,000 shares in 2000) |                                      |                            | (116,949   | )                        |            |               | (96,067    | )             |            |      | (145,945   | )         
|                                               | Cost of shares issued (5,409 shares in 2002, 0 shares in
2001 and 49,910 shares in 2000)           |                                      |                            | 49,005     |                          |            |               |           |               |            |      | 218,274    |           
|                                               |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|                                               | Balance at end of year                                                                             |                                      |                            | (3,490,938 | )                        |            |               | (3,422,994 | )             |            |      | (3,326,927 | )         
|                                               |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           
|                                               |                                                                                                    |                                      | Total shareholders equity |            | $                        | 81,370,409 |               |            |               | 72,645,318 |      |            |            | 64,270,869 | 
|                                               |                                                                                                    |                                      |                            |            |                          |            |               |            |               |            |      |           

See accompanying notes to consolidated financial statements.

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##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows

|                                                                     |                                                                                   |                                                                                   |                                           |              |                          |             |               |             |               |            |           |             |            |            |  
|-------------------------------------------------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------- | ------------ | ------------------------ | ----------- | ------------- | ----------- | ------------- | ---------- | --------- | ----------- | ---------- | ---------- | -
|                                                                     |                                                                                   |                                                                                   |                                           |              | Years ended December 31,
|                                                                     |                                                                                   |                                                                                   |                                           |              |                         
|                                                                     |                                                                                   |                                                                                   |                                           |              |                          |             |               |             | 2001          |            | 2000     
|                                                                     |                                                                                   |                                                                                   |                                           |              | 2002                     |             | (As Restated) |             | (As Restated)
|                                                                     |                                                                                   |                                                                                   |                                           |              |                          |             |               |             |              
|Cash flows from operating activities:                                |                                                                                   |                                                                                   |                                           |              |                          |             |               |             |               |            |           |            
|                                                                     | Net income                                                                        |                                                                                   | $                                         | 7,308,874    |                          |             |               | 6,445,672   |               |            |           | 7,606,215   |           
|                                                                     | Adjustments to reconcile net income to net
cash provided by operating activities: |                                                                                   |                                           |              |                          |             |               |             |               |            |           |             |           
|                                                                     |                                                                                   | Realized investment gains                                                         |                                           |              | (1,036,704               | )           |               |             | (27,501       | )          |           |             | (405,933   | )         
|                                                                     |                                                                                   | Increase in policy liabilities and accruals                                       |                                           |              | 15,731,520               |             |               |             | 12,981,119    |            |           |             | 10,891,757 |           
|                                                                     |                                                                                   | (Increase) in deferred policy acquisition costs                                   |                                           |              | (6,405,300               | )           |               |             | (5,294,025    | )          |           |             | (6,028,610 | )         
|                                                                     |                                                                                   | Change in liability for income taxes                                              |                                           |              | 1,135,872                |             |               |             | 713,591       |            |           |             | 1,054,461  |           
|                                                                     |                                                                                   | (Increase) Decrease in amounts receivable
and amounts recoverable from reinsurers |                                           |              | (510,401                 | )           |               |             | 161,724       |            |           |             | (1,211,138 | )         
|                                                                     |                                                                                   | Depreciation expense                                                              |                                           |              | 217,418                  |             |               |             | 228,616       |            |           |             | 212,163    |           
|                                                                     |                                                                                   | Other, net                                                                        |                                           |              | 548,657                  |             |               |             | 329,240       |            |           |             | (634,123   | )         
|                                                                     |                                                                                   |                                                                                   |                                           |              |                          |             |               |             |               |            |           |            
|                                                                     |                                                                                   |                                                                                   | Net cash provided by operating
activities |              |                          | 16,989,936  |               |             |               | 15,538,436 |           |             |            | 11,484,792 |  
|                                                                     |                                                                                   |                                                                                   |                                           |              |                          |             |               |             |               |            |           |            
|Cash flows from investing activities:                                |                                                                                   |                                                                                   |                                           |              |                          |             |               |             |               |            |           |            
|                                                                     | Purchase of fixed maturities available for sale                                   |                                                                                   |                                           | (132,315,381 | )                        |             |               | (67,827,757 | )             |            |           | (20,141,334 | )         
|                                                                     | Purchase of equity securities                                                     |                                                                                   |                                           | (1,412,058   | )                        |             |               | (1,972,576  | )             |            |           | (2,636,020  | )         
|                                                                     | Sales of fixed maturities held for investment                                     |                                                                                   |                                           | 450,000      |                          |             |               |            |               |            |           |            |           
|                                                                     | Sale of fixed maturities available for sale                                       |                                                                                   |                                           | 108,146,942  |                          |             |               | 50,369,530  |               |            |           | 3,487,068   |           
|                                                                     | Sale of equity securities                                                         |                                                                                   |                                           | 1,319,439    |                          |             |               | 1,832,149   |               |            |           | 1,819,352   |           
|                                                                     | Proceeds from maturities of fixed maturities
held for investment                  |                                                                                   |                                           | 4,000,000    |                          |             |               | 3,500,000   |               |            |           | 1,010,000   |           
|                                                                     | Proceeds from maturity and redemption of
fixed maturities available for sale      |                                                                                   |                                           | 10,322,348   |                          |             |               | 7,043,398   |               |            |           | 6,154,391   |           
|                                                                     | First mortgage loans originated                                                   |                                                                                   |                                           | (193,600     | )                        |             |               |            |               |            |           |            |           
|                                                                     | Principal collected on first mortgage loans                                       |                                                                                   |                                           | 511,521      |                          |             |               | 425,627     |               |            |           | 801,141     |           
|                                                                     | Net increase in policy loans                                                      |                                                                                   |                                           | (764,365     | )                        |             |               | (820,239    | )             |            |           | (249,399    | )         
|                                                                     | Other, net                                                                        |                                                                                   |                                           | (191,593     | )                        |             |               | (223,696    | )             |            |           | (232,568    | )         
|                                                                     |                                                                                   |                                                                                   |                                           |              |                          |             |               |             |               |            |           |            
|                                                                     |                                                                                   |                                                                                   | Net cash used in investing activities     |              |                          | (10,126,747 | )             |             |               | (7,673,564 | )         |             |            | (9,987,369 | )
|                                                                     |                                                                                   |                                                                                   |                                           |              |                          |             |               |             |               |            |           |            
|Cash flows from financing activities:                                |                                                                                   |                                                                                   |                                           |              |                          |             |               |             |               |            |           |            
|                                                                     | Cash dividends paid                                                               |                                                                                   |                                           | (1,019,980   | )                        |             |               | (1,019,108  | )             |            |           | (1,019,108  | )         
|                                                                     | Purchase of treasury stock                                                        |                                                                                   |                                           | (116,949     | )                        |             |               | (96,067     | )             |            |           | (145,945    | )         
|                                                                     |                                                                                   |                                                                                   |                                           |              |                          |             |               |             |               |            |           |            
|                                                                     |                                                                                   |                                                                                   | Net cash used in financing activities     |              |                          | (1,136,929  | )             |             |               | (1,115,175 | )         |             |            | (1,165,053 | )
|                                                                     |                                                                                   |                                                                                   |                                           |              |                          |             |               |             |               |            |           |            
|                                                                     |                                                                                   |                                                                                   | Net increase in cash and
cash equivalents |              |                          | 5,726,260   |               |             |               | 6,749,697  |           |             |            | 332,370    |  
|Cash and cash equivalents:                                           |                                                                                   |                                                                                   |                                           |              |                          |             |               |             |               |            |           |            
|                                                                     | Beginning of year                                                                 |                                                                                   |                                           | 13,187,601   |                          |             |               | 6,437,904   |               |            |           | 6,105,534   |           
|                                                                     |                                                                                   |                                                                                   |                                           |              |                          |             |               |             |               |            |           |            
|                                                                     | End of year                                                                       |                                                                                   | $                                         | 18,913,861   |                          |             |               | 13,187,601  |               |            |           | 6,437,904   |           
|                                                                     |                                                                                   |                                                                                   |                                           |              |                          |             |               |             |               |            |           |            
|Supplemental disclosures of cash paid during
the year  income taxes |                                                                                   | $                                                                                 | 1,825,000                                 |              |                          |             | 1,705,292     |             |               |            | 2,156,832 |            
|                                                                     |                                                                                   |                                                                                   |                                           |              |                          |             |               |             |               |            |           |            

See accompanying notes to consolidated financial statements.

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##### Table of Contents



COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income

|                                       |                                                                         |                                             |           |                          |           |      |           |           |           |  |           |           |           | 
|-------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------------- | --------- | ------------------------ | --------- | ---- | --------- | --------- | --------- |  | --------- | --------- | --------- | 
|                                       |                                                                         |                                             |           | Years ended December 31,
|                                       |                                                                         |                                             |           |                         
|                                       |                                                                         |                                             |           | 2002                     |           | 2001 |           | 2000     
|                                       |                                                                         |                                             |           |                          |           |      |           |          
|Net income                             |                                                                         | $                                           | 7,308,874 |                          |           |      | 6,445,672 |           |           |  | 7,606,215 |          
|                                       |                                                                         |                                             |           |                          |           |      |           |           |           |  |           |          
|Other comprehensive income before tax: |                                                                         |                                             |           |                          |           |      |           |           |           |  |           |          
|                                       | Unrealized gains on securities
available for sale                       |                                             |           | 4,881,177                |           |      |           | 4,120,265 |           |  |           | 3,283,344 |          
|                                       | Reclassification adjustment for realized gains
included in net earnings |                                             |           | (1,036,704               | )         |      |           | (27,501   | )         |  |           | (405,933  | )        
|                                       |                                                                         |                                             |           |                          |           |      |           |           |           |  |           |          
|                                       |                                                                         | Total other comprehensive income
before tax |           |                          | 3,844,473 |      |           |           | 4,092,764 |  |           |           | 2,877,411 | 
|                                       | Income tax expense related to items
of other comprehensive income       |                                             |           | 1,436,218                |           |      |           | 1,558,113 |           |  |           | 1,126,466 |          
|                                       |                                                                         |                                             |           |                          |           |      |           |           |           |  |           |          
|                                       |                                                                         | Other comprehensive income,
net of tax      |           |                          | 2,408,255 |      |           |           | 2,534,651 |  |           |           | 1,750,945 | 
|                                       |                                                                         |                                             |           |                          |           |      |           |           |           |  |           |          
|                                       |                                                                         | Total comprehensive income                  |           | $                        | 9,717,129 |      |           |           | 8,980,323 |  |           |           | 9,357,160 | 
|                                       |                                                                         |                                             |           |                          |           |      |           |           |           |  |           |          

See accompanying notes to consolidated financial statements.

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COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002

(1) Summary of Significant Accounting Policies



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cotton States Life Insurance Company (the Company) was organized under
the laws of the State of Georgia in 1955. The Company is currently
licensed to transact business in Alabama, Florida, Georgia, Kentucky,
Louisiana, Mississippi, North Carolina, South Carolina, Tennessee and
Virginia. The Company currently markets only individual life insurance,
payroll deduction life insurance, guaranteed issue and simplified issue
life insurance and individual annuities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | On February 21, 2002, the Company filed notice of its intent to withdraw
its multi-line exclusive agents from Kentucky primarily due to losses
incurred by the Companys affiliate, Cotton States Mutual Insurance
Company. Without objection from the Kentucky Department of Insurance, the
Companys withdrawal plan was accepted pursuant to Kentucky insurance
regulations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | In July of 1989, the Company formed CSI Brokerage Services, Inc. (CSI).
CSI brokers insurance products for the Companys exclusive agents not
offered by the Companys affiliated property and casualty companies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | In November of 1989, the Company acquired 60% of the outstanding common
stock of Cotton States Marketing Resources, Inc. (CSMR). During 1992,
the Company acquired the remaining 40% of CSMRs stock. CSMR brokers
through the Companys exclusive agents other insurance companies life and
accident and health products not underwritten by the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America (GAAP), which vary in certain respects from reporting
practices prescribed or permitted by the Insurance Department of the State
of Georgia. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the reported amounts of revenues and
expenses during the reporting period. Amounts that the Company deems to be
most sensitive to changes in estimates include deferred policy acquisition
costs, future policy benefits, income taxes, and impairments as they relate
to investments. In addition, the Company must determine requirements for
disclosure of contingent assets and liabilities as of the date of the
financial statements based upon estimates. In all instances, actual
results could differ from estimates.
|
| | The significant accounting policies are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consolidation Policy                                                                                                                                                                                                     
|
| | The consolidated financial statements include the accounts of the
Company, and its wholly owned subsidiaries, CSI and CSMR. All
significant intercompany balances and transactions have been eliminated
in consolidation.
|
| | Reclassifications                                                                                                                                                                                                        
|
| | Certain amounts in the accompanying financial statements have been
reclassified to conform with the current periods presentation.                                                                                       



| |                                             
| | --------------------------------------------
| | Recognition of Premiums and Brokerage Income



| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Premiums on life and accident and health insurance policies are
recognized as income when due. Premiums on universal life policies are
recognized as income when deducted from the policys account value.

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COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002



| |                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | CSI and CSMR receive commissions on insurance policies written by the
Companys agents on behalf of unaffiliated insurance companies. This
income is recognized when the related insurance policies are written as
reported by the insurance companies with which the business is placed.                                   
|
| | Future Policy Benefits                                                                                                                                                                                                                                                                                                      
|
| | Future policy benefits on life insurance policies are computed using a
net level premium method based upon various assumptions as to
investment yields, withdrawals, morbidity, and mortality. Future
policy benefits on universal life insurance policies and annuities
represent the contracts accumulated account value.



| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Reinsurance                                                                                                                                                                                          
|
| | Reinsurance premiums and benefits paid or provided are accounted for on
a basis consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Deferred Policy Acquisition Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | The costs of acquiring most new life business are deferred and
amortized with interest over the premium-paying period of the related
policies. For individual life policies, such amounts are amortized in
proportion to the ratio of the annual premium income to the total
anticipated premium income. Such anticipated premium income is
estimated using the same assumptions used for computing future policy
benefits. For universal life policies, deferrable costs are amortized
in proportion to the ratio of the contracts annual gross profits to
total anticipated gross profits. First-year excess expense charges are
also deferred and accreted to income in the same manner as deferrable
costs are amortized. Total anticipated gross profits are based on
assumptions for investment margins, surrender charges, mortality
charges, and level expense loads. The principal expenses deferred are
commissions and certain expenses of the product development, policy
issue, underwriting, and agency departments, all of which vary with and
are primarily related to the production of new business. Policy
acquisition costs deferred were approximately $10,215,000 in 2002,
$9,831,000 in 2001, and $9,313,000 in 2000.



| |                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                    
|
| | For purposes of presenting its statements of cash flows, the Company
considers all short-term investments to be cash equivalents.
Short-term investments have original maturity dates of less than three
months.                                                                                                                                                                             
|
| | Investments                                                                                                                                                                                                                                                                                                                                                                                  
|
| | The Company accounts for investments under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities.                                                                                                                                                                                                 
|
| | Fixed maturities held for investment are stated at amortized cost.
Fixed maturities available for sale are stated at fair value. The cost
of securities sold is determined by the specific identification method.
First mortgage loans are stated at their aggregate unpaid balance.
Policy loans are stated at their aggregate unpaid balance and
short-term investments are stated at cost.

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COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002



| |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Investments deemed to have a loss in value which is other than
temporary are written down to their fair value. Unrealized gains and
losses on fixed maturities available for sale are excluded from
earnings and are reported within shareholders equity as a component of
accumulated other comprehensive income, net of deferred taxes and
amounts attributable to the Companys universal life and annuity
products.



| |                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | The Company, CSI, and CSMR file a consolidated Federal income tax
return.                                                                                                                                                                                                                                                                                                                                                     
|
| | Deferred taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory rates applicable to future
years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The effect on
deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.                          
|
| | Stock Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees,and related interpretations
in accounting for its stock based compensation. As such, compensation
expense would generally only be recorded if the current market price of
the underlying stock on the date of grant exceeded the exercise price.
|
| | Earnings Per Share                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | The following table summarizes information relating to the calculation
of basic and diluted earnings per share of common stock:                                                                                                                                                                                                                                                                                               

|                                 |                                |         |                  |  |                          |   |               |  |             |         |               |  |             |   |               |  |        |         |           |  |   |   |           |  |       |         | 
|-------------------------------- | ------------------------------ | ------- | ---------------- |  | ------------------------ | - | ------------- |  | ----------- | ------- | ------------- |  | ----------- | - | ------------- |  | ------ | ------- | --------- |  | - | - | --------- |  | ----- | ------- | 
|                                 |                                |         |                  |  | Years ended December 31,
|                                 |                                |         |                  |  |                         
|                                 |                                |         |                  |  | 2002                     |   | 2001          |  | 2000       
|                                 |                                |         |                  |  |                          |   |               |  |            
|                                 |                                |         |                  |  | Income                   |   | Shares        |  | Income      |         | Shares        |  | Income      |   | Shares       
|                                 |                                |         |                  |  | (Numerator)              |   | (Denominator) |  | (Numerator) |         | (Denominator) |  | (Numerator) |   | (Denominator)
|                                 |                                |         |                  |  |                          |   |               |  |             |         |               |  |             |   |              
|Data for Basic EPS
calculation   |                                | $       | 7,308,874        |  |                          |   | 6,337,387     |  |             | $       | 6,445,672     |  |             |   | 6,342,817     |  |        | $       | 7,606,215 |  |   |   | 6,345,687 | 
|                                 | Effect of dilutive
securities: |         |                  |  |                          |   |               |  |             |         |               |  |             |   |               |  |        |         |           |  |   |   |           |  |      
|                                 |                                | Options |                  |  |                         |   |               |  | 1,239       |         |               |  |            |   |               |  | 13,898 |         |           |  |  |   |           |  | 2,655 |        
|                                 |                                |         | Restricted
stock |  |                          |  |               |  |             | 156,041 |               |  |             |  |               |  |        | 163,218 |           |  |   |  |           |  |       | 117,727 | 
|                                 |                                |         |                  |  |                          |   |               |  |             |         |               |  |             |   |               |  |        |         |           |  |   |   |           | 
|Data for Diluted
EPS calculation |                                | $       | 7,308,874        |  |                          |   | 6,494,667     |  |             | $       | 6,445,672     |  |             |   | 6,519,933     |  |        | $       | 7,606,215 |  |   |   | 6,466,069 | 
|                                 |                                |         |                  |  |                          |   |               |  |             |         |               |  |             |   |               |  |        |         |           |  |   |   |           | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Recent Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | In June 2001, the Financial Accounting Standards Board issued SFAS No.
141 Business Combinations. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations with a
closing date after June 30, 2001. This statement eliminates the
pooling-of-interest method of accounting for business combinations.
SFAS No. 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets in a business
combination. The Financial Accounting Standards Board has also issued
SFAS No. 142 Goodwill and Other Intangible Assets which supersedes
Opinion 17 Intangible
Assets, and is effective for fiscal years beginning after December 15,
2001. SFAS No. 142 addresses how goodwill and other intangible assets
should be accounted for in financial statements upon acquisition and
how these items should be accounted for subsequent to acquisition. The
Companys adoption of SFAS Nos. 141 and 142 did not affect the
Companys results of operations or financial position.

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COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Financial Accounting Standards Board also issued SFAS No. 143
Accounting for Asset Retirement Obligations, which is effective for
fiscal years beginning after June 15, 2002, with early adoption
encouraged. SFAS No. 143 applies to legal obligations associated with
the retirement of long-lived assets that result from the acquisition,
construction, development and (or) the normal operation of a long-lived
asset, except for certain obligations of lessees. The adoption of SFAS
No. 143 did not affect the Companys results of operations or financial
position.                                                                                                                                                                                                         
|
| | The Financial Accounting Standards Board also issued SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived Assets which
supercedes SFAS No. 121 Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, and the accounting
and reporting provisions of APB Opinion No. 30 Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions, and is effective for fiscal years beginning after
December 15, 2001. SFAS No. 144 establishes a single accounting model
for the disposal of long-lived assets. The adoption of SFAS No. 144
did not affect the Companys results of operations or financial
position.
|
| | The Financial Accounting Standards Board also issued SFAS No. 145
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, which is effective for
financial statements issued after May 15, 2002. The adoption of SFAS
No. 145 did not affect the Companys results of operations or financial
position.                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | In July 2002, the Financial Accounting Standards Board issued SFAS No.
146 Accounting for Costs Associated with Exit or Disposal Activities,
which is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The adoption of SFAS No. 146 is not
expected to affect the Companys results of operations or financial
position.                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | In October 2002, the Financial Accounting Standards Board issued SFAS
No. 147 Acquisitions of Certain Financial Institutions, which is
effective October 1, 2002. The adoption of SFAS No. 147 did not affect
the Companys results of operations or financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | In November 2002 the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, for which accounting requirements are
effective for guarantees issued or modified after December 31, 2002 and
disclosure requirements are effective for financial statements issued
after December 15, 2002. The adoption of Interpretation No. 45 did
not, and is not expected to, affect the Companys results of operations
or financial position.                                                                                                                                                                                                                  
|
| | In December 2002, the Financial Accounting Standards Board issued SFAS
No. 148 Accounting for Stock-Based Compensation  Transition and
Disclosure, which is effective for financial statements issued after
December 15, 2002. The adoption of SFAS No. 148 did not affect the
Companys results of operations or financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | Effective January 1, 2001, the State of Georgia adopted the National
Association of Insurance Commissioners Codification of Statutory
Accounting Practices. The impact on the Companys statutory surplus
upon adoption of the codification standards was not material.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002

(2) Restatement of Previously Issued Financial Statements



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2003, the Company became aware that the obligations under
its employee and directors stock-based compensation programs, which may be
settled only with shares of the Companys common stock, were incorrectly
classified as liabilities instead of shareholders equity. Accordingly,
the Company has restated the affected balances for all prior periods in
these consolidated financial statements. Such restatements do not impact
net income as reported in the accompanying consolidated statements of
earnings or retained earnings for any periods presented. The effects of
the restatements were as follows:

|                  |                            |  |                        |             |             |  |  |             | 
|----------------- | -------------------------- |  | ---------------------- | ----------- | ----------- |  |  | ----------- | 
|                  |                            |  | As Previously Reported |             | As Restated
|                  |                            |  |                        |             |            
|December 31, 2001 |                            |  |                        |             |             |  |  |            
|                  | Other liabilities          |  | $                      | 7,774,011   |             |  |  | 5,663,215   | 
|                  |                            |  |                        |             |             |  |  |            
|                  | Total liabilities          |  | $                      | 164,245,816 |             |  |  | 162,135,020 | 
|                  |                            |  |                        |             |             |  |  |            
|                  | Common stock               |  | $                      | 6,754,504   |             |  |  | 6,917,722   | 
|                  |                            |  |                        |             |             |  |  |            
|                  | Additional paid-in capital |  | $                      | 1,496,417   |             |  |  | 3,443,995   | 
|                  |                            |  |                        |             |             |  |  |            
|                  | Total shareholders equity |  | $                      | 70,534,522  |             |  |  | 72,645,318  | 
|                  |                            |  |                        |             |             |  |  |            
|December 31, 2000 |                            |  |                        |             |             |  |  |            
|                  | Common stock               |  | $                      | 6,754,504   |             |  |  | 6,870,283   | 
|                  |                            |  |                        |             |             |  |  |            
|                  | Additional paid-in capital |  | $                      | 1,496,417   |             |  |  | 2,917,628   | 
|                  |                            |  |                        |             |             |  |  |            
|                  | Total shareholders equity |  | $                      | 62,733,879  |             |  |  | 64,270,869  | 
|                  |                            |  |                        |             |             |  |  |            
|December 31, 1999 |                            |  |                        |             |             |  |  |            
|                  | Common stock               |  | $                      | 6,754,504   |             |  |  | 6,830,073   | 
|                  |                            |  |                        |             |             |  |  |            
|                  | Additional paid-in capital |  | $                      | 1,528,178   |             |  |  | 2,615,899   | 
|                  |                            |  |                        |             |             |  |  |            



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2003, the Company became aware that
the pension plan disclosures in 2001 had been based on the actuarial
report issued as of January 1, 2001 rather than the actuarial
report issued as of December 31, 2001, which had been used in
the computation of the pension expense and accrued pension liability.
These corrections do not impact the accompanying consolidated
balance sheets, consolidated statements of earnings or retained
earnings for any period presented. The revised disclosures are
included in Note 7 and consist of the benefit obligation at end
of year which changed from $1,215,750 to $2,169,044, the fair value
of plan assets at end of year which changed from $1,670,770 to
$1,425,129, the accrued liabilities which changed from $(394,150) to
$(487,497), the discount rate which changed from 6.21% to 7.25%, and
the expected long-term rate of return which changed from 8.25% to
9.00%.
|
| | Also during 2003, the Company became aware
that it reported stock issued under its employee stock-based
compensation program in 2000 and proceeds from the sale of
investments in 2001 and 2000 incorrectly in the consolidated
statements of cash flows. Accordingly, the Company restated the affected
components of the consolidated statements of cash flows for all periods
presented in these consolidated financial statements. Such restatements do not
impact net income as reported in the accompanying consolidated statements of
earnings or retained earnings for any period presented. The effects of the
restatements were as follows:                                                                                                                                                                                                                                                                               

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COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002

|                  |                                           |  |               |             |             |  |  |            |  
|----------------- | ----------------------------------------- |  | ------------- | ----------- | ----------- |  |  | ---------- | -
|                  |                                           |  | As Previously |             |             |  | 
|                  |                                           |  | Reported      |             | As Restated
|                  |                                           |  |               |             |            
|December 31, 2001 |                                           |  |               |             |             |  |  |           
|                  | Net cash provided by operating activities |  | $             | 15,565,937  |             |  |  | 15,538,436 |  
|                  |                                           |  |               |             |             |  |  |           
|                  | Net
cash used in investing activities     |  | $             | (7,701,065  | )           |  |  | (7,673,564 | )
|                  |                                           |  |               |             |             |  |  |           
|December 31, 2000 |                                           |  |               |             |             |  |  |           
|                  | Net cash provided by operating activities |  | $             | 11,755,755  |             |  |  | 11,484,792 |  
|                  |                                           |  |               |             |             |  |  |           
|                  | Net
cash used in investing activities     |  | $             | (10,393,302 | )           |  |  | (9,987,369 | )
|                  |                                           |  |               |             |             |  |  |           
|                  | Net
cash used in financing activities     |  | $             | (1,030,083  | )           |  |  | (1,165,053 | )
|                  |                                           |  |               |             |             |  |  |           

(3) Investments



| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | The amortized cost and estimated fair values of investments in debt and
equity securities as of December 31, 2002 and 2001 are as follows:

|                     |                                                                                       |       |           |            |             |            |        |            |           |       |         |           |         |  |           |            |             | 
|-------------------- | ------------------------------------------------------------------------------------- | ----- | --------- | ---------- | ----------- | ---------- | ------ | ---------- | --------- | ----- | ------- | --------- | ------- |  | --------- | ---------- | ----------- | 
|                     |                                                                                       |       |           | 2002      
|                     |                                                                                       |       |           |           
|                     |                                                                                       |       |           |            |             |            |        | Gross      |           | Gross |         | Estimated
|                     |                                                                                       |       |           | Amortized  |             | unrealized |        | unrealized |           | fair 
|                     |                                                                                       |       |           | cost       |             | gains      |        | losses     |           | value
|                     |                                                                                       |       |           |            |             |            |        |            |           |      
|Held for investment: |                                                                                       |       |           |            |             |            |        |            |           |       |         |           |         |  |           |           
|                     | Corporate securities                                                                  |       | $         | 7,048,175  |             |            |        | 276,198    |           |       |         |          |         |  |           | 7,324,373  |            
|                     |                                                                                       |       |           |            |             |            |        |            |           |       |         |           |         |  |           |           
|Available for sale:  |                                                                                       |       |           |            |             |            |        |            |           |       |         |           |         |  |           |           
|                     | U.S. Treasury securities and
obligations of U.S. government
corporations and agencies |       | $         | 38,462,349 |             |            |        | 1,974,989  |           |       |         | 594       |         |  |           | 40,436,744 |            
|                     | Corporate securities                                                                  |       |           | 72,424,094 |             |            |        | 3,086,079  |           |       |         | 190,280   |         |  |           | 75,319,893 |            
|                     | Debt securities issued by
foreign governments                                         |       |           | 3,391,946  |             |            |        | 23,042     |           |       |         | 24,807    |         |  |           | 3,390,181  |            
|                     | Mortgage-backed securities                                                            |       |           | 31,880,950 |             |            |        | 1,313,426  |           |       |         | 33,788    |         |  |           | 33,160,588 |            
|                     |                                                                                       |       |           |            |             |            |        |            |           |       |         |           |         |  |           |           
|                     |                                                                                       | Total |           | $          | 146,159,339 |            |        |            | 6,397,536 |       |         |           | 249,469 |  |           |            | 152,307,406 | 
|                     |                                                                                       |       |           |            |             |            |        |            |           |       |         |           |         |  |           |           
|Equity securities    |                                                                                       | $     | 2,984,720 |            |             |            | 22,405 |            |           |       | 487,230 |           |         |  | 2,519,895 |           
|                     |                                                                                       |       |           |            |             |            |        |            |           |       |         |           |         |  |           |           

|                     |                                                                                       |       |           |            |             |            |         |            |           |       |         |           |           |  |           |            |             | 
|-------------------- | ------------------------------------------------------------------------------------- | ----- | --------- | ---------- | ----------- | ---------- | ------- | ---------- | --------- | ----- | ------- | --------- | --------- |  | --------- | ---------- | ----------- | 
|                     |                                                                                       |       |           | 2001      
|                     |                                                                                       |       |           |           
|                     |                                                                                       |       |           |            |             |            |         | Gross      |           | Gross |         | Estimated
|                     |                                                                                       |       |           | Amortized  |             | unrealized |         | unrealized |           | fair 
|                     |                                                                                       |       |           | cost       |             | gains      |         | losses     |           | value
|                     |                                                                                       |       |           |            |             |            |         |            |           |      
|Held for investment: |                                                                                       |       |           |            |             |            |         |            |           |       |         |           |           |  |           |           
|                     | Debt securities issued by
foreign governments                                         |       | $         | 999,765    |             |            |         | 4,595      |           |       |         |          |           |  |           | 1,004,360  |            
|                     | Corporate securities                                                                  |       |           | 10,552,435 |             |            |         | 440,505    |           |       |         | 37,196    |           |  |           | 10,955,744 |            
|                     |                                                                                       |       |           |            |             |            |         |            |           |       |         |           |           |  |           |           
|                     |                                                                                       | Total |           | $          | 11,552,200  |            |         |            | 445,100   |       |         |           | 37,196    |  |           |            | 11,960,104  | 
|                     |                                                                                       |       |           |            |             |            |         |            |           |       |         |           |           |  |           |           
|Available for sale:  |                                                                                       |       |           |            |             |            |         |            |           |       |         |           |           |  |           |           
|                     | U.S. Treasury securities and
obligations of U.S. government
corporations and agencies |       | $         | 36,763,922 |             |            |         | 592,847    |           |       |         | 66,614    |           |  |           | 37,290,155 |            
|                     | Corporate securities                                                                  |       |           | 79,403,521 |             |            |         | 1,681,550  |           |       |         | 1,079,741 |           |  |           | 80,005,330 |            
|                     | Mortgage-backed securities                                                            |       |           | 14,136,358 |             |            |         | 532,967    |           |       |         |          |           |  |           | 14,669,325 |            
|                     |                                                                                       |       |           |            |             |            |         |            |           |       |         |           |           |  |           |           
|                     |                                                                                       | Total |           | $          | 130,303,801 |            |         |            | 2,807,364 |       |         |           | 1,146,355 |  |           |            | 131,964,810 | 
|                     |                                                                                       |       |           |            |             |            |         |            |           |       |         |           |           |  |           |           
|Equity securities    |                                                                                       | $     | 3,673,660 |            |             |            | 194,661 |            |           |       | 396,599 |           |           |  | 3,471,722 |           
|                     |                                                                                       |       |           |            |             |            |         |            |           |       |         |           |           |  |           |           

28



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COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002



| |                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The amortized cost and estimated fair value of debt securities at December
31, 2002, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.

|                     |                                       |       |   |            |             |            |  |            |             | 
|-------------------- | ------------------------------------- | ----- | - | ---------- | ----------- | ---------- |  | ---------- | ----------- | 
|                     |                                       |       |   | Amortized  |             | Estimated 
|                     |                                       |       |   | cost       |             | fair value
|                     |                                       |       |   |            |             |           
|Held for investment: |                                       |       |   |            |             |            |  |           
|                     | Due in one year or less               |       | $ | 3,700,704  |             |            |  | 3,756,596  |            
|                     | Due after one year through five years |       |   | 3,347,471  |             |            |  | 3,567,777  |            
|                     |                                       |       |   |            |             |            |  |           
|                     |                                       | Total |   | $          | 7,048,175   |            |  |            | 7,324,373   | 
|                     |                                       |       |   |            |             |            |  |           
|Available for sale:  |                                       |       |   |            |             |            |  |           
|                     | Due in one year or less               |       | $ | 5,001,454  |             |            |  | 5,062,150  |            
|                     | Due after one year through five years |       |   | 36,750,298 |             |            |  | 38,022,347 |            
|                     | Due after five years through 10 years |       |   | 50,454,365 |             |            |  | 53,287,645 |            
|                     | Due after 10 years                    |       |   | 22,072,272 |             |            |  | 22,774,676 |            
|                     | Mortgage-backed securities            |       |   | 31,880,950 |             |            |  | 33,160,588 |            
|                     |                                       |       |   |            |             |            |  |           
|                     |                                       | Total |   | $          | 146,159,339 |            |  |            | 152,307,406 | 
|                     |                                       |       |   |            |             |            |  |           



| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bonds with an amortized cost of $1,914,000 and $1,878,000 at December 31,
2002 and 2001, respectively, were on deposit with state insurance
regulatory authorities in accordance with statutory requirements.
|
| | Realized and unrealized gains and losses on investments for the years ended
December 31 were as follows:                                                                                                     

|                                                                              |                                      |                                              |                                       |                                     |          |      |            |           |   |      |           |           |   |  |           |  
|----------------------------------------------------------------------------- | ------------------------------------ | -------------------------------------------- | ------------------------------------- | ----------------------------------- | -------- | ---- | ---------- | --------- | - | ---- | --------- | --------- | - |  | --------- | -
|                                                                              |                                      |                                              |                                       |                                     |          | 2002 |            | 2001      |   | 2000
|                                                                              |                                      |                                              |                                       |                                     |          |      |            |           |   |     
|Realized gains (losses) on sales, redemptions,
and impairment of investments: |                                      |                                              |                                       |                                     |          |      |            |           |   |      |           |          
|                                                                              |                                      |                                              | Fixed maturities held for investment: |                                     |          |      |            |           |   |      |           |           |   |  |          
|                                                                              |                                      |                                              |                                       | Gross losses:                       |          | $    | (49,768    | )         |   |      |          |           |   |  |          |  
|                                                                              |                                      |                                              | Fixed maturities available for sale:  |                                     |          |      |            |           |   |      |           |           |   |  |          
|                                                                              |                                      |                                              |                                       | Gross gains                         |          |      | 3,921,917  |           |   |      | 874,785   |           |   |  | 92,433    |  
|                                                                              |                                      |                                              |                                       | Gross losses                        |          |      | (1,602,144 | )         |   |      | (709,279  | )         |   |  | (9,213    | )
|                                                                              |                                      |                                              |                                       |                                     |          |      |            |           |   |      |           |          
|                                                                              |                                      |                                              |                                       | Net realized gains                  |          |      | 2,319,773  |           |   |      | 165,506   |           |   |  | 83,220    |  
|                                                                              |                                      |                                              |                                       |                                     |          |      |            |           |   |      |           |          
|                                                                              |                                      | Equity securities:                           |                                       |                                     |          |      |            |           |   |      |           |           |   | 
|                                                                              |                                      |                                              |                                       | Gross gains                         |          |      | 158,032    |           |   |      | 218,976   |           |   |  | 450,315   |  
|                                                                              |                                      |                                              |                                       | Gross losses                        |          |      | (939,595   | )         |   |      | (356,981  | )         |   |  | (127,602  | )
|                                                                              |                                      |                                              |                                       |                                     |          |      |            |           |   |      |           |          
|                                                                              |                                      |                                              |                                       | Net realized (losses) gains         |          |      | (781,563   | )         |   |      | (138,005  | )         |   |  | 322,713   |  
|                                                                              |                                      |                                              |                                       |                                     |          |      |            |           |   |      |           |          
|                                                                              |                                      | Net realized losses on other invested assets |                                       |                                     | (451,738 | )    |            |           |  |      |           |           |  | 
|                                                                              |                                      |                                              |                                       |                                     |          |      |            |           |   |      |           |          
|                                                                              |                                      |                                              |                                       | Total                               |          |      | 1,036,704  |           |   |      | 27,501    |           |   |  | 405,933   |  
|                                                                              |                                      |                                              |                                       |                                     |          |      |            |           |   |      |           |          
|Changes in unrealized gains (losses):                                         |                                      |                                              |                                       |                                     |          |      |            |           |   |      |           |          
|                                                                              | Fixed maturities held for investment |                                              |                                       | (131,706                            | )        |      |            | 251,068   |   |      |           | 257,944   |  
|                                                                              | Fixed maturities available for sale  |                                              |                                       | 4,487,058                           |          |      |            | 4,889,813 |   |      |           | 3,299,306 |  
|                                                                              | Equity securities                    |                                              |                                       | (262,887                            | )        |      |            | (307,128  | ) |      |           | 13,827    |  
|                                                                              |                                      |                                              |                                       |                                     |          |      |            |           |   |      |           |          
|                                                                              |                                      |                                              |                                       | Net unrealized gains                |          |      | 4,092,465  |           |   |      | 4,833,753 |           |   |  | 3,571,077 |  
|                                                                              |                                      |                                              |                                       |                                     |          |      |            |           |   |      |           |          
|                                                                              |                                      |                                              |                                       | Total realized and unrealized
gains |          | $    | 5,129,169  |           |   |      | 4,861,254 |           |   |  | 3,977,010 |  
|                                                                              |                                      |                                              |                                       |                                     |          |      |            |           |   |      |           |          

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COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002



| |                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2002 the Company sold a security out of its held-to-maturity
portfolio due to evidence of a significant deterioration in the issuers
creditworthiness. At the time of sale the security had an amortized cost
of $499,768. The Company realized a loss of $49,768 on the transaction.
|
| | Details of net investment income are as follows:                                                                                                                                                                                                                                             

|                   |                                      |                         |   |           |            |      |  |           |            |  |  |           |            | 
|------------------ | ------------------------------------ | ----------------------- | - | --------- | ---------- | ---- |  | --------- | ---------- |  |  | --------- | ---------- | 
|                   |                                      |                         |   | 2002      |            | 2001 |  | 2000     
|                   |                                      |                         |   |           |            |      |  |          
|Investment income: |                                      |                         |   |           |            |      |  |           |            |  |  |          
|                   | Fixed maturities held for investment |                         | $ | 670,907   |            |      |  | 923,838   |            |  |  | 1,052,274 |           
|                   | Fixed maturities available for sale  |                         |   | 8,481,253 |            |      |  | 8,405,376 |            |  |  | 8,063,799 |           
|                   | Equity securities                    |                         |   | 42,756    |            |      |  | 44,357    |            |  |  | 36,582    |           
|                   | First mortgage loans                 |                         |   | 120,653   |            |      |  | 166,808   |            |  |  | 192,450   |           
|                   | Policy loans                         |                         |   | 742,616   |            |      |  | 675,825   |            |  |  | 616,130   |           
|                   | Short-term investments               |                         |   | 166,125   |            |      |  | 296,987   |            |  |  | 319,935   |           
|                   |                                      |                         |   |           |            |      |  |           |            |  |  |          
|                   |                                      | Total investment income |   |           | 10,224,310 |      |  |           | 10,513,191 |  |  |           | 10,281,170 | 
|                   | Less investment expenses             |                         |   | 395,346   |            |      |  | 230,568   |            |  |  | 190,390   |           
|                   |                                      |                         |   |           |            |      |  |           |            |  |  |          
|                   |                                      | Net investment income   |   | $         | 9,828,964  |      |  |           | 10,282,623 |  |  |           | 10,090,780 | 
|                   |                                      |                         |   |           |            |      |  |           |            |  |  |          

(4) Disclosures about Fair Value of Financial Instruments



| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:



| |                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cash and Short-Term Investments                                                                                                                                                                                                                                                                                                  
|
| | The carrying amount of cash and short-term investments is a reasonable
estimate of fair value.                                                                                                                                                                                                                                   
|
| | Investment Securities                                                                                                                                                                                                                                                                                                            
|
| | For investment securities (which include fixed maturities held for
investment, fixed maturities available for sale, and equity
securities), fair values are based on quoted market prices or dealer
quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
|
| | Mortgage Loans                                                                                                                                                                                                                                                                                                                   
|
| | The fair value of mortgage loans is estimated using the quoted market
prices for securities backed by similar loans, adjusted for differences
in loan characteristics.                                                                                                                                                           
|
| | Policy Loans                                                                                                                                                                                                                                                                                                                     
|
| | The carrying amount of policy loans is a reasonable estimate of fair
value.                                                                                                                                                                                                                                                      
|
| | Universal Life and Annuity Benefits                                                                                                                                                                                                                                                                                              
|
| | The carrying amount of universal life and annuity benefits is a
reasonable estimate of fair value since credited interest approximates
current market rates.                                                                                                                                                                     

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COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002



| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The estimated fair values and carrying values of the Companys
financial instruments at December 31, 2002 and 2001 are the same except
for investment securities which are detailed in footnote 3 and mortgage
loans as follows:

|     |  |                |           |       |  |   |           | 
|---- |  | -------------- | --------- | ----- |  | - | --------- | 
|     |  | Mortgage loans
|     |  |               
|     |  | Carrying       |           | Fair 
|     |  | amount         |           | value
|     |  |                |           |      
|2002 |  | $              | 1,320,330 |       |  | $ | 1,405,337 | 
|2001 |  |                | 1,671,989 |       |  |   | 1,715,738 | 

(5) Future Policy Benefits and Reinsurance



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | The composition of future policy benefits, and the significant assumptions
used in their development, are as follows (dollars in thousands):

|                                 |               |                |                              |        |               |          |         |                |        |           |             |             |    |             |              |                   |           |                     |                     |            |               |  |  |  |  |  | 
|-------------------------------- | ------------- | -------------- | ---------------------------- | ------ | ------------- | -------- | ------- | -------------- | ------ | --------- | ----------- | ----------- | -- | ----------- | ------------ | ----------------- | --------- | ------------------- | ------------------- | ---------- | ------------- |  |  |  |  |  | 
|                                 |               |                |                              |        | Future policy |          |         |                |        |           | Assumptions |             |    |             |             
|                                 |               |                |                              |        | benefits      |          |         |                |        |           |             |             |    |             |             
|                                 |               |                |                              |        |               |          | Years   |                |        |           |             |             |    |             |              |                   |           |                     |                    
|Line of business                 |               | 2002           |                              | 2001   |               | of issue |         | Interest rates |        | Mortality |             | Withdrawals
|                                 |               |                |                              |        |               |          |         |                |        |           |             |            
|Life:                            |               |                |                              |        |               |          |         |                |        |           |             |             |    |             |              |                   |           |                     |                     |            |               |  |  | 
|                                 | Individual    |                | $                            | 3,454  |               |          |         | 3,518          |        |           |             | 1956-65     |    |             |              | 4%                |           |                     | 1955-60 Basic Table |            | Company      
|                                 |               |                |                              |        |               |          |         |                |        |           |             |             |    |             |              |                   |           | Select and Ultimate |                     | experience
|                                 | Individual    |                |                              | 7,851  |               |          |         | 8,012          |        |           |             | 1966-79     |    |             |              | 6.5% - 5%(A)      |           |                     | Same as above       |            | Same as above
|                                 | Individual    |                |                              | 5,109  |               |          |         | 5,197          |        |           |             | 1980-88     |    |             |              | 7.5% - 6%(A)      |           |                     | 1965-70 Basic Table |            | Same as above
|                                 |               |                |                              |        |               |          |         |                |        |           |             |             |    |             |              |                   |           | Select and Ultimate |                     |            |               | 
|                                 | Individual    |                |                              | 31,472 |               |          |         | 25,313         |        |           |             | 1989-02     |    |             |              | 7.5% - 6%(A)      |           |                     | 1975-80 Basic Table |            | Same as above
|                                 |               |                |                              |        |               |          |         |                |        |           |             |             |    |             |              |                   |           | Select and Ultimate |                     |            |               | 
|                                 | Individual    |                |                              | 5,275  |               |          |         | 4,721          |        |           | Various     |             |    | 3.5% - 2.5% |              |                   | Statutory |                     | Same as above      
|                                 | Annuities and |                |                              |        |               |          |         |                |        |           |             |             |    |             |              |                   |           |                     | Accumulated         |            | Same as above
|                                 |               | universal life |                              |        | 107,230       |          |         |                | 98,942 |           |             | Various     |    |             | 6.25% - 4.5% |                   |           | account value       |                     |            |               | 
|Group                            |               |                | 5                            |        |               |          | 5       |                |        | Various   |             |             |   |             |              | Unearned premiums |           |                     |                    |           
|                                 |               |                |                              |        |               |          |         |                |        |           |             |             |    |             |              |                   |           |                     |                     |            |               |  |  | 
|                                 |               |                | 160,396                      |        |               |          | 145,708 |                |        |           |             |             |    |             |              |                   |           |                     |                     |            |               |  |  | 
|Accident and health
 Individual |               |                | 28                           |        |               |          | 29      |                |        | Various   |             |             | 3% |             |              |                   |          |                     |                     |            |              | 
|                                 |               |                |                              |        |               |          |         |                |        |           |             |             |    |             |              |                   |           |                     |                     |            |               |  |  | 
|                                 |               |                | Total future
policy
benefits |        | $             | 160,424  |         |                |        | 145,737   |             |             |    |             |              |                   |           |                     |                     |            |               |  |  |  |  |  | 
|                                 |               |                |                              |        |               |          |         |                |        |           |             |             |    |             |              |                   |           |                     |                     |            |               |  |  | 



|(A) |  | Interest rates are graded to the ultimate rate in 25 years.
|--- |  | -----------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company participates in certain business assumed from Federally
sponsored group pools. Further, it is the Companys general policy to
reinsure individual life insurance in excess of $100,000, group life
insurance in excess of $55,000, major medical payments in excess of $85,000
annually per individual, accidental deaths, and certain disability income
coverage.

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COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company utilizes reinsurance agreements to reduce its exposure to large
losses in all aspects of its insurance business. Such reinsurance permits
recovery of a portion of large losses from reinsurers, although it does not
discharge the primary liability of the Company as direct insurer of the
risks insured. The Company evaluates the financial strength of potential
reinsurers and continually monitors the financial condition of reinsurers.
Only those reinsurance recoverable balances deemed probable of recovery are
reflected as assets on the Companys consolidated balance sheets. Amounts
ceded under reinsurance agreements become liabilities of the Company should
the reinsurers be unable to meet their obligations under the reinsurance
agreements.



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | The effect of reinsurance assumed and ceded on certain financial statement
accounts is as follows:

|                     |                     |              |   |            |            |      |  |            |            |  |  |            |            | 
|-------------------- | ------------------- | ------------ | - | ---------- | ---------- | ---- |  | ---------- | ---------- |  |  | ---------- | ---------- | 
|                     |                     |              |   | 2002       |            | 2001 |  | 2000      
|                     |                     |              |   |            |            |      |  |           
|Premiums:            |                     |              |   |            |            |      |  |            |            |  |  |           
|                     | Direct premiums     |              | $ | 36,441,773 |            |      |  | 33,660,529 |            |  |  | 30,346,024 |           
|                     | Reinsurance assumed |              |   | 1,201,107  |            |      |  | 923,435    |            |  |  | 766,213    |           
|                     | Reinsurance ceded   |              |   | (4,550,788 | )          |      |  | (4,363,227 | )          |  |  | (4,295,714 | )         
|                     |                     |              |   |            |            |      |  |            |            |  |  |           
|                     |                     | Net premiums |   | $          | 33,092,092 |      |  |            | 30,220,737 |  |  |            | 26,816,523 | 
|                     |                     |              |   |            |            |      |  |            |            |  |  |           
|Benefits and claims: |                     |              |   |            |            |      |  |            |            |  |  |           
|                     | Reinsurance assumed |              | $ | 1,180,846  |            |      |  | 903,187    |            |  |  | 751,279    |           
|                     |                     |              |   |            |            |      |  |            |            |  |  |           
|                     | Reinsurance ceded   |              | $ | 3,360,986  |            |      |  | 4,774,926  |            |  |  | 4,230,022  |           
|                     |                     |              |   |            |            |      |  |            |            |  |  |           

(6) Income Taxes



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Deferred income taxes reflect the net tax effects of temporary differences
between the carrying values of assets and liabilities for financial
reporting purposes and Federal income tax purposes. The net deferred tax
liability at December 31, 2002 and 2001 is composed of the tax-effected
temporary differences related to the following amounts:

|                          |                                          |                                |   |            |            |      |  |            |            | 
|------------------------- | ---------------------------------------- | ------------------------------ | - | ---------- | ---------- | ---- |  | ---------- | ---------- | 
|                          |                                          |                                |   | 2002       |            | 2001
|                          |                                          |                                |   |            |            |     
|Deferred tax assets:      |                                          |                                |   |            |            |      |  |           
|                          | Equity securities                        |                                | $ | 355,424    |            |      |  | 68,659     |           
|                          | Life insurance reserves                  |                                |   | 6,398,237  |            |      |  | 6,205,996  |           
|                          | Unearned mortality and expense charges   |                                |   | 877,807    |            |      |  | 855,149    |           
|                          | Postretirement health benefits liability |                                |   | 73,025     |            |      |  | 79,625     |           
|                          | Deferred compensation                    |                                |   | 438,834    |            |      |  | 425,683    |           
|                          | Other, net                               |                                |   | 290,351    |            |      |  | 221,963    |           
|                          |                                          |                                |   |            |            |      |  |           
|                          |                                          | Total deferred tax assets      |   |            | 8,433,678  |      |  |            | 7,857,075  | 
|                          |                                          |                                |   |            |            |      |  |           
|Deferred tax liabilities: |                                          |                                |   |            |            |      |  |           
|                          | Fixed maturities available for sale      |                                |   | 2,090,343  |            |      |  | 564,743    |           
|                          | Deferred policy acquisition costs        |                                |   | 17,360,463 |            |      |  | 15,328,987 |           
|                          | Due and unpaid premiums                  |                                |   | 118,501    |            |      |  | 99,475     |           
|                          | Other, net                               |                                |   | 45,555     |            |      |  | 69,121     |           
|                          |                                          |                                |   |            |            |      |  |           
|                          |                                          | Total deferred tax liabilities |   |            | 19,614,862 |      |  |            | 16,062,326 | 
|                          |                                          |                                |   |            |            |      |  |           
|                          |                                          | Net deferred tax liability     |   | $          | 11,181,184 |      |  |            | 8,205,251  | 
|                          |                                          |                                |   |            |            |      |  |           



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | SFAS No. 109, Accounting for Income Taxes,specifically identifies certain
temporary differences for which deferred tax liabilities are not recognized
unless it becomes apparent that those temporary differences will reverse in
the foreseeable future. The Company has not recorded a deferred tax
liability for one such item entitled policyholders surplus created by
Federal income tax regulations in effect prior to 1984. Certain untaxed
income accumulated in this special memorandum tax account will become
taxable if distributions, other than stock dividends, are made in excess of
certain amounts

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COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002



| |                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | accumulated in another special memorandum tax account entitled
shareholders surplus. The balance in the policyholders surplus
account at December 31, 2002 was $59,088,000. The balance in the
shareholders surplus account at December 31, 2002 was $4,203,000. The
Company does not anticipate any of the policyholders surplus account
becoming taxable in the foreseeable future.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In assessing the deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Management has concluded that it is
more likely than not that all of its deferred tax assets are realizable.
Therefore, no valuation allowance was established at December 31, 2002 and
2001.
|
| | Federal income tax expense is less than amounts determined by multiplying
earnings before Federal income taxes by the Federal tax rate of 35%. The
reasons for such difference and the tax effect of each are as follows:                                                                                                                                                                                                                                                                                                             

|                                                              |                            |   |           |           |      |  |           |           |  |  |           |           | 
|------------------------------------------------------------- | -------------------------- | - | --------- | --------- | ---- |  | --------- | --------- |  |  | --------- | --------- | 
|                                                              |                            |   | 2002      |           | 2001 |  | 2000     
|                                                              |                            |   |           |           |      |  |          
|Federal income tax expense at
statutory rate                  |                            | $ | 3,594,411 |           |      |  | 3,102,595 |           |  |  | 3,798,645 |          
|Special deduction available to small
life insurance companies |                            |   | (608,987  | )         |      |  | (611,156  | )         |  |  | (559,193  | )        
|Surtax exemption                                              |                            |   | (49,546   | )         |      |  | (71,184   | )         |  |  | (92,163   | )        
|Other, net                                                    |                            |   | 24,993    |           |      |  | (1,371    | )         |  |  | 99,768    |          
|                                                              |                            |   |           |           |      |  |           |           |  |  |           |          
|                                                              | Total Federal income taxes |   | $         | 2,960,871 |      |  |           | 2,418,884 |  |  |           | 3,247,057 | 
|                                                              |                            |   |           |           |      |  |           |           |  |  |           |          

(7) Retirement Plans, Other Postretirement Benefit Plans and Deferred Compensation Plans



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company, in conjunction with Cotton States Mutual (Mutual) and Shield
Insurance Company (Shield), affiliates, sponsors a non-contributory
defined benefit pension plan covering all eligible employees. Plan
benefits are based on the age of the employee, the employees average
salary for the highest five consecutive years of compensation and the
employees years of service. The Companys funding policy is to make
annual contributions sufficient to fund the plans normal cost (current
service cost) plus amortization of the unfunded prior service cost. The
Company and its affiliates are charged the allocable share of such
contributions based on their proportionate share of payroll.
|
| | In addition to pension benefits, the Company has a plan which provides for
postretirement health care and life insurance benefits for certain
employees. These benefits include major medical insurance with deductible
and coinsurance provisions. The Company accrues benefits on a current
basis and the plan is not funded.                                                                                                                                                                                                                                                                                                                                                                                      

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COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002



| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following table summarizes plan assets, obligations, pension cost and
assumptions of the pension plan and other postretirement benefit plan as of
December 31, 2002 and 2001.

|                                            |                                                |   |                  |           |                    |  |        |           |      |   |   |          |   |  |   |          |  
|------------------------------------------- | ---------------------------------------------- | - | ---------------- | --------- | ------------------ |  | ------ | --------- | ---- | - | - | -------- | - |  | - | -------- | -
|                                            |                                                |   | Pension Benefits |           | Other Benefits    
|                                            |                                                |   |                  |           |                   
|                                            |                                                |   | 2002             |           | 2001 (As Restated) |  | 2002   |           | 2001
|                                            |                                                |   |                  |           |                    |  |        |           |     
|Change in benefit obligation:               |                                                |   |                  |           |                    |  |        |           |      |   |   |          |   |  |   |         
|                                            | Benefit obligation at beginning of year        |   | $                | 2,169,044 |                    |  |        | 1,818,560 |      |   | $ | 144,591  |   |  |   | 152,508  |  
|                                            | Benefits accrued/service cost                  |   |                  | 93,977    |                    |  |        | 93,563    |      |   |   |         |   |  |   | 3,010    |  
|                                            | Interest                                       |   |                  | 147,301   |                    |  |        | 135,507   |      |   |   | 10,483   |   |  |   | 11,383   |  
|                                            | Actuarial gain or loss                         |   |                  | (85,080   | )                  |  |        | 150,520   |      |   |   | (7,908   | ) |  |   | (4,072   | )
|                                            | Benefits paid                                  |   |                  | (60,453   | )                  |  |        | (42,435   | )    |   |   | (20,412  | ) |  |   | (18,238  | )
|                                            | Plan amendments                                |   |                  |          |                    |  |        | 13,329    |      |   |   |         |   |  |   |         |  
|                                            |                                                |   |                  |           |                    |  |        |           |      |   |   |          |   |  |   |         
|                                            | Benefit obligation at end of year              |   | $                | 2,264,789 |                    |  |        | 2,169,044 |      |   | $ | 126,754  |   |  |   | 144,591  |  
|                                            |                                                |   |                  |           |                    |  |        |           |      |   |   |          |   |  |   |         
|Change in plan assets:                      |                                                |   |                  |           |                    |  |        |           |      |   |   |          |   |  |   |         
|                                            | Fair value of plan assets at beginning
of year |   | $                | 1,425,129 |                    |  |        | 1,463,573 |      |   | $ |         |   |  |   |         |  
|                                            | Actual return on plan assets                   |   |                  | 127,940   |                    |  |        | 3,991     |      |   |   |         |   |  |   |         |  
|                                            | Administrative expenses                        |   |                  |          |                    |  |        |          |      |   |   |         |   |  |   |         |  
|                                            | Benefits paid                                  |   |                  | (60,453   | )                  |  |        | (42,435   | )    |   |   |         |   |  |   |         |  
|                                            |                                                |   |                  |           |                    |  |        |           |      |   |   |          |   |  |   |         
|                                            | Fair value of plan assets at end of year       |   | $                | 1,492,616 |                    |  |        | 1,425,129 |      |   | $ |         |   |  |   |         |  
|                                            |                                                |   |                  |           |                    |  |        |           |      |   |   |          |   |  |   |         
|Funded Status:                              |                                                |   |                  |           |                    |  |        |           |      |   |   |          |   |  |   |         
|                                            | Funded status                                  |   | $                | (772,173  | )                  |  |        | (743,915  | )    |   | $ | (126,754 | ) |  |   | (144,591 | )
|                                            | Unamortized prior service cost                 |   |                  | 40,615    |                    |  |        | 44,576    |      |   |   |         |   |  |   |         |  
|                                            | Unrecognized net gain or loss                  |   |                  | 127,887   |                    |  |        | 213,842   |      |   |   | (92,466  | ) |  |   | (89,599  | )
|                                            | Unrecognized transition asset                  |   |                  |          |                    |  |        | (2,000    | )    |   |   |         |   |  |   |         |  
|                                            |                                                |   |                  |           |                    |  |        |           |      |   |   |          |   |  |   |         
|                                            | Accrued liabilities                            |   | $                | (603,671  | )                  |  |        | (487,497  | )    |   | $ | (219,220 | ) |  |   | (234,190 | )
|                                            |                                                |   |                  |           |                    |  |        |           |      |   |   |          |   |  |   |         
|Benefit obligation for non-vested employees |                                                | $ | 25,020           |           |                    |  | 20,012 |           |      | $ |  |          |   |  |  |         
|                                            |                                                |   |                  |           |                    |  |        |           |      |   |   |          |   |  |   |         
|Components of net periodic benefit cost:    |                                                |   |                  |           |                    |  |        |           |      |   |   |          |   |  |   |         
|                                            | Service cost                                   |   | $                | 93,977    |                    |  |        | 93,563    |      |   | $ |         |   |  |   | 3,010    |  
|                                            | Interest cost                                  |   |                  | 147,301   |                    |  |        | 135,507   |      |   |   | 10,483   |   |  |   | 11,383   |  
|                                            | Expected return on plan assets                 |   |                  | (127,065  | )                  |  |        | (130,659  | )    |   |   |         |   |  |   |         |  
|                                            | Amortization of unrecognized transition
asset  |   |                  | (2,000    | )                  |  |        | (8,000    | )    |   |   |         |   |  |   |         |  
|                                            | Amount of unrecognized gains and losses        |   |                  |          |                    |  |        |          |      |   |   | (6,483   | ) |  |   | (14,393  | )
|                                            | Amount of prior service cost recognized        |   |                  | 3,961     |                    |  |        | 2,936     |      |   |   |         |   |  |   |         |  
|                                            |                                                |   |                  |           |                    |  |        |           |      |   |   |          |   |  |   |         
|                                            | Total net periodic benefit cost                |   | $                | 116,174   |                    |  |        | 93,347    |      |   | $ | 4,000    |   |  |   |         |  
|                                            |                                                |   |                  |           |                    |  |        |           |      |   |   |          |   |  |   |         

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COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002

|                                                 |  |                  |      |                    |  |      |      |      |  |  |      |   |  |  |      |  
|------------------------------------------------ |  | ---------------- | ---- | ------------------ |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                                                 |  | Pension Benefits |      | Other Benefits    
|                                                 |  |                  |      |                   
|                                                 |  | 2002             |      | 2001
(As Restated) |  | 2002 |      | 2001
|                                                 |  |                  |      |                    |  |      |      |     
|Discount rate                                    |  |                  | 7.00 | %                  |  |      | 7.25 | %    |  |  | 6.75 | % |  |  | 7.25 | %
|Rate of compensation increase                    |  |                  | 5.00 |                    |  |      | 5.00 |      |  |  |     |   |  |  |     |  
|Expected long-term rate of return
on plan assets |  |                  | 9.00 |                    |  |      | 9.00 |      |  |  |     |   |  |  |     |  
|Projected increase in health care costs          |  |                  |     |                    |  |      |     |      |  |  | 5.25 |   |  |  | 5.00 |  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Significant actuarial assumptions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | A 1% annual increase in assumed health care cost would increase the
accumulated postretirement benefit obligation at December 31, 2002 by
approximately $7,500 and the service and interest cost components of the
net periodic postretirement benefit cost for 2002 by $500. A 1% annual
decrease in the assumed health care costs would decrease the accumulated
postretirement benefit obligation at December 31, 2002 by approximately
$6,900 and the service and interest components of the net periodic
postretirement benefit cost by $475.
|
| | The Company also sponsors a defined contribution plan for the benefit of
the Companys employees and the employees of affiliated companies.
Matching contributions by the Company vary and are determined by the
Companys prior year profitability measured by return on equity. The
Companys matching contributions were $26,664 in 2002, $38,000 in 2001 and
$43,838 in 2000.                                                                                                                                                                 

(8) Transactions with Affiliates



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Mutual, through its wholly owned subsidiary, Shield, controls approximately
33% of the Companys outstanding common stock. Most officers and directors
of the Company hold similar positions with these affiliates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Certain general expenses are allocated to the Company from its affiliates.
These expenses, such as salaries, advertising, rents, etc., represent the
Companys share of expenses initially paid by Mutual and are allocated
based on specific identification or, if undeterminable, generally on the
basis of each companys premium. Expenses allocated to the Company may not
be the same as expenses incurred if the Company operated as a stand-alone
entity. Expenditures allocated to the Company amounted to $3,471,048 in
2002, $3,992,556 in 2001, and $3,386,739 in 2000. At December 31, 2002
the Company was owed $42,469 from Mutual and at December 31, 2001 the
Company owed Mutual $186,482.
|
| | The Company expensed pension costs of $116,174 in 2002, $93,347 in 2001,
and $61,645 in 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Rent for use of software of $106,000 in 2002, 2001, and 2000, has been
charged to the affiliated companies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002

(9) Stock-Based Compensation



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has various stock option plans for the Companys officers and
key employees, as well as directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | The Company accounts for its various stock-based compensation as expense,
recorded on the grant date only to the extent that the current market price
of the underlying stock exceeds the exercise price on the grant date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | Under the employee plan, options may be granted to purchase up to 937,500
shares of the Companys common stock at a per share price of not less than
100% of fair market value at date of grant. Under the directors plan,
options are granted based on the level of directors fees at a per share
price of 50% of fair market value at date of grant. The employee and
directors options have a term of 10 years and are not subject to any
vesting requirements. The weighted-average remaining contractual life on
options outstanding at December 31, 2002 is 7.0 years. The
weighted-average grant date fair value of options granted during 2002,
2001, and 2000 was $9.61, $7.69, and $5.42, respectively. Stock option
transactions are summarized below:

|                                           |  |                          |         |       |  |          |      |       |  |      |         |          |  |   |      |  |  |          |         |   |  |   |      | 
|------------------------------------------ |  | ------------------------ | ------- | ----- |  | -------- | ---- | ----- |  | ---- | ------- | -------- |  | - | ---- |  |  | -------- | ------- | - |  | - | ---- | 
|                                           |  | Years Ended
December 31,
|                                           |  |                         
|                                           |  |                          |         |       |  | Weighted |      |       |  |      |         | Weighted |  |   |      |  |  | Weighted
|                                           |  |                          |         |       |  | Average  |      |       |  |      |         | Average  |  |   |      |  |  | Average 
|                                           |  |                          |         |       |  | Exercise |      |       |  |      |         | Exercise |  |   |      |  |  | Exercise
|                                           |  | 2002                     |         | Price |  | 2001     |      | Price |  | 2000 |         | Price   
|                                           |  |                          |         |       |  |          |      |       |  |      |         |         
|Options outstanding at January 1           |  |                          | 87,134  |       |  | $        | 4.67 |       |  |      | 70,532  |          |  | $ | 4.41 |  |  |          | 91,541  |   |  | $ | 3.82 | 
|Granted                                    |  |                          | 17,398  |       |  |          | 4.80 |       |  |      | 16.602  |          |  |   | 5.75 |  |  |          | 17,541  |   |  |   | 4.31 | 
|Exercised                                  |  |                          |        |       |  |          |     |       |  |      |        |          |  |   |     |  |  |          | (38,550 | ) |  |   | 2.96 | 
|                                           |  |                          |         |       |  |          |      |       |  |      |         |          |  |   |      |  |  |          |         |   |  |   |      | 
|Options outstanding at December 31         |  |                          | 104,532 |       |  | $        | 4.69 |       |  |      | 87,134  |          |  | $ | 4.67 |  |  |          | 70,532  |   |  | $ | 4.41 | 
|                                           |  |                          |         |       |  |          |      |       |  |      |         |          |  |   |      |  |  |          |         |   |  |   |      | 
|Options
exercisable at December 31         |  |                          | 104,532 |       |  |          |      |       |  |      | 87,134  |          |  |   |      |  |  |          | 70,532  |   |  |   |      | 
|Options available for grant at
December 31 |  |                          | 512,647 |       |  |          |      |       |  |      | 530,045 |          |  |   |      |  |  |          | 546,647 |   |  |   |      | 
|                                           |  |                          |         |       |  |          |      |       |  |      |         |          |  |   |      |  |  |          |         |   |  |   |      | 

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COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002



| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | The following table summarizes information about stock options outstanding
at December 31, 2002:

|          |  |             |         |               |  |           |     |          |  |   |      | 
|--------- |  | ----------- | ------- | ------------- |  | --------- | --- | -------- |  | - | ---- | 
|          |  |             |         |               |  | Weighted  |     |          |  |  
|          |  |             |         |               |  | Average   |     | Weighted
|Range of  |  |             |         |               |  | Remaining |     | Average 
|Exercise  |  | Number      |         | Contractual   |  | Exercise 
|Price     |  | Outstanding |         | Life in Years |  | Price    
|          |  |             |         |               |  |          
|$0-2.40   |  |             | 21,314  |               |  |           | 3.8 |          |  | $ | 2.31 | 
|3.80-4.80 |  |             | 48,931  |               |  |           | 7.9 |          |  |   | 4.34 | 
|5.75-7.63 |  |             | 34,287  |               |  |           | 7.7 |          |  |   | 6.67 | 
|          |  |             |         |               |  |           |     |          |  |   |      | 
|$0-7.63   |  |             | 104,532 |               |  |           | 7.0 |          |  | $ | 4.69 | 
|          |  |             |         |               |  |           |     |          |  |   |      | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition to the stock options described above, the Company has awarded
nontransferable, restricted shares of Company common stock to various key
executives under key executive restricted stock bonus plans. The market
value of the common stock at the date of issuance is recorded as
compensation expense using the straight-line method over the vesting period
of the awards. The Company awarded 67,329, 47,439, and 63,225 shares of
restricted stock under such plans during 2002, 2001, and 2000,
respectively. The weighted-average grant date fair value of such shares
was $9.09, $9.83, and $7.04 respectively. Aggregate compensation expense
with respect to the foregoing restricted stock awards was $51,553,
$424,726, and $59,146 in 2002, 2001, and 2000 respectively.
|
| | In accordance with APB Opinion No. 25, $135,000, $519,000, and $125,000 in
compensation expense has been recorded in 2002, 2001, and 2000,
respectively, for the various stock option and restricted stock awards
granted in 2002, 2001, and 2000. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options and
restricted stock awards under SFAS No. 123, Accounting for Stock-Based
Compensation,the Companys net income, basic net income per share, and
diluted net income per share would have been reduced to the pro forma
amounts indicated below:                                                                                                                                                                               

|                              |             |  |                          |           |      |  |      |           |  |  |  |           | 
|----------------------------- | ----------- |  | ------------------------ | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                              |             |  | Years ended December 31,
|                              |             |  |                         
|                              |             |  | 2002                     |           | 2001 |  | 2000
|                              |             |  |                          |           |      |  |     
|Net income:                   |             |  |                          |           |      |  |      |           |  |  |  |          
|                              | As reported |  | $                        | 7,308,874 |      |  |      | 6,445,672 |  |  |  | 7,606,215 | 
|                              | Pro forma   |  |                          | 7,247,329 |      |  |      | 6,420,950 |  |  |  | 7,587,201 | 
|Basic net income per share:   |             |  |                          |           |      |  |      |           |  |  |  |          
|                              | As reported |  |                          | 1.15      |      |  |      | 1.02      |  |  |  | 1.20      | 
|                              | Pro forma   |  |                          | 1.14      |      |  |      | 1.01      |  |  |  | 1.20      | 
|Diluted net income per share: |             |  |                          |           |      |  |      |           |  |  |  |          
|                              | As reported |  |                          | 1.13      |      |  |      | .99       |  |  |  | 1.18      | 
|                              | Pro forma   |  |                          | 1.12      |      |  |      | .98       |  |  |  | 1.17      | 



| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The per share weighted-average fair value of stock options and restricted
stock granted was estimated using an option pricing model with the
following weighted-average assumptions: expected life of five

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COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002



| |                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | years for options and seven years for restricted stock awarded in 2000, and
three years for restricted stock awarded in 2002 and 2001; expected
dividend yield of 1.67% for 2002 grants, 1.60% for 2001 grants, and 2.10%
for 2000 grants; risk-free interest rate of 3.5% for 2002, 4.5% for 2001,
and 5.0% for 2000; and an expected volatility of 66% for 2002 grants, 65%
for 2001 grants, and 58% for 2000 grants.

(10) Statutory Financial Statements



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ from GAAP.
Material differences resulting from these accounting practices include:
deferred policy acquisition costs which are not recognized for statutory
purposes; statutory non-admitted assets are recognized under GAAP
accounting; statutory investment valuation reserves are not recognized
under GAAP accounting; premiums for universal life and investment-type
products are recognized as revenues for statutory purposes and as deposits
to policyholders accounts under GAAP; different assumptions are used in
calculating future policyholders benefits; and different methods are used
for calculating valuation allowances and deferred Federal income taxes for
statutory and GAAP purposes.
|
| | Net income and shareholders equity, as reported to regulatory authorities
in conformity with statutory accounting practices for each of the years in
the three-year period ended December 31, 2002 are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                               |  |      |            |      |  |      |            |  |  |  |            | 
|------------------------------ |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  |  | ---------- | 
|                               |  | 2002 |            | 2001 |  | 2000
|                               |  |      |            |      |  |     
|Statutory net (loss) income    |  | $    | (111,135   | )    |  |      | 2,258,801  |  |  |  | 8,109,372  | 
|Statutory shareholders equity |  | $    | 34,840,911 |      |  |      | 34,431,844 |  |  |  | 33,330,254 | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Georgia Insurance Code limits dividends in any one year to the greater
of statutory earnings, excluding realized capital gains, or 10% of
statutory surplus, unless the express permission of the Georgia Insurance
Department is obtained. Dividend payments to shareholders are further
limited by the Georgia Insurance Code to unassigned statutory surplus,
which at December 31, 2002 was approximately $29,000,000. The excess of
retained earnings determined in accordance with GAAP over unassigned
statutory surplus is not available for payment of dividends. The Company
may pay a dividend amounting to approximately $2,900,000 in 2003 without
prior regulatory approval.

(11) Litigation



| |                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is a defendant in various actions incidental to the conduct of
its business. While the ultimate outcome of these matters cannot be
estimated with certainty, management does not believe the actions will
result in any material loss to the Company.

(12) Business Segments



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys operations can be grouped into three major segments: (i)
individual life insurance, (ii) guaranteed issue and simplified issue life
insurance, and (iii) brokerage operations. These segments are
differentiated primarily by their respective methods of distribution and
the nature of related products, as the Companys operations in each
segment are concentrated within its southeastern states geographic market.
Individual life insurance products are distributed through the Companys
multi-line exclusive agents, guaranteed issue and simplified issue
products are distributed through independent agents as well as exclusive
agents, and brokerage operations involve

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COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | third party products distributed through the Companys exclusive and
independent agents. The Company does not group items on the consolidated
balance sheet into segments, nor does it analyze those items by segment
when making management decisions. The Company allocates net investment
income and net realized gains to its individual life insurance and
guaranteed issue and simplified issue life insurance segments based on the
ratio of each segments reserves to total reserves. Net investment income
and net realized gains for the Companys brokerage segment is based on
actual amounts earned by its brokerage subsidiaries.

|                                                                |                                                   |                                    |                             |            |           |            |           |            |           |            |            |            |           |            | 
|--------------------------------------------------------------- | ------------------------------------------------- | ---------------------------------- | --------------------------- | ---------- | --------- | ---------- | --------- | ---------- | --------- | ---------- | ---------- | ---------- | --------- | ---------- | 
|                                                                |                                                   |                                    |                             |            | 2002      |            | 2001      |            | 2000     
|                                                                |                                                   |                                    |                             |            |           |            |           |            |          
|Individual life insurance:                                      |                                                   |                                    |                             |            |           |            |           |            |           |            |            |           
|                                                                | Premiums                                          |                                    | $                           | 19,347,710 |           |            |           | 18,658,255 |           |            |            | 17,816,354 |          
|                                                                | Net investment income                             |                                    |                             | 8,857,310  |           |            |           | 9,458,445  |           |            |            | 9,403,578  |          
|                                                                | Net realized investment gains                     |                                    |                             | 935,571    |           |            |           | 24,969     |           |            |            | 160,104    |          
|                                                                |                                                   |                                    |                             |            |           |            |           |            |           |            |            |           
|                                                                |                                                   |                                    | Total revenue               |            |           | 29,140,591 |           |            |           | 28,141,669 |            |            |           | 27,380,036 | 
|                                                                | Policyholder benefits and claims                  |                                    |                             | 9,478,267  |           |            |           | 8,821,942  |           |            |            | 8,139,214  |          
|                                                                | Interest credited                                 |                                    |                             | 5,904,423  |           |            |           | 5,527,001  |           |            |            | 5,198,089  |          
|                                                                | Amortization of deferred policy acquisition costs |                                    |                             | 2,084,635  |           |            |           | 3,248,281  |           |            |            | 2,273,031  |          
|                                                                | Other operating expenses                          |                                    |                             | 5,143,895  |           |            |           | 5,257,470  |           |            |            | 4,830,481  |          
|                                                                |                                                   |                                    |                             |            |           |            |           |            |           |            |            |           
|                                                                |                                                   |                                    | Total benefits and expenses |            |           | 22,611,220 |           |            |           | 22,854,694 |            |            |           | 20,440,815 | 
|                                                                |                                                   |                                    |                             |            |           |            |           |            |           |            |            |           
|                                                                |                                                   | Segment profit before income taxes |                             |            | 6,529,371 |            |           |            | 5,286,975 |            |            |            | 6,939,221 |           
|                                                                |                                                   |                                    |                             |            |           |            |           |            |           |            |            |           
|Guaranteed issue and simplified issue life insurance:           |                                                   |                                    |                             |            |           |            |           |            |           |            |            |           
|                                                                | Premiums                                          |                                    |                             | 12,438,241 |           |            |           | 10,529,996 |           |            |            | 8,106,634  |          
|                                                                | Net investment income                             |                                    |                             | 952,774    |           |            |           | 775,780    |           |            |            | 540,200    |          
|                                                                | Net realized investment gains                     |                                    |                             | 101,134    |           |            |           | 2,532      |           |            |            | 9,670      |          
|                                                                |                                                   |                                    |                             |            |           |            |           |            |           |            |            |           
|                                                                |                                                   |                                    | Total revenue               |            |           | 13,492,149 |           |            |           | 11,308,308 |            |            |           | 8,656,504  | 
|                                                                | Policyholder benefits and claims                  |                                    |                             | 9,332,175  |           |            |           | 7,656,444  |           |            |            | 5,728,786  |          
|                                                                | Amortization of deferred policy acquisition costs |                                    |                             | 1,676,350  |           |            |           | 1,218,431  |           |            |            | 941,079    |          
|                                                                | Other operating expenses                          |                                    |                             | 2,001,826  |           |            |           | 1,913,723  |           |            |            | 1,427,835  |          
|                                                                |                                                   |                                    |                             |            |           |            |           |            |           |            |            |           
|                                                                |                                                   |                                    | Total benefits and expenses |            |           | 13,010,351 |           |            |           | 10,788,598 |            |            |           | 8,097,700  | 
|                                                                |                                                   |                                    |                             |            |           |            |           |            |           |            |            |           
|                                                                |                                                   | Segment profit before income taxes |                             |            | 481,798   |            |           |            | 519,710   |            |            |            | 558,804   |           
|                                                                |                                                   |                                    |                             |            |           |            |           |            |           |            |            |           
|Brokerage:                                                      |                                                   |                                    |                             |            |           |            |           |            |           |            |            |           
|                                                                | Brokerage commissions                             |                                    |                             | 4,242,470  |           |            |           | 4,190,482  |           |            |            | 4,197,173  |          
|                                                                | Net investment income                             |                                    |                             | 18,880     |           |            |           | 48,397     |           |            |            | 147,003    |          
|                                                                | Net realized investment gains                     |                                    |                             |           |           |            |           |           |           |            |            | 236,160    |          
|                                                                |                                                   |                                    |                             |            |           |            |           |            |           |            |            |           
|                                                                |                                                   |                                    | Total revenue               |            |           | 4,261,350  |           |            |           | 4,238,879  |            |            |           | 4,580,336  | 
|                                                                | Operating expenses                                |                                    |                             | 966,955    |           |            |           | 1,106,448  |           |            |            | 1,154,992  |          
|                                                                |                                                   |                                    |                             |            |           |            |           |            |           |            |            |           
|                                                                |                                                   | Segment profit before income taxes |                             |            | 3,294,395 |            |           |            | 3,132,431 |            |            |            | 3,425,344 |           
|                                                                |                                                   |                                    |                             |            |           |            |           |            |           |            |            |           
|Combined segment profit before income taxes                     |                                                   |                                    | 10,305,564                  |            |           |            | 8,939,116 |            |           |            | 10,923,369 |           
|Group life insurance and individual
accident and health results |                                                   |                                    | (35,819                     | )          |           |            | (74,560   | )          |           |            | (70,097    | )         
|                                                                |                                                   |                                    |                             |            |           |            |           |            |           |            |            |           
|Income before Federal income taxes                              |                                                   | $                                  | 10,269,745                  |            |           |            | 8,864,556 |            |           |            | 10,853,272 |           
|                                                                |                                                   |                                    |                             |            |           |            |           |            |           |            |            |           

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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of
Cotton States Life Insurance Company:

We have audited the accompanying consolidated balance sheet of Cotton States
Life Insurance Company and subsidiaries as of December 31, 2002, and the
related consolidated statements of earnings, shareholders equity, cash flows,
and comprehensive income for the year then ended. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the 2002 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Cotton States Life Insurance Company and subsidiaries at December 31, 2002, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States.

/s/ Ernst & Young LLP

Atlanta, Georgia
February 25, 2003, except for Note 2   as
to which the date is March 14, 2003

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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Cotton States Life Insurance Company:

We have audited the accompanying consolidated balance sheet of Cotton States
Life Insurance Company and subsidiaries (the Company) as of December 31,
2001, and the related consolidated statements of earnings, shareholders
equity, cash flows, and comprehensive income for each of the years in the
two-year period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial
position of Cotton States Life Insurance Company and subsidiaries at December
31, 2001, and the results of their operations and their cash flows for each of
the years in the two-year period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.

As discussed in note 2 to the consolidated
financial statements, the Company restated its consolidated financial
statements for the years ended December 31, 2001 and 2000.

/s/ KPMG LLP
Atlanta, Georgia
February 26, 2002, except as to note 2,   which
is as of March 14, 2003

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Managements Report to Shareholders of Cotton States Life Insurance Company and
Subsidiaries

The accompanying consolidated financial statements for Cotton States Life
Insurance Company and subsidiaries (the Company) were prepared by management,
which is responsible for the objectivity and integrity of these statements.
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America and,
where appropriate, are based on managements best estimates and judgments.
Other financial data about the Company contained in this annual report is
consistent with that presented in the consolidated financial statements.

The Companys consolidated financial statements for the year ended December 31,
2002 have been audited by independent auditors, Ernst & Young LLP. The
Companys consolidated financial statements for the years ended December 31,
2001 and 2000 have been audited by independent auditors, KPMG LLP. Their roles
are to audit the consolidated financial statements in accordance with auditing
standards generally accepted in the United States of America and render an
independent and professional opinion on managements consolidated financial
statements. The auditors reports on the Companys consolidated financial
statements appear on the previous two pages.

The Board of Directors, through its audit committee comprised of outside
directors, monitors managements financial reporting. The independent auditors
have direct access to the audit committee and meet with the committee
periodically to discuss the scope of each audit, the results of the audit and
other matters which they believe should be brought to the committees
attention.

|                                                             |  |                                                  
|------------------------------------------------------------ |  | -------------------------------------------------
|/s/ J. Ridley Howard                                         |  | /s/ William J. Barlow                            
|                                                             |  |                                                  
|J. Ridley Howard                                             |  | William J. Barlow, CPA                           
|Chairman of the Board,
President and Chief
Executive Officer |  | Vice President of Finance
and Assistant Treasurer

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Quarterly Results

The following is a summary of the unaudited quarterly results of operations for
the three years ended December 31, 2002.

|                                                                      |  |          |            |         |  |              |            |             |  |  |            |  |  |  |            | 
|--------------------------------------------------------------------- |  | -------- | ---------- | ------- |  | ------------ | ---------- | ----------- |  |  | ---------- |  |  |  | ---------- | 
|2002 quarter ended                                                    |  | March 31 |            | June 30 |  | September 30 |            | December 31
|                                                                      |  |          |            |         |  |              |            |            
|Premiums                                                              |  | $        | 7,666,317  |         |  |              | 8,007,993  |             |  |  | 8,060,634  |  |  |  | 9,357,148  | 
|Net investment income, realized
investment gains and brokerage income |  |          | 3,637,194  |         |  |              | 3,503,033  |             |  |  | 4,232,362  |  |  |  | 3,735,549  | 
|                                                                      |  |          |            |         |  |              |            |             |  |  |            |  |  |  |            | 
|Total revenue                                                         |  |          | 11,303,511 |         |  |              | 11,511,026 |             |  |  | 12,292,996 |  |  |  | 13,092,697 | 
|                                                                      |  |          |            |         |  |              |            |             |  |  |            |  |  |  |            | 
|Benefits and expenses                                                 |  |          | 9,074,595  |         |  |              | 9,226,686  |             |  |  | 9,456,105  |  |  |  | 10,173,099 | 
|                                                                      |  |          |            |         |  |              |            |             |  |  |            |  |  |  |            | 
|Net income                                                            |  |          | 1,531,168  |         |  |              | 1,693,718  |             |  |  | 2,022,074  |  |  |  | 2,061,914  | 
|                                                                      |  |          |            |         |  |              |            |             |  |  |            |  |  |  |            | 
|Basic income per share of common stock                                |  | $        | .24        |         |  |              | .27        |             |  |  | .32        |  |  |  | .33        | 
|Diluted income per share of common stock                              |  |          | .24        |         |  |              | .26        |             |  |  | .31        |  |  |  | .32        | 

|                                                                      |  |          |            |         |  |              |            |             |  |  |            |  |  |  |            | 
|--------------------------------------------------------------------- |  | -------- | ---------- | ------- |  | ------------ | ---------- | ----------- |  |  | ---------- |  |  |  | ---------- | 
|2001 quarter ended                                                    |  | March 31 |            | June 30 |  | September 30 |            | December 31
|                                                                      |  |          |            |         |  |              |            |            
|Premiums                                                              |  | $        | 7,031,353  |         |  |              | 7,142,797  |             |  |  | 7,562,016  |  |  |  | 8,484,571  | 
|Net investment income, realized
investment gains and brokerage income |  |          | 3,460,539  |         |  |              | 3,743,105  |             |  |  | 3,751,475  |  |  |  | 3,545,487  | 
|                                                                      |  |          |            |         |  |              |            |             |  |  |            |  |  |  |            | 
|Total revenue                                                         |  |          | 10,491,892 |         |  |              | 10,885,902 |             |  |  | 11,313,491 |  |  |  | 12,030,058 | 
|                                                                      |  |          |            |         |  |              |            |             |  |  |            |  |  |  |            | 
|Benefits and expenses                                                 |  |          | 8,894,448  |         |  |              | 8,595,265  |             |  |  | 8,750,623  |  |  |  | 9,616,451  | 
|                                                                      |  |          |            |         |  |              |            |             |  |  |            |  |  |  |            | 
|Net income                                                            |  |          | 1,021,054  |         |  |              | 1,701,120  |             |  |  | 1,966,038  |  |  |  | 1,757,460  | 
|                                                                      |  |          |            |         |  |              |            |             |  |  |            |  |  |  |            | 
|Basic income per share of common stock                                |  | $        | .16        |         |  |              | .27        |             |  |  | .31        |  |  |  | .28        | 
|Diluted income per share of common stock                              |  |          | .16        |         |  |              | .26        |             |  |  | .30        |  |  |  | .27        | 

|                                                                      |  |          |           |         |  |              |            |             |  |  |            |  |  |  |            | 
|--------------------------------------------------------------------- |  | -------- | --------- | ------- |  | ------------ | ---------- | ----------- |  |  | ---------- |  |  |  | ---------- | 
|2000 quarter ended                                                    |  | March 31 |           | June 30 |  | September 30 |            | December 31
|                                                                      |  |          |           |         |  |              |            |            
|Premiums                                                              |  | $        | 6,125,550 |         |  |              | 6,384,463  |             |  |  | 6,772,298  |  |  |  | 7,534,212  | 
|Net investment income, realized
investment gains and brokerage income |  |          | 3,425,803 |         |  |              | 3,621,825  |             |  |  | 3,542,674  |  |  |  | 4,103,584  | 
|                                                                      |  |          |           |         |  |              |            |             |  |  |            |  |  |  |            | 
|Total revenue                                                         |  |          | 9,551,353 |         |  |              | 10,006,288 |             |  |  | 10,314,972 |  |  |  | 11,637,796 | 
|                                                                      |  |          |           |         |  |              |            |             |  |  |            |  |  |  |            | 
|Benefits and expenses                                                 |  |          | 7,127,072 |         |  |              | 7,056,698  |             |  |  | 7,353,474  |  |  |  | 9,119,893  | 
|                                                                      |  |          |           |         |  |              |            |             |  |  |            |  |  |  |            | 
|Net income                                                            |  |          | 1,523,615 |         |  |              | 2,061,165  |             |  |  | 2,124,910  |  |  |  | 1,896,525  | 
|                                                                      |  |          |           |         |  |              |            |             |  |  |            |  |  |  |            | 
|Basic income per share of common stock                                |  | $        | .24       |         |  |              | .32        |             |  |  | .34        |  |  |  | .30        | 
|Diluted income per share of common stock                              |  |          | .24       |         |  |              | .31        |             |  |  | .33        |  |  |  | .29        | 
|                                                                      |  |          |           |         |  |              |            |             |  |  |            |  |  |  |            | 

Note  Failure of individual quarterly income per share to total to annual
income per share results from the computation of weighted average number of
shares on an individual quarterly basis.

The fourth quarter results for the three years include participation in
Federally sponsored group pools as follows:

|         |  |      |           |      |  |      |         |  |  |  |         | 
|-------- |  | ---- | --------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|         |  | 2002 |           | 2001 |  | 2000
|         |  |      |           |      |  |     
|Premiums |  | $    | 1,201,459 |      |  |      | 923,435 |  |  |  | 766,213 | 
|Benefits |  |      | 1,180,846 |      |  |      | 903,187 |  |  |  | 751,279 | 

See previous discussion on Results of Operations.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

The Company filed a report on Form 8-K on August 22, 2002 relating to the
change in its certifying accountant to Ernst & Young LLP for the year ending
December 31, 2002.




PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Identification of Directors

The By-laws of the Company provide that the Board of Directors shall be divided
into three classes with approximately one-third of the Board of Directors
elected each year. Each director is elected to hold office for a term of
three years or until his or her successor has been duly elected and has
qualified or until he or she attains the age of 72.

Terms Expiring 2003 Annual Meeting  Nominated for Re-election

ROBERT C. McMAHAN
Director Since 1987
Age 62

Since 1994, Mr. McMahan has been President and Chief Executive Officer of
Golden Point Group, Inc., a Georgia corporation. Mr. McMahan was President and
CEO of Fernbank, Inc., d/b/a Fernbank Museum of Natural History through
November, 1994. Mr. McMahan was Vice Chairman of First Union National Bank of
Georgia through September 1993. Mr. McMahan was Chairman, Chief Executive
Officer and a director of DF Southeastern Inc., prior to January 15, 1993 and
of Decatur Federal Savings & Loan Association prior to March 1, 1993, and was
President of each entity prior to April, 1989. Mr. McMahan is Chairman of the
Compensation Committee and serves as a member of the Executive Committee of the
Board of Directors of the Company. Mr. McMahan also is a member of the Board
of Directors of Mutual, CSMR, First Union National Bank of Georgia, Golden
Point Group, Inc., Integration Solutions Group, LLC, Piedmont Community Bank,
United Commercial Bank, and Mountain Heritage Bank, in organization.

THOMAS A. HARRIS
Director Since 1995
Age 54

Since 1987, Mr. Harris has been the President and Chief Executive Officer of
Merchant Capital Investments, Inc., a Montgomery, Alabama investment and
merchant banking firm. Mr. Harris is Chairman of the Investment Committee and
a member of the Executive Committee and the Audit Committee of the Board of
Directors of the Company. Mr. Harris also serves on the Board of Directors of
Mutual, Corral Southeast, and The Capital Partnership.

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##### Table of Contents



Terms Expiring 2004 Annual Meeting

J. RIDLEY HOWARD
Director Since 1989
Age 55

Since 1998, Mr. Howard has been the Chairman of the Board of Directors of the
Company, Mutual, CSI, CSMR and Shield. He has served as President and Chief
Executive Officer since 1989. Mr. Howard held various other offices with the
Company and its affiliates prior to January 1, 1989. Mr. Howard is a member of
the Executive Committee of the Board of Directors of the Company. Mr. Howard
is a member of the Board of Directors of Piedmont Bank of Georgia.

CAROL D. CHERRY
Director Since 1996
Age 55

Since 1976, Ms. Cherry has been Chairman of the Board of Directors of Shopn
Chek, Inc., an international marketing service company providing clients with
information relative to the verbal and physical presentation of their products
and/or services at the retail level. From 1976 to 1998, Ms. Cherry was also
the President of Shopn Chek, Inc. Ms. Cherry also is a member of the
Compensation Committee and the Investment Committee of the Board of Directors
of the Company. Ms. Cherry also is a member of the Board of Directors of
Mutual, CSI, and Cherry Convention Services, Inc.

DARRELL D. PITTARD
Director Since 2001
Age 54

Since November 2000, Mr. Pittard has been the Managing Partner, Chairman and
Chief Executive Officer of Currahee Bridge Development, LLC, a mixed-use resort
development on Lake Hartwell, Georgia. Mr. Pittard is also Vice Chairman of
Branch Banking and Trust of Georgia. From January 2000 through November 2000,
Mr. Pittard served as Executive Vice President, Branch Banking and Trust of
Georgia. From 1993 through January 2000, Mr. Pittard was Chairman and Chief
Executive Officer of Premier Bancshares. Mr. Pittard is also a member of the
Compensation Committee and Investment Committee of the Board of Directors of
the Company. Mr. Pittard is also a member of the Board of Directors of
Mutual, Branch Banking and Trust of Georgia, and Branch Banking and Trust of
North Carolina.

Terms Expiring 2005 Annual Meeting

MATHEWS D. SWIFT
Director Since 1997
Age 55

Since 1998, Mr. Swift has been the President and Chief Operating Officer of W.
C. Bradley Co., Real Estate Division and President of Developers-Investors,
Inc., a subsidiary of W. C. Bradley Co. From 1986 to 1997, Mr. Swift was the
Vice President and General Manager of W. C. Bradley Co., Real Estate Division.
Mr. Swift serves as a member of the Audit Committee and the Investment
Committee of the Board of Directors. Mr. Swift also is a member of the Board
of Directors of Mutual, CSMR, Swift-Illges Foundation, Northstar

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##### Table of Contents



Industries, Inc., and serves as a director of the Advisory Board of Columbus Bank & Trust
Company, an affiliate of Synovus Financial Corporation.

GAYLORD O. COAN
Director Since 1995
Age 67

From 1995 until his retirement in July 2001, Mr. Coan served as Chief Executive
Officer of Gold Kist, Inc. Mr. Coan is Chairman of the Executive Committee and
is a member of the Audit Committee and the Compensation Committee of the Board
of Directors of the Company. Mr. Coan also is a member the Board of Directors
of Mutual and Imperial Sugar Company.

E. JENNER WOOD, III
Director Since 1991
Age 51

Since June 2002, Mr. Wood has been President of SunTrust, Central Group.
Prior to his current position, Mr. Wood was President of SunTrust Bank, Georgia
from June 2001 through May 2002. Mr. Wood also served as Executive Vice
President, Trust and Investment Services, of SunTrust Banks, Inc., a position
he held from October 1993 through May 2001. Mr. Wood is Chairman of the Audit
committee and is a member of the Executive Committee of the Board of Directors
of the Company. Mr. Wood also is a member of the Board of Directors of
Mutual, CSI, Oxford Industries, Crawford & Company and Georgia Power Company.

There are no family relationships among the directors or between any director
and any executive officer of the Company. All directors have served
continuously since their first election or appointment.

OTHER INFORMATION ABOUT THE BOARD AND ITS COMMITTEES

During 2002, the Board of Directors held four meetings. Each director
attended at least 75% of the aggregate meetings of the Board of Directors and
meetings of committees of which he or she was a member. The Board of Directors
has four standing committees. Certain information regarding the function of
the Boards committees, and the number of meetings held by each committee
during 2002 is presented below.

Audit Committee

The Audit Committee annually reviews and recommends to the Board of
Directors the certified public accounting firm to be engaged as independent
auditors of the Company for the next calendar year. Management is responsible
for the Companys internal controls, financial reporting process and compliance
with the laws and regulations and ethical business standards. The independent
accountants are responsible for performing an independent audit of the
Companys consolidated financial statements in accordance with generally
accepted auditing standards and to issue a report thereon. The Audit
Committees responsibility is to monitor and oversee these processes. Each
member of the Audit Committee is independent, as such term is defined under
applicable NASD rules. During 2002, the Audit Committee held four meetings.

Compensation Committee

The Compensation Committee periodically reviews the compensation and other
benefits provided to officers of the Company and advises the Board of Directors
with respect to compensation for the officers of the Company. During 2002, the
Compensation Committee held three meetings.

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Investment Committee

The Investment Committee reviews the Companys investments and advises the
Board of Directors with respect to such investments. During 2002, the
Investment Committee held four meetings.

Executive Committee

The Executive Committee is authorized to act on behalf of the Board of
Directors on all matters that may arise between regular meetings of the Board
of Directors upon which the Board of Directors would be authorized to act,
including the nomination of directors. During 2002, the Executive Committee
held five meetings.

Identification of Executive Officers

The executive officers of the Company, their respective ages and all
positions and offices with the Company held by each are as follows:

|                    |  |     |    |               |  |                    |      |  |  |                                                             
|------------------- |  | --- | -- | ------------- |  | ------------------ | ---- |  |  | ------------------------------------------------------------
|                    |  |     |    |               |  | Year Elected       |      | 
|Name                |  | Age |    | as an Officer |  | Position or Office
|                    |  |     |    |               |  |                   
|J. Ridley Howard    |  |     | 55 |               |  |                    | 1984 |  |  | Chairman of the Board, President
and Chief Executive Officer
|                    |  |     |    |               |  |                    |      |  |  |                                                             
|Harry V. Scott, Jr. |  |     | 55 |               |  |                    | 1990 |  |  | Senior Vice President                                       

J. Ridley Howard was elected Chairman of the Board of Directors of the
Company, Mutual, Shield, CSI, and CSMR, effective January 1, 2001. Mr. Howard
continues to hold the offices of President and Chief Executive Officer of the
Company, Mutual, Shield, CSI, and CSMR, which he has held since 1989.

Harry V. Scott was elected Senior Vice President of the Company, Mutual,
and Shield, a position he has held since July 7, 2001. Mr. Scott was Vice
President of Marketing for the five years preceding his election as Senior Vice
President of the Company, Mutual and Shield.

Officers are elected at the meeting of the Board of Directors following
the Annual Meeting of Shareholders to serve for one year or until their
successors are elected.

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ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

|                             |                            |      |                        |        |            |       |           |                 |  |                 |         |        |  |   |                        |        |  |   |       |       | 
|---------------------------- | -------------------------- | ---- | ---------------------- | ------ | ---------- | ----- | --------- | --------------- |  | --------------- | ------- | ------ |  | - | ---------------------- | ------ |  | - | ----- | ----- | 
|                             |                            |      |                        |        |            |       |           |                 |  |                 |         |        |  |   | Long Term Compensation
|                             |                            |      | Annual Compensation(1) |        |            |      
|Name and                     |                            |      |                        |        | Restricted |       | All Other
|Principal Position           |                            | Year |                        | Salary |            | Bonus |           | Stock Awards(2) |  | Compensation(3)
|                             |                            |      |                        |        |            |       |           |                 |  |                
|J. Ridley Howard             |                            |      | 2002                   |        |            | $     | 56,043    |                 |  | $               | 90,965  |        |  | $ | 270,207                |        |  | $ | 276   |      
|Chairman, President, and CEO |                            |      | 2001                   |        |            |       | 52,602    |                 |  |                 | 95,424  |        |  |   | 239,594                |        |  |   | 642   |      
|                             |                            |      | 2000                   |        |            |       | 46,873    |                 |  |                 | 104,700 |        |  |   | 253,037                |        |  |   | 735   |      
|Harry V. Scott, Jr.          |                            |      | 2002                   |        |            | $     | 28,888    |                 |  | $               | 35,420  |        |  | $ | 92,832                 |        |  | $ | 276   |      
|                             | Senior Vice President      |      |                        | 2001   |            |       |           | 22,814          |  |                 |         | 27,264 |  |   |                        | 72,274 |  |   |       | 642   | 
|                             |                            |      | 2000                   |        |            |       | 17,490    |                 |  |                 | 29,054  |        |  |   | 65,970                 |        |  |   | 735   |      
|Norma Y. Christopher         |                            |      | 2002                   |        |            | $     | 131,000   |                 |  | $               | 16,905  |        |  | $ | 45,295                 |        |  | $ | 4,095 |      
|                             | Vice President and Actuary |      |                        | 2001   |            |       |           | 132,769         |  |                 |         | 19,766 |  |   |                        | 22,718 |  |   |       | 4,980 | 
|                             |                            |      | 2000                   |        |            |       | 123,000   |                 |  |                 | 21,987  |        |  |   | 13,698                 |        |  |   | 5,976 |      



|(1) |  | The salaries of certain executive officers of the Company are prorated
among the Company, Mutual and Shield, based upon the premium income of
each entity. Ms. Christophers compensation is allocated entirely to the
Company. Total compensation of the Companys executive officers for 2002
from all affiliated corporations was $1,183,434 of which the Company paid
$365,417.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The aggregate restricted stock holdings at the end of 2002 for Messrs.
Howard, and Scott were 115,152, and 31,002, shares with values of
$1,098,550 and $295,759, respectively, based upon the value of the
Companys Common Stock at December 31, 2002. Dividends on stock awards
are paid at the same rate as paid to all share owners.                                          
|   
|(3) |  | This amount equals the Companys 401(k) matching contribution, which is
allocated on the same prorated basis as salaries.                                                                                                                                                                                                                                                          

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Compensation Pursuant to Plans

Pension Plan

The Company is a participating employer in the Cotton States Employee
Retirement Income Plan (the Plan), which is a qualified pension plan
sponsored jointly with Mutual. The Plan covers all of the Companys salaried
employees.

The Plan provides a retirement income benefit at age 65 which is based on
the employees number of years of service (maximum 35 years) and average
earnings during the five consecutive years (in the last ten years of
employment) in which the earnings are highest. Age 65 retirement benefit is
derived as the sum of (i) the product of the number of years of service times
85% of average earnings and (ii) the product of the number of years of service
times 55% of excess average earnings. Excess average earnings is the amount,
if any, by which the average earnings for a participant exceeds the 35 year
average maximum social security taxable wage base for all persons born in the
same year as the participant. The Plan also provides an early retirement
benefit after age 55, with no reduction in benefit entitlement due to age, when
the sum of the employees age and years of credited service equals or exceeds
80. If the employee has not obtained 80 points at retirement, the benefits are
reduced 5% for each year the retirees age is less than 65. The Plan also
contains a death benefit for the surviving spouse of an employee (who had at
least five years of credited service) which is equal to 50% of the deceased
employees accrued benefit. If the death occurs after termination from
employment and prior to an early retirement date, the spouses benefit is
reduced as for early retirement income benefits. Accrued benefits under the
Plan vest after the employee accrues five years of service.

Supplemental Executive Retirement Plan

The Company adopted the Cotton States Supplemental Executive Retirement
Plan (SERP) effective January 1, 1992 in order to provide for a supplemental
pension plan to replace pension benefits which were affected as a result of
amendments to the Internal Revenue Code of 1986, as amended (IRC).

The SERP is an agreement between the Company and employees meeting the
qualification provisions of the SERP in which the Company provides benefits in
excess of the limitations on benefits imposed by the IRC regarding highly
compensated employees. The SERP also replaces the pension accruals set forth
under the Plan as a result of the new benefit formulas mandated by the IRC
which resulted in amendments to the Plan. The SERP incorporates all of the
terms and conditions of the Plan and future amendments to the Plan. Mr. Howard
is not a participant in the SERP plan.

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The following table sets forth the estimated annual benefits payable upon
retirement at age 65 under the plans.

PENSION PLAN AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
INCOME ANNUAL BENEFITS PAYABLE UPON RETIREMENT AT AGE 65

|                                |  |                           |         |    |  |    |         |    |  |    |         |  |  |  |         |  |  |  |         | 
|------------------------------- |  | ------------------------- | ------- | -- |  | -- | ------- | -- |  | -- | ------- |  |  |  | ------- |  |  |  | ------- | 
|Final average remuneration from |  |                           |         |    |  |    |         |    |  |    |         |  |  |  |         |  |  |  |         | 
|the Company and Mutual for the  |  | Years of service with the
|highest five years              |  | Company and Mutual       
|                                |  |                          
|                                |  | 15                        |         | 20 |  | 25 |         | 30 |  | 35
|                                |  |                           |         |    |  |    |         |    |  |   
|$125,000                        |  |                           | 29,400  |    |  |    | 39,900  |    |  |    | 50,400  |  |  |  | 60,900  |  |  |  | 71,400  | 
|$150,000                        |  |                           | 35,280  |    |  |    | 47,880  |    |  |    | 60,480  |  |  |  | 73,080  |  |  |  | 85,680  | 
|$175,000                        |  |                           | 41,160  |    |  |    | 55,860  |    |  |    | 70,560  |  |  |  | 85,260  |  |  |  | 99,960  | 
|$200,000                        |  |                           | 47,040  |    |  |    | 63,840  |    |  |    | 80,640  |  |  |  | 97,440  |  |  |  | 114,240 | 
|$225,000                        |  |                           | 51,282  |    |  |    | 68,376  |    |  |    | 85,470  |  |  |  | 102,564 |  |  |  | 114,240 | 
|$250,000                        |  |                           | 57,532  |    |  |    | 76,709  |    |  |    | 95,887  |  |  |  | 115,064 |  |  |  | 115,064 | 
|$300,000                        |  |                           | 70,032  |    |  |    | 93,376  |    |  |    | 116,720 |  |  |  | 140,064 |  |  |  | 140,064 | 
|$350,000                        |  |                           | 82,532  |    |  |    | 110,043 |    |  |    | 137,553 |  |  |  | 165,064 |  |  |  | 165,064 | 
|$400,000                        |  |                           | 95,032  |    |  |    | 126,709 |    |  |    | 158,387 |  |  |  | 190,064 |  |  |  | 190,064 | 
|$450,000                        |  |                           | 107,532 |    |  |    | 143,376 |    |  |    | 179,220 |  |  |  | 215,064 |  |  |  | 215,064 | 
|$500,000                        |  |                           | 120,032 |    |  |    | 160,043 |    |  |    | 200,053 |  |  |  | 240,064 |  |  |  | 240,064 | 

The benefits reflected in the preceding table are in addition to an
employees social security benefits. The Company has allocated its
proportionate share of retirement costs for the officers it shares with Mutual
and Shield.

Officers named in the summary Compensation Table have been credited with
the following years of service: J. Ridley Howard, 21 years; Harry V. Scott,
14 years; and Norma Y. Christopher, 15 years.

The estimated annual retirement benefits under the plans for all executive
officers of the Company as a group from the participating companies aggregate
$242,439. This estimate assumes no change from 2002 salaries, retirement at
age 65, and continuous employment with the Company. Estimated annual
retirement benefits under the plans attributable solely to service with the
Company cannot be stated due to the allocation of service and compensation
among the Company and its affiliates.

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Incentive Savings Plan

The Company participates in the Cotton States Incentive Savings and
Investment 401(k) Plan (the 401(k) Plan). The 401(k) Plan is a qualified
savings incentive plan sponsored by the same companies that sponsor the
Companys Plan. The 401(k) Plan is open to all employees who have completed
one year of service and have reached their twenty-first birthday. Eligible
employees may contribute from 2% to 10% of their compensation to the 401(k)
Plan. The Company makes its matching contribution based only on the first 6%
of an employees compensation, which is not to exceed a maximum contribution of
$12,000 per employee. The match is based on the return on equity of the
sponsoring companies. The Companys contribution will not be less than 20% nor
more than 60% of the employees contribution eligible for matching. Employees
are fully vested in the Companys contribution after five years of service.
Employees are not permitted to withdraw their account before age 59-1/2 except
in the event of death, disability, termination of employment, or financial
hardship.

Incentive Stock Options

The Company has a qualified incentive stock option plan for its officers
and key employees and those of its subsidiaries, CSI and CSMR (the ISO Plan).
During 2002, no options were granted under the ISO Plan.

At December 31, 2002, there were no options outstanding. During 2002,
there were no shares acquired through the exercise of options pursuant to the
ISO Plan.

Directors Discounted Stock Option Plan

The Company has a Directors Discounted Stock Option Plan (the DSOP).
The DSOP is designed to assist the Company in attracting, retaining and
compensating highly qualified individuals who are not employees of the Company
for service as members of the Board and to provide them with a proprietary
interest in the common stock of the Company. The Board believes the DSOP will
be beneficial to the Company and its shareholders by encouraging and enabling
non-employee directors to have a personal financial stake in the Company, in
addition to emphasizing their common interest with the shareholders in
increasing the value of the common stock of the Company in the long term.

The DSOP provides for automatic yearly grants of options to purchase
shares of common stock of the Company to each director who elects to
participate in the DSOP. Each director who is not an employee of the Company
or any of its subsidiaries or affiliates may participate by filing with the
Company an irrevocable election to receive the grant of a stock option in lieu
of part or all of the fees which the director would have been entitled to
receive for the immediately preceding year for his or her service on the Board.
Options will be granted automatically on the date of the annual meeting of the
Board as to any director who, prior to the date of such annual meeting, has
filed with the Company an irrevocable election to participate in the DSOP.

The number of shares of common stock of the Company subject to each option
granted to a director shall be determined by dividing (i) the directors fee
due to a director, by (ii) the fair market value of the common stock of the
Company on the date of grant, minus the option exercise price. The fair market
value of the common stock of the Company under the DSOP shall be the closing
price as reported on the Nasdaq National Market and the option exercise price
for each option granted shall be 50% of the fair market value, to be paid in
cash by the director upon exercise. All options granted under the DSOP will
expire ten years after the date of grant, subject to DSOP provisions relating
to the retirement of the director because of death, disability, or age. That
portion of an option granted under the DSOP which is attributable to any
portion of the directors fees which is not earned due to termination as a
director, shall automatically abate and be canceled. In the event of the death
of the holder of any unexercised option, all of the holders outstanding
options will become immediately exercisable upon the date of death by his or
her legal representative.

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No option may be exercised under the DSOP before the 12 month anniversary of
the date of grant.

As of December 31, 2002 a total of 281,250 shares of Company common stock
is reserved for issuance under the DSOP (subject to adjustment for subsequent stock splits,
stock dividends and certain other changes in the common stock of the Company).
Excluding 14,414 options held by retired directors as of December 31, 2002,
options to acquire 90,118 shares were outstanding under the DSOP, including
17,398 options to be granted automatically at the 2003 Annual Meeting. Upon
the exercise of an option, the Company will issue authorized but previously
unissued shares. The exercise prices regarding the options outstanding under
the DSOP range from $1.92 to $7.63 per share.

If an option issued under the DSOP is terminated or canceled without having
been exercised, the shares which were not purchased thereunder will again
become available for issuance under the DSOP.

Adjustments will be made in the number of shares subject to the DSOP and
in the purchase price of outstanding options in the event of any change in the
number of shares of common stock of the Company outstanding as a result of a
stock split or stock dividend, recapitalization, merger, consolidation, or
other similar corporate change.

Performance Share Awards Plan

The Company has a Performance Share Awards Plan (the PAR Plan). The PAR
Plan is designed to reward employees of the Company, its subsidiaries and
affiliates for services performed on behalf of the Company, to stimulate
employees efforts on behalf of the Company, to encourage such employees to
remain with the Company, and to provide them with an ownership interest in the
common stock of the Company. The Board believes the PAR Plan will be
beneficial to the Company and its shareholders by encouraging and enabling
employees to have a personal financial stake in the Company.

The PAR Plan authorizes the Compensation Committee of the Board of
Directors to grant awards of shares of common stock of the Company to employees
of the Company designated by the Compensation Committee. The Compensation
Committee may grant performance share awards in shares of the common stock if
the performance of the Company, or any subsidiary, division or affiliate of the
Company selected by the Compensation Committee, meets certain goals established
by the Compensation Committee during an award period. The Compensation
Committee would determine the goals, the maximum payment value of an award, and
the length of an award. In order to receive payment, a recipient of a
performance share award must remain in the employ of the Company until the
completion of the award period.

An aggregate of 281,250 shares of common stock of the Company are subject
to the PAR Plan. Adjustments will be made in the number of shares subject to
an award in the event of any change in the number of shares of common stock
outstanding as a result of a stock split or stock dividend, recapitalization,
merger, consolidation, or other similar corporate change. The Company has
granted 279,314 shares under the PAR Plan of which 0 vested in 2002. In the
event of a change of control of the Company, as defined in the PAR Plan, all
awards granted prior to the change of control shall immediately vest and the
shares subject to the award shall be issued to the recipient of the award.

Awards granted under the PAR Plan provide the recipients with the right to
acquire shares of Common Stock as follows:

|     |  |                  |        |              |  |                  |         |                |  |  |         |  |  |  |         | 
|---- |  | ---------------- | ------ | ------------ |  | ---------------- | ------- | -------------- |  |  | ------- |  |  |  | ------- | 
|Year |  | Number of Shares |        | Date Granted |  | Earliest Vesting |         | Latest Vesting
|     |  |                  |        |              |  |                  |         |               
|2000 |  |                  | 63,225 |              |  |                  | 2/22/00 |                |  |  | 2/21/03 |  |  |  | 2/21/07 | 
|2001 |  |                  | 47,439 |              |  |                  | 2/21/01 |                |  |  | 2/20/04 |  |  |  | 2/20/08 | 
|2002 |  |                  | 52,455 |              |  |                  | 2/26/02 |                |  |  | 2/25/05 |  |  |  | 2/25/09 | 

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As of December 31, 2002, the following executive officers had been granted
awards to receive shares pursuant to the PAR Plan:

|                     |  |                         |   |                  |  |  |         | 
|-------------------- |  | ----------------------- | - | ---------------- |  |  | ------- | 
|                     |  | Number of Shares Vested |   | Number of Shares
|Name                 |  | Including Dividends     |   | Unvested        
|                     |  |                         |   |                 
|J. Ridley Howard     |  |                         | 0 |                  |  |  | 115,152 | 
|Harry V. Scott       |  |                         | 0 |                  |  |  | 31,002  | 
|Norma Y. Christopher |  |                         | 0 |                  |  |  | 10,421  | 

Other Compensation

Each executive officer is provided the use of one automobile by the
Company, Mutual and Shield, but is required to reimburse the Company, Mutual
and Shield for the personal use of the automobile. Officers are reimbursed for
club dues. The Company, Mutual and Shield are allocated these expenses under
the same formula on which salaries are prorated. The total cost of these
expenses does not exceed 10% of any executive officers salary and bonus
compensation.

Compensation of Directors

During 2002, no director of the Company received any remuneration from the
Company in his or her capacity as a director except for fees, options to
receive common stock in lieu of fees pursuant to the DSOP, and reimbursement
for expenses incurred in connection with attending directors and committee
meetings. No director received cash compensation in excess of $19,750 for his
or her services as a director during 2002. Each director, other than J. Ridley
Howard, is paid an annual stipend of $7,000. Mr. Howard did not receive an
annual stipend in 2002. In addition, each director was paid $850 plus travel
expenses for each meeting of directors and $700 for each committee meeting of
directors attended. Each committee member, other than J. Ridley Howard,
received an additional $1,400 as an annual stipend and each committee
chairperson received $2,000 as an annual stipend. The aggregate directors
fees and reimbursable expenses for 2002 totaled $168,301. There were no
retirement benefits accrued or set aside during 2002 for any director for his
or her services as director. Upon reaching the mandatory retirement age of
72, directors of the Company become directors emeritus and receive stipends
ranging from $600 to $11,000 annually for periods ranging from 15 years to life
after the date of retirement. In February, 2000, the Board of Directors
eliminated the retirement stipends for any director retiring after that date.

In addition to the director compensation payable by the Company as
disclosed above, directors who are not employees of the Company are eligible to
participate in the DSOP which was approved by the shareholders of the Company
at the 1996 annual meeting. The DSOP, which is administered by the
Compensation Committee, permits the grant of stock options to directors of the
Company who are not employees of the Company at an exercise price equal to 50%
of the current market value at the date of grant as an alternative to the
payment of retainer and meeting fees in cash to the directors. Fractional
shares are paid in cash. During 2002, certain directors of the Company
deferred fees in exchange for remuneration in the form of stock options in lieu
of cash to be granted at the 2003 annual meeting as follows:

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|                   |  |          |        |           |  |         |      |            |  |  |       |  |  |  |          | 
|------------------ |  | -------- | ------ | --------- |  | ------- | ---- | ---------- |  |  | ----- |  |  |  | -------- | 
|                   |  |          |        |           |  | OPTION  |      | OPTIONS    |  |  |       | 
|                   |  | FEES     |        | PRICE PER |  | TO BE   |      | EXPIRATION
|NAME               |  | DEFERRED |        | SHARE     |  | GRANTED |      | DATE      
|                   |  |          |        |           |  |         |      |           
|Cherry, Carol D    |  | $        | 7,575  |           |  | $       | 4.80 |            |  |  | 1,577 |  |  |  | 01/02/13 | 
|Coan, Gaylord O    |  | $        | 19,400 |           |  | $       | 4.80 |            |  |  | 4,040 |  |  |  | 01/02/13 | 
|Harris, Thomas A   |  | $        | 9,875  |           |  | $       | 4.80 |            |  |  | 2,056 |  |  |  | 01/02/13 | 
|McMahan, Robert C  |  | $        | 18,000 |           |  | $       | 4.80 |            |  |  | 3,748 |  |  |  | 01/02/13 | 
|Pittard, Darrell D |  | $        | 15,650 |           |  | $       | 4.80 |            |  |  | 3,259 |  |  |  | 01/02/13 | 
|Swift, Mathews D   |  | $        | 13,050 |           |  | $       | 4.80 |            |  |  | 2,718 |  |  |  | 01/02/13 | 

Compensation Committee Interlocks and Insider Participation

The members of the Compensation Committee of the Board of Directors during
the fiscal year were Messrs. McMahan and Coan and Ms. Cherry. None of these
directors are or have been officers or employees of the Company or its
subsidiaries. With the exception of Mr. Howard, no executive officer of the
Company serves on the board of any other company other than an affiliate of the
Company. Mr. Howard is a member of the Board of Directors of Piedmont Bank of
Georgia.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Security Ownership of Certain Beneficial Owners

The table below sets forth certain information about persons or entities
known by the Company to own beneficially more than 5% of the Companys common
stock, as of December 31, 2002. Except as noted below, the Company believes
that each of the persons or entities listed has sole investment and voting
power with respect to the shares included in the table.

|                                        |                                              |                           |           |          |  |  |         |  | 
|--------------------------------------- | -------------------------------------------- | ------------------------- | --------- | -------- |  |  | ------- |  | 
|                                        |                                              |                           |           |          |  |  | Percent
|Name and Address                        |                                              | Number of Shares Owned(1) |           | of Class
|                                        |                                              |                           |           |         
|Shield Insurance Company (2)            |                                              |                           | 2,102,385 |          |  |  | 33.2    | 
|244
Perimeter Center Parkway            |                                              |                           |           |          |  |  |         | 
|Atlanta, Georgia 30346                  |                                              |                           |           |          |  |  |         | 
|Fidelity Management & Research Company, |                                              |                           | 612,500   |          |  |  | 9.7     | 
|                                        | a wholly owned subsidiary of
FMR Corporation |                           |           |          |  |  |         |  | 
|82 Devonshire Street                    |                                              |                           |           |          |  |  |         | 
|Boston, Massachusetts 02109             |                                              |                           |           |          |  |  |         | 
|Marvin Schwartz                         |                                              |                           | 492,982   |          |  |  | 7.8     | 
|c/o
Neuberger & Berman                  |                                              |                           |           |          |  |  |         | 
|605 Third Avenue                        |                                              |                           |           |          |  |  |         | 
|New York, New York 10158                |                                              |                           |           |          |  |  |         | 



---

|(1) |  | Under the rules of the U. S. Securities and Exchange Commission, a person
is deemed to be beneficial owner of a security if he or she has or shares
the power to vote or to direct the voting of such security, or the power
to dispose or to direct the disposition of such security. A person is
also deemed to be a beneficial owner of any securities that such a person
has the right to acquire beneficial ownership of within 60 days as well as
any securities owned by such persons spouse, children or relatives living
in the same household. Accordingly, more than one person may be deemed to
be a beneficial owner of the same securities.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Shield is a wholly owned subsidiary of Mutual. The Board of Directors of
Mutual is identical to the Board of Directors of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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Security Ownership of Management

The following table sets forth certain information about beneficial
ownership of the Companys common stock of each director and executive officer
of the Company and directors and officers as a group as of December 31, 2002.
All shares are owned outright without shared voting and investment power except
as set forth below.

|                                                    |  |                      |         |                  |  |  |     |  |  |  |  | 
|--------------------------------------------------- |  | -------------------- | ------- | ---------------- |  |  | --- |  |  |  |  | 
|Name of Beneficial Owner:                           |  | Amount and Nature of |         |                  |  |  |     |  |  | 
|Directors                                           |  | Beneficial Ownership |         | Percent of Class
|                                                    |  |                      |         |                 
|Carol D. Cherry                                     |  |                      | 675     | (1)              |  |  | *   |  |  |  |  | 
|Gaylord O. Coan                                     |  |                      | 500     | (2)              |  |  | *   |  |  |  |  | 
|Thomas A. Harris                                    |  |                      | 5,187   | (3)              |  |  | *   |  |  |  |  | 
|J. Ridley Howard                                    |  |                      | 81,994  | (4)              |  |  | 1.3 |  |  |  |  | 
|Robert C. McMahan                                   |  |                      | 2,109   | (5)              |  |  | *   |  |  |  |  | 
|Darrell D. Pittard                                  |  |                      | 2,000   | (6)              |  |  | *   |  |  |  |  | 
|Mathews D. Swift                                    |  |                      | 875     | (7)              |  |  | *   |  |  |  |  | 
|E. Jenner Wood, III                                 |  |                      | 1,405   |                  |  |  | *   |  |  |  |  | 
|Named Executive Officers                            |  |                      |         |                  |  |  |     |  |  |  |  | 
|Harry V. Scott                                      |  |                      | 6,000   | (8)              |  |  | *   |  |  |  |  | 
|Norma Y. Christopher                                |  |                      | 16,503  | (9)              |  |  | *   |  |  |  |  | 
|All Executive Officers and Directors as a Group(10) |  |                      |         |                  |  |  |     |  |  |  |  | 
|(14 persons)                                        |  |                      | 125,454 |                  |  |  | 2.0 |  |  |  |  | 



---

|(*)  |  | Less than 1% not applicable                                                                                                                                                                                                                                                                                                                                                                             
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(1)  |  | Does not include options to acquire 8,580 shares previously granted or
options to acquire 1,577 shares to be granted automatically at the 2003
Annual Meeting under the DSOP.                                                                                                                                                                                                                           
|    
|(2)  |  | Does not include options to acquire 22,344 shares previously granted or
options to acquire 4,040 shares to be granted automatically at the 2003
Annual Meeting under the DSOP.                                                                                                                                                                                                                          
|    
|(3)  |  | Does not include options to acquire 12,941 shares previously granted or
options to acquire 2,056 shares to be granted automatically at the 2003
Annual Meeting under the DSOP.                                                                                                                                                                                                                          
|    
|(4)  |  | Does not include 115,152 shares plus accrued dividends awarded under the
PAR Plan that have not vested.                                                                                                                                                                                                                                                                                                 
|    
|(5)  |  | Does not include options to acquire 17,509 shares previously granted or
options to acquire 3,748 shares to be granted automatically at the 2003
Annual Meeting under the DSOP.                                                                                                                                                                                                                          
|    
|(6)  |  | Does not include options to acquire 2,720 shares previously granted or
options to acquire 3,259 shares to be granted                      automatically at the 2003
Annual Meeting under the DSOP.                                                                                                                                                                                                      
|    
|(7)  |  | Does not include options to acquire 8,626 shares preciously granted or
options to acquire 2,718 shares to be granted automatically at the 2003 Annual
Meeting under the DSOP.                                                                                                                                                                                                                           
|    
|(8)  |  | Does not include 31,002 shares plus accrued dividends awarded under the
PAR Plan that have not vested.                                                                                                                                                                                                                                                                                                  
|    
|(9)  |  | Does not include 10,421 shares plus accrued dividends awarded under the
PAR plan that have not vested.                                                                                                                                                                                                                                                                                                  
|    
|(10) |  | Does not include 174,843 shares plus accrued dividends awarded under
the PAR Plan that have not vested which would increase the percentage of
outstanding shares for all officers and directors as a group to 4.7%.
Also does not include options to acquire 72,720 shares previously
granted or options to acquire 17,398 shares to be granted automatically
at the 2003 Annual Meeting under the DSOP.

56



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##### Table of Contents



Changes in Control

None.

Securities Authorized for Issuance Under Equity Compensation Plans

The Equity Compensation Plan Information is set forth in Item 5 of this
Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Transactions with Management and Others

Shield, which is wholly owned by Mutual, owns 2,102,385 shares or 33.2% of
the outstanding common stock of the Company. See Item 12.

Certain general expenses are allocated to the Company by Mutual. These
expenses such as salaries, advertising, rents, and related expenses, represent
the Companys share of expenses initially paid by Mutual and are allocated
based on specific identification or, if indeterminable, generally on the basis
of each companys premium income. Expenditures allocated to the Company
amounted to $3,471,048 in 2002. See Item 1.

Gaylord O. Coan, a director of the Company, served as President and CEO of
Gold Kist, Inc. through July 2001. Gold Kist, Inc. owns no stock of the
Company. The Company shares offices with Mutual and Shield in a building owned
by a partnership of Mutual and Gold Kist, Inc. The Company is not a partner in
the partnership which owns the building and has no equity interest in the
building.

Gaylord O. Coan, a director of the Company, served as a director of
SunTrust Bank, Atlanta. E. Jenner Wood, III, a director of the Company, serves
as an executive officer of SunTrust Bank, Central Group. SunTrust Banks, Inc.
received fees from the Company in 2002 for services rendered as the transfer
agent of the Company. SunTrust Bank, Atlanta, a subsidiary of SunTrust Banks,
Inc., received fees from the Company in 2002 for investment and custodial
services and leases of computer hardware.

ITEM 14. CONTROLS AND PROCEDURES

(a)  Evaluation of Disclosure Controls and Procedures. The Companys Chief
Executive Officer and Chief Accounting Officer have evaluated the effectiveness
of the Companys disclosure controls and procedures (as such term is defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended (the Exchange Act), as of a date within 90 days prior to the filing
date of this annual report (the Evaluation Date). Based on such
evaluation, such officers have concluded that as of the Evaluation Date, the
Companys disclosure controls and procedures are effective in alerting them on
a timely basis to material information relating to the Company (including the
Companys consolidated subsidiaries) required to be included in the Companys
report filed or submitted under the Exchange Act.

(b)  Changes in Internal Controls. Since the Evaluation Date, there have not
been any significant changes in the Companys internal controls or in other
factors that could significantly affect such controls.

57



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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

Financial Statements

The following consolidated financial statements and independent auditors
report are incorporated by reference to Part II, Item 8 of this report:

|                                                             |                                 
|------------------------------------------------------------ | --------------------------------
|Report of Independent Auditors                              
|Consolidated Balance Sheets, December 31, 2002 and 2001     
|Consolidated Statements of Earnings, Years ended            
|                                                             | December 31, 2002, 2001 and 2000
|Consolidated Statements of Shareholders Equity, Years ended
|                                                             | December 31, 2002, 2001 and 2000
|Consolidated Statements of Cash Flows, Years ended          
|                                                             | December 31, 2002, 2001 and 2000
|Consolidated Statements of Comprehensive Income, Years ended
|                                                             | December 31, 2002, 2001 and 2000
|Notes to Consolidated Financial Statements                  

58



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##### Table of Contents



Financial Statement Schedules

The following consolidated financial statement schedules and independent
auditors report thereon are included herein:

|                                                                |                                             
|--------------------------------------------------------------- | --------------------------------------------
|Report of Independent Auditors on Financial Statement Schedules
|Schedule I  Consolidated Summary of Investments,              
|                                                                | December 31, 2002                           
|Schedule III  Supplementary Insurance Information,            
|                                                                | Years ended December 31, 2002, 2001 and 2000
|Schedule IV  Reinsurance, Years ended December 31, 2002       
|                                                                | 2001 and 2000                               

All other schedules are omitted as the required information is
inapplicable, or the information is presented in the consolidated financial
statements or related notes.

|         |  |                                                                                                                                                                                                                                               
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  |                                                                                                                                                                                                                                               
|         |  |                                                                                                                                                                                                                                               
|3.1      |  | Amended and Restated Articles of Incorporation of the Registrant
(incorporated by reference to Exhibit 3 to the Registrants Annual Report
on Form 10-K for the year ended December 31, 1994, File No. 95074277).                             
|         |  |                                                                                                                                                                                                                                               
|3.2      |  | Bylaws, as amended, of the Registrant (incorporated by reference to
Exhibit 3 to the Registrants Annual Report on Form 10-K for the year
ended December 31, 1994, File No. 95074227).                                                        
|         |  |                                                                                                                                                                                                                                               
|10.1.1   |  | Amended and Restated Directors Discounted Stock Option Plan
(incorporation by reference to Exhibit 10.1.1 to the Registrants Annual
Report on form 10-K for the year ended December 31, 1999, File No.
2-39729).                            
|         |  |                                                                                                                                                                                                                                               
|10.2     |  | Performance Shares Awards Plan (incorporated by reference to Exhibit 10.2
to the Registrants Registration Statement on Form S-8, Registration No.
333-00795).                                                                                
|         |  |                                                                                                                                                                                                                                               
|10.3.1   |  | Amended and Restated 1983 Incentive Stock Option Plan (incorporated by
reference to Exhibit 10.3.1 to the Registrants Annual Report on Form 10-K
for the year ended December 31, 1999, File No. 2-39729).                                    
|         |  |                                                                                                                                                                                                                                               
|10.3.2   |  | Form of Incentive Stock Option Agreement pursuant to the 1983 Incentive
Stock Option Plan (incorporated by reference to Exhibit 10.3.2 to the
Registrants Annual Report on Form 10-K for the year ended December 31,
1999, File No. 2-39729).
|         |  |                                                                                                                                                                                                                                               
|11.      |  | Statement re: Computation of Earnings per Share                                                                                                                                                                                               
|         |  |                                                                                                                                                                                                                                               
|21.      |  | Subsidiaries of the Registrant.                                                                                                                                                                                                               
|         |  |                                                                                                                                                                                                                                               
|23.      |  | Consents of independent auditors.                                                                                                                                                                                                             
|         |  |                                                                                                                                                                                                                                               
|         |  | All other exhibits are omitted as the required documents are inapplicable.                                                                                                                                                                    

Report on Form 8-K

No report on Form 8-K was filed for the fourth quarter of 2002.

59



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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of
Cotton States Life Insurance Company:

We have audited the consolidated financial
statements of Cotton States Life Insurance Company and subsidiaries as of
December 31, 2002, and for the year then ended, and have issued
our report thereon dated February 25, 2003, except for
Note 2 as to which the date is March 14, 2003. Our audit
also included the financial statement schedules as of
December 31, 2002, and for the year then ended, listed in
Item 15. These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our
audits.

In our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects
the information set forth therein.

|                                   |  |                       
|---------------------------------- |  | ----------------------
|                                   |  | /s/  Ernst & Young LLP
|                                   |  |                       
|                                   |  |                       
|Atlanta, Georgia
February 25, 2003 |  |                       

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Independent Auditors Report



The Board of Directors and Shareholders
Cotton States Life Insurance Company:

Under date of February 26, 2002, except as to
note 2 which is as of March 14, 2003, we reported on the
consolidated balance sheet of Cotton States Life Insurance Company and
subsidiaries (the Company) as of December 31, 2001, and the
related consolidated statements of earnings, shareholders equity, cash
flows, and comprehensive income for each of the years in the two-year
period ended December 31, 2001, as contained in the annual
report on Form 10-K for the year ended December 31, 2002. In connection
with our audits of the aforementioned consolidated financial statements,
we also have audited the related financial statement schedules as
listed in Item 15. The financial statement schedules are the
responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statement schedules based on our audits.

In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth herein.

/s/ KPMG
LLP



Atlanta, Georgia
February 26, 2002

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Schedule I

Cotton States Life Insurance Company and Subsidiaries
Consolidated Summary of Investments
December 31, 2002

|                                       |  |        |                                                                  |                                           |   |               |             |  |  |            |             |  |  |                 |             | 
|-------------------------------------- |  | ------ | ---------------------------------------------------------------- | ----------------------------------------- | - | ------------- | ----------- |  |  | ---------- | ----------- |  |  | --------------- | ----------- | 
|                                       |  |        |                                                                  |                                           |   |               |             |  |  |            |             |  |  | Amount at Which
|                                       |  |        |                                                                  |                                           |   |               |             |  |  |            | Fair        |  |  | Shown on the   
|Type of Investments                    |  | Cost   |                                                                  | Value                                     |   | Balance Sheet
|                                       |  |        |                                                                  |                                           |   |              
|Fixed maturities, held for investment: |  |        |                                                                  |                                           |   |               |             |  |  |            |             | 
|                                       |  | Bonds: |                                                                  |                                           |   |               |             |  |  |            |             |  |  |                
|                                       |  |        | Public utilities                                                 |                                           | $ | 3,847,836     |             |  |  | 4,014,381  |             |  |  | 3,847,836       |            
|                                       |  |        | All other corporate bonds                                        |                                           |   | 3,200,339     |             |  |  | 3,309,992  |             |  |  | 3,200,339       |            
|                                       |  |        |                                                                  |                                           |   |               |             |  |  |            |             | 
|                                       |  |        | Total fixed maturities held for investment                       |                                           |   | 7,048,175     |             |  |  | 7,324,373  |             |  |  | 7,048,175       |            
|Fixed maturities, available for sale:  |  |        |                                                                  |                                           |   |               |             |  |  |            |             | 
|                                       |  | Bonds: |                                                                  |                                           |   |               |             |  |  |            |             |  |  |                
|                                       |  |        | United States government and government
agencies and authorities |                                           |   | 70,343,299    |             |  |  | 73,597,332 |             |  |  | 73,597,332      |            
|                                       |  |        | Foreign governments                                              |                                           |   | 3,391,946     |             |  |  | 3,390,181  |             |  |  | 3,390,181       |            
|                                       |  |        | Public utilities                                                 |                                           |   | 7,138,615     |             |  |  | 7,492,026  |             |  |  | 7,492,026       |            
|                                       |  |        | All other corporate bonds                                        |                                           |   | 65,285,479    |             |  |  | 67,827,867 |             |  |  | 67,827,867      |            
|                                       |  |        |                                                                  |                                           |   |               |             |  |  |            |             | 
|                                       |  |        |                                                                  | Total fixed maturities available for sale |   |               | 146,159,339 |  |  |            | 152,307,406 |  |  |                 | 152,307,406 | 
|Equity securities                      |  |        | 2,984,720                                                        |                                           |   |               | 2,519,895   |  |  |            | 2,519,895   | 
|First mortgage loans on real estate    |  |        | 1,320,330                                                        |                                           |   |               | 1,405,337   |  |  |            | 1,320,330   | 
|Policy loans                           |  |        | 10,425,612                                                       |                                           |   |               | 10,425,612  |  |  |            | 10,425,612  | 
|Other investments                      |  |        | 582,000                                                          |                                           |   |               | 582,000     |  |  |            | 582,000     | 
|                                       |  |        |                                                                  |                                           |   |               |             |  |  |            |             | 
|                                       |  |        |                                                                  | Total investments                         |   | $             | 168,520,176 |  |  |            | 174,564,623 |  |  |                 | 174,203,418 | 
|                                       |  |        |                                                                  |                                           |   |               |             |  |  |            |             | 

See accompanying independent auditors report.

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Schedule III

Cotton States Life Insurance Company and Subsidiaries
Supplementary Insurance Information
December 31, 2002 and 2001

As of December 31, 2002

|                                                       |  |                   |            |               |  |                  |             |  |  |  |           | 
|------------------------------------------------------ |  | ----------------- | ---------- | ------------- |  | ---------------- | ----------- |  |  |  | --------- | 
|                                                       |  | Deferred Policy   |            | Future Policy |  | Claims and      
|Segment                                                |  | Acquisition Costs |            | Benefits      |  | Benefits Payable
|                                                       |  |                   |            |               |  |                 
|Individual life insurance                              |  | $                 | 42,334,335 |               |  |                  | 141,978,294 |  |  |  | 1,852,632 | 
|Guaranteed issue and
simplified issue life
insurance   |  |                   | 15,252,075 |               |  |                  | 16,984,622  |  |  |  | 1,041,037 | 
|Brokerage                                              |  |                   |           |               |  |                  |            |  |  |  |          | 
|                                                       |  |                   |            |               |  |                  |             |  |  |  |           | 
|Total segments                                         |  |                   | 57,686,410 |               |  |                  | 158,962,916 |  |  |  | 2,893,669 | 
|Group life insurance and
accident and health
insurance |  |                   |           |               |  |                  | 1,461,191   |  |  |  | 347,674   | 
|                                                       |  |                   |            |               |  |                  |             |  |  |  |           | 
|Total                                                  |  | $                 | 57,686,410 |               |  |                  | 160,424,107 |  |  |  | 3,241,343 | 
|                                                       |  |                   |            |               |  |                  |             |  |  |  |           | 

As of December 31, 2001

|                                                       |  |                   |            |               |  |                  |             |  |  |  |           | 
|------------------------------------------------------ |  | ----------------- | ---------- | ------------- |  | ---------------- | ----------- |  |  |  | --------- | 
|                                                       |  | Deferred Policy   |            | Future Policy |  | Claims and      
|Segment                                                |  | Acquisition Costs |            | Benefits      |  | Benefits Payable
|                                                       |  |                   |            |               |  |                 
|Individual life insurance                              |  | $                 | 39,392,084 |               |  |                  | 131,658,328 |  |  |  | 1,056,371 | 
|Guaranteed issue and
simplified issue life
insurance   |  |                   | 12,268,724 |               |  |                  | 12,481,282  |  |  |  | 825,123   | 
|Brokerage                                              |  |                   |           |               |  |                  |            |  |  |  |          | 
|                                                       |  |                   |            |               |  |                  |             |  |  |  |           | 
|Total segments                                         |  |                   | 51,660,808 |               |  |                  | 144,139,610 |  |  |  | 1,881,494 | 
|Group life insurance and
accident and health
insurance |  |                   |           |               |  |                  | 1,597,700   |  |  |  | 315,126   | 
|                                                       |  |                   |            |               |  |                  |             |  |  |  |           | 
|Total                                                  |  | $                 | 51,660,808 |               |  |                  | 145,737,310 |  |  |  | 2,196,620 | 
|                                                       |  |                   |            |               |  |                  |             |  |  |  |           | 

Note  Certain information has been omitted from this schedule but is
included in the accompanying notes to the consolidated financial
statements.

See accompanying independent auditors report.

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Schedule IV

Cotton States Life Insurance Company and Subsidiaries
Reinsurance
Years ended December 31, 2002, 2001, and 2000

|                             |           |           |                           |                           |  |            |               |           |  |              |               |         |  |            |               |  |  |            |            |  |  |            |     | 
|---------------------------- | --------- | --------- | ------------------------- | ------------------------- |  | ---------- | ------------- | --------- |  | ------------ | ------------- | ------- |  | ---------- | ------------- |  |  | ---------- | ---------- |  |  | ---------- | --- | 
|                             |           |           |                           |                           |  |            |               |           |  |              |               |         |  |            |               |  |  |            |            |  |  | Percentage
|                             |           |           |                           |                           |  |            |               |           |  | Ceded to     |               | Assumed |  |            |               |  |  | Of Amount 
|                             |           |           |                           |                           |  | Gross      |               | Other     |  | From Other   |               | Net     |  | Assumed   
|                             |           |           |                           |                           |  | Amount     |               | Companies |  | Companies(1) |               | Amount  |  | To net (1)
|                             |           |           |                           |                           |  |            |               |           |  |              |               |         |  |           
|Year ended December 31, 2002 |           |           |                           |                           |  |            |               |           |  |              |               |         |  |            |               |  |  |            |            | 
|Life insurance inforce       |           |           | 5,287,804,000             |                           |  |            | 1,415,701,000 |           |  |              | 1,278,934,000 |         |  |            | 5,151,037,000 |  |  |            | 24.8       | 
|                             |           |           |                           |                           |  |            |               |           |  |              |               |         |  |            |               |  |  |            |            | 
|                             | Premiums: |           |                           |                           |  |            |               |           |  |              |               |         |  |            |               |  |  |            |            |  | 
|                             |           |           | Life insurance            |                           |  | 36,309,031 |               |           |  | 4,515,508    |               |         |  | 1,201,107  |               |  |  | 32,994,630 |            |  |  | 3.6        |    
|                             |           |           | Accident/health insurance |                           |  | 132,742    |               |           |  | 35,280       |               |         |  |           |               |  |  | 97,462     |            |  |  |           |    
|                             |           |           |                           |                           |  |            |               |           |  |              |               |         |  |            |               |  |  |            |            | 
|                             |           |           |                           | Total                     |  |            | 36,441,773    |           |  |              | 4,550,788     |         |  |            | 1,201,107     |  |  |            | 33,092,092 |  |  |            | 3.6 | 
|                             |           |           |                           |                           |  |            |               |           |  |              |               |         |  |            |               |  |  |            |            | 
|Year ended December 31, 2001 |           |           |                           |                           |  |            |               |           |  |              |               |         |  |            |               |  |  |            |            | 
|Life insurance inforce       |           |           | 5,041,438,000             |                           |  |            | 1,333,597,000 |           |  |              | 1,229,093,000 |         |  |            | 4,936,934,000 |  |  |            | 24.9       | 
|                             |           |           |                           |                           |  |            |               |           |  |              |               |         |  |            |               |  |  |            |            | 
|                             |           | Premiums: |                           |                           |  |            |               |           |  |              |               |         |  |            |               |  |  |            |            |  |  |           
|                             |           |           |                           | Life insurance            |  |            | 33,524,955    |           |  |              | 4,329,538     |         |  |            | 923,435       |  |  |            | 30,118,852 |  |  |            | 3.1 | 
|                             |           |           |                           | Accident/health insurance |  |            | 135,574       |           |  |              | 33,689        |         |  |            |              |  |  |            | 101,885    |  |  |            |    | 
|                             |           |           |                           |                           |  |            |               |           |  |              |               |         |  |            |               |  |  |            |            | 
|                             |           |           |                           | Total                     |  |            | 33,660,529    |           |  |              | 4,363,227     |         |  |            | 923,435       |  |  |            | 30,220,737 |  |  |            | 3.1 | 
|                             |           |           |                           |                           |  |            |               |           |  |              |               |         |  |            |               |  |  |            |            | 
|Year ended December 31, 2000 |           |           |                           |                           |  |            |               |           |  |              |               |         |  |            |               |  |  |            |            | 
|Life insurance inforce       |           |           | 4,794,431,000             |                           |  |            | 1,251,895,000 |           |  |              | 780,840,000   |         |  |            | 4,323,376,000 |  |  |            | 18.1       | 
|                             |           |           |                           |                           |  |            |               |           |  |              |               |         |  |            |               |  |  |            |            | 
|                             |           | Premiums: |                           |                           |  |            |               |           |  |              |               |         |  |            |               |  |  |            |            |  |  |           
|                             |           |           | Life insurance            |                           |  | 30,194,291 |               |           |  | 4,264,239    |               |         |  | 766,213    |               |  |  | 26,696,265 |            |  |  | 2.9        |    
|                             |           |           | Accident/health insurance |                           |  | 151,733    |               |           |  | 31,475       |               |         |  |           |               |  |  | 120,258    |            |  |  |           |    
|                             |           |           |                           |                           |  |            |               |           |  |              |               |         |  |            |               |  |  |            |            | 
|                             |           |           |                           | Total                     |  |            | 30,346,024    |           |  |              | 4,295,714     |         |  |            | 766,213       |  |  |            | 26,816,523 |  |  |            | 2.9 | 
|                             |           |           |                           |                           |  |            |               |           |  |              |               |         |  |            |               |  |  |            |            | 



---

|(1) |  | All reinsurance assumed results from participation in Federally
sponsored group pools.
|--- |  | --------------------------------------------------------------------------------------

See accompanying independent auditors report.

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SIGNATURES

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

COTTON STATES LIFE INSURANCE COMPANY

|                                      |  |          |  |                           |  |         
|------------------------------------- |  | -------- |  | ------------------------- |  | --------
|J. Ridley Howard                      |  | 03/04/03 |  | William J. Barlow         |  | 03/04/03
|                                      |  |         
|Chairman of the Board of Directors/   |  | DATE     |  | Vice President of Finance |  | DATE    
|President and Chief Executive Officer |  |          |  | and Assistant Treasurer   |  |         

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

|                 |  |          |  |                     |  |         
|---------------- |  | -------- |  | ------------------- |  | --------
|Carol D. Cherry  |  | 03/04/03 |  | Robert C. McMahan   |  | 03/04/03
|                 |  |         
|Director         |  | DATE     |  | Director            |  | DATE    
|                 |  |          |  |                     |  |         
|Gaylord O. Coan  |  | 3/04/03  |  | Darrell D. Pittard  |  | 03/04/03
|                 |  |         
|Director         |  | DATE     |  | Director            |  | DATE    
|                 |  |          |  |                     |  |         
|Thomas A. Harris |  | 03/04/03 |  | Mathews D. Swift    |  | 03/04/03
|                 |  |         
|Director         |  | DATE     |  | Director            |  | DATE    
|                 |  |          |  |                     |  |         
|J. Ridley Howard |  | 03/04/03 |  | E. Jenner Wood, III |  | 03/04/03
|                 |  |         
|Director         |  | DATE     |  | Director            |  | DATE    

65



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##### Table of Contents






Certification Pursuant to Registrants
Filing Under Section 13(a) or 15(d) of the Securities and Exchange Act

I, J. Ridley Howard, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Cotton States Life
Insurance Company;                                                                                                                                                                                                                                
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                  

|   |  |                                                                                                                                                                                                                                                                                             
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
|   |  |                                                                                                                                                                                                                                                                                             
|b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                  
|   |  |                                                                                                                                                                                                                                                                                             
|c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors;
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|   |  |                                                                                                                                                                                                                                                                                               
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
|   |  |                                                                                                                                                                                                                                                                                               
|b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|      |  |          |  |                                                                 
|----- |  | -------- |  | ----------------------------------------------------------------
|Date: |  | 03/04/03 |  |                                                                 
|     
|      |  |          |  | /s/  J. Ridley Howard                                           
|      |  |          |  | J. Ridley Howard, Chairman
President and Chief Executive Officer

66



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##### Table of Contents






Certification Pursuant to Registrants
Filing Under Section 13(a) or 15(d) of the Securities and Exchange Act

I, William J. Barlow, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Cotton States Life
Insurance Company                                                                                                                                                                                                                                
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statement were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                  
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have;                                                                                                 

|   |  |                                                                                                                                                                                                                                                                                            
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a) |  | designed such disclosure control and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
|  
|b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                 
|  
|c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation of the Evaluation Date;                                                                                                                          



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors;
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|   |  |                                                                                                                                                                                                                                                                                               
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
|  
|b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|               |  |                                                                    
|-------------- |  | -------------------------------------------------------------------
|Date: 03/04/03 |  |                                                                    
|              
|               |  | /s/   William J. Barlow                                            
|               |  | William J. Barlow
Vice President of Finance and Assistant Treasurer

67



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##### Table of Contents



Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)

The undersigned, as the President and Chief Executive Officer and Vice
President of Finance and Assistant Treasurer of Cotton States Life Insurance
Company, each certify that the Annual Report on Form 10-K for the period ended
December 31, 2002, which accompanies this certification fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934 and the information contained in the periodic report
fairly presents, in all material respects, the financial condition and results
of operations of Cotton States Life Insurance Company at the dates and for the
periods indicated. The foregoing certification is made pursuant to §906 of
the Sarbanes-Oxley Act of 2002 (18 U.S.C.§1350) and no purchaser or seller of
securities or any other person shall be entitled to rely upon the foregoing
certification for any other purpose. The undersigned expressly disclaims any
obligation to update the foregoing certification except as required by law.

|               |  |                                                                                           
|-------------- |  | ------------------------------------------------------------------------------------------
|Date: 03/04/03 |  | /s/ J. Ridley HowardJ. Ridley Howard, Chairman
President and Chief Executive Officer      
|              
|               |  |                                                                                           
|              
|Date: 03/04/03 |  | /s/   William J. BarlowWilliam J. Barlow
Vice President of Finance and Assistant Treasurer

68