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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|þ |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 
|  |  |                                                                                         
|  |  | FOR THE QUARTERLY PERIOD ENDED March 31, 2003or                                         
|  |  |                                                                                         
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-20882

Standard Management Corporation
(Exact name of registrant as specified in its charter)

|                                                                                             |  |                                                    
|-------------------------------------------------------------------------------------------- |  | ---------------------------------------------------
|Indiana
(State or other jurisdiction
of incorporation or organization)                       |  | No. 35-1773567
(I.R.S. Employer Identification No.)
|                                                                                             |  |                                                    
|10689 N. Pennsylvania Street, Indianapolis, Indiana
(Address of principal executive offices) |  | 46280
(Zip Code)                                   

(317) 574-6200
(Registrants telephone number, including area code)

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

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

As of May 1, 2003, the Registrant had 8,057,089 shares of Common Stock
outstanding.





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TABLE OF CONTENTS



|                                                                                              |                                                        |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------ |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                                                               
|ITEM 1. FINANCIAL STATEMENTS                                                                 
|                                                                                              | CONSOLIDATED BALANCE SHEETS                           
|                                                                                              | CONSOLIDATED STATEMENTS OF INCOME                     
|                                                                                              | CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY       
|                                                                                              | CONSOLIDATED STATEMENTS OF CASH FLOWS                 
|                                                                                              | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION                                                                   
|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.                                                    
|                                                                                              | SIGNATURES                                            
|EX-10.1 EMPLMT AGMT B/T STANDARD MGT/RONALD HUNTER                                           
|EX-10.2 EMPLMT AGMT B/T STANDARD MGT/PAUL PHEFFER                                            
|EX-99.1 SECTION 906 CERTIFICATION OF THE CEO                                                 
|EX-99.2 SECTION 906 CERTIFICATION OF THE CFO                                                 



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##### Table of Contents



STANDARD MANAGEMENT CORPORATION

INDEX

|        |  |                                                                                       |  |  |       |             |  | 
|------- |  | ------------------------------------------------------------------------------------- |  |  | ----- | ----------- |  | 
|        |  |                                                                                       |  |  |       | Page Number
|        |  |                                                                                      
|Part I  |  | FINANCIAL INFORMATION:                                                                |  |  |       |            
|Item 1  |  | Financial Statements                                                                  |  |  |       |            
|        |  | Consolidated Balance
Sheets                                                          |  |  |       |            
|        |  | March 31, 2003 (Unaudited) and December 31, 2002 (Audited)                            |  |  | 3     |            
|        |  | Consolidated
Statements of Income                                                    |  |  |       |            
|        |  | For the Three Months Ended March 31, 2003 and 2002 (Unaudited)                        |  |  | 4     |            
|        |  | Consolidated
Statements of Shareholders Equity                                      |  |  |       |            
|        |  | For the Three Months Ended March 31, 2003 and 2002 (Unaudited)                        |  |  | 5     |            
|        |  | Consolidated
Statements of Cash Flows                                                |  |  |       |            
|        |  | For the Three Months Ended March 31, 2003 and 2002 (Unaudited)                        |  |  | 6     |            
|        |  | Notes to Consolidated Financial Statements (Unaudited)                                |  |  | 7-10  |            
|Item 2  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |  | 11-24 |            
|Item 3  |  | Quantitative and Qualitative Disclosures about Market Risk                            |  |  | 24    |            
|Item 4  |  | Controls and Procedures                                                               |  |  | 24    |            
|Part II |  | OTHER INFORMATION:                                                                    |  |  |       |            
|Item 6  |  | Exhibits and Reports on Form 8-K                                                      |  |  | 25    |            
|        |  | SIGNATURES                                                                            |  |  | 25    |            
|        |  | Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002              |  |  | 26-27 |            

2



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##### Table of Contents






PART I  FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS

STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)

|                                                                                            |                                                            |                                                                                                    |                                      |           |           |             |         |             |           |  |  | 
|------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------------------------------------ | --------- | --------- | ----------- | ------- | ----------- | --------- |  |  | 
|                                                                                            |                                                            |                                                                                                    |                                      |           |           | March 31    |         | December 31
|                                                                                            |                                                            |                                                                                                    |                                      |           |           | 2003        |         | 2002       
|                                                                                            |                                                            |                                                                                                    |                                      |           |           |             |         |            
|                                                                                            |                                                            |                                                                                                    |                                      |           |           | (Unaudited) |         | (Audited)  
|                                                                                            |                                                            |                                                                                                    |                                      |           |           |             |         |            
|                                                                                            |                                                            |                                                                                                    |                                      | ASSETS    |           |             |         |             |           |  |  | 
|Investments:                                                                                |                                                            |                                                                                                    |                                      |           |           |             |         |            
|                                                                                            | Securities available for sale:                             |                                                                                                    |                                      |           |           |             |         |             |          
|                                                                                            |                                                            | Fixed maturity securities at fair value (amortized cost $1,462,069 in 2003
and $1,350,961 in 2002) |                                      | $         | 1,487,858 |             |         | $           | 1,379,792 | 
|                                                                                            | Mortgage loans on real estate                              |                                                                                                    |                                      | 6,070     |           |             |         | 6,348       |          
|                                                                                            | Policy loans                                               |                                                                                                    |                                      | 12,540    |           |             |         | 12,722      |          
|                                                                                            | Real estate                                                |                                                                                                    |                                      | 1,275     |           |             |         | 1,252       |          
|                                                                                            | Equity-indexed call options                                |                                                                                                    |                                      | 3,541     |           |             |         | 3,904       |          
|                                                                                            | Short-term investments                                     |                                                                                                    |                                      | 616       |           |             |         | 713         |          
|                                                                                            | Other invested assets                                      |                                                                                                    |                                      | 926       |           |             |         | 1,076       |          
|                                                                                            |                                                            |                                                                                                    |                                      |           |           |             |         |             |           | 
|                                                                                            |                                                            | Total investments                                                                                  |                                      |           | 1,512,826 |             |         |             | 1,405,807 | 
|Cash and cash equivalents                                                                   |                                                            |                                                                                                    | 33,582                               |           |           |             | 60,197  |            
|Accrued investment income                                                                   |                                                            |                                                                                                    | 14,125                               |           |           |             | 16,255  |            
|Amounts due and recoverable from reinsurers                                                 |                                                            |                                                                                                    | 38,563                               |           |           |             | 38,951  |            
|Deferred policy acquisition costs                                                           |                                                            |                                                                                                    | 158,340                              |           |           |             | 153,954 |            
|Present value of future profits                                                             |                                                            |                                                                                                    | 14,870                               |           |           |             | 14,949  |            
|Goodwill                                                                                    |                                                            |                                                                                                    | 10,320                               |           |           |             | 6,417   |            
|Property and equipment (less accumulated depreciation of $4,098 in 2003 and $3,903 in
2002) |                                                            |                                                                                                    | 12,941                               |           |           |             | 12,832  |            
|Other assets                                                                                |                                                            |                                                                                                    | 6,708                                |           |           |             | 5,785   |            
|                                                                                            |                                                            |                                                                                                    |                                      |           |           |             |         |             |           | 
|                                                                                            |                                                            | Total assets                                                                                       |                                      | $         | 1,802,275 |             |         | $           | 1,715,147 | 
|                                                                                            |                                                            |                                                                                                    |                                      |           |           |             |         |            
|                                                                                            |                                                            |                                                                                                    | LIABILITIES AND SHAREHOLDERS EQUITY |           |           |             |         |             |           |  | 
|Liabilities:                                                                                |                                                            |                                                                                                    |                                      |           |           |             |         |            
|                                                                                            | Insurance policy liabilities                               |                                                                                                    | $                                    | 1,653,975 |           |             | $       | 1,570,348   |          
|                                                                                            | Accrued expenses and other payables                        |                                                                                                    |                                      | 5,093     |           |             |         | 5,561       |          
|                                                                                            | Obligations of capital lease                               |                                                                                                    |                                      | 706       |           |             |         | 804         |          
|                                                                                            | Mortgage payable                                           |                                                                                                    |                                      | 6,908     |           |             |         | 6,757       |          
|                                                                                            | Notes payable                                              |                                                                                                    |                                      | 13,300    |           |             |         | 13,000      |          
|                                                                                            | Current income taxes                                       |                                                                                                    |                                      | 2,064     |           |             |         | 3,811       |          
|                                                                                            | Deferred federal income taxes                              |                                                                                                    |                                      | 7,158     |           |             |         | 6,432       |          
|                                                                                            |                                                            |                                                                                                    |                                      |           |           |             |         |             |           | 
|                                                                                            |                                                            | Total liabilities                                                                                  |                                      |           | 1,689,204 |             |         |             | 1,606,713 | 
|                                                                                            |                                                            |                                                                                                    |                                      |           |           |             |         |            
|Company-obligated trust preferred securities                                                |                                                            |                                                                                                    | 20,700                               |           |           |             | 20,700  |            
|Shareholders Equity:                                                                       |                                                            |                                                                                                    |                                      |           |           |             |         |            
|                                                                                            | Preferred stock, no par value:                             |                                                                                                    |                                      |           |           |             |         |             |          
|                                                                                            |                                                            | Authorized 870,000 shares; none issued and outstanding                                             |                                      |           |          |             |         |             |          | 
|                                                                                            | Common stock and additional paid in capital, no par value: |                                                                                                    |                                      |           |           |             |         |             |          
|                                                                                            |                                                            | Authorized 20,000,000 shares; issued 9,572,167 in 2003 and 9,369,752 in
2002                       |                                      |           | 67,858    |             |         |             | 63,857    | 
|                                                                                            | Treasury stock, at cost, 1,515,078 shares in 2003 and 2002 |                                                                                                    |                                      | (7,671    | )         |             |         | (7,671      | )        
|                                                                                            | Accumulated other comprehensive income                     |                                                                                                    |                                      | 10,365    |           |             |         | 11,739      |          
|                                                                                            | Retained earnings                                          |                                                                                                    |                                      | 21,819    |           |             |         | 19,809      |          
|                                                                                            |                                                            |                                                                                                    |                                      |           |           |             |         |            
|                                                                                            |                                                            | Total shareholders equity                                                                         |                                      |           | 92,371    |             |         |             | 87,734    | 
|                                                                                            |                                                            |                                                                                                    |                                      |           |           |             |         |            
|                                                                                            |                                                            | Total liabilities and shareholders equity                                                         |                                      | $         | 1,802,275 |             |         | $           | 1,715,147 | 
|                                                                                            |                                                            |                                                                                                    |                                      |           |           |             |         |            

See accompanying notes to consolidated financial statements.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, Dollars in Thousands, Except Per Share Amounts)

|                                                                            |                                                                                |                                                                              |       |                    |        |      |        |        |        | 
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ---------------------------------------------------------------------------- | ----- | ------------------ | ------ | ---- | ------ | ------ | ------ | 
|                                                                            |                                                                                |                                                                              |       | Three Months Ended
|                                                                            |                                                                                |                                                                              |       | March 31          
|                                                                            |                                                                                |                                                                              |       |                   
|                                                                            |                                                                                |                                                                              |       | 2003               |        | 2002
|                                                                            |                                                                                |                                                                              |       |                    |        |     
|Revenues:                                                                   |                                                                                |                                                                              |       |                    |        |      |        |       
|                                                                            | Premium income                                                                 |                                                                              | $     | 1,877              |        |      | $      | 2,383  |       
|                                                                            | Net investment income                                                          |                                                                              |       | 21,146             |        |      |        | 17,153 |       
|                                                                            | Call option losses                                                             |                                                                              |       | (3,098             | )      |      |        | (1,393 | )     
|                                                                            | Net realized investment gains (losses)                                         |                                                                              |       | 9,927              |        |      |        | (274   | )     
|                                                                            | Policy income                                                                  |                                                                              |       | 2,233              |        |      |        | 1,777  |       
|                                                                            | Fees and other income                                                          |                                                                              |       | 349                |        |      |        | 817    |       
|                                                                            |                                                                                |                                                                              |       |                    |        |      |        |        |       
|                                                                            |                                                                                | Total revenues from continuing operations                                    |       |                    | 32,434 |      |        |        | 20,463 | 
|Benefits and expenses:                                                      |                                                                                |                                                                              |       |                    |        |      |        |       
|                                                                            | Benefits and claims                                                            |                                                                              |       | 2,354              |        |      |        | 2,292  |       
|                                                                            | Interest credited to interest-sensitive annuities and other financial products |                                                                              |       | 11,651             |        |      |        | 7,894  |       
|                                                                            | Amortization                                                                   |                                                                              |       | 9,879              |        |      |        | 3,988  |       
|                                                                            | Commission expenses                                                            |                                                                              |       | 68                 |        |      |        | 577    |       
|                                                                            | Other operating expenses                                                       |                                                                              |       | 4,410              |        |      |        | 2,724  |       
|                                                                            | Interest expense and financing costs                                           |                                                                              |       | 1,025              |        |      |        | 1,112  |       
|                                                                            |                                                                                |                                                                              |       |                    |        |      |        |       
|                                                                            |                                                                                | Total benefits and expenses from continuing operations                       |       |                    | 29,387 |      |        |        | 18,587 | 
|Income before federal income taxes                                          |                                                                                |                                                                              | 3,047 |                    |        |      | 1,876  |       
|Federal income tax expense                                                  |                                                                                |                                                                              | 1,037 |                    |        |      | 385    |       
|                                                                            |                                                                                |                                                                              |       |                    |        |      |        |       
|Income from continuing operations                                           |                                                                                |                                                                              | 2,010 |                    |        |      | 1,491  |       
|Income from discontinued operations less taxes of $0 and $264, respectively |                                                                                |                                                                              |      |                    |        |      | 513    |       
|Cumulative effect of accounting change for goodwill impairment              |                                                                                |                                                                              |      |                    |        |      | (1,212 | )     
|                                                                            |                                                                                |                                                                              |       |                    |        |      |        |        |       
|Net income                                                                  |                                                                                | $                                                                            | 2,010 |                    |        | $    | 792    |       
|                                                                            |                                                                                |                                                                              |       |                    |        |      |        |       
|Earnings per share  basic:                                                 |                                                                                |                                                                              |       |                    |        |      |        |       
|                                                                            | Income from continuing operations                                              |                                                                              | $     | .26                |        |      | $      | .19    |       
|                                                                            | Income from discontinuing operations                                           |                                                                              |       |                   |        |      |        | .07    |       
|                                                                            |                                                                                |                                                                              |       |                    |        |      |        |       
|                                                                            |                                                                                | Income before cumulative effect of accounting change for goodwill impairment |       |                    | .26    |      |        |        | .26    | 
|                                                                            | Cumulative effect of accounting change for goodwill impairment                 |                                                                              |       |                   |        |      |        | (.16   | )     
|                                                                            |                                                                                |                                                                              |       |                    |        |      |        |        |       
|                                                                            | Net income                                                                     |                                                                              |       | .26                |        |      |        | .10    |       
|                                                                            |                                                                                |                                                                              |       |                    |        |      |        |       
|Earnings per share  diluted:                                               |                                                                                |                                                                              |       |                    |        |      |        |       
|                                                                            | Income from continuing operations                                              |                                                                              | $     | .25                |        |      | $      | .18    |       
|                                                                            | Income from discontinuing operations                                           |                                                                              |       |                   |        |      |        | .07    |       
|                                                                            |                                                                                |                                                                              |       |                    |        |      |        |       
|                                                                            |                                                                                | Income before cumulative effect of accounting change for goodwill impairment |       |                    | .25    |      |        |        | .25    | 
|                                                                            | Cumulative effect of accounting change for goodwill impairment                 |                                                                              |       |                   |        |      |        | (.15   | )     
|                                                                            |                                                                                |                                                                              |       |                    |        |      |        |        |       
|                                                                            | Net income                                                                     |                                                                              | $     | .25                |        |      | $      | .10    |       
|                                                                            |                                                                                |                                                                              |       |                    |        |      |        |       

See accompanying notes to consolidated financial statements.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Unaudited, Dollars in Thousands)

|                           |                                       |                                                                                |                                                                                  |       |        |        |         |       |            |   |               |    |               |   |             |   |        |        |        |       |     |  | 
|-------------------------- | ------------------------------------- | ------------------------------------------------------------------------------ | -------------------------------------------------------------------------------- | ----- | ------ | ------ | ------- | ----- | ---------- | - | ------------- | -- | ------------- | - | ----------- | - | ------ | ------ | ------ | ----- | --- |  | 
|                           |                                       |                                                                                |                                                                                  |       |        |        |         |       | Common     |   |               |    |               |   |             |   |        |        |        |       |    
|                           |                                       |                                                                                |                                                                                  |       |        |        |         |       | stock and  |   |               |    |               |   | Accumulated |   |        |        |       
|                           |                                       |                                                                                |                                                                                  |       |        |        |         |       | additional |   |               |    |               |   | other       |   |        |        |       
|                           |                                       |                                                                                |                                                                                  |       |        |        |         |       | paid in    |   | Treasury      |    | comprehensive |   | Retained   
|                           |                                       |                                                                                |                                                                                  |       | Total  |        | capital |       | stock      |   | income (loss) |    | earnings     
|                           |                                       |                                                                                |                                                                                  |       |        |        |         |       |            |   |               |    |              
|Balance at January 1, 2002 |                                       | $                                                                              | 70,189                                                                           |       |        | $      | 63,011  |       |            | $ | (7,589        | )  |               | $ | (6,172      | ) |        | $      | 20,939 |      
|                           | Comprehensive loss:                   |                                                                                |                                                                                  |       |        |        |         |       |            |   |               |    |               |   |             |   |        |        |        |       |    
|                           |                                       | Net income                                                                     |                                                                                  |       | 792    |        |         |       |            |   |               |    |               |   |             |   |        |        |        |       | 792 | 
|                           |                                       | Other comprehensive income:                                                    |                                                                                  |       |        |        |         |       |            |   |               |    |               |   |             |   |        |        |        |       |     | 
|                           |                                       |                                                                                | Change in unrealized gain (loss) on
securities, net taxes (benefits) of $(3,618) |       |        | (7,041 | )       |       |            |   |               |    |               |   |             |   |        | (7,041 | )      |       |     |  | 
|                           |                                       | Change in foreign currency translation                                         |                                                                                  |       | (163   | )      |         |       |            |   |               |    |               |   |             |   | (163   | )      |        |       |     | 
|                           |                                       |                                                                                |                                                                                  |       |        |        |         |       |            |   |               |    |               |   |             |   |        |        |        |      
|                           |                                       |                                                                                | Other comprehensive loss                                                         |       |        | (7,204 | )       |       |            |   |               |    |               |   |             |   |        |        |        |       |     |  | 
|                           |                                       |                                                                                | Comprehensive loss                                                               |       |        | (6,412 | )       |       |            |   |               |    |               |   |             |   |        |        |        |       |     |  | 
|                           | Issuance of common stock and warrants |                                                                                |                                                                                  | 51    |        |        |         | 51    |            |   |               |    |               |   |             |   |        |        |        |       |    
|                           | Preferred stock dividends             |                                                                                |                                                                                  | (5    | )      |        |         |       |            |   |               | (5 | )             |   |             |   |        |        |        |       |    
|                           |                                       |                                                                                |                                                                                  |       |        |        |         |       |            |   |               |    |               |   |             |   |        |        |        |      
|Balance at March 31, 2002  |                                       | $                                                                              | 63,823                                                                           |       |        | $      | 63,062  |       |            | $ | (7,594        | )  |               | $ | (13,376     | ) |        | $      | 21,731 |      
|                           |                                       |                                                                                |                                                                                  |       |        |        |         |       |            |   |               |    |               |   |             |   |        |        |        |      
|Balance at January 1, 2003 |                                       | $                                                                              | 87,734                                                                           |       |        | $      | 63,857  |       |            | $ | (7,671        | )  |               | $ | 11,739      |   |        | $      | 19,809 |      
|Comprehensive income:      |                                       |                                                                                |                                                                                  |       |        |        |         |       |            |   |               |    |               |   |             |   |        |        |        |      
|                           | Net income                            |                                                                                |                                                                                  | 2,010 |        |        |         |       |            |   |               |    |               |   |             |   |        |        |        | 2,010 |    
|                           | Other comprehensive loss:             |                                                                                |                                                                                  |       |        |        |         |       |            |   |               |    |               |   |             |   |        |        |        |       |    
|                           |                                       | Change in unrealized gain (loss) on securities,
net taxes (benefits) of $(591) |                                                                                  |       | (1,374 | )      |         |       |            |   |               |    |               |   |             |   | (1,374 | )      |        |       |     | 
|                           |                                       |                                                                                |                                                                                  |       |        |        |         |       |            |   |               |    |               |   |             |   |        |        |        |      
|                           |                                       |                                                                                | Other comprehensive loss                                                         |       |        | (1,374 | )       |       |            |   |               |    |               |   |             |   |        |        |        |       |     |  | 
|                           |                                       |                                                                                | Comprehensive income                                                             |       |        | 636    |         |       |            |   |               |    |               |   |             |   |        |        |        |       |     |  | 
|                           | Issuance of common stock and warrants |                                                                                |                                                                                  | 4,001 |        |        |         | 4,001 |            |   |               |    |               |   |             |   |        |        |        |       |    
|                           |                                       |                                                                                |                                                                                  |       |        |        |         |       |            |   |               |    |               |   |             |   |        |        |        |      
|Balance at March 31, 2003  |                                       | $                                                                              | 92,371                                                                           |       |        | $      | 67,858  |       |            | $ | (7,671        | )  |               | $ | 10,365      |   |        | $      | 21,819 |      
|                           |                                       |                                                                                |                                                                                  |       |        |        |         |       |            |   |               |    |               |   |             |   |        |        |        |      

See accompanying notes to consolidated financial statements.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES




CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, Dollars in Thousands)

|                                                                                                                                      |                                                                |                                           |         |                    |          |      |         |          |          |  
|------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ----------------------------------------- | ------- | ------------------ | -------- | ---- | ------- | -------- | -------- | -
|                                                                                                                                      |                                                                |                                           |         | Three Months Ended
|                                                                                                                                      |                                                                |                                           |         | March 31          
|                                                                                                                                      |                                                                |                                           |         |                   
|                                                                                                                                      |                                                                |                                           |         | 2003               |          | 2002
|                                                                                                                                      |                                                                |                                           |         |                    |          |     
|Operating Activities                                                                                                                  |                                                                |                                           |         |                    |          |      |         |         
|Net income                                                                                                                            |                                                                | $                                         | 2,010   |                    |          | $    | 792     |         
|Adjustments to reconcile net income to net cash provided by operating
activities:                                                     |                                                                |                                           |         |                    |          |      |         |         
|                                                                                                                                      | Amortization of deferred acquisition costs                     |                                           |         | 9,879              |          |      |         | 3,708    |         
|                                                                                                                                      | Deferral of acquisition costs                                  |                                           |         | (14,555            | )        |      |         | (15,550  | )       
|                                                                                                                                      | Federal income taxes                                           |                                           |         | (1,408             | )        |      |         | (303     | )       
|                                                                                                                                      | Depreciation and amortization                                  |                                           |         | 433                |          |      |         | 727      |         
|                                                                                                                                      | Insurance policy liabilities                                   |                                           |         | 16,841             |          |      |         | 10,278   |         
|                                                                                                                                      | Net realized investment (gains) losses                         |                                           |         | (9,927             | )        |      |         | 274      |         
|                                                                                                                                      | Accrued investment income                                      |                                           |         | 2,130              |          |      |         | (889     | )       
|                                                                                                                                      | Cumulative effect of accounting change for goodwill impairment |                                           |         |                   |          |      |         | 1,212    |         
|                                                                                                                                      | Other                                                          |                                           |         | (44                | )        |      |         | 857      |         
|                                                                                                                                      |                                                                |                                           |         |                    |          |      |         |         
|                                                                                                                                      |                                                                | Net cash provided by operating activities |         |                    | 5,359    |      |         |          | 1,106    |  
|                                                                                                                                      |                                                                |                                           |         |                    |          |      |         |         
|Investing Activities                                                                                                                  |                                                                |                                           |         |                    |          |      |         |         
|Fixed maturity securities available for sale:                                                                                         |                                                                |                                           |         |                    |          |      |         |         
|                                                                                                                                      | Purchases                                                      |                                           |         | (621,939           | )        |      |         | (169,843 | )       
|                                                                                                                                      | Sales                                                          |                                           |         | 459,713            |          |      |         | 41,302   |         
|                                                                                                                                      | Maturities, calls and redemptions                              |                                           |         | 59,965             |          |      |         | 8,030    |         
|Short-term investments, net                                                                                                           |                                                                |                                           | (237    | )                  |          |      | (3,366  | )       
|Other investments, net                                                                                                                |                                                                |                                           | 5       |                    |          |      | (2,096  | )       
|                                                                                                                                      |                                                                |                                           |         |                    |          |      |         |         
|                                                                                                                                      |                                                                | Net cash used by investing activities     |         |                    | (102,493 | )    |         |          | (125,973 | )
|                                                                                                                                      |                                                                |                                           |         |                    |          |      |         |         
|Financing Activities                                                                                                                  |                                                                |                                           |         |                    |          |      |         |         
|Borrowings (repayments) on notes payable                                                                                              |                                                                |                                           | 244     |                    |          |      | (625    | )       
|Premiums received on interest-sensitive and other financial products
credited to policyholder account balances, net of premiums ceded |                                                                |                                           | 123,687 |                    |          |      | 147,683 |         
|Return of policyholder account balances on interest-sensitive annuities
and other financial products                                  |                                                                |                                           | (53,414 | )                  |          |      | (30,252 | )       
|Issuance of common stock and warrants                                                                                                 |                                                                |                                           | 2       |                    |          |      | 45      |         
|                                                                                                                                      |                                                                |                                           |         |                    |          |      |         |         
|                                                                                                                                      | Net cash provided by financing activities                      |                                           |         | 70,519             |          |      |         | 116,851  |         
|                                                                                                                                      |                                                                |                                           |         |                    |          |      |         |         
|Net increase (decrease) in cash and cash equivalents                                                                                  |                                                                |                                           | (26,615 | )                  |          |      | (8,016  | )       
|Cash and cash equivalents at beginning of period                                                                                      |                                                                |                                           | 60,197  |                    |          |      | 18,144  |         
|                                                                                                                                      |                                                                |                                           |         |                    |          |      |         |         
|Cash and cash equivalents at end of period                                                                                            |                                                                | $                                         | 33,582  |                    |          | $    | 10,128  |         
|                                                                                                                                      |                                                                |                                           |         |                    |          |      |         |         

See accompanying notes to consolidated financial statements.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following notes should be read along with the notes to the
consolidated financial statements included in the 2002 Form 10-K of Standard
Management Corporation (we, our, us, Standard Management or the
Company).

Standard Management is a holding company that a) develops, markets and/or
administers annuity and life insurance products and b) distributes pharmacy
goods and services through its health subsidiary.

Note 1  Basis of Presentation

Our unaudited, consolidated financial statements reflect normal recurring
adjustments that are necessary to present fairly Standard Managements
financial position and results of operations on a basis consistent with that of
our prior audited consolidated financial statements. As permitted by rules and
regulations of the Securities and Exchange Commission applicable to quarterly
reports on Form 10-Q, we have condensed or omitted certain information and
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles (GAAP). We have also
reclassified certain amounts from the prior periods to conform to the 2003
presentation. These reclassifications have no effect on net income or
shareholders equity. Results for interim periods are not necessarily
indicative of the results that may be expected for a full year.

Effective September 17, 2002 we concluded the sale of our International
Operations (discontinued operations). We have included in our consolidated
balance sheets at December 31, 2002 and for the period ended March 31, 2002 the
results from discontinued operations.

Effective March 25, 2003, we acquired for 200,000 shares of SMC stock,
Medical Care & Outcomes, LLC (MCO). MCO provides an innovative tool for
our health services segment to acquire real-time patient data on compliance and
therapeutic outcomes following an office visit or hospital stay. The purchase
price included contingent consideration, based on a targeted closing sales
price of SMC stock on the anniversary date of the acquisition over each of the
next four years. The contingent consideration has been recognized as additional
paid in capital in the March 31, 2003 consolidated financial statements. The
purchase was accounted for under the purchase method of accounting and resulted
in recognizing a preliminary goodwill amount of $3.9 million. Under purchase
accounting, we allocated the total purchase price of the assets and liabilities
acquired, based on a determination of their fair values and recorded the excess
of acquisition cost over net assets acquired as goodwill.

Operating Segments

We revised our operating segments as of January 1, 2003. The prior period
operating segments have been restated to reflect the current period
classification. The former Domestic Operations segment is categorized into the
following three continuing operating segments.

Financial Services

Our
Financial Services segment is comprised of Standard Life Insurance
Company of Indiana (Standard Life) and Dixie National Life Insurance Company
(Dixie Life) life insurance companies. Financial Services consists of
revenues earned and expenses incurred from our insurance operations. Our
primary products include deferred annuities, single premium immediate annuities
and equity-indexed annuities. The profitability of this segment is primarily a
function of net investment spread (the difference between the investment income
earned on our investments less the interest we credit to our policyholders),
persistency of our in force business, mortality experience and management of
our operating expenses.

Health Services

Our health services segment, which was formed in 2002, consists of
revenues earned and expenses incurred from our pharmaceutical operations. Our
primary customer base consists of consumers, academic institutions and mental
health facilities. The profitability of this segment is primarily a function of
gross margin on sales (the difference between sales and cost of sales) and
management of our operating expenses.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Other Services

Our other services segment consists of revenues earned and expenses
incurred related to corporate operations, primarily acquisitions and
divestitures, capital management, and administrative marketing services. This
marketing activity consists of commission income and expenses for services
provided to unaffiliated companies.

Discontinued Operations  International Operations

Our International Operations (discontinued operations) were sold in the
last half of 2002. The 2002 results included revenues earned and expenses
incurred from abroad, primarily Europe, and include fees collected on our
deposits from unit-linked assurance products. The profitability of this
segment primarily is dependant on the amount of separate account assets under
management, the management fee charged on those assets and management of our
operating expenses.

Use of Estimates

The nature of the insurance business requires us to make estimates and
assumptions that affect the amounts reported in our consolidated financial
statements and accompanying notes. For example, we use significant estimates
and assumptions in calculating deferred policy acquisition costs, present value
of future profits, goodwill, future policy benefits and deferred federal income
taxes. If future experience differs from these estimates and assumptions, our
financial statements could be materially affected.

Goodwill

All goodwill is held in the financial services and health services
reportable segments. The activity related to goodwill is summarized as follows
for March 31 (dollars in thousands):

|                           |  |          |        |             |  |   |        |  
|-------------------------- |  | -------- | ------ | ----------- |  | - | ------ | -
|                           |  | March 31 |        | December 31
|                           |  | 2003     |        | 2002       
|                           |  |          |        |            
|Balance, beginning of year |  | $        | 6,417  |             |  | $ | 5,146  |  
|Goodwill acquired          |  |          | 3,903  |             |  |   | 2,483  |  
|Goodwill impairment        |  |          |       |             |  |   | (1,212 | )
|                           |  |          |        |             |  |   |        |  
|Balance, end of year       |  | $        | 10,320 |             |  | $ | 6,417  |  
|                           |  |          |        |             |  |   |        |  

Note 2  Mortgage Payable, Notes Payable and Trust Preferred Securities

Our mortgage payable, notes payable and trust preferred securities were as
follows (dollars in thousands):

|                           |                                              |  |          |       |          |   |             |        |  |   |        |        | 
|-------------------------- | -------------------------------------------- |  | -------- | ----- | -------- | - | ----------- | ------ |  | - | ------ | ------ | 
|                           |                                              |  | Interest |       | March 31 |   | December 31
|                           |                                              |  | Rate     |       | 2003     |   | 2002       
|                           |                                              |  |          |       |          |   |            
|Mortgage payable           |                                              |  | 7.33     | %     |          | $ | 6,908       |        |  | $ | 6,757  |       
|                           |                                              |  |          |       |          |   |             |        |  |   |        |       
|Notes payable:             |                                              |  |          |       |          |   |             |        |  |   |        |       
|                           | Promissory note                              |  |          | 6.00  | %        |   |             | 500    |  |   |        | 500    | 
|                           | Borrowings under revolving credit agreements |  |          | 4.89  | %(1)     |   |             | 1,800  |  |   |        | 1,500  | 
|                           | Senior subordinated notes                    |  |          | 10.00 | %        |   |             | 11,000 |  |   |        | 11,000 | 
|                           |                                              |  |          |       |          |   |             |        |  |   |        |       
|                           |                                              |  |          |       |          | $ | 13,300      |        |  | $ | 13,000 |       
|                           |                                              |  |          |       |          |   |             |        |  |   |        |       
|Trust preferred securities |                                              |  | 10.25    | %     |          | $ | 20,700      |        |  | $ | 20,700 |       
|                           |                                              |  |          |       |          |   |             |        |  |   |        |       



---

|(1) |  | Current weighted average rate at March 31, 2003.
|--- |  | ------------------------------------------------

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 3  Net Unrealized Gain on Securities Available for Sale

The components of unrealized gain on securities available for sale in
shareholders equity are summarized as follows (dollars in thousands):

|                                                |                                      |                                                        |           |          |        |             |           |        |        | 
|----------------------------------------------- | ------------------------------------ | ------------------------------------------------------ | --------- | -------- | ------ | ----------- | --------- | ------ | ------ | 
|                                                |                                      |                                                        |           | March 31 |        | December 31
|                                                |                                      |                                                        |           | 2003     |        | 2002       
|                                                |                                      |                                                        |           |          |        |            
|Fair value of securities available for sale     |                                      | $                                                      | 1,487,858 |          |        | $           | 1,379,792 |       
|Amortized cost of securities available for sale |                                      |                                                        | 1,462,069 |          |        |             | 1,350,961 |       
|                                                |                                      |                                                        |           |          |        |             |           |       
|                                                |                                      | Gross unrealized gain on securities available for sale |           |          | 25,789 |             |           |        | 28,831 | 
|Adjustments for:                                |                                      |                                                        |           |          |        |             |           |       
|                                                | Deferred policy acquisition costs    |                                                        |           | (6,247   | )      |             |           | (6,942 | )     
|                                                | Present value of future profits      |                                                        |           | (3,786   | )      |             |           | (4,113 | )     
|                                                | Deferred federal income tax benefits |                                                        |           | (5,484   | )      |             |           | (6,075 | )     
|                                                | Other                                |                                                        |           | 93       |        |             |           | 38     |       
|                                                |                                      |                                                        |           |          |        |             |           |       
|                                                |                                      | Net unrealized gain on securities available for sale   |           | $        | 10,365 |             |           | $      | 11,739 | 
|                                                |                                      |                                                        |           |          |        |             |           |       

Note 4  Earnings Per Share

A reconciliation of income and shares used to calculate basic and diluted
earnings per share is as follows (dollars in thousands):

|                                                                   |                                  |   |                    |        |      |   |           |         | 
|------------------------------------------------------------------ | -------------------------------- | - | ------------------ | ------ | ---- | - | --------- | ------- | 
|                                                                   |                                  |   | Three Months Ended
|                                                                   |                                  |   | March 31          
|                                                                   |                                  |   |                   
|                                                                   |                                  |   | 2003               |        | 2002
|                                                                   |                                  |   |                    |        |     
|Income:                                                            |                                  |   |                    |        |      |   |           |        
|Net income  basic earnings per share                              |                                  | $ | 2,010              |        |      | $ | 792       |        
|                                                                   |                                  |   |                    |        |      |   |           |        
|Net income  diluted earnings per share                            |                                  | $ | 2,010              |        |      | $ | 792       |        
|                                                                   |                                  |   |                    |        |      |   |           |        
|Shares:                                                            |                                  |   |                    |        |      |   |           |        
|Weighted average shares outstanding for basic earnings per share   |                                  |   | 7,870,298          |        |      |   | 7,607,930 |        
|Effect of dilutive securities:                                     |                                  |   |                    |        |      |   |           |        
|                                                                   | Stock options                    |   |                    | 5,307  |      |   |           | 103,753 | 
|                                                                   | Stock warrants                   |   |                    | 24,433 |      |   |           | 156,433 | 
|                                                                   |                                  |   |                    |        |      |   |           |        
|                                                                   | Dilutive potential common shares |   |                    | 29,740 |      |   |           | 260,186 | 
|                                                                   |                                  |   |                    |        |      |   |           |        
|Weighted average shares outstanding for diluted earnings per share |                                  |   | 7,900,038          |        |      |   | 7,868,116 |        
|                                                                   |                                  |   |                    |        |      |   |           |        

Note 5  Stock Option Plan

Effective June 12, 2002, we adopted the 2002 Stock Incentive Plan which
authorizes the granting of options to employees, directors and consultants of
the Company to purchase up to 990,000 shares of SMC common stock at a price not
less than its market value on the date the option is granted. The number of
shares of stock available for issuance pursuant to the Plan is
automatically increased on the first trading day of each calendar year
beginning January 1, 2003, by an amount equal to 3% of the shares of stock

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

outstanding on the trading day immediately preceding January 1. Options may
not be granted under the 2002 Stock Incentive Plan on a date that is more than
ten years from the date of its adoption. The options may become exercisable
immediately or over a period of time. Any shares subject to an option which for
any reason expires or is terminated unexercised may again be subject to an
option under the Plan. The 2002 Stock Incentive Plan also permits granting of
stock appreciation rights and restricted stock awards.

SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure, was issued in December 2002. This statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, to require more prominent disclosure
in both annual and interim financial statements. Adoption of SFAS No. 148 will
not impact our financial position or results of operations. SFAS No. 123, as
amended by SFAS No. 148, allows companies to either expense the estimated fair
value of stock options or to continue their current practice and disclose the
pro forma effects on net income and earnings per share had the fair value of
the options been expensed. We have elected to continue our practice of
recognizing compensation expense using the intrinsic value based method of
accounting and to provide the required pro forma information. The compensation
cost based on fair value at the grant date, which is consistent with the
provisions of SFAS No. 123, as amended by SFAS No. 148, would result in pro
forma net income and pro forma earnings per share of the following for the
quarter ended March 31 (in thousands, except per share amounts):

|                                                                                                              |                       |   |                    |     |      |   |     |     | 
|------------------------------------------------------------------------------------------------------------- | --------------------- | - | ------------------ | --- | ---- | - | --- | --- | 
|                                                                                                              |                       |   | Three Months Ended
|                                                                                                              |                       |   | March 31          
|                                                                                                              |                       |   |                   
|                                                                                                              |                       |   | 2003               |     | 2002
|                                                                                                              |                       |   |                    |     |     
|Reported net income                                                                                           |                       | $ | 2,010              |     |      | $ | 792 |    
|Add: Stock-based employee
compensation expense
included in reported net
income                                |                       |   |                   |     |      |   |    |    
|Less: Total stock-based
employee compensation
expense determined under
fair
value based method for all
grants |                       |   | (162               | )   |      |   |    |    
|                                                                                                              |                       |   |                    |     |      |   |     |    
|Pro forma net income                                                                                          |                       | $ | 1,848              |     |      | $ | 792 |    
|                                                                                                              |                       |   |                    |     |      |   |     |    
|Earnings per share:                                                                                           |                       |   |                    |     |      |   |     |    
|                                                                                                              | Basic  as reported   |   | $                  | .26 |      |   | $   | .26 | 
|                                                                                                              | Basic  pro forma     |   |                    | .23 |      |   |     | .26 | 
|                                                                                                              | Diluted  as reported |   | $                  | .25 |      |   | $   | .25 | 
|                                                                                                              | Diluted  pro forma   |   |                    | .23 |      |   |     | .25 | 

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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

General

The following discussion highlights the material factors affecting the
results of operations and the significant changes in balance sheet items.
Notes to the consolidated financial statements included in this report and the
notes to the consolidated financial statements included in our Form 10-K for
the year ended December 31, 2002 should be read in conjunction with this Form
10-Q.

Comparison of the Three Month Period Ended March 31, 2003 and March 31, 2002:

The following table summarizes the results of our operations (dollars in
thousands):

|                                                                   |                                                                |                                                                            |            |                                                  |        |                    |      |        |       |     |       | 
|------------------------------------------------------------------ | -------------------------------------------------------------- | -------------------------------------------------------------------------- | ---------- | ------------------------------------------------ | ------ | ------------------ | ---- | ------ | ----- | --- | ----- | 
|                                                                   |                                                                |                                                                            |            |                                                  |        | Three Months Ended
|                                                                   |                                                                |                                                                            |            |                                                  |        | March 31          
|                                                                   |                                                                |                                                                            |            |                                                  |        |                   
|                                                                   |                                                                |                                                                            |            |                                                  |        | 2003               |      | 2002  
|                                                                   |                                                                |                                                                            |            |                                                  |        |                    |      |       
|                                                                   |                                                                | Operating income (loss) before income taxes (continuing
operations)        |            | $                                                | (1,025 | )                  |      | $      | 2,151 |    
|                                                                   |                                                                | Operating income before income taxes (discontinued operations)             |            |                                                  |       |                    |      |        | 777   |    
|                                                                   |                                                                |                                                                            |            |                                                  |        |                    |      |       
|                                                                   |                                                                | Consolidated operating income (loss) before income taxes                   |            |                                                  | (1,025 | )                  |      |        | 2,928 |    
|                                                                   |                                                                | Income taxes (benefits) related to operating income (loss)                 |            |                                                  | (348   | )                  |      |        | 743   |    
|                                                                   |                                                                |                                                                            |            |                                                  |        |                    |      |        |       |    
|                                                                   |                                                                |                                                                            |            | Consolidated operating income (loss) after taxes |        |                    | (677 | )      |       |     | 2,185 | 
|                                                                   |                                                                |                                                                            |            |                                                  |        |                    |      |       
|                                                                   |                                                                | Consolidated realized investment gains (losses) before
income tax benefits |            |                                                  | 4,072  |                    |      |        | (274  | )  
|                                                                   |                                                                | Income taxes (benefits) related to realized investment gains
(losses)      |            |                                                  | 1,385  |                    |      |        | (93   | )  
|                                                                   |                                                                |                                                                            |            |                                                  |        |                    |      |        |       |    
|Consolidated realized investment gains (losses) after tax benefits |                                                                |                                                                            | 2,687      |                                                  |        |                    | (181 | )     
|                                                                   |                                                                |                                                                            |            |                                                  |        |                    |      |        |       |    
|                                                                   |                                                                | Income (loss) before cumulative effect of accounting change                |            |                                                  | 2,010  |                    |      |        | 2,004 |    
|                                                                   | Cumulative effect of accounting change for goodwill impairment |                                                                            |            |                                                 |        |                    |      | (1,212 | )    
|                                                                   |                                                                |                                                                            |            |                                                  |        |                    |      |       
|                                                                   |                                                                |                                                                            | Net income |                                                  | $      | 2,010              |      |        | $     | 792 |      
|                                                                   |                                                                |                                                                            |            |                                                  |        |                    |      |       

Consolidated Results and Analysis:

Net income for the first quarter of 2003 was $2.0 million, or $.25 per
diluted share, compared to $.8 million, or $.10 per diluted share for the first
quarter of 2002. Impacting the quarter were net realized investment gains after
tax of $2.7 million, or $.34 per diluted share. The net realized investment
gains offset tax basis capital loss carryforwards, resulting in no current
income tax liability. Pretax operating loss included charges of $.07 per
diluted share of operating expenses corresponding to the development of our new
Health Services segment. In the Financial Services segment, net income was
affected by $.07 per diluted share associated with reduced spread income
reflecting the lower interest rate environment, $.03 per diluted share from
unfavorable mortality, and $.02 per diluted share associated with litigation
costs. The prior year period included $.03 per diluted share from a lower
effective tax rate resulting from the use of tax loss carryforwards.

Net income for the first quarter of 2002 was $.8 million, or $.10 per
diluted share, compared to $2.0 million, or $.24 per diluted share, in the
first quarter of 2001. Impacting the quarter were net realized investment
losses from the sale of fixed maturity securities of $.03 per diluted share,
and a higher effective tax rate of $.02 per diluted share. Pretax operating
earnings increased 16% over the comparable quarter and were positively impacted
by an increase in net investment spread of $.06 per diluted share.

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Offsetting this increase was higher than expected mortality experience of $.02
per diluted share and the cumulative effect of accounting for goodwill
impairment of $.15 per diluted share.

Financial Services:

|                                                                                     |                                                       |                                                            |        |                        |         |      |        |         |         | 
|------------------------------------------------------------------------------------ | ----------------------------------------------------- | ---------------------------------------------------------- | ------ | ---------------------- | ------- | ---- | ------ | ------- | ------- | 
|                                                                                     |                                                       |                                                            |        | Three Months Ended    
|                                                                                     |                                                       |                                                            |        | March 31              
|                                                                                     |                                                       |                                                            |        |                       
|                                                                                     |                                                       |                                                            |        | 2003                   |         | 2002
|                                                                                     |                                                       |                                                            |        |                        |         |     
|                                                                                     |                                                       |                                                            |        | (Dollars in thousands)
|Premiums and Deposits Collected:                                                     |                                                       |                                                            |        |                        |         |      |        |        
|                                                                                     | Traditional life                                      |                                                            | $      | 1,877                  |         |      | $      | 2,384   |        
|                                                                                     |                                                       |                                                            |        |                        |         |      |        |        
|                                                                                     | Deferred annuities                                    |                                                            |        | 49,275                 |         |      |        | 88,632  |        
|                                                                                     | Single premium immediate annuities and other deposits |                                                            |        | 38,509                 |         |      |        | 36,436  |        
|                                                                                     | Equity-indexed annuities                              |                                                            |        | 35,758                 |         |      |        | 22,459  |        
|                                                                                     | Universal and interest-sensitive life                 |                                                            |        | 152                    |         |      |        | 160     |        
|                                                                                     |                                                       |                                                            |        |                        |         |      |        |        
|                                                                                     |                                                       | Subtotal  interest sensitive and other financial products |        |                        | 123,694 |      |        |         | 147,687 | 
|                                                                                     |                                                       |                                                            |        |                        |         |      |        |        
|                                                                                     | Total premiums and deposits collected                 |                                                            | $      | 125,571                |         |      | $      | 150,071 |        
|                                                                                     |                                                       |                                                            |        |                        |         |      |        |        
|Statement of Operations:                                                             |                                                       |                                                            |        |                        |         |      |        |        
|Premium income                                                                       |                                                       | $                                                          | 1,877  |                        |         | $    | 2,384  |        
|Policy income                                                                        |                                                       |                                                            | 2,233  |                        |         |      | 1,777  |        
|                                                                                     |                                                       |                                                            |        |                        |         |      |        |        
|                                                                                     | Total policy related income                           |                                                            |        | 4,110                  |         |      |        | 4,161   |        
|Net investment income                                                                |                                                       |                                                            | 21,143 |                        |         |      | 17,146 |        
|Call option losses                                                                   |                                                       |                                                            | (3,098 | )                      |         |      | (1,393 | )      
|Fees and other income                                                                |                                                       |                                                            | 114    |                        |         |      | 106    |        
|                                                                                     |                                                       |                                                            |        |                        |         |      |        |        
|                                                                                     | Total revenues                                        |                                                            |        | 22,269                 |         |      |        | 20,020  |        
|                                                                                     |                                                       |                                                            |        |                        |         |      |        |        
|Benefits and claims                                                                  |                                                       |                                                            | 2,354  |                        |         |      | 2,292  |        
|Interest credited to interest sensitive annuities and other financial products       |                                                       |                                                            | 11,651 |                        |         |      | 7,894  |        
|Amortization                                                                         |                                                       |                                                            | 4,023  |                        |         |      | 3,988  |        
|Commission expenses                                                                  |                                                       |                                                            | (3     | )                      |         |      | 363    |        
|Other operating expenses                                                             |                                                       |                                                            | 1,919  |                        |         |      | 1,477  |        
|                                                                                     |                                                       |                                                            |        |                        |         |      |        |         |        
|                                                                                     | Total benefits and expenses                           |                                                            |        | 19,944                 |         |      |        | 16,014  |        
|                                                                                     |                                                       |                                                            |        |                        |         |      |        |        
|                                                                                     | Operating income before income taxes                  |                                                            |        | 2,325                  |         |      |        | 4,006   |        
|Federal
income tax expense                                                           |                                                       |                                                            | 792    |                        |         |      | 1,362  |        
|                                                                                     |                                                       |                                                            |        |                        |         |      |        |         |        
|                                                                                     | Operating
income after income taxes                   |                                                            |        | 1,533                  |         |      |        | 2,644   |        
|Net
realized investment gains (losses), net of related amortization and
income taxes |                                                       |                                                            | 2,687  |                        |         |      | (181   | )      
|                                                                                     |                                                       |                                                            |        |                        |         |     
|Cumulative effect of accounting change for goodwill impairment                       |                                                       |                                                            |       |                        |         |      | (1,212 | )      
|                                                                                     |                                                       |                                                            |        |                        |         |      |        |        
|Net income                                                                           |                                                       | $                                                          | 4,220  |                        |         | $    | 1,251  |        
|                                                                                     |                                                       |                                                            |        |                        |         |      |        |        

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General:Our financial services segment consists of revenues earned and
expenses incurred from our insurance operations. Our primary products include
deferred annuities, single premium immediate annuities and equity-indexed
annuities. The profitability of this segment is primarily a function of net
investment spread (the difference between the investment income earned on our
investments less the interest we credit to our policyholders), persistency of
our in force business, mortality experience and management of our operating
expenses.

Premium depositsconsist of deposits from our deferred annuities, single
premium immediate annuities, equity-indexed annuities, and other financial
products that do not incorporate significant mortality features. For GAAP,
these premium deposits are not shown as premium income in the income statement.
A change in premium deposits in a single period does not directly cause our
operating income to change, although continued increases or decreases in
premiums may affect the growth rate of assets on which investment spreads are
earned.



| |  | Premium deposits for the first quarter of 2003 decreased $24.0 million or
16%, to $123.7 million, compared to the first quarter of 2002. Deferred
annuities decreased $39.4 million or 44%, to $49.3 million. Single
premium immediate annuities increased $2.1 million, or 6%, to $38.5
million. Deposits from equity-indexed annuities increased $13.3 million or
59%, to $35.8 million.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|  |  | Premium deposits decreased in the 2003 period primarily because of continued
focus on increasing margins and lowering front-end product costs.                                                                                                                                                                                                                                            

Premium incomeconsists of premiums earned from 1) traditional life products
and 2) annuity products that incorporate significant mortality features.



| |  | Premium income for the first quarter of 2003 decreased by $.5 million or
21%, to $1.9 million compared to the first quarter of 2002. Effective
August 2001, we suspended the active marketing of life products
indefinitely. However, we continue to manage our in force life business.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Policy incomerepresents 1) mortality income and administrative fees earned on
universal life products and 2) surrender income earned on terminated universal
life and annuity policies.



| |  | Policy income for the first quarter of 2003 increased $.5 million or 26%,
to $2.2 million compared to the first quarter of 2002.
|- |  | --------------------------------------------------------------------------------------------------------------------------------

Net investment incomeincludes interest earned on invested assets which
fluctuates with changes in 1) the amount of average invested assets supporting
insurance liabilities and 2) the average yield earned on those invested assets.



| |  | Net investment income for the first quarter of 2003 increased by $4.0
million or 23%, to $21.1 million compared to the first quarter of 2002.
Net investment income increased as a result of a $437.6 million or 44%,
increase in the weighted average invested assets for the period, which was
partially offset by a decrease in the net investment yields earned on
average invested assets of 5.88% for the first quarter of 2003 compared to
6.70% for the first quarter 2002. Decline in net investment yields are due
primarily to investing new premium deposits in assets earning lower money
yields.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|  |  | See also Call option losses and Interest credited to interest
sensitive annuities and other financial products for information regarding
the impact of our equity-indexed products.                                                                                                                                                                                                                                                                                                                                                                                                                       

Call option lossesrelate to equity-indexed products that are hedged with call
options to limit risk against unusually high crediting rates from favorable
returns in the equity market. The market value of these options fluctuate from
period to period and are substantially offset by amounts credited to
policyholder account balances.



| |  | Call option losses for the
first quarter of 2003 increased by $1.7
million or 122%, to $3.1 million compared to the first quarter of 2002.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------

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Call option losses for the first quarter of 2003 were due to the impact from
changes in the market value of our call options as a result of changes in the S
& P 500 Index and the purchase of additional options to support increased
equity-indexed liabilities.

Fees and other incomeconsists of fee income related to servicing unaffiliated
blocks of business and experience refunds.



| |  | Fees and other income increased $8,000 or 8%, to $.1 million.
|- |  | -------------------------------------------------------------

Benefits and claimsinclude 1) mortality experience, 2) benefits from other
policies that incorporate significant mortality features and 3) changes in
future policy reserves. Throughout our history, we have experienced periods of
higher and lower benefit claims. This volatility is not uncommon in the life
insurance industry and, over extended periods of time, periods of higher claims
experience tend to offset periods of lower claim experience.



| |  | Benefits and claims for the first quarter of 2003 increased $.1 million
or 3%, to $2.4 million compared to the first quarter of 2002, and includes
the impact from less traditional life business.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest credited to interest sensitive annuities and other financial products
represents interest credited to insurance liabilities of the deferred
annuities, single premium immediate annuities, equity-indexed annuities and
other financial products. This expense fluctuates with changes in 1) the
average interest sensitive insurance liabilities, 2) the average credited rate
on those liabilities, 3) the market value fluctuations of call options and 4)
the impact of SFAS No. 133, Accounting for Derivatives Instruments and Hedging
Activities.



| |  | During the first quarter of 2003, interest credited increased $3.8
million to $11.7 million, an increase of 48% compared to the first quarter
of 2002. This increase is primarily due to a 48% increase in average
interest sensitive liabilities of $459.2 million and $1.4 million from the
impact of SFAS No. 133, offset by a reduction of $1.0 million from changes
in the market value of liabilities supporting equity-indexed products.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|  |  | The weighted average credited rates for the first quarter of 2003 and 2002
were 4.28% and 4.74%, respectively. The decline in average credited rates is
due to rate reductions taken by management to reflect the reduction in net
investment earned rates over the same period.                                                                                                                                                               

Amortizationincludes 1) amortization related to the present value of our
policies purchased from our acquired insurance business and 2) amortization of
deferred acquisition costs related to capitalized costs of our insurance
business sold.



| |  | Amortization for the first quarter of
2003 was $4.0 million, unchanged compared to the first quarter of 2002.
|- |  | -------------------------------------------------------------------------------------------------------------

Commission expensesrepresent commission expenses, net of deferrable amounts.



| |  | Commission expenses decreased $.4 million to $(3,000). The decrease in net
commission expense is a result of a change in deferral practice on renewal commissions
in excess of ultimate commission rates. Previously, no renewal commissions have been
deferred. Effective in 2003, we have deferred all renewal commissions that are in
excess of ultimate renewal commission rates resulting in a decrease in net commission
expense.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other operating expensesconsist of general operating expenses, including
salaries, net of deferrable amounts.



| |  | Other operating expenses for the first quarter of 2003 increased $.5
million or 30%, to $2.0 million compared to the first quarter of 2002.
Other operating expenses increased due to increased litigation costs and
lower expense deferrals. These items were offset by a decrease in salary
expense resulting from realigning personnel between business segments.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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See also Other operating expenses in the other services segment for
corresponding increase in salary expense.

Net realized investment gains (losses), net of related amortizationfluctuate
from period to period and generally arise when securities are sold in response
to changes in the investment environment. Realized investment gains (losses)
can affect the timing of the amortization of deferred acquisition costs and the
present value of future profits.



| |  | Net realized investment gains, net of
related amortization, were $4.1 million in the first quarter of 2003, largely
resulting from a strategy to realize tax basis capital loss carryforwards.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Approximately 98% of our fixed maturity securities are classified as investment grade at March 31, 2003.                                                                                      

Health Services:

|                                     |                            |                |                     |      |                        |     |      |    |   |    | 
|------------------------------------ | -------------------------- | -------------- | ------------------- | ---- | ---------------------- | --- | ---- | -- | - | -- | 
|                                     |                            |                |                     |      | Three Months Ended    
|                                     |                            |                |                     |      | March 31              
|                                     |                            |                |                     |      |                       
|                                     |                            |                |                     |      | 2003                   |     | 2002
|                                     |                            |                |                     |      |                        |     |     
|                                     |                            |                |                     |      | (Dollars in thousands)
|Gross Margin on Sales:               |                            |                |                     |      |                        |     |      |   
|                                     | Sales                      |                | $                   | 692  |                        |     | $    | 22 |  
|                                     |                            |                |                     |      |                        |     |      |   
|                                     | Cost of goods sold         |                |                     | 573  |                        |     |      | 13 |  
|                                     | Fulfillment costs          |                |                     |      |                        |     |      |    |  
|                                     | Processing costs           |                |                     | 201  |                        |     |      |   |  
|                                     |                            | Shipping costs |                     |      | 26                     |     |      |    |  |   
|                                     |                            |                |                     |      |                        |     |      |   
|                                     |                            |                | Total cost of sales |      |                        | 800 |      |    |   | 13 | 
|                                     | Gross margin on sales      |                | $                   | (108 | )                      |     | $    | 9  |  
|                                     |                            |                |                     |      |                        |     |      |   
|Statement of Operations:             |                            |                |                     |      |                        |     |      |   
|Gross margin on sales                |                            | $              | (108                | )    |                        | $   | 9    |   
|Other income                         |                            |                | 13                  |      |                        |     | 1    |   
|                                     |                            |                |                     |      |                        |     |      |   
|                                     | Total revenues             |                |                     | (95  | )                      |     |      | 10 |  
|                                     |                            |                |                     |      |                        |     |      |   
|Marketing and sales expenses         |                            |                | 122                 |      |                        |     |     |   
|Commission expenses                  |                            |                | 22                  |      |                        |     |     |   
|Other operating expenses             |                            |                | 594                 |      |                        |     | 13   |   
|Interest expense and financing costs |                            |                | 8                   |      |                        |     |     |   
|                                     |                            |                |                     |      |                        |     |      |   
|                                     | Total expenses             |                |                     | 746  |                        |     |      | 13 |  
|                                     |                            |                |                     |      |                        |     |      |   
|                                     | Income before income taxes |                | $                   | (841 | )                      |     | $    | (3 | )
|Federal income tax (benefit) expense |                            |                | (286                | )    |                        |     |     |   
|                                     |                            |                |                     |      |                        |     |      |   
|                                     | Net income (loss)          |                | $                   | (555 | )                      |     | $    | (3 | )
|                                     |                            |                |                     |      |                        |     |      |   

General:Our health services segment consists of revenues earned and expenses
incurred from our pharmaceutical operations. Our primary customer base
consists of consumers, academic institutions and mental health facilities. The
profitability of this

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segment is primarily a function of gross margin on sales (the difference
between sales and cost of sales) and management of our operating expenses.

Gross margin on salesconsist of gross revenue from sales of product and
related shipping fees, net of discounts, coupons, and sales returns less cost
of goods and fulfillment costs. Cost of goods include the products sold to the
Companys customers, including allowances for shrinkage, damage, slow movement
and expired inventory, as well as outbound shipping costs. Fulfillment costs
consist of expenses relating to packaging supplies, credit card processing
fees, payroll expenses related to customer service, warehouse personnel and
pharmacists engaged in order verification activities, and rent and depreciation
expense related to equipment and fixtures in our facility.



| |  | Gross margin on sales for the first quarter of 2003 decreased $.1 million
to $(.1) million, compared to the first quarter of 2002.                                                               
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|  |  | Gross margin on sales decreased in the 2003 period primarily due to 1) a
change in the manufacturer-wholesaler for the purchase of our
pharmaceuticals, 2) product mix, and 3) fulfillment costs.
| 
|  |  | Net sales for the first quarter of 2003 increased by $.6 million compared to
the first quarter of 2002 due to an increase in order volume and a growing
customer base.                           

Other incomeconsists of consignment service fees for managing customers
inventory related to clinical studies.



| |  | Other income for the first quarter of 2003 increased by $12,000 to
$13,000 compared to the first quarter of 2002. The Company expects these
contracts to continue through the end of 2003.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Marketing and sales expensesinclude advertising and marketing expenses,
promotional expenditures, payroll, and related expenses for personnel engaged
in marketing and sales activities.



| |  | Marketing and sales expenses increased $.1 million to $.1 million for the
first quarter of 2003 compared to the first quarter of 2002. The $.1
million increase is primarily attributable to initiating new marketing
campaigns to our existing channels and salary expenses related to
establishing an executive sales team.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Commission expenseincludes sale personnel payments for acquired new customer
accounts.



| |  | Commission expense for the first quarter of 2003 increased by $22,000, to
$22,000 compared to the first quarter of 2002. We expect these contracts
to continue through the end of 2003.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other operating expensesconsist of general operating expenses, including
salaries for executive and administrative personnel, other professional fees,
and travel expenses.



| |  | Other operating expenses for the first quarter of 2003 increased $.5
million to $.5 million compared to the first quarter of 2002. The increase
is primarily a result of the transfer of personnel through acquisitions,
the development of an executive management team and other professional
fees relating to the design of our website and pharmacy system.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Other Services:

|                                     |                                   |   |                        |        |      |   |       |        |  
|------------------------------------ | --------------------------------- | - | ---------------------- | ------ | ---- | - | ----- | ------ | -
|                                     |                                   |   | Three Months Ended    
|                                     |                                   |   | March 31              
|                                     |                                   |   |                       
|                                     |                                   |   | 2003                   |        | 2002
|                                     |                                   |   |                        |        |     
|                                     |                                   |   | (Dollars in thousands)
|Statement of Operations:             |                                   |   |                        |        |      |   |       |       
|Net investment income                |                                   | $ | 2                      |        |      | $ | 6     |       
|Commission income                    |                                   |   | 318                    |        |      |   | 692   |       
|Fees and other income                |                                   |   | 11                     |        |      |   | 9     |       
|                                     |                                   |   |                        |        |      |   |       |       
|                                     | Total revenues                    |   |                        | 331    |      |   |       | 707    |  
|                                     |                                   |   |                        |        |      |   |       |       
|Commission expenses                  |                                   |   | 49                     |        |      |   | 214   |       
|Other operating expenses             |                                   |   | 1,773                  |        |      |   | 1,243 |       
|Interest expense and financing costs |                                   |   | 1,017                  |        |      |   | 1,103 |       
|                                     |                                   |   |                        |        |      |   |       |       
|                                     | Total expenses                    |   |                        | 2,839  |      |   |       | 2,560  |  
|                                     |                                   |   |                        |        |      |   |       |       
|                                     | Income (loss) before income taxes |   |                        | (2,508 | )    |   |       | (1,853 | )
|Federal income tax (benefit) expense |                                   |   | (853                   | )      |      |   | (884  | )     
|                                     |                                   |   |                        |        |      |   |       |       
|Net income (loss)                    |                                   | $ | (1,655                 | )      |      | $ | (969  | )     
|                                     |                                   |   |                        |        |      |   |       |       

General:Our other services segment consists of revenues earned and expenses
incurred related to corporate operations, primarily acquisitions and
divestitures, capital management, and administrative marketing services. This
marketing activity consists of commission income and expenses for services
provided to unaffiliated companies.

Commission incomeconsists of fee income related to servicing unaffiliated
blocks of business.



| |  | Commission income decreased $.4 million or 54%, to $.3 million compared
to the first quarter of 2002. Commission income decreased due to a change
in the product mix administrated through our marketing services.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Commission expensesrepresent commission expenses related to servicing
unaffiliated blocks of business.



| |  | Commission expenses decreased $.2 million or 77%, to $49,000 compared to
the first quarter of 2002. Commission expense decreased due to a change in
product mix administrated through our marketing services.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other operating expensesconsist of corporate operating expenses, including
salaries.



| |  | Other operating expenses for
the first quarter of 2003 increased $.5
million or 43%, to $1.8 million compared to the first quarter of 2002.
Other operating expenses increased primarily due to salary expense
resulting from realigning personnel between segments.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See also Other operating expenses in the financial services segment for the
corresponding decrease.

Interest expense and financing costsrepresents interest, deferred debt costs,
and distributions for the Trust Preferred securities issued by the
company.



| |  | Interest expense and financing costs decreased $.1 million or 8% to $1.0
million compared to the first quarter of 2002. This decrease is due to
lower interest rates.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Discontinued Operations:

|                                     |                           |                                       |   |                        |   |      |       |        |        | 
|------------------------------------ | ------------------------- | ------------------------------------- | - | ---------------------- | - | ---- | ----- | ------ | ------ | 
|                                     |                           |                                       |   | Three Months Ended    
|                                     |                           |                                       |   | March 31              
|                                     |                           |                                       |   |                       
|                                     |                           |                                       |   | 2003                   |   | 2002
|                                     |                           |                                       |   |                        |   |     
|                                     |                           |                                       |   | (Dollars in thousands)
|Premiums and Deposits Collected:     |                           |                                       |   |                        |   |      |       |       
|                                     | Traditional life          |                                       | $ |                       |   |      | $     | 14     |       
|                                     | Separate account deposits |                                       |   |                       |   |      |       | 13,829 |       
|                                     |                           |                                       |   |                        |   |      |       |        |       
|                                     |                           | Total premiums and deposits collected |   | $                      |  |      |       | $      | 13,843 | 
|                                     |                           |                                       |   |                        |   |      |       |       
|Statement of Operations:             |                           |                                       |   |                        |   |      |       |       
|Premium income                       |                           | $                                     |  |                        |   | $    | 14    |       
|Net investment income                |                           |                                       |  |                        |   |      | 81    |       
|Separate account fees                |                           |                                       |  |                        |   |      | 1,881 |       
|                                     |                           |                                       |   |                        |   |      |       |        |       
|                                     |                           | Total revenues                        |   |                        |  |      |       |        | 1,976  | 
|                                     |                           |                                       |   |                        |   |      |       |        |       
|Benefits and claims                  |                           |                                       |  |                        |   |      | 60    |       
|Amortization                         |                           |                                       |  |                        |   |      | 139   |       
|Commission expenses                  |                           |                                       |  |                        |   |      | 54    |       
|Other operating expenses             |                           |                                       |  |                        |   |      | 946   |       
|                                     |                           |                                       |   |                        |   |      |       |        |       
|                                     |                           | Total benefits and expenses           |   |                        |  |      |       |        | 1,199  | 
|                                     |                           |                                       |   |                        |   |      |       |        |       
|                                     |                           | Income before income taxes            |   | $                      |  |      |       | $      | 777    | 
|Federal
income tax (benefit) expense |                           |                                       |  |                        |   |      | 264   |       
|                                     |                           |                                       |   |                        |   |      |       |       
|Net
income                           |                           | $                                     |  |                        |   | $    | 513   |       
|                                     |                           |                                       |   |                        |   |      |       |       

General:Our International Operations (discontinued operations) were sold in
the last half of 2002. The 2002 results included revenues earned and expenses
incurred from abroad, primarily Europe, and include fees collected on our
deposits from unit-linked assurance products. The profitability of this
segment primarily is dependant on the amount of separate account assets under
management, the management fee charged on those assets and management of our
operating expenses.

Separate account depositsconsist of deposits from our unit-linked assurance
products. For GAAP these separate account deposits are not shown as premium
income in the income statement. A change in separate account deposits in a
single period does not directly cause our operating income to change, although
continued increases or decreases in separate account deposits may affect the
growth rate of separate account assets on which fees are earned.



| |  | Separate account deposits were $13.8 million for the first quarter of
2002. The International Operations were sold in 2002.
|- |  | ---------------------------------------------------------------------------------------------------------------------------

Net investment incomerepresents income earned on our corporate assets such as
cash, short-term investments and fixed securities. Standard Management
International was required to hold a certain level of cash and short-term
investments in order to comply with local insurance laws.



| |  | Net investment income was $.1 million for the first quarter of 2002.
Corporate assets averaged $7.8 million for the first quarter of 2002 and
primarily consist of cash and short-term investments.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | The net investment yields earned on average invested assets were 4.15%
for the first quarter of 2002.
|- |  | -----------------------------------------------------------------------------------------------------

Fees from separate accountsrepresent the net fees earned on our unit-linked
assurance products. The fees include asset based administrative fees, premium
based administrative fees and the amortization of front end loads (deferred
revenue) into income. Asset based fees fluctuate in relation to separate
account assets, and premium based fees fluctuate in relation to premium
collections for certain products. Deferred revenue amortization fluctuates
subject to the amortization rules of SFAS No. 97.



| |  | Fees from separate accounts for the first quarter of 2002 were $1.9
million. Actual separate account assets decreased $66.5 million or 13%,
to $429.5 million from the comparable prior period.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Amortizationincludes the amortization of deferred acquisition costs, such as
sales commissions and other costs, directly related to selling new business and
foreign exchange translation.



| |  | Amortization for the first
quarter of 2002 was $.1 million.
|- |  | -----------------------------------------------------------

Commission expensesrepresent commission expenses, net of deferrable amounts.



| |  | Commission expenses were $.1 million for the first quarter of 2002. Due to
the nature of our business, most incurred commissions are deferred.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

Other operating expensesconsist of general operating expenses, including
salaries, net of deferrable amounts.



| |  | Other operating expenses for
the first quarter of 2002 were $.9 million.
|- |  | ------------------------------------------------------------------------

Foreign currency translationfor the first quarter of 2002 was impacted by the
strengthening and weakening of the United States dollar relative to foreign
currencies, primarily the Euro. The impact of these translations has been
quantified on fees from separate accounts and amortization.

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Liquidity and Capital Resources

Liquidity of Standard Management (Parent Company)

Standard Management is a financial and health services holding company
whose liquidity requirements are met through payments received from our
subsidiaries. These payments include 1) surplus debenture interest, 2)
dividends, 3) management fees, 4) equipment rental fees, 5) lease income and 6)
allocation of taxes through a tax sharing agreement, all of which are subject
to restrictions under applicable insurance laws and are used to pay our
operating expenses and meet our debt service obligations. These internal
sources of liquidity have been supplemented in the past by external sources
such as revolving credit agreements and long-term debt and equity financing in
the capital markets.

Potential Cash Available for 2003

We anticipate that available cash from our existing working capital,
surplus debenture interest, dividends, management fees, equipment rental fees,
lease income and tax sharing payments will be more than adequate to meet our
anticipated parent company cash requirements for 2003. The following describes
our potential sources of cash in 2003.

Surplus
Debenture Interest:We loaned $27.0 million to Standard Life
pursuant to unsecured surplus debenture agreements (Surplus
Debentures), which
requires Standard Life to make quarterly interest payments at a variable
corporate base rate plus 2% per annum, and annual principal payments of $1.0
million per year beginning in 2007 and concluding in 2033. The interest and
principal payments are subject to quarterly approval by the Indiana Department
of Insurance, depending upon satisfaction of certain financial tests relating
to levels of Standard Lifes capital and surplus and general approval of the
Commissioner of the Indiana Department of Insurance. We currently anticipate
that these quarterly approvals will be granted. Assuming the approvals are granted
and the March 31, 2003 interest rate of 6.25% continues, we expect to receive
interest income of $1.8 million from the Surplus Debentures in 2003.

Dividendspaid from Standard Life are limited by laws applicable to
insurance companies. As an Indiana domiciled insurance company, Standard Life
may pay a dividend or distribution from its surplus profits, without the prior
approval of the Commissioner of the Indiana Department of Insurance, if the
dividend or distribution, together with all other dividends and distributions
paid within the preceding twelve months, does not exceed the greater of 1) net
gain from operations or 2) 10% of surplus, in each case as shown in its
preceding annual statutory financial statements. In 2002, we did not receive
dividends from our insurance subsidiaries. In 2003, we could receive dividends
of approximately $5.6 million from Standard Life, without regulatory approval;
however, payment of dividends will require approval from SCOR Life U.S.
Insurance Company, a reinsurer of Standard Life.

Management
Fees: Pursuant to a management services agreement, Standard
Life paid $3.0 million during 2002 for certain management services related to
the production of business, investment of assets and evaluation of
acquisitions. In addition, Dixie Life paid Standard Life $1.1 million in 2002 for certain management services provided. Both of these
agreements provide that they may be modified or terminated by the applicable
Departments of Insurance in the event of financial hardship of Standard Life or
Dixie Life. In 2003, we expect to receive management fees of $3.6 million from
Standard Life.

Equipment
Rental Fees:In 2002, we charged subsidiaries $1.1 million for
the use of our equipment. In 2003, we expect to receive $1.1 million of
equipment rental fees from Standard Life.

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Lease
Income:Effective January 1, 2002, we entered into a lease
agreement with Standard Life whereby Standard Life will lease approximately
43,000 square feet of our office space located at 10689 North Pennsylvania
Street. In 2003, we expect to receive lease income of $.8 million from
Standard Life.

Tax
Sharing Payments:Effective January 1, 2000 we entered into a tax
sharing agreement with Savers Marketing and Standard Management International
that allocates the consolidated federal income tax liability. During 2002,
Savers Marketing paid $.1 million and Standard Management International
paid $.6 million in accordance with this agreement. Standard
Management International terminated its participation in this agreement with
the sale of our International Operations in the last half of 2002. We do not
expect tax sharing payments in 2003 to be material.

Estimated Cash Required in 2003

The following are the characteristics of our mortgage payable, promissory
note, notes payable and Trust Preferred securities, including estimated
required payments in 2003.

Mortgage Payable:

The following are characteristics of our mortgage payable agreement at
March 31, 2003:



| |  |  | outstanding balance of $6.9 million;                                                              
| | - |  | --------------------------------------------------------------------------------------------------
|
| |  |  | weighted average interest rate of 7.33% per annum;                                                
|
| |  |  | principal and interest payments: $57,000 per month through December, 2011;                        
|
| |  |  | interest payments required in 2003 based on current balances will be $.5 million;                 
|
| |  |  | note may be prepaid on or before January, 2005 at 105% and declining to 101% after December, 2008.

Notes Payable:

The
following are characteristics of our promissory note at
March 31, 2003:



| |  |  | outstanding balance of $.5 million;                                                                                                       
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | interest rate of 6.0% per annum;                                                                                                          
|
| |  |  | principal and interest payments: $30,000 interest per year in 2003
and 2004; principal payments thereafter beginning in 2005 through 2007;
|
| |  |  | interest payments required in 2003 based on current balances will be $30,000.                                                             

The
following are characteristics of our amended credit agreement at
March 31, 2003:



| |  |  | outstanding balance of $1.5 million;                                                                                                                                                                                                           
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | weighted average interest rate of 4.91%;                                                                                                                                                                                                       
|
| |  |  | principal payments: $.6 million paid in January 2002, $3.75 million
paid in September 2002, $2.0 million paid in October 2002 and $.25
million paid in December 2002. The remaining principal payment of $1.5
million is due in September 2003.

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| |  |  | subject to certain restrictions and financial and other covenants;           
| | - |  | -----------------------------------------------------------------------------
|
| |  |  | interest payments required in 2003 based on current balances will be $49,000.

The
following are characteristics of our subordinated debt agreement at
March 31, 2003:



| |  |  | outstanding balance of $11.0 million;                                                                           
| | - |  | ----------------------------------------------------------------------------------------------------------------
|
| |  |  | interest rate is greater of 1) 10% per annum or 2) six month London
Inter-Bank Offered Rate (LIBOR) plus 1.5%;
|
| |  |  | due October 2007;                                                                                               
|
| |  |  | interest payments required in 2003 based on current balances will be $1.1 million.                              

Trust Preferred Securities:These securities represent an undivided
beneficial interest in the assets of SMAN Capital Trust I, a Delaware business
trust organized to purchase our junior subordinated debentures and issue
preferred securities. The assets of the Trust consist solely of the debentures
which were purchased by the Trust with the proceeds of the offering. On August
9, 2001, the Trust completed a public offering of $20.7 million of its 10.25%
preferred securities. The Trust used the proceeds of this offering to purchase
our 10.25% junior subordinated debentures. Net proceeds from the sale of the
debentures of approximately $19.3 million were used to redeem our Series A
preferred stock of $6.5 million and repay $7.3 million of our notes payable.
The remaining proceeds were used for general corporate purposes.

The following are characteristics of our Trust Preferred securities at
March 31, 2003:



| |  |  | outstanding balance of $20.7 million;                                                                    
| | - |  | ---------------------------------------------------------------------------------------------------------
|
| |  |  | annual distribution rate of 10.25%; distributions may be deferred up to 20 consecutive quarters;         
|
| |  |  | matures August 9, 2031;                                                                                  
|
| |  |  | may be redeemed on or after August 9, 2006 at $10 per security plus accumulated and unpaid distributions;
|
| |  |  | distributions required in 2003 based on current balances will be $2.1 million;                           
|
| |  |  | distributions are classified as interest expense.                                                        

General:On a consolidated basis we reported net cash provided by operations
of $5.4 million and $1.1 million for the first quarter of 2003 and 2002,
respectively. At April 1, 2003, we had parent company only cash and
short-term investments of $.3 million which are available for general
corporate purposes. Annual parent company operating expenses (not including
interest expense) were $5.5 million and $4.3 million for 2002 and 2001,
respectively.

Liquidity of Insurance Operations

Insurance
Operations:The principal liquidity requirements of Standard
Life are its 1) contractual obligations to policyholders, 2) Surplus Debenture
interest, dividends, management fees and rental fees to Standard Management and
3) operating expenses. The primary source of funding for these obligations has
been cash flow from premium income, net investment income, investment sales and
maturities and sales of annuity products. These sources of liquidity for
Standard Life significantly exceed scheduled uses. Liquidity is also affected
by unscheduled benefit payments including death benefits, policy withdrawals
and surrenders. The amount of withdrawals and surrenders is affected by a
variety of factors such as renewal interest crediting rates, interest rates for
competing products, general economic conditions, Standard Lifes A.M. Best
rating and events in the industry that affect policyholders confidence. In August 2002, Standard
Life received a rating from A.M. Best of (B+), or very

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good category, a one-category reduction from its previous rating of (B++)
(Very Good). A.M. Best cited rapid growth in the annuity business, modest
risk-adjusted capitalization and high exposure to below investment grade bonds
as a percentage of capital and surplus, as the primary reasons for the rating
change.

The policies and annuities issued by Standard Life contain provisions that
allow policyholders to withdraw or surrender their policies under defined
circumstances. These policies and annuities generally contain provisions, which
apply penalties or otherwise restrict the ability of policyholders to make such
withdrawals or surrenders. Standard Life closely monitors the surrender and
policy loan activity of its insurance products and manages the composition of
its investment portfolios, including liquidity, to ensure it has sufficient
cash resources in light of such activity.

Changes in interest rates may affect our incidence of policy surrenders
and other withdrawals. In addition to the potential effect on liquidity,
unanticipated withdrawals in a changing interest rate environment could
adversely affect our earnings if we were required to sell investments at
reduced values to meet liquidity demands. We manage our asset and liability
portfolios in order to minimize the adverse earnings effect of changing market
interest rates. We seek assets that have duration characteristics similar to
the liabilities that they support. We also prepare cash flow projections and
perform cash flow tests under various market interest rate scenarios to assist
in evaluating liquidity needs and adequacy. Our insurance subsidiaries
currently expect available liquidity sources and future cash flows to be
adequate to meet the demand for funds.

Statutory surplus is computed according to rules prescribed by the
National Association of Insurance Commissioners as modified by the Indiana
Department of Insurance, or the state in which our insurance subsidiaries do
business. Statutory accounting rules are different from GAAP and are intended
to reflect a more conservative perspective. With respect to new business,
statutory accounting practices require that: 1) acquisition costs (primarily
commissions and policy issue costs) and 2) reserves for future guaranteed
principal payments and interest in excess of statutory rates, be expensed in
the year the new business is written. These items cause a reduction in
statutory surplus or surplus strain in the year written for many insurance
products. We design our products to minimize such first-year losses, but
certain products continue to cause a statutory loss in the year written. Our
long-term growth goals contemplate continued growth in our insurance
businesses. To achieve these growth goals, our insurance subsidiaries will need
to increase statutory surplus. Additional statutory surplus may be secured
through various sources such as internally generated statutory earnings,
infusions with funds generated through our debt or equity offerings, or mergers
with other life insurance companies. If additional capital is not available
from one or more of these sources, we believe that we could reduce surplus
strain through the use of reinsurance or through reduced writing of new
business.

We believe that the operational cash flow of Standard Life will be
sufficient to meet our anticipated needs for 2003. As of March 31, 2003,
Standard Life had statutory capital and surplus for regulatory purposes of
$59.0 million. As the annuity business produced by Standard Life increases,
Standard Life expects to satisfy statutory capital and surplus requirements
through statutory profits and through additional capital contributions by
Standard Management. Net cash flow from operations on a statutory basis of
Standard Life, after payment of benefits and operating expenses, was $48.2
million for the first quarter of 2003 and $112.3 million for the first quarter
of 2002. If the need arises for cash, which is not readily available,
additional liquidity could be obtained from the sale of invested assets.

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Forward-looking Statements

All statements, trend analyses, and other information contained in this
quarterly report on Form 10-Q or any document incorporated by reference herein
relative to markets for our products and trends in our operations or financial
results, as well as other statements including words such as anticipate,
believe, plan, estimate, expect, intend, and other similar
expressions, constitute forward-looking statements under the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
known and unknown risks, uncertainties and other factors which may cause actual
results to be materially different from those contemplated by the
forward-looking statements. Such factors include, but are not limited to:



| |  | General economic conditions and other factors, including prevailing interest rate levels, and stock market performance,
which may affect our ability to sell products, the market value of our investments and the lapse rate and profitability of
our policies.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Our ability to achieve anticipated levels of operational efficiencies at recently acquired companies, as well as through
other cost-saving initiatives.                                                                                                         
| 
| |  | Customer response to new products, distribution channels and marketing initiatives.                                                                                                                                                                             
| 
| |  | Mortality, morbidity and other factors which may affect the profitability of our insurance products.                                                                                                                                                            
| 
| |  | Changes in the federal income tax laws and regulation which may affect the relative tax advantages of some of our products.                                                                                                                                     
| 
| |  | Increasing competition in the sale of our products.                                                                                                                                                                                                             
| 
| |  | Regulatory changes or actions, including those relating to regulation of financial services affecting bank sales and
underwriting of insurance products, regulation of the sale, underwriting and pricing of insurance products.                                
| 
| |  | The availability and terms of future acquisitions.                                                                                                                                                                                                              
| 
| |  | The risk factors or uncertainties listed from time to time in any document incorporated by reference herein.                                                                                                                                                    




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risks and the way they are managed are summarized in our

discussion and analysis of financial condition and results of operations in our
Form 10-K for the year ended December 31, 2002. There have been no material
changes in 2003 to these risks or the management of these risks.




ITEM 4. CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-4c under the Securities Exchange Act of 1934) as of a date within 90 days
of the filing date of this quarterly report on Form 10-Q (the Evaluation
Date). They have concluded that, as of the Evaluation Date, our disclosure
controls and procedures were adequate and effective. There were no significant
changes in our internal controls or in other factors that could significantly
affect disclosure controls and procedures subsequent to the Evaluation Date.

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PART II. OTHER INFORMATION




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

| |  |  |      |  |  |                                                                                                                          
| |  |  | ---- |  |  | -------------------------------------------------------------------------------------------------------------------------
| |  |  | 10.1 |  |  | Employment Agreement by and between Standard Management and Ronald D. Hunter dated and effective January 1, 2003.        
| |  |  | 10.2 |  |  | Employment Agreement by and between Standard Management and Paul B. (Pete) Pheffer dated and effective January 1, 2003.
| |  |  | 99.1 |  |  | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350                                             
| |  |  | 99.2 |  |  | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350                                             

(b) Reports on Form 8-K

On February 21, 2003, we filed a Current Report on Form 8-K reporting the
amendment to the quarterly report for the period ended September 30, 2002
giving effect to the error in calculating the gain on sale of discontinued
operations.

On March 10, 2003, we filed a Current Report on Form 8-K/A amending the
Form 8-K filed on February 21, 2003.

On April 1, 2003, we filed a report on Form 8-K with the Commission
related to the appointment of an officer.




SIGNATURES

Pursuant to the requirements 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.

Dated: May 14, 2003



| | STANDARD MANAGEMENT CORPORATION
(Registrant)
| | --------------------------------------------



| | By: /s/ RONALD D. HUNTER
Ronald D. Hunter
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
| | -------------------------------------------------------------------------------------------------------------------------



| | By: /s/ GERALD R. HOCHGESANG
Gerald R. Hochgesang
Senior Vice President and Treasurer
(Chief Accounting Officer)
| | ----------------------------------------------------------------------------------------------------------------

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CERTIFICATION

I, Ronald D. Hunter, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Standard Management
Corporation;                                                                                                                                                                                                                                        
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly 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 quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly
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 we
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 quarterly 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 quarterly report (the Evaluation
Date); and                                                                                                  
|
| | c) |  | presented in this quarterly 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 officer 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 officer and I have indicated in this
quarterly 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: |  | May 14, 2003                                         
|      |  |                                                      
|      |  | /s/ Ronald D. Hunter                                 
|      |  |                                                      
|      |  | Ronald D. Hunter
Chairman and Chief Executive Officer

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CERTIFICATION

I, Paul B. (Pete) Pheffer, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Standard Management
Corporation;                                                                                                                                                                                                                                         
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly 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 quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly
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 we
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 quarterly 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 quarterly report (the Evaluation
Date); and                                                                                                  
|
| | c) |  | presented in this quarterly 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 officer 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 officer and I have indicated in this
quarterly 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: |  | May 14, 2003                                                  
|      |  |                                                               
|      |  | /s/ Paul B. (Pete) Pheffer                                  
|      |  |                                                               
|      |  | Paul B. (Pete) Pheffer
President and Chief Financial Officer

27