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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 June 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
    
    No. 35-1773567(State or other jurisdiction
    
    (I.R.S. Employer Identification No.)of incorporation or organization)


10689 N. Pennsylvania Street, Indianapolis, Indiana
    
    46280(Address of principal executive offices)
    
    (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 August 14, 2003, the Registrant had 8,069,089 shares of Common Stock
outstanding.





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TABLE OF CONTENTS



|                                                                                              |                                                        |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------ |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                                                               
|ITEM 1. FINANCIAL STATEMENTS                                                                 
|                                                                                              | CONSOLIDATED BALANCE SHEETS                           
|                                                                                              | CONSOLIDATED STATEMENTS OF INCOME                     
|                                                                                              | CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY       
|                                                                                              | CONSOLIDATED STATEMENTS OF CASH FLOWS                 
|                                                                                              | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|ITEM 3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                     
|ITEM 4.       CONTROLS AND PROCEDURES                                                        
|PART II. OTHER INFORMATION                                                                   
|ITEM 1.       LEGAL PROCEEDINGS                                                              
|ITEM 2.       CHANGES IN SECURITIES AND USE OF PROCEEDS                                      
|ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS                          
|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.                                                    
|SIGNATURES                                                                                   
|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 
June 30, 2003 (Unaudited) and December 31, 2002 (Audited)
    
    
    3Consolidated Statements of Income 
For the Six Months Ended June 30, 2003 and 2002 (Unaudited)
    
    
    4Consolidated Statements of Shareholders Equity 
For the Six Months Ended June 30, 2003 and 2002 (Unaudited)
    
    
    6Consolidated Statements of Cash Flows 
For the Six Months Ended June 30, 2003 and 2002 (Unaudited)
    
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8-12Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13-32Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    32Item 4.
    
    Controls and Procedures
    
    
    32Part II.
    
    OTHER INFORMATION:Item 1.
    
    Legal Proceedings
    
    
    33Item 2.
    

Changes in Securities and Use of Proceeds
    
    
    33Item 4.
    
    Submission of Matters to a Vote of Securities Holders
    
    
    33Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    33SIGNATURES
    
    
    34


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PART I  FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS

STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)

June 30
    
    December 312003
    
    2002(Unaudited)
    
    (Audited)ASSETSInvestments:Securities available for sale:Fixed maturity securities at fair value (amortized cost $1,561,242 in 2003
and $1,350,961 in 2002)
    
    $
    1,608,387
    
    
    $
    1,379,792Mortgage loans on real estate
    
    
    4,672
    
    
    
    6,348Policy loans
    
    
    12,470
    
    
    
    12,722Real estate
    
    
    1,006
    
    
    
    1,252Equity-indexed call options
    
    
    11,882
    
    
    
    3,904Short-term investments
    
    
    650
    
    
    
    713Other invested assets
    
    
    981
    
    
    
    1,076Total investments
    
    
    1,640,048
    
    
    
    1,405,807Cash and cash equivalents
    
    
    14,450
    
    
    
    60,197Accrued investment income
    
    
    16,252
    
    
    
    16,255Amounts due and recoverable from reinsurers
    
    
    37,341
    
    
    
    38,951Deferred policy acquisition costs
    
    
    157,513
    
    
    
    153,954Present value of future profits
    
    
    11,442
    
    
    
    14,949Goodwill
    
    
    10,910
    
    
    
    6,417Property and equipment (less accumulated depreciation of $4,485 in 2003 and $3,903 in
2002)
    
    
    12,837
    
    
    
    12,832Other assets
    
    
    8,024
    
    
    
    5,785Total assets
    
    $
    1,908,817
    
    
    $
    1,715,147LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Insurance policy liabilities
    
    $
    1,744,486
    
    
    $
    1,570,348Accrued expenses and other payables
    
    
    6,754
    
    
    
    5,561Obligations of capital lease
    
    
    618
    
    
    
    804Mortgage payable
    
    
    6,881
    
    
    
    6,757Notes payable
    
    
    15,250
    
    
    
    13,000Current income taxes
    
    
    1,246
    
    
    
    3,811Deferred federal income taxes
    
    
    10,817
    
    
    
    6,432Total liabilities
    
    
    1,786,052
    
    
    
    1,606,713Company-obligated trust preferred securities
    
    
    20,700
    
    
    
    20,700Shareholders Equity:Preferred stock, no par value:Authorized 870,000 shares; none issued and outstanding
    
    
    
    
    
    
    Common stock and additional paid in capital, no par value:Authorized 20,000,000 shares; issued 9,572,167 in 2003 and 9,369,752 in
2002
    
    
    67,856
    
    
    
    63,857Treasury stock, at cost, 1,515,078 shares in 2003 and 2002
    
    
    (7,671
    )
    
    
    (7,671
    )Accumulated other comprehensive income
    
    
    19,029
    
    
    
    11,739Retained earnings
    
    
    22,851
    
    
    
    19,809Total shareholders equity
    
    
    102,065
    
    
    
    87,734Total liabilities and shareholders equity
    
    $
    1,908,817
    
    
    $
    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
    
    Six Months EndedJune 30
    
    June 302003
    
    2002
    
    2003
    
    2002Revenues:Premium income
    
    $
    2,424
    
    
    $
    1,838
    
    
    $
    4,301
    
    
    $
    4,222Net investment income
    
    
    20,623
    
    
    
    18,493
    
    
    
    41,769
    
    
    
    35,644Call option gains (losses)
    
    
    6,087
    
    
    
    (5,598
    )
    
    
    2,989
    
    
    
    (6,991
    )Net realized investment gains (losses)
    
    
    8,347
    
    
    
    (8,624
    )
    
    
    18,274
    
    
    
    (8,898
    )Policy income
    
    
    2,740
    
    
    
    1,946
    
    
    
    4,973
    
    
    
    3,723Fees and other income
    
    
    167
    
    
    
    266
    
    
    
    516
    
    
    
    1,082Total revenues from continuing operations
    
    
    40,388
    
    
    
    8,321
    
    
    
    72,822
    
    
    
    28,782Benefits and expenses:Benefits and claims
    
    
    3,246
    
    
    
    2,482
    
    
    
    5,600
    
    
    
    4,774Interest credited to interest-sensitive annuities and
other financial products
    
    
    21,123
    
    
    
    10,240
    
    
    
    32,774
    
    
    
    18,133Amortization
    
    
    8,010
    
    
    
    2,140
    
    
    
    17,889
    
    
    
    6,128Commission expenses
    
    
    6
    
    
    
    (174
    )
    
    
    74
    
    
    
    403Other operating expenses
    
    
    5,466
    
    
    
    2,390
    
    
    
    9,876
    
    
    
    5,115Interest expense and financing costs
    
    
    988
    
    
    
    1,123
    
    
    
    2,013
    
    
    
    2,234Total benefits and expenses from continuing
operations
    
    
    38,839
    
    
    
    18,201
    
    
    
    68,226
    
    
    
    36,787Income (loss) before federal income taxes
    
    
    1,549
    
    
    
    (9,880
    )
    
    
    4,596
    
    
    
    (8,005
    )Federal income tax expense (benefit)
    
    
    517
    
    
    
    (6,017
    )
    
    
    1,554
    
    
    
    (5,633
    )Income (loss) from continuing operations
    
    
    1,032
    
    
    
    (3,863
    )
    
    
    3,042
    
    
    
    (2,372
    )Discontinued operations:Income from discontinued operations (less taxes of $0,
$285, $0, and $550)
    
    
    
    
    
    
    556
    
    
    
    
    
    
    
    1,068Gain from the sale of discontinued operations (less
taxes of $0, $2,169, $0 and $2,169)
    
    
    
    
    
    
    4,210
    
    
    
    
    
    
    
    4,210Total discontinued operations
    
    
    
    
    
    
    4,766
    
    
    
    
    
    
    
    5,278Cumulative effect of accounting change for goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,212
    )Net income
    
    $
    1,032
    
    
    $
    903
    
    
    $
    3,042
    
    
    $
    1,694


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
    
    Six Months EndedJune 30
    
    June 302003
    
    2002
    
    2003
    
    2002Earnings per share  basic:Income (loss) from continuing operations
    
    $
    .13
    
    
    $
    (.50
    )
    
    $
    .38
    
    
    $
    (.31
    )Discontinued operations:Income from discontinued operations
    
    
    
    
    
    
    .07
    
    
    
    
    
    
    
    .14Gain from the sale of discontinued operations
    
    
    
    
    
    
    .55
    
    
    
    
    
    
    
    .55Total discontinued operations
    
    
    
    
    
    
    .62
    
    
    
    
    
    
    
    .69Cumulative effect of accounting change for goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (.16
    )Net income
    
    $
    .13
    
    
    $
    .12
    
    
    $
    .38
    
    
    $
    .22Earnings per share  diluted:Income (loss) from continuing operations
    
    $
    .13
    
    
    $
    (.48
    )
    
    $
    .38
    
    
    $
    (.29
    )Discontinued operations:Income from discontinued operations
    
    
    
    
    
    
    .07
    
    
    
    
    
    
    
    .13Gain from the sale of discontinued operations
    
    
    
    
    
    
    .52
    
    
    
    
    
    
    
    .52Total discontinued operations
    
    
    
    
    
    
    .59
    
    
    
    
    
    
    
    .65Cumulative effect of accounting change for goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (.15
    )Net income
    
    $
    .13
    
    
    $
    .11
    
    
    $
    .38
    
    
    $
    .21


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 loss:Net income
    
    
    1,694
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,694Other comprehensive income:Change in unrealized gain (loss) on
securities, net taxes (benefits) of $1,542
    
    
    2,885
    
    
    
    
    
    
    
    
    
    
    
    2,885Change in foreign currency translation
    
    
    (521
    )
    
    
    
    
    
    
    
    
    
    
    (521
    )Other comprehensive income
    
    
    2,364Comprehensive income
    
    
    4,058Issuance of common stock and warrants
    
    
    837
    
    
    
    837Exercise of common stock options
    
    
    (251
    )
    
    
    (251
    )Preferred stock dividends
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Balance at June 30, 2002
    
    $
    74,828
    
    
    $
    63,597
    
    
    $
    (7,594
    )
    
    $
    (3,808
    )
    
    $
    22,633Balance at January 1, 2003
    
    $
    87,734
    
    
    $
    63,857
    
    
    $
    (7,671
    )
    
    $
    11,739
    
    
    $
    19,809Comprehensive income:Net income
    
    
    3,042
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,042Other comprehensive income:Change in unrealized gain (loss) on securities,
net taxes (benefits) of $3,854
    
    
    7,290
    
    
    
    
    
    
    
    
    
    
    
    7,290Other comprehensive income
    
    
    7,290Comprehensive income
    
    
    10,332Issuance of common stock and warrants
    
    
    3,999
    
    
    
    3,999Balance at June 30, 2003
    
    $
    102,065
    
    
    $
    67,856
    
    
    $
    (7,671
    )
    
    $
    19,029
    
    
    $
    22,851


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)

Six Months EndedJune 302003
    
    2002Operating ActivitiesNet income
    
    $
    3,042
    
    
    $
    1,694Net income from discontinued operations
    
    
    
    
    
    
    (1,068
    )Gain from the sale of discontinued operations
    
    
    
    
    
    
    (4,210
    )Adjustments to reconcile net income to net cash provided by operating
activities:Amortization of deferred acquisition costs
    
    
    17,889
    
    
    
    5,161Deferral of acquisition costs
    
    
    (25,124
    )
    
    
    (31,312
    )Federal income taxes
    
    
    (4,377
    )
    
    
    (7,339
    )Depreciation and amortization
    
    
    683
    
    
    
    1,691Insurance policy liabilities
    
    
    27,084
    
    
    
    30,189Net realized investment (gains) losses
    
    
    (18,274
    )
    
    
    8,898Net accrual of bond discount
    
    
    3,014
    
    
    
    727Accrued investment income
    
    
    3
    
    
    
    (3,581
    )Cumulative effect of accounting change for goodwill impairment
    
    
    
    
    
    
    1,212Other
    
    
    517
    
    
    
    (431
    )Net cash provided by operating activities
    
    
    4,457
    
    
    
    1,631Investing ActivitiesFixed maturity securities available for sale:Purchases
    
    
    (1,032,774
    )
    
    
    (518,024
    )Sales
    
    
    695,099
    
    
    
    259,195Maturities, calls and redemptions
    
    
    142,692
    
    
    
    6,500Short-term investments, net
    
    
    (4,924
    )
    
    
    6,982Other investments, net
    
    
    1,861
    
    
    
    (1,709
    )Net cash used by investing activities
    
    
    (198,046
    )
    
    
    (247,056
    )Financing ActivitiesBorrowings (repayments) on notes payable
    
    
    2,167
    
    
    
    (666
    )Premiums received on interest-sensitive and other financial products
credited to policyholder account balances, net of premiums ceded
    
    
    250,016
    
    
    
    307,016Return of policyholder account balances on interest-sensitive
annuities and other
financial products
    
    
    (104,341
    )
    
    
    (72,491
    )Issuance of common stock and warrants
    
    
    
    
    
    
    530Net cash provided by financing activities
    
    
    147,842
    
    
    
    234,389Net increase (decrease) in cash and cash equivalents
    
    
    (45,747
    )
    
    
    (11,036
    )Cash and cash equivalents at beginning of period
    
    
    60,197
    
    
    
    18,144Cash and cash equivalents at end of period
    
    $
    14,450
    
    
    $
    7,108


See accompanying notes to consolidated financial statements.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

Note 1  Basis of Presentation

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

Effective September 17, 2002 we concluded the sale of our International
Operations (discontinued operations). We have included in our consolidated
statements of income for the period ended June 30, 2002 the
results from 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 June 30, 2003 consolidated financial
statements. The purchase was accounted for under the purchase method of
accounting and resulted in recognizing a preliminary goodwill amount of $3.9
million. Under purchase accounting, we allocated the total purchase price of
the assets and liabilities acquired, based on a determination of their fair
values and recorded the excess of acquisition cost over net assets acquired as
goodwill.

Effective June 11, 2003, we acquired from Roche Diagnostics Corporation
the business assets of MyDoc.com. MyDoc.com 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 MyDoc.com service. The contingent
consideration has not been recognized in the June 30, 2003 consolidated
financial statements and would be recorded in the future periods upon
achievements 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 $553,000. 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.

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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 the
last half of 2002. The 2002 results included revenues earned and expenses
incurred from abroad, primarily Europe, and include fees collected on our
deposits from unit-linked assurance products. The profitability of this
segment primarily 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):

June 30
    
    December 312003
    
    2002Balance, beginning of year
    
    $
    6,417
    
    
    $
    5,146Goodwill acquired
    
    
    4,493
    
    
    
    2,483Goodwill impairment
    
    
    
    
    
    
    (1,212
    )Balance,
end of period
    
    $
    10,910
    
    
    $
    6,417


New Pronouncements

In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 Accounting for Certain Instruments with Characteristics of both
Liabilities and Equity(SFAS No. 150) which establishes standards for classifying
and measuring as liabilities certain financial instruments that embody
obligations of the issuer and have characteristics of both liabilities and
equity. We are required to adopt the provisions of SFAS No. 150 in the third
quarter of 2003 and management is currently evaluating the impact of the
adoption, with an emphasis on the application to our Trust Preferred
Securities.

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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
    
    June 30
    
    December 31Rate
    
    2003
    
    2002Mortgage payable
    
    
    7.33
    %
    
    $
    6,881
    
    
    $
    6,757Notes payable:Promissory note
    
    
    6.00
    %
    
    
    500
    
    
    
    500Borrowings under revolving credit agreements
    
    
    4.76
    %(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 June 30, 2003.
|--- |  | -----------------------------------------------

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):

June 30
    
    December 312003
    
    2002Fair value of securities available for sale
    
    $
    1,608,387
    
    
    $
    1,379,792Amortized cost of securities available for sale
    
    
    1,561,242
    
    
    
    1,350,961Gross unrealized gain on securities available for sale
    
    
    47,145
    
    
    
    28,831Adjustments for:Deferred policy acquisition costs
    
    
    (11,407
    )
    
    
    (6,942
    )Present value of future profits
    
    
    (6,831
    )
    
    
    (4,113
    )Deferred federal income tax benefits
    
    
    (9,929
    )
    
    
    (6,075
    )Other
    
    
    51
    
    
    
    38Net unrealized gain on securities available for sale
    
    $
    19,029
    
    
    $
    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
    
    Six Months EndedJune 30
    
    June 302003
    
    2002
    
    2003
    
    2002Income (loss):Income (loss) from continuing operations
    
    $
    1,032
    
    
    
    ($3,863
    )
    
    $
    3,042
    
    
    
    ($2,372
    )Income from discontinued operations
    
    
    
    
    
    
    4,766
    
    
    
    
    
    
    
    5,278Cumulative effect of accounting change
for goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,212
    )Net income  basic earnings per share
    
    
    1,032
    
    
    
    903
    
    
    
    3,042
    
    
    
    1,694Net income  diluted earnings per share
    
    $
    1,032
    
    
    $
    903
    
    
    $
    3,042
    
    
    $
    1,694Shares:Weighted average shares outstanding for
basic earnings per share
    
    
    8,057,089
    
    
    
    7,613,479
    
    
    
    7,963,694
    
    
    
    7,610,705Effect of dilutive securities:Stock options
    
    
    75,422
    
    
    
    292,351
    
    
    
    40,365
    
    
    
    198,052Stock warrants
    
    
    32,959
    
    
    
    258,574
    
    
    
    28,695
    
    
    
    207,503Dilutive potential common shares
    
    
    108,381
    
    
    
    550,925
    
    
    
    69,060
    
    
    
    405,555Weighted average shares outstanding for
diluted earnings per share
    
    
    8,165,470
    
    
    
    8,164,404
    
    
    
    8,032,754
    
    
    
    8,016,260


Note 5  Stock Option Plan

Effective June 12, 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. Options may not be granted under
the 2002 Stock Incentive Plan on a date that is more than ten years from the
date of its adoption. The options may become exercisable immediately or over a
period of time. Any shares subject to an option which for any reason expires or
is terminated unexercised may again be subject to an option under the Plan.
The 2002 Stock Incentive Plan also permits granting of stock appreciation
rights and restricted stock awards. During the six months ended
June 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 will
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 six months ended June 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
    
    Six Months EndedJune 30
    
    June 302003
    
    2002
    
    2003
    
    2002Reported net income
    
    $
    1,032
    
    
    $
    903
    
    
    $
    3,042
    
    
    $
    1,694Add: 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
    
    
    205
    
    
    
    41
    
    
    
    249
    
    
    
    82Pro forma net income
    
    $
    827
    
    
    $
    862
    
    
    $
    2,793
    
    
    $
    1,612Earnings per share:Basic  as reported
    
    $
    .13
    
    
    $
    .12
    
    
    $
    .38
    
    
    $
    .22Basic  pro forma
    
    
    .10
    
    
    
    .11
    
    
    
    .35
    
    
    
    .21Diluted  as reported
    
    
    .13
    
    
    
    .11
    
    
    
    .38
    
    
    
    .21Diluted  pro forma
    
    
    .10
    
    
    
    .11
    
    
    
    .35
    
    
    
    .20


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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 Six Month Periods Ended June 30, 2003 and June 30, 2002:

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

Three Months Ended
    
    Six Months EndedJune 30
    
    June 302003
    
    2002
    
    2003
    
    2002Income (loss) from continuing operations
    
    $
    1,032
    
    
    $
    (3,863
    )
    
    $
    3,042
    
    
    $
    (2,372
    )Discontinued operations:Operating income from discontinued
operations (less taxes of $0, $285, $0
and $550)
    
    $
    
    
    
    $
    556
    
    
    $
    
    
    
    $
    1,068Gain from the sale of discontinued
operations (less taxes of $0 and
$2,169, $0 and $2,169)
    
    
    
    
    
    
    4,210
    
    
    
    
    
    
    
    4,210Income from discontinued operations
    
    
    
    
    
    
    4,766
    
    
    
    
    
    
    
    5,278Cumulative effect of accounting change
for goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,212
    )Net income
    
    $
    1,032
    
    
    $
    903
    
    
    $
    3,042
    
    
    $
    1,694


Consolidated Results and Analysis:

For the quarter ended June 30, 2003, income from continuing operations
was $1.0 million, or $.13 per diluted share, compared to a loss of $3.9
million, or $.48 per diluted share for the second quarter of 2002.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

Financial Services:

Net income for the current quarter end
was $3.9 million, or $.47 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 gains of $3.0
million, or $.36 per diluted share, while the comparable prior year quarter
included net realized investment losses of $5.7 million, or $.70 per diluted
share. The current quarter as compared to the prior year quarter was negatively
affected by reduced spread income of $.16 per diluted share due to the decline
in the net investment income yield, which has declined faster than we were able
to reduce credited rates, and increased legal expenses of $.02 per diluted
share. The prior year quarter was negatively affected by a net $.20 per diluted
share for reserve strengthening and was positively affected by $.17 per diluted
share from a lower effective tax rate resulting from the use of tax loss
carryforwards.

Health Services:

Current period net loss per diluted share was
$.11, compared to a $.01 loss in the comparable prior year period. The current
period loss included additional expenses associated with the continued
development of U.S. Health Services operating platform and infrastructure.

Other Services:

Current period net loss per diluted share was
$.23, compared to the prior period net income of $.01 per diluted share. The
prior period was positively impacted by $.12 per diluted share from a lower
effective tax rate resulting from the use of tax loss carryforwards.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

Financial Services:

Three Months Ended
    
    Six Months EndedJune 30
    
    June 302003
    
    2002
    
    2003
    
    2002(Dollars in thousands)
    
    (Dollars in thousands)Premiums and Deposits Collected:Traditional life
    
    $
    2,424
    
    
    $
    1,838
    
    
    $
    4,301
    
    
    $
    4,222Deferred annuities
    
    
    41,162
    
    
    
    82,366
    
    
    
    90,430
    
    
    
    170,997Single premium immediate annuities
and other deposits
    
    
    46,721
    
    
    
    44,777
    
    
    
    85,230
    
    
    
    81,210Equity-indexed annuities
    
    
    38,300
    
    
    
    32,048
    
    
    
    74,058
    
    
    
    54,507Universal and interest-sensitive life
    
    
    146
    
    
    
    142
    
    
    
    298
    
    
    
    302Subtotal  interest-sensitive
and other financial
products
    
    
    126,329
    
    
    
    159,333
    
    
    
    250,016
    
    
    
    307,016Total premiums and deposits collected
    
    $
    128,753
    
    
    $
    161,171
    
    
    $
    254,317
    
    
    $
    311,238Statement of Operations:Premium income
    
    $
    2,424
    
    
    $
    1,838
    
    
    $
    4,301
    
    
    $
    4,222Policy income
    
    
    2,740
    
    
    
    1,946
    
    
    
    4,973
    
    
    
    3,723Total policy related income
    
    
    5,164
    
    
    
    3,784
    
    
    
    9,274
    
    
    
    7,945Net investment income
    
    
    20,587
    
    
    
    18,534
    
    
    
    41,731
    
    
    
    35,679Call option losses
    
    
    6,087
    
    
    
    (5,598
    )
    
    
    2,989
    
    
    
    (6,991
    )Fees and other income
    
    
    21
    
    
    
    (190
    )
    
    
    136
    
    
    
    (84
    )Total revenues
    
    
    31,859
    
    
    
    16,530
    
    
    
    54,130
    
    
    
    36,549Benefits and claims
    
    
    3,246
    
    
    
    2,482
    
    
    
    5,600
    
    
    
    4,774Interest credited to interest-sensitive
annuities and other financial products
    
    
    21,123
    
    
    
    10,240
    
    
    
    32,774
    
    
    
    18,133Amortization
    
    
    4,173
    
    
    
    2,118
    
    
    
    8,196
    
    
    
    6,106Commission expenses
    
    
    (42
    )
    
    
    (203
    )
    
    
    (45
    )
    
    
    160Other operating expenses
    
    
    1,968
    
    
    
    1,338
    
    
    
    3,888
    
    
    
    2,811Total benefits and expenses
    
    
    30,468
    
    
    
    15,975
    
    
    
    50,413
    
    
    
    31,984Operating income before income taxes
    
    
    1,391
    
    
    
    555
    
    
    
    3,717
    
    
    
    4,565Federal income tax expense (benefit)
    
    
    472
    
    
    
    (1,210
    )
    
    
    1,265
    
    
    
    151Operating income after income taxes
    
    
    919
    
    
    
    1,767
    
    
    
    2,452
    
    
    
    4,414Net realized investment gains (losses),
net of related
amortization and income taxes
    
    
    2,976
    
    
    
    (5,692
    )
    
    
    5,664
    
    
    
    (5,873
    )Cumulative effect of accounting change for
goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,212
    )Net income (loss)
    
    $
    3,895
    
    
    $
    (3,925
    )
    
    $
    8,116
    
    
    $
    (2,671
    )


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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 the second quarter of 2003 decreased $33.0
million or 21%, to $126.3 million, compared to the second quarter
of 2002. Deferred annuities decreased $41.2 million or 50%, to
$41.2 million. Single premium immediate annuities increased $1.9
million, or 4%, to $46.7 million. Deposits from equity-indexed
annuities increased $6.3 million or 20%, to $38.3 million.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Premium deposits for the first six months of 2003 decreased $57.0
million or 19%, to $250.0 million, compared to the first six
months of 2002. Deferred annuities decreased $80.6 million or
47%, to $90.4 million. Single premium immediate annuities
increased $4.0 million, or 5%, to $85.2 million. Deposits from
equity-indexed annuities increased $19.6 million or 36%, to $74.1
million.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Premium deposits decreased in the 2003 period primarily 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 second quarter of 2003 increased by $.6
million or 32%, to $2.4 million compared to the second quarter of
2002 as a result of a decline in premiums ceded to reinsurers.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Premium income for the first six months of 2003 increased by $.1
million or 2%, to $4.3 million compared to the first six months of
2002 as a result of a decline in premiums ceded to reinsurers.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 second quarter of 2003 increased $.8 million
or 41%, to $2.7 million compared to the second quarter of 2002.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Policy income for the first six months of 2003 increased $1.3
million or 34%, to $5.0 million compared to the first six months
of 2002.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------

Policy income increased due to an expected increase in surrenders in response
to management actions taken on 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.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

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 second quarter of 2003 increased by
$2.1 million or 11%, to $20.6 million compared to the second
quarter of 2002. Net investment income increased as a result of a
$393.2 million or 35%, increase in the weighted average invested
assets for the period, which was partially offset by a decrease in
the net investment yields earned on average invested assets of
5.38% for the second quarter of 2003 compared to 6.60% for the
second quarter 2002. The decline in net investment yields is due
primarily to the timing of investing new premium deposits in
assets which currently earn lower yields than the portfolio yield.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Net investment income for the first six months of 2003 increased
by $6.1 million or 17%, to $41.7 million compared to the first six
months of 2002. Net investment income increased as a result of a
$407.8 million or 39%, increase in the weighted average invested
assets for the period, which was partially offset by a decrease in
the net investment yields earned on average invested assets of
5.61% for the first six months of 2003 compared to 6.71% for the
first six months 2002. The decline in net investment yields is due
primarily to the timing of investing new premium deposits in
assets which currently earn lower yields than the portfolio yield.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | See also Call option income and Interest credited to interest sensitive
annuities and other financial products for 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 are substantially offset by amounts credited to
policyholder account balances.

Quarterly analysis:



| |  | Call option income for the second quarter of 2003 increased by
$11.7 million or 209%, to $6.1 million compared to the second
quarter of 2002.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Call option income for the first six months of 2003 increased by
$10.0 million or 143%, to $3.0 million compared to the first six
months of 2002.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

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

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

Quarterly analysis:



| |  | Fees and other income increased $.2 million to $21,000 primarily
due to an increase in mortality associated with experience
refunds.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Fees and other income increased $.2 million to $.1 million
primarily due to an increase in mortality associated with
experience refunds.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

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 second quarter of 2003 increased $.8
million or 31%, to $3.2 million compared to the second quarter of
2002.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Benefits and claims for the first six months of 2003 increased $.8
million or 17%, to $5.6 million compared to the first six months
of 2002.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------

Benefits and claims were higher in 2003 primarily due to increased death claims
and annuity benefits for our in-force life policies and single-premium
immediate annuities.

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 second quarter of 2003, interest credited increased
$10.9 million or 106%, to $21.1 million compared to the second
quarter of 2002. This increase is primarily due to an $11.7
million increase in the change in market value of insurance policy
liabilities supporting equity indexed annuity products. The growth
in average interest sensitive liabilities of $422.2 million or
39%, compared to the second quarter of 2002, also contributed to
the increase in credited interest.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The weighted average credited rates for the
second quarter of 2003
and 2002 were 3.95% and 5.39%, respectively. The decline in
average credited rates is due to rate reductions taken by
management to maintain spread income over the same period.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | During the first six months of 2003, interest credited increased
$14.6 million or 81%, to $32.8 million compared to the first six
months of 2002. This increase is primarily due to a $10.0 million
of increase in the market value of insurance policy liabilities
supporting our equity indexed annuity products. The growth in
average interest sensitive liabilities of $440.8 million or 44%,
compared to the first six months of 2002, also contributed to the
increase in credited interest.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The weighted average credited rates for the first six months of
2003 and 2002 were 4.00% and 4.95%, respectively. The decline in
average credited rates 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 related to the present value of our
policies purchased from our acquired insurance business and 2) amortization of
deferred acquisition costs related to capitalized costs of our insurance
business sold.

Quarterly analysis:



| |  | Amortization for the second quarter of 2003 was $4.2 million, an
increase of $2.1 million or 97% compared to the second quarter of 2002.
The increase in amortization primarily relates to the effects of
reduced spread income and the remainder relates to a $.8 million impact of SFAS No. 133.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Amortization for the first six months of 2003 was $8.2 million, an
increase of $2.1 million or 34% compared to the first six months of
2002. The increase in amortization primarily relates to the effects
of reduced spread income and is partially offset by a $.1 million decrease due to the impact of SFAS No.
133.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Commission expensesrepresent commission expenses, net of deferrable amounts.

Quarterly analysis:



| |  | Commission expenses increased $.1 million to $(42,000).
|- |  | -------------------------------------------------------

Year-to-date analysis:



| |  | Commission expenses decreased $.2 million to $(45,000).
|- |  | -------------------------------------------------------

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

Quarterly analysis:



| |  | Other operating expenses for the second quarter of 2003 increased
$.6 million or 47%, to $2.0 million compared to the second quarter
of 2002. Other operating expenses increased 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 current quarter
resulting in increased legal expenses.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Other operating expenses for the first six months of 2003
increased $1.1 million or 38%, to $3.9 million compared to the
first six months of 2002. Other operating expenses increased 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 six months of 2003 resulting in increased legal
expenses. These items were offset by a decrease in salary expense resulting
from realigning personnel between business segments.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

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.

Quarterly analysis:



| |  | Net realized investment gains, net of related amortization, were $3.0 million in the second quarter of 2003 compared to
net realized investment losses of $(5.7) million in the second quarter of 2002, largely resulting from a strategy to
realize tax basis capital loss carryforwards. Net realized investment
gains for the second quarter of 2003 include an other-than-temporary
writedown of $.5 million for certain fixed maturity securities.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Net realized investment gains, net of related amortization, were $5.7 million in the first six months of 2003 compared
to net realized investment losses of $(5.8) million in the first six months of 2002, largely resulting from a strategy
to realize tax basis capital loss carryforwards. Net realized
investment gains for the first six months of 2003 include an
other-than-temporary writedown of $1.7 million for certain fixed
maturity securities.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Approximately 98% of our fixed maturity securities are classified as investment grade at June 30, 2003.
|- |  | -------------------------------------------------------------------------------------------------------

Federal income tax benefit

Quarterly analysis:



| |  | Federal income tax expense increased $1.6 million or 139%, to $.5
million compared to the second quarter 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.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Federal income tax expense increased $1.1 million or 732%, to $1.3
million compared to the six 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
    
    Six Months EndedJune 30
    
    June 302003
    
    2002
    
    2003
    
    2002(Dollars in thousands)
    
    (Dollars in thousands)Gross Margin on Sales:Sales
    
    $
    739
    
    
    $
    21
    
    
    $
    1,431
    
    
    $
    43Cost of Goods Sold
    
    
    669
    
    
    
    19
    
    
    
    1,242
    
    
    
    32Fulfillment costs:Processing costs
    
    
    270
    
    
    
    
    
    
    
    471
    
    
    
    Shipping costs
    
    
    22
    
    
    
    
    
    
    
    48
    
    
    
    Total cost of sales
    
    
    961
    
    
    
    19
    
    
    
    1,761
    
    
    
    32Gross margin on sales
    
    $
    (222
    )
    
    $
    2
    
    
    $
    (330
    )
    
    $
    11Statement of Operations:Gross margin on sales
    
    $
    (222
    )
    
    $
    2
    
    
    $
    (330
    )
    
    $
    11Other income
    
    
    24
    
    
    
    
    
    
    
    37
    
    
    
    Total gross margin and other income
    
    
    (198
    )
    
    
    2
    
    
    
    (293
    )
    
    
    11Marketing and sales expenses
    
    
    88
    
    
    
    
    
    
    
    210
    
    
    
    Commission expenses
    
    
    12
    
    
    
    
    
    
    
    34
    
    
    
    Other operating expenses
    
    
    1,094
    
    
    
    57
    
    
    
    1,688
    
    
    
    70Interest expense and financing costs
    
    
    7
    
    
    
    8
    
    
    
    15
    
    
    
    8Total expenses
    
    
    1,201
    
    
    
    65
    
    
    
    1,947
    
    
    
    78Loss before income taxes
    
    
    (1,399
    )
    
    
    (63
    )
    
    
    (2,240
    )
    
    
    (67
    )Federal income tax benefit
    
    
    (475
    )
    
    
    (21
    )
    
    
    (761
    )
    
    
    (23
    )Net loss
    
    $
    (924
    )
    
    $
    (42
    )
    
    $
    (1,479
    )
    
    $
    (44
    )


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 second quarter of 2003
increased by $.9 million to
$.9 million compared to the second quarter of 2002.
| | - |  | -----------------------------------------------------------------------------------------------------------------------

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

Year-to-date analysis:



| |  |  | Net loss for the first six months of 2003 increased by $1.4 million
to $1.4 million compared to the first six months of 2002.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------

Net loss in 2003 periods is due to
additional expenses associated with the continued development of the
Health Services segment's operating platform and infrastructure since
its organization in 2002.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

Other Services:

Three Months Ended
    
    Six Months EndedJune 30
    
    June 302003
    
    2002
    
    2003
    
    2002(Dollars in thousands)
    
    (Dollars in thousands)Statement of Operations:Net investment income
    
    $
    36
    
    
    $
    (41
    )
    
    $
    38
    
    
    $
    (35
    )Commission income
    
    
    339
    
    
    
    451
    
    
    
    657
    
    
    
    1,143Fees and other income
    
    
    5
    
    
    
    3
    
    
    
    16
    
    
    
    12Total revenues
    
    
    380
    
    
    
    413
    
    
    
    711
    
    
    
    1,120Commission expenses
    
    
    36
    
    
    
    29
    
    
    
    85
    
    
    
    243Other operating expenses
    
    
    2,316
    
    
    
    1,009
    
    
    
    4,090
    
    
    
    2,256Interest expense and financing costs
    
    
    981
    
    
    
    1,123
    
    
    
    1,998
    
    
    
    2,226Total expenses
    
    
    3,333
    
    
    
    2,161
    
    
    
    6,173
    
    
    
    4,725Loss before income taxes
    
    
    (2,953
    )
    
    
    (1,748
    )
    
    
    (5,462
    )
    
    
    (3,605
    )Federal income tax benefit
    
    
    (1,014
    )
    
    
    (1,852
    )
    
    
    (1,867
    )
    
    
    (2,736
    )Net income (loss)
    
    $
    (1,939
    )
    
    $
    104
    
    
    $
    (3,595
    )
    
    $
    (869
    )


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

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

Quarterly analysis:



| |  | Commission income decreased $.1 million or 25%, to $.3 million
compared to the second quarter of 2002. Commission income
decreased due to a change in the product mix administrated through
our marketing services.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Commission income decreased $.5 million or 43%, to $.7 million
compared to the first six months of 2002. Commission income
decreased due to a change in the product mix administrated through
our marketing services.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Quarterly analysis:



| |  | Commission expenses increased $6,000 or 24%, to $36,000 compared to
the second quarter of 2002. Commission expense increased due to a change
in product mix administrated through our marketing services.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

Year-to-date analysis:



| |  |  | Commission expenses decreased $.2 million or 65%, to $85,000 compared
to the first six months of 2002. Commission expense decreased due to a
change in product mix administrated through our marketing services.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other operating expensesconsist of corporate operating expenses, including
salaries.

Quarterly analysis:



| |  | Other operating expenses increased $1.3 million or 130%, to $2.3
million compared to the second quarter of 2002. Operating expenses
increased primarily due to salary expense resulting from
realigning personnel between segments.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Other operating expenses increased $1.8 million or 81%, to $4.1
million compared to the first six months of 2002. Other operating
expenses increased primarily due to salary expense resulting from
realigning personnel between segments.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See also Other operating expenses in the Financial Services segment for the
corresponding decrease.

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

Quarterly analysis:



| |  |  | Interest expense and financing costs decreased $.1 million or 13%, to
$1.0 million compared to the second quarter of 2002. This decrease is
due to lower interest rates.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Interest expense and financing costs decreased $.2 million or 10%, to
$2.0 million compared to the first six months of 2002. This decrease is
due to lower interest rates.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Federal income tax benefit

Quarterly analysis:



| |  |  | Federal income tax benefit decreased $.8 million or 45%, to $1.0
million compared to the second quarter of 2002. This decrease is due to
a higher effective tax rate of 34% in 2003. In the prior period there
was a lower effective tax rate resulting from the utilization of net
operating loss carryforwards of $1.0 million.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  |  | Federal income tax benefit decreased $.9 million or 32%, to $1.8
million compared to the first six months of 2002. This decrease is due to a
higher effective tax rate of 34% in 2003. In the prior period there was
a lower effective tax rate resulting from the utilization of net
operating loss carryforwards of $1.0 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

Discontinued Operations:

Three Months Ended
    
    Six Months EndedJune 30
    
    June 302003
    
    2002
    
    2003
    
    2002(Dollars in thousands)
    
    (Dollars in thousands)Statement of Operations:Premium income
    
    $
    
    
    
    $
    4
    
    
    $
    
    
    
    $
    18Net investment income
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    103Separate account fees
    
    
    
    
    
    
    1,688
    
    
    
    
    
    
    
    3,569Total revenues
    
    
    
    
    
    
    1,714
    
    
    
    
    
    
    
    3,690Benefits and claims
    
    
    
    
    
    
    (246
    )
    
    
    
    
    
    
    (186
    )Amortization
    
    
    
    
    
    
    133
    
    
    
    
    
    
    
    272Commission expenses
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    97Other operating expenses
    
    
    
    
    
    
    943
    
    
    
    
    
    
    
    1,889Total benefits and expenses
    
    
    
    
    
    
    873
    
    
    
    
    
    
    
    2,072Income before income taxes
    
    
    
    
    
    
    841
    
    
    
    
    
    
    
    1,618Federal income benefit expense
    
    
    
    
    
    
    285
    
    
    
    
    
    
    
    550Income
before
gain on
sale of
discontinued
operations
    
    
    
    
    
    
    556
    
    
    
    
    
    
    
    1,068Gain from the sale
of discontinued
operations (less
taxes of $0 and
$2,169)
    
    
    
    
    
    
    4,210
    
    
    
    
    
    
    
    4,210Net income
    
    $
    
    
    
    $
    4,766
    
    
    $
    
    
    
    $
    5,278


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

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

Quarterly analysis:



| |  | Net investment income for the second quarter of 2002 was $22,000. Corporate assets averaged $8.0 million for the second
quarter of 2002 and primarily consist of cash and short-term investments.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The net investment yields earned on average invested assets were 2.60% for the second quarter of 2002.
|- |  | ------------------------------------------------------------------------------------------------------

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

Year-to-date analysis:



| |  | Net investment income for the first six months of 2002 was $.1 million. Corporate assets averaged $7.9 million for the first
six months of 2002 and primarily consist of cash and short-term investments.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The net investment yields earned on average invested assets were 1.10% for the period ending June 30, 2002.
|- |  | -----------------------------------------------------------------------------------------------------------

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

Quarterly analysis:



| |  | Fees from separate accounts for the second quarter of 2002 were $1.7 million. Separate account assets averaged $426
million for the second quarter of 2002.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

Year-to-date analysis:



| |  | Fees from separate accounts for the first six months of 2002 were $3.6 million. Separate account assets averaged $420
million for the six months of 2002.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

Benefits and claims

Quarterly analysis:



| |  | Benefits and claims for the second quarter of 2002 was $(.2) million.
|- |  | ---------------------------------------------------------------------

Year-to-date analysis:



| |  | Benefits and claims for the first six months of 2002 was $(.2) million.
|- |  | -----------------------------------------------------------------------

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

Quarterly analysis:



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

Year-to-date analysis:



| |  | Amortization for the first six months of 2002 was $.3 million.
|- |  | --------------------------------------------------------------

Commission expensesrepresent commission expenses, net of deferrable amounts.

Quarterly analysis:



| |  | Commission expenses for the second quarter of 2002 were $43,000. Due to
the nature of our business, most incurred commissions are deferred.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

Year-to-date analysis:



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

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

Quarterly analysis:



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

Year-to-date analysis:



| |  | Other operating expenses for the first six months of 2002 were $1.9 million.
|- |  | ----------------------------------------------------------------------------

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

Gain from the sale of discontinued operations

Quarterly and Year-to-date analysis:



| |  | Gain from the sale of discontinued operations was $4.2 million due to the
sale of the portfolio of Premiers business in Bermuda in 2002.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------

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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;
however, payment of dividends will require approval from SCOR Life U.S.
Insurance Company, a reinsurer of Standard Life.

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

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

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 the last half of 2002. We do not expect tax
sharing payments in 2003 to be material.

Estimated Cash Required in 2003

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

Mortgage Payable:

The following are characteristics of our mortgage payable agreement at
June 30, 2003:



| |  |  | outstanding balance of $6.9 million;
| | - |  | ------------------------------------



| |  |  | weighted average interest rate of 7.33% per annum;
| | - |  | --------------------------------------------------



| |  |  | principal and interest payments: $57,000 per month through December, 2011;
| | - |  | --------------------------------------------------------------------------



| |  |  | interest payments required in 2003 based on current balances will be $.5 million;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | note may be prepaid on or before January, 2005 at 105% and declining to 101% after December, 2008.
| | - |  | --------------------------------------------------------------------------------------------------

Notes Payable:

The following are characteristics of our promissory note at June 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 June 30, 2003:



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



| |  |  | weighted average interest rate of 4.76%;
| | - |  | ----------------------------------------



| |  |  | principal payments: The remaining principal payment of $3.75 million is due in September 2003.
| | - |  | ----------------------------------------------------------------------------------------------



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



| |  |  | interest payments required in 2003 based on current balances will be $.1 million.
| | - |  | ---------------------------------------------------------------------------------

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

_________________________

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



| |  |  | outstanding balance of $11.0 million;
| | - |  | -------------------------------------



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



| |  |  | principal due October 2007;
| | - |  | ---------------------------



| |  |  | interest payments required in 2003 based on current balances will be $1.1 million.
| | - |  | ----------------------------------------------------------------------------------

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

The following are characteristics of our Trust Preferred securities at
June 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 $4.5 million and $1.6 million for the second quarter of 2003 and 2002,
respectively. At August 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 $3.4 million and $2.0 million for the first six months of 2003 and 2002,
respectively.

Liquidity of Insurance Operations

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

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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 June 30, 2003,
Standard Life had statutory capital and surplus for regulatory purposes of
$58.3 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 $92.8
million for the second quarter of 2003 and $228.8 million for the second
quarter of 2002. If the need arises for cash, which is not readily available,
additional liquidity could be obtained from the sale of invested assets.

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STANDARD MANAGEMENT CORPORATION AND SUBSIDIARIES

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Forward-looking Statements

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



| |  | General economic conditions and other factors, including prevailing interest rate levels, and stock market performance, which
may affect our ability to sell products, the market value of our investments and the lapse rate and profitability of our
policies.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our ability to achieve anticipated levels of operational efficiencies at recently acquired companies, as well as through other
cost-saving initiatives.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Customer response to new products, distribution channels and marketing initiatives.
|- |  | -----------------------------------------------------------------------------------



| |  | Mortality, morbidity and other factors which may affect the profitability of our insurance products.
|- |  | ----------------------------------------------------------------------------------------------------



| |  | Changes in the federal income tax laws and regulation which may affect the relative tax advantages of some of our products.
|- |  | ---------------------------------------------------------------------------------------------------------------------------



| |  | Increasing competition in the sale of our products.
|- |  | ---------------------------------------------------



| |  | Regulatory changes or actions, including those relating to regulation of financial services affecting bank sales and
underwriting of insurance products, regulation of the sale, underwriting and pricing of insurance products.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The availability and terms of future acquisitions, 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

_________________________




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 2.       CHANGES IN SECURITIES AND USE OF PROCEEDS

On March 25, 2003, we issued 200,000 shares of common stock in exchange for all
of the member units of Medical Care & Outcomes, LLC. We issued the securities
to 13 persons pursuant to a private offering on reliance in the exemption from
registration under the Securities Act of 1933 provided by Section 4(2). An
appropriate legend was affixed to the share certificates issued in the
transition.




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

At our Annual Meeting of Stockholders held on June 11, 2003, the following
individuals were elected to the Board of Directors:

Shares For
    
    Shares WithheldStephen M. Coons
    
    
    6,189,288
    
    
    
    349,548Martial R. Knieser
    
    
    6,164,819
    
    
    
    374,017P.B. (Pete) Pheffer
    
    
    6,159,230
    
    
    
    379,606James H. Steane II
    
    
    6,454,420
    
    
    
    84,416


A total of 6,538,836 shares were present in person or by proxy at the Annual
Meeting of Stockholders.




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

(a)    Exhibits

31.1
    
    Rule 13a  14(a)/15d  14(a) Certification by Chief Executive Officer31.2
    
    Rule 13a  14(a)/15d  14(a) Certification by Chief Financial Officer32.1
    
    Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 135032.2
    
    Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350


(b)    Reports on Form 8-K

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

On May 14, 2003, we filed a report on Form 8-K with the Commission
related to the announcement of our financial results for the first quarter of
2003.

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

_________________________




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: August 14, 2003

STANDARD 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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