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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

Commission file number 0-20882

Standard Management Corporation

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value

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 [X] No [  ]

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

The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on February 28, 2003 as reported on The NASDAQ Stock Market, was approximately $25.8 million. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of February 28, 2003 Registrant had outstanding 7,857,089 shares of Common Stock.

Documents Incorporated by Reference:
Portions of the Registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders will be incorporated by reference into Part III of this Form 10-K.

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PART I

     As used in this report, unless the context otherwise clearly requires, “we”, “our”, “us”, “Standard Management”, and the “Company” refer to Standard Management Corporation. All financial information contained in this report is presented in accordance with generally accepted accounting principles (“GAAP”) unless otherwise specified.

Item 1.       BUSINESS OF STANDARD MANAGEMENT

     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.

     On May 24, 2002, we signed an agreement to sell 100% of the shares of Premier Life (Luxembourg) S.A. (“Premier Life (Luxembourg)”) and the portfolio of Premier Life (Bermuda), Ltd. (“Premier Life (Bermuda)”) (collectively our “International Operations”) to Winterthur Life, a division of Credit Suisse Group. On August 14, 2002, we closed the sale of our Bermuda business and received net proceeds of $6.5 million. On September 17, 2002, we closed the sale of Premier Life (Luxembourg) and received net proceeds of $19.2 million. Accordingly, the International Operations have been reflected as discontinued operations in our Consolidated Financial Statements included in this report.

     Operating Segments

     We conduct and manage our business through the following operating segments reflecting the geographical locations of principal subsidiaries:

     Domestic Operations (Continuing operations) includes the following subsidiaries at December 31, 2002:

	•		Standard Life Insurance Company of Indiana (“Standard Life”), our principal insurance subsidiary, was organized in 1934 as an Indiana domiciled life insurer. It is licensed to write new business or service existing business in the District of Columbia and all states except New York and New Jersey. Standard Life offers deferred annuities, equity-indexed annuities, and single premium immediate annuities. Effective August 2001, we suspended active marketing of life insurance products indefinitely, however we continue to manage our in force life business. Standard Life also generates cash flow and income from closed blocks of in force life insurance and annuities. Standard Life has a rating of “ B+” (Very Good) from the rating agency A.M. Best Company, Inc. (“A.M. Best”).
	•		Dixie National Life Insurance Company (“Dixie Life”), a 99.5% owned subsidiary of Standard Life, was organized in 1965 as a Mississippi domiciled life insurer. Dixie Life is licensed in 22 states and administers life insurance products, primarily “burial expense” policies. Effective January 1, 1999, we ceased selling new business through Dixie Life, which has a rating of “B” (Fair) by A.M. Best.
	•		Savers Marketing Corporation (“Savers Marketing”) markets Standard Life’s products through financial institutions and independent agents. Savers Marketing also receives administrative, marketing and commission fees for services provided to unaffiliated companies.
	•		U.S. Health Services Corporation (“U.S. Health Services”) was organized in 2002 under the laws of the State of Delaware. U.S. Health Services develops and distributes retail and third party reimbursed products and services through direct to consumer as well as institutional channels.

     International Operations (Discontinued operations) included the following insurance subsidiaries:

	•		Standard Management International S.àr.l. (“Standard Management International”) (formerly Standard Management International S.A.), a wholly owned subsidiary of Standard Management, is a holding company organized under Luxembourg law with its registered office in Luxembourg.
	•		Premier Life (Luxembourg) primarily offered unit-linked products throughout the European Union.
	•		Premier Life (Bermuda) primarily offered unit-linked products in markets throughout the world.

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Marketing

     Domestic Marketing

     General: Our agency force, of approximately 10,250 independent general agents, was organized to provide a lower cost alternative to the traditional captive agency force. These agents distribute a full line of annuity products issued by Standard Life. We believe that both agents and policy owners value the service we provide. We assist agents in 1) submitting and processing policy applications, 2) training and education, and 3) marketing support.

     Standard Life offers a full portfolio of annuity products selected on the basis of their competitive position, profitability and likely consumer acceptance. Such portfolio includes single and flexible premium deferred annuities, equity-indexed annuities and single premium immediate annuities. Standard Life does not offer variable annuity products.

     Each general agent operates his own agency and is responsible for all expenses of the agency. The general agents are compensated directly by Standard Life, which performs issuance, underwriting and accounting functions related to the policy. Standard Life is not dependent on any one agent or agency for any substantial amount of its business. No single agent accounted for more than 3% of Standard Life’s annual annuity sales in 2002, and the top twenty individual agents accounted for approximately 20% of Standard Life’s annuity sales in 2002. At December 31, 2002, approximately 66% of Standard Life’s independent agents were located in Indiana, California, Florida, Ohio and Michigan with the balance distributed across the country. Standard Life is attempting to increase the number and geographic diversity of its agents.

     Standard Life does not have exclusive agency agreements with its agents. Therefore, our management believes most of these agents sell similar products for other insurance companies, which could result in a sales decline if Standard Life’s products were to become relatively less competitive.

     Savers Marketing distributes life, annuity and health products through financial institutions and independent general agents. Savers Marketing has approximately 2,500 active brokers and is not dependent on any one broker or agency for any substantial amount of its business. Each broker operates independently and is responsible for all of his or her expenses. Savers Marketing employs three regional managers, who are responsible for personally initiating and maintaining direct communications with brokers and are responsible for the recruitment and training of all new brokers.

     Savers Marketing designed and began to market flexible spending accounts and COBRA services to employer groups in the fall of 2001. Payroll administration was added to the portfolio of administrative services in May 2002.

     U.S. Health Services distributes pharmaceutical products and services to consumers, various institutional operations, point of care programs and contract repackaging services. The markets in which U.S. Health Services competes are generally broad based and competitive. The principal means of competition include product availability, service and competitive pricing. The Company is utilizing direct-to-consumer advertising for distribution of pharmaceutical products.

Currently Marketed Products

     We primarily market deferred annuities, equity-indexed annuities, and single premium immediate annuities domestically. The following table sets forth the amounts and percentages of our net deposits received from currently marketed products for the year ended December 31 (in thousands):

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Domestic Products

     Deferred Annuities. Standard Life markets both single and flexible premium deferred annuities, which provide for an initial deposit by the owner. Flexible premium products also provide for optional additional deposits, the time and amount of which are at the discretion of the owner. Standard Life credits the account of the owner with earnings at interest rates that are revised periodically until the maturity date. This accumulated value is tax deferred. Revisions to interest rates on deferred annuities are restricted by an initial crediting rate guaranteed for a specific period of time, usually one year, and a minimum crediting rate guaranteed for the term of the deferred annuity, which is typically 3%. At maturity, the owner can elect a lump sum cash payment of the accumulated value or one of the various payout options available. Standard Life’s deferred annuities also typically provide for penalty-free partial withdrawals of up to 10% annually of the accumulation value after the owner has held the deferred annuity for more than 12 months. In addition, the owner may surrender the deferred annuity at any time before the maturity date and receive the accumulated value, less any surrender charge then in effect for that contract. To protect holders of deferred annuities from a sharp reduction in the credited interest rate after a deferred annuity is issued, Standard Life permits the deferred annuity holder of certain annuities to surrender the annuity during a specified period without incurring a surrender charge if the renewal-crediting rate is below a stated level. This stated level of interest is referred to as the “bail-out rate” and is typically below the original crediting rate, but above the minimum guaranteed crediting rate. Certain products also contain a market value adjustment feature, whereby a policyholder’s surrender value is adjusted for changes in the interest rate environment. This feature protects us against the risk of policyholder surrender when asset values are depressed.

     As of January 1, 2003, the crediting rates available on Standard Life’s currently marketed deferred annuities ranged from 3.0% to 7.55% with most new issues having an interest rate with a one-year guarantee period. A series of annuity products introduced in 2000 have their interest rate guaranteed for an initial period of 5 to 10 years. After the initial period, the crediting rate may be changed periodically, subject to a minimum guaranteed rate of 3.0%. As of January 1, 2003, interest crediting rates after the initial guarantee period ranged from 3.0% to 5.25%. The surrender charge is initially 7% to 15% of the contract value depending on the product and decreases over the applicable surrender charge period of 5 to 13 years. Certain currently marketed products carry a bailout rate for the first 2 to 5 years after issuance; as of January 1, 2003, the bailout rate for such products ranged from 3.0% to 4.5%. As of December 31, 2002, Standard Life had 14,926 currently marketed deferred annuity contracts in force.

     Equity-indexed Annuities. In response to consumers’ desire for alternative investment products with returns linked to common stocks, Standard Life introduced a line of equity-indexed annuity products in 1998. The annuity’s contract value is equal to the premium paid, increased for returns based on the change in the Standard & Poor’s 500 Index (“S&P 500 Index”) and/or the Dow Jones Industrial Average Index (“DJIA”). Standard Life’s equity-indexed annuities apply index credits to policyholders annually, so that a given year’s equity credits are locked in, and cannot be reduced by future declines in the index. Two basic index crediting methods are used for Standard Life’s equity-indexed annuities, “participation rate” crediting and “spread/cap” crediting. For participation rate products, a percentage (the participation rate) of the change in the index accrues to the contract value. For spread/cap products, increases in the index up to the spread amount do not accrue to the contract value, but above the spread, the contract is credited the full amount of the increase in the index up to the limit of the cap. Standard Life has the discretionary ability to annually change the participation rates and spreads/caps on its products. The minimum guaranteed values are equal to between 75% and 85% of first year premiums and between 87.5% and 90% of renewal premiums collected for equity-indexed annuities, plus interest credited at an annual rate of 3%. The annuities provide for penalty-free withdrawals of up to 10% in each year after the first year of the annuity’s term. Other withdrawals from the product are subject to a surrender charge. Standard Life purchases S&P’s 500 Index or DJIA Index Call Options to hedge potential increases to policyholder benefits resulting from increases in the Index to which the product’s return is linked. As of December 31, 2002, Standard Life had 7,726 currently marketed equity-indexed contracts in force.

     Single Premium Immediate Annuities. Standard Life offers single premium immediate annuities, which are purchased with a one time premium deposit at the time of issuance. In exchange for a one time premium deposit, Standard Life begins an agreed upon payout stream shortly after issuance of the contract consisting of principal plus accumulated interest credited to the annuity. Payout is guaranteed for the term of the contract. A new single premium immediate annuity product was introduced in 2000, which resulted in a significant increase in sales for 2000, 2001, and 2002. As of December 31, 2002, Standard Life had 3,565 currently marketed single premium immediate annuity contracts in force.

     Other Domestic Product Information. Annuity sales increased in 2002 primarily due to greater productivity per agent and an expanded geographic presence.

     Individual annuity sales within the United States have nearly tripled from $54 billion in 1990 to more than $141 billion in 2001, according to the American Council of Life Insurers. The individual annuity market, which is one of our primary targets, comprises virtually all of our domestic sales and 95% and 80% of total sales in 2002 and 2001, respectively.

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As the 76 million “baby boomers” born from 1946 through 1964 grow older, demand for insurance products is expected to grow. We believe that those seeking adequate retirement incomes will become less dependent on Social Security and their employers’ retirement programs and more dependent upon their own financial resources. Annuities currently enjoy an advantage over certain other saving mechanisms because the annuitant receives a tax-deferred accrual of interest on the investment during the accumulation period.

Our gross domestic sale percentages by U.S. geographical region are summarized as follows:

     Former Products (“Closed Blocks”)

     We also generate cash flow and income from our closed blocks of in force life insurance and annuities. Closed blocks consist of in force life insurance and annuities that are not currently being marketed. The closed block designation does not have legal or regulatory significance and there are no restrictions on their assets or future profits. The premiums received on the closed blocks are primarily from the ordinary and universal life business. Closed block premiums typically decline over extended periods of time as a result of policy lapses, surrenders and expiries.

     Annuities. Our closed blocks of deferred annuities consist primarily of flexible premium deferred annuities and a small amount of single premium deferred annuities, which, unlike flexible premium deferred annuities, do not provide for additional deposits. As of January 1, 2003, these deferred annuities had crediting rates ranging from 3.0% to 5.5% and guaranteed minimum crediting rates ranging from 3.0% to 5.5%. The crediting rate may be changed periodically. The contract owner is permitted to withdraw all or part of the accumulation value. Our closed blocks of annuities include payout annuities which consist of annuities in which benefits are paid out over a specified time period. Payout annuities cannot be terminated by surrender or withdrawal. Interest rates used in determining payout annuities range from 3.0% to 7.0% and cannot be changed. At December 31, 2002, we had 11,977 annuity contracts in force for closed blocks.

     Traditional Life. Our closed blocks of traditional life business include several types of participating and non-participating, whole life and term life insurance policies. Face amounts vary, but retained death benefits are $150,000 or less per life. Traditional life insurance products involve fixed premium payments made over time, with the stated death benefit paid in full upon the death of the insured. The whole life policy combines the death benefit with a forced savings plan. Premiums remain level over the life of the policy, with the policyholder prefunding during the early years of coverage when risk of death is low. Over time, whole life policies begin to accrue a cash value, which can be made available to the policyholder net of taxes and withdrawal penalties. The term policy provides benefits only as long as premiums are paid. At December 31, 2002, we had 40,009 traditional life policies in force for closed blocks.

     Universal Life. Our closed blocks of universal life business include flexible premium universal life policies which provide for periodic deposits, interest credits to account values and charges to the account values for mortality and administrative costs. As of January 1, 2003, the interest rate on existing flexible premium universal life policies was 4% to 5% with a guaranteed interest rate of 4.0% to 5.0%. At December 31, 2002, we had 10,782 universal life policies in force for closed blocks.

     Former International Products (“Discontinued operations”)

     Unit-linked Assurance Products. Standard Management International wrote unit-linked assurance products, which are similar to U.S. produced variable life products. Separate account assets and liabilities were maintained primarily for the exclusive benefit of these contracts, where benefits on surrender and maturity are not guaranteed. They generally represent

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funds held in accounts to meet specific investment objectives of policyholders who bear the investment risk. Products include 1) single premium unit-linked contracts, with publicly traded investment options, 2) annual premium unit-linked contracts, with publicly traded investment options and 3) personal portfolio contracts, which include private stock and limited market investment options. Investment income and investment gains and losses within the separate accounts accrue directly to the policyholders. The fees received by Standard Management International for administrative and contract holder maintenance services performed for these separate accounts are included in our Consolidated Statement of Operations. Mortality risk on these products is minimal.

     In the past Standard Management International also sold non-linked investment contracts, universal life policies, and to a lesser extent, traditional life policies. The investment contracts are mainly short-term single premium endowments or payout annuities under which fixed benefits are paid to the policyholder. The universal life contracts are mainly regular premium and single premium endowment. The benefits payable to the policyholders are directly linked to the investment performance of the underlying assets. Non-linked products represent less than 2% of Standard Management International’s product liabilities.

     Other International Product Information. The decrease in deposits from unit-linked products in 2002 was primarily due to the sale of the International Operations in 2002.

     See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Product Profitability”.

Operations

     Our principal administrative departments for our insurance subsidiaries include financial, new business and policyholder services, and information technology services (“IT”) departments. The financial department provides accounting, budgeting, tax, investment, financial reporting and actuarial services and establishes cost control systems. The new business department reviews policy applications, and issues and administers our policies. The policyholder services department authorizes disbursements related to claims and surrenders. The IT department oversees and administers our information processing systems.

     Our administrative departments use a common integrated policy administration system that permits efficiency and cost control. Our IT system services approximately 92,000 active policies at December 31, 2002.

Underwriting

     Premiums charged on life insurance products are based in part on assumptions about the incidence and timing of insurance claims. When we issued life insurance business, we adopted and followed underwriting procedures for traditional and universal life insurance policies. Life insurance does not allow for underwriting after a policy is issued. Since we no longer issue new life insurance policies, life insurance underwriting activities are minimal and occur only when a policyholder requests a change which is subject to underwriting. Underwriting with respect to annuities is minimal.

     Traditional underwriting procedures are not applied to policies acquired in blocks. In these cases, we review the mortality experience for recent years and compare actual experience to that assumed in the actuarial projections for the acquired policies.

Investments

     Investment activities are an integral part of our business as the investment income of our insurance subsidiaries is a significant part of total revenues. Profitability is significantly affected by spreads between interest earned on invested assets and rates credited on insurance liabilities. Substantially all credited rates on deferred annuities may be changed at least annually. For the year ended December 31, 2002, the weighted average net yield of our investment portfolio was 6.53% and the weighted average interest rate credited on our interest-sensitive liability portfolio, excluding liabilities related to separate accounts and equity indexed annuities, was approximately 4.46% per annum for an average investment spread of 207 basis points at December 31, 2002, compared to 240 basis points at December 31, 2001. The decline in the investment spread is primarily driven by the impact and significance of our 2002 annuity deposits and by the impact of realized investment losses. Annuity deposits received in 2002 were invested during a rapidly declining interest rate environment, resulting in reduced earned rates on new investments and on the asset portfolio as a whole. In this environment, we were unable to adjust crediting rates quickly enough, on both new sales and renewal business, to maintain prior year spreads. In addition, realized investment gains and losses resulted in reduced investment income during 2002. Future increases or decreases in interest

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rates may increase or decrease the average interest rate spread between investment yields and interest rates credited on insurance liabilities, which in turn may have a beneficial or adverse effect on our future profitability. Sales of fixed maturity securities that result in investment gains may also tend to decrease future average interest rate spreads. State insurance laws and regulations prescribe the types of permitted investments and limit their concentration in certain classes of investments.

     We balance the duration of our invested assets with the expected duration of benefit payments arising from insurance liabilities. The “duration” of a security is a measure of a security’s price sensitivity to changes in market interest rates. The option-adjusted duration of fixed maturity securities and short-term investments for our U.S. insurance subsidiaries was 3.9 and 5.1 at December 31, 2002 and 2001, respectively.

     Our investment strategy is guided by strategic objectives established by the Investment Committee of the Board of Directors. Our major investment objectives are to: 1) maximize book investment income without exposing surplus to excessive volatility, 2) match the anticipated duration of investments with the anticipated duration of policy liabilities through our asset-liability cash flow management process, 3) maximize our company objectives for tax considerations and realized gain/loss recognition, and 4) provide sufficient liquidity to meet cash requirements with minimum sacrifice of investment yield. Consistent with this strategy, we invest primarily in securities of the U.S. government and its agencies, investment grade utilities, corporate debt securities and collateralized mortgage obligations. When opportunities arise, below investment grade securities may be purchased; however, protection against default risk is a primary consideration. We will not invest more than 7% of our bond portfolio in below investment grade securities.

     The National Association of Insurance Commissioners (“NAIC”) assigns quality ratings to securities called “NAIC Designations” which are used by insurers when preparing their annual statements. The NAIC assigns ratings to publicly traded and privately-placed securities. The ratings assigned range from Class 1 to Class 6, with a rating in Class 1 being of the highest quality. The following table sets forth the quality of our fixed maturity securities as of December 31, 2002, classified in accordance with the ratings assigned by the NAIC:

     Deutsche Investment Management Americas Inc. manages our domestic fixed maturity securities, subject to the direction of our Investment Committee.

     Approximately 46% of our fixed maturity securities at December 31, 2002 are comprised of mortgage-backed securities that include collateralized mortgage obligations and mortgage-backed pass-through securities. Approximately 34% of the book value of mortgage-backed securities in our portfolio are backed by the full faith and credit of the U.S. government as to the full amount of both principal and interest and 38% are backed by an agency of the U.S. government (although not by the full faith and credit of the U.S. government). We closely monitor the market value of all investments within our mortgage-backed portfolio.

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     The following table summarizes our mortgage-backed securities at December 31, 2002 (in thousands):

     The fair values for mortgage-backed securities were determined from broker-dealer markets, internally developed methods and nationally recognized statistical rating organizations.

     Certain mortgage-backed securities are subject to significant prepayment risk, since, in periods of declining interest rates, mortgages may be repaid more rapidly than scheduled as individuals refinance higher rate mortgages to take advantage of the lower current rates. As a result, holders of mortgage-backed securities may receive large prepayments on their investment, which cannot be reinvested at an interest rate comparable to the rate on the prepaying mortgages. Planned and target amortization class securities are designed to amortize in a more predictable manner by shifting the primary risk of prepayment of the underlying collateral to investors in other tranches (“support classes”). Mortgage-backed pass-through securities, “sequential” and support class collateralized mortgage obligations, which comprised the remaining 91% of the book value of our mortgage-backed securities at December 31, 2002, are more sensitive to prepayment risk.

Reserves

     Our insurance subsidiaries have established and carry as liabilities in their financial statements actuarially determined liabilities to satisfy their respective annuity contract and life insurance policy obligations.

     Insurance policy liabilities for deferred annuities, universal life policies and international unit-linked products are equal to the full account value that accrues to the policyholder (cumulative premiums less certain charges, plus interest credited) with credited interest rates ranging from 3.0% to 11.5% in 2002 and 3.0% to 12.5% in 2001.

     Insurance policy liabilities for equity-indexed annuity products are computed in accordance with Statement of Financial Accounting Standards No. 133,” Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), and consist of a book value liability for benefits guaranteed in the contract, combined with a market value liability for equity-linked benefits of the contract.

     We perform periodic studies to compare current experience for mortality, interest and lapse rates with projected experience used in calculating the deferred annuity and universal life insurance policy liabilities. Differences are reflected currently in earnings for each period. Historically, we have not experienced significant adverse deviations from our assumptions.

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     Insurance policy liabilities for traditional life insurance contracts are computed using the net level premium method on the basis of assumed investment yields, mortality and withdrawals, which were appropriate at the time the policies were issued. Assumed investment yields are based on interest rates ranging from 6.2% to 7.5%. Mortality is based upon various actuarial tables, principally the 1965-1970 or the 1975-1980 Select and Ultimate Table. Withdrawals are based upon our experience and vary by issue age, type of coverage, and duration.

Reinsurance

     Consistent with the general practice of the life insurance industry, we have reinsured portions of the coverage provided by our insurance products with other insurance companies under agreements of indemnity reinsurance. Our policy risk retention limit on the life of any one individual does not exceed $150,000.

     Indemnity reinsurance agreements are intended to limit a life insurer’s maximum loss on a particular risk or to obtain a greater diversification of risk. Indemnity reinsurance does not discharge the primary liability of the original insurer to the insured, but it is the practice of insurers for statutory accounting purposes (subject to certain limitations of state insurance statutes) to account for risks which have been reinsured with other approved companies, to the extent of the reinsurance, as though they are not risks for which the original insurer is liable. However, under Statement of Financial Accounting Standards No. 113 (“SFAS 113”), “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts”, these amounts are added back to policy reserves and recorded as amounts due from reinsurers.

     Reinsurance ceded on life insurance policies to unaffiliated companies in 2002, 2001 and 2000, excluding financial reinsurance agreements, represented 49.9%, 49.4% and 45.3%, respectively, of our gross combined individual life insurance in force at the end of such years. Reinsurance assumed in the normal course from unaffiliated companies in 2002, 2001 and 2000 represented 11.8%, 11.0% and 8.7%, respectively, of our net combined individual life insurance in force.

     The following is reinsurance ceded information for our in force life insurance policies at December 31, 2002 (in thousands):

     Reinsured life insurance in force at December 31, 2002 is ceded to insurers rated “A” (“Excellent”) or better by A.M. Best. Historically, we have not experienced material losses in collection of reinsurance receivables.

     Our largest annuity reinsurer at December 31, 2002, SCOR Life U.S. Insurance Company (“SCOR Life”), represented $20.1 million, or 52% of our total reinsurance recoverable and is rated “A-” (Excellent) by A.M. Best. SCOR Life limits dividends by Standard Life to Standard Management or affiliated companies if its adjusted surplus is less than 5.5% of admitted assets or $78.9 million at December 31, 2002.

     “Admitted assets” are defined by the NAIC as “probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events” which may be included in an insurance company’s balance sheet. Some assets or portions of assets may be considered “nonadmitted” because they do not conform to the laws and regulations of various states. Therefore, certain assets which normally would be accorded value in noninsurance corporations are accorded no value and thus reduce the reported surplus of the insurance company.

     Standard Life’s adjusted surplus was $59.3 million on December 31, 2002, therefore, SCOR Life’s approval will be required prior to the payment of dividends to Standard Management in 2003.

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Acquisition Strategy, Recent Acquisitions and Divestiture

     Acquisition Strategy

     A principal component of our strategy prior to 1999 was to grow through the acquisition of life insurance companies and blocks of in force life insurance and annuities. Although our focus has been on internal organic growth since 1999, we regularly investigate acquisition opportunities in the life insurance industry that complement or are otherwise strategically consistent with our existing business. Any decision to acquire a block of business or an insurance company will depend on a favorable evaluation of various factors. We believe that availability of blocks of business in the marketplace will continue in response to ongoing industry consolidation, risk-based capital requirements and other regulatory and rating agency concerns. We currently have no plans or commitments to acquire any specific insurance business or other material assets.

     We have information systems and administrative capabilities necessary to add additional blocks of business without a proportional increase in operating expenses. In addition, we have developed management techniques for reducing or eliminating the expenses of the companies we acquire through the consolidation of their operations. Such techniques include reduction or elimination of overhead, including the acquired company’s management, staff and home office, elimination of marketing expenses and, where appropriate, the substitution of Standard Life’s distribution network for the acquired company’s current distribution system, and the conversion of the acquired company’s data processing operations to our system.

     We typically acquire companies or blocks of business through the purchase or exchange of shares. This method is also used for assumption reinsurance transactions. Any future acquisitions may be subject to certain regulatory approvals, policyholder consents and stockholder approval.

     In 2002, our acquisition strategy included acquiring companies to distribute retail and third party reimbursed products and services. See “Recent Acquisitions” below.

     In addition, in 2002, we capitalized on our previous investment by selling our International Operations which allowed us to not only create a new subsidiary, U.S. Health Services, but also to fund current growth in our domestic insurance operations.

     Recent Acquisitions

     During 2002, we acquired, for cash, the pharmaceutical business of HomeMed Channel, Inc. and PCA, LLC. In addition, in December 2002, we purchased assets of Prescriptions by Mail, Inc., which was financed primarily by a promissory note. All three acquisitions were accounted for under the purchase method of accounting. In 2002, U.S. Health Services, a wholly owned subsidiary of Standard Management Corporation, was formed to distribute retail and third party reimbursed products and services through direct to consumer as well as institutional channels.

     Divestiture

     In 2002, we sold the International Operations which consisted of 100% of the shares in Premier Life (Luxembourg) and the portfolio of Premier Life (Bermuda) to Winterthur Life, a division of Credit Suisse Group, resulting in a gain from the sale of discontinued operations of $6.9 million. With the net proceeds received from the sale, we made a $15 million capital contribution to Standard Life, repaid $3.75 million in debt, and retained the remaining $6.25 million for general corporate purposes.

Competition

     The life insurance industry is highly competitive and consists of a large number of both stock and mutual insurance companies, many of which have substantially greater financial resources, broader and more diversified product lines and larger staffs than those possessed by Standard Management. According to the American Council of Life Insurers, there were approximately 1,225 life insurance companies in the United States, which may offer insurance products similar to ours. Competition within the life insurance industry occurs on the basis of, among other things, 1) product features such as price and interest rates, 2) perceived financial stability of the insurer, 3) policyholder service, 4) name recognition and 5) ratings assigned by insurance rating organizations.

     We must also compete with other insurers to attract and retain the allegiance of agents. We believe that competition centers more on the strength of the agent relationship rather than on the insurer’s name recognition to the customer. We offer

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competitive products, competitive commission structures, internet based agent services, prompt policy issuance and responsive policyholder service and believe we are successful in attracting and retaining agents.

     Competition also is encountered from the expanding number of banks, securities brokerage firms and other financial intermediaries which are marketing insurance products and which offer competing products such as savings accounts and securities. We began distributing annuities through financial institutions as a result of the acquisition of Savers Marketing in March 1998. The passage, by Congress, of the Gramm-Leach-Bliley Financial Services Modernization Act (“GLB Act”) has expanded competitive opportunities for non-insurance financial services companies.

     Financial institutions, marketing companies, agents who market insurance products and policyholders use the ratings of an insurer as one factor in determining which insurer’s annuity to market or purchase. Standard Life and Dixie Life have a rating of “B+” and “B”, respectively, by A.M. Best. A rating of “B+” is assigned by A.M. Best to companies that, in their opinion, have achieved very good overall performance when compared to the standards established by A.M. Best, and have a good ability to meet their obligations to policyholders over a long period of time. A rating of “B” is assigned by A.M. Best to companies that, in their opinion, have achieved good overall performance when compared to the standards established by A.M. Best. According to A.M. Best, these companies generally have an adequate ability to meet their obligations to policyholders, but their financial strength is vulnerable to unfavorable changes in underwriting or economic conditions. In evaluating a company’s financial and operating performance, A.M. Best reviews the company’s profitability, leverage and liquidity as well as the company’s book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its reserves and the experience and competence of its management. A.M. Best’s ratings are based upon factors relevant to policyholders, agents, insurance brokers and intermediaries and are not directed to the protection of investors. Generally, rating agencies base their ratings on information furnished to them by the issuer and on their own investigations, studies and assumptions by the rating agencies. There is no assurance that any particular rating will continue for any given period of time or that it will not be changed or withdrawn entirely if, in the judgment of the rating agency, circumstances so warrant. Although a higher rating by A.M. Best or another insurance rating organization could have a favorable effect on Standard Life’s business, management believes that it is able to compete on the basis of their competitive crediting rates, asset quality, strong relations with its independent agents and the quality of service to its policyholders.

     The pharmaceutical industry is highly competitive, both regionally and nationally. We must compete with other retail pharmacies and national mail order/internet pharmacies, which distribute prescription and non-prescription (over the counter) products. We believe we offer pharmaceutical products at competitive prices with prompt service and are successful in maintaining customer satisfaction.

Federal Income Taxation

     We file a consolidated return with our non insurance subsidiaries for federal income tax purposes, and beginning January 1, 2001 with our insurance subsidiaries, Standard Life and Dixie Life. At December 31, 2002, we have a net capital loss carryforward of approximately $2.2 million, which expires in 2006.

     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. In 2002, Savers Marketing paid $.1 million and Standard Management International paid $.6 million in accordance with this agreement. In 2001, Savers Marketing paid $.4 million and Standard Management International recovered $.1 million in accordance with this agreement. Standard Management International terminated its participation in this agreement with the sale of our International Operations.

     The products marketed and issued by Standard Life generally provide the policyholder with an income tax advantage, as compared to other saving investments such as certificates of deposit and bonds, in that income taxation on the increase in value of the product is deferred until receipt by the policyholder. With other savings investments, the increase in value is taxed as earned. Life insurance benefits that accrue prior to the death of the policyholder, and annuity benefits, are generally not taxable until paid, and life insurance death benefits are generally exempt from income tax. The tax advantage for life insurance and annuity products is provided in the Internal Revenue Code of 1986, as amended, and is generally followed in all states and other U.S. taxing jurisdictions. Accordingly, it is subject to change by Congress and the legislatures of the respective taxing jurisdictions.

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Inflation

     A primary direct effect of inflation is an increase to our operating expenses. A large portion of our operating expenses consists of salaries, which are subject to wage increases at least partly affected by the rate of inflation.

     The rate of inflation also affects us indirectly. To the extent that the government’s economic policy to control the level of inflation results in changes in our interest rates, our new sales of annuity products, investment income and withdrawal rates are affected. Changes in the level of interest rates also have an effect on interest spreads, as investment earnings are reinvested.

Regulatory Factors

     Our insurance subsidiaries are subject to significant regulation by the insurance regulatory authorities in the jurisdictions in which they are domiciled and the insurance regulatory bodies in the other jurisdictions in which they are licensed to sell insurance. The purpose of such regulation is primarily to ensure the financial stability of insurance companies and to provide safeguards for policyholders rather than to protect the interest of stockholders or debtholders. The insurance laws of various jurisdictions establish regulatory agencies with broad administrative powers relating to 1) the licensing of insurers and their agents, 2) the regulation of trade practices, 3) management agreements, 4) the types of permitted investments and maximum concentration, 5) deposits of securities, 6) the form and content of financial statements, 7) premiums charged by insurance companies, 8) sales literature and insurance policies, 9) accounting practices and the maintenance of specified reserves and 10) capital and surplus. Our insurance subsidiaries are required to file detailed periodic financial reports with supervisory agencies in certain jurisdictions.

     Most states have also enacted legislation regulating insurance holding company activities including acquisitions, extraordinary dividends, terms of surplus debentures, terms of affiliate transactions and other related matters. The insurance holding company laws and regulations vary by state, but generally require an insurance holding company and its insurance company subsidiaries licensed to do business in the state to register and file certain reports with the regulatory authorities, including information concerning capital structure, ownership, financial condition, certain intercompany transactions and general business operations. State holding company laws also require prior notice or regulatory agency approval of certain material intercompany transfers of assets within the holding company structure. Recently a number of state regulators have considered or have enacted legislative proposals that change, and in many cases increase, the authority of state agencies to regulate insurance companies and holding companies. For additional information on state laws regulating insurance company subsidiaries, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and Note 12 to our Consolidated Financial Statements.

     Under Indiana insurance law, Standard Life may not enter into certain transactions, including management agreements and service contracts, with members of its insurance holding company system, including Standard Management, unless Standard Life has notified the Indiana Department of Insurance of its intention to enter into these transactions and the Indiana Department of Insurance has not disapproved of them within the period specified by Indiana law. Among other things, these transactions are subject to the requirement that their terms and charges or fees for services performed be fair and reasonable.

     The Indiana insurance laws and regulations require that the statutory surplus of Standard Life following any dividend or distribution be reasonable in relation to its outstanding liabilities and adequate to its financial needs. The Indiana Department of Insurance may bring an action to enjoin or rescind the payment of a dividend or distribution by Standard Life that would cause its statutory surplus to be unreasonable or inadequate under this requirement.

     Most states, including Indiana, require administrative approval of the acquisition of 10% or more of the outstanding shares of an insurance company incorporated in the state or the acquisition of 10% or more of the outstanding shares of an insurance holding company whose insurance subsidiary is incorporated in the state. The request for approval must be accompanied by detailed information concerning the acquiring parties and the plan of acquisition. The acquisition of 10% of these shares is generally deemed to be the acquisition of “control” for the purpose of the holding company statutes. However, in many states the insurance authorities may find that “control” in fact does or does not exist in circumstances in which a person owns or controls either a lesser or a greater amount of securities.

     In some instances state regulatory authorities require deposits of assets for the protection of either policyholders in those states or for all policyholders. At December 31, 2002, securities of $10.5 million or approximately .75% of the book value of our U.S. insurance subsidiaries’ invested assets were on deposit with various state treasurers or custodians. These deposits must consist of securities that comply with the standards that the particular state has established.

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     In recent years, NAIC, and state insurance regulators have examined existing laws and regulations and their application to insurance companies. This examination has focused on 1) insurance company investment and solvency issues, 2) risk-based capital guidelines, 3) assumption reinsurance, 4) interpretations of existing laws, 5) the development of new laws, 6) the interpretation of non-statutory guidelines, 7) the standardization of statutory accounting rules and 8) the circumstances under which dividends may be paid. The NAIC has encouraged states to adopt model NAIC laws on specific topics such as holding company regulations and the definition of extraordinary dividends. We are unable to predict the future impact of changing state regulation on our operations.

     The NAIC, as well as Indiana and Mississippi, have each adopted Risk-Based Capital (“RBC”) requirements for life and health insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks. State insurance regulators use the RBC requirements as regulatory tools only, which aid in the identification of insurance companies that could potentially lack sufficient capital. Regulatory compliance is determined by a ratio (the “RBC Ratio”) of the company’s regulatory total adjusted capital to its authorized control level RBC. The two components of the RBC Ratio are defined by the NAIC. The RBC ratios that require corrective action are as follows:

     At December 31, 2002, the RBC Ratios of Standard Life and Dixie Life were both at least one and a half times greater than the levels at which company action is required. If these RBC Ratios should decline in the future, our subsidiaries might be subject to increased regulatory supervision and decreased ability to pay dividends, management fees and surplus debenture interest to Standard Management.

     On the basis of annual statutory statements filed with state regulators, the NAIC calculates 12 financial ratios to assist state regulators in monitoring the financial condition of insurance companies. A “usual range” of results for each ratio is used as a benchmark. In the past, variances in certain ratios of our insurance subsidiaries have resulted in inquiries from insurance departments to which we have responded. Such inquiries did not lead to any restrictions affecting our operations.

     We attempt to manage our assets and liabilities so that income and principal payments received from investments are adequate to meet the cash flow requirements of our policyholder liabilities. The cash flows of our liabilities are affected by actual maturities, surrender experience and credited interest rates. We periodically perform cash flow studies under various interest rate scenarios to evaluate the adequacy of expected cash flows from our assets to meet the expected cash requirements of our liabilities. We utilize these studies to determine if it is necessary to lengthen or shorten the average life and duration of our investment portfolio. Because of the significant uncertainties involved in the estimation of asset and liability cash flows, there can be no assurance that we will be able to effectively manage the relationship between our asset and liability cash flows.

     The statutory filings of our insurance subsidiaries require classifications of investments and the establishment of an asset valuation reserve, designed to stabilize a company’s statutory surplus against fluctuations in the market value of stocks and bonds, according to regulations prescribed by the NAIC. The asset valuation reserve consists of two main components: a “default component” to provide for future credit-related losses on fixed income investments and an “equity component” to provide for losses on all types of equity investments, including real estate. The NAIC requires an additional reserve, called the interest maintenance reserve, which consists of the portion of realized capital gains and losses from the sale of fixed income securities attributable to changes in interest rates. The interest maintenance reserve is required to be amortized against earnings on a basis reflecting the remaining period to maturity of the fixed income securities sold. These regulations affect the ability of our insurance subsidiaries to reflect investment gains and losses in current period statutory earnings and surplus.

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     The amounts related to Asset Valuation Reserve and Interest Maintenance Reserve for the insurance subsidiaries at December 31, 2002 are summarized as follows (in thousands):

     The annual addition to the asset valuation reserve consists of a factor-based basic contribution plus 20% of the difference between the reserve objective and the accumulated balance. If the calculated reserve with current year additions exceeds the maximum reserve amount, the reserve is reduced to the maximum amount. For the year ended December 31, 2002, our U.S. subsidiaries each made the required contribution to the asset valuation reserve.

     Most jurisdictions require insurance companies to participate in guaranty funds designed to cover claims against insolvent insurers. Insurers authorized to transact business in these jurisdictions are generally subject to assessments based on annual direct premiums written in that jurisdiction to pay such claims, if any. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer’s financial strength and, in certain instances, may be offset against future state premium taxes. The incurrence and amount of such assessments have increased in recent years and may increase further in future years. The likelihood and amount of all future assessments cannot be reasonably estimated and are beyond our control.

     As part of their routine regulatory oversight process, approximately once every three to five years, state insurance departments conduct periodic detailed examinations of the books, records and accounts of insurance companies domiciled in their states. Standard Life had an examination during 2001 for the five-year period ended December 31, 2000 and Dixie Life had an examination during 2001 for the three-year period ended December 31, 2000. These final examination reports were issued in 2002 with no adjustments to the statutory statements required.

     The federal government does not directly regulate the insurance business. However, federal legislation and administrative policies in several areas, including pension regulation, age and sex discrimination, financial services regulation and federal taxation, do affect the insurance business. In addition, legislation has been introduced from time to time in recent years, which, if enacted, could result in the federal government assuming a more direct role in the regulation of the insurance industry. The GLB Act has left the currently existing regime of state insurance regulation largely intact; however, more comprehensive federal legislation in this area is still being actively considered by Congress.

     In addition, the pharmaceutical industry has long been subject to regulation by various federal, state and local agencies, primarily as to product manufacture, safety, efficacy, advertising and labeling. In addition, governmental bodies in the United States as well as other countries have expressed concern about costs relating to health care, and in some cases, have focused attention on the pricing of drugs and on appropriate drug utilization. Government regulation may be expanded significantly in the United States in the future. We are unable to predict the extent to which our business may be affected by future regulatory developments.

Employees

     As of January 31, 2003, we had 130 employees. We believe our future success will depend, in part, on our ability to attract and retain highly-skilled technical, marketing, support and management personnel. We believe we have excellent relations with our employees.

Item 2. Properties

     In December 2001, we signed a promissory note and mortgage due December 31, 2011, with a current outstanding principal amount of $6.8 million at December 31, 2002, used to finance our home office building consisting of 58,000 square feet and located at 10689 North Pennsylvania Street, Indianapolis, Indiana. Approximately 46,000 square feet of the building is leased to Standard Life pursuant to a lease agreement entered into on January 1, 2002.

     In June 2002, our warehouse lease was renegotiated from 16,000 to 10,000 square feet of space located at 2525 North Shadeland, Indianapolis, Indiana. The lease expires on September 30, 2004.

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     Savers Marketing leases approximately 4,000 square feet in an office building located at 8064 North Point Boulevard, Winston-Salem, North Carolina, which was renegotiated in March 2002 and expires on March 31, 2005.

     U.S. Health Services leases approximately 15,000 square feet in an office building located at 6210 N. Technology Center Drive, Indianapolis, Indiana. The lease expires April 16, 2007.

Item 3. 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 4. Submission of Matters to a Vote of Securities Holders

     At our Annual Meeting of Stockholders held on June 12, 2002, the following individuals were elected to the Board of Directors:

     A total of 6,345,781 shares were present in person or by proxy at the Annual Meeting of Stockholders.

     Our 2002 Stock Incentive Plan was adopted in all respects, with 2,090,660 shares voting for the plan, 2,057,754 shares voting against the plan and 13,732 shares abstained.

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PART II

Item 5. Market for our Common Stock and Related Stockholder Matters

     Our Common Stock trades on NASDAQ under the symbol “SMAN”. The following table sets forth, for the periods indicated, the range of the high and low sales prices of our Common Stock as reported by NASDAQ. We have never paid cash dividends on our Common Stock. At the close of business on February 28, 2003 there were approximately 3,000 holders of record of the outstanding shares of our Common Stock. Although our Common Stock is traded on NASDAQ, no assurance can be given as to the future price of or the markets for the stock.

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Item 6. Selected Historical Financial Data

     (Dollars in Thousands, Except Per Share Amounts and Shares Outstanding)

     The following historical financial data was derived from our audited Consolidated Financial Statements. This historical financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and related Notes.

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Notes to Selected Historical Financial Data
(Dollars in Thousands, Except Per Share Amounts)

(a)		Comparison of consolidated financial information is significantly affected by the acquisitions of Savers Life on March 12, 1998 and Midwestern Life on October 30, 1998.
(b)		Operating income is commonly used as a meaningful measure of reporting results as a supplemental disclosure to net income. Operating income is not a generally accepted accounting principle (“GAAP”) measure of performance and may not be comparable to similarly titled measures used by other companies. Operating income represents net income before 1) extraordinary gains (losses), 2) net realized investment gains (losses) (less related income taxes (benefits) and amortization), 3) gain on the sale of discontinued operations and 4) cumulative effect of accounting change for goodwill impairment. Operating income should be reviewed in conjunction with net income and cash flow information included elsewhere in this report.
(c)		Includes Medicare supplement premiums of $6.0 million related to the Savers Life acquisition. This business was sold effective July 1, 1998.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion highlights the principal factors affecting the results of our operations and the significant changes in our balance sheet items on a consolidated basis for the periods listed, as well as liquidity and capital resources. This discussion should be read in conjunction with the accompanying Consolidated Financial Statements, related Notes and “Selected Historical Financial Data”.

Forward-looking Statements

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

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

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Product Profitability

     The long-term profitability of life insurance and annuity products depends on the accuracy of the actuarial assumptions that underlie the pricing of such products. Actuarial calculations for such insurance products, and the ultimate profitability of such products, are based on four major factors: 1) persistency, 2) mortality, 3) return on cash invested by the insurer during the life of the policy and 4) expenses of acquiring and administering the policies.

     Interest spreads represent a major profit source on interest sensitive life and annuity products, so margins on these products are sensitive to interest rate fluctuations. In general, we are able to maintain spreads by adjusting credited interest rates for changes in our earned rates, subject to competitive and timing constraints. However, there are corollary effects of interest rate changes.

     Rising interest rates result in a decline in the market value of assets, and also tend to result in increased policyholder surrenders as other investment options become relatively more attractive. The effect of increased surrenders is to reduce earnings over the long term. Current period earnings effect may vary depending on the level of surrender charges and deferred policy acquisition costs (“DAC”) and present value of future profits (“PVFP”) assets. In addition, increasing interest rates give rise to disintermediation risk, the risk that assets must be sold at depressed values in order to fund increased surrender payments. This risk is mitigated by properly matching assets and liabilities.

     We seek to closely match the estimated duration of our invested assets to the expected duration of our liabilities. When the estimated durations of assets and liabilities are similar, exposure to interest rate risk is minimized because a change in the value of assets should be largely offset by a change in the value of liabilities. A significant mismatch of the durations of invested assets and liabilities could have an impact on our future financial results.

     Declining interest rates generally have little immediate effect on our investment earnings rates. Over time, as we invest positive cash flows at lower rates, our earned rates decline. In such an environment, we attempt to adjust credited interest rates accordingly, subject to competitive pressures. In most situations, this action allows us to maintain our margins. However, the sustained period of low interest rates may impact future interest spreads, results of operations and financial condition.

     The average expected remaining life of Standard Life’s traditional life and annuity business in force at December 31, 2002 was 7.5 years. This calculation was determined based upon our actuarial models and assumptions as to expected persistency and mortality. Persistency is the extent to which insurance policies sold are maintained by the insured. The persistency of life insurance and annuity products is a critical element of their profitability. However, a surrender charge often applies in the early contract years and declines to zero over time.

     Life insurance policyholders sometimes do not pay premiums, thus causing their policies to lapse. For the years 2002, 2001 and 2000 Standard Life experienced total policy lapses, excluding surrenders, of 3.4%, 3.7% and 5.7% of total policies in force at December 31 of each year, respectively. Ongoing premiums are not required for annuity policies, so annuities do not experience policy lapses.

     Variances Between Actual and Expected Profits. Actual experience on purchased and produced insurance may vary from projections due to differences in renewal premiums collected, investment spreads, mortality costs, persistency, administrative costs and other factors. Variances from original projections, whether positive or negative, are included in net income as they occur. To the extent that these variances indicate that future experience will differ from the estimated profits reflected in the capitalization and amortization of the PVFP and DAC assets, current and future amortization rates may be adjusted.

Product Accounting

     Present Value of Future Profits. In accordance with industry practice, when we purchase a block of existing insurance business, we assign a portion of the purchase price, PVFP, as the pre-tax value of the business acquired. The asset is the discounted value of future cash flows arising from the existing block of business. The discount rate used is based upon many elements, such as yields generated on similar business, our cost of capital and the interest rate environment as of the purchase date. Discount rates used in determining our PVFP assets range from 8% to 18%.

     After purchase, amortization of the asset occurs in proportion to profits emerging from the purchased policies. The asset is amortized over the expected life of the block of business. The percentages of expected net amortization of the beginning balance of the total PVFP asset as of December 31, 2002 are expected to be between 10% and 15% in each of the years 2003 through 2007.

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     Deferred Policy Acquisition Costs. Insurance policies issued after the purchase date of a company will generate significant costs that vary directly with and relate to the acquisition of the new business. Under GAAP accounting rules, these acquisition costs on new policies are to be capitalized and recorded as DAC. For universal and interest sensitive life and annuity products, the DAC asset is amortized in proportion to estimated gross profits over the life of the contract. For immediate annuities, DAC is amortized so as to produce a constant yield on the net policyholder liability. Virtually all of our DAC is a result of writing annuity products.

     Amortization of DAC related to operations was $19.0 million, $10.7 million and $8.7 million for the years ended December 31, 2002, 2001 and 2000, respectively. The increase in current year amortization expense resulted primarily from the emergence of gross profits from business sold in recent years and the acceleration of DAC amortization due to DAC unlocking. Future expected amortization of DAC, assuming no new business after December 31, 2002 and current assumptions, is as follows (in thousands):

     Accounting for Deferred Annuities and Universal and Interest-Sensitive Life Products. We primarily account for our annuity, universal and interest-sensitive life policy deposits in accordance with Statement of Financial Accounting Standards No. 97 (“SFAS No. 97”), “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses on the Sale of Investments”. Under SFAS No. 97, a benefit reserve is established at the time of policy issuance in an amount equal to the deposits received. Thereafter, the benefit reserve is adjusted for any additional deposits, interest credited and partial or complete withdrawals. Revenues for annuities and universal and interest-sensitive life policies, other than certain non-interest sensitive annuities, consist of policy charges for surrenders and partial withdrawals, mortality and administration, and investment income earned. These revenues do not include the annuity, universal and interest-sensitive life policy deposits. Expenses related to these products include interest credited to policyowner account balances, operating costs for policy administration, amortization of DAC and mortality costs in excess of account balances.

     Costs relating to the acquisition of new business, primarily commissions paid to agents, which vary with and are directly related to the production of new business, are deferred to the extent that such costs are recoverable from future profit margins. At the time of issuance, the acquisition expenses, approximately 12% of our initial annuity premium deposits are capitalized as DAC. In accordance with SFAS No. 97, DAC with interest is amortized over the lives of the policies in a constant relationship to the present value of estimated future gross profits.

     Accounting for Equity Indexed Annuities. Revenues and expenses for equity-indexed annuities are recognized in accordance with the SFAS No. 97 model, described above. Policy liabilities for equity-indexed annuities are computed in accordance with SFAS No. 133 which requires that an equity-indexed annuity liability be bifurcated into a “host contract” and a “derivative contract”. The host contract liability is a book value liability providing for the equity-indexed annuity policy’s guaranteed benefits. The derivative contract liability is a market value liability providing for the equity-linked benefits available in the policy. The derivative liability includes a liability for equity-linked benefits accruing during the current contract year, as well as liability amounts for future equity benefits which have not yet been granted.

     Accounting for Traditional Life Products. Traditional life insurance products are accounted as long-duration insurance contracts in accordance with Statement of Financial Accounting Standards No. 60 (“SFAS No. 60”), “Accounting and Reporting by Insurance Enterprises”. Under SFAS No. 60, benefit reserves are actuarially calculated using the net level reserve method. Revenues consist of policy premiums and investment income on assets supporting policy liabilities. Expenses consist of policy benefits incurred, increases in policy liabilities, and operating costs for policy administration, and amortization of DAC.

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     Costs related to the acquisition of new business, primarily commissions paid to agents, which vary with and are directly related to the production of new business, are deferred to the extent that such costs are recoverable from future profit margins. At the time of issuance, the acquisition expenses are capitalized as DAC. In accordance with SFAS No. 60, DAC with interest is amortized over the lives of the policies in a constant relationship to policy premiums.

     Accounting for Immediate Annuities. Immediate annuities with no life contingent payments, which comprise the majority of our immediate annuities in force and the majority of new immediate annuity sales, are accounted as investment contracts in accordance with FAS No. 97. Revenues consist of investment income, and expenses consist of the imputed interest credits to policies as well as operating costs for policy administration. An initial net premium policy liability is established as initial premium less acquisition costs. The imputed credited rate is the rate, which equates this net premium to the guaranteed payments. After issue, the liability changes by the amount of imputed interest credits and benefit payments. For balance sheet purposes, this net premium liability is presented as a gross premium liability offset by a DAC asset.

     Immediate annuities with payments contingent on the survival of the annuitant are accounted as limited-payment contracts in accordance with FAS No. 60, with revenue recognition, expense recognition, and liabilities computed as described above for traditional life products.

CRITICAL ACCOUNTING POLICIES

     The accounting polices described below require management to make significant estimates and assumptions using information available at the time the estimates are made. Such estimates and assumptions significantly affect various reported amounts of assets and liabilities. Management has made estimates in the past that we believed to be appropriate but were subsequently revised to reflect actual experience. If our future experience differs materially from these estimates and assumptions, our results of operations and financial condition could be affected. Accordingly, we consider them to be critical in preparing our consolidated financial statements. A more detailed description of our accounting policies is included in the Notes to our Consolidated Financial Statements.

     Investments

     The carrying value of our investment portfolio was $1.4 billion at December 31, 2002. The accounting risks associated with these assets relate to the recognition of income, our determination of other-than-temporary impairments and our estimation of fair values.

     We amortize premiums and discounts as yield adjustments over the contractual lives of fixed maturity securities. We consider anticipated prepayments on mortgage-backed securities in determining estimated future yields on such securities.

     When we sell a security, we report the difference between the sales proceeds and amortized cost (determined based on specific identification) as an investment gain or loss.

     We periodically evaluate whether the declines in fair value of our investments are other-than-temporary. Our evaluation consists of a review of qualitative and quantitative factors. For investments with publicly quoted market prices, we generally consider a decline to be an other-than-temporary impairment if the quoted market price is less than its accounting basis for three quarters, absent evidence to the contrary. We also consider additional factors to determine whether the declines in fair value are other-than-temporary, such as downgrades of the security by a rating agency, deterioration in the financial condition of the issuer, and other publicly available issuer-specific news or general market conditions. For investments in companies with no quoted market price, we consider similar qualitative and quantitative factors and also take into account the cost of the investment, the type of investment, subsequent purchases of the same or similar investments, the current financial position and operating results of the company invested in, and such other factors as may be relevant. Declines in fair values of securities deemed to be other-than-temporary are recognized as a reduction of net income.

     Determining what constitutes an other-than-temporary decline involves significant judgment. Declines in fair value below cost not considered other-than-temporary in the current period could be considered other-than-temporary in a future period and reduce earnings to the extent of the write-down.

     Estimated fair values for our investments are determined based on estimates from nationally recognized pricing services, broker-dealer market makers, and internally developed methods. Our internally developed methods require us to make judgments about the security’s credit quality, liquidity and market spread.

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     Equity indexed call options are derivative instruments linked to the major stock indices (S&P 500 Index and DJIA) which are used to hedge the equity benefits of our equity indexed annuity products. We purchase call options whose payoff characteristics mirror the equity benefits of our products. These securities are carried at fair value and the change in fair value is included in net investment income.

     DAC and PVFP

     The combined balance of our DAC and PVFP was $168.9 million. The recovery of these costs is dependent on the future profitability of the related business at December 31, 2002.

     Each year, we evaluate the recoverability of the unamortized balance of the DAC and PVFP. We consider estimated future gross profits or future premiums, expected mortality or morbidity, interest earned and credited rates, persistency and expenses in determining whether the balance is recoverable. If we determine a portion of the unamortized balance is not recoverable, it is charged to amortization expense.

     The assumptions we use to amortize and evaluate the recoverability of the DAC and PVFP involve significant judgment. A significant revision to these assumptions will impact future financial results.

     Goodwill

     The balance of our goodwill was $6.4 million at December 31, 2002. The recovery of this asset is dependent on the fair value of the business to which it relates. Prior to January 1, 2002, these assets were generally amortized over a 20-40 year period. Effective in 2002, pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets”, (“SFAS No. 142”), goodwill is no longer amortized but is subject to annual impairment tests based on the estimated fair value of the business units that comprise our domestic segment. There are numerous assumptions and estimates underlying the determination of the estimated fair value of these businesses. Different valuation methods and assumptions can produce significantly different results that could affect the amount of any potential impairment charge that might be required to be recognized. A charge of $1.2 million resulting from the impairment of goodwill from the adoption of SFAS No. 142 was recorded in 2002.

     Income Taxes

     Our income tax expense includes deferred income taxes arising from temporary differences between the financial reporting and tax basis of assets and liabilities and capital loss carryforwards. We have gross deferred income tax assets of $48.4 million at December 31, 2002. In assessing the realization of our deferred income tax assets, we consider whether it is more likely than not that the deferred income tax assets will be realized. The ultimate realization of our deferred income tax assets depends upon generating future taxable income during the periods in which our temporary differences become deductible and capital gains before our capital loss carryforwards expire. We evaluate the recoverability of our deferred income tax assets by assessing the need for a valuation allowance on a quarterly basis. If we determine that it is more likely than not that our deferred income tax assets will not be recovered, a valuation allowance will be established against some or all of our deferred income tax assets. This could have a significant effect on our future results of operations and financial position.

     No valuation allowance has been provided on our deferred income tax assets at December 31, 2002, as we believe it is more likely than not that all such assets will be realized. We reached this conclusion after considering the availability of taxable income in prior carryback years, tax planning strategies, and the likelihood of future taxable income exclusive of reversing temporary differences and carryforwards. Differences between forecasted and actual future operating results could adversely impact our ability to realize our deferred income tax assets.

     Liabilities for Insurance Products

     The total balance of our liabilities for insurance products was $1.57 billion at December 31, 2002. These liabilities are often payable over an extended period of time and the profitability of the related products is dependent on the pricing of the products and other factors. Differences between pricing assumptions and actual experience will impact future financial results.

     We calculate and maintain reserves for the estimated future payment of claims to our policyholders based on actuarial assumptions. These assumptions are generally best estimates, with moderate provision for adverse deviation. Many factors can affect the adequacy of these reserves and liabilities, such as economic and social conditions, inflation, changes in doctrines of legal liability and extra contractual damage awards. Therefore, the reserves and liabilities we establish are necessarily based on extensive estimates, assumptions and historical experience. Establishing reserves is an uncertain

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process, and it is possible that actual claims will materially exceed our reserves and have a material adverse effect on our results of operations and financial condition. Our financial results depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in determining our reserves and pricing our products. If our assumptions with respect to future claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would be required to increase our liabilities, negatively affecting our operating results.

     Liabilities for Loss Contingencies Related to Legal Proceedings

     We are involved in various legal proceedings in the normal course of business. The ultimate outcome of these legal proceedings cannot be predicted with certainty. We recognize an estimated loss from these loss contingencies when we believe it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. However, it is difficult to measure the actual loss that might be incurred related to legal proceedings. The ultimate outcome of these lawsuits are not expected to have a material adverse effect on our consolidated results of operations and financial position based on our current understanding of the relevant facts and laws.

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Results of operations by segment for the three years ended December 31, 2002:

The following tables and narratives summarize the results of our operations by business segment:

Consolidated Results and Analysis

     Our 2002 net loss was $1.1 million, or $.14 per diluted share. The results for 2002 were impacted by 1) accelerated amortization of deferred acquisition costs on fixed annuity products of $5.1 million, 2) a reserve strengthening adjustment of $1.5 million, 3) write-off and legal costs related to the recovery of agency receivable balances of $.9 million, 4) operating expenses related to the development of our new U.S. Health Services Corporation subsidiary of $1.1 million, and 5) an increase in net realized investment losses, less related amortization and taxes, attributable to write-downs on the value of collateralized debt obligations due to increased default rates and weaknesses in the energy and telecommunications sectors of $6.9 million. The above decreases in net income were partially offset by a $2.6 million tax benefit over the prior year.

     Also occurring in 2002, a gain on discontinued operations of $6.9 million related to the sale of our International Operations was recorded. In addition, a charge of $1.2 million resulting from the impairment of goodwill from the adoption of SFAS No. 142 was recorded. No extraordinary losses occurred in 2002.

     Our 2001 net income was $1.8 million, or $.23 per diluted share, down 65% per share over the comparable 2000 period. The results for 2001 were impacted by 1) an increase in the Company’s effective tax rate resulting in $.6 million; 2) an increase in net realized investment losses, less related amortization and taxes, attributable to the sale of Enron bonds and write-downs on the value of collateralized debt obligations due to increased default rates from the economic slow down of $3.8 million; 3) litigation settlement costs of $.3 million, and 4) reduced spread on interest sensitive products of $.4 million. These above decreases in net income were somewhat offset by paid life insurance claims, less related reserves, of $.9 million. No extraordinary losses occurred in 2001.

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Domestic operations (Continuing operations):