UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended December 31, 2003 or

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 o

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. 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 x

The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Registrant’s Common Stock as of the most recently completed second quarter 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 29, 2004 Registrant had outstanding 8,114,196 shares of Common Stock.

Documents Incorporated by Reference: None

Table of Contents

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PART I

     As used in this report, unless the context otherwise clearly requires, “we”, “our”, “us”, and “Standard Management” 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. Our website is located at www.sman.com, however, the information contained on the website is not to be considered incorporated by reference herein.

Item 1. Business of Standard Management

Overview

     Standard Management is a holding company that currently conducts its business through two distinct segments: financial services and health services. The financial services segment is primarily involved in the asset accumulation business targeting the retirement-age market. Principally through its wholly owned life insurance subsidiary, Standard Life Insurance Company of Indiana (“Standard Life”), we develop, market and administer annuity and life insurance products. Historically, substantially all of our business has been conducted in the financial services segment through Standard Life and our other insurance company subsidiaries.

     In 2002, we entered the health services segment. The health services segment is operated through our subsidiary, U.S. Health Services Corporation. U. S. Health Services distributes pharmaceutical products and services to institutions, point of care programs, contract repackaging services and consumers.

Recent Developments

     Standard Management recently engaged investment banking advisors for the purpose of providing us and our subsidiaries with advice in analyzing our capital needs and other general financial advisory services. The services being provided by these advisors will be used by Standard Management in consideration of a variety of potential business arrangements or undertakings including, without limitation:

•		the possible restructuring or reorganization of the capital or debt of Standard Management or any of our subsidiaries;
•		the potential public or private placement of one or more securities of Standard Management or any of our subsidiaries;
•		possible joint ventures, combinations or undertakings between Standard Management and various third parties; or
•		the possible sale of a material portion of the assets or securities of Standard Management or any of our subsidiaries to, or merger of Standard Management or any of our subsidiaries with, various third parties.

     As part of this process, our investment banking advisors have received indications of interest for the purchase of Standard Life. At the present time, we have not commenced negotiations with any party nor have we entered into an agreement with respect to any transaction, although we are considering all of our options and may elect to enter into negotiations with respect to the sale of Standard Life or with respect to any of the other alternatives. In the event we consummate a sale of Standard Life, management anticipates that it would cease operations in the life insurance sector and focus primarily on the health services sector.

     In the event a transaction were to be consummated, we would expect to use the proceeds of any such transaction for various corporate purposes including to pay off some or all of our existing indebtedness, to fund the capital needs of our health services operations, for potential acquisitions of complementary business, and for other general corporate purposes. To the extent any such disposition provides proceeds in excess of our needs, we could use some or all of such excess funds to repurchase outstanding shares of our common stock or declare a cash dividend. Because of the existence of potential business arrangements as described, shareholders should carefully evaluate the risks that are associated with a change in the primary nature of our business operations, while at the same time recognizing that the timing of any shift in the focus of our business operations or a sale of financial services assets is uncertain and might not occur at all. See “Factors That May Affect Further Results” commencing on page 39.

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Financial Services Segment

     Our financial services segment includes Standard Life, our principal insurance subsidiary, which 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 currently sells deferred annuities, equity-indexed annuities, and single premium immediate annuities and manages its in force life business. Standard Life has a rating of “B+” (Very Good) from the rating agency A.M. Best Company, Inc. (“A.M. Best”). This segment also includes Standard Life’s subsidiary Dixie National Life Insurance Company (“Dixie Life”).

Marketing

     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. Our agency force, which includes 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.

     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 2% of Standard Life’s annual annuity sales in 2003, and the top 20 individual agents accounted for approximately 18% of Standard Life’s annuity sales in 2003. At December 31, 2003, approximately 42% of Standard Life’s independent agents were located in Indiana, California, Florida, Ohio and Michigan with the remaining agents 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.

Currently Marketed Products

     We primarily market deferred annuities, equity-indexed annuities, and single premium immediate annuities. 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):

     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 2.5% to 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

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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, 2004, the crediting rates available on new sales of Standard Life’s currently marketed deferred annuities ranged from 3% to 5% with most new issues having an interest rate with a one-year guarantee period. Crediting rates on in force policies range from 3% to 7%. The surrender charge is initially 7% to 14% of the contract value depending on the product and decreases over the applicable surrender charge period of 5 to 10 years. As of December 31, 2003, Standard Life had 19,299 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 Index”). 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 discretion to annually change the participation rates and spreads/caps on its products. The minimum guaranteed values are equal to between 75% and 90% 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, 2003, Standard Life had 10,120 currently marketed equity-indexed contracts in force.

     Single Premium Immediate Annuities and Supplementary Contracts. Standard Life’s currently marketed deferred annuity and equity indexed annuity products offer policyholders the right to exchange their deferred annuity contract for a supplementary contract which provides a guaranteed stream of benefit payments for a fixed period and/or until the death of the annuitant. These supplementary contracts have characteristics similar to single premium immediate annuities. As of December 31, 2003, Standard Life had 6,091 single premium immediate annuity contracts in force and 1,060 supplementary contracts in-force arising from currently marketed annuity products.

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

     Individual annuity sales within the United States have nearly tripled from $61 billion in 1992 to more than $168 billion in 2002, according to the American Council of Life Insurers. 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.

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

(1)

No other state had gross sales greater than 3 % in 2003.

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, 2004, these deferred annuities had crediting rates ranging from 3% to 5.5% and guaranteed minimum crediting rates ranging from 3% 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 immediate annuities and supplementary contracts 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 1.5% to 7% and cannot be changed after a policy is issued. At December 31, 2003, we had 553 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, 2003, we had 36,073 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, 2004, the interest rate on existing flexible premium universal life policies was 3% to 5% with a guaranteed interest rate of 3% to 5%. At December 31, 2003, we had 9,877 universal life policies in force for closed blocks.

Operations

     Our principal administrative departments for our insurance subsidiaries include financial, new business, 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.

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     Our administrative departments use a common integrated policy administration system that permits efficiency and cost control. Our IT system services approximately 92,500 active policies at December 31, 2003.

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. 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.

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. The weighted average net yield of our investment portfolio was 5.34%.

     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 4.9 and 3.9 years at December 31, 2003 and 2002, respectively, which reasonably match the duration of our policy liabilities of 4.4 and 5.1 years at December 31, 2003 and 2002, respectively.

     Our investment strategy is guided by strategic objectives established by the Investment Committee of our 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, 2003, classified in accordance with the ratings assigned by the NAIC:

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

     Approximately 50% of our fixed maturity securities at December 31, 2003 are comprised of mortgage-backed securities that include collateralized mortgage obligations and mortgage-backed pass-through securities. Approximately 13% 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 72% are backed by an agency of the U.S. government (although not by the full faith and credit of the U.S. government). In rising interest rate environments, prepayments on mortgage-backed securities will slow and result in duration extension. In anticipation of rising interest rates in 2004 and beyond, during 2003 we repositioned its mortgage-backed portfolio by selling agency guaranteed mortgage-backed securities

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and investing in more tightly structured securities including agency backed planned amortization class collateralized mortgage obligations and commercial mortgage-backed securities. As a result, agency mortgage-backed pass-through securities were reduced from $432.0 million or 68% of mortgage-backed securities at December 31, 2002 to $273.8 million or 33% of mortgage backed securities at December 31, 2003.

     The following table summarizes our mortgage-backed securities at December 31, 2003 (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 56.5% of the book value of our mortgage-backed securities at December 31, 2003, 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.

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     Insurance policy liabilities for deferred annuities and universal life policies 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 7.55% in 2003 and 3.0% to 11.5% in 2002.

     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 annuity and life insurance policy liabilities. Differences are reflected currently in earnings for each period. We recorded a charge of $7.9 million and $7.8 million for 2003 and 2002, respectively, related to the acceleration of deferred policy acquisition costs (“DAC”) amortization due to DAC unlocking.

     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 2003, 2002 and 2001, excluding financial reinsurance agreements, represented 39%, 40%, and 42%, 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 2003, 2002 and 2001 represented 9.2%, 9.0%, and 9.3%, respectively, of our net combined individual life insurance in force.

     The following is reinsurance ceded information for the four reinsurers to which we have ceded the largest amount of life reinsurance at December 31, 2003 (in thousands):

     Reinsured life insurance in force at December 31, 2003 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, 2003, SCOR Life U.S. Insurance Company (“SCOR Life”), represented $18.2 million, or 51% of our total reinsurance recoverable and is rated “B++” (Very Good) by A.M. Best.

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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, as of 2003, there were approximately 1,171 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 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. 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.

Federal Income Taxation

     We file a consolidated return with our non-insurance subsidiaries, excluding U.S. Health Services, for federal income tax purposes, and beginning January 1, 2001 with our insurance subsidiaries, Standard Life and Dixie Life. At December 31, 2003, we have a net capital loss carryforward of approximately $.5 million, which expires in 2007.

     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.

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.

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     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 13 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, 2003, securities of $11.0 million, or approximately .65% 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.

     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

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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, 2003, the RBC Ratios of Standard Life and Dixie Life were 2.9 and 8.1, respectively. 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.

     The amounts related to Asset Valuation Reserve and Interest Maintenance Reserve for our insurance subsidiaries at December 31, 2003 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

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exceeds the maximum reserve amount, the reserve is reduced to the maximum amount. For the year ended December 31, 2003, our insurance 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.

Health Services Segment

General

     Established in 2002, U.S. Health Services Corporation is deploying a national health services distribution platform. U.S. Health Services vertically integrates pharmaceutical care with the delivery of healthcare services principally in the sub-acute, institutional segment of the healthcare market; for example, skilled nursing facilities, assisted living facilities and correctional facilities. In addition U.S. Health Services, through its subsidiaries and operating units, acts as a wholesale drug distributor/repackager and a pharmacy management solution to various sectors of the veterinary care industry. Through long-term service contracts, we seek to reduce revenue volatility and create additional opportunities to introduce others, complimentary healthcare products and services.

     U.S. Health Services currently operates through its subsidiaries HomeMed Channel, Inc., PCA, LLC, Apothecary Solutions Corporation, HomeDoc Corporation, and Medical Care and Outcomes, LLC. Each of these subsidiaries services a specific market in the pharmaceutical services sector. HomeMed Channel, Inc., through its divisions HomeMed Pharmacy and HomeMed Veterinary, operates as direct-to-consumer retail and mail order pharmacy and veterinary pharmaceutical manager and supplier. PCA, LLC is a wholesale drug distributor and repackager. Apothecary Solutions Corporation, doing business as HomeMed Institutional Pharmacy, contracts as a closed-door institutional pharmacy manager. HomeDoc Corporation and Medical Care and Outcomes, LLC provide proprietary medical diagnostic and compliance technologies to community pharmacists and national pharmacy associations which allow them to safely, lawfully and confidentially track prescribed drug and medical care regiments of individual patients, in partnership with treating physicians, in order to enhance the continued delivery of care.

Marketing

     U.S. Health Services is organized around three key distribution engines: Retail Pharmacy, Institutional Pharmacy and Veterinary Pharmacy. Supporting each operating unit are technology platforms to facilitate customer interaction, product fulfillment and point-of-care health management.

     We focus on serving the following customer populations:

•

Retail Consumers – HomeMed Retail Pharmacy provides high quality, affordable medications direct-to-consumers.

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•		Employers – HomeMed Retail Pharmacy provides affordable mail-order medications to employees of corporate clients.
•		Medical Clinics – PCA, LLC distributes re-packaged stock medications to student health centers, physician’s offices, urgent care clinics and other point-of-care facilities to provide convenience to consumers and ensure medication compliance from the caregiver’s perspective.
•		Veterinary Clinics – HomeMed Veterinary Clinic distributes re-packaged stock medications to animal clinics. Dispensing and inventory management technology are a key element of the solution we provide to veterinarians.
•		Institutional Consumers – HomeMed Institutional Pharmacy provides medications and medical supplies to consumers living in assisted living, skilled nursing, correctional and home care settings. Compliance packaging ensures patient safety and enhances therapy outcomes.
•		Institutions – HomeMed Institutional Pharmacy also works directly with skilled nursing and licensed assisted living facilities to provide resident medications and value-added pharmacy services directly to the institution. Consultant pharmacists and specialized IV nurses enhance patient care by assisting facility nursing staff and helping coordinate medication management.
•		Hospitals – U.S. Health Services partners with hospitals to implement retail pharmacy services.

     We leverage direct and indirect sales channels to acquire new customers. An integrated customer care function ensures rapid response to customer needs and field-level feedback to each of our operating units. Customer-focused nurses and pharmacist consultants complete the cycle of care by staying close to the consumers of our products.

Growth Strategy

     We believe U.S. Health Services is well-positioned to benefit from a rapidly growing population utilizing pharmacy services. The pharmacy industry is currently in a state of flux and consolidation, providing opportunities for selected acquisitions. Further, certain segments of healthcare have never been consolidated, specifically, the assisted living, congregate care and home health agency sectors.

     We believe that the continued expansion of our wholesale supply operations in the high-growth, high-margin veterinary pharmaceutical segment can position us as a unique “virtual pharmacy manager” for owners and operators of veterinary clinics, which until now have been forced to manage their own internal pet pharmacies as part of their medical practice or risk losing market share to unaffiliated and unlicensed pet product distributors. Our intent to partner with veterinarians using a clinic drug replenishment model, rather than selling directly to consumers of pet pharmaceuticals without first engaging a veterinarian’s involvement, successfully addresses substantial concerns in the veterinary community about the appropriate medical level of care provided to animals and the maintenance of a proper and ethical veterinarian-client relationship.

     We believe that many of the growth opportunities available to us in the health services area involve combining high-technology concepts with physician provider, hospital, hospice, nursing, and clinical care settings. By providing access to health services to clients regardless of whether they are located in an institutional care facility or are receiving provider services out of their own home, we believe we can build sustained brand and company loyalty among patients at all levels of care. U. S. Health Services brings the benefits of a seasoned, visionary and diverse management team, a highly skilled and experienced staff, an existing proprietary technology base, and strong relationships with customers and suppliers.

Regulatory Factors

     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. We continuously monitor the effects of such regulatory activity on our operations.

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     The nursing home pharmacy business has long operated under regulatory cost containment pressures from both state and federal legislation primarily through Medicaid and, to a lesser extent, Medicare. Medicaid has long-established programs for reimbursement which have over time been revised and refined and have not had a material adverse effect on the pricing policies or receivables collection for nursing home pharmacy services. Any future changes in such reimbursement programs or in regulations relating thereto, such as reductions in the allowable reimbursement levels or the timing of processing of payments, could adversely affect our business. Medicare has recently added a prescription drug benefit which will be phased in gradually between 2004 and 2006 and which may also affect our business, although the extent of this effect cannot be quantified at this time.

     We are subject to fraud and abuse laws which preclude, among other things, (a) persons from soliciting, offering, receiving or paying any remuneration in order to induce the referral of a patient for treatment or for inducing the ordering or purchasing of items or services that are in any way paid for by Medicare or Medicaid, and (b) physicians from making referrals to certain entities with which they have a financial relationship. The fraud and abuse laws and regulations are broad in scope and are subject to frequent modification and varied interpretation.

     Institutional pharmacies as well as the long-term care facilities they serve are subject to extensive federal, state and local regulation. These regulations cover required qualifications, day-to-day operations and the documentation of activities. All of our pharmacies are licensed in the states in which they operate and are registered with the appropriate federal authorities pursuant to the regulation of controlled substances.

Competition

     The pharmaceutical distribution industry is a highly competitive and fragmented industry, both regionally and nationally. In each of our market segments, we compete with local, regional and national organizations focused on similar customer groups. In the direct dispensing of pharmaceutical products to end consumers, we compete with local and national retail, mail order and institutional pharmacies as well as pharmacies owned by long-term care facilities. We compete in this market based on competitive pricing, localized services, value-added technologies and partnering initiatives that drive shared revenue.

     In the pharmaceutical wholesale distribution and repackaging marketplace, we compete with a number of local and national providers. We serve both human medical clinics and veterinary medical clinics from a centralized distribution facility thereby which puts us in two distinct competitive zones. There are fewer competitors in the repackaging niches that we target, but they are highly specialized.

     In the institutional and corporate services marketplace, we compete with a number of large, national companies providing a broad mix of services to hospitals, long-term care facilities and employer groups. We compete by targeting narrow niches within these customer segments and providing highly customized pharmaceutical product solutions. Highly focused services and support coupled with profit-sharing business models make us an appealing partner in these strategic relationships.

     No individual customer or market segment is critical to the total sales of our products and services.

Acquisition Strategy, Recent Acquisitions and Divestiture

Acquisition Strategy – Financial Services

     A principal component of our strategy since 1999 has been internal organic growth. However, 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.

     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.

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     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.

Acquisition Strategy – Health Services

     Our acquisition strategy includes acquiring companies to distribute retail and third party reimbursed pharmaceutical products and services. We have identified several potential strategic acquisitions in the institutional pharmacy industry. These potential acquisitions would also allow us to build to critical mass in terms of both customers served and human and technological capital. While we intend to grow this segment of the business quickly and on a regional basis through acquisitions in the near term, we are also committed to creating operational efficiencies in our existing operations in an attempt to reduce expenses and increase economies available to us, so that our business can grow organically as well.

     Described below are the acquisitions made since the commencement of our health services segment.

     Effective February 6, 2004, our wholly-owned subsidiary, Apothecary Solutions Corporation acquired certain assets of Alliance Center, Inc. Apothecary Solutions is an institutional pharmacy. The purchase price was $3.6 million, and additional contingent consideration of up to $175,000 may be paid, based on a percentage of outstanding accounts receivable collected. The purchase was accounted for under the purchase method of accounting and resulted in recognizing a preliminary goodwill amount of $1.2 million. Under purchase accounting, we allocated the total purchase price of the assets and liabilities acquired, based on a determination of the fair values and recorded the excess of the acquisition cost over net assets acquired as goodwill.

     During 2003, we acquired Medical Care & Outcomes, LLC, for shares of common stock. 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 was accounted for under the purchase method of accounting and resulted in recognizing a preliminary goodwill amount of $3.6 million. Under purchase accounting, we allocated the total purchase price of the assets and liabilities acquired, based on a determination of the fair values and recorded the excess of the acquisition cost over net assets acquired as goodwill.

     In addition, in 2003, we acquired the business assets of MyDoc.com from Roche Diagnostics Corporation and placed these assets into our wholly-owned subsidiary, HomeDoc Corporation. HomeDoc Corporation is the first virtual healthcare service where board-certified, state-licensed physicians are available online, 24 hours per day / 7 days per week to diagnose and treat common ailments and provide prescriptions. The purchase was accounted for under the purchase method of accounting and resulted in recognizing a preliminary goodwill amount of $645,000.

     During 2002, we acquired the pharmaceutical business of HomeMed Channel, Inc. and PCA, LLC and the assets of Prescriptions by Mail, Inc. All three acquisitions were accounted for under the purchase method of accounting.

Divestiture- International Operations

     In 2002, we sold our International Operations which consisted of 100% of the shares in Premier Life (Luxembourg) S.A. and the portfolio of Premier Life (Bermuda) Limited 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 $3.8 million in debt, and retained the remaining $6.3 million for general corporate purposes.

Employees

     As of February 29, 2004, we had 184 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 $6.6 million at December 31, 2003, used to finance our home office building consisting of 56,000 square

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feet and located at 10689 North Pennsylvania Street, Indianapolis, Indiana. Approximately 43,000 square feet of the building is leased to Standard Life pursuant to a lease agreement entered into on December 28, 2001. The remaining space is used by Standard Management and U.S. Health Services.

     We lease 10,000 square feet of space located at 2525 North Shadeland, Indianapolis, Indiana for warehouse purposes. This lease expires on September 30, 2004.

     U.S. Health Services leases approximately 30,000 square feet in an office building located at 6210 N. Technology Center Drive, Indianapolis, Indiana. The lease expires April 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

               None.

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Part II

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

     Our common stock trades on the NASDAQ National Market 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 29, 2004 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.

Equity Compensation Plan Information

     In January 2002, the Securities and Exchange Commission adopted new rules for the disclosure of equity compensation plans. The purpose of the new rules is to summarize the potential dilution that could occur from past and future equity grants under all equity compensation plans. The following provides tabular disclosure of the number of securities to be issued upon the exercise of outstanding options, the weighted average exercise price of outstanding options, and the number of securities remaining available for future issuance under our equity compensation plans. All of our equity compensation plans have been approved by our shareholders.

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Item 6. Selected Financial Data

     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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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.

Overview

     We specialize in the sale of individual annuities. Under accounting principles generally accepted in the United States, or GAAP, premium collections for deferred annuities are reported as insurance policy liabilities instead of as revenues. Sources of revenues for products accounted for as insurance policy liabilities are net investment income, surrender charges deducted from the account balances of policyholders in connection with withdrawals, realized gains and losses on investments and call option income. Components of expenses for products accounted for as insurance policy liabilities are interest credited to account balances, amortization of deferred policy acquisition costs, and other operating costs and expenses.

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     Earnings from products accounted for as insurance policy liabilities are primarily generated from the excess of net investment income earned over the interest credited to the policyholder, or the “investment spread”. Our investment spread is summarized as follows as of December 31:

     Our profitability depends in large part upon the amount of assets under our management, investment spreads we earn on our policyholders’ account balances, our ability to manage our investment portfolio to maximize returns and minimize risks such as interest rate changes, defaults or impairment of assets, our ability to manage costs of the options purchased to fund the interest credits on our index annuities, our ability to manage the costs of acquiring new business (principally commissions to agents and first year bonuses credited to policyholders) and our ability to manage our operating expenses.

     The weighted average effective credited rate represents interest on interest sensitive liabilities, including equity indexed annuities, offset by gains on call option assets used to hedge equity indexed annuity liabilities.

Product Profitability - Financial Services

     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 annuity and interest sensitive life products. 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, or DAC, and present value of future profits, or PVFP. 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, 2003 was 7.2 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 2003, 2002 and 2001 Standard Life experienced total policy lapses, excluding surrenders, of 3.1%, 3.4% and 3.7% of total

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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, 2003 are expected to be between 9% and 14% in each of the years 2004 through 2008.

     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, 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 $22.9 million, $19.0 million and $10.7 million for the years ended December 31, 2003, 2002 and 2001, 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, 2003 and current assumptions, is as follows (in thousands):

     Accounting for Deferred Annuities and Universal and Interest-Sensitive Life Products. We primarily account for our deferred 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 10% 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.

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     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.

     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 us 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. We have 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 $1.7 billion in Financial Services at December 31, 2003. 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. 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

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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.

     Equity indexed call options are derivative instruments linked to the major stock indices (S&P 500 Index and DJIA Index) 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 $182.9 million. The recovery of these costs is dependent on the future profitability of the related business at December 31, 2003.

     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. We recorded a charge of $7.9 million and $7.8 million for 2003 and 2002, respectively, related to the acceleration of DAC amortization due to DAC unlocking.

Goodwill and Intangible Assets

     The balance of our goodwill and intangible assets was $11.0 million at December 31, 2003. The recovery of this asset is dependent on the fair value of the business to which it relates. 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. 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 in the Financial Services segment.

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 $60.2 million at December 31, 2003. 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.

     A $3.0 million valuation allowance has been provided on certain operating loss carryforwards in Health Services at December 31, 2003. 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

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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 $1.84 billion at December 31, 2003. 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 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 is 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, 2003:

Consolidated Results and Analysis

Loss from Continuing Operations – 2003

     Net loss from continuing operations for 2003 was $10.2 million, or $1.26 per diluted share, compared to a loss of $7.9 million, or $.99 per diluted share for 2002.

     Financial Services: Net loss for 2003 was $.2 million, compared to a $5.3 million net loss for 2002. The 2003 net loss included net realized investment gains of $7.9 million, charges of accelerated amortization of DAC of $5.2 million on fixed annuity products, reduced spread income of $2.6 million due to the decline in net investment income yield, which has declined faster than we were able to reduce credited rates on our in-force business, and $.8 million associated with lower expense capitalization due to reduced new business writings. The loss for 2002 included net realized investment losses of $5.9 million, accelerated amortization of DAC of $5.1 million, reserve strengthening of $1.5 million, the write-off of an agency receivable balance of $.8 million, and tax benefits of $2.5 million.

     Net loss for the fourth quarter of 2003 was $5.0 million, compared to net income of $3.6 million in the fourth quarter of 2002. Impacting the 2003 quarter was the same charges for the accelerated amortization of DAC, lower expense capitalization due to reduced new business writings of $.3 million, and reduced spread income of $.3 million. The 2002 quarter was impacted by net realized investment gains of $.7 million, the write-off of an agency receivable balance of $.2 million, and tax benefits of $1.2 million.

     Health Services: Net loss for 2003 was $7.2 million, compared to a loss of $1.2 million for 2002. The 2003 loss included expenses associated with the continued development of U. S. Health Service’s operating platform and infrastructure, as well as ongoing concentrated marketing initiatives. Also, 2003 results were reduced by $3.0 million as a result of recording a valuation allowance on the tax benefits on this segment’s operating loss.

     Other Services: Net loss for 2003 was $2.8 million, compared to a net loss of $1.4 million for 2002. The results for 2003 were negatively impacted by a higher effective tax rate and the reduced net commission income due to the sale of a small marketing service subsidiary which period over period impact the results by $1.8 million, and $1.2 million, respectively. Also impacting 2003, was deferred debt write-offs associated with recent refinancing activities of $.3 million. The results for 2002 were negatively impacted from net realized investment losses of $1.0 million.

     Loss from Discontinued Operations – 2003

     Net loss from discontinued operations for 2003 was $.3 million, due to our settling a purchase price adjustment on the sale of our International Operations.

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Financial Services:

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          General: Our Financial Services segment consists of revenues earned and expenses incurred from our insurance operations. Our primary products include deferred annuities, equity-indexed annuities and single premium immediate 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 the in force business, mortality experience and management of our operating expenses.

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

•		Premium deposits for 2003 decreased $178.5 million or 30%, to $421.0 million. Deferred annuities decreased $191.3 million or 60%, to $129.3 million. Equity indexed annuities decreased $1.4 million or 1%, to $125.3 million. Single premium immediate annuities and other deposits increased $14.3 million or 9%, to $165.8 million.
•		Premium deposits for 2002 increased $277 million or 86%, to $599.5 million. Deferred annuities increased $142.4 million or 80%, to $320.6 million. Equity indexed annuities increased $59.6 million or 89%, to $126.7 million. Single premium immediate annuities and other deposits increased $75.1 million or 98%, to $151.5 million.

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

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

•		Premium income for 2003 decreased $.2 million or 3%, to $8.9 million.
•		Premium income for 2002 decreased $.2 million or 3%, to $9.2 million.

          Premium income decreased during 2003 and 2002 as a result of policy lapses and surrenders.

          Policy income represents 1) mortality income and administrative fees earned on universal life products and 2) surrender income earned as a result of terminated universal life and annuity policies.

•		During 2003, policy income increased $2.8 million or 34%, to $10.8 million.
•		During 2002, policy income increased $.4 million or 5%, to $8.1 million.

          Policy income increased during 2003 and 2002 as a result of an increase in policy surrender charges.

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

•		During 2003, net investment income increased $7.1 million or 9% to $82.9 million. Average cash and invested assets, at book value, increased by $348.6 million or 29% due to the growth in insurance liabilities from annuity sales in recent periods.
•		During 2002, net investment income increased $17.3 million or 29% to $75.8 million. Average cash and invested assets, at book value, increased by $347.2 million or 39% due to the growth in insurance liabilities from annuity sales in recent periods.
•		Our net investment yield for 2003 was 5.34%. Our net investment yield for 2002 was 6.53%.

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•

The decline in net investment yield for 2003 and 2002 resulted from investing new funds generated from annuity sales, from principal repayments, and from the sale of securities during this historically low interest rate environment at interest rates lower than the average portfolio rate.

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

•		During 2003, call option gains increased by $22.0 million to $12.0 million.
•		During 2002, call option losses increased by $4.2 million or 71%, to $10.1 million.

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

          See “Interest credited to interest sensitive annuities and other financial products” below for additional information regarding the impact of our equity-indexed products.

          Fee and other income consist of fee income related to servicing unaffiliated blocks of business and commission income.

•		During 2003, fee and other income decreased by $0.4 million or 55% to $0.3 million. This decrease results from the termination of a marketing and administration contract in 2002.
•		During 2002, fee and other income decreased by $0.3 million or 27% to $0.7 million. This decrease results from the termination of a marketing and administration contract in 2002.

          Benefits and claims include 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. Such volatility is not uncommon in the life insurance industry and, over extended periods of time, periods of higher claim experience tend to offset periods of lower claim experience.

•		Benefits and claims in 2003 increased by $3.0 million or 30%, to $13.0 million. Benefits and claims were higher in 2003 primarily due to increased death claims and other benefits for our in-force life policies and increased benefit payments for our supplemental contracts including life contingencies.
•		Benefits and claims in 2002 decreased by $2.5 million or 20%, to $9.9 million. This decrease includes the impact from favorable mortality of $.5 million compared to the 2001 period.

          Interest credited to interest sensitive annuities and other financial products represents interest credited to insurance liabilities of deferred annuities, equity-indexed annuities, single premium immediate 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 and 3) the market value fluctuations of call options.

•		In 2003, interest credited increased $29.0 million to $71.6 million, of which $23.0 million related to equity indexed annuity products and the remaining $48.6 million related to all other interest sensitive annuity and life insurance products. Interest credited increased $22.0 million due to the impact of improved equity market performance on equity products. Interest credited increased $12.5 million due to a 33% increase in average interest sensitive liabilities of $381 million compared to 2002, partially offset by $5.5 million of reductions due to reduced crediting rates.
•		In 2002, interest credited increased $12.4 million or 41%, to $42.6 million due to a 48% increase in average interest sensitive liabilities of $384.0 million compared to 2001, partially offset by a reduction in credited rates. In addition, interest credited decreased $1.8 million as a result of market value changes of call options supporting our equity-indexed products. Reserve strengthening actions increased interest credited by $2.4 million.

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•

The weighted average credited rate on interest sensitive liabilities, including equity-indexed annuities, for 2003 and 2002 were 4.62% and 3.63%, respectively. The increase in average credited rate was due to the impact of improved equity market performance on equity indexed annuity crediting rates. When offset by gains on call option assets used to hedge equity-indexed annuity liabilities, the “effective” crediting rates for 2003 and 2002 were 3.84% and 4.50%, respectively, a reduction of .66% from the prior period.

          Amortization includes 1) amortization of deferred policy acquisition costs related to capitalized costs of insurance business sold, 2) amortization related to the present value of polices purchased from acquired insurance business and 3) amortization of goodwill for the 2001 period.

•		Amortization in 2003 increased by $3.8 million or 19%, to $24.3 million. This increase relates primarily to higher annuity sales volume, offset by lower gross profits. We recorded a charge of $7.9 million and $7.8 million for 2003 and 2002, respectively, related to the acceleration of DAC amortization due to DAC unlocking.
•		Amortization in 2002 increased by $11.6 million or 130%, to $20.5 million. This increase relates primarily to a $7.8 million acceleration of DAC amortization due to DAC unlocking and the emergence of gross profits from business sold in recent years.

          Acquisition costs for deferred annuity contracts and equity-indexed annuity contracts are required to be amortized over the lives of the contracts in relation to the incidence of estimated gross profits. Estimated gross profits on fixed and equity-indexed annuity contracts include investment spread, surrender income, expense margins, and realized investment gains and losses. Gross profit estimates are evaluated regularly, with historical gross profit estimates adjusted to actual results and projected gross profit estimates updated to reflect current expectations. DAC amortization is adjusted both retrospectively and prospectively (unlocked) in accordance with the revised profit stream, and retrospective adjustments are reported in the current reporting period.

          Commission expenses represent commission expenses, net of deferrable amounts.

•		During 2003, commission expenses decreased $0.4 million to $3,000, primarily due to the termination of a marketing and administrative agreement in 2002.
•		During 2002, commission expenses were unchanged at $.4 million.

          Operating expenses consist of general operating expenses, including salaries, net of deferrable amounts.

•		In 2003, operating expenses increased by $1.7 million or 25%, to $8.4 million. Operating expenses increased as a result of our capitalizing $1.2 million less operating expense during 2003 as a decline in annuity sales from the record levels of $581 million for 2002 to $420 million for 2003 did not result in a corresponding decline in variable costs. In addition, operating expenses in 2003 increased by $.4 million for legal costs, including settlement amounts for the favorable disposition of several non-material claims and proceedings in the normal course of business.
•		In 2002, operating expenses increased $0.5 million or 8%, to $6.7 million.

          Operating expenses – affiliated consist of general operating expenses, including rent and management fees paid to Standard Management and recorded in the Other Services segment.

•		In 2003, affiliated operating expenses increased $0.6 million or 12%, to $5.5 million. Affiliated operating expenses in 2003 included an additional $.7 million of rent expense pursuant to the lease agreement for 2003 and 2002 for building operating costs including utilities and taxes.
•		In 2002, affiliated operating expenses increased $0.2 million or 3%, to $4.9 million.

          Interest expense and financing costs - affiliated represents interest expense incurred on the surplus debentures issued to Standard Management.

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•		In 2003, affiliated interest expense and financing costs decreased by $.1 million or 7%, to $1.7 million. The decline in interest expense resulted from the decline in the prime rate.
•		In 2002, affiliated interest expense and financing costs decreased by $.7 million or 27%, to $1.8 million. The decline in interest expense resulted from the decline in the prime rate.

          The weighted average interest rate for 2003, 2002, and 2001 was 6.20%, 6.67%, and 9.13%, respectively.

          Net realized investment gains (losses), net of related amortization fluctuate from period to period and generally arise when securities are sold in response to changes in the investment environment. Realized investment gains (losses) may affect the timing of the amortization of DAC and the amortization of the PVFP.

•		Net realized investment gains for 2003, net of DAC amortization of $9.6 million, were $8.2 million.
•		Net realized investment losses for 2002, net of DAC amortization of $9.9 million, were $9.0 million. The majority of the loss was attributable to the write-downs on the value of collateralized debt obligations due to increased default rates and securities in the energy and telecommunications sectors.

          We maintain a high quality investment portfolio with 99% and 97% of our fixed maturity securities classified as investment grade securities as of December 31, 2003 and 2002, respectively.

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Health Services:

     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:

     Net loss in for 2003 was $7.2 million as compared to $1.2 million for 2002. The 2003 loss included expenses associated with the continued development of U. S. Health Service’s operating platform and infrastructure, as well as ongoing concentrated marketing initiatives. Also, the 2003 results were reduced by $3.0 million as a result of recording a valuation allowance on the tax benefits on this segments operating loss.

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Other Services:

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

          Operating income - affiliated consists of income from the Financial Services segment related to management fees and rental income

•		During 2003, operating income - affiliated increased $.6 million or 12%, to $5.5 million due to increased rental income.
•		During 2002, operating income - affiliated increased $.2 million or 3%, to 4.9 million.

          Interest income - affiliated consists of interest income from the Financial Services segment related to the surplus debentures issued by Standard Management.

•		During 2003, interest income - affiliated decreased $.1 million or 7%, to $1.7 million. The decline in interest income resulted from the decline in the prime rate.
•		During 2002, interest income - affiliated decreased $.7 million or 27%, to 1.8 million. The decline in interest income resulted from the decline in the prime rate.

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

•		During 2003, commission income decreased $1.8 million or 73%, to $.7 million due to the sale of the assets of Savers Marketing.
•		During 2002, commission income decreased $3.8 million or 61%, to 2.4 million due to a decrease in sales by Savers Marketing.

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

•		During 2003, commission expenses decreased $.8 million or 99%, to $10,000 due to the sale of the assets of Savers Marketing.
•		During 2002, commission expenses decreased $2.7 million or 78%, to $.8 million due to a decrease in sales by Savers Marketing.

          Net investment expenses - affiliated represents interest expense paid to Financial Services.

          Other operating expenses consists of corporate operating expenses, including salaries.

•		During 2003, other operating expenses remained at $6.5 million.
•		During 2002, other operating expenses increased $1.4 million or 29%, to 6.5 million.

          Interest expense and financing costs represents interest expense incurred and the amortization of debt issuance costs.

•		During 2003, interest expense and financing costs increased $.1 million or 2%, to $4.4 million.
•		During 2002, interest expense and financing costs increased $.8 million or 24% to $4.3 million due to increased borrowings.

          Federal income tax benefit

•		During 2003, federal income tax benefit decreased $1.9 million or 82%, to $.4 million. Federal income benefit decreased due to a valuation allowance related to the operating losses recorded in 2003. Also, in 2002, there was a utilization of a net operating loss carryforward of $1.0 million.
•		During 2002, federal income tax benefit increased $2.7 million to $2.3 million. Federal income benefit increased due to the utilization a of a net operating loss carryforward of $1.0 million.

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International Operations (discontinued operations):

          General: Our International Operations (discontinued operations) were sold in 2002. The 2002 and 2001 results included revenues earned and expenses incurred from abroad, primarily Europe, and include fees collected on our deposits from unit-linked assurance products. The profitability of this segment primarily was dependant on the amount of separate account assets under management, the management fee charged on those assets and management of our operating expenses.

          Income from discontinued operations consist of general operating expenses, including salaries, net of deferrable amounts.

•

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

          Gain (loss) on sale of discontinued operations, net of related costs results from the sale of our International Operations in 2002.

•		Loss from the sale of discontinued operations in 2003 due to our settling a purchase price adjustment resulting in a $275,000 charge.
•		Gain from sale of discontinued operations in 2002 resulted from the sale of the portfolio of Premier Life (Bermuda), Limited and the sale of Premier Life (Luxembourg) S.A. in 2002.

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Liquidity and Capital Resources

Liquidity of Standard Management (Parent Company)

     We are a financial 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, 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 2004

     We anticipate that available cash from our existing working capital, surplus debenture interest, dividends, management fees, rental income and tax sharing payments will be adequate to meet our anticipated parent company cash requirements for 2004. The following describes our potential sources of cash in 2004.

     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 these quarterly approvals will be granted. Assuming the approvals are granted and the December 31, 2003 interest rate of 6.0% continues, we expect to receive interest income of $1.6 million from the surplus debentures in 2004.

     Dividends paid 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 12 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 2003 and 2002, there were no dividends received from our subsidiaries. In 2004, we could receive dividends of $1.9 million from Standard Life, without regulatory approval and an additional $8.5 million with regulatory approval.

     Management Fees. Pursuant to a management services agreement, Standard Life paid $ 3.6 million during 2003 for certain management services related to the production of business, investment of assets and evaluation of acquisitions. In addition, Dixie Life paid Standard Life $0.7 million in 2003, respectively, 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 2004, we expect to receive management fees of $3.6 million from Standard Life.

     Equipment Rental Fees. In 2003, we received $1.1 million from Standard Life for the use of our equipment and we expect to receive the same amount in 2004.

     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 in Indianapolis. During 2003, we received approximately $.8 million in lease income from Standard Life and we expect to receive the same amount in 2004. Also associated with this lease, Standard Life is responsible for its share of building maintenance expenses. During 2003, we received $.7 million in maintenance expenses for 2003 and 2002. We expect to receive $.3 million in maintenance expense in 2004.

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Estimated Cash Required in 2004

     The following are the characteristics of our mortgage payable, promissory note, notes payable and trust preferred securities, including estimated required payments in 2004.

     Mortgage Payable:

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

•		outstanding balance of $6.6 million;
•		interest rate of 7.375% per annum;
•		principal and interest payments: $56,000 per month through December, 2011;
•		interest payments required in 2004 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 notes at December 31, 2003:

•		outstanding balance of $1.0 million;
•		weighted average interest rate of 3.0% per annum;
•		principal and interest payments: $30,000 interest only per year in 2003 and 2004; principal payments thereafter beginning in 2005 through 2007.

     The following are characteristics of our senior secured credit agreement at December 31, 2003:

•		outstanding balance of $20 million;
•		weighted average interest rate of 5.92%;
•		principal payments: $1.5 million to be paid in 2004, $2.0 million to be paid in 2005, $2.1 million to be paid in 2006, and $2.2 million to be paid in 2007. The remaining principal payment of $12.2 million is due in 2008
•		subject to certain restrictions and financial and other covenants;
•		interest payments required in 2004 based on current balances will be $1.2 million.

     Trust Preferred Securities:

     These securities represent an undivided beneficial interest in the assets of SMAN Capital Trust I, a Delaware business trust organized to purchase our junior subordinated debentures and issue preferred securities. The assets of the Trust consist solely of the debentures which were purchased by the Trust with the proceeds of the offering. On August 9, 2001, the Trust completed a public offering of $20.7 million of its 10.25% preferred securities. The Trust used the proceeds of this offering to purchase our 10.25% junior subordinated debentures.

     The following are characteristics of our trust preferred securities at December 31, 2003:

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

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     General. On a consolidated basis we reported net cash provided by operations of $26.8 million and $18.4 million for 2003 and 2002, respectively. Although deposits received on our interest-sensitive annuities and other financial products are not included in cash flow from operations under GAAP, these funds are available. Cash provided by operations plus net deposits received, less net account balances returned to policyholders on interest sensitive annuities and other financial products, resulted in positive cash flow of $230.5 million and $479.0 million for 2003 and 2002, respectively. The decrease is primarily due to a decline in annuity premium deposits. Cash generated on a consolidated basis is available only to the extent that it is generated at the holding company level or is available through interest, dividends, management fees or other payments from our subsidiaries.

     At December 31, 2003, we had “parent company only” cash and short-term investments of $.3 million. These funds are available for general corporate purposes. Our “parent company only” operating expenses, not including interest expense, were $5.5 million and $5.5 million for 2003 and 2002, respectively.

     Contractual Obligations. In our day-to-day business activities, we incur certain commitments to make future payments under contracts such as operating leases and purchase orders. Maturities under these contracts are set forth in the following table as of December 31, 2003, in thousands:

(Payments include principal and interest)

     Off-Balance Sheet Arrangements. We have no off-balance sheet financing arrangements.

Liquidity of Financial Services

     The principal liquidity requirements of Standard Life are its 1) contractual obligations to policyholders, 2) surplus debenture interest, dividends, management fees and rental fees to Standard Management and 3) operating expenses. The primary source of funding for these obligations has been cash flow from premium income, net investment income, investment sales and maturities and sales of annuity products. These sources of liquidity for Standard Life significantly exceed scheduled uses. Liquidity is also affected by unscheduled benefit payments including death benefits, policy withdrawals and surrenders. The amount of withdrawals and surrenders is affected by a variety of factors such as renewal interest crediting rates, interest rates for competing products, general economic conditions, Standard Life’s A.M. Best rating and events in the industry that affect policyholders’ confidence. In October 2003, A.M. Best confirmed Standard Life’s rating of (“B+”), or “very good”.

     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 U.S. insurance subsidiaries currently expect available liquidity sources and future cash flows to be adequate to meet the demand for funds.

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     Statutory surplus is computed according to rules prescribed by the NAIC 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, and in 2003 none of our products 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 U.S. 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 2004. As of December 31, 2003, Standard Life had statutory capital and surplus for regulatory purposes of $62.8 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 $139.8 million and $343.2 million for 2003 and 2002, respectively. The decrease is primarily due to a decline in annuity premium deposits. If the need arises for cash, which is not readily available, additional liquidity could be obtained from the sale of invested assets.

Liquidity of Health Services

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

     We believe that the operational cash flow of our Health Services segment will not be sufficient to meet our anticipated operational needs for 2004. Therefore, this segment is expected to continue to fund its cash needs through external borrowings and capital contributions from Standard Management.

Factors That May Affect Future Results

     We are currently considering a transaction that would significantly alter the nature of our business.

     We have historically operated in the financial services segment as a holding company for insurance companies. If we consummate the currently contemplated sale of Standard Life and exit the financial services segment, we would be operating solely in the health services segment, which we entered only two years ago. To date, our health services operations have generated little revenue and have sustained significant losses. In order to become profitable, our health services business will require additional capital expenditures. There can be no assurance that we would be able to obtain sufficient funds, from operating cash flow or otherwise, to successfully operate and expand the business. We have limited history operating in the health services segment and no assurance can be given that such operations will ever be profitable. See “Recent Developments” on page 3.

            The price of the Company’s common stock may demonstrate increased volatility upon the announcement of a proposed sale of Standard Life or upon the consummation of such a transaction and could decline below recent levels. In the event of a significant and sustained decline, the Company could be delisted from Nasdaq.

     The Company’s common stock may exhibit increased volatility upon the announcement or consummation of a transaction involving the sale of Standard Life. Depending upon investor acceptance of the proposed transaction, the price of the stock could decline below recent levels. If such decline were severe and sustained, Nasdaq could initiate action to delist the Company’s shares, which could further negatively impact the price and/or marketability of the shares.

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     We are subject to a number of factors affecting its business, including intense competition in the industry and the ability to attract and retain agents, suppliers, clients and employees. If we are unable to respond appropriately to any of these factors, business and financial results could suffer.

     Our operating results are affected by many factors, including competition, lapse rates, interest rates, maintenance of insurance ratings, changes in the regulatory environment with respect to pharmacy service providers, relationships with suppliers of inventory held in its health services division, relationships with large institutional clients, general governmental regulation and general business conditions, many of which are outside our control.

     Our financial services division operates in a highly competitive environment and is in direct competition with a large number of insurance companies, many of which offer a greater number of products through a greater number of agents and have greater resources. In addition, we may be subject, from time to time, to new competition resulting from additional insurance carriers introducing products similar to those offered by us. Moreover, as a result of recent federal legislation, commercial banks, insurance companies, and investment banks may now combine, provided certain requirements are satisfied, and we can expect to encounter increased competition from these providers of financial services. This competitive environment could result in lower premiums, loss of sales and reduced profitability.

     We believe that the ability to compete is dependent upon, among other things, the ability to retain and attract independent general agents to market products and the ability to develop competitive products that also are profitable. Although management believes that good relationships with our independent general agents exist, competition for those agents among insurance companies is intense. Our independent general agents typically represent other insurance companies and may sell products that compete with its products. Sales of our annuity products and, therefore, our results of operations and financial condition may be adversely affected if we are unsuccessful in attracting and retaining independent agents and marketing organizations.

     Our health services segment operates in a highly competitive environment and is in direct and indirect competition with a number of other companies that operate in the pharmaceutical market space, including other retail, institutional and wholesale pharmacies, health insurers, health management organizations, pharmacy benefit managers and discount drug programs offered directly by pharmaceutical manufacturers. In addition, the provision of drugs and pharmacy benefits is a highly dynamic and evolving business which is tied closely to changes in the Medicare/Medicaid reimbursement environment, governmental entitlement program budget restrictions exercised at both the state and federal levels, cost controls imposed by third-party payors in an attempt to exercise control over spiraling health care costs, and increasing competition from pharmacies operating outside the United States which ship drugs to U.S. residents over the Internet and using other distribution channels. There are currently a number of active initiatives being pursued by local and national legislatures. On December 8, 2003, President Bush signed into law the Medicare Prescription Drug Improvement and Modernization Act of 2003, a comprehensive voluntary prescription drug benefit administered under Medicare Part D effective January 1, 2006. The new act also provides certain cost-sharing government subsidies for individuals who might otherwise qualify for drug coverage under Medicaid or similar government-funded aid programs.

     Since a notable portion of our future institutional pharmacy business will be made available to Medicare-qualified patients who may qualify for this new benefit, it may have a substantial and lasting effect on the profitability of our business depending on how it and similar initiatives are administered by the government agencies charged with implementation. Since important elements of the new act relating to issues as formulary development, drug pricing and drug discount cards have yet to be finalized, it is impossible to predict the impact of the act on our profitability.

     Our success also depends upon the continued contributions of key officers and employees. Should one or more of these individuals leave or otherwise become unavailable for any reason, business and results of operations could be materially adversely affected.

     Financial results could suffer if our A.M. Best ratings are downgraded.

     Insurers compete with other insurance companies, financial intermediaries and other institutions on the basis of a number of factors, including the ratings assigned by A.M. Best. A.M. Best assigns ratings labeled (“A++”) through (“F”) (“Superior,” “Excellent,” “Very Good,” “Fair,” “Marginal,” “Weak,” “Poor,” “Under Regulatory Supervision,” and “In Liquidation”). Standard Life and Dixie Life have a rating of (“B+”) (Very Good) and (“B”) (Fair), respectively, by A.M. Best. A.M. Best’s ratings represent their opinion based on a comprehensive quantitative and qualitative review of our financial strength, operating performance and market profile. A rating of (“B+”) is assigned by A.M. Best to companies

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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 reviews its ratings of insurance companies from time to time. If the A.M. Best ratings were downgraded, sales of annuity products could be significantly impacted and the financial condition and results of operations could be materially adversely affected.

     Changes in governmental regulation and legislation could have a substantial impact on our profitability.

     Our insurance subsidiaries are subject to substantial governmental regulation in each of the jurisdictions in which they conduct business. Changes in these regulations could have a significant impact on our profitability. The primary purpose of these regulations is to protect policyholders, not investors. These regulations are vested in governmental agencies having broad administrative power with respect to all aspects of our insurance business, including premium rates, policy forms and applications, marketing illustrations, dividend payments, capital adequacy and the amount and type of investments we may have.

     The NAIC, and state insurance regulators continually reexamine existing laws and regulations and their application to insurance companies. Changes in the NAIC or state regulations, including, for example, changes in the risk-based capital requirements, which are determined by the NAIC and state regulators, could affect the ability of our subsidiaries to pay dividends to us which could affect our ability to make payments upon our contractual obligations.

     In addition, the federal government has become increasingly involved with insurance regulation in recent years, including the passage of the Gramm-Leach-Bliley Act, and more comprehensive federal legislation in this area is still being considered by Congress. Federal legislation and administrative policies in several areas, including pension regulation, age and sex discrimination, financial services regulation and federal taxation, affect us specifically and the insurance business in general. New state or federal laws or regulations, as well as a more strict interpretation of existing laws or regulations, may adversely affect our current claims exposure, adversely affect the profitability of our current and future products, and materially affect our future operations by increasing the costs of regulatory compliance. We cannot predict the impact of future state or federal laws or regulations on our business. See “Business of Standard Management – Regulatory Factors.”

     Our health subsidiary is also subject to substantial regulation at both the state and Federal levels. Our ability to continue operating as a retail, mail order and institutional pharmacy is contingent upon our ability to maintain appropriate licenses in all the states in which they currently conduct business. We are also required to comply with a comprehensive set of regulations under the Federal Health Insurance Portability and Accountability Act (“HIPAA”) with respect to the privacy and security of patient health information and the method in which this information is electronically transmitted to payors and governmental agencies such as the agencies responsible for implementing the Medicare and Medicaid programs. Regulations implementing HIPAA are still being disseminated, revised and actively reviewed as of the time of this writing. It is possible that substantial changes in these regulations, or in the strictness of interpretation of these regulations, may adversely affect our relationships with our clients and materially affect our future operations by increasing the costs of regulatory compliance. As with the insurance laws, we cannot predict the impact of future state or Federal laws or regulations on its health services business.

     Under the Internal Revenue Code of 1986, as amended (“Code”), income tax payable by policyholders on investment earnings is deferred during the accumulation period of certain life insurance and annuity products. The favorable tax treatment may give certain of our products a competitive advantage over other non-insurance products. On May 28, 2003, President Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003, which reduces the federal income tax rates applicable to certain dividends and capital gains realized by individuals. This legislation may lessen the competitive advantage of certain of our products relative to other investments that generate dividend or capital gain income. As a result, demand for certain of our products that offer income tax deferral may be negatively affected. Additionally, Congress has from time to time considered other legislation that would reduce or eliminate the relative benefits to policy owners of the deferral of taxation on the accretion of value within certain insurance products or might otherwise affect the taxation of insurance products and insurance companies. In particular, President Bush recently proposed legislation, currently under consideration by Congress, that would increase the amount that taxpayers may contribute each year to individual retirement

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accounts, which provide deferral benefits similar to those offered by our tax-deferral products. To the extent that the Code is revised in accordance with these proposals or otherwise in a manner that reduces the tax-deferred status of insurance products, or reduces the taxation of, or expands the market for, competing products, all life insurance companies, including us, could be adversely affected.

     Interest rate fluctuations could negatively affect spread income.

     Significant changes in interest rates expose insurance companies to the risk of not earning anticipated spreads between the interest rate earned on investments and the credited interest rates paid on outstanding policies. Both rising and declining interest rates can negatively affect spread income. Although we develop and maintain asset/liability management programs and procedures designed to preserve spread income in rising or falling interest rate environments, changes in interest rates could adversely affect these spreads.

     Our financial results are highly dependent on the financial condition of the companies in which we make investments and could suffer if the value of our investments decreases due to factors beyond our control.

     Our invested assets, approximately $1.69 billion, represented approximately 86% of our total assets at December 31, 2003. These investments are subject to customary risks of credit defaults and changes in market values. In addition, the value of our investment portfolio depends in part on the financial condition of the companies in which we have made investments. Factors beyond our control, including interest rate levels, financial market performance, and general economic conditions may have a significant negative impact on our investment income and the value of our investment assets, which would have a material adverse affect on our financial condition.

     Our policy claims fluctuate from year to year, and future benefit payments may exceed our established reserves, which would cause our earnings to suffer.

     Our earnings are significantly dependent upon the extent to which the actual claims received by our subsidiaries is consistent with the actuarial assumptions we use in establishing reserves for the payment of benefit claims. To the extent that the actual claims experience of our subsidiaries exceeds our established reserves, our operating income would be negatively affected, resulting in an adverse effect on our earnings.

     Volatility in benefit claims is common in the life insurance industry. While our reserves have been sufficient to cover policy claims in the past and we attempt to limit the risk by carefully underwriting new policies and sharing risks with reinsurance companies, we may still experience a period of higher than anticipated benefit claims that exceeds our established reserves. If this were to happen, it could result in increased operating losses.

     Because a significant portion of our annuity contracts are surrenderable, any substantial increase in the level of surrenders could negatively affect financial results.

     As of December 31, 2003, approximately 79.4% or $1.2 billion of annuity contracts in force (measured by statutory reserves) were surrenderable. Approximately 9% of those contracts or approximately $99.9 million of annuity contracts in force (measured by statutory reserves) are surrenderable without charge. Changes in prevailing interest rates, ratings or other factors which result in or lead to significant levels of surrenders of existing annuity contracts could have a material adverse effect on our financial condition and results of operations. Surrenders result in a reduction of invested assets that earn investment income and a reduction of policyholder account balances that credit interest.

     Our financial results could be materially adversely affected if our assumptions regarding the value of intangible assets proven to be incorrect.

     Included in our financial statements are certain assets that are primarily valued, for financial statement purposes, on the basis of management’s assumptions. These assets include items such as:

•		deferred policy acquisition costs;
•		present value of future profits;
•		intangibles;

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•		goodwill; and
•		organization and deferred debt issuance costs.

     The assumptions are based upon, among others, interest rate spread and rates of mortality, surrender and lapse. If, for instance, future mortality rates were higher than expected, projected margins would be lower and deferred policy acquisition cost amortization would increase. The value of these assets reflected in our December 31, 2003 balance sheet totaled $166 million, or 8% of our assets. Although we have established procedures to periodically review the assumptions used to value these assets and determine the need to make adjustments, if our assumptions are incorrect and adjustments need to be made, our financial results could be materially adversely affected.

     Our profitability and ability to conduct business through our health subsidiary could be negatively impacted by a change in our relationships with our largest institutional clients.

     A large portion of the present and future growth of our institutional pharmacy business is contingent upon our ability to acquire and retain long-term contracts at favorable terms with institutional care facilities. Currently we have thirteen contractual relationships with large institutional clients and forty three relationships with smaller facilities. We are presently attempting to grow and diversify the number, type and terms of these contracts, but a number of factors – including the ability to favorably compete with respect to pricing, our relationships with drug and supplement manufacturers and suppliers, and the economic solvency and profitability of our institutional clients – can impact our profitability and opportunities for future growth. In addition, although we believe our current relationship with our institutional clients is strong, the loss of key institutional clients would materially affect the operation of our health services segment.

     Because our health services business model is relatively new and unproven, its limited operating history in this segment is not indicative of future performance, and this part of its business is difficult to evaluate.

     Because we have only recently entered the Health Services segment, it does not have an operating history upon which an investor can evaluate our prospects. In attempting to implement our business model, we may need to significantly change our business operations, sales and implementation practices, customer service and support operations and management focus. We are also facing new risks and challenges, including a lack of meaningful historical financial data upon which to plan future budgets, the need to develop strategic relationships and other risks described below

     Continuing efforts to contain healthcare costs may reduce our future health services revenue.

     The sales and profitability of the health services segment are affected by the efforts of healthcare payors to contain or reduce the cost of healthcare by lowering reimbursement rates, limiting the scope of covered services, and negotiating reduced or capitated pricing arrangements. Any changes which lower reimbursement levels under Medicaid, Medicare or private pay programs, including managed care contracts, could reduce our future revenue. Furthermore, other changes in these reimbursement programs or in related regulations could reduce its future revenue. These changes may include modifications in the timing or processing of payments and other changes intended to limit or decrease the growth of Medicaid, Medicare or third party expenditures.

     If we fail to comply with licensure requirements, fraud and abuse laws or other applicable laws, it may need to curtail operations, and could be subject to significant penalties.

     Our pharmacy business is subject to extensive and often changing federal, state and local regulations, and our pharmacy is required to be licensed in the states in which it is located or does business. While we continuously monitor the effects of regulatory activity on its operations and believe we currently have all necessary pharmacy licenses, the failure to obtain or renew any required regulatory approvals or licenses could adversely affect the continued operation of the business. The long-term care facilities that contract for our services are also subject to federal, state and local regulations and are required to be licensed in the states in which they are located. The failure by these long-term care facilities to comply with these or future regulations or to obtain or renew any required licenses could result in our inability to provide pharmacy services to these facilities and their residents. We are also subject to federal and state laws that prohibit some types of direct and indirect payments between healthcare providers. These laws, commonly known as the fraud and abuse laws, prohibit payments intended to induce or encourage the referral of patients to, or the recommendation of, a particular provider of items or services. Violation of these laws can result in loss of licensure, civil and criminal penalties and exclusion from the Medicaid, Medicare and other federal healthcare programs.

     If we or our client institutions fail to comply with Medicaid and Medicare reimbursement regulations, our health services revenue could be reduced, we could be subject to penalties and we could lose our eligibility to participate in these programs.

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     As of December 31, 2003, approximately 25% of our health services’ pharmacy billings were directly reimbursed by government sponsored programs. Government sponsored programs include Medicaid and, to a lesser extent, Medicare. Our remaining billings are currently paid or reimbursed by individual residents, long-term care facilities and other third-party payors, including private insurers. A portion of these revenues are indirectly dependent on government programs. We anticipate that as the institutional pharmacy portion of our Health Services segment grows, direct reimbursement from government sponsored programs will become a material portion of our pharmacy billings.

     The Medicaid and Medicare programs are highly regulated. The failure, even if inadvertent, of us and/or our client institutions to comply with applicable reimbursement regulations could adversely affect our reimbursement under these programs and our ability to continue to participate in these programs. In addition, our failure to comply with these regulations could subject us to other penalties.

     We are subject to additional risks relating to our acquisition strategy.

     One component of our growth strategy contemplates our making selected acquisitions that will help grow the Health Services segment. Acquisitions involve inherent uncertainties. These uncertainties include the effect on the acquired businesses of integration into a larger organization and the availability of management resources to oversee the operations of these businesses. The successful integration of acquired businesses will require, among others:

•		consolidation of financial and managerial functions and elimination of operational redundancies;
•		achievement of purchasing efficiencies;
•		the addition and integration of key personnel; and
•		the maintenance of existing business.

     Even though an acquired business may have experienced positive financial performance as an independent company prior to an acquisition, we cannot be sure that the business will continue to perform positively after an acquisition.

     We also may acquire businesses with unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations. We have policies and procedures to conduct reviews of potential acquisition candidates for compliance with healthcare laws and to conform the practices of acquired businesses to its standards and applicable laws. We also generally seek indemnification from sellers covering these matters. We may, however, incur material liabilities for past activities of acquired businesses.

     We cannot be sure of the successful integration of any acquisition or that an acquisition will not have an adverse impact on our results of operations or financial condition.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     We seek to invest available funds in a manner that will maximize shareholder value and fund future obligations to policyholders and debtors, subject to appropriate risk considerations. Many of our products incorporate surrender charges, market interest rate adjustments or other features to encourage persistency. Approximately 68.7% of the total insurance liabilities at December 31, 2003 had surrender penalties or other restrictions and approximately 21% are not subject to surrender.

     We also seek to maximize the total return on our investments through active investment management. Accordingly, we have determined that the entire portfolio of fixed maturity securities is available to be sold in response to:

•		changes in market interest rates;
•		changes in relative values of individual securities and asset sectors;
•		changes in prepayment risks;
•		changes in credit quality outlook for certain securities;
•		liquidity needs; and
•		other factors.

     Profitability of many of our products is significantly affected by the spreads between interest yields on investments and rates credited on insurance liabilities. Although substantially all credited rates on annuity products may be changed annually (subject to minimum guaranteed rates), changes in competition and other factors, including the impact of the level of surrenders and withdrawals, may limit the ability to adjust or to maintain crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions. As of December 31, 2003, the average yield, computed on the cost basis of the investment portfolio, was 5.45%, and the average interest rate credited or accruing to total insurance liabilities was 3.64%, excluding guaranteed interest bonuses for the first year of the annuity contract.

     Computer models were used to perform simulations of the cash flows generated from our existing business under various interest rate scenarios. These simulations measured the potential gain or loss in fair value of interest rate-sensitive financial instruments. With such estimates, we seek to closely match the duration of assets to the duration of liabilities. When the estimated duration 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. At December 31, 2003, the option adjusted duration of fixed maturity securities and short-term investments were approximately 4.86, and the option adjusted duration of insurance liabilities was approximately 5.51. The “option adjusted duration” compares the change in the value of an asset or liability with a change in interest rates. This means that if interest rates in general increased 1%, the value of our asset portfolio would decrease by approximately 5.51%.

     If interest rates were to increase by 10% from their December 31, 2003 levels, our fixed maturity securities and short-term investments (net of the corresponding changes in the values of cost of policies purchased, cost of policies produced and insurance liabilities) would decline in fair value by approximately $87.6 million.

     The calculations involved in our computer simulations incorporate numerous assumptions, require significant estimates and assume an immediate change in interest rates without any management of the investment portfolio in reaction to such change. Consequently, potential changes in the value of our financial instruments indicated by the simulations will likely be different from the actual changes experienced under given interest rate scenarios, and the differences may be material. Because our investments and liabilities are actively managed, actual losses could be less than those estimated above.

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Item 8. Consolidated Financial Statements and Supplementary Data

     The financial statements and supplementary data required with respect to this Item 8 are listed in Item 15(a) (1) and included in a separate section of this report and are incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     None

Item 9A. 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 December 31, 2003 (the “Evaluation Date”). They have concluded that, as of the Evaluation Date, our disclosure controls and procedures were adequate and effective. There were no significant changes in our internal controls or in other factors that could significantly affect disclosure controls and procedures subsequent to the Evaluation Date.

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PART III

Item 10. Directors and Executive Officers of the Registrant

     Our executive officers and directors are as follows:

     Ronald D. Hunter. Mr. Hunter has been our Chairman of the Board, Chief Executive Officer since its formation in June 1989 and the Chairman of the Board and Chief Executive Officer of Standard Life since December 1987. From June 1989 until 2002, Mr. Hunter also served as our President. Previously, Mr. Hunter held several management and sales positions in the life insurance industry with a number of companies. Mr. Hunter has been widely recognized for his vision and leadership qualities, earning him the distinction of being a finalist four times for the Ernst & Young Entrepreneur of the Year award. He has also become well-known as the author of the book, Vision Questing: Turning Dreams into Realities.

     P.B. (Pete) Pheffer. Mr. Pheffer has been our President since 2002 and Chief Financial Officer and a director since June 1997. Prior to joining us, Mr. Pheffer was Senior Vice President, Chief Financial Officer and Treasurer of Jackson National Life Insurance Company from 1994 to 1996 and prior to that was Senior Vice President and Chief Financial Officer at Kemper Life Insurance Companies from 1992 to 1994. Mr. Pheffer, a CPA, received his MBA from the University of Chicago in 1988.

     Stephen M. Coons. Mr. Coons has been a director since August 1989. Mr. Coons has been our General Counsel and Executive Vice President since March 1993 and has been our Secretary since March 1994. He was of counsel to the law firm of Coons, Maddox & Koeller from March 1993 to December 1995. Prior to March 1993, Mr. Coons was a partner with the law firm of Coons & Saint. He has been practicing law for over 30 years. Mr. Coons served as Indiana Securities Commissioner from 1978 to 1983.

     Marc D. Novotney. Mr. Novotney has served as President of Standard Life Insurance Company of Indiana since March 2003. Mr. Novotney was the President of Western Security Life Insurance Company, an AmerUs Company, from 1995 to 2002. Mr. Novotney also served as Senior Vice President, Multi-Company Business of Indianapolis Life Insurance Company from 1999 to 2002. Mr. Novotney received his MBA from Indiana Wesleyan University.

     Martial R. Knieser. Dr. Knieser has served as President of U.S. Health Services since January 2004 and has been a director of Standard Management since 1990. He was Director of Laboratories of Community Hospital Indianapolis from 1978 to 1991 and was Medical Director of Stat Laboratory Services

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from 1989 to 1999. Dr. Knieser also has been Medical Director of Standard Life since December 1987. Dr. Knieser currently serves as Director of Laboratories of St. Vincent Mercy Hospital, Elwood, Indiana.

     Robert A. Borns. Mr. Borns has been a director since 1996. He has served as Chairman of Borns Management Corporation (real estate owners and managers), Indianapolis, Indiana since 1962 and as Chairman of Correctional Management Company, L.L.C. (privatized correctional facilities), Indianapolis, Indiana since 1996. Mr. Borns serves on the board of Northern Trust Company Bank/California, division of Northern Trust Co.

     Robert J. Salyers. Mr. Salyers has been a director since 2001. Mr. Salyers has been practicing law since 1973 and is currently with the law firm of Salyers & Eiteljorg, P.C. Mr. Salyers received his B.S. from Purdue University and his J.D. from Indiana University Law School.

     James H. Steane II. Mr. Steane has been a director since 2002. In 1999 Mr. Steane retired from Fleet Bank after 29 years in corporate banking, where he held a number of positions, including Senior Vice President and Senior Lending Officer in the Insurance and Mutual Fund Group of Fleet Bank. Mr. Steane is also the past President of Junior Achievement of Hartford, Connecticut and the American School for the Deaf. Mr. Steane received his MBA from Adelphi University.

Board of Directors

     Our board of directors consists of seven directors and is divided into three classes, each serving a three-year term. Messrs. Hunter and Steane serve as Class III directors until the 2004 annual meeting of shareholders. Messrs. Borns and Salyers serve as Class I directors until the 2005 annual meeting of shareholders. Messrs. Coons, Knieser and Pheffer serve as Class II directors until the 2006 annual meeting of shareholders.

     Our board of directors has five standing committees: the Executive Committee, the Audit Committee, the Compensation Committee, the Incentive Stock Option Committee and the Nominating Committee.

     The principal function of the Executive Committee is acting for the full board of directors in the management of business when action is required between board of directors meetings. The committee meets as necessary, and all actions by the committee are reported at the next board of directors meeting. Members of the Executive Committee are Messrs. Hunter (Chairman), Coons, Pheffer and Salyers.

     The Audit Committee reviews the results and scope of the audit and other services provided by its independent auditors and recommends the appointment of independent auditors to the board of directors. In addition, the committee also monitors the effectiveness of the audit effort and financial reporting and the adequacy of financial and operating controls. Members of the Audit Committee are Messrs. Steane (Chairman), Borns and Salyers. Mr. Steane has been designated by our board of directors as the audit committee financial expert.

     The Compensation Committee approves compensation objectives and policy for all employees and is responsible for developing and making recommendations to the board of directors with respect to the Company’s executive compensation policies. In addition, the Compensation Committee determines periodically and recommends to the board of directors the base cash compensation for our Chief Executive Officer and other executive officers. The committee reports to shareholders on executive compensation items as required by the SEC. Members of the Compensation Committee are Messrs. Borns (Chairman), Steane and Salyers.

     The Incentive Stock Option Committee has responsibility for granting stock options to eligible members of management under, and otherwise administers both the 2002 Stock Incentive Plan and the Amended and Restated 1992 Stock Option Plan. The entire board of directors comprises the members of the Incentive Stock Option Plan Committee.

     The Nominating Committee recommends to the full board of directors qualified candidates for election as our directors and officers. Members of the Nominating Committee are Messrs. Salyers (Chairman), Borns and Steane.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

     Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and persons who own more than ten percent (10%) of our common stock (“Reporting Persons”), to file

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reports of ownership and changes in ownership with the Securities and Exchange Commission. Reporting Persons are required by the Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) reports they file. Based solely on our review of the copies of such forms received by us and written representations from certain Reporting Persons, we believe that during 2003 our Reporting Persons complied with all filing requirements applicable to them.

Code of Ethics

     We have adopted a Code of Business Conduct and Ethics that applies to our Chief Executive Officer, Chief Financial Officer, and the principal accounting officer. A copy of this Code of Business Conduct and Ethics is available without charge upon request from the Chief Financial Officer at Standard Management Corporation, 10689 N. Pennsylvania, Indianapolis, Indiana 46280. If we make any substantive amendments to this Code of Business Conduct and Ethics or grants any waiver from a provision of it, we will disclose the nature of such amendment or waiver on our website at www.sman.com or in a Current Report on Form 8-K.

Item 11. Executive Compensation

     The following table sets forth the annual and certain other components of the compensation for the last three fiscal years earned by Mr. Hunter, Chairman and Chief Executive Officer of the Company, and our other currently serving executive officers whose salary and bonus exceeded $100,000 during fiscal year 2003 (Messrs. Pheffer, Coons and Novotney) as well as such information for certain former executive officers whose salary and bonus exceeded $100,000 during fiscal year 2003 but who were no longer serving in such a capacity at the end of 2003 (Messrs. Firestone and Stahl):

SUMMARY COMPENSATION TABLE

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SUMMARY COMPENSATION TABLE (Continued)