table of contents

#### **2001 ANNUALREVIEW**

KENTUCKY INVESTORS,INC.

Letter to ourStockholders...........................................3

InMemoriam...............................................................6

Board ofDirectors.......................................................7

CorporateOfficers......................................................10

Management's Discussionand Analysis........................ 13

Selected FinancialData................................................ 25

Report of IndependentAuditors................................... 25

Consolidated FinancialStatements............................... 26

Notes to ConsolidatedFinancial Statements................. 30

Stock Prices and AnnualMeeting................................. 43

letter to ourstockholders

In 2001 KentuckyInvestors, Inc. achieved record net earnings from operations andsales by Investors**H**eritage LifeInsurance Company, its major subsidiary, were again at recordlevels.  Other subsidiaries, Investors Heritage FinancialServices Group, Inc. and Investors Heritage Printing, Inc. alsomade excellent progress.

Net earnings for KentuckyInvestors increased $2,277,974 (151%) over 2000 to$3,784,341.  Among the reasons for the enhanced results wereimprovements and changes in three areas mentioned in lastyear’s report.  We successfully reduced Agency salesexpenses, improved mortality in our**L**ife Paid-up at 95 product line, and completed the redesign andimplementation of our Legacy 2000 Final Expense product.

Dividends paid byInvestors Heritage are the principal source of income for KentuckyInvestors, Inc. **W**e remaincommitted to both paying a dividend to our shareholders andcontinuing efforts to increase statutory surplus in the insurancecompany.  The 2001 dividend declared for KentuckyInvestors’ stockholders is $.38 pershare.                

During 2001 KentuckyInvestors realized the following increases:  Invested Assets9.2%; Total Assets 6.8%; Total Liabilities 5.8%; Total Revenue7.6%; and Total Benefits and Expenses 3.1%. Stockholders’ Equity increased 15.2% to $42,927,653. Book Value Per Share increased from $32.36 at December 31, 2000, to$37.89 at December 31, 2001.  Investors Heritage’sStatutory Capital and Surplus was $14,907,971 as of December 31,2001.   

Last year we successfullytook action to correct three areas mentioned earlier to improve thecompany’s profits.  This year we will be reviewing otherkey products, their mortality experience, the economy and itseffect on these products.  Necessary adjustments to improvethe products will be made with the best interest of our clients andthe profitability of the company in mind.  We are committed tobeing a strong force in our key markets for the long-term.  Webelieve that it is imperative to provide products that arebeneficial to all parties concerned and are able to accomplish thisby staying abreast of our marketing conditions, productprofitability, and changing economic conditions.

We continue to concentrateon three insurance markets: (1) Preneed and Final Expense soldthrough funeral homes; (2) Credit related products sold in banksand automobile dealerships through our Financial Services Division;and (3) Ordinary Life Insurance sold to middle incomefamilies.  Our experience in these markets ranging from overforty-one years to twenty-eight years has enabled us to grow anddevelop an exceptional sales organization and home office staffthat provides outstanding service to our clients.

We believe that strategicalliances with other companies in sales and administration are alsovery important to our continued growth.  I have reported onthese alliances for the past several years

and they continue to beinstrumental in our success.  Recently we expanded alliancesin our three markets, thereby offering new products and services toour sales personnel. 

The thirteen-year trend ofrecord sales is continuing in 2002.  Premium sales during thefirst two months of the year were up 15% over the strong sales pacefor the same period last year.  While we did not reach ouroverall 2001 sales goal, the Financial Services Group surpassedtheir goals and also reached record levels.  We attribute thisto our strong marketing efforts in this area over the past fewyears and to increased loan demand stimulated by low interestrates.  A graph showing sales growth for the last severalyears is on page 11.

More detail about theactivity of the company and our results for the year 2001 ispresented in the Management's Discussion and Analysis on pages13-24.  I encourage you to review these pages.

Dr. Adron Doran, a memberof the Board of Directors of Investors Heritage Life InsuranceCompany, died Thanksgiving Day, 2001.  A memoriam to him is onPage 6.

Jerry F. Howell, Sr.retired from the Boards of Directors of Kentucky Investors andInvestors Heritage Life Insurance Company effective January 1,2002.   Kentucky Investors was organized by Harry LeeWaterfield in October 1963 to purchase controlling interest inInvestors Heritage Life.  Mr. Howell was one of twenty-sixoriginal investors.  He and Mr. Waterfield had been closepersonal and political friends since January 1942, when Mr. Howelljoined Mr. Waterfield as a member of the Kentucky House ofRepresentatives.  Mr. Howell was a member of the originalKentucky Investors Board of Directors, beginning his service August8, 1963.  He became a member of the Investors Heritage LifeInsurance Company Board November 18, 1963.  He was a trustedadvisor and gave great insight to the Board management of our twocompanies.  Mr. Howell informed the Board of his resignationnoting that the timing coincided with the opening of the 2002Kentucky Legislative session, marking the sixtieth anniversary ofhis and Mr. Waterfield’s first meeting. 

Mr. Howell offered toresign in 1994 when he and his wife moved to Florida, but I urgedhim to remain a member.  He did so with considerableinconvenience to himself and I greatly appreciate the extra yearsof service he gave our companies.  We will miss his attendanceat our Board meetings and I personally want to thank him for sixtyyears of friendship, support, advice and counsel to the Waterfieldfamily and others associated with us and the companies.

David Reed, a member ofthe Kentucky Investors Board since 1982 has succeeded Mr. Howell onthe Investors Heritage Board.

On April 30, 2001 PeggyKays, retired.  Ms. Kays joined Investors Heritage on February1, 1967 and for twenty-six years she was responsible forAgent/Credit Life Accounting and Payroll.  On January 14,1993, she was elected Vice President, Human Resources.  Wesincerely appreciate the excellent service Ms. Kays gave to ourfamily of companies. 

On May 10, 2001 BobbyRussell was elected Vice-President, Human Resources.  Bobbyhas twenty-seven and one-half years of service with InvestorsHeritage in Group Life, Premium Accounting, Actuarial and served atime as Treasurer.  Jimmy McIver returned to theTreasurer’s position with the reorganization at Ms. Kaysretirement. 

The tragic events ofSeptember 11 shook the foundations of our great country. However, I believe it proved, to many who may have forgotten orsome younger people who may never have realized, just how greatAmerica is.  It also proved how strong Americans are and howmuch we really do treasure our heritage andfreedom. 

I believe all Americansrealize that united, supportive of our government and unwavering inour resolve, our country and its allies will overcome the forces ofterrorism.  Hopefully, we will all work together for betterunderstanding of and respect for all people in order to rid theworld of the hatred that apparently led to this worldwidecrisis.

Harry Lee WaterfieldII

---Pictureof Mr. Waterfield inserted here-

in memoriam

Dr. Adron Doran, longtimefriend of the Waterfield family and member of the InvestorsHeritage Life Insurance Company Board of Directors since May 11,1972, died Thursday, November 22, at age ninety-two.  Hiswife, Mignon, survived him.

Dr. Doran and his wifebecame close friends with my parents while all attended MurrayState University in the early 1930’s.  All natives ofwest Kentucky, they were lifelong personal, political, and businessfriends.

 

Dr. Doran attendedFreed-Hardman College in Henderson, Tennessee, which is associatedwith the Church of Christ, and he became a minister.  Aftergraduating he went to Murray State University, taught at three highschools in west Kentucky and served as principal andcoach.

Dr. Doran entered politicsin 1943, served four terms in the House of Representatives, one asSpeaker of the House.  Three of his terms coincided with myfather’s tenure in the House of Representatives, two terms ofwhich he spent as Speaker of the House.

In 1954, Dr. Doran becamePresident of Morehead State University in Morehead,Kentucky.   At that time Morehead had 700 students. When he retired in 1977, the school had a student body of7,500. 

Throughout his life, Dr.Doran served as a Church of Christ minister in several localpastorates, preached as guest minister in numerous churchesthroughout the country, and was a rousing revivalminister.

Dr. Doran was extremelyhealthy and alert all of his life but during the past two years hesuffered several physical problems.  However, he continued toattend Board meetings and his keen mind was always helpful in ourcorporate deliberations.  Dr. Doran’s friendship andadvice will be greatly missed but nothing missed more than hisbeautiful prayers with which we opened our Board meetings eachmonth for the past twenty-nine and one-half years.

--Pictureof Dr. Doran inserted here --

board & corporateofficers

**Harry Lee WaterfieldII**

Chairman of theBoard

President and ChiefExecutive Officer

Frankfort,Kentucky

BOARD                                                               OFFICERS

**  Harold GlennDoran                                 Howard L. Graham**

  BoardMember                                          Vice President,

 Dover,Tennessee                                     Corporate Services

                                                                       Frankfort, Kentucky

**Gordon C.Duke                                         Jane S. Jackson**

BoardMember                                            Assistant Secretary

Frankfort,Kentucky                                    Frankfort,Kentucky

**Robert M. Hardy,Jr.                                 Jimmy R. McIver**

BoardMember                                            Treasurer

Vice President and GeneralCounsel         Frankfort,Kentucky

Frankfort,Kentucky                 

**Dr. Jerry F. Howell,Jr.                              Nancy W. Walton**

BoardMember                                              First Vice President

Morehead,Kentucky                                   Frankfort, Kentucky

**David W.Reed                                              Wilma C. Yeary**

BoardMember                                               Secretary

Gilbertsville,Kentucky                                 Frankfort, Kentucky

**Helen S.Wagner                                           Ernst & Young LLP**

BoardMember                                                 Independent Auditors

Owensboro,Kentucky

****

# **- Pictures offollowing Board Members on this page -  **

Harold GlennDoran

Kentucky Investors, Inc.and Investors Heritage Life Insurance Company, Inc.

Michael F. Dudgeon,Jr.

Investors Heritage LifeInsurance Company, Inc.

Gordon C. Duke

Kentucky Investors, Inc.and Investors Heritage Life Insurance Company, Inc.

Robert M.. Hardy,Jr.

Kentucky Investors, Inc.and Investors Heritage Life Insurance Company, Inc.

****

# **board ofdirectors**

# **Pictures of followingBoard Members on this page -  **

Dr. Jerry F.Howell

# **Kentucky Investors,Inc. and Investors Heritage Life Insurance Company,Inc.**

David W. Reed

# **Kentucky Investors,Inc. and Investors Heritage Life Insurance Company,Inc.**

Helen S. Wagner

# **Kentucky Investors,Inc. and Investors Heritage Life Insurance Company,Inc.**

Harry Lee WaterfieldII

# **Kentucky Investors,Inc. and Investors Heritage Life Insurance Company,Inc.**

****

corporate officers ofsubsidiaries

# **Harry Lee WaterfieldII**

Chairman, Presidentand

Chief Executive OfficerIFPH

                                                                       

**RickCalvert                                                        Raymond L. Carr**

Vice PresidentP                                                 Vice President,I                                                  

                                                                            Administrative Operations and

**           **                                                                   Computer Services

**Michael F. Dudgeon,Jr.                                  Howard L. Graham**

Vice President, FinancialServices IH                Vice President,

                                                                                   Corporate Services I

                                                                             Vice President F    

**Robert M. Hardy,Jr.                                         N. Douglas Hippe**

Vice President and GeneralCounsel IH            Vice President, AccountingI

Vice President, LegalF                                                 

**                                                           **

**JulieHunsinger                                                 Jane S. Jackson**

Vice President and ChiefActuaryI                     Assistant Secretary I

**                                                                                **Secretary FP

**Jimmy R.McIver                                                 Don R. Philpot**

TreasurerIFP                                                             VicePresident, AgencyI

                                                                                **                                      **                          

           

**Bobby R.Russell**                                             **Nancy W.Walton**                          

 Vice President, Human ResourcesI                      Vice President, Underwriting I

**Lawrence J. Sprecher,M.D.                              L. Jane Wise**

  Medical DirectorI                                                                         Vice President, Policy ServicesI

**           **

**Wilma C.Yeary**

  SecretaryI

                

I                    Investors Heritage Life Insurance Company

F                   Investors Heritage Financial Services Group, Inc.

P                   Investors Heritage Printing, Inc.

H                  Investors Heritage Life Insurance Company Board Member

  

The following graphsappear on this page.

**IHLIC YEARLY PRODUCTIONGROWTH**

A graph appears on thispage showing the yearly production growth for InvestorsHeritage.  This graph shows the production breakdown: 1993 -$13,019,794; 1994 - $15,041,644; 1995 - $17,885,612; 1996 -$23,601,396; 1997 - $29,314,282; 1998 - $31,080,181; 1999 -$33,640,525; 2000 - $34,576,542; and 2001 - $37,658,249.

**DISTRIBUTION OFMORTGAGE LOANS**

December 31,2001

A pie chart appears onthis page showing the Distribution of Mortgage Loans.  Thischart shows the following breakdown:  Retail: 51.7%; Other:16.5%; Office Properties: 14.1% Industrial: 7.2%; Apartments: 5.9%and residential (1-4 families): 4.6%

**DISTRIBUTION OF FIXEDINCOME ASSETS**

December 31,2001

A pie chart appears onthis page showing the Distribution of Fixed Income Assets. The chart shows the following breakdown:  Corporate: 46.5%;Mortgage-backed Securities: 26.9%; Government: 11.7%; Foreigns: 7.8%; Asset-backed Securities: 5.4%; States &Political Subdivisions: 1.7%.

**DISTRIBUTION OFCORPORATE BONDS**

December 31,2001

A pie chart appears onthis page showing the Distribution of Corporate Bonds.  Thischart shows the following breakdown:  Industrial andMiscellaneous:  56.0%; Bank and Finance:  28.8%; andUtilities:  15.2%.

##### **management’sdiscussion & analysis**

ORGANIZATIONALSTRUCTURE

Kentucky Investors, Inc.is the parent company of Investors Heritage Life Insurance Company,Investors Heritage Financial Services Group, Inc. and InvestorsHeritage Printing, Inc. Kentucky Investors and each subsidiary aredomiciled in the Commonwealth of Kentucky.

CONSOLIDATION

The accompanyingconsolidated financial statements of Kentucky Investors include theaccounts of its respective wholly owned subsidiaries, afterelimination of intercompany transactions. However, approximatelyninety-nine percent (99%) of Kentucky Investors' operations aregenerated by Investors Heritage.  We will be referring toKentucky Investors and its subsidiaries as the“Company”.

CONTINUED EXPANSION ANDNEW AFFILIATIONS

The Company has beenexpanding its market share in the Preneed funeral market for thelast several years. The result has been consistent growth in almostall of the states that were targeted for expansion.  InvestorsHeritage received authorization to transact business inPennsylvania during 2001 and admission to Maryland is expectedduring 2002.

Investors HeritageFinancial Services Group continues to operate under marketingagreements with Investors Heritage.  This arrangement hasproven to be successful and enabled Investors Heritage FinancialServices Group and Investors Heritage to continue utilizing theirexpertise in the marketing and administration of Credit insuranceproducts.  Further, Investors Heritage Financial ServicesGroup enables Investors Heritage to offer mortgage protection andordinary life insurance products through financialinstitutions.  Finally, Investors Heritage Financial ServicesGroup has entered into marketing relationships with other insurancecompanies to provide products that Investors Heritage does notcurrently offer.

FINANCIALSTRENGTH

The quality of ourinvestment portfolio and the current level of shareholders' equitycontinue to provide a sound financial base as we strive to expandour marketing system to offer competitive, quality products. Please see INVESTMENTS, LIQUIDITY AND FUND RESTRICTIONS for a moredetailed discussion. 

BUSINESSSEGMENTS    

Statement of FinancialAccounting Standard ("SFAS") No. 131 requires a "managementapproach" in the presentation of business segments based on howmanagement internally evaluates the operating performance of itsbusiness units.  The segment data that follows has beenprepared in accordance with SFAS No. 131.   Please referto the Notes to the Consolidated Financial Statements foradditional information regarding segment data.

REVENUES

Overall revenues were$70,388,000, $65,427,000 and $62,772,000 in 2001, 2000 and 1999,respectively.  The increases were due primarily to our growthas a provider of quality Preneed products, growth in investedassets due to increased sales of the Preneed and Burial products,and affiliations with other life insurers that market our Preneedproducts through partnership arrangements.  A discussion ofthe changes by business segments follows. Additionally, the Companyhas experienced steady growth in net investment income whichincreased 8% or $1,310,000 in 2001 from 2000.  The 2000increase over 1999 was 12% or $1,806,000.  This increase isprimarily due to the increase in invested assets.

PRENEED & BURIALPRODUCTS 

The Preneed & BurialProducts segment includes both life and annuity products sold byfuneral directors or affiliated agents to fund prearrangedfunerals.

Revenues for the Preneed& Burial Products business segment were 6% or $2,958,000 higherin 2001 than 2000. The 2000 increase over 1999 was 7% or$3,371,000.  

New premium productionincreased approximately 9% in 2001 over 2000.  New premiumscollected during 2001, 2000 and 1999 were $33,598,000, $30,794,000and $29,242,000, respectively. During 2001, Investors Heritagefocused on eighteen states for developing new accounts. Investors Heritage continues to utilize the endorsement of the WestVirginia Funeral Directors Association in promoting Preneed salesin that state.  In addition, during 2000 Investors Heritageentered into a strategic partnership with Key Life InsuranceCompany of Indianapolis, Indiana, an experienced Preneed insurer inMichigan.  Key Life utilizes the endorsement of the MichiganFuneral Directors Association to market Investors Heritage Preneedproducts in that state.  New Preneed premiums of $1,657,000from Michigan in 2001 increased 155% over 2000 premiums of$650,000.

Premium production remainsstrong in North Carolina.  However, due to the successfulexpansion of our marketing operation in other states, new Preneedpremiums of $11,496,000 from North Carolina agents accounted for34% of the total new Preneed  premiums collected in 2001 compared to $11,236,000 or 37% for2000.  New premium collections of $5,738,000 from Kentucky in2001 increased 9% over 2000 premiums of $5,255,000, the sameincrease as 2000 over 1999, and accounted for 17% of the totalpremium collected in 2001.  Other states showing significantgains were Arkansas, Arizona, Georgia, Mississippi, Texas andVirginia.  Management plans to continue to develop the Preneedfuneral market and anticipates increases in single premiumproduction for 2002 over 2001.  It is anticipated thatincreases will be derived from higher production in the statesnoted above and from expansion into Pennsylvania where InvestorsHeritage was authorized to do business in 2001.  Authorizationwill be sought in Maryland and it is anticipated that it will begranted during 2002.

The increase in netinvestment income earned by Preneed and Burial products alsocontributed to the overall increase in Revenues.  Netinvestment income increased $1,473,000 or 13%, in 2001 compared to2000 and $1,460,000 or 15%, in 2000 compared to 1999.  Theincrease in net investment income is partially due to theCompany’s investments in mortgage loans, which have beenselectively increased due to the continuing low rates on fixedmaturities.  This strategy has added value to the overallportfolio.  (See INVESTMENTS, LIQUIDITY AND FUNDRESTRICTIONS.)

New strategic partnershipsand affiliations continued to be developed during 2001.  Twohighly rated life insurers are marketing Investors Heritageproducts on a fee basis. The Company also continued its partnershipwith Family Assistance Service, Inc., a firm that provides anat-need financing program and an accounts receivable/cashmanagement system for funeral homes. The Company offers thisprogram to existing Preneed funeral home clients as well as funeralhomes that do not currently sell our Preneed insurance products.Family Assistance has been helpful in increasing our core lines ofbusiness by giving the Company an opportunity to offer a valuableservice to our funeral home accounts.  Through December 31,2001, the program has approved a total of $3,793,000 in credit, ofwhich $2,600,000 has been funded for non-recourse loans to ourfuneral home customers.  Investors Heritage Financial ServicesGroup receives a commission for loans that are approved.

Investors Heritageintroduced a new whole life final expense product during the thirdquarter of 2001.  The new product, Heritage Final Expense, hasreplaced the Legacy 2000 Final Expense series and is being marketedthrough funeral homes and independent agencies.  InvestorsHeritage entered into a reinsurance agreement with Munich AmericanReassurance Company with regard to this new product to reduceinitial surplus strain and provide more level future profits. Pursuant to the terms of the reinsurance agreement, the HeritageFinal Expense products are being reinsured on an 80/20 quota sharebasis with Investors Heritage retaining 20% of each risk up to amaximum of $5,000 on any one life.

TRADITIONAL &UNIVERSAL LIFE PRODUCTS

This segment includestraditional life and group life insurance products, annuities(primarily qualified) and universal life products.

Revenues for 2001, 2000and 1999 were $13,401,000, $13,007,000 and $13,573,000,respectively. New premiums collected during 2001, 2000 and 1999were $2,595,000, $2,313,000 and $2,884,000, respectively.  Inaddition to our ordinary agency force, Investors Heritage FinancialServices Group markets traditional insurance products through banksand other financial institutions.  Investors HeritageFinancial Services Group had a successful year in recruiting newaccounts.  In June of 2001, a new renewable and convertibleterm product, “Term to 95” was introduced.  Thenew product and the recruiting efforts of Investors HeritageFinancial Services Group were the primary reasons for the increasein revenue for this business segment.  The Term to 95 productis being reinsured on an 80/20 quota-share basis with LincolnNational Reinsurance Company (now Swiss Re) with Investors Heritageretaining 20% of each risk up to a maximum of $100,000 perlife.  This reinsurance arrangement allows Investors Heritageto utilize Swiss Re’s underwriting expertise, and will assistin eliminating fluctuations in income due to largerclaims. 

In addition to introducingthe Term to 95 product, we have expanded the products available toour regular ordinary insurance agents by making available productsof other companies.  For a number of years, outlets wereprovided for our agents who had substandard business that InvestorsHeritage would not accept.  Beginning in the last quarter of2001, Investors Heritage Financial Services Group was able toprovide second to die policies, substandard life policies, largerterm policies and health insurance products through other companiesthat insure this type of business.  Investors HeritageFinancial Services Group will receive a fee for providing thoseservices and the outlook for increased fee income from thismarketing opportunity is positive.

Net investment income forthis segment increased $119,000 or 3%, in 2001 compared to 2000 and$81,000 or 2%, in 2000 compared to 1999.  The increase in netinvestment income compared to 2000 is due to the overall increasein the Company’s asset base.

CREDIT INSURANCE PRODUCTS& ADMINISTRATIVE SERVICES

This segment includes themarketing and administration of Credit Life and Credit Accident andHealth insurance products which we will refer to as "Credit Life,""Credit A&H" and "Credit Insurance".  Credit Insurancepremiums written during 2001, 2000 and 1999 were $13,244,000,$15,455,000 and $18,774,000, respectively.  Managementbelieves the continued decline in Credit insurance premiums isdirectly related to a decrease in loan demand.  All of therelated underwriting risk is being reinsured 100% with major,well-known life companies, Munich

American ReassuranceCompany and The Canada Life Assurance Company. In addition,Investors Heritage Financial Services Group has obtainedreinsurance relationships for Investors Heritage with three othercompanies, Life Investors Insurance Company, American United LifeInsurance Company and Universal Guaranty Life InsuranceCompany.  Each of these agreements generates marketing andretention fees, but not administration fees.  

Revenues for this segmentwere $395,000, $423,000 and $345,000 for 2001, 2000, 1999,respectively. 

CORPORATE &OTHER

This segment consists ofcorporate accounts measured primarily by stockholders' Paid-InCapital, Contributed Surplus, Earned Surplus, Property andEquipment and other minor business lines which include groupannuities and group and individual accident and healthproducts.

Revenues from this segmentwere $3,105,000 in 2001, $1,468,000 in 2000 and $1,696,000 in1999.  Included in revenues were realized capital gains(losses) that were $1,099,000, ($599,000) and ($307,000) in 2001 in2000 and 1999, respectfully.  Fixed maturity bonds that hadreached their optimum value were sold during 2001.   Therealized gains and the overall increase in the asset base are theprimary reasons for the higher revenues for 2001.

OPERATINGRESULTS

The Company's Net Incomefor 2001 increased $2,278,000 or 151% from 2000 and for 2000decreased $873,000 or 37% from 1999.  The decrease in 2000 netincome when compared to 1999 came from several areas ofoperations.  First, general expenses were higher thananticipated due to opportunities to increase our home office fieldagency staff.  Further, agency related general expenses wereunderestimated and finally overall mortality was 8% higher thanexpected due to unanticipated anti-selection in certain finalexpense products.  Corrective measures taken in 2001 withregard to general expense budgeting, the utilization of reinsuranceto lower the mortality risk and to minimize initial surplus strainand more favorable mortality experience, coupled with a significantincrease in realized capital gains, resulted in the significantgain in net income for 2001.

Earnings per share were$3.33, $1.31 and $2.79 for 2001, 2000 and 1999,respectively.

PRENEED & BURIALPRODUCTS

Pre-tax income (Incomefrom Operations Before Federal Income Tax) for this businesssegment was $2,205,000, $1,358,000 and $3,590,000 for 2001, 2000,1999, respectively.  The decrease in pre-tax income in 2000was primarily due to causes identified above.  The majority ofthe general expense overruns as well as the higher than expectedmortality in 2000 were related to this  business segment. Theimprovement in pre-tax income for 2001 is the result of activemanagement of the investment portfolio and reduced levels ofrelative policyholder benefits and expenses related to in forcebusiness.  However, current market conditions, includingcompetitive pricing for this segment and the low interest rateenvironment, continue to narrow profits generated from newsales.   Management anticipates developing new singlepremium products for this segment during 2002.

TRADITIONAL &UNIVERSAL LIFE PRODUCTS

Pre-tax income for thissegment was $1,467,000, $667,000 and $1,047,000 in 2001, 2000 and1999, respectively. Favorable mortality during 2001 was the primaryreason for the increase in this segment.  Higher than expectedunreinsured claims and expense levels in 2000 reduced pre-taxincome.

CREDIT INSURANCE PRODUCTS& ADMINISTRATIVE SERVICES

Pre-tax income (loss) was$72,000, $113,000 and ($43,000) for 2001, 2000 and 1999,respectively. The loss in 1999 was generated by the run-off ofCredit Insurance and the related deferred acquisition costsamortization from an aged block of business.  InvestorsHeritage has been reinsuring 100% of the Credit Insurance risks forthe past few years while generating revenues by servicing andadministering the business for our reinsurers.  Thissegment’s performance is in relation to generatedrevenues.  The decrease in revenues in 2001 accounts for thelower pre-tax gain.

CORPORATE &OTHER

Pre-tax income for thissegment was $1,479,000, $106,000 and $258,000 for 2001, 2000 and1999, respectively.  Pre-tax realized capital gains (losses)were $1,099,000 ($599,000) and ($307,000) for 2001, 2000 and 1999,respectively and were the primary contributors to the fluctuationsfor this business segment. 

INVESTMENTS, LIQUIDITY ANDFUND RESTRICTIONS

The Company's investmentportfolio continues to provide financial stability.  It ismanagement's opinion that the Company has adequate cash flows bothon a long-term and short-term basis as evidenced by theConsolidated Statements of Cash Flows presented in this AnnualReview. The Company's cash flows were derived from insurancepremiums and investments. Management anticipates these cash flowsto experience steady growth due to the profitability of all threesubsidiaries.

During 2001, InvestorsHeritage Financial Services Group's sixth full year of operation,revenues were $527,000, down 2% or $12,000 compared to 2000, anddividends in the aggregate amount of $338,500 were paid to KentuckyInvestors.  Revenues from Investors Heritage Printing were$510,000 in 2001, down 4% compared to $534,000 in 2000, andInvestors Heritage Printing paid $5,000 in dividends to KentuckyInvestors in 2001.  Management of Investors Heritage Printingwill continue to work to improve revenues from unaffiliated sourcesas well as to provide printing services for InvestorsHeritage.  Revenues from all of these sources constituteapproximately 1% of our overall Revenues in 2001 and management isworking on the continued growth and profitability of both InvestorsHeritage Financial Services Group and Investors HeritagePrinting.

Management is not aware ofany commitments or unusual events that could materially affect theCompany's capital resources.  During the fourth quarter of2000 Kentucky Investors borrowed $2,000,000 on a long-term basisand an additional $400,000 was borrowed during the second quarterof 2001. Kentucky Investors utilized $200,000 of the loan amount toreduce debt to Investors Heritage and $1,800,000 was loaned toInvestors Heritage in exchange for a surplus note.  Theremainder of the loan proceeds were used for general corporatepurposes (See Note F to the Financial Statements). There was noshort-term external debt.

Other than the itemsdisclosed in Note H to the Consolidated Financial Statements andthe increased regulatory reporting requirements which generallyincrease administrative expenses, management is not aware of anycurrent recommendations by any regulatory authority which ifimplemented would have any material effect on the Company'sliquidity, capital resources or operations.**  ** TheNational Association of Insurance Commissioners has formed aworking group and several states are reviewing statutes andregulations dealing with small face amount life insurance policies.Proposals range from requiring disclosures for policyholders torequiring small face amount policies to be paid up when premiumspaid equal some specified multiple of the death benefits.  Theworking group has proposed a model disclosure act and while severalstates are considering the model, to date it has not been adoptedin any of the states.  To the extent that a statute orregulation is adopted that puts a limit on the amount of premiumsthat can be collected on a small face amount policy, it wouldpotentially limit the ages at which we would issue such a policyand require us to increase premiums for all policyholders. Because regulators are in the process of relinquishing theirauthority to regulate rates on other types of insurance and becauselife insurance rates have never been regulated, it is unlikely thatregulators would decide to regulate rates for life insurancepolices at this time.  However, if such rate regulationoccurs, it will negatively impact some of the products we sell andsome of the markets in which we operate, specifically the Preneedand Burial markets.

The Company will continueto explore various opportunities, including mergers andacquisitions and purchasing blocks of business from othercompanies, which may dictate a need for either long-term orshort-term debt.  There are no restrictions as to use of fundsexcept the restriction on Investors Heritage as to the payment ofcash dividends to shareholders which is discussed in more detail inNote H to the Consolidated Financial Statements.

Since inception, we havemaintained a sound, conservative investment strategy.  Thefixed income portfolio of public bonds is managed by an independentportfolio manager, Conning Asset Management Company(“Conning”).  As of December 31, 2001, 87.3% ofthe Company's total invested assets are managed by Conning pursuantto specific investment guidelines which have been approved by theBoard of Directors.  The primary investment objectives havebeen to maintain the quality and integrity of the fixed incomeportfolio while improving the total return on investments. These goals have been accomplished by methodically diversifying theportfolio over the last 13 years.

The fixed income portfoliois diversified among sectors.  The market value and theStandard & Poor's average quality rating of this portfolio asof December 31, 2001 are $243.8 million and AA-,respectively.  At year-end 2001 the fixed income portfolio wasallocated as follows:  46.5% - corporate; 11.7% - government;26.9% - mortgage-backed securities; 7.8% - foreign; 5.4% -asset-backed securities; and 1.7% - states and politicalsubdivisions.  Within the corporate bond sector, the portfoliois also diversified with 28.8% of that sector invested in bank andfinance, 56.0% in industrial and miscellaneous, and 15.2% inutilities.  Pie charts showing the Distribution of FixedIncome Assets and Distribution of Corporate Bonds are located onpage 12.

The fixed income portfolioalso includes $65.5 million (at fair value) of mortgage-backedsecurities ("MBS"), which represents 23% of total invested assetsand 27% of the fixed income portfolio.  MBS add value to theportfolio and Conning has provided the expertise to purchase MBSwith the confidence that the credits have been properly analyzedand that the investment properly suits the Company's asset andliability needs.

There have been concernsexpressed by rating agencies, various regulators and otherconstituencies regarding investments in MBS by insurers and otherfinancial institutions.  Although these highly ratedsecurities provide excellent credit quality, their liquidity riskmust be monitored.  Except for three commercial-backedmortgages of approximately $3.1 million, all of the collateral ofthe MBS owned are guaranteed by the Government National MortgageAssociation ("GNMA"), Federal National Mortgage Association("FNMA") or Federal Home Loan Mortgage Corporation("FHLMC").

The FNMA and FHLMCsecurities are structured either as publicly traded collateralizedmortgage obligations ("CMO") or pass-throughs.  Unlike mostcorporate or real estate debt, the primary concern with an MBS isthe uncertainty of timing of cash flows due to prepaymentassumptions rather than the possibility of loss ofprincipal.

CMO holdings representapproximately 53% of the total MBS portfolio.  In accordancewith Emerging Issues Task Force Issue 99-20, “Recognition ofInterest Income and Impairment of Purchased and Retained BeneficialInterests in Securitized Financial Assets” (“EITF99-20”), when these securities are purchased at a discount orpremium, the income yield will vary with changes in prepaymentspeeds due to the change in accretion of discount or amortizationof premium, as well as the timing of the basic principal andinterest cash flows.  The overall impact of the CMO’svariability in yields on the portfolio is not significant inrelation to the yield and cash flows of the total investedassets.  More importantly, the investment portfolio has noexposure to more volatile, high-risk CMO’s, such as thosestructured to share in residual cash 

flows.  Except forone sequential pay CMO of approximately $907,000, the CMO’sheld are either planned amortization class ("PAC") bonds, orsupport class ("SUP") bonds, both of which are structured toprovide more certain cash flows to the investor and therefore havereduced prepayment risk.  Based on our analysis of theinvestment portfolio there are no impairment issues with respect toour CMO’s under the provisions of EITF 99-20.

Pass-throughs comprise theremainder of MBS owned representing approximately 47% of the totalMBS portfolio.  Pass-throughs are GNMA, FNMA or FHLMCguaranteed MBS which, simply stated, pass-through interest andprincipal payments to the investors in accordance with theirrespective ownership percentage.

Additionally, the Companyalso engages in commercial and residential mortgage lending withapproximately 95% of these investments being in commercialproperties.  All mortgage loans are originated in-house andall loans are secured by first mortgages on the real estate. Loan to value ratios of 80% or less and debt service coverage fromexisting cash flows of 115% are generally required.  TheCompany minimizes credit risk in its mortgage loan portfoliothrough various methods, including stringently underwriting theloan request, maintaining small average loan balances, reviewingits larger mortgage loans on an annual basis and diversifying theportfolio by property type.  The average loan balance is$392,235 and the average loan to value is 51.4%.  The largestloan currently held is $948,542.  The Company has $24.7million invested in mortgage loans, which represents 9% of totalinvested assets.  The portfolio is diversified across variousproperty types as follows:  16.5% - office; 51.7% - retail;7.2% -industrial; 4.6% - 1 to 4 family; 5.9% - apartments; and14.1% - other.  A pie chart showing the Distribution ofMortgage Loans is located on page 11.

Over the last severalyears we have methodically reduced the concentration of mortgageloans on properties located in Kentucky in order to diversify ourportfolio geographically. We are familiar with our mortgage loanmarkets and are not aware of any negative factors or trends whichwould have a material impact on the local economies where themortgage loan properties are located. The Company has beensuccessful in adding value to the total investment portfoliothrough its mortgage loan originations due to the fact that yieldsrealized from the mortgage loan portfolio are from 78 to 412 basispoints higher than yields realized from fixed incomeinvestments.  Value has also been added because the mortgageloan portfolio has consistently performed well.  As ofDecember 31, 2001, the Company had only one non-performing mortgageloan, which would include loans past due 90 days or more, loans inprocess of foreclosure, restructured loans and real estate acquiredthrough foreclosure.  The non-performing mortgage loan, whichis more than 90 days past due, is a Commercial Mortgage with anoutstanding balance of under $700,000.  The property securingthe loan has a fair market value of $1,002,000.

The strength of ourliquidity is found in our conservative approach in the productdevelopment area and in the strength and stability of our fixedincome portfolio and our mortgage loans.  For 2001, the fixedincome investments were 99.6% investment grade as rated by Standard& Poor's, down 0.2% from 2000.  None of the Company'sfixed income assets are in default.  Liquidity is also managedby laddering maturities of our fixed income portfolio.  Theaverage duration of our fixed income investments is 5.0 years withapproximately $7.1 million due within 12 months and approximately$36.2 million due within the following four years. Historically management has anticipated that all such investmentswill be held until maturity.  However, one of theresponsibilities of our independent portfolio manager is toconstantly monitor the credit rating of our fixed incomeinvestments to determine if rating changes of any investmentrequires action by management.  As explained in detail in NoteA to the Consolidated Financial Statements, all fixed incomesecurities and all marketable equity securities are classified asavailable-for-sale and are carried at fairvalue.            

MARKET RISKEXPOSURES

Measuring market risk is akey function of our asset/liability management process.  Totest financial risk and investment strategy, the Company performsan asset adequacy analysis each year.  Dynamic models of bothassets and liabilities are created to project financial resultsunder several shifts in the current interest rateenvironment.  Results show that the Company's exposure to arelative 10% increase or decrease in the interest rates prevalentat December 31, 2001 is a net loss of less than$500,000.

Items taken into accounton the asset side include prepayment and liquidity risks, assetdiversification and quality considerations.  On the liabilityside, interest crediting strategies and policyholder and agentbehavior (lapses, loans, withdrawals and premium flow) aredynamically modeled in relationship to the particular interest rateenvironment tested.  Although the Company is careful to ensurethat these assumptions are consistent with the best available data,interest-sensitive cash flows cannot be forecast with certainty andcan deviate significantly from the assumptions made.  Becauseasset and liability durations are continually changing as newpolicyholder contracts are issued and as new investments are addedto the portfolio, the Company manages its balance sheet on anongoing basis and its net exposure to changes in interest rates mayvary over time. 

REGULATORYMATTERS

The statutory capital andsurplus of Investors Heritage increased $2,403,000 in 2001following a decrease of $567,000 in 2000.  During the lastquarter of 2000 two fixed maturity investments were sold at asubstantial loss.  To offset this loss an investment in anunaffiliated common stock was sold at a gain.  The netrealized gain was $131,000.  However, a net unrealized loss of$936,000 was recognized in 2000 on the unaffiliated common stockand an unrealized gain of $346,000 on affiliated investments for anet charge to statutory capital and surplus of $590,000.

Another charge tostatutory surplus for 2000 was Goodwill in the amount of$598,000.  Statutory goodwill associated with the 2000purchase of the covered obligations of Franklin American LifeInsurance Company was disallowed as an admitted asset by theKentucky Department of Insurance even though statutory goodwill, upto 10% of the insurer's capital and surplus, is an admitted assetunder the Accounting Practices and Procedures of the NationalAssociation of Insurance Commissioners. During the 2001 session,the Kentucky General Assembly adopted legislation that allows thestatutory goodwill to be included as an admitted asset inaccordance with NAIC standards.  Therefore, the amortizedstatutory goodwill was recognized as an admitted asset after theeffective date of the legislation. 

Although InvestorsHeritage reported a $467,000 statutory operating loss in 2000,Investors Heritage produced a $1,022,000 statutory operating gainin 2001.  Acquisition costs on record insurance sales whichare required to be expensed in the year of sale under statutoryaccounting practices, adverse mortality experience in both Preneedand Traditional Life Products, a non-budgeted one-time generalexpense and the acquisition costs in connection with the FranklinAmerican business were the primary reasons for the loss in2000.  Those deficiencies were corrected during 2001 allowingInvestors Heritage to return an operating gain.  Foradditional discussion on statutory accounting practices refer toNote H to the Consolidated Financial Statements.

FORWARD LOOKINGINFORMATION

The Company cautionsreaders regarding certain forward-looking statements contained inthis report and in any other statements made by, or on behalf of,the Company, whether or not in future filings with the Securitiesand Exchange Commission (the "SEC"). Forward-looking statements arestatements not based on historical information and which relate tofuture operations, strategies, financial results or otherdevelopments. Statements using verbs such as "expect","anticipate", "believe" or words of similar import generallyinvolve forward-looking statements. Without limiting the foregoing,forward-looking statements include statements which represent theCompany's beliefs concerning future levels of sales and redemptionsof the Company's products, investment spreads and yields or theearnings and profitability of the Company's activities.

Forward-looking statementsare necessarily based on estimates and assumptions that areinherently subject to significant business, economic andcompetitive uncertainties and contingencies, many of which arebeyond the Company's control and many of which are subject tochange. These uncertainties and contingencies could cause actualresults to differ materially from those expressed in anyforward-looking statements made by, or on behalf of, the Company.Whether or not actual results differ materially fromforward-looking statements may depend on numerous foreseeable andunforeseeable factors and developments. Some of these may benational in scope, such as general economic conditions, changes intax laws and changes in interest rates. Some may be related to theinsurance industry generally, such as pricing competition,regulatory developments, industry consolidation and the effects ofcompetition in the insurance business from other insurancecompanies and other financial institutions operating in theCompany's market area and elsewhere. Others may relate to theCompany specifically, such as credit, volatility and other risksassociated with the Company's investment portfolio. The Companycautions that such factors are not exclusive. The Company disclaimsany obligation to update forward-looking information.

report ofindependent auditors    /    selectedfinancial data

**(000’s omitted except for Earnings and CashDividends Per Share)**
|                                                                                                                                     | **   2001**                    | **    2000** | **    1999**                                            | **   1998**                                      | **   1997**                                      |
|-------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------|-----------------------------|------------------------------------------------------------------------|------------------------------------------------------------|------------------------------------------------------------|
|                                                                                                                                     |                                          |                             |                                                                        |                                                            |                                                            |
| Totalrevenue.................................................................................................................       | $ 70,388                            | $   65,427        |  $  62,772                                                   | $ 57,708                                                   | $  52,707                                             |
| Total benefits andexpenses..........................................................................................                |   65,165                       | 63,183                      |       57,920                                  |    53,698                                   |    49,863                                   |
| Netincome....................................................................................................................       |      3,784           | 1,506                       |        2,379                        |       1,975                       |       1,523                       |
| Earnings pershare.........................................................................................................          |       3.33      | 1.31                        |          2.79             |        2.34             |        1.84             |
| Totalassets...................................................................................................................      | 390,778                                  | 365,936                     |     291,215                                             |   288,369                                             |   256,872                                             |
| Totalliabilities...............................................................................................................     | 347,851                                  | 328,681                     |     260,186                                             |   243,673                                             |   217,543                                             |
| Debt............................................................................................................................... |     2,688                 | 2,229                       |           264        |         407        |          -0-  |
| Cash dividends pershare...............................................................................................              |       ..38 | .38                         |            ..38 |          ..38 |          ..38 |

The Board of Directors andStockholders

Kentucky Investors,Inc.

               We have audited the accompanying consolidated balance sheets ofKentucky Investors, Inc. as of December 31, 2001 and 2000, and therelated consolidated statements of income, stockholders’equity, and cash flows for each of the three years in the periodended December 31, 2001. These financial statements are theresponsibility of the Company's management.  Ourresponsibility is to express an opinion on these financialstatements based on our audits.

               We conducted our audits in accordance with auditing standardsgenerally accepted in the United States.  Those standardsrequire that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free ofmaterial misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in thefinancial statements.  An audit also includes assessing theaccounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our audits provide a reasonablebasis for our opinion.

               In our opinion, the consolidated financial statements referred toabove present fairly, in all material respects, the consolidatedfinancial position of Kentucky Investors, Inc. at December 31, 2001and 2000, and the consolidated results of their operations andtheir cash flows for each of the three years in the period endedDecember 31, 2001, in conformity with accounting principlesgenerally accepted in the United States.        

                                                                       /s/Ernst & Young LLP

                                                                                                           

Cincinnati,Ohio

March 14, 2002

**KENTUCKYINVESTORS, INC.**

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER31, 2001 and 2000**
| **ASSETS**                                                                                                                                                                                                                  | **2001**                                                             |  | **2000**                                              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------|--|-------------------------------------------------------|
|                                                                                                                                                                                                                             |                                                                      |  |                                                       |
| **  INVESTMENTS**                                                                                                                                                                                                 |                                                                      |  |                                                       |
| **     **Securities available-for-sale, at fair value:                                                                                                                                             |                                                                      |  |                                                       |
|            Fixed maturities (amortized cost: 2001-$235,124,000;2000-$215,983,658)...........                                                                         | $ 243,831,823                                                   |  | $   220,446,702                             |
|            Equity securities (cost: 2001-$845,735;2000-$845,735).........................................                                                            |        1,605,888                  |  | 1,366,982                                             |
|        Mortgage loans on realestate........................................................................................                                                              |      24,710,790                             |  | 23,864,291                                            |
|         Policyloans...................................................................................................................                                                   |        7,909,681                  |  | 7,760,207                                             |
|         Otherlong-terminvestments.........................................................................................                                                               |           409,658  |  | 428,042                                               |
|        Short-terminvestments.................................................................................................                                                            |            837,560 |  | 1,890,815                                             |
|         Totalinvestments..........................................................................................................                                                       | $ 279,305,400                                                   |  | $ 255,757,039                                    |
|                                                                                                                                                                                                                             |                                                                      |  |                                                       |
|         Cashand cashequivalents.............................................................................................                                                             |        6,432,594                  |  |     3,324,447                          |
|        Accrued investmentincome...........................................................................................                                                               |        4,019,947                  |  |     3,826,971                          |
|         Dueand deferredpremiums...........................................................................................                                                               |        4,544,329                  |  |     4,601,062                          |
|        Deferred acquisitioncosts.............................................................................................                                                            |      24,930,081                             |  |  23,962,641                                      |
|        Present value of futureprofits.......................................................................................                                                             |           514,585  |  |       586,298           |
|         Leasedproperty under capitalleases............................................................................                                                                   |           449,033  |  |       224,879           |
|        Property andequipment................................................................................................                                                             |        1,766,657                  |  |     1,909,928                          |
|        Goodwill........................................................................................................................                                                  |           970,862  |  |     1,019,407                          |
|         Otherassets...................................................................................................................                                                   |        1,140,337                  |  |     1,319,856                          |
|        Amounts recoverable fromreinsurers............................................................................                                                                    |      66,704,355                             |  |  69,403,217                                      |
|                                                                                                                                                                                                                             | $ 390,778,180                                                   |  | $ 365,935,745                                    |
|                                                                                                                                                                                                                             |                                                                      |  |                                                       |
| **LIABILITIES ANDSTOCKHOLDERS’ EQUITY**                                                                                                                                                                               |                                                                      |  |                                                       |
|                                                                                                                                                                                                                   |                                                                      |  |                                                       |
| **     LIABILITIES**                                                                                                                                                                               |                                                                      |  |                                                       |
| **       **Policy liabilities:                                                                                                                                                           |                                                                      |  |                                                       |
|              Benefitreserves.......................................................................................................                        | $ 306,419,302                                                   |  | $ 290,096,285                                    |
|              Unearned premiumreserves....................................................................................                                  |      21,550,803                             |  | 23,816,171                                            |
|              Policyclaims............................................................................................................                      |        2,607,661                  |  |  2,570,382                                       |
|              Other policyholders’ funds:                                                                                                             |                                                                      |  |                                                       |
|              Dividend and endowmentaccumulations................................................................                                           |        1,117,342                  |  | 1,084,217                                             |
|              Reserves for dividends and endowments andother.................................................                                               |           923,804  |  | 801,687                                               |
|                  Total policyliabilities..........................................................................................     | $ 332,618,912                                                   |  | $     318,368,742                 |
|              Federal incometaxes................................................................................................                           |        6,233,425                  |  | 3,810,143                                             |
|              Obligations under capitalleases...............................................................................                                |           443,544  |  | 228,991                                               |
|              Notespayable..........................................................................................................                        |        2,244,074                  |  | 2,000,000                                             |
|              Otherliabilities........................................................................................................                      |        6,310,572                  |  | 4,273,551                                             |
|                  Totalliabilities..................................................................................................... | $ 347,850,527                                                   |  | $ 328,681,427                                    |
|                                                                                                                                                                                                                             |                                                                      |  |                                             |
| **     STOCKHOLDERS’ EQUITY**                                                                                                                                                                |                                                                      |  |                                                       |
|            Common stock (shares issued: 2001-1,132,960,2000-1,151,323)...........................                                                                    | $     1,132,960                             |  |   $      1,151,323 |
|            Paid-insurplus...........................................................................................................                                 |        8,413,332                  |  | 8,399,106                                             |
|            Accumulated other comprehensive income...............................................................                                                     |        5,737,351                  |  | 3,001,407                                             |
|            Retainedearnings.......................................................................................................                                   |      27,644,010                             |  | 24,702,482                                            |
|                Total stockholders’equity....................................................................................               | $    42,927,653                                       |  |   $    37,254,318            |
|                                                                                                                                                                                                                             | $ 390,778,180                                                   |  | $ 365,935,745                                    |

See notesto consolidated financial statements.

**KENTUCKYINVESTORS, INC.**

**CONSOLIDATED STATEMENTS OF INCOME**

**FOR THEYEARS ENDED DECEMBER 31, 2001, 2000, 1999**
|                                                                                                                              | **2001**                                                                                  |  | **2000**                                                                                                                                                                                                                                               |  | **1999**                                                                                              |
|------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|-------------------------------------------------------------------------------------------------------|
| **REVENUE**                                                                                                                  |                                                                                           |  |                                                                                                                                                                                                                                                        |  |                                                                                                       |
|    Premiums andotherconsiderations...................................................                              | $ 49,830,549                                                                         |  | $ 47,939,399                                                                                                                                                                                                                                      |  | $46,907,642                                                                                           |
|    Investmentincome, net ofexpenses..................................................                              | 18,327,345                                                                                |  | 17,017,723                                                                                                                                                                                                                                             |  | 15,211,964                                                                                            |
|    Realized gain(loss) on investments,net............................................                              | 1,099,079                                                                                 |  | (599,238)                                                                                                                                                                                                                                              |  | (307,275)                                                                                             |
|    Otherincome......................................................................................               |  1,130,682                                                                           |  | 1,069,180                                                                                                                                                                                                                                              |  | 959,332                                                                                               |
|     Totalrevenue...................................................................................      | $ 70,387,655                                                                         |  | $ 65,427,064                                                                                                                                                                                                                                      |  | $ 62,771,663                                                                                     |
|                                                                                                                              |                                                                                           |  |                                                                                                                                                                                                                                                        |  |                                                                                                       |
| **BENEFITS ANDEXPENSES**                                                                                                     |                                                                                           |  |                                                                                                                                                                                                                                                        |  |                                                                                                       |
|    Death andotherbenefits....................................................................                      | $ 30,243,587                                                                         |  | $ 26,629,623                                                                                                                                                                                                                                      |  | $ 22,845,282                                                                                     |
|    Guaranteedannualendowments........................................................                              | 714,194                                                                                   |  | 746,215                                                                                                                                                                                                                                                |  | 776,742                                                                                               |
|    Dividends topolicyholders................................................................                       | 711,318                                                                                   |  | 716,426                                                                                                                                                                                                                                                |  | 715,448                                                                                               |
|    Increase inbenefit reserves and                                                                                 |                                                                                           |  |                                                                                                                                                                                                                                                        |  |                                                                                                       |
|     unearnedpremiums..........................................................................           | 18,748,848                                                                                |  | 20,400,433                                                                                                                                                                                                                                             |  | 20,187,658                                                                                            |
|    Acquisitioncostsdeferred.................................................................                       | (8,697,446)                                                                               |  | (8,526,224)                                                                                                                                                                                                                                            |  | (8,407,930)                                                                                           |
|    Amortizationof deferred acquisitioncosts........................................                                | 7,391,695                                                                                 |  | 7,213,058                                                                                                                                                                                                                                              |  | 6,335,810                                                                                             |
|   Commissions......................................................................................                | 5,987,291                                                                                 |  | 5,998,730                                                                                                                                                                                                                                              |  | 6,358,819                                                                                             |
|    Otherinsuranceexpenses...................................................................                       | 10,065,349                                                                                |  | 10,005,106                                                                                                                                                                                                                                             |  | 9,108,078                                                                                             |
|     Total benefits andexpenses.............................................................              | $ 65,164,836                                                                         |  | $ 63,183,367                                                                                                                                                                                                                                      |  | $57,919,907                                                                                           |
|                                                                                                                              |                                                                                           |  |                                                                                                                                                                                                                                                        |  |                                                                                                       |
| **INCOME FROM OPERATIONSBEFORE**                                                                                             |                                                                                           |  |                                                                                                                                                                                                                                                        |  |                                                                                                       |
| **   FEDERALINCOME TAX AND MINORITY**                                                                              |                                                                                           |  |                                                                                                                                                                                                                                                        |  |                                                                                                       |
| **   INTERESTIN NET INCOME OF SUBSIDIARY**.......................                                                  | $    5,222,819                                                             |  | $   2,243,697                                                                                                                                                                                                                                |  | $   4,851,756                                                                               |
|                                                                                                                              |                                                                                           |  |                                                                                                                                                                                                                                                        |  |                                                                                                       |
|    Provision forincome taxes:                                                                                      |                                                                                           |  |                                                                                                                                                                                                                                                        |  |                                                                                                       |
|     Current............................................................................................. | $      438,478                                              |  | $       65,330                                                                                                                                                                                                      |  | $     326,000                                                                |
|     Deferred...........................................................................................  | 1,000,000                                                                                 |  | 672,000                                                                                                                                                                                                                                                |  | 1,305,000                                                                                             |
|                                                                                                                              | $    1,438,478                                                             |  | $     737,330                                                                                                                                                                                                                 |  | $   1,631,000                                                                               |
|                                                                                                                              |                                                                                           |  |                                                                                                                                                                                                                                                        |  |                                                                                                       |
| **INCOME FROM OPERATIONSBEFORE**                                                                                             |                                                                                           |  |                                                                                                                                                                                                                                                        |  |                                                                                                       |
| **   MINORITYINTEREST IN NET INCOME**                                                                              |                                                                                           |  |                                                                                                                                                                                                                                                        |  |                                                                                                       |
| **   OFSUBSIDIARY**..................................................                                              | $    3,784,341                                                             |  | $    1,506,367                                                                                                                                                                                                                          |  | $   3,220,756                                                                               |
|                                                                                                                              |                                                                                           |  |                                                                                                                                                                                                                                                        |  |                                                                                                       |
| **MINORITY INTEREST INNET INCOME**                                                                                           |                                                                                           |  |                                                                                                                                                                                                                                                        |  |                                                                                                       |
| **   OFSUBSIDIARY**..................................................                                              |               -0-   |  |                       -0-                                                                                                                |  | 841,500                                                                                               |
|                                                                                                                              |                                                                                           |  |                                                                                                                                                                                                                                                        |  |                                                                                                       |
| **NETINCOME**..........................................................                                                      | $    3,784,341                                                             |  |  $    1,506,367                                                                                                                                                                                                                    |  | $   2,379,256                                                                               |
|                                                                                                                              |                                                                                           |  |                                                                                                                                                                                                                                                        |  |                                                                                                       |
| **EARNINGS PERSHARE**........................................                                                                |  $             3.33 |  | $                      $                  1.31 |  |    $             2.79 |
|                                                                                                                              |                                                                                           |  |                                                                                                                                                                                                                                                        |  |                                                                                                       |

                                            See notes to consolidated financial statements.

**KENTUCKYINVESTORS, INC.**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITY**

**FOR THEYEARS ENDED DECEMBER 31, 2001, 2000, 1999**
|                                                                                                                        |                             |  |             | **Accumulated**              |              |  |                         |
|------------------------------------------------------------------------------------------------------------------------|-----------------------------|--|-------------|------------------------------|--------------|--|-------------------------|
|                                                                                                                        |                             |  |             | **Other**                    |              |  | **Total**               |
|                                                                                                                        | **Common**                  |  | **Paid-in** | **Comprehensive**            | **Retained** |  | **Stockholders’** |
|                                                                                                                        | **Stock**                   |  | **Surplus** | **Income (Loss) ** | **Earnings** |  | **Equity**              |
|                                                                                                                        |                             |  |             |                              |              |  |                         |  |  |
| **BALANCE, JANUARY 1, 1999**                                                                                      | $    848,116 |  | $3,442,248  |                              | $6,392,746   |  | $21,541,625             |  | $32,224,735 |
|                                                                                                                        |                             |  |             |                              |              |  |                         |  |  |
| **  Comprehensive income:**                                                                                  |                             |  |             |                              |              |  |                         |  |  |
|     Net income...................................                                                  |                             |  |             |                              |              |  | 2,379,256               |  | 2,379,256 |
|     Change in net unrealized appreciation                                                          |                             |  |             |                              |              |  |                         |  |  |
|        onavailable-for-sale securities.....                                              |                             |  |             |                              | (8,706,530)  |  |                         |  | (8,706,530) |
|        Totalcomprehensive income(loss).................................................. |                             |  |             |                              |              |  |                         |  | (6,327,274) |
|    Cashdividend..................................                                                            |                             |  |             |                              |              |  | (358,185)               |  | (358,185) |
|    Issuance ofcommon stock, net.......                                                                       | 15,079                      |  | 149,584     |                              |              |  | 125,491                 |  | 290,154 |
|    Shareexchange transaction.............                                                                    | 291,685                     |  | 4,907,760   |                              |              |  |                         |  | 5,199,445 |
|                                                                                                                        |                             |  |             |                              |              |  |                         |  |  |
| **BALANCE, DECEMBER 31,1999**                                                                                          | $1,154,880                  |  | $8,499,592  |                              | $(2,313,784) |  | $23,688,187             |  | $31,028,875 |
|                                                                                                                        |                             |  |             |                              |              |  |                         |  |  |
| **  Comprehensive income:**                                                                                  |                             |  |             |                              |              |  |                         |  |  |
|     Net income...................................                                                  |                             |  |             |                              |              |  | 1,506,367               |  | 1,506,367 |
|     Change in net unrealized appreciation                                                          |                             |  |             |                              |              |  |                         |  |  |
|        onavailable-for-sale securities.....                                              |                             |  |             |                              | 5,315,191    |  |                         |  | 5,315,191 |
|        Totalcomprehensive income......                                                   |                             |  |             |                              |              |  |                         |  | 6,821,558 |
|    Cashdividend..................................                                                            |                             |  |             |                              |              |  | (470,133)               |  | (470,133) |
|    Issuance ofcommon stock, net.......                                                                       | 2,731                       |  | 37,851      |                              |              |  | (7,320)                 |  | 33,262 |
|    Shareexchange transaction.............                                                                    | (6,288)                     |  | (138,337)   |                              |              |  | (14,619)                |  | (159,244) |
|                                                                                                                        |                             |  |             |                              |              |  |                         |  |  |
| **BALANCE, DECEMBER 31,2000**                                                                                          | $1,151,323                  |  | $8,399,106  |                              | $3,001,407   |  | $24,702,482             |  | $37,254,318 |
|                                                                                                                        |                             |  |             |                              |              |  |                         |  |  |
| **  Comprehensive income:**                                                                                  |                             |  |             |                              |              |  |                         |  |  |
|     Net income...................................                                                  |                             |  |             |                              |              |  | 3,784,341               |  | 3,784,341 |
|     Change in net unrealized appreciation                                                          |                             |  |             |                              |              |  |                         |  |  |
|        onavailable-for-sale securities.....                                              |                             |  |             |                              | 2,735,944    |  |                         |  | 2,735,944 |
|        Totalcomprehensive income......                                                   |                             |  |             |                              |              |  |                         |  | 6,520,285 |
|    Cashdividend..................................                                                            |                             |  |             |                              |              |  | (470,928)               |  | (470,928) |
|    Issuance ofcommon stock, net.......                                                                       | (18,363)                    |  | 14,226      |                              |              |  | (363,399)               |  | (367,536) |
|    Shareexchange transaction.............                                                                    |                             |  |             |                              |              |  | (8,486)                 |  | (8,486) |
|                                                                                                                        |                             |  |             |                              |              |  |                         |  |  |
| **BALANCE, DECEMBER 31,2001**                                                                                          | $1,132,960                  |  | $8,413,332  |                              | $5,737,351   |  | $27,644,010             |  | $ 42,927,653 |

                        

       See notes toconsolidated financial statements.

**KENTUCKYINVESTORS, INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**FOR THEYEARS ENDED DECEMBER 31, 2001, 2000, 1999**
|                                                                                                                                                                                                                                          |  | **2001**                                                                                                  |  | **2000**                               |  | **1999**                                                                                                         |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|-----------------------------------------------------------------------------------------------------------|--|----------------------------------------|--|------------------------------------------------------------------------------------------------------------------|
| **OPERATINGACTIVITIES**                                                                                                                                                                                                                  |  |                                                                                                           |  |                                        |  |                                                                                                                  |
|    Netincome..........................................................................................                                                                                                                         |  | $   3,784,341                                                                                   |  | $   1,506,367                |  | $    2,379,256                                                                                    |
|    Adjustmentsto reconcile net income                                                                                                                                                                                          |  |                                                                                                           |  |                                        |  |                                                                                                                  |
|     to net cash provided by operating activities:                                                                                                                                                                    |  |                                                                                                           |  |                                        |  |                                                                                                                  |
|        Change inoperating assets andliabilities:.................................                                                                                                                          |  |                                                                                                           |  |                                        |  |                                                                                                                  |
|          Benefitreserves...........................................................................                                                                                         |  | 16,950,702                                                                                                |  | 20,495,926                             |  | 25,460,007                                                                                                       |
|          Policyclaims................................................................................                                                                                       |  | 37,279                                                                                                    |  | 557,990                                |  | (73,924)                                                                                                         |
|          Other policyholderfunds...........................................................                                                                                                 |  | 155,242                                                                                                   |  | 55,296                                 |  | (7,994)                                                                                                          |
|          Accrued investmentincome......................................................                                                                                                     |  | (192,976)                                                                                                 |  | (362,794)                              |  | (365,247)                                                                                                        |
|          Other assets and otherliabilities..............................................                                                                                                    |  | 2,428,514                                                                                                 |  | 155,186                                |  | (79,947)                                                                                                         |
|          Due and deferredpremiums.......................................................                                                                                                    |  | 56,733                                                                                                    |  | (49,651)                               |  | (310,517)                                                                                                        |
|           Amounts recoverable fromreinsurers.....................................                                                                                                           |  | 2,698,862                                                                                                 |  | 69,538                                 |  | (5,284,996)                                                                                                      |
|          Amortization of deferred acquisitioncosts.............................                                                                                                             |  | 7,391,695                                                                                                 |  | 7,213,058                              |  | 6,335,810                                                                                                        |
|          Policy acquisition costsdeferred.............................................                                                                                                      |  | (8,697,446)                                                                                               |  | (8,526,224)                            |  | (8,407,930)                                                                                                      |
|           Realized loss (gain) oninvestments.........................................                                                                                                       |  | (1,099,079)                                                                                               |  | 599,238                                |  | 307,275                                                                                                          |
|          Provision for deferred federal incometaxes............................                                                                                                             |  | 1,000,000                                                                                                 |  | 672,000                                |  | 1,305,000                                                                                                        |
|          Federal incometax.......................................................................                                                                                           |  | 13,854                                                                                                    |  | (24,110)                               |  | (3,384,143)                                                                                                      |
|          Net adjustment for premium and discount on investments..                                                                                                                           |  | (100,118)                                                                                                 |  | 85,974                                 |  | 286,189                                                                                                          |
|          Depreciation and otheramortization........................................                                                                                                         |  | 564,023                                                                                                   |  | 541,140                                |  | 484,853                                                                                                          |
|          Change in minority interest andother.....................................                                                                                                          |  |                  -0- |  | (159,244)                              |  | 3,627,261                                                                                                        |
|                                                                                                                                                                                                                                          |  |                                                                                                           |  |                                        |  |                                                                                                                  |
| **NET CASH PROVIDED BYOPERATING**

**  ACTIVITIES**............................................................                                                                                                                |  | $ 24,991,626                                                                                         |  | $ 22,829,690                      |  | $ 22,270,953                                                                                                |
|                                                                                                                                                                                                                                          |  |                                                                                                           |  |                                        |  |                                                                                                                  |
| **INVESTINGACTIVITIES**                                                                                                                                                                                                                  |  |                                                                                                           |  |                                        |  |                                                                                                                  |
|     Securities available-for-sale:                                                                                                                                                                                   |  |                                                                                                           |  |                                        |  |                                                                                                                  |
|          Purchases.....................................................................................                                                                                     |  | $(65,117,220)                                                                                             |  | $(31,984,036)                          |  | $(45,334,028)                                                                                                    |
|          Sales andmaturities....................................................................                                                                                            |  | 47,167,587                                                                                                |  | 14,481,063                             |  | 27,475,182                                                                                                       |
|     Otherinvestments:                                                                                                                                                                                                     |  |                                                                                                      |  |                                        |  |                                                                                                                  |
|         Cost ofacquisition.......................................................................                                                                                                |  | (5,319,589)                                                                                               |  | (9,477,581)                            |  | (5,568,194)                                                                                                      |
|         Sales andmaturities.....................................................................                                                                                                 |  | 5,395,255                                                                                                 |  | 2,601,078                              |  | 3,965,182                                                                                                        |
|         Considerations from assumption of Franklin American

           Life Insurance Company policyobligations......................... |  |                  -0- |  | 6,303,944                              |  |                   -0-  |
|     Netadditions to property andequipment.....................................                                                                                                                                            |  | (522,069)                                                                                                 |  | (187,129)                              |  | (794,581)                                                                                                        |
|                                                                                                                                                                                                                                          |  |                                                                                                           |  |                                        |  |                                                                                                                  |
| **NET CASH USED BYINVESTING**

** ACTIVITIES**.............................................................                                                                                                                         |  | $(18,396,036)                                                                                             |  | $(18,262,661)                          |  | $(20,256,439)                                                                                                    |
|                                                                                                                                                                                                                                          |  |                                                                                                           |  |                                        |  |                                                                                                                  |
| **FINANCINGACTIVITIES**                                                                                                                                                                                                                  |  |                                                                                                           |  |                                        |  |                                                                                                                  |
|    Receipts from universal life policies credited to                                                                                                                                                                      |  |                                                                                                           |  |                                        |  |                                                                                                                  |
|        policyholderaccountbalances....................................................                                                                                                                     |  | $   5,082,705                                                                                   |  | $   3,308,407                |  | $   4,324,562                                                                                          |
|     Returnof policyholder account balances on                                                                                                                                                                             |  |                                                                                                           |  |                                        |  |                                                                                                                  |
|       universal lifepolicies......................................................................                                                                                                              |  | (7,975,758)                                                                                               |  | (8,542,770)                            |  |  (6,356,764)                                                                                                |
|    Proceeds from notespayable..........................................................                                                                                                                                   |  | 244,074                                                                                                   |  | 2,000,000                              |  |                    -0- |
|    Issuances of commonstock............................................................                                                                                                                                   |  | (367,536)                                                                                                 |  | 33,262                                 |  | 290,154                                                                                                          |
|    Dividends...........................................................................................                                                                                                                   |  | (470,928)                                                                                                 |  | (470,133)                              |  | (358,185)                                                                                                        |
|                                                                                                                                                                                                                                          |  |                                                                                                           |  |                                        |  |                                                                                                                  |
| **NET CASH USED BYFINANCING**                                                                                                                                                                                                            |  |                                                                                                           |  |                                        |  |                                                                                                                  |
| **  ACTIVITIES**............................................................                                                                                                                                                   |  | $ (3,487,443)                                                                                        |  | $ (3,671,234)                     |  | $ (2,100,233)                                                                                               |
|                                                                                                                                                                                                                                          |  |                                                                                                           |  |                                        |  |                                                                                                                  |
| **INCREASE (DECREASE) INCASH**                                                                                                                                                                                                           |  | $   3,108,147                                                                                   |  | $     895,795 |  | $      (85,719)                                                                    |
|    Cash and cashequivalents at beginning ofyear..........................                                                                                                                                                      |  | 3,324,447                                                                                                 |  | 2,428,652                              |  | 2,514,371                                                                                                        |
|                                                                                                                                                                                                                                          |  |                                                                                                           |  |                                        |  |                                                                                                                  |
| **CASH AND CASHEQUIVALENTS AT**

**  END OFYEAR**.........................................................                                                                                                                          |  | $   6,432,594                                                                                   |  | $   3,324,447                |  | $ 2,428,652                                                                                                 |

See notesto consolidated financial statements.

**NOTE  A - Natureof Operations and Accounting Policies**

Kentucky Investors, Inc.(“Kentucky Investors”) is the holding company ofInvestors Heritage Life Insurance Company (“InvestorsHeritage”), Investors Heritage Printing, Inc., a printingcompany and Investors Heritage Financial Services Group, Inc., aninsurance marketing company.  These entities are collectivelyhereinafter referred to as the "Company". Ninety-nine percent ofKentucky Investors operations are generated by InvestorsHeritage.

The Company's operationsinvolve the sale and administration of various insurance andannuity products, including, but not limited to, participating,non-participating, whole life, limited pay, universal life, annuitycontracts, Credit Life, Credit Accident and Health and groupinsurance policies.  The principal markets for the Company'sproducts are in the Commonwealths of Kentucky and Virginia, and thestates of North Carolina, South Carolina, Ohio, Indiana, Florida,Tennessee, Illinois, Georgia, West Virginia, Arizona, Michigan,Mississippi and Texas.

**Basis ofPresentation:**  The accompanying consolidatedfinancial statements of Kentucky Investors and subsidiaries havebeen prepared in accordance with accounting principles generallyaccepted in the United States (“GAAP”).

**Principles ofConsolidation:**  The consolidated financialstatements include the wholly-owned subsidiaries of KentuckyInvestors, which are Investors Heritage and its subsidiary,Investors Underwriters, Inc., Investors Heritage Printing, Inc. andInvestors Heritage Financial Services Group, Inc. Intercompany transactions are eliminated in the Company'sconsolidated financial statements.

**Investments:**  In accordance withStatement of Financial Accounting Standards (“SFAS”)No. 115, "Accounting for Certain Investments in Debt and EquitySecurities", the Company classifies all fixed maturities and equitysecurities as available-for-sale.  Under SFAS No. 115,securities classified as available-for-sale are carried at fairvalue with appreciation (depreciation) relating to temporary marketvalue changes recorded as an adjustment to other comprehensiveincome.

Premiums and discounts onfixed maturity investments are amortized into income using theinterest method.  Anticipated prepayments on mortgage-backedsecurities are considered in the determination of the effectiveyield on such securities.  If a difference arises betweenanticipated prepayments and actual prepayments, the carrying valueof the investment is adjusted with a corresponding charge or creditto interest income.

Realized gains and losseson the sale of investments are determined based upon the specificidentification method and include provisions forother-than-temporary impairments where appropriate.

Mortgage loans, policyloans and other long-term investments are carried at unpaidbalances.  Short-term investments represent securities withmaturity dates within one year but exceeding three months. These securities are carried at amortized cost.

Cash equivalents includemoney market funds on deposit at various financial institutionswith contractual maturity dates within three months at the time ofpurchase.

**Deferred AcquisitionCosts:**  Commissions and other acquisition costswhich vary with and are primarily related to the production of newbusiness are deferred and amortized over the life of the relatedpolicies (refer to Revenues and Expenses discussed later regardingamortization methods).  Recoverability of deferred acquisitioncosts is evaluated annually by comparing the current estimate ofthe present value of expected pretax future profits to theunamortized asset balance.  If such current estimate is lessthan the existing balance, the difference is charged toexpense.

****

**notes to consolidatedfinancials**         

**NOTE  A -Continued**

**Property andEquipment:**  Property and equipment is carried atcost less accumulated depreciation, using principally thestraight-line method.  Accumulated depreciation on propertyand equipment was $4,003,312 and $3,824,428 at December 31, 2001and 2000, respectively.

**CapitalLeases:**During 2001 the Company entered into five capitalleases for office equipment and an auto lease.  Total leasepayments for 2001, 2000 and 1999 relating to new and previouslyexisting capital leases were $214,284, $186,826 and $163,668respectively. Future minimum lease payments for 2002, 2003, 2004,and 2005 are $204,020, $147,795, $110,084, and $11,243,respectively.  The present value of net minimum lease paymentsat December 31, 2001 was $445,022, which is equal to the totalfuture minimum lease payments of $473,142 less imputed interest of$28,120. Accumulated amortization on the leased property was$546,513 and $357,763 at December 31, 2001 and 2000,respectively.

**Goodwill:**  Goodwill is beingamortized over forty years using the straight-line method. Accumulated amortization was $1,277,908 and $1,229,363 at December31, 2001 and 2000, respectively.

**Present Value of FutureProfits:**  Present value of future profitsrepresents the estimated value assigned to the insurance in forceof the assumed policy obligations at the date of acquisition. The assigned value is amortized over the expected remaining life ofthe insurance in force (which approximates a weighted average of 8years).  Accumulated amortization was $129,741 and $55,449 atDecember 31, 2001 and 2000, respectively.  Annual amortizationin each of the following five years will be approximately$74,300.

**Benefit Reserves andPolicyholder Deposits:**  Reserves on traditionallife and accident and health insurance products are calculatedusing the net level premium method based upon estimated futureinvestment yields, mortality, withdrawals and other assumptions,including dividends on participating policies.  Theassumptions used for prior year issues are locked in. Current yearissues are reserved for using updated assumptions determined byreviewing the Company's past experience and includes a provisionfor possible unfavorable deviation.

Benefit reserves andpolicyholder deposits on universal life and investment-typeproducts are determined by using the retrospective deposit methodand represent the policy account value before consideration ofsurrender charges.  In addition, unearned revenues areincluded as a part of the benefit reserve.

The mortality assumptionsfor regular ordinary business are based on the 1955-60 Basic Table,Select and Ultimate, for plans issued prior to 1982, the 1965-70Basic Table, Select and Ultimate, for plans issued in 1982 through1984, the 1975-80 Basic Table, Select and Ultimate, for plansissued after 1984 and on the Company's experience for final expenseplans.

**Reinsurance:**  The Company assumesand cedes reinsurance under various agreements providing greaterdiversification of business, allowing management to controlexposure to potential losses arising from large risks, andproviding additional capacity for growth.  Amounts recoverablefrom reinsurers are estimated in a manner consistent with therelated liabilities associated with the reinsured policies. In accordance with SFAS No. 113, "Accounting and Reporting forReinsurance of Short-Duration and Long-Duration Contracts",reserves ceded to reinsurers of $65,748,887 and $67,985,728 atDecember 31, 2001 and 2000, respectively, are shown gross on theCompany's balance sheet.

**notes toconsolidated financials**

**NOTE  A -Continued**

**Unearned PremiumReserves:**  Credit Life unearned premium reservesare calculated for level and reducing coverage using the monthlypro rata and Rule of 78's methods, respectively.  CreditAccident and Health unearned premium reserves are determined basedupon the Rule of 78's.

**PolicyClaims:**  Policy claims are based on reported claimsplus estimated incurred but not reported claims developed fromtrends of historical data applied to current exposure.

**Other Policyholders'Funds:**  Other policyholders' funds consistprimarily of dividends and endowments left on deposit atinterest.

**ParticipatingPolicies: ** Participating business approximates 7%of ordinary life insurance in force.  Participating dividendsare accrued as declared by the Board of Directors of InvestorsHeritage.  The liability for future policy benefits forparticipating policies was determined based on the Net LevelPremium Reserve Method, 3% interest, and the 1941 CSO Mortality and1958 CSO Mortality tables.  All guaranteed benefits wereconsidered in calculating these reserves.  Deferredacquisition costs are amortized in proportion to expected grossprofits.  The average assumed investment yields used indetermining expected gross profits ranged from 3.56% to 9.17% (forthe current and all future years an assumed investment yield of6.80% was utilized).

**Federal IncomeTaxes:**  The Company utilizes the liability methodin accordance with SFAS No. 109, "Accounting for Income Taxes", toaccount for income taxes.  Under such method, deferred taxassets and liabilities are determined based on differences betweenthe financial reporting and the tax bases of assets and liabilitiesand are measured using the enacted tax rates.

**Revenues andExpenses:**  Revenues on traditional life andaccident and health insurance products consist of direct andassumed premiums reported as earned when due.  Liabilities forfuture policy benefits, including unearned premium reserves onaccident and health policies and unreleased profits on limited-paylife policies, are provided and acquisition costs are amortized byassociating benefits and expenses with earned premiums to recognizerelated profits over the life of the contracts.  Acquisitioncosts are amortized over the premium paying period using the netlevel premium method.  Traditional life insurance products aretreated as long duration contracts since they are ordinary wholelife insurance products which generally remain in force for thelifetime of the insured.  The accident and health insuranceproducts are treated as long duration contracts because they arenon-cancelable.

Revenues for universallife and investment-type products consist of investment income andpolicy charges for the cost of insurance and policy initiation andadministrative fees.  Expenses include interest credited topolicy account balances, actual administrative expenses and benefitpayments in excess of policy account balances.

Deferred acquisition costsrelated to universal life and investment-type products areamortized as a uniform percentage of each year's expected grossprofits, over the life of the policies.  Amortization isunlocked for significant changes in expected versus actual grossprofits, including the effects of realized gains orlosses.

**Common Stock andEarnings per Share:**  The par value per share is$1.00 with 4,000,000 shares authorized. Earnings per share ofcommon stock were computed based on the weighted average number ofcommon shares outstanding during each year.  The number ofcommon shares used in this computation was 1,136,634 in 2001,1,148,302 in 2000 and 854,135 in 1999.  Cash dividends pershare were $.38 in 2001, 2000 and 1999.

****

**notes to consolidatedfinancials**

**NOTE  A -Continued**

**Accumulated OtherComprehensive Income(Loss):**SFAS No. 130, "ReportingComprehensive Income", requires unrealized gains or losses onavailable-for-sale securities to be included in other comprehensiveincome.  The reclassification amounts (net of 34% tax) for theyears ended December 31, 2001, 2000 and 1999 are summarized asfollows:
|                                                                                                                                                                                                                                                                                                                                                             |   | **2001**                |   | **2000**        |   | **1999**                         |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---|-------------------------|---|-----------------|---|----------------------------------|
| Net unrealized gain (loss)arising                                                                                                                                                                                                                                                                                                                           |   |                         |   |                 |   |                                  |
|    duringperiod.....................................                                                                                                                                                                                                                                                                                              | $ | 3,825,612               | $ | 4,629,104       | $ | (8,981,205)                      |
| Reclassificationadjustment fornet                                               (gains) losses included in net income |   |   (1,089,668) |   | 686,087         |   |      274,675 |
| Net unrealized gain (loss)on certain          securities...........................................                                                                                                                                                                                                       | $ | 2,735,944               | $ |  5,315,191 | $ |  (8,706,530)                |

**Use ofEstimates:**  The preparation of financial statementsrequires management to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanyingnotes.  Actual results could differ from those estimates.

**NOTE  B -Acquisitions**

Effective April 1, 2000,Investors Heritage assumed the covered obligations of FranklinAmerican Life Insurance Company ("Franklin American") through anassumption reinsurance agreement with the liquidator of FranklinAmerican, the National Organization of Life and Health GuarantyAssociations ("NOLHGA") and participating life and health insuranceguaranty associations.  The gross acquisition price wasapproximately $4,400,000.  The difference between the fairvalues of assets received and liabilities assumed was recorded asthe present value of future profits ("PVFP"), representing theactuarially determined present value of anticipated profits to berealized from the business, using a risk-adjusted discountrate.

In conjunction with theassumption reinsurance agreement, Investors Heritage entered into acoinsurance agreement with Scottish Annuity & Life InsuranceCompany (Cayman) Ltd. ("Scottish") whereby Investors Heritage ceded85% of the assumed policy obligations from Franklin American. Pursuant to this arrangement, Investors Heritage eliminated theportion of PVFP associated with the ceded business.  Benefitreserves ceded to Scottish and included in the amounts recoverablefrom reinsurers equaled $38,367,934 and $39,273,582 at December 31,2001 and 2000, respectively.  An escrow account has beenestablished by Scottish to secure Investors Heritage’s cededbenefit obligations.  The Company received $172,552 and$132,840 of fee income associated with this reinsurance agreementin 2001 and 2000, respectively.

On December 31, 1999Kentucky Investors acquired the minority stockholders' common stockof Investors Heritage through a share exchange. Under the terms ofthis share exchange, Kentucky Investors issued 1.24 shares ofcommon stock for every 1 share of Investors Heritage common stockheld by minority stockholders. Kentucky Investors issuedapproximately 291,685 shares of stock with a value of approximately$6,709,000. Prior to the share exchange, Kentucky Investors ownedapproximately 74% of Investors Heritage. The acquisition of theremaining 26% from Investors Heritage's minority shareholders wasaccounted for as a purchase and was a tax-free transaction;accordingly, the deferred tax liability of Kentucky Investors atthe date of the acquisition was utilized to decrease the purchaseprice.  The net purchase price for the minority stockholders'interest in Investors Heritage was approximately $5,200,000(including costs associated with the acquisition of approximately$324,000 and reduction of the deferred tax liability ofapproximately $1,833,000).

**NOTE  C -Investments**

The Company limits creditrisk by emphasizing investment grade securities and by diversifyingits investment portfolio among government and corporate bonds andmortgage loans.  The Company manages its fixed incomeportfolio to diversify between and within industry sectors. Mortgage loans, exclusive of insured or guaranteed mortgages, areissued at loan to value ratios not exceeding 80 percent. Approximately $11,892,000 of the loans outstanding at December 31,2001 were to borrowers located in Kentucky.  All loans aresecured by a first mortgage on the property.

Investments inavailable-for-sale securities are summarized as follows:
| **2001**                                                  |                   |  | **Gross**               |  | **Gross**                              |  |                                |
|-----------------------------------------------------------|-------------------|--|-------------------------|--|----------------------------------------|--|--------------------------------|
|                                                           | **Amortized**     |  | **Unrealized**          |  | **Unrealized**                         |  | **Fair**                       |
|                                                           | **Cost**          |  | **Gains**               |  | **Losses**                             |  | **Value**                      |
| **Available-for-salesecurities:**                         |                   |  |                         |  |                                        |  |                                |
| U.S. governmentobligations...............                 | $ 27,470,643 |  | $   1,176,394 |  | $      40,110 |  | $    28,606,927 |
| States and politicalsubdivisions.........                 | 4,103,505         |  | 38,529                  |  | 59,864                                 |  | 4,082,170                      |
| Corporate............................................     | 122,176,799       |  | 5,401,938               |  | 957,552                                |  | 126,621,185                    |
| Foreign................................................   | 17,934,805        |  | 1,082,710               |  | 43,336                                 |  | 18,974,179                     |
| Mortgage-backedsecurities.................                | 63,438,248        |  | 2,209,361               |  | 100,247                                |  | 65,547,362                     |
| Total fixed maturitysecurities............                | $235,124,000      |  | $   9,908,932 |  | $1,201,109                             |  | $ 243,831,823             |
| Equitysecurities.................................         | 845,735           |  | 766,093                 |  | 5,940                                  |  | 1,605,888                      |
| Total.................................................... | $235,969,735      |  | $10,675,025             |  | $1,207,049                             |  | $ 245,437,711             |
| **2000**                                                                  |               |  | **Gross**        |  | **Gross**                                                                                          |  |                          |
|---------------------------------------------------------------------------|---------------|--|------------------|--|----------------------------------------------------------------------------------------------------|--|--------------------------|
|                                                                           | **Amortized** |  | **Unrealized**   |  | **Unrealized**                                                                                     |  | **Fair**                 |
|                                                                           | **Cost**      |  | **Gains**        |  | **Losses**                                                                                         |  | **Value**                |
| **Available-for-salesecurities:**                                         |               |  |                  |  |                                                                                                    |  |                          |
| U.S. governmentobligations...............................                 | $30,940,882   |  | $ 1,002,385 |  | $                20,817 |  | $   31,922,450 |
| States and politicalsubdivisions.........................                 | 992,029       |  | 12,081           |  | -0-                                                                                                |  | 1,004,110                |
| Corporate............................................................     | 115,630,291   |  | 3,084,247        |  | 1,089,950                                                                                          |  | 117,624,588              |
| Foreign................................................................   | 20,618,688    |  | 678,728          |  | 94,327                                                                                             |  | 21,203,089               |
| Mortgage-backedsecurities.................................                | 47,801,768    |  | 998,015          |  | 107,318                                                                                            |  | 48,692,465               |
| Total fixed maturitysecurities............................                | $215,983,658  |  | $ 5,775,456 |  | $ 1,312,412                                                                                   |  | $220,446,702             |
| Equitysecurities.................................................         | 845,735       |  | 526,402          |  | 5,155                                                                                              |  | 1,366,982                |
| Total.................................................................... | $216,829,393  |  | $ 6,301,858 |  | $ 1,317,567                                                                                   |  | $221,813,684             |
|                                                                           |               |  |                  |  |                                                                                                    |  |                          |

In accordance with SFASNo. 115, net unrealized gains  for investments classified asavailable-for-sale are shown, net of the effect on deferred incometaxes and deferred policy acquisition costs assuming that theappreciation had been realized.  A summary follows:
|                                                                           | **December31**                                 |
|---------------------------------------------------------------------------|------------------------------------------------|
|                                                                           | **2001**                                       |  | **2000** |
| Net unrealizedappreciation on                                             |                                                |  |  |
|    available-for-salesecurities...............................  | $     9,467,976  |  | $    4,984,291  |
|    Adjustment todeferred acquisition costs......                |       (775,021)  |  |       (436,708) |
|    Deferredincome taxes........................................ |     (2,955,604)                 |  |    (1,546,176) |
| Net unrealizedappreciation on                                             |                                                |  |  |
|   available-for-salesecurities...............................   | $     5,737,351       |  | $    3,001,407 |
|                                                                           |                                                |  |  |

**notes toconsolidated financials**

**NOTE  C -Continued**

The amortized cost andfair value of debt securities at December 31, 2001, by contractualmaturity, are presented below.  Expected maturities willdiffer from contractual maturities because borrowers may have theright to call or prepay obligations with or without call orprepayment penalties.

                                                    
|                                                                                             | **Available-for-Sale** |
|---------------------------------------------------------------------------------------------|------------------------|
|                                                                                             |                        | **Amortized** |  | **Fair** |
|                                                                                             |                        | **Cost** |  | **Value** |
| Due in one year orless......................................................                |                        | $     7,141,023 |  | $    6,521,203 |
| Due after one year throughfive years.............................                           |                        |      36,165,822 |  |     37,917,745 |
| Due after five yearsthrough ten years............................                           |                        |      87,880,600 |  |     90,977,059 |
| Due after tenyears.............................................................             |                        |      35,112,286 |  |     37,214,447 |
| Due at multiple maturitydates..........................................                     |                        |      68,824,269 |  |     71,201,369 |
| Total...................................................................................... |                        | $ 235,124,000 |  | $ 243,831,823 |

Proceeds during 2001, 2000and 1999 from sales and maturities of investments inavailable-for-sale securities were $47,167,587, $14,481,063 and$27,473,932, respectively.  Gross gains of $1,673,704,$853,970 and $121,729 and gross losses of $584,036, $1,540,057 and$396,404 were realized on those sales during 2001, 2000 and 1999,respectively.

Presented below isinvestment information, including the accumulated and annual changein net unrealized investment gain or loss.  Additionally, thetable below shows the annual change in net unrealized investmentgain (loss) and the amount of realized investment gain (loss) ondebt and equity securities for the years ended December 31, 2001,2000 and 1999:
|                                                                            | **2001** |                  | **2000** |                                                                       | **1999** |
|----------------------------------------------------------------------------|----------|------------------|----------|-----------------------------------------------------------------------|----------|
| Change in unrealizedinvestment

      gain(loss): |          |                  |          |                                                                       |          |
|   Available-for-sale:                                            |          |                  |          |                                                                       |          |
|     Debt securities.........................           |          | $ 4,244,779 |          | $    8,401,634                          |          | $ (15,963,266) |
|     Equity securities......................            |          | 238,906          |          | (692,231)                                                             |          |      (1,251,285) |
| Realized investment gain(loss):                                            |          |                  |          |                                                                       |          |  |
|   Available-for-sale:                                            |          |                  |          |                                                                       |          |  |
|     Debt securities.........................           |          | $ 1,089,668 |          | $  (1,461,834)                                              |          | $     (276,554) |
|     Equity securities......................            |          | -0-              |          |           775,747   |          |              1,879  |
|                                                                            |          |                  |          |                                                                       |          |  |

Major categories ofinvestment income are summarized as follows:
|                                                                           |  | **2001**    |  | **2000**                                          |  | **1999**                                          |
|---------------------------------------------------------------------------|--|-------------|--|---------------------------------------------------|--|---------------------------------------------------|
| Fixedmaturities...................................................        |  | $16,183,339 |  | $14,829,680                                       |  | $13,489,661                                       |
| Mortgage loans on realestate.........................                     |  | 2,043,664   |  |      1,763,981                |  |      1,324,602                |
| Other.................................................................... |  | 904,321     |  |      1,022,273                |  |        952,956 |
|                                                                           |  | $19,131,324 |  | $17,615,934                                       |  | $15,767,219                                       |
| Investmentexpenses.........................................               |  | 803,979     |  |        598,211 |  |        555,255 |
|                                                                           |  | $18,327,345 |  | $17,017,723                                       |  | $15,211,964                                       |

The Company is required tohold assets on deposit for the benefit of policyholders inaccordance with statutory rules and regulations.  At December31, 2001 and 2000, these required deposits had book values of$23,657,924 and $23,322,627, respectively.

**NOTE  D - FairValues of Financial Instruments**

The following disclosureof the estimated fair values of financial instruments is made inaccordance with the requirements of SFAS No. 107, "Disclosuresabout Fair Value of Financial Instruments".  The estimatedfair value amounts have been determined using available marketinformation and appropriate valuation methodologies.  However,considerable judgment was necessarily required to interpret marketdata to develop these estimates.  Accordingly, the estimatesare not necessarily indicative of the amounts which could berealized in a current market exchange.  The use of differentmarket assumptions or estimation methodologies may have a materialeffect on the fair value amounts.
|                                                                         | **December 31**          |
|-------------------------------------------------------------------------|--------------------------|
|                                                                         | **   2001**    | **  2000** |
|                                                                         | **Carrying**             | **Fair** | **Carrying** | **Fair** |
|                                                                         | **Value**                | **Value** | **Value** | **Value** |
| **Assets:**                                                             |                          |  |  |  |
|    Fixedmaturities..............................              | $ 243,831,823       | $ 243,831,823 | $   220,446,702 | $   220,446,701 |
|    Equitysecurities............................               | 1,605,888                | 1,605,888 | 1,366,982 | 1,366,982 |
|    Mortgageloans on real estate:                              |                          |  |  |  |
|     Commercial...................................   | 23,574,150               | 23,226,006 | 22,207,606 | 22,785,340 |
|     Residential.................................... | 1,136,640                | 1,129,473 | 1,656,685 | 1,713,032 |
|    Policyloans....................................            | 7,909,681                | 7,909,681 | 7,760,207 | 7,760,207 |
|    Otherlong-term investments.......                          | 409,658                  | 409,658 | 428,042 | 428,042 |
|    Short-terminvestments................                      | 837,560                  | 837,560 | 1,890,815 | 1,890,815 |
|    Cash and cashequivalents..........                         | 6,432,594                | 6,432,594 | 3,324,447 | 3,324,447 |
|    Accruedinvestment income........                           | 4,019,947                | 4,019,947 | 3,826,971 | 3,826,971 |
|                                                                         |                          |  |  |  |
| **Liabilities:**                                                        |                          |  |  |  |
|    Policyholderdeposits                                       |                          |  |  |  |
|     (investment-type contracts)......               | $   79,689,179 | $   75,152,860 | $     79,998,756 | $     75,168,177 |
|    Policyclaims..................................             | 2,607,661                | 2,607,661 | 2,570,382 | 2,570,382 |
|     Obligationsunder capital leases.                          | 443,544                  | 443,544 | 228,991 | 228,991 |
|    Notespayable................................               | 2,244,074                | 2,244,074 |       2,000,000 |       2,000,000 |

The following methods andassumptions were used in estimating the “fair value”disclosures for financial instruments in the accompanying financialstatements and notes thereto:

Cash, cash equivalents,short-term investments, policy loans, accrued investment income andother long-term investments:  The carrying amounts reportedfor these financial instruments approximate their fairvalues.

Fixed maturities andequity securities:  The fair values for fixed maturities andequity securities (including redeemable preferred stocks) are basedon quoted market prices.

Mortgage loans on realestate:  The fair values for mortgage loans are estimatedusing discounted cash flow analyses, using the actual spot rateyield curve in effect at December 31.

Investment-typecontracts:  The fair values for the liabilities underinvestment-type insurance contracts are calculated as surrendervalues on these contracts.

Policy claims, obligationsunder capital leases and notes payable:  The carrying amountsreported for these liabilities approximate their fairvalue.

The fair values forinsurance contracts other than investment contracts are notrequired to be disclosed under SFAS No. 107.

**notes to consolidatedfinancials**

**NOTE  E - FederalIncome Tax**

Deferred income taxesreflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reportingpurposes and the amounts used for income tax purposes. Significant components of the Company’s deferred taxliabilities and assets as of December 31 are as follows:
|                                                                                                |  | **2001**                            |  | **2000**                |
|------------------------------------------------------------------------------------------------|--|-------------------------------------|--|-------------------------|
| **Deferred taxliabilities:**                                                                   |  |                                     |  |                         |
|    Policyacquisitioncosts................................................            |  |  $    6,134,819 |  | $   5,901,199 |
|    Netunrealized gain on available-for-sale securities......                         |  | 2,955,604                           |  | 1,546,176               |
|   Other............................................................................  |  | 2,206,297                           |  | 1,927,775               |
|     Total deferred taxliabilities........................................  |  |     $ 11,296,720     |  | $  9,375,150       |
|                                                                                                |  |                                     |  |                         |
| **Deferred taxassets:**                                                                        |  |                                     |  |                         |
|    Benefitreserves............................................................       |  | $   3,271,919             |  | $   3,773,530 |
|   Other............................................................................  |  | 1,791,376                           |  | 1,791,477               |
|     Total deferred taxassets.............................................  |  | $   5,063,295             |  | $   5,565,007 |
|                                                                                                |  |                                     |  |                         |
|     Net deferred taxliabilities........................................... |  | $   6,233,425             |  | $   3,810,143 |
|                                                                                                |  |                                     |  |                         |

The reconciliation ofincome tax attributable to operations computed at the federalstatutory tax rate to income tax expense is:
|                                                                                            |  | **2001**               |   | **2000** |                       | **1999** |
|--------------------------------------------------------------------------------------------|--|------------------------|---|----------|-----------------------|----------|
| Statutory federal incometax rate..........................................                 |  |  34.0             | % |          | 34.0                  | %        |  | 34.0 | % |
| Small life insurancecompany deduction...............................                       |  | (10.1)                 | % |          |     .0 | %        |  | (3.9) | % |
| Other..................................................................................... |  |     3.6 | % |          | (1.1)                 | %        |  |  3.5 | % |
|                                                                                            |  |                        |   |          |                       |          |  |  |  |
|    Effectiveincome taxrate....................................................   |  |  27.5             | % |          | 32.9                  | %        |  | 33.6 | % |

At December 31, 2001,approximately $4,000,000 of the retained earnings of the Companyrepresent earnings prior to 1984 which accumulated in an accountknown as policyholders' surplus, which was not subject to incometaxation.  In certain circumstances, including ifdistributions are made to stockholders in excess of approximately$26,400,000, the Company could be subject to additional federalincome tax unrelated to its normal taxable income.  Noprovision for such income tax has been made at December 31,2001.

The Company made incometax payments of $441,850, $272,364 and $343,153 in 2001, 2000 and1999, respectively.

****

**NOTE  F - NotesPayable**

On December 27, 2000, theCompany entered into long-term debt with Fifth Third Bank in theamount of $2,000,000, at an interest rate of 8.5%, due on December27, 2005.  The funds were used to retire notes payable and toissue a surplus note to its subsidiary, Investors Heritage. On May 1, 2001, the Company borrowed an additional $400,000 on thenote and the interest rate was adjusted to 1% under the primerate.  The rate at year end is 3.75%.   Interestexpense and interest paid on the note was $141,073 in2001.

****

**NOTE  G - EmployeeBenefit Plans**

The Company participatesin a noncontributory retirement plan which covers substantially allemployees.  Benefits are based on years of service and thehighest consecutive 60 months average earnings within the last 120months of credited service.  Benefits are funded based onactuarially-determined amounts.

The following tablesprovide additional details for the Company on a consolidatedbasis. 
|                                                                                      | **2001**                                                                                                                          |  | **2000**                            |  | **1999**                            |
|--------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|--|-------------------------------------|--|-------------------------------------|
| **Change in benefitobligation:**                                                     |                                                                                                                                   |  |                                     |  |                                     |
|     Benefitobligation at beginning of year...................         | $   7,403,251                                                                                                      |  | $   6,792,209        |  | $   6,011,932        |
|    Servicecost............................................................ | 326,978                                                                                                                      |  | 291,466                        |  | 284,761                        |
|    Interestcost........................................................... | 576,221                                                                                                                      |  | 525,402                        |  | 462,102                        |
|    Actuarialloss.........................................................  | 523,024                                                                                                                      |  | 206,174                        |  | 147,391                        |
|    Benefitspaid..........................................................  | (762,331)                                                                                                                         |  | (412,000)                           |  | (113,977)                           |
|    Benefitobligation at end of year............................            | $   8,067,143                                                                                                      |  | $   7,403,251        |  | $   6,792,209        |
|                                                                                      |                                                                                                                                   |  |                                     |  |                                     |
| **Change in planassets:**                                                            |                                                                                                                                   |  |                                     |  |                                     |
|    Fair value ofplan assets at beginning of year........                   | $   6,127,941                                                                                                      |  | $   5,855,055        |  | $   5,087,542        |
|    Actual returnon plan assets..................................           | 528,534                                                                                                                      |  | 372,886                        |  | 581,490                        |
|    Employercontribution...........................................         | 370,940                                                                                                                      |  | 312,000                        |  | 300,000                        |
|    Benefitspaid..........................................................  | (762,331)                                                                                                                         |  | (412,000)                           |  | (113,977)                           |
|    Fair value ofplan assets at end of year..................               | $   6,265,084                                                                                                      |  | $   6,127,941        |  | $   5,855,055        |
|                                                                                      |                                                                                                                                   |  |                                     |  |                                     |
|    Fundedstatus.........................................................   | $ (1,802,059)                                                                                                                |  | $ (1,275,310)                  |  | $     (937,154) |
|    Unrecognizednet actuarial loss..............................            | 1,738,773                                                                                                               |  | 1,298,935                      |  | 1,009,044                      |
|    Unrecognizedtransition asset................................            |                     -0-  |  | (34,143)                            |  | (68,287)                            |
|    Unrecognizedprior service credit..........................              | (91,264)                                                                                                                          |  | (126,367)                           |  | (161,470)                           |
|    Accruedpensioncost.............................................         | $    (154,550)                                                                                                     |  | $     (136,885) |  | $     (157,867) |
|                                                                                      |                                                                                                                                   |  |                                     |  |                                     |
| **Components of netperiodic benefit cost:**                                          |                                        |  |                                        |  |                                        |
|--------------------------------------------------------------------------------------|----------------------------------------|--|----------------------------------------|--|----------------------------------------|
|    Servicecost............................................................ | $    326,978  |  | $    291,466  |  | $    284,761  |
|    Interestcost........................................................... | 576,221                           |  | 525,402                           |  | 462,102                           |
|    Expectedreturn on plan assets..............................             | (551,111)                              |  | (525,433)                              |  | (457,692)                              |
|    Recognizednet loss................................................      | 105,763                           |  | 68,830                            |  | 79,878                            |
|    Amortizationof prior service credit......................               | (35,103)                               |  | (35,103)                               |  | (35,103)                               |
|    Amortizationof transition asset............................             | (34,143)                               |  | (34,144)                               |  | (34,143)                               |
|    Net periodicbenefit cost........................................        | $    388,605  |  | $    291,018  |  | $    299,803  |

The discount rate used indetermining the actuarial present value of the projected benefitobligation was 7.25% in 2001 and 2000.  The rate of increasein future compensation levels was 5% for 2001, 2000 and 1999. The expected long-term rate of return on plan assets was 9% in2001, 2000 and 1999.  At December 31, 2001, plan assetsconsist of an immediate participation group retirement annuitycontract (a deposit administration contract) that is comprised offunds held in a general account of  Investors Heritage, whichhas a contract value of $5,567,584, and 31,000 shares of theCompany’s common stock with a fair value of $697,500. The common stock of the Company is stated at fair value based uponquoted bid prices on the last day of the Plan year.

**notes toconsolidated financials**

**NOTE G -Continued**

The Company also sponsorsa 401(k) defined contribution plan.  At December 31, 2001 and2000, plan assets consist entirely of the Company’s commonstock, although employees have the option to invest in selectmutual funds.  The Company matches 100% of employeecontributions invested in the Company’s stock.  AtDecember 31, 2001, the plan held Company stock of 273,000 shareswith a fair value of $6,142,505.  At December 31, 2000, theplan held Company stock of 271,859 shares with a fair value of$5,573,102.  Matching contributions to the plan expensed for2001, 2000 and 1999 were $258,186, $218,041, and $204,112,respectively.  Dividends paid to the plan on Company stockwere $100,971, $95,219 and $108,976 in 2001, 2000 and 1999,respectively.

****

**NOTE  H -Stockholders' Equity and Dividend Restrictions**

Statutory restrictionslimit the amount of dividends which may be paid by InvestorsHeritage.  Generally, dividends during any year may not bepaid, without prior regulatory approval, in excess of the lessor of(a) 10 percent of statutory stockholders' equity as of thepreceding December 31, or (b) statutory net income for thepreceding year.  In addition, dividends are limited to theamount of unassigned surplus reported for statutory purposes, whichwas $8,993,615 at December 31, 2001.

The Company's 1999 stockoption and stock appreciation rights plan became effective as ofSeptember 16, 1999. The 1999 plan authorizes the Company's board togrant non-qualified stock options to the Company's and itssubsidiaries' key employees and non-employee directors. The Companyauthorized for issuance a total of 250,000 shares of common stockunder the 1999 plan and granted options to purchase 75,000 sharesof common stock at $23.00 per share, all of which vested onSeptember 24, 2001.  None of the options have been exercisedas of December 31, 2001.

The Company accounts forits stock option grants in accordance with APB Opinion No. 25,"Accounting for Stock Issued to Employees". No compensation expensehas been recognized for these stock options. The effect of applyingthe fair value method of accounting for the Company's stock basedawards results in net income and earnings per share that are notmaterially different from the amounts reported.

**NOTE  I -Statutory Accounting Practices**

Investors Heritage isdomiciled in the Commonwealth of Kentucky and prepares itsstatutory-basis financial statements in accordance with accountingpractices prescribed or permitted by the Kentucky Department ofInsurance (the "Department").  Effective January 1, 2001,Kentucky has adopted the National Association of InsuranceCommissioners’ statutory accounting practices as the basis ofits statutory accounting practices.  The revised practiceshave changed, to some extent, prescribed statutory accountingpractices and have resulted in changes to the accounting practicesthat Investors Heritage uses to prepare its statutory-basisfinancial statements.  The primary statutory changes affectingInvestors Heritage are the establishment of deferred income taxes,recognition of realized losses for investment impairments which aredeemed other than temporary, and recognition of an estimate foranticipated guaranty fund assessments and premium tax offsetsrelated to future insolvencies.  As of January 1, 2001,Investors Heritage reported the cumulative effect of changes inaccounting principles related to the adoption of codification as adirect increase in surplus of $844,536.

Investors Heritage'sstatutory-basis capital and surplus was $14,907,971 and $12,504,973at December 31, 2001 and 2000, respectively.  Statutory-basisnet income (loss) was $1,295,706, $(335,535) and $1,003,580 for2001, 2000 and 1999, respectively.

Principle adjustments tostatutory amounts to derive GAAP amounts include: a) costs ofacquiring new policies are deferred and amortized; b) benefitreserves are calculated using more realistic investment, mortalityand withdrawal assumptions; c) changes in deferred taxes associatedwith timing differences are recorded in net income rather thandirectly to equity; d) value of business acquired and goodwillestablished for acquired companies differ from admitted statutorygoodwill; e) accounting for certain investments in debt securitiesis at fair value with unrealized gains and losses reported as aseparate component of equity; and f) statutory asset valuationreserves and interest maintenance reserves areeliminated.

**NOTE  J - Segmentand Reinsurance Data**

SFAS No. 131, "Disclosuresabout Segments of an Enterprise and Related Information", requiresa "management approach" (how management internally evaluates theoperating performance of its business units) in the presentation ofbusiness segments. The segment data that follows has been preparedin accordance with SFAS No. 131.

The Company operates infour segments as shown in the following table.  All segmentsinclude both individual and group insurance.  Identifiablerevenues, expenses and assets are assigned directly to theapplicable segment.  Net investment income and invested assetsare generally allocated to the insurance and the corporate segmentsin proportion to policy liabilities and stockholders' equity,respectively.  Certain assets, such as property and equipmentand leased property under capital leases, are assigned to theCorporate segment.  Goodwill has been allocated to theinsurance lines based upon the mix of business of companiesacquired. Results for the parent company, Investors HeritagePrinting, Inc. and Investors Heritage Financial Services Group,Inc. after elimination of intercompany amounts, are allocated tothe Corporate segment.
|                                                                                      | **2001**                                                                  |  | **2000**                                                                         |  | **1999**                                                                               |
|--------------------------------------------------------------------------------------|---------------------------------------------------------------------------|--|----------------------------------------------------------------------------------|--|----------------------------------------------------------------------------------------|
|                                                                                      | **(000’s omitted)**                                                 |
| **Revenue:**                                                                         |                                                                           |  |                                                                                  |  |                                                                                        |
|    Preneed andburial products................................              | $  53,487                                                            |  | $   50,529                                                        |  | $      47,158                                                 |
|    Traditionaland universal life products...............                   |    13,401                                                  |  |       13,007                                       |  |        13,573                                       |
|    Creditinsurance products and                                            |                                                                           |  |                                                                                  |  |                                                                                        |
|     administrativeservices...................................... |         395                       |  |            423            |  |             345            |
|    Corporate andother............................................          |       3,105                                      |  |         1,468                            |  |          1,696                            |
|                                                                                      | $  70,388                                                            |  | $    65,427                                                  |  | $      62,772                                                 |
| **Pre-tax income fromoperations:**                                                   |                                                                           |  |                                                                                  |  |                                                                                        |
|    Preneed andburial products................................              | $   2,205                                                  |  | $      1,358                                       |  | $       3,590                                       |
|    Traditionaland universal life products...............                   |       1,467                                      |  |            667            |  |          1,047                            |
|    Creditinsurance products and                                            |                                                                           |  |                                                                                  |  |                                                                                        |
|     administrativeservices...................................... |           72            |  |            113            |  | (43)                                                                                   |
|    Corporate andother............................................          |       1,479                                      |  |            106            |  |             258            |
|                                                                                      | $   5,223                                                  |  | $      2,244                                       |  | $       4,852                                       |
| **Assets:**                                                                          |                                                                           |  |                                                                                  |  |                                                                                        |
|    Preneed andburial products................................              | $231,778                                                                  |  | $  216,149                                                             |  | $   152,096                                                             |
|    Traditionaland universal life products...............                   |    70,690                                                  |  |       69,361                                       |  |        73,117                                       |
|    Creditinsurance products and                                            |                                                       |  |                                                                                  |  |                                                                                        |
|     administrativeservices...................................... |    26,222                                                  |  |       27,413                                       |  |        27,151                                       |
|    Corporate andother............................................          |    62,088                                                  |  |       53,013                                       |  |        38,851                                       |
|                                                                                      | $390,778                                                                  |  | $  365,936                                                             |  | $   291,215                                                             |
| **Amortization anddepreciation expense:**                                            |                                                                           |  |                                                                                  |  |                                                                                        |
|    Preneed andburial products................................              | $   5,689                                                  |  | $      5,514                                       |  | $       4,249                                       |
|    Traditionaland universal life products...............                   |       1,820                                      |  |         1,789                            |  |          2,094                            |
|    Creditinsurance products and                                            |                                                                      |  |                                                                                  |  |                                                                                        |
|     administrativeservices...................................... |             4 |  |              11 |  |               33 |
|    Corporate andother............................................          |         443                       |  |            440            |  |             445            |
|                                                                                      | $   7,956                                                  |  | $      7,754                                       |  | $       6,821                                       |

NOTE J - Continued

The Company ceded 100% ofthe risks associated with its Credit Life and Accident insurancewritten during 2001, 2000, and 1999 through coinsurance agreementswith various companies.  The Company administers the cededCredit Life and Accident insurance for an agreed-upon fee. During 2001, 2000, and 1999, the Company received $673,577,$698,513 and $733,682, respectively, of fee income associated withthese reinsurance arrangements which is recognized in the CreditInsurance Products & Administrative Services and Corporate andother lines of the preceding table.  Ceded benefit and claimreserves associated with these reinsurance arrangements at December31, 2001, 2000, and 1999 were $22,206,079 $22,973,197 and$21,988,882, respectively.  Additionally, the Company utilizesyearly renewable term reinsurance to cede life insurance coveragein excess of its retention limit which has been set at$100,000.   (Refer to footnote B for information relatingto reinsurance associated with its purchase of Franklin Americanpolicy obligations.)

Total premiums cededamounted to $17,402,598, $19,371,941 and $19,575,438 in 2001, 2000and 1999, respectively, and commissions and expense allowancesreceived were $8,164,277, $8,992,753 and $11,449,379 in 2001, 2000and 1999, respectively.  Unearned premium reserves werereduced by $21,510,347 and $23,756,083 at December 31, 2001 and2000, respectively, for credit-related reinsurancetransactions.  Benefit recoveries associated with theCompany's ceded reinsurance contracts were $10,287,905, $7,786,428and $3,145,178 in 2001, 2000 and 1999, respectively.  TheCompany remains contingently liable on all ceded insurance shouldany reinsurer be unable to meet their obligations.  Assumedreinsurance premiums were $2,526,269, $2,374,686 and $2,617,579 in2001, 2000 and 1999, respectively.

**NOTE  K -Contingent Liabilities**

The Company is named as adefendant in a number of legal actions arising primarily fromclaims made under insurance policies.  Management and itslegal counsel are of the opinion that the settlement of thoseactions will not have a material adverse effect on the financialposition or results of operations.

In most of the states inwhich the Company is licensed to do business, guaranty fundassessments may be taken as a credit against premium taxes over afive year period.  These assessments, brought about by theinsolvency of life and health insurers, are levied at thediscretion of the various state guaranty fund associations to coverassociation obligations.  It is management's opinion that theeffect of any future assessments would not be material on thefinancial position or results of operations of the Company becauseof the use of premium tax off-sets.

**NOTE L - New AccountingPronouncements**

In June 2001, theFinancial Accounting Standards Board issued Statements of FinancialAccounting Standards No. 141, Business Combinations, and No. 142,Goodwill and Other Intangible Assets, effective for fiscal yearsbeginning after December 15, 2001.  Under the new rules,goodwill will no longer be amortized but will be subject to annualimpairment tests in accordance with the Statements.  Otherintangible assets will continue to be amortized over their usefullives.

The Company will apply thenew rules on accounting for goodwill and other intangible assetsbeginning in the first quarter of 2002.  The Company hasperformed the first of the required impairment tests of goodwilland has determined that there is no material effect on the earningsand financial position of the Company.

****

**NOTE M - QuarterlyFinancial Data (Unaudited)**

The following tables showthe unaudited quarterly financial data for the Company.

| **2001**                                                                                         | **1st Quarter** |  | **2nd Quarter** |  | **3rd Quarter** |  | **4th Quarter**                                                              |
|--------------------------------------------------------------------------------------------------|-----------------|--|-----------------|--|-----------------|--|------------------------------------------------------------------------------|
|                                                                                                  |                 |  |                 |  |                 |  |                                                                              |
| Premiums.........................                                                                | $12,320,718     |  | $12,897,136     |  | $12,723,215     |  | $11,889,480                                                                  |
| Totalrevenue...................                                                                  | 17,180,515      |  | 17,807,407      |  | 18,037,007      |  |  17,362,726                                                             |
| Netincome......................                                                                  | 692,176         |  | 794,815         |  | 948,761         |  |     1,348,589                                                 |
| Earningsper      

    share ....... | 0.60            |  | 0.71            |  | 0.73            |  |             1.29 |
|                                                                                                  |                 |  |                 |  |                 |  |                                                                              |
| **2000**                                                                                         | **1st Quarter** |  | **2nd Quarter** |  | **3rd Quarter** |  | **4th Quarter**                                                              |
|                                                                                                  |                 |  |                 |  |                 |  |                                                                              |
| Premiums.........................                                                                | $12,072,877     |  | $11,893,188     |  | $12,786,790     |  |  $11,186,544                                                            |
| Totalrevenue...................                                                                  | 16,491,433      |  | 16,317,696      |  | 17,440,685      |  |     15,177,250                                                |
| Net income(loss)............                                                                     | 600,996         |  | 535,600         |  | 659,299         |  |     (289,528)                                                 |
| Earnings (loss)

    per share.....................                          | 0.52            |  | 0.47            |  | 0.57            |  | (0.25)                                                                       |

                             

**stockinformation**  

STOCK PRICES

OTCBULLETIN BOARD MARKET QUOTATIONS

                                  **2001 Market Price Range**

                                   

                                   March             June               Sept.            Dec.

                                   20.50-20.63      19.80-20.50     19.80-20.70    20.70-22.50

Kentucky

Investors, Inc.

                                   2001 Annual Dividend Per Share - $.38

                                   

### **2000 Market PriceRange**

March             June                Sept.            Dec.

19.00-23.00      20.00-20.50      20.25-20.50   20.50-20.75

2000 Annual Dividend PerShare - $.38

__________________________________

                                   

The stock of KentuckyInvestors is quoted on the OTC Bulletin Board.  The quotationsreflect inter-dealer prices, without retail mark-up, mark-down orcommission, and may not represent actual transactions.  Thesymbol for Kentucky Investors is KINV. 

The 2002 cash dividend tobe paid to its stockholders by Kentucky Investors on April 5, 2002is $.38 per share. 

**ANNUALMEETING**

** **

The 2002 meeting ofshareholders of Kentucky Investors is scheduled for 11 a.m. onThursday, May 9, 2002 at the company auditorium, Second and ShelbyStreets, Frankfort, Kentucky. 

**FORM10-K**

A copy of the Form 10-KAnnual Report to the Securities and Exchange Commission for theCompany can be obtained upon request to theSecretary. 

**TRANSFERAGENT**

Investors Heritage LifeInsurance Company

Stock TransferDepartment

P.O. Box 717

Frankfort, Kentucky40602-0717

(800) 422-2011, ext.1009

(502) 209-1009