SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

                QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

                             SECURITIES ACT OF 1934

For the Quarterly Period Ended September 30, 1999
Commission File Number 0-4690

                        FINANCIAL INDUSTRIES CORPORATION
             (Exact Name of Registrant as specified in its charter)

         Texas                                 74-2126975
(State of Incorporation)   (I.R.S. Employer Identification Number)

The Austin Centre, 701 Brazos, 12th Floor

Austin, Texas                                     78701
(Address of principal executive offices)       (Zip Code)

Registrant's telephone number, including area code (512) 404-5000

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                    YES X NO

Number of common shares outstanding ($.20 par value) at end of period: 5,054,661

                                      - 1 -


<PAGE>




                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

                                      INDEX

                                                                        PAGE NO.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Consolidated Balance Sheets
         September 30, 1999 and December 31, 1998............................ 3

Consolidated Statements of Income
         For the three and nine month periods ended
         September 30, 1999 and 1998......................................... 5

Consolidated Statements of Cash Flows
         For the three and nine month periods ended
         September 30, 1999 and 1998......................................... 9

Notes to Consolidated Financial Statements...................................13

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

         FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS......................15

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES

            ABOUT MARKET RISK ...............................................24

PART II

Other  Information...........................................................26

Signature  Page..............................................................28

                                      - 2 -


<PAGE>







                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                       September 30,       December 31,
                                                          1999                1998
                                                       (unaudited)

ASSETS
<S>                                                        <C>                 <C>

Investments other than investments
 in affiliate:

Fixed  maturities  available for sale
 at market value (amortized cost of
 $77,464 and $76,727 at September 30,
 1999 and December 31, 1998, respectively)      $        77,820           $      79,402

Equity securities at market (cost
 approximates $11 at September 30,
 1999 and December 31, 1998)                                  4                       4

Policy loans                                              3,495                   3,155

Short-term investments                                   25,478                  27,589
                                                ---------------           -------------

     Total investments                                  106,797                 110,150

Cash                                                      2,198                   2,601

Investment in affiliate                                  70,164                  70,950

Accrued investment income                                 1,103                   1,209

Agency advances and other receivables                     6,519                   7,759

Reinsurance receivables                                  14,949                  12,426

Due and deferred premiums                                12,154                  12,181

Property and equipment, net                               1,758                   1,758

Deferred policy acquisition costs                        51,836                  48,510

Present value of future profits of
 acquired businesses                                     24,348                  28,294

Other assets                                              4,353                   5,392

Separate account assets                                     324                     508
                                                ---------------           -------------
     Total Assets                               $       296,503           $     301,738
                                                ================          ==============

</TABLE>
              The accompanying notes are an integral part of these
                        consolidated financial statements

                                      - 3 -


<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                        September 30,       December 31,
                                                           1999                1998
                                                       (unaudited)

LIABILITIES AND SHAREHOLDERS' EQUITY
<S>                                                         <C>                 <C>

Liabilities:

Policy liabilities and contract holder
 deposit funds:

Future policy benefits                        $          60,913         $       60,069

Contract holder deposit funds                            44,681                 45,128

Unearned premiums                                            14                     28

Other policy claims and benefits payable                  4,282                  4,582
                                              -----------------         --------------
                                                        109,890                109,807

Subordinated notes payable to affiliate                  43,035                 47,645

Deferred federal income taxes                            23,709                 23,984

Other liabilities                                         3,516                  4,474

Separate account liabilities                                324                    508
                                              -----------------         --------------

Total Liabilities                                       180,474                186,418
                                              -----------------         --------------

Commitments and Contingencies

Shareholders' equity:

Common stock, $.20 par value, 10,000,000
 shares authorized; 5,845,300 shares
 issued, 5,054,661 outstanding in 1999
 and 1998                                                 1,169                  1,169

Additional paid-in capital                                7,225                  7,225

Accumulated other comprehensive income                       62                  5,898

Retained earnings                                       114,948                108,403
                                              -----------------         --------------
                                                        123,404                122,695

Common treasury stock, at cost, 790,639
 at 1999 and 1998.                                       (7,375)                (7,375)
                                              -----------------         --------------

Total Shareholders' Equity                              116,029                115,320
                                              -----------------         --------------

Total Liabilities and Shareholders' Equity    $         296,503         $      301,738
                                              =================         ==============
</TABLE>


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

                                      - 4 -


<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                      (in thousands except per share data)
<TABLE>
<CAPTION>

                                                               Three Months Ended
                                                                 September 30,
                                                         1999                    1998
                                                                  (unaudited)
<S>                                                       <C>                     <C>
Revenues:

 Premiums                                      $          8,516       $          9,629

 Net investment income                                    1,733                  1,949

 Earned insurance charges                                 1,148                  1,533

 Other                                                      324                    350
                                               ----------------       ----------------
                                                         11,721                 13,461

Benefits and expenses:

 Policyholder benefits and expenses                       3,557                  4,480

 Interest expense on contract holders
  deposit funds                                             345                    577

 Amortization of present value of future
  profits of acquired businesses                          1,334                  1,541

 Amortization of deferred policy
  acquisition costs                                       1,354                  1,272

 Operating expenses                                       2,728                  2,954

 Interest expense                                           532                    809
                                               ----------------       ----------------
                                                          9,850                 11,633
                                               ----------------       ----------------

Income before federal income tax and
 equity in net earnings of affiliates                     1,871                  1,828


Provision for federal income taxes                          181                    419
                                               ----------------       ----------------

Income before equity in net earnings
 of affiliates                                            1,690                  1,409

Equity in net earnings of affiliate,
 net of tax                                                 786                    744
                                               ----------------       ----------------

Net income                                     $          2,476       $          2,153
                                               ================       ================
</TABLE>

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

                                      - 5 -


<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                      (in thousands except per share data)
<TABLE>
<CAPTION>
                                                            Three Months Ended
                                                               September 30,
                                                       1999                    1998

                                                               (unaudited)
<S>                                                     <C>                    <C>

Net Income Per Share

Basic:

Average weighted shares outstanding                         5,055                  5,428
                                               ==================     ==================

Basic earnings per share                       $             0.49     $             0.40
                                               ==================     ==================

Diluted:

Common stock and common stock equivalents                   5,203                  5,602
                                               ==================     ==================

Diluted earnings per share                     $             0.48     $             0.38
                                               ==================     ==================


</TABLE>


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

                                      - 6 -


<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                      (in thousands except per share data)
<TABLE>
<CAPTION>
                                                           Nine Months Ended
                                                              September 30,
                                                     1999                     1998
                                                               (unaudited)
<S>                                                   <C>                      <C>
Revenues:

 Premiums                                  $         26,198       $          29,350

 Net investment income                                5,187                   5,870

 Earned insurance charges                             3,733                   4,698

 Other                                                1,026                   1,047
                                           ----------------       -----------------
                                                     36,144                  40,965


Benefits and expenses:

 Policyholder benefits and expenses                  11,490                  12,384

 Interest expense on contract holders
   deposit funds                                      1,317                   1,783

 Amortization of present value of future
   profits of acquired businesses                     3,946                   4,810

 Amortization of deferred policy
   acquisition costs                                  3,737                   3,538

 Operating expenses                                   8,450                   9,553

 Interest expense                                     1,782                   2,210
                                           ----------------       -----------------

   TOTAL                                             30,722                  34,278
                                           ----------------       -----------------

Income before federal income tax and
 equity in net earnings of affiliates                 5,422                   6,687

Provision for federal income taxes                      954                   1,552
                                           ----------------       -----------------

Income before equity in net earnings
 of affiliates                                        4,468                   5,135

Equity in net earnings of affiliate,
 net of tax                                           2,077                   1,844
                                           ----------------       -----------------

Net income                                 $          6,545       $           6,979
                                           ================       =================
</TABLE>

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



                                      - 7 -


<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                      (in thousands except per share data)

<TABLE>
<CAPTION>
                                                                Nine Months Ended
                                                                  September 30,
                                                           1999                  1998
                                                                    (unaudited)
<S>                                                         <C>                   <C>
Net Income Per Share

Basic:

Average weighted shares outstanding                        5,055                  5,428
                                               =================      =================

Basic earnings per share                       $            1.29      $            1.29
                                               =================      =================

Diluted:

Common stock and common stock equivalents                  5,202                  5,604
                                               =================      =================

Diluted earnings per share                     $            1.26       $           1.25
                                               =================       ================
</TABLE>



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

                                      - 8 -


<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                              Three Months Ended
                                                                September  30,
                                                         1999                    1998
                                                                 (unaudited)

CASH FLOWS FROM OPERATING
ACTIVITIES
<S>                                                       <C>                     <C>

Net Income                                     $           2,476      $            2,153

Adjustments to reconcile net income
 to net cash provided by operating
 activities:

Amortization of present value of future
 profits of acquired business                              1,334                   1,541

Amortization of deferred policy
 acquisition costs                                         1,354                   1,272

Equity in undistributed earnings of
 affiliate                                                (1,389)                 (1,260)

Changes in assets and liabilities:

Decrease in accrued
 investment income                                            64                     334

Increase in agent advances and other
 receivables                                                (456)                 (1,357)

Decrease (increase) in due and
 deferred premiums                                           288                    (437)

Increase in deferred policy acquisition
 costs                                                    (2,555)                 (2,115)

Decrease (increase) in other assets                          518                     (75)

Increase in policy liabilities and accruals                  928                      23

Increase in other liabilities                                456                     417

(Decrease) increase in deferred federal
 income taxes                                               (122)                    870

Other, net                                                 1,155                    (195)
                                               -----------------      ------------------

Net cash provided by operating activities      $           4,051      $            1,171
                                               -----------------      ------------------
</TABLE>

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

                                      - 9 -


<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                  Three Months Ended
                                                                       September 30,
                                                                1999                  1998
                                                                       (unaudited)
<S>                                                              <C>                   <C>

CASH FLOWS FROM INVESTING ACTIVITIES

Fixed maturities purchased                          $        (8,561)        $          -0-

Proceeds from sales and maturities of
 fixed maturities                                             4,623                  2,377

Increase in policy loans                                       (218)                   (78)

Net change in short-term investments                          2,837                 (1,886)
                                                     ---------------         --------------

Net cash (used in) provided by investing activities          (1,319)                   413
                                                    ---------------         --------------

CASH FLOW FROM FINANCING
 ACTIVITIES

Repayment of subordinated notes payable                      (1,536)                (1,537)
                                                    ---------------         --------------
Net cash used in financing activities                        (1,536)                (1,537)
                                                    ---------------         --------------
Net increase in cash                                          1,196                     47

Cash, beginning of period                                     1,002                  1,210
                                                    ---------------         --------------
Cash, end of period                                 $         2,198         $        1,257
                                                    ===============         ==============

</TABLE>


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

                                     - 10 -


<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                   Nine Months Ended
                                                                     September 30,

                                                              1999                   1998
                                                                     (unaudited)
<S>                                                             <C>                  <C>

CASH FLOWS FROM OPERATING
ACTIVITIES

Net Income                                        $          6,545      $            6,979

Adjustments  to reconcile net income
 to net cash provided by operating
 activities:

Amortization of present value of future
 profits of acquired business                                3,946                   4,810

Amortization of deferred policy
 acquisition costs                                           3,737                   3,538

Equity in undistributed earnings of
 affiliate                                                  (3,867)                 (3,733)

Changes in assets and liabilities:

Decrease in accrued
 investment income                                             106                     266

Increase in agent advances and
 other  receivables                                         (1,283)                 (2,623)

Decrease (increase) in due and deferred
 premiums                                                       27                    (683)

Increase in deferred policy acquisition costs               (7,063)                 (6,185)

Decrease in other assets                                     1,039                     933

Increase in policy liabilities
 and accruals                                                   83                     144

Decrease in other liabilities                                 (957)                   (777)

(Decrease) increase in deferred federal
 income taxes                                                 (282)                  2,128

Other, net                                                   1,084                    (404)
                                                  ----------------      ------------------

Net cash provided by operating activities         $          3,115      $            4,393
                                                  ----------------      ------------------

</TABLE>


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

                                     - 11 -


<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
                                 (in thousands)
<TABLE>
<CAPTION>
                                                           Nine Months Ended
                                                             September 30,
                                                     1999                  1998
                                                            (unaudited)
<S>                                                   <C>                    <C>

CASH FLOWS FROM INVESTING ACTIVITIES

Fixed maturities purchased                      $    (18,557)      $      (9,082)

Proceeds from sales and maturities of
 fixed maturities                                     17,878               8,749

Increase in policy loans                                (340)               (291)

Net change in short-term investments                   2,111               1,624

Purchase & retirement of property
 and equipment                                             0                 (34)
                                                -------------      -------------

Net cash provided by investing activities              1,092                 966
                                                -------------      -------------

CASH FLOW FROM FINANCING
 ACTIVITIES

Repayment of subordinated notes payable               (4,610)             (4,610)
                                                -------------      -------------
Net cash used in financing activities                 (4,610)             (4,610)
                                                ------------       -------------
Net (decrease) increase in cash                         (403)                749

Cash, beginning of year                                2,601                 508
                                                -------------      -------------
Cash, end of period                             $      2,198       $       1,257
                                                =============      =============

</TABLE>

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

                                     - 12 -


<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The financial  statements  included herein reflect all adjustments which are, in
the opinion of management,  necessary to present a fair statement of the interim
results.  The statements  have been prepared to conform to the  requirements  of
Form 10-Q and do not necessarily  include all disclosures  required by generally
accepted accounting  principles (GAAP). The reader should refer to Form 10-K for
the year ended  December  31, 1998,  previously  filed with the  Commission  for
financial  statements  prepared  in  accordance  with GAAP.  Certain  prior year
amounts have been reclassified to conform with current year presentation.

The  consolidated   financial  statements  include  the  accounts  of  Financial
Industries Corporation ("FIC") and its wholly-owned subsidiaries. The investment
of FIC in  InterContinental  Life  Corporation  ("ILCO") is presented  using the
equity method.  All significant  intercompany  items and transactions  have been
eliminated.

NEW ACCOUNTING PRONOUNCEMENTS

Comprehensive Income

Total  comprehensive  income for the nine months  ended  September  30, 1999 and
September 30, 1998 is $.71 million and $8.65 million, respectively.

The following is a reconciliation of accumulated other comprehensive income from
December 31, 1998 to September 30, 1999 (in thousands):

<TABLE>
<CAPTION>
                                                               Net                 Total
                                      Net unrealized           appreciation        accumulated
                                      gain on investments      (depreciation)      other
                                      in fixed maturities      of equity           comprehensive
                                      available for sale       securities          income
<S>                                          <C>                  <C>                   <C>
Balance at December 31, 1998              $  5,900               $   (2)             $  5,898
Current Period Change                       (5,836)                   0                (5,836)
                                          --------               ------              --------
Balance at September 30, 1999             $     64               $   (2)             $     62
                                          ========               ======              ========
</TABLE>




                                     - 13 -


<PAGE>






                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NEW ACCOUNTING PRONOUNCEMENTS


In December 1997, the Accounting  Standards Executive Committee issued Statement
of Position  ("SOP") 97-3,  "Accounting by Insurance and Other  Enterprises  for
Insurance-Related  Assessments,"  which  provides  guidance  on  accounting  for
insurance-related assessments. The Company adopted SOP 97-3 effective January 1,
1999.  The adoption of SOP 97-3 did not have a material  impact on the Company's
results of operations, liquidity or financial position.

In  June  1998,  the  FASB  issued  FAS  No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities",  which establishes accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts,  (collectively  referred to as derivatives) and for
hedging activities. FAS 133 is applicable to financial statements for all fiscal
quarters of fiscal years  beginning after June 15, 2000 as amended by FAS No 137
"accounting for Derivative  Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statements No. 133. The operations of the Company are not
affected by the provisions of FAS No. 133.

                                     - 14 -


<PAGE>



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
     OF OPERATION:

For the  nine-month  period  ended  September  30,  1999,  Financial  Industries
Corporation's  ("FIC") net income was  $6,545,000  (basic  earnings of $1.29 per
common  share,  or diluted  earnings  of $1.26 per common  share) as compared to
$6,979,000  (basic  earnings of $1.29 per common share,  or diluted  earnings of
$1.25 per common share) in the first nine months of 1998. Earnings per share are
stated in accordance with the requirements of FAS No. 128, which establishes two
measures of earnings per share:  basic  earnings per share and diluted  earnings
per share.  Basic earnings per share is computed by dividing income available to
common  shareholders by the weighted average number of common shares outstanding
during the period.  Diluted  earnings per share reflect the  potential  dilution
that would occur if  securities  or other  contracts  to issue common stock were
converted or exercised.

                              Results of Operations

FIC's  income from  operations - as  determined  before  federal  income tax and
equity in net earnings of its affiliate, InterContinental Life Corporation - for
the nine-month  period ended  September 30, 1999, was $5,422,000 (on revenues of
$36,144,000),  as compared to  $6,687,000  (on revenues of  $40,965,000)  in the
first nine months of 1998.

Earnings per share (basic and diluted) for the nine-month period ended September
30,  1999  include  $.03 per share due to the  decrease  in the number of common
shares  outstanding  resulting  from (i) FIC's  purchase on November 17, 1998 of
101,304  shares  of FIC's  common  stock  from the Roy F. and Joann  Cole  Mitte
Foundation  (the  "Foundation"),   a  Texas  non-profit   corporation  which  is
controlled  by Mr.  Mitte and his wife,  at a price of  $18.625  per share (or a
total  purchase price of  $1,886,787)  and (ii) Family Life Insurance  Company's
purchase on November  17, 1998 of 272,000  shares of FIC's common stock from the
Foundation  at a price  of  $18.625  per  share  (or a total  purchase  price of
$5,066,000).

Premiums for the first nine months of 1999, net of reinsurance ceded, were $26.2
million,  as  compared  to $29.4  million  in the  first  nine  months  of 1998.
Policyholder  benefits and expenses  were $11.5  million in the 1999 period,  as
compared to $12.4 million in the first nine months of 1998.

As of September 30, 1999, the market value of the fixed maturities available for
sale  segment  was $77.8  million as  compared  to an  amortized  value of $77.5
million, or an unrealized gain of $0.3 million. The increase reflects unrealized
gains on such investments related to changes in interest rates subsequent to the
purchase  of such  investments.  There is no  assurance  that  this gain will be
realized in the future.  The net of tax effect of this increase ($0.2 million at
September 30, 1999) has been recorded as an increase in shareholders' equity. As
required under the provisions of FAS No. 130, the  determination of "Accumulated
other comprehensive

                                     - 15 -


<PAGE>



income" includes separate  identification of the change in values which occurred
during the current period.

The  operating  strategy  of the  Company's  management  emphasizes  several key
objectives:  expense  management;  marketing of  competitively  priced insurance
products  which are designed to generate an acceptable  level of  profitability;
maintenance of a high quality portfolio of investment grade securities;  and the
provision of quality customer service.

            Equity in Net Income of InterContinental Life Corporation

General:

For the nine-month  period ended September 30, 1999, the Company's equity in the
net  earnings of  InterContinental  Life  Corporation  ("ILCO"),  net of federal
income tax, was $2,077,000 , as compared to $1,844,000 for the first nine months
of 1998.

On March 17,  1999,  ILCO paid a stock  dividend  (one share of common stock for
each outstanding share of common stock).  FIC currently owns 3,590,292 shares of
ILCO's common stock.  In addition,  Family Life currently owns 342,400 shares of
ILCO common stock.  As a result,  FIC currently  owns,  directly and  indirectly
through  Family Life,  3,932,692  shares  (approximately  45%) of ILCO's  common
stock.

Prior to  September  30, 1998,  FIC held  options to acquire (on a  pre-dividend
basis) an additional  1,702,155 shares. The options were granted under an option
agreement  between FIC and ILCO which was entered into in March,  1986  ("Option
Agreement").  The Option Agreement  provided that it continued in effect as long
as FIC guaranteed  indebtedness of ILCO. Since the Senior Loan of ILCO was fully
repaid on September 30, 1998, FIC's rights under the Option Agreement expired on
September 30, 1998.

As of September 30, 1999, the market value of ILCO's fixed maturities  available
for sale segment was $409.4  million as compared to an amortized cost of $410.04
million,  or  an  unrealized  loss  of  $0.64  million.  The  decrease  reflects
unrealized  losses on such  investments  related to changes  in  interest  rates
subsequent to the purchase of such investments. Since FIC owns approximately 45%
of the  common  stock of ILCO,  the net of tax  effect  of this  decrease  ($0.2
million at September 30, 1999) is included in "Accumulated  other  comprehensive
income" on the Consolidated  Balance Sheets and has been recorded as an decrease
in shareholders' equity.

Liquidity and Capital Resources of ILCO:

ILCO is a holding company whose principal  assets consist of the common stock of
Investors  Life  Insurance  Company of North  America  ("Investors-NA")  and its
subsidiary,    Investors   Life   Insurance   Company   of   Indiana   (formerly
InterContinental  Life  Insurance  Company).  ILCO's  primary  source  of  funds
consists of payments under the surplus debentures from Investors-NA.

                                     - 16 -


<PAGE>



Prior to September 30, 1998, the cash  requirements of ILCO consisted  primarily
of its  service  of  the  indebtedness  created  in  connection  with  the  1988
acquisition of the Investors Life Companies and the 1995 acquisition of Meridian
Life Insurance Company (which company was subsequently  merged into another life
insurance  subsidiary  of  ILCO).  As of  December  31,  1997,  the  outstanding
principal  balance of ILCO's senior loan  obligations  was $11.0 million,  which
reflected the prepayment by ILCO of the payment originally scheduled for January
1, 1998.  A regular  payment in the amount of $3.7  million was made on April 1,
1998,  and a prepayment of the July 1, 1998  installment,  in the amount of $3.7
million, was made on June 30, 1998. The outstanding  principal balance of ILCO's
senior loan obligations was $3.6 million at June 30, 1998. The final installment
on the senior loan  obligation  scheduled  for  October 1, 1998,  was prepaid on
September  30, 1998. As a result,  the senior loan  obligation of ILCO was fully
discharged effective September 30, 1998.

ILCO's  principal  source of  liquidity  consists  of the  periodic  payment  of
principal and interest to it by  Investors-NA,  pursuant to the terms of the two
surplus  debentures.  The surplus  debentures were originally issued by Standard
Life  Insurance  Company  and  their  terms  were  previously  approved  by  the
Mississippi  Insurance  Commissioner.  In  connection  with the 1993  merger  of
Standard Life into Investors-NA,  the obligations of the surplus debentures were
assumed by  Investors-NA.  As of September 30, 1999, the  outstanding  principal
balances  of  the  surplus  debentures  were  $1.5  million  and  $6.9  million,
respectively.  The terms of the latter of the two  Surplus  Debentures  required
final  payment  of the  remaining  principal  balance  on  September  30,  1999.
Effective  September  28, 1999,  the ILCO and  Investors-NA  amended the payment
schedule to provide payment of the remaining balance in four installments,  with
the final installment being due July 1, 2000. Since Investors-NA is domiciled in
the  State  of  Washington,   the  Washington   insurance  law  applies  to  the
administration of the terms of the surplus  debentures.  Under the provisions of
the surplus  debentures  and current  law, no prior  approval of the  Washington
Insurance Commissioner is required for Investors-NA to pay interest or principal
on the surplus debentures;  provided that, after giving effect to such payments,
the statutory surplus of Investors- NA is in excess of $10 million (the "surplus
floor").  However,  Investors-NA  has  voluntarily  agreed  with the  Washington
Insurance Commissioner that it will provide at least five days advance notice of
payments  which it will make under the surplus  debenture.  As of September  30,
1999, the statutory  capital and surplus of Investors-NA  was $70.2 million,  an
amount  substantially  in excess of the  surplus  floor.  The funds  required by
Investors-NA  to meet its  obligations  to ILCO  under the terms of the  surplus
debentures  are generated  from  operating  income  generated from insurance and
investment operations.

In addition to the payments under the terms of the Surplus Debentures,  ILCO has
received dividends from its subsidiaries.  Washington's  insurance code includes
the "greater of"  standard for payment of dividends to  shareholders,  but has a
requirement  that  prior  notification  of a proposed  dividend  be given to the
Washington Insurance  Commissioner and that cash dividends may be paid only from
earned surplus.  Under the "greater of" standard,  an insurer may pay a dividend
in an amount equal to the greater of (i) 10% of policyholder surplus or (ii) the
insurer's net gain from  operations  for the previous  year. As of September 30,
1999, Investors-NA had earned surplus of $46.0 million.

                                     - 17 -


<PAGE>



Investors-IN is domiciled in the State of Indiana.  Under the Indiana  insurance
code, a domestic insurer may make dividend  distributions  upon proper notice to
the  Department  of  Insurance,  as long as the  distribution  is  reasonable in
relation to adequate  levels of  policyholder  surplus and quality of  earnings.
Under Indiana law the dividend must be paid from earned  surplus.  Extraordinary
dividend  approval would be required where a dividend exceeds the greater of 10%
of  surplus  or the  net  gain  from  operations  for  the  prior  fiscal  year.
Investors-IN had earned surplus of $17.6 million at September 30, 1999. In June,
1999,  Investors-IN  paid a  dividend  in the  amount of $3  million to its sole
shareholder, Investors-NA. The amount of the dividend was less than the net gain
from  operations for the prior fiscal year;  accordingly,  no prior approval was
required  for the  payment of the  dividend.  Advance  notice of the payment was
provided  to the  Indiana  Department  of  Insurance,  in  accordance  with  the
provisions of the Indiana Insurance Code.

The Form 10-Qs of ILCO for the nine-month  periods ended  September 30, 1999 and
September 30, 1998, set forth the business  operations and financial  results of
ILCO and its life insurance  subsidiaries.  Such 10-Q reports of ILCO, including
the discussion by ILCO's management under the caption  "Management's  Discussion
and Analysis of Financial Conditions and Results of Operations" are incorporated
herein by reference.

                        Liquidity and Capital Resources:

FIC is a holding company whose  principal  assets consist of the common stock of
Family Life and its equity  ownership in ILCO.  FIC's primary sources of capital
consists of cash flow from operations of its subsidiaries.

The cash  requirements  of FIC and its  subsidiaries  consist  primarily  of its
service of the  indebtedness  created in connection with its ownership of Family
Life. As of September 30, 1999, the outstanding balance of such indebtedness was
$43.0 million on the Subordinated Notes granted by Investors-NA.

The  principal  source of  liquidity  for  FIC's  subsidiaries  consists  of the
periodic  payment of principal and interest by Family Life pursuant to the terms
of a Surplus  Debenture.  The terms of the  Surplus  Debenture  were  previously
approved by the Washington Insurance  Commissioner.  Under the provisions of the
Surplus Debenture and current law, no prior approval of the Washington Insurance
Department  is required  for Family Life to pay  interest  or  principal  on the
Surplus  Debenture;  provided that,  after giving effect to such  payments,  the
statutory  surplus  of Family  Life is in excess of 6% of assets  (the  "surplus
floor").  However,  Family  Life has  voluntarily  agreed  with  the  Washington
Insurance Commissioner that it will provide at least five days advance notice of
payments  which it will make under the surplus  debenture.  As of September  30,
1999,  the statutory  capital and surplus of Family Life was $27.6  million,  an
amount  substantially  in excess of the surplus floor. As of September 30, 1999,
the  principal  balance of the Surplus  Debenture was $16.1  million.  The funds
required by Family Life to meet its  obligations  under the terms of the Surplus
Debenture  are generated  primarily  from premium  payments from  policyholders,
investment  income and the proceeds  from the sale and  redemption  of portfolio
investments.

                                     - 18 -


<PAGE>



Washington's insurance code includes the "greater of" standard for dividends but
has requirements that prior  notification of a proposed dividend be given to the
Washington Insurance  Commissioner and that cash dividends may be paid only from
earned surplus. Family Life does not presently have earned surplus as defined by
the regulations adopted by the Washington Insurance Commissioner and, therefore,
is not permitted to pay cash dividends.  However, since the new law applies only
to dividend payments,  the ability of Family Life to make principal and interest
payments  under the Surplus  Debenture  is not  affected.  The Company  does not
anticipate  that Family Life will have any  difficulty  in making  principal and
interest  payments on the Surplus  Debenture in the amounts  necessary to enable
Family Life Corporation to service its indebtedness for the foreseeable future.

The  sources  of  funds  for  Family  Life  consist  of  premium  payments  from
policyholders,  investment  income and the proceeds from the sale and redemption
of portfolio  investments.  These funds are applied primarily to provide for the
payment of claims under  insurance  and annuity  policies,  operating  expenses,
taxes,  investments in portfolio securities,  shareholder dividends and payments
under the provisions of the Surplus Debenture.

FIC's net cash flow  provided by  operating  activities  was $3.1 million in the
first nine months of 1999,  as compared to $4.4 million in the first nine months
of 1998.  Net cash flow used in  financing  activities  was $4.6  million in the
first nine months of 1999,  as compared to $4.6 million in the first nine months
of 1998.

In connection  with the purchase of the Investors Life Companies by ILCO and the
purchase of Family Life by a wholly-owned  subsidiary of FIC, FIC guaranteed the
payment of the indebtedness created in connection with such acquisitions.  After
giving  effect to the  refinancing  of the ILCO Senior Loan and the repayment of
the ILCO Subordinated Loans, the guaranty commitments of FIC with respect to the
debt  obligations  of ILCO  related to the ILCO  Senior  Loan.  The  outstanding
principal balance of ILCO's senior loan obligations was $3.6 million at June 30,
1998. The final installment on the Senior Loan obligation  scheduled for October
1, 1998,  was  prepaid on  September  30,  1998.  As a result,  the Senior  Loan
obligation of ILCO was fully discharged  effective September 30, 1998, relieving
FIC of the guaranty commitments with respect to the debt obligations of ILCO.

The guaranty  commitments of FIC under the loans incurred in connection with the
acquisition  of Family Life (after  taking into account the  repayments  and new
loans which occurred in July, 1993) relate to: (i) the $22.5 million note issued
by Family Life Corporation to Investors Life Insurance Company of North America,
and (ii) the $34.5 million loaned by Investors-NA to two subsidiaries of FIC.

Management  believes that its cash, cash  equivalents and short term investments
are sufficient to meet the needs of its business and to satisfy debt service.

There are no trends, commitments or capital asset requirements that are expected
to have an adverse effect on the liquidity of FIC.

                                     - 19 -


<PAGE>



                                   Investments

As of  September  30, 1999,  the  Company's  investment  assets  totaled  $106.8
million, as compared to $110.2 million as of December 31, 1998.

The level of short-term  investments at September 30, 1999 was $25.5 million, as
compared  to $27.6  million  as of  December  31,  1998.  The  fixed  maturities
available for sale portion  represents $77.8 million of investment  assets as of
September  30, 1999,  as compared to $79.4  million at December  31,  1998.  The
amortized cost of fixed  maturities  available for sale as of September 30, 1999
was $77.5 million  representing  a net  unrealized  gain of $0.3  million.  This
unrealized gain principally reflects changes in interest rates from the date the
respective  investments were purchased.  To reduce the exposure to interest rate
changes,  portfolio  investments  are selected so that  diversity,  maturity and
liquidity   factors   approximate   the  duration  of  associated   policyholder
liabilities.

The assets held by Family Life must comply with applicable  state insurance laws
and  regulations.  In  selecting  investments  for the  portfolios  of its  life
insurance  subsidiaries,  the Company's  emphasis is to obtain  targeted  profit
margins,  while  minimizing  the  exposure  to  changing  interest  rates.  This
objective  is  implemented  by  selecting   primarily   short-  to  medium-term,
investment grade fixed income securities.  In making such portfolio  selections,
the  Company  generally  does not  select  new  investments  which are  commonly
referred to as "high yield" or "non-investment grade".

The fixed  maturities  portfolio  of Family  Life,  as of  September  30,  1999,
consisted solely of fixed maturities investments which, in the annual statements
of the companies,  as filed with state  insurance  departments,  were designated
under the National Association of Insurance Commissioners ("NAIC") rating system
as a "1" (highest quality).

The   investments  of  Family  Life  and  ILCO's   insurance   subsidiaries   in
mortgage-backed securities included collateralized mortgage obligations ("CMOs")
of  $22.1  million  and  $182.1  million,   respectively,   and  mortgage-backed
pass-through  securities  of $5.6 million and $30.7  million,  respectively,  at
September 30, 1999.  Mortgage-backed  pass-through securities,  sequential CMO's
and support  bonds,  which  comprised  approximately  44.1% of the book value of
FIC's  mortgage-backed  securities  and  52.0%  of  the  book  value  of  ILCO's
mortgage-backed  securities at September  30, 1999,  are sensitive to prepayment
and extension risks. ILCO and FIC have reduced the risk of prepayment associated
with  mortgage-backed  securities  by  investing in planned  amortization  class
("PAC"),  target  amortization  class ("TAC")  instruments and scheduled  bonds.
These  investments are designed to amortize in a predictable  manner by shifting
the risk of prepayment of the underlying  collateral to other investors in other
tranches  ("support  classes")  of the CMO. At September  30, 1999,  PAC and TAC
instruments  and scheduled  bonds  represented  approximately  55.9% of the book
value of FIC's  mortgage-backed  securities and approximately  48.0% of the book
value of ILCO's  mortgage-backed  securities.  Sequential  and  support  classes
represented  approximately  24.0%  of the book  value  of FIC's  mortgage-backed
securities and approximately  37.6% of the book value of ILCO's  mortgage-backed
securities at September  30, 1999.  In addition,  FIC and ILCO limit the risk of
prepayment  of CMOs by not  paying a premium  for any CMOs.  ILCO and FIC do not
invest in mortgage-backed securities

                                     - 20 -


<PAGE>



with increased  prepayment  risk, such as  interest-only  stripped  pass-through
securities  and inverse  floater  bonds.  Neither FIC nor ILCO had any z-accrual
bonds as of September 30, 1999. The prepayment risk that certain mortgage-backed
securities are subject to is prevalent in periods of declining  interest  rates,
when  mortgages  may be  repaid  more  rapidly  than  scheduled  as  individuals
refinance higher rate mortgages to take advantage of the lower current rates. As
a result, holders of mortgage-backed securities may receive large prepayments on
their  investments  which cannot be reinvested at an interest rate comparable to
the  rate on the  prepaying  mortgages.  Neither  FIC nor ILCO  made  additional
investments  in CMOs  during  1998 and the first  three  quarters  of 1999.  The
current investment  objectives of both FIC and ILCO do not contemplate additions
to the portfolio of CMO investments during the remainder of 1999.

Management  believes that the absence of "high-yield" or "non-investment  grade"
investments  (as  defined  above)  in  the  portfolios  of  its  life  insurance
subsidiary  enhances  the ability of the  Company to service  its debt,  provide
security  to its  policyholders  and to credit  relatively  consistent  rates of
return to its policyholders.

                                 Y2K Compliance

The  Company  and its  subsidiaries  utilize a  centralized  computer  system to
process policyholder records and financial information. In addition, the Company
uses non-centralized  computer terminals in connection with its operations.  The
software programs used in connection with these systems will be affected by what
is referred to as the "Y2K date problem".  This refers to the limitations of the
programming  code in  certain  existing  software  programs  to  recognize  date
sensitive information as the year 2000 approaches.  Unless modified prior to the
year 2000,  such systems may not properly  recognize such  information and could
generate erroneous data or cause a system to fail to operate properly.

The Company has evaluated its centralized  computer  systems and has developed a
plan to reach Y2K  compliance.  A central feature of the plan is to convert most
of the  centralized  systems to a common  system which is already in  compliance
with Y2K requirements.  The Company has completed this system conversion, except
as it  relates to the  conversion  of  approximately  560  active  policies  and
additional  testing  of  previously  completed  conversions.   The  Company  has
increased the budget for the  implementation and completion of the Plan from the
prior  years  estimate.  As of December  31,  1997,  the  Company  had  budgeted
approximately $330,000 for implementing the Plan. Based on its current analysis,
the Company expects that the cost of  implementing  and completing the Plan will
result in an after-tax  expense of  approximately  $898,000  for the  three-year
(1997 - 1999) conversion  period. For the three month period ended September 30,
1999, the Company has incurred an after tax expense of approximately  $34,400 in
connection  with  the  completion  of the  Plan.  Between  January  1,  1997 and
September 30, 1999, the Company has expended approximately 84% of the three-year
expected after-tax cost discussed above.

The Plan called for an upgrade of the Family  Life's  administrative  systems by
changing  individual lines of computer code in order to modify current operating
software  such  that  it  will  become  Y2K  compliant.  This  process  included
approximately 29 sub-systems  which provide data input to the main systems.  The
administrative systems which were not modified were

                                     - 21 -


<PAGE>



converted onto the Company's CK/4 System,  a system designed to be Y2K compliant
according to the representations of the vendor.

The systems which  administer a substantial  number of Family Life policies will
be  modified  rather  than  converted.   The  modification  of  the  PMS  system
(administering  approximately 100,880 policies for Family Life) was completed in
March, 1998. The conversion of the Cypros AP system (administering approximately
22,210 active policies for Family Life) was completed in October of 1999.

A small number of Family Life  policies are  administered  by systems which also
administer  policies for ILCO and its subsidiaries.  With regard to ILCO and its
subsidiaries,   the  ALIS  system  (administering  approximately  42,000  active
policies for  Investors-NA  at the time of conversion)  was converted to CK/4 in
January  of  1998.  The   conversion  of  the  Life  70  system   (administering
approximately  15,300 active policies for  Investors-IN) was completed in May of
1999. The  modification  of the Lifecomm-B  system which is responsible  for the
administration  of  approximately  16,900 active  policies  assumed after ILCO's
acquisition  of State Auto Life was also  completed.  As of June 30,  1999,  the
Lifecomm-A  system  administered   approximately   57,140  active  policies  for
Investors-NA and 2000 active policies for Family Life. As of September 30, 1999,
the conversion of all but approximately  6,130 active policies for Investors- NA
and 560 active  policies  for Family Life had been  completed.  The  majority of
those  conversions  were  completed  in  November,  and the Company  expects the
conversion of the remaining  Lifecomm-A  policies to be completed before the end
of November, 1999.

The Company  also faces the risk that one or more of its  external  suppliers of
goods  or  services  ("third  party  providers")  will not be in a  position  to
properly  interact  with the  Company due to the  inability  of such third party
provider to resolve its own Y2K issues.  The Company has  completed an inventory
of its third party provider relationships.  In order to assess the Y2K readiness
of such third  party  providers,  the  Company  has  developed  and  forwarded a
detailed questionnaire to such providers. The Company has received responses and
assurances of Y2K readiness from all of its mission critical external suppliers,
as  well  as  many  of its  non-mission  critical  suppliers.  The  receipt  and
evaluation of responses is on-going,  and the Company will  consider  whether to
continue  relationships  with  external  suppliers  who fail to  respond  to the
questionnaire.

In 1997,  FIC  Computer  Services  - a  subsidiary  of FIC which  provides  data
processing services for the Company and its affiliates - purchased new mainframe
hardware and accompanying  operating software,  which the vendor has represented
to be Y2K  compliant.  This  hardware  and  software  was  tested  in 1998.  The
telephone system has been tested by the maintenance provider for that system and
the Company has received assurances that the telephone system is Y2K compliant.

With respect to non-centralized  systems (i.e., desktop computers),  the Company
has obtained  updated  software  releases  and new  hardware  designed to be Y2K
compliant according to the  representations of the vendors.  The Company expects
that the effort  needed to correct for Y2K problems on such systems will be less
time intensive than the effort needed to achieve

                                     - 22 -


<PAGE>



compliance for its centralized systems. The installation of such new PC hardware
and software was  commenced in early 1999,  and was  completed in  mid-November,
1999.

In the event that a major administrative system fails to operate properly due to
the Y2K  problem,  or the  Company  does  not  complete  the  necessary  systems
conversions  prior to January 1,  2000,  the  Company  has  developed  a plan to
respond to such a  contingency.  FIC  Computer  Services  has  assigned  certain
personnel to be members of an emergency  response team to resolve Y2K operations
problems. Additionally, insurance policies would be administered manually if the
necessary  systems  conversions  were not completed prior to January 1, 2000, or
subsequent Y2K operations problems persist.  Manual policy  administration would
require  additional  personnel.   If  substantial  additional  personnel  become
necessary for manual policy administration,  the training and salary expenses of
such personnel  could  materially  affect the Company's  business and results of
operations.  The  Company is not able to  estimate  the  likelihood  that manual
administration  will be needed or the amount of any expense which it would incur
in connection with such manual administration.

                 Cautionary Statements for Purposes of the "Safe
             Harbor" Provisions of the Private Securities Litigation
                               Reform Act of 1995

Except  for  historical  factual  information  set  forth  in this  Management's
Discussion  and  Analysis,  certain  statements  made in this report are forward
looking and contain  information about financial results,  economic  conditions,
Y2K risks and other  risks and known  uncertainties.  The Company  cautions  the
reader that actual results could differ materially from those anticipated by the
Company, depending upon the eventual outcome of certain factors,  including: (1)
heightened  competition for new business,  (2)  significant  changes in interest
rates, (3) adverse  regulatory  changes  affecting the business of insurance and
(4) adverse changes in the Y2K readiness of the Company or its significant third
party providers.

                             Accounting Developments

In December, 1997, the Accounting Standards Executive Committee issued Statement
of Position  ("SOP") 97-3,  "Accounting by Insurance and Other  Enterprises  for
Insurance-Related  Assessments",  which  provides  guidance  on  accounting  for
insurance-related  assessments.  The Company adopted SOP 97-3, effective January
1,  1999.  The  adoption  of SOP  97-3  did not have a  material  impact  on the
Company's results of operations, liquidity or financial position.

In  June,  1998,  the  FASB  issued  FAS No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities",  which establishes accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts,  (collectively  referred to as derivatives) and for
hedging  activities.  FAS No. 133 is applicable to financial  statements for all
fiscal quarters of fiscal years beginning after June 15, 2000, as amended by FAS
No.  137,  "Accounting  for  Derivative  Instruments  and Hedging  Activities  -
Deferral of the Effective  Date of FASB  Statement No. 133." As the Company does
not have significant

                                     - 23 -


<PAGE>



investments  in derivative  financial  instruments,  the adoption of FAS No. 133
does  not  have a  material  impact  on the  Company's  results  of  operations,
liquidity or financial position.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

GENERAL:

FIC's principal  assets are financial  instruments,  which are subject to market
risks.  Market risk is the risk of loss arising  from adverse  changes in market
rates, principally interest rates on fixed rate investments. For a discussion of
the  Company's  investment  portfolio and the  management  of that  portfolio to
reflect the nature of the  underlying  insurance  obligations  of the  Company's
insurance  subsidiaries,  please  refer to the  information  set forth in Item 2
"Management's  Discussion  and Analysis of Financial  Conditions  and Results of
Operation - Investments" of this report.

The  following is a discussion of the Company's  primary  market risk  sensitive
instruments.  It should be noted that this  discussion has been developed  using
estimates  and  assumptions.  Actual  results may differ  materially  from those
described below.  Further,  the following  discussion does not take into account
actions which could be taken by management in response to the assumed changes in
market rates. In addition, the discussion does not take into account other types
of risks which may be involved in the business  operations of the Company,  such
as the reinsurance recoveries on reinsurance treaties with third party insurers.

The primary market risk to the Company's  investment  portfolio is interest rate
risk. Since the Company own  approximately  45% of the common stock of ILCO, the
interest  rate risk of ILCO's fixed income  portfolio has an effect on the value
of  FIC's  "investment  in  affiliate".  The  Company  does  not use  derivative
financial instruments.

INTEREST RATE RISK:

(A)      FIC'S FIXED INCOME INVESTMENTS:

         Assuming an immediate  increase of 100 basis points in interest  rates,
         the net hypothetical loss in fair market value related to the financial
         instruments  segment of the Company's  balance sheet is estimated to be
         $3.5  million at  September  30, 1999 and $2.5  million at December 31,
         1998. For purposes of the foregoing estimate,  the following categories
         of the Company's fixed income investments were taken into account:  (i)
         fixed  maturities,  including fixed maturities  available for sale, and
         (ii) short-term investments. The market value of such assets was $103.3
         million at September 30, 1999 and $107.0 million at December 31, 1998.

         The  fixed  income   investments   of  the  Company   include   certain
         mortgage-backed  securities.  The market value of such  securities  was
         $27.9  million at September  30, 1999 and $33.9 million at December 31,
         1998.  Assuming an  immediate  increase of 100 basis points in interest
         rates,  the net  hypothetical  loss in the fair market value related to
         such

                                     - 24 -


<PAGE>



         mortgage-backed securities is estimated to be $1.5 million at September
         30, 1999 and $1.2 million at December 31, 1998.

(B)      FIC'S INVESTMENT IN AFFILIATE:

         The value of FIC's investment in affiliate is affected by the amount of
         unrealized gains and losses, net of tax, in the investment portfolio of
         its affiliate, ILCO. Assuming an immediate increase of 100 basis points
         in interest  rates,  the net  hypothetical  loss in value,  net of tax,
         related to the  Company's  investment  in  affiliate is estimated to be
         $6.4  million at  September  30, 1999 and $4.6  million at December 31,
         1998.

 The hypothetical  effect of the interest rate risk on fair values was estimated
by applying a commonly  used model.  The model  projects  the impact of interest
rate changes on a range of factors, including duration and potential prepayment.

                                     - 25 -


<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

Part II. Other Information

ITEM 1.  LEGAL PROCEEDINGS

The Company and its subsidiaries are defendants in certain legal actions related
to the normal business  operations of the Company.  Management believes that the
resolution  of such  legal  actions  will not have a  material  impact  upon the
financial statements.

ILCO and  Investors-NA  are  defendants in a lawsuit which was filed in October,
1996, in Travis County, Texas. CIGNA Corporation,  an unrelated Company, is also
a named  defendant in the lawsuit.  The named  plaintiffs in the suit (a husband
and wife), allege that the universal life insurance policies sold to them by INA
Life Insurance  Company (a company which was merged into  Investors- NA in 1992)
utilized unfair sales  practices.  The named  plaintiffs seek reformation of the
life  insurance  contracts  and an  unspecified  amount  of  damages.  The named
plaintiffs  also seek a class action as to similarly  situated  individuals.  No
certification  of a class has been  granted as of the date  hereof.  The Company
believes that the suit is without  merit and intends to  vigorously  defend this
matter.

In August,  1997,  another  individual  filed a similar action in Travis County,
Texas against the corporate entities  identified above. The lawsuit involves the
same type of policy and includes  allegations which are substantially  identical
to the  allegations  in the first action.  The named  plaintiff also seeks class
certification.  The  Company  believes  that  the  court  would  consider  class
certification  with  respect  to only one of these  actions.  The  Company  also
believes that this action is without merit and intends to vigorously defend this
matter.

ITEM 2.  CHANGES IN SECURITIES

                  None

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

                  None

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

                  None

ITEM 5.  OTHER INFORMATION

                  None

                                     - 26 -


<PAGE>



ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits

                  Form 10-K  Annual  Report  of  Registrant  for the year  ended
                  December  31, 1998  heretofore  filed by  Registrant  with the
                  Securities   and   Exchange   Commission,   which  is   hereby
                  incorporated by reference.

         (b)      Reports on Form 8-K:

                  None

                                     - 27 -


<PAGE>






                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

                                    SIGNATURE

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

FINANCIAL INDUSTRIES CORPORATION

 /S/ JAMES M. GRACE
James M. Grace, Treasurer

Date:   November 12, 1999

                                     - 28 -


<PAGE>