SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

|X| Quarterly Report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2003

|_| Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

Commission File Number 0-3722

ATLANTIC AMERICAN CORPORATION
Incorporated pursuant to the laws of the State of Georgia

Internal Revenue Service-- Employer Identification No.
58-1027114

Address of Principal Executive Offices:
4370 Peachtree Road, N.E., Atlanta, Georgia 30319
(404) 266-5500

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes . No X .

The total number of shares of the registrant’s Common Stock, $1 par value, outstanding on November 6, 2003, was 21,214,332.

ATLANTIC AMERICAN CORPORATION

INDEX

Part I.	Financial Information	Page No.
Item 1.	Financial Statements:
	Consolidated Balance Sheets- September 30, 2003 and December 31, 2002	2
	Consolidated Statements of Operations- Three months and nine months ended September 30, 2003 and 2002	3
	Consolidated Statements of Shareholders' Equity - Nine months ended September 30, 2003 and 2002	4
	Consolidated Statements of Cash Flows - Nine months ended September 30, 2003 and 2002	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21
Part II.	Other Information
Item 1.	Legal Proceedings	22
Item 6.	Exhibits and Reports on Form 8-K	22
Signature		23

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited; In thousands, except share data)


ASSETS
	September 30, 2003	December 31, 2002
Cash, including short-term investments of $700 and $21,487	$ 27,947	$ 41,638
Investments:
Bonds (cost: $199,475 and $175,672)	205,002	181,830
Common and preferred stocks (cost: $46,429 and $42,042)	64,425	57,242
Other invested assets (cost: $4,867 and $5,255)	4,703	5,031
Mortgage loans	3,225	3,330
Policy and student loans	2,366	2,409
Total investments	279,721	249,842
Receivables:
Reinsurance	48,279	49,875
Other (net of allowance for doubtful accounts: $1,324 and $1,121)	40,561	40,386
Deferred income taxes, net	1,189	667
Deferred acquisition costs	26,935	25,922
Other assets	9,213	9,644
Goodwill	3,008	3,008
Total assets	$ 436,853	$ 420,982

LIABILITIES AND SHAREHOLDERS' EQUITY

Insurance reserves and policy funds:
Future policy benefits	$ 46,435	$ 44,767
Unearned premiums	54,300	55,900
Losses and claims	153,480	148,691
Other policy liabilities	4,512	4,777
Total policy liabilities	258,727	254,135
Accounts payable and accrued expenses	41,066	38,807
Bank debt payable	15,000	32,000
Trust preferred securities obligations	40,000	17,500
Total liabilities	354,793	342,442

Commitments and contingencies (Note 9)
Shareholders' equity:
Preferred stock, $1 par, 4,000,000 shares authorized; Series B preferred, 134,000 shares issued and outstanding, $13,400 redemption value	134	134
Series C preferred, 5,000 shares and 25,000 shares issued and outstanding in 2003 and 2002, respectively; $500 and $2,500 redemption value in 2003 and 2002, respectively	5	25
Common stock, $1 par, 50,000,000 shares authorized; 21,412,138 shares issued and 21,207,280 shares outstanding in 2003 and 21,374,370 shares outstanding in 2002	21,412	21,412
Additional paid-in capital	52,258	55,204
Accumulated deficit	(6,124)	(11,270)
Unearned compensation	(39)	(30)
Accumulated other comprehensive income	14,792	13,143
Treasury stock, at cost, 204,858 shares in 2003 and 37,768 shares in 2002	(378)	(78)
Total shareholders' equity	82,060	78,540
Total liabilities and shareholders' equity	$ 436,853	$ 420,982

The accompanying notes are an integral part of these consolidated financial statements.

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ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; In thousands, except per share data)


	Three Months Ended September 30,		Nine Months Ended September 30,
	2003	2002	2003	2002
Revenue:
Insurance premiums	$ 37,916	$ 39,163	$ 115,671	$ 114,695
Investment income	3,900	3,782	11,770	10,693
Realized investment gains (losses), net	(501)	45	834	147
Other income	219	161	741	764
Total revenue	41,534	43,151	129,016	126,299
Benefits and expenses:
Insurance benefits and losses incurred	23,220	28,538	78,535	82,045
Commissions and underwriting expenses	11,824	11,414	33,014	30,514
Interest expense	827	642	2,295	1,891
Other	3,946	3,082	10,879	8,689
Total benefits and expenses	39,817	43,676	124,723	123,139
Income before income taxes and cumulative effect of change in accounting principle	1,717	(525)	4,293	3,160
Income tax benefit	(1,549)	(1,481)	(880)	(243)
Income before cumulative effect of change in accounting principle	3,266	956	5,173	3,403
Cumulative effect of change in accounting principle (Note 2)	-	-	-	(15,816)
Net income (loss)	3,266	956	5,173	(12,413)
Preferred stock dividends	(324)	(358)	(1,036)	(1,073)
Net income (loss) applicable to common stock	$ 2,942	$ 598	$ 4,137	$ (13,486)
Basic income (loss) per common share:
Income before cumulative effect of change in accounting principle	$ .14	$ .03	$ .20	$ .11
Cumulative effect of change in accounting principle	-	-	-	(.74)
Net income (loss)	$ .14	$ .03	$ .20	$ (.63)
Diluted income (loss) per common share:
Income before cumulative effect of change in accounting principle	$ .13	$ .03	$ .19	$ .11
Cumulative effect of change in accounting principle	-	-	-	(.73)
Net income (loss)	$ .13	$ .03	$ .19	$ (.62)

The accompanying notes are an integral part of these consolidated financial statements.

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ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited; In thousands)


Nine Months Ended September 30, 2003	Preferred Stock	Common Stock	Additional Paid-in Capital	Accumulated Deficit
Balance, December 31, 2002	$ 159	$ 21,412	$ 55,204	$ (11,270)
Comprehensive income:
Net income				5,173
Increase in unrealized investment gains
Fair value adjustment to interest rate swap
Deferred income tax attributable to other comprehensive income
Total comprehensive income

Preferred stock redeemed	(20)		(1,980)
Dividends accrued on preferred stock			(1,036)
Deferred share compensation expense			39
Restricted stock grants			(1)
Amortization of unearned compensation
Purchase of shares for treasury
Issuance of shares for employee benefit plans and stock options			32	(27)
Balance, September 30, 2003	$ 139	$ 21,412	$ 52,258	$ (6,124)


Nine Months Ended September 30, 2003	Unearned Compensation	Net Accumulated Other Comprehensive Income	Treasury Stock	Total
Balance, December 31, 2002	$ (30)	$ 13,143	$ (78)	$ 78,540
Comprehensive income:
Net income				5,173
Increase in unrealized investment gains		2,223		2,223
Fair value adjustment to interest rate swap		314		314
Deferred income tax attributable to other comprehensive income		(888)		(888)
Total comprehensive income				6,822
Preferred stock redeemed				(2,000)
Dividends accrued on preferred stock				(1,036)
Deferred share compensation expense				39
Restricted stock grants	(66)		67	-
Amortization of unearned compensation	57			57
Purchase of shares for treasury			(580)	(580)
Issuance of shares for employee benefit plans and stock options			213	218
Balance, September 30, 2003	$ (39)	$ 14,792	$ (378)	$ 82,060


Nine Months Ended September 30, 2002	Preferred Stock	Common Stock	Additional Paid-in Capital	Accumulated Deficit
Balance, December 31, 2001	$ 159	$ 21,412	$ 56,606	$ 1,097
Comprehensive income (loss):
Net loss				(12,413)
Increase in unrealized investment gains
Fair value adjustment to interest rate swap
Deferred income tax attributable to other comprehensive income
Total comprehensive loss

Dividends accrued on preferred stock			(1,073)
Deferred share compensation expense			44
Restricted stock grants			(12)
Amortization of unearned compensation
Purchase of shares for treasury
Issuance of shares for employee benefit plans and stock options				(114)
Balance, September 30, 2002	$ 159	$ 21,412	$ 55,565	$ (11,430)


Nine Months Ended September 30, 2002	Unearned Compensation	Net Accumulated Other Comprehensive Income	Treasury Stock	Total
Balance, December 31, 2001	$ -	$ 8,748	$ (496)	$ 87,526
Comprehensive income (loss):
Net loss				(12,413)
Increase in unrealized investment gains		4,744		4,744
Fair value adjustment to interest rate swap		(418)		(418)
Deferred income tax attributable to other comprehensive income		(1,514)		(1,514)
Total comprehensive loss				(9,601)

Dividends accrued on preferred stock				(1,073)
Deferred share compensation expense				44
Restricted stock grants	(66)		78
Amortization of unearned compensation	18			18
Purchase of shares for treasury			(1)	(1)
Issuance of shares for employee benefit plans and stock options			274	160
Balance, September 30, 2002	$ (48)	$ 11,560	$ (145)	$ 77,073

The accompanying notes are an integral part of these consolidated financial statements.

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ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; In thousands)


	Nine Months Ended September 30,
	2003	2002

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$ 5,173	$ (12,413)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Cumulative effect of change in accounting principle	-	15,816
Amortization of deferred acquisition costs	13,209	13,352
Acquisition costs deferred	(14,222)	(15,554)
Realized investment gains	(834)	(147)
Increase in insurance reserves	4,618	15,868
Compensation expense related to share awards	96	62
Depreciation and amortization	865	721
Deferred income tax benefit	(1,410)	(473)
Decrease (increase) in receivables, net	1,395	(18,755)
(Decrease) increase in other liabilities	(634)	4,167
Other, net	632	(164)
Net cash provided by operating activities	8,888	2,480

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold, called or matured	95,680	56,488
Investments purchased	(120,259)	(88,179)
Additions to property and equipment	(428)	(263)
Net cash used by investing activities	(25,007)	(31,954)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of trust preferred securities	21,824	-
Repayments of debt	(17,000)	-
Preferred stock redemption	(2,000)	-
Preferred stock dividends	(131)	(169)
Proceeds from the exercise of stock options	13	13
Purchase of treasury shares	(278)	(1)
Net cash provided (used) by financing activities	2,428	(157)
Net decrease in cash and cash equivalents	(13,691)	(29,631)
Cash and cash equivalents at beginning of period	41,638	68,846
Cash and cash equivalents at end of period	$ 27,947	$ 39,215
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$ 2,466	$ 1,639
Cash paid for income taxes	$ 357	$ 113

The accompanying notes are an integral part of these consolidated financial statements.

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ATLANTIC AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited; In thousands, except share and per share data)

Note 1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Atlantic American Corporation (the “Parent” or “Company”) and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. The consolidated financial statements and the related notes thereto included herein should be read in conjunction with the Company’s consolidated financial statements, and the notes thereto, that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended September 30, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

Note 2. Impact of Recently Issued Accounting Standards

        In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 provides guidance on the financial accounting and reporting for acquired goodwill and other intangible assets. The Company adopted SFAS 142 as of January 1, 2002 and accordingly goodwill and indefinite-lived intangible assets are no longer amortized but are subject to impairment tests in accordance with SFAS 142. Intangible assets with finite lives continue to be amortized over their useful lives, which are no longer limited to a maximum of forty years. The criteria for recognizing an intangible asset have also been revised. The impact of adopting SFAS 142 resulted in an impairment loss of $15,816 in the Company’s property and casualty division; and such loss was reflected as a cumulative effect of change in accounting principle in the Company’s first quarter of 2002 results of operations.
        In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). This statement provides the financial accounting and reporting standards for the cost of legal obligations associated with the retirement of tangible long-lived assets. In accordance with SFAS 143, asset retirement obligations will be recorded at fair value in the period they are incurred if a reasonable estimate can be made. The Company adopted SFAS 143 on January 1, 2003. The adoption did not have a material effect on the Company’s financial condition or results of operations.
        In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities. The Company adopted SFAS 146 on January 1, 2003. The adoption did not have a material effect on the Company’s financial condition or results of operations.
        In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to transactions entered into prior to February 1, 2003 in the first fiscal year or interim period ending after December 15, 2003. Although the Company initially believed that the adoption of such statement would not have an effect on the Company’s financial condition or results of operations, interpretation uncertainties with respect to certain provisions have not only delayed the required implementation date for FIN 46; but have also raised issues with respect to the Company’s currently consolidated wholly owned trusts. As future guidance is provided, the Company will further evaluate its current consolidation of the trusts.
        In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS 149 did not have a material effect on the Company’s financial condition or results of operations.
        In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 aims to eliminate diversity in practice by requiring that mandatorily redeemable instruments, certain forward purchase contracts, written put options, and other types of financial instruments be reported as liabilities by their issuers. The standard includes a number of new disclosure requirements and is effective for instruments entered into or modified after May 31, 2003. For existing instruments, SFAS 150 is effective in the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have a material effect on the Company’s financial condition or results of operations.

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Note 3. Segment Information

The Company has four principal insurance subsidiaries, each focusing on a specific geographic region and/or specific products. Each operating company is managed independently and is evaluated on its individual performance. The following summary sets forth each principal operating company’s revenue and income (loss) before taxes and cumulative effect of change in accounting principle for the three months and nine months ended September 30, 2003 and 2002.


Revenues	Three Months Ended September 30,		Nine Months Ended September 30,
	2003	2002	2003	2002
American Southern	$ 9,470	$ 11,410	$ 32,071	$ 33,638
Association Casualty	5,352	6,700	16,981	20,330
Georgia Casualty	9,510	8,881	27,951	23,913
Bankers Fidelity	17,062	16,017	51,384	47,803
Corporate and Other	2,685	1,832	7,416	5,632
Adjustments and eliminations	(2,545)	(1,689)	(6,787)	(5,017)
Total Revenue	$ 41,534	$ 43,151	$ 129,016	$ 126,299


Income (loss) before income taxes and cumulative effect of change in accounting principle	Three Months Ended September 30,		Nine Months Ended September 30,
	2003	2002	2003	2002
American Southern	$ 2,101	$ 2,101	$ 5,584	$ 4,907
Association Casualty	53	(2,093)	(1,358)	(1,203)
Georgia Casualty	267	(200)	1,260	566
Bankers Fidelity	1,166	1,094	3,861	2,835
Corporate and Other	(1,870)	(1,427)	(5,054)	(3,945)
Consolidated results	$ 1,717	$ (525)	$ 4,293	$ 3,160

Note 4. Credit Arrangements

On May 15, 2003, the Company participated in a pooled private placement offering of trust preferred securities. In that offering, the Company issued to a Connecticut statutory trust, which was created and is controlled by the Company (the “Trust”), approximately $23,196 in thirty year subordinated debentures, and the Trust sold $22,500 of trust preferred securities to third party investors. The trust preferred securities have an interest rate equivalent to the three-month London Interbank Offer Rate (“LIBOR”) plus 4.10%, which was 5.23% at September 30, 2003. Of the $21,824 in net proceeds, $17,000 was used to reduce the balance on the outstanding debt with Wachovia Bank, N.A. (“Wachovia”), $2,000 was used to redeem 20,000 shares of the Company’s Series C Preferred Stock, $2,000 was contributed to the capital of one of the Company’s subsidiaries and the balance of $824 was used for general corporate purposes. In May 2003, the credit agreement with Wachovia was modified in order to provide for the issuance of such securities.
At September 30, 2003, the Company’s $55,000 of borrowings consisted of $15,000 outstanding under a bank loan with Wachovia and an aggregate of $40,000 of outstanding trust preferred securities issued by two statutory trust subsidiaries. Effective June 30, 2003, the Company executed an amended and restated credit agreement (“Term Loan”) with Wachovia with respect to the outstanding $15,000 bank debt. Terms of the agreement require the Company to repay $2,000 in principal on July 1, 2004 and $1,000 on December 31, 2004. Beginning in 2005 and each year thereafter, the Company must repay $500 on June 30 and $1,250 on December 31 with one final payment of $6,750 at maturity on June 30, 2008. The interest rate on the Term Loan is equivalent to three-month LIBOR plus an applicable margin, which was 2.50% at September 30, 2003. The margin varies based upon the Company’s leverage ratio (debt to total capitalization) and ranges from 1.75% to 2.50%. The Term Loan requires the Company to comply with certain covenants including, among others, ratios that relate funded debt, as defined, to total capitalization and earnings before interest, taxes, depreciation, and amortization (“EBITDA”). The Company must also comply with limitations on capital expenditures and additional debt obligations. The outstanding $40,000 of trust preferred securities were issued by two statutory business trusts both of which are wholly owned subsidiaries of the Company (the “Trusts”). Both trust preferred securities issuances have a maturity of thirty years from their original date of issuance, are callable, in whole or in part, only at the option of the Company after five years and quarterly thereafter, and have an interest rate of three-month LIBOR plus an applicable margin. The margin ranges from 4.00% to 4.10%. At September 30, 2003 the effective interest rate of the trust preferred securities was 5.19%. The principal assets of the Trusts are an aggregate of $41,238 of subordinated debentures issued by the Company with identical rates of interest and maturities as the underlying trust preferred securities. The obligations of the Company with respect to the issuance of the trust preferred securities represent a full and unconditional guarantee by the Company of each Trust’s obligations with respect to the trust preferred securities. Subject to certain exceptions and limitations, the Company may elect from time to time to defer subordinated debenture interest payments, which would result in a deferral of distribution payments on the related trust preferred securities.

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Note 5. Derivative Financial Instruments

On March 21, 2001, the Company entered into a $15,000 notional amount interest rate swap agreement with Wachovia to hedge its interest rate risk on a portion of its outstanding borrowings. The interest rate swap was effective on April 2, 2001 and matures on June 30, 2004. The Company has agreed to pay a fixed rate of 5.1% and receive three-month LIBOR until maturity. The settlement date and the reset date occur every 90 days following April 2, 2001 until maturity.
The estimated fair value and related carrying value of the Company’s interest rate swap at September 30, 2003 was a liability of approximately $601.

Note 6. Reconciliation of Other Comprehensive Income


	Three Months Ended, September 30,		Nine Months Ended, September 30,
	2003	2002	2003	2002
Gain (loss) on sale of securities included in net income	$ (501)	$ 45	$ 834	$ 147
Other comprehensive income (loss):
Net pre-tax unrealized gain (loss) arising during period	$ (2,328)	$ (816)	$ 3,057	$ 4,891
Reclassification adjustment	501	(45)	(834)	(147)
Net pre-tax unrealized gain (loss) recognized in other comprehensive income	(1,827)	(861)	2,223	4,744
Fair value adjustment to interest rate swap	143	(266)	314	(418)
Deferred income tax attributable to other comprehensive income (loss)	589	395	(888)	(1,514)
Change in accumulated other comprehensive income	(1,095)	(732)	1,649	2,812
Accumulated other comprehensive income beginning of period	15,887	12,292	13,143	8,748
Accumulated other comprehensive income end of period	$ 14,792	$ 11,560	$ 14,792	$ 11,560

Note 7. Earnings Per Common Share

A reconciliation of the numerator and denominator of the earnings per common share calculations are as follows:

Three Months Ended
September 30, 2003

Income

Shares
Per Share
Amount

Basic Earnings Per Common Share:

Net Income $               3,266 21,150

Less preferred stock dividends
(324)

Net income applicable to common shareholders
2,942
21,150
$                .14

Diluted Earnings Per Common Share:

Effect of dilutive stock options - 470

Effect of Series B Preferred Stock 301 3,358

Effect of Series C Preferred Stock 23
125

Net income applicable to common shareholders $              3,266
25,103
$               .13

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Note 7. Earnings Per Common Share (continued)


	Three Months Ended September 30, 2002
	Income	Shares	Per Share Amount
Basic Earnings Per Common Share:
Net Income	$ 956	21,334
Less preferred stock dividends	(358)
Net income applicable to common shareholders	$ 598	21,334	$ .03
Diluted Earnings Per Common Share:
Effect of dilutive stock options		325
Net income available to common shareholders	$ 598	21,659	$ .03


	Nine Months Ended September 30, 2003
	Income	Shares	Per Share Amount
Basic Earnings Per Common Share:
Net Income	$ 5,173	21,209
Less preferred stock dividends	(1,036)
Net income applicable to common shareholders	$ 4,137	21,209	$ .20
Diluted Earnings Per Common Share:
Effect of dilutive stock options		344
Net income applicable to common shareholders	$ 4,137	21,553	$ .19

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Note 7. Earnings Per Common Share (continued)


	Nine Months Ended September 30, 2002
	Income	Shares	Per Share Amount
Basic Earnings (Loss) Per Common Share:
Income before cumulative effect of change in accounting principle	$ 3,403	21,289
Less preferred stock dividends	(1,073)
Income before cumulative effect of change in accounting principle applicable to common shareholders	2,330	21,289	$ .11
Cumulative effect of change in accounting principle	(15,816)	21,289	(.74)
Net loss applicable to common shareholders	$ (13,486)	21,289	$ (.63)
Diluted Earnings (Loss) Per Common Share:
Income before cumulative effect of change in accounting principle applicable to common shareholders	$ 2,330	21,289
Effect of dilutive stock options	-	378
Income before cumulative effect of change in accounting principle applicable to common shareholders	2,330	21,667	$ .11
Cumulative effect of change in accounting principle	(15,816)	21,667	(.73)
Net loss applicable to common shareholders	$ (13,486)	21,667	$ (.62)

Outstanding stock options of 386,500 for the three months ended September 30, 2003 were excluded from the earnings per common share calculation since their impact was antidilutive. Average outstanding stock options of 444,000 for the nine months ended September 30, 2003 were excluded from the earnings per common share calculation since their impact was antidilutive. Outstanding stock options of 735,000 for the three months ended September 30, 2002 were excluded from the earnings per common share calculation since their impact was antidilutive. Outstanding stock options of 685,000 for the nine months ended September 30, 2002 were excluded from the earnings per common share calculation since their impact was antidilutive. The assumed conversions of the Series B Preferred Stock and the Series C Preferred Stock were excluded from the earnings per common share calculation for the nine months ended September 30, 2003 and for the third quarter and first nine months of 2002 since their impact was antidilutive.

Note 8. Stock Options

The Company accounts for stock options as prescribed by Accounting Principles Board Opinion No. 25 and discloses pro forma information as provided by SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”. Pro forma net income (loss) and net income (loss) per share were determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value of these options was estimated at the date of grant using an options pricing model, which requires the input of subjective assumptions including the volatility of the stock price. The following table presents the pro forma disclosures used to estimate the fair value of these options for the three months and nine months ended September 30, 2003 and 2002.

-10-


	Three Months Ended September 30,		Nine Months Ended September 30,
	2003⁽²⁾	2002⁽²⁾	2003⁽²⁾	2002⁽¹⁾	2002⁽²⁾
Net income (loss), as reported	$ 3,266	$ 956	$ 5,173	$ 3,403	$ (12,413)
Add: Stock-based employee compensation expense included in reported net income, net of tax	19	29	62	40	40
Deduct: Total stock-based employee compensation expense determined under fair value based method, net of tax	(78)	(99)	(224)	(222)	(222)
Pro forma net income (loss)	$ 3,207	$ 886	$ 5,011	$ 3,221	$ (12,595)
Net income (loss) per common share:
Basic - as reported	$ .14	$ .03	$ .20	$ .11	$ (.63)
Basic - pro forma	$ .14	$ .02	$ .19	$ .10	$ (.64)
Diluted - as reported	$ .13	$ .03	$ .19	$ .11	$ (.62)
Diluted - pro forma	$ .13	$ .02	$ .18	$ .10	$ (.63)

⁽¹⁾ Based on income before cumulative effect of change in accounting principle.
⁽²⁾Based on net income (loss).

The resulting pro forma compensation cost may not be representative of that to be expected in future years.

Note 9. Commitments and Contingencies

During 2000, the Company’s subsidiary American Southern renewed its largest account. Although this contract was renewed through a competitive bidding process, one of the parties bidding for this particular contract contested the award of this business to American Southern and filed a claim to nullify the contract. During the fourth quarter of 2000, American Southern received an unfavorable judgment relating to this litigation and appealed the ruling. The contract, which had accounted for approximately 10% of annualized premium revenue of Atlantic American, remained in effect pending appeal. On March 4, 2003, the South Carolina Court of Appeals reversed the lower court ruling and remanded the case back to the Procurement Review Panel to determine if American Southern was entitled to vendor preference. The contract subject to dispute contractually terminated on April 30, 2003 and currently neither party to the litigation is pursuing a determination from the Procurement Review Panel. Management, at this time, does not believe that the ultimate settlement of this case will have any impact on the Company’s financial position or results of operations. During 2003, American Southern prepared a renewal quote for this business; however, given the competitive nature of the current insurance marketplace, the company was unable to renew this account. This contract represented annualized premiums of approximately $14.5 million and contributed approximately $0.1 million and $0.3 million to the earnings of American Southern for the previous two contract years ended April 30, 2003.

From time to time the Company and its subsidiaries are parties to litigation occurring in the normal course of business. In the opinion of management, such litigation will not have a material adverse effect on the Company’s financial position or results of operations.

Note 10. Related Party Transaction

During the second quarter of 2003, in accordance with the terms of the Series C Preferred Stock, the Company exercised its right to redeem 5,000 shares of the outstanding Series C Preferred Stock at the redemption price specified in the terms of the Series C Preferred Stock, $100 per share, for $500. During the third quarter of 2003, the Company called for the redemption of 15,000 shares of outstanding Series C Preferred Stock at the designated redemption price of $100 per share, reducing the total outstanding shares to 5,000. All remaining shares of Series C Preferred Stock are owned directly by affiliates of the Company’s Chairman.

Note 1


	Three Months Ended September 30, 2003
	Income	Shares	Per Share Amount
Basic Earnings Per Common Share:
Net Income	$ 3,266	21,150
Less preferred stock dividends	(324)
Net income applicable to common shareholders	2,942	21,150	$ .14
Diluted Earnings Per Common Share:
Effect of dilutive stock options	-	470
Effect of Series B Preferred Stock	301	3,358
Effect of Series C Preferred Stock	23	125
Net income applicable to common shareholders	$ 3,266	25,103	$ .13