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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 1934FOR THE QUARTERLY PERIOD ENDED September 30, 2003oro
    
    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 November 14, 2003, the Registrant had 8,114,196 shares of Common Stock
outstanding.





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TABLE OF CONTENTS



|                                                                   |                                                        |  |  |  |  |  |  | 
|------------------------------------------------------------------ | ------------------------------------------------------ |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                                    
|CONSOLIDATED BALANCE SHEETS                                       
|                                                                   | CONSOLIDATED STATEMENTS OF INCOME                     
|                                                                   | CONSOLIDATED STATEMENTS OF INCOME                     
|                                                                   | CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY       
|                                                                   | CONSOLIDATED STATEMENTS OF CASH FLOWS                 
|                                                                   | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|                                                                   | ITEM 4. CONTROLS AND PROCEDURES                       
|                                                                   | PART II. OTHER INFORMATION                            
|                                                                   | ITEM 1. LEGAL PROCEEDINGS                             
|                                                                   | ITEM 5. OTHER INFORMATION                             
|                                                                   | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K              
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO                      
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO                      
|EX-32.1 SECTION 906 CERTIFICATION OF THE CEO                      
|EX-32.2 SECTION 906 CERTIFICATION OF THE CFO                      



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STANDARD MANAGEMENT CORPORATION

INDEX

Page NumberPart I.
    
    FINANCIAL INFORMATION:Item 1.
    
    Financial StatementsConsolidated Balance Sheets 
September 30, 2003 (Unaudited) and December 31, 2002 (Audited)
    
    
    3Consolidated Statements of Income 
For the Three Months and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
    
    
    4Consolidated Statements of Shareholders Equity 
For the Nine Months Ended September 30, 2003 and 2002 (Unaudited)
    
    
    6Consolidated Statements of Cash Flows 
For the Nine Months Ended September 30, 2003 and 2002 (Unaudited)
    
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    30Item 4.
    
    Controls and Procedures
    
    
    30Part II.
    
    OTHER INFORMATION:Item 1.
    
    Legal Proceedings
    
    
    31Item 5.
    
    Other Information
    
    
    31Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    31SIGNATURES
    
    
    32


2



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PART I  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)

September 30
    
    December 312003
    
    2002(Unaudited)
    
    (Audited)ASSETSInvestments:Securities available for sale:Fixed maturity securities at fair value (amortized cost $1,580,601 in 2003
and $1,350,961 in 2002)
    
    $
    1,601,124
    
    
    $
    1,379,792Mortgage loans on real estate
    
    
    4,141
    
    
    
    6,348Policy loans
    
    
    12,431
    
    
    
    12,722Real estate
    
    
    831
    
    
    
    1,252Equity-indexed call options
    
    
    13,406
    
    
    
    3,904Short-term investments
    
    
    670
    
    
    
    713Other invested assets
    
    
    1,331
    
    
    
    1,076Total investments
    
    
    1,633,934
    
    
    
    1,405,807Cash and cash equivalents
    
    
    46,977
    
    
    
    60,197Accrued investment income
    
    
    16,013
    
    
    
    16,255Amounts due and recoverable from reinsurers
    
    
    36,815
    
    
    
    38,951Deferred policy acquisition costs
    
    
    169,172
    
    
    
    153,954Present value of future profits
    
    
    14,881
    
    
    
    14,949Goodwill
    
    
    11,101
    
    
    
    6,417Property and equipment (less accumulated depreciation of $4,851 in 2003 and $3,903 in
2002)
    
    
    12,613
    
    
    
    12,832Other assets
    
    
    8,849
    
    
    
    5,785Total assets
    
    $
    1,950,355
    
    
    $
    1,715,147LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Insurance policy liabilities
    
    $
    1,799,745
    
    
    $
    1,570,348Accrued expenses and other payables
    
    
    14,791
    
    
    
    5,561Obligations of capital lease
    
    
    538
    
    
    
    804Current federal income taxes
    
    
    
    
    
    
    3,811Deferred federal income taxes
    
    
    4,079
    
    
    
    6,432Mortgage payable
    
    
    6,840
    
    
    
    6,757Notes payable
    
    
    15,250
    
    
    
    13,000Total liabilities
    
    
    1,841,243
    
    
    
    1,606,713Company-obligated trust preferred securities
    
    
    20,700
    
    
    
    20,700Shareholders Equity:Preferred stock, no par value:No shares issued and outstanding
    
    
    
    
    
    
    Common stock and additional paid in capital, no par value:Authorized 20,000,000 shares; issued 9,629,274 in 2003 and 9,369,752 in
2002
    
    
    68,078
    
    
    
    63,857Treasury stock, at cost, 1,515,078 shares in 2003 and 2002
    
    
    (7,671
    )
    
    
    (7,671
    )Accumulated other comprehensive income
    
    
    8,365
    
    
    
    11,739Retained earnings
    
    
    19,640
    
    
    
    19,809Total shareholders equity
    
    
    88,412
    
    
    
    87,734Total liabilities and shareholders equity
    
    $
    1,950,355
    
    
    $
    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)

Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302003
    
    2002
    
    2003
    
    2002Revenues:Premium income
    
    $
    2,612
    
    
    $
    1,732
    
    
    $
    6,913
    
    
    $
    5,955Net investment income
    
    
    19,852
    
    
    
    19,785
    
    
    
    61,621
    
    
    
    55,429Call option gains (losses)
    
    
    1,062
    
    
    
    (3,049
    )
    
    
    4,051
    
    
    
    (10,040
    )Net realized investment gains (losses)
    
    
    (232
    )
    
    
    (3,672
    )
    
    
    18,041
    
    
    
    (12,570
    )Policy income
    
    
    2,864
    
    
    
    2,139
    
    
    
    7,837
    
    
    
    5,862Fees and other income
    
    
    (480
    )
    
    
    392
    
    
    
    37
    
    
    
    2,100Total revenues from continuing operations
    
    
    25,678
    
    
    
    17,327
    
    
    
    98,500
    
    
    
    46,736Benefits and expenses:Benefits and claims
    
    
    4,285
    
    
    
    2,577
    
    
    
    9,885
    
    
    
    7,351Interest credited to interest-sensitive annuities and other
financial products
    
    
    16,497
    
    
    
    11,009
    
    
    
    49,271
    
    
    
    29,142Amortization
    
    
    3,042
    
    
    
    8,325
    
    
    
    20,931
    
    
    
    14,453Commission expenses
    
    
    44
    
    
    
    156
    
    
    
    118
    
    
    
    1,188Other operating expenses
    
    
    5,217
    
    
    
    4,002
    
    
    
    15,093
    
    
    
    9,114Interest expense and financing costs
    
    
    1,039
    
    
    
    1,102
    
    
    
    3,052
    
    
    
    3,336Total benefits and expenses from continuing operations
    
    
    30,124
    
    
    
    27,171
    
    
    
    98,350
    
    
    
    64,584Income (loss) before federal income taxes
    
    
    (4,446
    )
    
    
    (9,844
    )
    
    
    150
    
    
    
    (17,848
    )Federal income tax expense (benefit)
    
    
    (1,509
    )
    
    
    (3,007
    )
    
    
    44
    
    
    
    (8,639
    )Income (loss) from continuing operations
    
    
    (2,937
    )
    
    
    (6,837
    )
    
    
    106
    
    
    
    (9,209
    )Discontinued operations:Income from discontinued operations (less taxes of $550)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,068Gain
(loss) from the sale of discontinued operations (less taxes of $0,
$1,956, $0 and $2,169)
    
    
    (275
    )
    
    
    2,662
    
    
    
    (275
    )
    
    
    6,872Total discontinued operations
    
    
    (275
    )
    
    
    2,662
    
    
    
    (275
    )
    
    
    7,940Cumulative effect of accounting change for goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,212
    )Net loss
    
    $
    (3,212
    )
    
    $
    (4,175
    )
    
    $
    (169
    )
    
    $
    (2,481
    )


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
    
    Nine Months EndedSeptember 30
    
    September 302003
    
    2002
    
    2003
    
    2002Earnings per share  basic:Income (loss) from continuing operations
    
    $
    (.37
    )
    
    $
    (.90
    )
    
    $
    .01
    
    
    $
    (1.21
    )Discontinued operations:Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .14Gain (loss) from the sale of discontinued operations
    
    
    (.03
    )
    
    
    .35
    
    
    
    (.03
    )
    
    
    .90Total discontinued operations
    
    
    
    
    
    
    .35
    
    
    
    
    
    
    
    1.04Cumulative effect of accounting change for goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (.16
    )Net loss
    
    $
    (.40
    )
    
    $
    (.55
    )
    
    $
    (.02
    )
    
    $
    (.33
    )Earnings per share  diluted:Income (loss) from continuing operations
    
    $
    (.36
    )
    
    $
    (.85
    )
    
    $
    .01
    
    
    $
    (1.15
    )Discontinued operations:Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .13Gain (loss) from the sale of discontinued operations
    
    
    (.03
    )
    
    
    .33
    
    
    
    (.03
    )
    
    
    .86Total discontinued operations
    
    
    
    
    
    
    .33
    
    
    
    
    
    
    
    .99Cumulative effect of accounting change for goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (.15
    )Net loss
    
    $
    (.39
    )
    
    $
    (.52
    )
    
    $
    (.02
    )
    
    $
    (.31
    )


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)

Commonstock and
    
    
    
    
    
    Accumulatedadditional
    
    
    
    
    
    otherpaid in
    
    Treasury
    
    comprehensive
    
    RetainedTotal
    
    capital
    
    stock
    
    income (loss)
    
    earningsBalance at January 1, 2002
    
    $
    70,189
    
    
    $
    63,011
    
    
    $
    (7,589
    )
    
    $
    (6,172
    )
    
    $
    20,939Comprehensive income:Net loss
    
    
    (2,481
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,481
    )Other comprehensive income:Change in unrealized gain (loss) on
securities, net taxes (benefits) of $6,292
    
    
    12,183
    
    
    
    
    
    
    
    
    
    
    
    12,183
    
    
    
    Change in foreign currency translation
    
    
    2,246
    
    
    
    
    
    
    
    
    
    
    
    2,246
    
    
    
    Other comprehensive income
    
    
    14,429
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive income
    
    
    11,948
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock and warrants
    
    
    837
    
    
    
    837
    
    
    
    
    
    
    
    
    
    
    
    Exercise of common stock options
    
    
    (251
    )
    
    
    (251
    )
    
    
    
    
    
    
    
    
    
    
    Preferred stock dividends
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    Balance at September 30, 2002
    
    $
    82,718
    
    
    $
    63,597
    
    
    $
    (7,594
    )
    
    $
    8,257
    
    
    $
    18,458Balance at January 1, 2003
    
    $
    87,734
    
    
    $
    63,857
    
    
    $
    (7,671
    )
    
    $
    11,739
    
    
    $
    19,809Comprehensive loss:Net loss
    
    
    (169
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (169
    )Other comprehensive loss:Change in unrealized gain (loss) on securities,
net taxes (benefits) of $(1,621)
    
    
    (3,374
    )
    
    
    
    
    
    
    
    
    
    
    (3,374
    )
    
    
    Other comprehensive loss
    
    
    (3,374
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss
    
    
    (3,543
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common stock and warrants
    
    
    4,221
    
    
    
    4,221
    
    
    
    
    
    
    
    
    
    
    
    Balance at September 30, 2003
    
    $
    88,412
    
    
    $
    68,078
    
    
    $
    (7,671
    )
    
    $
    8,365
    
    
    $
    19,640


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)

Nine Months EndedSeptember 302003
    
    2002Operating ActivitiesNet income from continuing operations
    
    $
    (169
    )
    
    $
    (2,481
    )Net income from discontinued operations
    
    
    
    
    
    
    (1,068
    )(Gain) loss from the sale of discontinued operations
    
    
    275
    
    
    
    (6,872
    )Adjustments to reconcile net income to net cash provided by operating
activities:Amortization of deferred acquisition costs
    
    
    20,720
    
    
    
    14,725Deferral of acquisition costs
    
    
    (32,644
    )
    
    
    (50,487
    )Federal income taxes
    
    
    (6,287
    )
    
    
    (10,472
    )Depreciation and amortization
    
    
    1,369
    
    
    
    1,121Insurance policy liabilities
    
    
    43,683
    
    
    
    43,203Net realized investment (gains) losses
    
    
    (18,155
    )
    
    
    12,570Net accrual of bond discount
    
    
    5,879
    
    
    
    1,432Accrued investment income
    
    
    241
    
    
    
    (2,802
    )Cumulative effect of accounting change for goodwill impairment
    
    
    
    
    
    
    1,212Other
    
    
    (378
    )
    
    
    (4,815
    )Net cash provided (used) by operating activities
    
    
    14,534
    
    
    
    (4,734
    )Investing ActivitiesFixed maturity securities available for sale:Purchases
    
    
    (1,298,163
    )
    
    
    (1,310,081
    )Sales
    
    
    828,299
    
    
    
    871,118Maturities, calls and redemptions
    
    
    260,783
    
    
    
    69,458Short-term investments, net
    
    
    (5,408
    )
    
    
    6,477Other investments, net
    
    
    1,093
    
    
    
    (2,201
    )Net cash used by investing activities
    
    
    (213,396
    )
    
    
    (365,229
    )Financing ActivitiesProceeds from the sale of discontinued operations
    
    
    
    
    
    
    25,690Borrowings (repayments) on notes payable
    
    
    1,808
    
    
    
    (4,454
    )Premiums received on interest-sensitive and other financial products
credited to policyholder account balances, net of premiums ceded
    
    
    344,911
    
    
    
    448,197Return of policyholder account balances on interest-sensitive
annuities and other
financial products
    
    
    (161,111
    )
    
    
    (97,935
    )Issuance of common stock and warrants
    
    
    34
    
    
    
    530Net cash provided by financing activities
    
    
    185,642
    
    
    
    372,028Net increase (decrease) in cash and cash equivalents
    
    
    (13,220
    )
    
    
    2,065Cash and cash equivalents at beginning of period
    
    
    60,197
    
    
    
    18,144Cash and cash equivalents at end of period
    
    $
    46,977
    
    
    $
    20,209


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 through its insurance
subsidiaries and b) distributes pharmaceutical products 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).

Effective March 25, 2003, we acquired for 200,000 shares of our common
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 our common 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 our 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.

Effective June 11, 2003, we acquired the business assets of MyDoc.com
(renamed as HomeDoc Corporation) from Roche Diagnostics Corporation. HomeDoc
Corporation is the first virtual healthcare service where board-certified,
state-licensed physicians are available online, 24 hours per day / 7 days per
week to diagnose and treat common ailments and provide prescriptions. The
purchase price was $645,000 and additional contingent consideration of up to
$500,000 may be paid, based on a percentage of gross revenue generated from the
HomeDoc service. The contingent consideration has not been recognized in the
consolidated financial statements and would be recorded in the future periods
upon achievement of the gross revenue targets. The purchase was accounted for
under the purchase method of accounting and resulted in recognizing a
preliminary goodwill amount of $622,000. 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 reclassified 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 consists of revenues earned and expenses
incurred from our insurance operations, particularly Standard Life Insurance
Company of Indiana (Standard Life) and Dixie National Life Insurance Company
(Dixie Life). Our primary insurance 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.

8



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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1  Basis of Presentation (continued)

Health Services

Our Health Services segment, which was formed in 2002, and is conducted
primarily through our subsidiary U.S. Health Services Corporation, develops and
distributes retail and third party reimbursed pharmaceutical products and
services through direct-to-consumer as well as institutional channels. Our
primary customer base consists of consumers, academic institutions, skilled
nursing facilities, assisted living facilities, home health care agencies 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.

Other Services

Our Other Services segment consists of revenues and expenses primarily
related to corporate operations and financing costs.

Discontinued Operations  International Operations

Our International Operations (discontinued operations) were sold in 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 was dependent
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 actual experience differs from these estimates and
assumptions, our financial statements could be materially affected.

Goodwill

The activity related to goodwill is summarized as follows (dollars in
thousands):

September 30
    
    December 312003
    
    2002Balance, beginning of year
    
    $
    6,417
    
    
    $
    5,146Goodwill acquired
    
    
    4,684
    
    
    
    2,483Goodwill impairment
    
    
    
    
    
    
    (1,212
    )Balance, end of period
    
    $
    11,101
    
    
    $
    6,417


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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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
    
    September 30
    
    December 31Rate
    
    2003
    
    2002Mortgage payable
    
    
    7.33
    %
    
    $
    6,840
    
    
    $
    6,757Notes payable:Promissory note
    
    
    6.00
    %
    
    
    500
    
    
    
    500Borrowings under revolving credit agreements
    
    
    5.00
    %(1)
    
    
    3,750
    
    
    
    1,500Senior subordinated notes
    
    
    10.00
    %
    
    
    11,000
    
    
    
    11,000$
    15,250
    
    
    $
    13,000Trust preferred securities
    
    
    10.25
    %
    
    $
    20,700
    
    
    $
    20,700




|(1) |  | Current weighted average rate at September 30, 2003.
|--- |  | ----------------------------------------------------

In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities. We are required to adopt the provisions of
Interpretation No. 46 in the fourth quarter of 2003. Management is
currently evaluating the impact of the adoption, with an emphasis on the
application to our Trust Preferred Securities.

Note 3  Net Unrealized Gain on Securities Available for Sale

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

September 30
    
    December 312003
    
    2002Fair value of securities available for sale
    
    $
    1,601,124
    
    
    $
    1,379,792Amortized cost of securities available for sale
    
    
    1,580,601
    
    
    
    1,350,961Gross unrealized gain on securities available for sale
    
    
    20,523
    
    
    
    28,831Adjustments for:Deferred policy acquisition costs
    
    
    (4,746
    )
    
    
    (6,942
    )Present value of future profits
    
    
    (3,084
    )
    
    
    (4,113
    )Deferred federal income tax benefits
    
    
    (4,377
    )
    
    
    (6,075
    )Other
    
    
    49
    
    
    
    38Net unrealized gain on securities available for sale
    
    $
    8,365
    
    
    $
    11,739


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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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
    
    Nine Months EndedSeptember 30
    
    September 302003
    
    2002
    
    2003
    
    2002Income (loss):Income (loss) from continuing operations
    
    $
    (2,937
    )
    
    $
    (6,837
    )
    
    $
    106
    
    
    $
    (9,209
    )Income (loss) from discontinued operations
    
    
    (275
    )
    
    
    2,662
    
    
    
    (275
    )
    
    
    7,940Cumulative effect of accounting change for
goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,212
    )Net loss  basic and diluted earnings per share
    
    $
    (3,212
    )
    
    $
    (4,175
    )
    
    $
    (169
    )
    
    $
    (2,481
    )Shares:Weighted average shares outstanding for basic
earnings per share
    
    
    8,085,305
    
    
    
    7,613,479
    
    
    
    8,004,266
    
    
    
    7,611,629Effect of dilutive securities:Stock options
    
    
    128,958
    
    
    
    196,003
    
    
    
    69,896
    
    
    
    197,369Stock warrants
    
    
    55,583
    
    
    
    215,997
    
    
    
    37,658
    
    
    
    210,335Dilutive potential common shares
    
    
    184,541
    
    
    
    412,000
    
    
    
    107,554
    
    
    
    407,704Weighted average shares outstanding for
diluted earnings per share
    
    
    8,269,846
    
    
    
    8,025,479
    
    
    
    8,111,820
    
    
    
    8,019,333


Note 5  Stock Option Plan

Effective June 2002, our shareholders approved our 2002 Stock Incentive
Plan that authorizes the granting of options to employees, directors and
consultants of the Company of up to 990,000 shares of our common stock at a
price not less than 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 outstanding on the
trading day immediately preceding January 1. 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.
During the nine months ended September 30, 2003, we granted options to purchase
605,000 shares of common stock at a weighted average exercise price of $3.93
per share.

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 did
not impact our financial position or results of operation. 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
three and nine months ended September 30 (in thousands, except per share
amounts):

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 5  Stock Option Plan (continued)

Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302003
    
    2002
    
    2003
    
    2002Reported net loss
    
    $
    (3,212
    )
    
    $
    (4,175
    )
    
    $
    (169
    )
    
    $
    (2,481
    )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
    
    
    5
    
    
    
    7
    
    
    
    253
    
    
    
    89Pro forma net loss
    
    $
    (3,217
    )
    
    $
    (4,182
    )
    
    $
    (422
    )
    
    $
    (2,570
    )Earnings per share:Basic  as reported
    
    $
    (.40
    )
    
    $
    (.55
    )
    
    $
    (.02
    )
    
    $
    (.33
    )Basic  pro forma
    
    
    (.40
    )
    
    
    (.55
    )
    
    
    (.07
    )
    
    
    (.34
    )Diluted  as reported
    
    
    (.39
    )
    
    
    (.52
    )
    
    
    (.02
    )
    
    
    (.31
    )Diluted  pro forma
    
    
    (.39
    )
    
    
    (.52
    )
    
    
    (.07
    )
    
    
    (.32
    )


Note 6 Subsequent Events

On November 13, 2003 the Company replaced its current $3.75 million senior
facility and $11 million senior subordinated debt with a $20 million senior
secured credit facility. The new senior facility is composed of a $10 million
five year loan with a fixed rate of 6.63%, and a $10 million revolving line of
credit with a floating rate equal to 90 day LIBOR plus 395 basis points.

In addition to the repayment of indebtedness described above, a portion of
the proceeds will be used for a $5 million capital contribution to Standard
Life, and general corporate activities within our Financial Services segment.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

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 and Nine Month Periods Ended September 30, 2003
and September 30, 2002:

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

Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302003
    
    2002
    
    2003
    
    2002Income (loss) from continuing operations
    
    $
    (2,937
    )
    
    $
    (6,837
    )
    
    $
    106
    
    
    $
    (9,209
    )Discontinued operations:Operating income from discontinued
operations (less taxes of $550)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,068Gain (loss) from the sale of discontinued
operations (less taxes of $0, $1,956, $0
and $4,125)
    
    
    (275
    )
    
    
    2,662
    
    
    
    (275
    )
    
    
    6,872Income (loss) from discontinued operations
    
    
    (275
    )
    
    
    2,662
    
    
    
    (275
    )
    
    
    7,940Cumulative effect of accounting change
for goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,212
    )Net loss
    
    $
    (3,212
    )
    
    $
    (4,175
    )
    
    $
    (169
    )
    
    $
    (2,481
    )


Consolidated Results and
Analysis:

For the quarter ended September 30, 2003, loss from continuing operations was
$2.9 million, or $.36 per diluted share, compared to a loss of $6.8 million, or
$.85 per diluted share for the third quarter of 2002.

Financial Services:

Net income for the current quarter was $.2 million, or $.02 per diluted share,
compared to a $3.9 million net loss or $.48 per diluted share for the
comparable prior year quarter. The current period net income included net
realized investment losses of $.2 million, or $.02 per diluted share, and
reduced spread income of $1.0 million, or $.12 per diluted share due to a
decline in net investment income yield, which has declined faster than we were
able to reduce credited rates. The comparable prior year quarter included net
realized investment losses of $.7 million, or $.09 per diluted share, and
charges of $5.1 million, or $.64 per diluted share from the accelerated
amortization of deferred acquisition costs (DAC), and $.5 million, or $.06
per diluted share from the write-off and legal costs related to the recovery of
agency receivable balances.

Health Services:

Current period net loss was $1.6 million, or $.19 per diluted share, compared
to a $.3 million net loss, or $.04 per diluted share for the comparable prior
year period. The current period loss included additional expenses associated
with the continued development of U. S. Health Services operating platform and
infrastructure, as well as ongoing concentrated marketing initiatives.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

Other Services:
Current period net loss was $1.5 million, or
$.19 per diluted
share, compared to a $2.6 million loss, or $.33 per diluted share for the
comparable prior year period. The current period was positively impacted by a
$.1 million or $.01 per diluted share from net realized investment gains. The
prior period was negatively impacted by a $.7 million or $.08 per diluted share
net realized investment loss.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

Financial Services:

Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302003
    
    2002
    
    2003
    
    2002(Dollars in thousands)
    
    (Dollars in thousands)Premiums and Deposits Collected:Deferred annuities
    
    $
    20,999
    
    
    $
    76,478
    
    
    $
    111,443
    
    
    $
    247,476Single premium immediate annuities and other deposits
    
    
    45,149
    
    
    
    33,353
    
    
    
    130,365
    
    
    
    114,562Equity-indexed annuities
    
    
    24,503
    
    
    
    31,189
    
    
    
    98,562
    
    
    
    85,696Universal and interest-sensitive life
    
    
    114
    
    
    
    151
    
    
    
    412
    
    
    
    453Subtotal  interest-sensitive and other financial
products premium deposits
    
    
    90,765
    
    
    
    141,171
    
    
    
    340,782
    
    
    
    448,187Traditional life
    
    
    2,612
    
    
    
    2,153
    
    
    
    6,913
    
    
    
    6,884Total premiums and deposits collected
    
    $
    93,377
    
    
    $
    143,324
    
    
    $
    347,695
    
    
    $
    455,071Statement of Operations:Premium income
    
    $
    2,612
    
    
    $
    2,153
    
    
    $
    6,913
    
    
    $
    6,884Policy income
    
    
    2,864
    
    
    
    2,139
    
    
    
    7,837
    
    
    
    5,862Total policy related income
    
    
    5,476
    
    
    
    4,292
    
    
    
    14,750
    
    
    
    12,746Net investment income
    
    
    19,857
    
    
    
    19,762
    
    
    
    61,588
    
    
    
    55,441Call option gains (losses)
    
    
    1,062
    
    
    
    (3,049
    )
    
    
    4,051
    
    
    
    (10,039
    )Fees and other income (losses)
    
    
    20
    
    
    
    27
    
    
    
    156
    
    
    
    (57
    )Total revenues
    
    
    26,415
    
    
    
    21,032
    
    
    
    80,545
    
    
    
    58,091Benefits and claims
    
    
    4,285
    
    
    
    2,998
    
    
    
    9,885
    
    
    
    8,280Interest credited to interest-sensitive annuities
and other financial products
    
    
    16,497
    
    
    
    11,009
    
    
    
    49,271
    
    
    
    29,142Amortization
    
    
    3,164
    
    
    
    9,907
    
    
    
    11,360
    
    
    
    16,013Commission expenses
    
    
    30
    
    
    
    121
    
    
    
    (15
    )
    
    
    281Other operating expenses
    
    
    1,876
    
    
    
    1,781
    
    
    
    5,764
    
    
    
    4,592Total benefits and expenses
    
    
    25,852
    
    
    
    25,816
    
    
    
    76,265
    
    
    
    58,308Operating income (losses) before income taxes
    
    
    563
    
    
    
    (4,784
    )
    
    
    4,280
    
    
    
    (217
    )Federal income tax expense (benefit)
    
    
    191
    
    
    
    (1,626
    )
    
    
    1,455
    
    
    
    (1,475
    )Operating income (loss) after income taxes
    
    
    372
    
    
    
    (3,158
    )
    
    
    2,825
    
    
    
    1,258Net realized investment gains (losses), net of
related amortization and income taxes
    
    
    (180
    )
    
    
    (733
    )
    
    
    5,484
    
    
    
    (6,606
    )Cumulative effect of accounting change for goodwill
impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,212
    )Net income (loss)
    
    $
    192
    
    
    $
    (3,891
    )
    
    $
    8,309
    
    
    $
    (6,560
    )


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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

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 annuity products and other
financial products that do not incorporate significant mortality features. For
GAAP purposes, 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.

Quarterly analysis:



| |  | Premium deposits for interest sensitive and other financial
products for the third quarter of 2003 decreased $50.4 million or
36%, to $90.8 million, compared to the third quarter of 2002.
Deferred annuities decreased $55.5 million or 73%, to $21.0
million. Single premium immediate annuities increased $11.8
million, or 35%, to $45.1 million. Deposits from equity-indexed
annuities decreased $6.7 million or 21%, to $24.5 million.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Premium deposits for interest sensitive and other financial
products for the first nine months of 2003 decreased $107.4
million or 24%, to $340.8 million, compared to the first nine
months of 2002. Deferred annuities decreased $136.0 million or
55%, to $111.4 million. Single premium immediate annuities
increased $15.8 million, or 13.8%, to $130.4 million. Deposits
from equity-indexed annuities increased $12.9 million or 15%, to
$98.6 million.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Premium deposits decreased in 2003 due to management actions to preserve spread
income in response to market conditions. Management actions included reducing
crediting rates, lowering agent commissions, and temporarily suspending sales
of selected products.

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

Quarterly analysis:



| |  | Premium income for the third quarter of 2003 increased by $0.5
million or 21%, to $2.6 million compared to the third quarter of
2002 as a result of increased deposits from supplemental contracts
with life contingencies.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Premium income for the first nine months of 2003 was $6.9 million
compared to $6.9 million for the first nine months of 2002.
|- |  | -----------------------------------------------------------------------------------------------------------------------------

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.

Quarterly analysis:



| |  | Policy income for the third quarter of 2003 increased $.7 million
or 34%, to $2.9 million compared to the third quarter of 2002.
|- |  | --------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Policy income for the first nine months of 2003 increased $2.0
million or 34%, to $7.8 million compared to the first nine months
of 2002.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

Policy income increased due to an expected increase in surrenders in response
to management actions taken to reduce crediting rates on some of our deferred
annuity products. The increase in annuity surrenders generates greater
surrender income from early termination charges associated with these products.

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.

Quarterly analysis:



| |  | Net investment income for the third quarter of 2003 increased by
$0.1 million or 1%, to $19.9 million compared to the third quarter
of 2002. Net investment income increased as a result of a $359.7
million or 28%, increase in the weighted average invested assets
for the period, which was partially offset by a decrease in the
net investment yield earned on average invested assets of 4.89%
for the third quarter of 2003 compared to 6.25% for the third
quarter 2002. The decline in net investment yield is due primarily
to the timing of investing new premium deposits in assets, which
currently earn lower yields than the portfolio yield, and to
prepayments on the Companys mortgage backed securities, which
reduced the current quarter yield by 14 basis points.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Net investment income for the first nine months of 2003 increased
by $6.1 million or 11%, to $61.6 million compared to the first
nine months of 2002. Net investment income increased as a result
of a $368.0 million or 32%, increase in the weighted average
invested assets for the period, which was partially offset by a
decrease in the net investment yield earned on average invested
assets of 5.43% for the first nine months of 2003 compared to
6.47% for the first nine months 2002. The decline in net
investment yield is due primarily to the timing of investing new
premium deposits in assets, which currently earn lower yields than
the portfolio yield, and to prepayments on the Companys mortgage
backed securities.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Also see Call option income and Interest credited to interest sensitive
annuities and other financial products for additional information regarding
the impact of our equity-indexed products.

Call option incomerelates 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 fluctuates
from period to period and is substantially offset by amounts credited to
policyholder account balances.

Quarterly analysis:



| |  | Call option income for the third quarter of 2003 increased by $4.1
million or 135%, to $1.1 million compared to the third quarter of
2002.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Call option income for the first nine months of 2003 increased by
$14.1 million or 140%, to $4.1 million compared to the first nine
months of 2002.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

Call option income for the 2003 periods resulted from changes in the market
value of our call options due to changes in the S&P 500 Index and the DJIA
Index.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

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

Quarterly analysis:



| |  | Fees and other income decreased $7,000 to $20,000 primarily due to
an increase in mortality associated with experience refunds.
|- |  | -------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Fees and other income increased $.2 million to $.2 million
primarily due to a decrease in mortality associated with
experience refunds.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------

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.

Quarterly analysis:



| |  | Benefits and claims for the third quarter of 2003 increased $1.3
million or 43%, to $4.3 million compared to the third quarter of
2002.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Benefits and claims for the first nine months of 2003 increased
$1.6 million or 19%, to $9.9 million compared to the first nine
months of 2002.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

Benefits and claims were higher in 2003 primarily due to increased death claims
and other benefits for our in-force life policies and increased benefit
payments for our supplemental contracts including life contingencies.

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.

Quarterly analysis:



| |  | During the third quarter of 2003, interest credited increased $5.5
million or 50%, to $16.5 million compared to the third quarter of
2002. $4.1 million of the increase is due to the changes in the
market value of call options on equity-indexed annuities. The
remainder is due to an overall increase in interest sensitive
liabilities.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The weighted average credited rate for the third quarter of 2003
and 2002 was 3.64% and 4.52%, respectively. The decline in
average credited rate is due to rate reductions taken by
management to maintain spread income over the same period.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | During the first nine months of 2003, interest credited increased
$20.1 million or 69%, to $49.3 million compared to the first nine
months of 2002. $14.1 million of the increase is due to the
changes in the market value of call options on equity-indexed
annuities. The remainder is due to an overall increase in interest
sensitive liabilities.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The weighted average credited rate for the first nine months of
2003 and 2002 was 3.73% and 4.86%, respectively. The decline in
average credited rate is due to rate reductions taken by
management to maintain spread income over the same period.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

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

Quarterly analysis:



| |  | Amortization for the third quarter of 2003 was $3.2 million, a decrease
of $6.7 million or 68% compared to the third quarter of 2002. This
decrease primarily relates to a $7.8 million acceleration of DAC
amortization due to DAC unlocking recorded in 2002.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:

Amortization for the first nine months of 2003 was $11.4 million, a decrease of
$4.7 million or 29% compared to the first nine months of 2002. This decrease
primarily relates to a $7.8 million acceleration of DAC amortization due to DAC
unlocking recorded in 2002.

Commission expensesrepresent commission expenses, net of deferrable amounts.

Quarterly analysis:



| |  | Commission expenses decreased $.1 million to $30,000 compared to the third quarter of 2002.
|- |  | -------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Commission expenses decreased $.3 million to $(15,000) compared to the first nine months of 2002.
|- |  | -------------------------------------------------------------------------------------------------

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

Quarterly analysis:



| |  | Other operating expenses for the third quarter of 2003 increased
$.1 million or 5%, to $1.9 million compared to the third quarter
of 2002
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Other operating expenses for the first nine months of 2003
increased $1.2 million or 26%, to $5.8 million compared to the
first nine months of 2002. Other operating expenses increased
primarily due to increased marketing costs and increased legal
costs for non-material proceedings in the normal course of
business involving claims under insurance policies or other
contracts. Favorable dispositions of several claims and
proceedings occurred during the first nine months of 2003
resulting in increased legal expenses.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

Quarterly analysis:



| |  | Net realized investment losses, net of related amortization, were $.2 million in the third quarter of 2003 compared to
net realized investment losses of $.7 million in the third quarter of 2002.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Net realized investment gains, net of related amortization, were $5.5 million in the first nine months of 2003 compared
to net realized investment losses of $6.6 million in the first nine months of 2002, largely resulting from a strategy
to realize tax benefits from capital loss carryforwards during 2003. Net realized investment gains for the first nine
months of 2003 are net of an other-than-temporary write-down of $1.7 million for certain fixed maturity securities.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Approximately 98.6% of our fixed maturity securities are classified as investment grade at September 30, 2003.
|- |  | --------------------------------------------------------------------------------------------------------------

Federal income tax benefit

Quarterly analysis:



| |  | Federal income tax expense increased $1.8 million to $.2 million compared to the third quarter of 2002.
|- |  | -------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Federal income tax expense increased $2.9 million to $1.5 million compared to the nine months of 2002. This increase is
due to a higher effective tax rate of 34% in 2003. In the 2002 period there was a lower effective tax rate resulting
from the utilization of net operating loss carryforwards of $1.4 million.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

Health Services:

Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302003
    
    2002
    
    2003
    
    2002(Dollars in thousands)
    
    (Dollars in thousands)Gross Margin (loss) on Sales:Sales
    
    $
    825
    
    
    $
    14
    
    
    $
    2,256
    
    
    $
    57Cost of Goods Sold
    
    
    675
    
    
    
    18
    
    
    
    1,917
    
    
    
    50Fulfillment costs:Processing costs
    
    
    626
    
    
    
    
    
    
    
    1,098
    
    
    
    Shipping costs
    
    
    26
    
    
    
    
    
    
    
    73
    
    
    
    Total cost of sales
    
    
    1,327
    
    
    
    18
    
    
    
    3,088
    
    
    
    50Gross margin (loss) on sales
    
    $
    (502
    )
    
    $
    (4
    )
    
    $
    (832
    )
    
    $
    7Statement of Operations:Gross margin (loss) on sales
    
    $
    (502
    )
    
    $
    (4
    )
    
    $
    (832
    )
    
    $
    7Other income
    
    
    4
    
    
    
    
    
    
    
    41
    
    
    
    Total gross margin (loss) and other income
    
    
    (498
    )
    
    
    (4
    )
    
    
    (791
    )
    
    
    7Marketing and sales expenses
    
    
    96
    
    
    
    
    
    
    
    306
    
    
    
    Commission expenses
    
    
    14
    
    
    
    
    
    
    
    48
    
    
    
    Other operating expenses
    
    
    1,815
    
    
    
    480
    
    
    
    3,503
    
    
    
    558Interest expense and financing costs
    
    
    7
    
    
    
    8
    
    
    
    22
    
    
    
    8Total expenses
    
    
    1,932
    
    
    
    488
    
    
    
    3,879
    
    
    
    566Loss before income taxes
    
    
    (2,430
    )
    
    
    (492
    )
    
    
    (4,670
    )
    
    
    (559
    )Federal income tax benefit
    
    
    (827
    )
    
    
    (167
    )
    
    
    (1,588
    )
    
    
    (190
    )Net loss
    
    $
    (1,603
    )
    
    $
    (325
    )
    
    $
    (3,082
    )
    
    $
    (369
    )


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

Net loss

Quarterly analysis:



| |  | Net loss for the third quarter of 2003 increased by $1.3 million to
$1.6 million compared to the third quarter of 2002.
|- |  | -----------------------------------------------------------------------------------------------------------------------

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

Year-to-date analysis:



| |  | Net loss for the first nine months of 2003 increased by $2.7 million
to $3.1 million compared to the first nine months of 2002.
|- |  | -------------------------------------------------------------------------------------------------------------------------------

Net loss in 2003 periods is due to additional salary expense and marketing
costs associated with the continued development of the Health Services
segments operating platform and infrastructure, as well as ongoing
concentrated marketing initiatives since its organization in 2002.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

Other Services:

Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302003
    
    2002
    
    2003
    
    2002(Dollars in thousands)
    
    (Dollars in thousands)Statement of Operations:Net investment income (losses)
    
    $
    (5
    )
    
    $
    23
    
    
    $
    33
    
    
    $
    (12
    )Commission income
    
    
    
    
    
    
    338
    
    
    
    657
    
    
    
    1,481Fees and other income (losses)
    
    
    (2
    )
    
    
    2
    
    
    
    15
    
    
    
    11Total revenues
    
    
    (7
    )
    
    
    363
    
    
    
    705
    
    
    
    1,480Commission expenses
    
    
    
    
    
    
    5
    
    
    
    86
    
    
    
    247Other operating expenses
    
    
    1,431
    
    
    
    1,709
    
    
    
    5,519
    
    
    
    3,963Interest expense and financing costs
    
    
    1,032
    
    
    
    1,102
    
    
    
    3,031
    
    
    
    3,328Total expenses
    
    
    2,463
    
    
    
    2,816
    
    
    
    8,636
    
    
    
    7,538Operating loss before income taxes
    
    
    (2,470
    )
    
    
    (2,453
    )
    
    
    (7,931
    )
    
    
    (6,058
    )Federal income tax benefit
    
    
    (728
    )
    
    
    (493
    )
    
    
    (2,704
    )
    
    
    (3,227
    )Operating loss after income taxes
    
    
    (1,632
    )
    
    
    (1,960
    )
    
    
    (5,227
    )
    
    
    (2,831
    )Net realized investment gain (losses),
net of income taxes
    
    
    106
    
    
    
    (661
    )
    
    
    106
    
    
    
    (661
    )Net loss
    
    $
    (1,526
    )
    
    $
    (2,621
    )
    
    $
    (5,121
    )
    
    $
    (3,492
    )


General:Our Other Services segment consists of revenues and expenses primarily
related to corporate operations and financing costs. During the third quarter
2003, the Company sold the assets of our marketing services company, Savers
Marketing Corporation for a $200,000 note receivable. The sale led to a
reduction in the quarterly commission income, commission expenses and operating
expenses.

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

Quarterly analysis:



| |  | Commission income decreased to $0 compared to the third quarter of
2002. Commission income decreased due to the sale of the assets of
Savers Marketing.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Commission income decreased $.8 million or 56%, to $.7 million
compared to the first nine months of 2002. Commission income
decreased due to the sale of Savers Marketing.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Quarterly analysis:

Commission expenses decreased to $0 compared to the third quarter of 2002.
Commission expense decreased due to the sale of the assets of Savers Marketing.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

Year-to-date analysis:



| |  | Commission expenses decreased $.2 million or 66%, to $86,000 compared
to the first nine months of 2002. Commission expense decreased due to
the sale of the assets of Savers Marketing.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other operating expensesconsist of corporate operating expenses, including
salaries.

Quarterly analysis:



| |  | Other operating expenses decreased $.3 million or 16%, to $1.4
million compared to the third quarter of 2002. Other operating
expense decreased due to the sale of the assets of Savers
Marketing.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Other operating expenses increased $1.6 million or 39%, to
$5.5 million compared to the first nine months of 2002. Other
operating expenses increased primarily due to salary expense
resulting from realigning personnel between segments.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Quarterly analysis:



| |  | Interest expense and financing costs decreased $.1 million or 6%,
to $1.0 million compared to the third quarter of 2002. This
decrease is due to lower interest rates.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Interest expense and financing costs decreased $.2 million or 9%,
to $3.0 million compared to the first nine months of 2002. This
decrease is due to lower interest rates.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Federal income tax benefit

Quarterly analysis:



| |  | Federal income tax benefit increased $.3 million or 73%, to $.8
million compared to the third quarter of 2002. This increase is due to a
higher effective tax rate of 34% in 2003.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Federal income tax benefit decreased $.6 million or 17%, to $2.6
million compared to the first nine months of 2002. This decrease is due
to a higher effective tax rate of 34% in 2003. The prior period
utilized a net operating loss carryforward of $1.0 million.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

Discontinued Operations:

Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302003
    
    2002
    
    2003
    
    2002(Dollars in thousands)
    
    (Dollars in thousands)Income before gain on
sale of discontinued
operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,068Gain (loss) from the
sale of discontinued operations (less
taxes of $0, $1,956, $0 and $2,169)
    
    
    (275
    )
    
    
    2,662
    
    
    
    (275
    )
    
    
    6,872Net income
    
    $
    (275
    )
    
    $
    2,662
    
    
    $
    (275
    )
    
    $
    7,940


General:Our International Operations (discontinued operations) were sold in
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
was dependant on the amount of separate account assets under management, the
management fee charged on those assets and management of our operating
expenses.

Income before gain on sale of discontinued operationsconsist of general
operating expenses, including salaries, net of deferrable amounts.

Year-to-date analysis:



| |  | Income before gain on sale of discontinued operations declined due to the
sale of the portfolio of Premier Life (Bermuda), Ltd and the sale of
Premier Life (Luxembourg) S.A. in 2002.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gain (loss) from the sale of discontinued operations

Year-to-date analysis:



| |  | Gain from the sale of discontinued operations in 2002 resulted from the
sale of the portfolio of Premier Life (Bermuda), Ltd and the sale of
Premier Life (Luxembourg) S.A. in 2002.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Loss from the sale of discontinued operations in
2003 is due to the Company
settling a purchase price adjustment resulting in a $275,000 charge.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

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 July 1, 2003 interest rate of 6.00% continues, we expect to
receive interest income of $1.7 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.

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.

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 corporate headquarters located in Indianapolis. In
2003, we expect to receive lease income of $.8 million from Standard Life.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

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 2002. Savers Marketing terminated its
participation in this agreement with the sale of the assets of Savers Marketing
on July 1, 2003. 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
September 30, 2003:



| |  | outstanding balance of $6.8 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 September 30, 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 September 30, 2003:



| |  | outstanding balance of $3.75 million;
|- |  | -------------------------------------



| |  | weighted average interest rate of 5%;
|- |  | -------------------------------------



| |  | principal payments: remaining principal payment of $3.75 million paid in October 2003.
|- |  | --------------------------------------------------------------------------------------



| |  | subject to certain restrictions and financial and other covenants;
|- |  | ------------------------------------------------------------------



| |  | interest payments in 2003 were $.1 million.
|- |  | -------------------------------------------

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

The following are characteristics of our subordinated debt agreement at
September 30, 2003:



| |  | outstanding balance of $11.0 million; to be paid November, 2003.
|- |  | ----------------------------------------------------------------



| |  | interest rate is greater of 1) 10% per annum or 2) six month London Inter-Bank Offered Rate (LIBOR) plus 1.5%;
|- |  | ----------------------------------------------------------------------------------------------------------------



| |  | principal balance (originally due October 2007) to be paid November, 2003.
|- |  | --------------------------------------------------------------------------



| |  | interest payments in 2003 were $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.

The following are characteristics of our Trust Preferred securities at
September 30, 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 $14.5 million and $(4.7) million for the third quarter of 2003 and 2002,
respectively. At November 1, 2003, we had parent company only cash and
short-term investments of $.1 million that are available for general corporate
purposes. Parent company operating expenses (not including interest expense)
were $4.8 million and $3.4 million for the first nine months of 2003 and 2002,
respectively.

Liquidity of Financial Services

Financial Services: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
October 2003, A.M. Best confirmed Standard Lifes rating of (B+), or very
good.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

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 September 30, 2003,
Standard Life had statutory capital and surplus for regulatory purposes of
$57.5 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 $112.9
million for the third quarter of 2003 and $343.6 million for the third 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.

Liquidity of Health Services

Health Services:The principal liquidity requirements of our Health
Services segment are its 1) cost of goods sold, 2) operating expenses, and 3)
future acquisitions. The primary source of funding for these obligations has
been cash flow from 1) pharmaceutical sales, 2) internal and external
borrowings, and 3) capital contributions from Standard Management. The
liquidity requirements of our Health Services segment have significantly
exceeded cash flow from pharmaceutical sales.

We believe that the operational cash flow of our Health Services segment
will not be sufficient to meet our anticipated operational needs for 2003.
Therefore, this segment is expected to continue to fund its cash needs through
internal and external borrowings and capital contributions from Standard
Management. As of September 30, 2003, our Health Services subsidiary had
equity of $2.9 million.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

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, including our ability to integrate any acquired companies.
|- |  | -------------------------------------------------------------------------------------------------------------



| |  | 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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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

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PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

We are involved in various legal proceedings in the normal course of
business. In most cases, these proceedings involve claims under insurance
policies or other contracts. The outcome of these legal proceedings are not
expected to have a material adverse effect on the consolidated financial
position, liquidity, or future results of our operations based on our current
understanding of the relevant facts and law.




ITEM 5. OTHER INFORMATION

On November 13, 2003 the Company replaced its $3.75 million senior
facility and $11 million senior subordinated debt with a $20 million senior
secured credit facility. The new senior facility is composed of a $10 million
five year loan with a fixed rate of 6.63%, and a $10 million revolving line of
credit with a floating annual rate equal to 90 day LIBOR plus 395 basis points.
In addition to the repayment of indebtedness described above, a portion of the
proceeds will be used for a $5 million capital contribution to Standard Life,
and general corporate activities within our Financial Services segment.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

31.1 Rule 13a  14(a)/15d  14(a) Certification by Chief Executive Officer

31.2 Rule 13a  14(a)/15d  14(a) Certification by Chief Financial Officer

32.1 Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350

32.2 Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350

(b) Reports on Form 8-K

On August 11, 2003, we filed a report on Form 8-K with the Commission
related to the announcement of our financial results for the second quarter of
2003.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

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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: November 14, 2003STANDARD MANAGEMENT CORPORATION
(Registrant)By: /s/ RONALD D. HUNTERRonald D. Hunter
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)By: /s/ GERALD R. HOCHGESANGGerald R. Hochgesang
Senior Vice President and Treasurer
(Chief Accounting Officer)


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