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, 2002
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)



6500 River Place Blvd., Building One, Austin, Texas                78730
    (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:
9,598,415.


                                      - 1 -



<PAGE>



                           Forward-Looking Statements


Except for  historical  factual  information  set forth in this Form  10-Q,  the
statements, analyses, and other information contained in this report relating to
trends in the Company's  operations and financial  results,  the markets for the
Company's products,  the future development of the Company's  business,  and the
contingencies and uncertainties to which the Company may be subject,  as well as
other  statements  including  words  such as  "anticipate,"  "believe,"  "path,"
"estimate,"   "expect,"  "intend"  and  other  similar  expressions   constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. Such statements are made based upon management's  current expectations and
beliefs concerning the financial results, economic conditions and are subject to
known and unknown risks,  uncertainties  and other factors  contemplated  by the
forward-looking  statements.  Such  factors  include,  among other  things:  (1)
general economic  conditions and other factors,  including  prevailing  interest
rate levels and stock market performance, which may affect the ability of FIC to
sell its products,  the market value of FIC's investments and the lapse rate and
profitability of policies;  (2) FIC's ability to achieve  anticipated  levels of
operational efficiencies and cost-saving  initiatives;  (3) customer response to
new products,  distribution channels and marketing  initiatives;  (4) mortality,
morbidity  and  other  factors  which  may  affect  the  profitability  of FIC's
insurance  products;  (5) changes in the Federal income tax laws and regulations
which may affect the  relative tax  advantages  of some of FIC's  products;  (6)
increasing  competition in the sale of insurance and  annuities;  (7) regulatory
changes or actions, including those relating to regulation of insurance products
and insurance companies; (8) ratings assigned to FIC's insurance subsidiaries by
independent rating  organizations such as A.M. Best Company,  which FIC believes
are  particularly  important  to the  sale of  annuity  and  other  accumulation
products; and (9) unanticipated litigation. There can be no assurance that other
factors not currently  anticipated  by management  will not also  materially and
adversely affect FIC.


                                      - 2 -



<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES


  INDEX

                                                                        Page No.



Part I - Financial Information

Item 1. Financial Statements
Consolidated Balance Sheets
         September 30, 2002 and December 31, 2001........................... 4

Consolidated Statements of Income
         For the three and nine month periods ended
         September 30, 2002 and September 30, 2001.......................... 6

Consolidated Statements of Cash Flows
         For the three and nine month periods ended
         September 30, 2002 and September 30, 2001..........................10

Notes to Consolidated Financial Statements..................................14

Item 2. Management's Discussion and Analysis of
         Financial Conditions and Results of Operations.....................17

Item 3. Quantitative and Qualitative Disclosures
            About Market Risk ..............................................29

Item 4. Controls and Procedures ............................................30


Part II

Other  Information..........................................................30

Signature  Page.............................................................33

Certifications..............................................................34


                                      - 3 -



<PAGE>



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

                                                September 30,       December 31,
                                                    2002               2001
                                                (unaudited)

ASSETS
Investments:

Fixed maturities held to maturity,
at amortized cost (market value approxi-
mates $1,028 and $1,028  at September 30,
2002 and December 31, 2001, respectively)       $     1,063          $    1,029

Fixed maturities available for sale at
market value(amortized cost of $449,215
and $496,704 at September 30,  2002
and December 31, 2001, respectively)                463,315             501,395

Equity securities, at market value(cost
approximates $59 at September 30, 2002
and December 31, 2001)                                   35                  56

Policy loans                                         47,610              49,794

Mortgage loans                                           73               4,715

Invested real estate                                 71,223              61,049

Short-term investments                              172,661             138,291

     Total investments                              755,980             756,329

Cash and cash equivalents                             8,044               7,094

Accrued investment income                             9,941               8,483

Agency advances and other receivables                31,817              30,324

Reinsurance receivables                              11,763              14,709

Due and deferred premiums                            12,336              13,411

Real estate occupied by the Company                  19,809              20,054

Property and equipment, net                           3,604               3,546

Deferred policy acquisition costs                    80,863              80,290

Present value of future profits of
 acquired businesses                                 27,299              31,251

Other assets                                         17,214              14,074

Separate account assets                             334,796             399,264

     Total Assets                               $ 1,313,466         $ 1,378,829


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


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<PAGE>



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

                                                September 30,        December31,
                                                    2002                 2001
                                                 (unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:

Policy liabilities and contract holder
 deposit funds:

Contract holder deposit funds                   $   556,138         $   556,117

Future policy benefits                              172,537             180,953

Other policy claims and benefits payable             14,008              13,985
                                                    742,684             751,055

Deferred federal income taxes                        34,640              31,920

Excess of net assets acquired over cost                  -0-             15,847

Other liabilities                                     7,689               8,938

Separate account liabilities                        327,067             391,593

Total Liabilities                                 1,112,080           1,199,353

Commitments and Contingencies

Shareholders' equity:

Common stock, $.20 par value, 25,000
shares authorized in 2002 and 2001,
11,857 and 11,736 shares issued in 2002
and 2001, 9,598 and 9,499 shares
outstanding in 2002 and 2001.                         2,372               2,348

Additional paid-in capital                           66,541              65,558

Accumulated other comprehensive income                7,842               2,297

Deferred compensation                                  (263)               (292)

Retained earnings                                   147,251             131,462
                                                    223,743             201,373
Common treasury stock, at cost, 2,258
and 2,237 shares in 2002 and 2001, respectively.    (22,357)            (21,897)

Total Shareholders' Equity                          201,386             179,476

Total Liabilities and Shareholders' Equity      $ 1,313,466         $ 1,378,829

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


                                      - 5 -



<PAGE>



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

                                               Three Months Ended September 30,
                                                     2002                2001

Revenues:

Premiums                                        $     8,607         $    10,225

Net investment income                                11,649              12,694

Earned insurance charges                              9,934              10,361

Other                                                   329                 685
                                                     30,519              33,965
Benefits and expenses:

Policyholder benefits and expenses                   10,623              10,321

Interest expense on contract holders
 deposit funds                                        7,423               7,439

Amortization of present value of future
 profits of acquired businesses                       1,094                 875

Amortization of deferred policy
 acquisition costs                                    2,766               1,745

Operating expenses                                    7,802               8,042

                                                     29,708              28,422
Income before federal income tax and
 equity in net earnings of affiliates                   811               5,543

Provision for federal income taxes                      (88)              1,737

Net Income                                      $       899              $3,806

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



                                      - 6 -



<PAGE>



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


                                                Three Months Ended September 30,
                                                     2002                2001
Net Income Per Share

Basic:

Average weighted shares outstanding                   9,597               9,483

Basic earnings per share                        $      0.09          $     0.40

Diluted:

Common stock and common stock equivalents             9,647               9,536

Diluted earnings per share                      $      0.09          $     0.40

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


                                      - 7 -



<PAGE>



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

                                                Nine Months Ended September 30,
                                                     2002                2001

Revenues:

Premiums                                        $    27,517       $      27,324

Net investment income                                32,789              21,466

Earned insurance charges                             31,435              16,953

Other                                                 1,019                 939
                                                     92,760              66,682

Benefits and expenses:

Policyholder benefits and expenses                   32,028              19,615

Interest expense on contract holders
 deposit funds                                       22,517              12,135

Amortization of present value of future
 profits of acquired businesses                       3,424               2,651

Amortization of deferred policy acquisition
 costs                                                6,913               4,678

Operating expenses                                   24,389              16,558

Interest expense                                         -0-                616

   Total                                             89,271              56,253

Income before federal income tax, equity
 in net earnings of affiliates and cumulative
 effect of change in accounting principle             3,489              10,429

Provision for federal income taxes                    1,221               3,091

Income before equity in net earnings of
 affiliates and cumulative effect of
 change in accounting principle                       2,268               7,338

Equity in net earnings of affiliate,
 net of tax                                              -0-              1,317

Net income before cumulative effect of
 change in accounting principle                       2,268               8,655

Cumulative effect of change in accounting
 principle                                           15,727                  -0-

Net Income                                      $    17,995          $    8,655
                                                     ======              ======

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


                                      - 8 -



<PAGE>



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

                                                Nine Months Ended September 30,
                                                     2002                2001
Net Income Per Share

Basic:

Average weighted shares outstanding                   9,543               7,261

Basic earnings per share

Income per share before cumulative
effect of change in accounting principle        $      0.24          $     1.19

Cumulative effect of change in accounting
 principle                                             1.65                0.00

Basic earnings per share                        $      1.89          $     1.19

Diluted:

Common stock and common stock equivalents             9,621               7,292

Diluted earnings per share

Income per share before cumulative effect
 of change in accounting principle              $      0.24          $     1.18

Cumulative effect of change in accounting
 principle                                             1.63                0.00

Diluted earnings per share                      $      1.87          $     1.18


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


                                      - 9 -



<PAGE>



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


                                                Three Months Ended September 30,
                                                     2002                2001
                                                           (unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES

Net Income                                      $       899          $    3,806

Adjustments to reconcile net income to
 net cash (used in)provided by operating
 activities:

Amortization of present value of future
 profits of acquired business                         1,094                 875

Depreciation                                            645                 625

Changes in assets and liabilities:

(Increase) decrease in accrued investment
 income                                              (1,634)                  1

Decrease in agent advances and other
 receivables                                          8,067               3,006

Decrease  in due and deferred premiums                  216               3,494

Net change in deferred policy acquisition
 costs                                                   53              (1,579)

(Increase) decrease in other assets                    (651)                184

Decrease in policy liabilities and accruals          (5,100)             (6,287)

Decrease in other liabilities                        (3,676)               (937)

Increase in deferred federal income taxes               996                 162

Other, net                                           (1,484)              1,484

Net cash (used in) provided by operating
 activities                                     $      (575)         $    4,834

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


                                      - 10 -



<PAGE>



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

                                                Three Months Ended September 30,
                                                     2002                2001
                                                           (unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES

Fixed maturities purchased                      $   (35,038)       $     (6,063)

Proceeds from sales and maturities of
 fixed maturities                                    79,328              27,841

Real estate capitalized                                 456             (10,861)

Net change in policy loans                              587               1,933

Increase in short-term investments, net             (46,210)            (16,234)

Purchases of property and equipment                  (1,957)               (668)

Net cash used in investing activities                (2,834)             (4,052)

CASH FLOW FROM FINANCING
 ACTIVITIES

Dividends paid                                           -0-             (2,051)

Contractholder fund deposits                         14,648              14,616

Contractholder fund withdrawals                     (10,629)            (12,832)

Issuance of common capital stock                         18                 271

Purchase of treasury stock                               -0-                 57

Net cash provided by financing activities             4,037                  61

Net increase in cash                                    628                 843

Cash, beginning of period                             7,416              12,079

Cash, end of period                             $     8,044          $   12,922

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


                                     - 11 -



<PAGE>



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


                                                Nine Months Ended September 30,
                                                     2002                2001
                                                           (unaudited)
CASH FLOWS FROM OPERATION
ACTIVITIES

Net Income                                      $    17,995       $       8,655

Adjustments to reconcile net income to
 net cash (used in) provided by operating
 activities:

Amortization of present value of future
 profits of acquired business                         3,424               2,931

Depreciation                                          1,926                 899

Cumulative change in accounting principle           (15,727)                 -0-

Equity in undistributed earnings of
 affiliate                                               -0-             (2,137)

Changes in assets and liabilities:

Increase in accrued  investment income               (1,458)               (103)

Decrease in agent advances and other
 receivables                                          1,453               3,003

Decrease in due and deferred premiums                 1,075               3,067

Net change in deferred policy acquisition
 costs                                                 (889)             (3,202)

(Increase) decrease in other assets                  (3,140)                229

Decrease in policy liabilities and accruals         (14,545)             (8,254)

Decrease in other liabilities                        (1,249)               (800)

(Decrease) increase in deferred federal
 income taxes                                          (573)                 12

Other, net                                             (528)              2,212

Net cash (used in) provided by operating
 activities                                     $   (12,236)         $    6,512


                                     - 12 -



<PAGE>



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


                                                Nine Months Ended September 30,
                                                     2002                2001
                                                           (unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES

Fixed maturities purchased                      $  (141,625)         $  (37,253)

Proceeds from sales and maturities of
 fixed maturities                                   194,641              70,406

Real estate capitalized                             (10,174)            (13,656)

Net change in policy loans                            2,184               1,825

Increase in short-term investments, net             (34,370)            (19,229)

Purchases of property and equipment                  (1,984)               (952)

Net cash provided by investing activities             8,672               1,141

CASH FLOW FROM FINANCING
 ACTIVITIES

Dividends Paid                                       (2,207)             (3,982)

Net cash from acquisition of insurance
 holding company                                         -0-              6,979

Contractholder fund deposits                         40,276              23,114

Contractholder fund withdrawals                     (34,102)            (20,068)

Issuance of common capital stock                      1,007                 271

Purchase of treasury stock                             (460)             (2,241)

Repayment of subordinated notes payable                  -0-             (1,537)

Net cash provided by financing activities             4,514               2,536

Net increase in cash                                    950              10,189

Cash, beginning of year                               7,094               2,733

Cash, end of period                             $     8,044          $   12,922

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


                                     - 13 -



<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The financial  statements  included herein have been presented to conform to the
requirements  of Form 10-Q.  This  presentation  includes year end balance sheet
data  that was  derived  from  audited  financial  statements.  The notes to the
financial  statements 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, 2001  previously  filed with the Securities
and Exchange  Commission for financial  statements  prepared in accordance  with
GAAP.  Management  believes the  financial  statements  reflect all  adjustments
necessary to present a fair  statement of interim  results.  Certain  prior year
amounts have been reclassified to conform with the current year presentation.

The  consolidated   financial  statements  include  the  accounts  of  Financial
Industries   Corporation   ("FIC")  and  its  wholly-owned   subsidiaries.   All
significant intercompany items and transactions have been eliminated.

Accumulated Other Comprehensive Income

The following is a reconciliation of accumulated other comprehensive income from
December 31, 2001 to September 30, 2002 (in thousands):

                      Net unrealized       Net                      Total
                      gain (loss) on       appreciation             accumulated
                      investments          depreciation)            other
                      in fixed maturities  of equity                comprehen-
                      available for sale   securities     Other     sive income

Balance at
 December 31, 2001    $ 2,527              $    (2)       $ (228)   $ 2,297
Current Period Change   5,559                  (14)           -0-     5,545
Balance at
 September 30, 2002   $ 8,086              $   (16)       $ (228)   $ 7,842

Dividends Declared

In March,  2001,  FIC announced that its board approved the payment of an annual
cash  dividend in the amount of $0.41 per share.  The dividend was paid on April
12,  2001,  to  shareholders  of record as of the close of business on March 19,
2001.

In May 2001, FIC announced that its Board of Directors approved the payment of a
semi-annual  cash dividend in the amount of $0.25 per common share. The dividend
was  payable on July 2, 2001,  to record  holders as of the close of business on
June 18, 2001.

A dividend of $0.23 per share was  declared in the second  quarter of 2002.  The
dividend was paid on June 21, 2002 to shareholders of record as of June 7, 2002.


                                     - 14 -



<PAGE>



Related Party Transactions

On January 8, 2001,  the Company  donated  $375,000 to the Roy F. and Joann Cole
Mitte  Foundation  (the  "Foundation").  The  Foundation is a charitable  entity
exempt  from  federal  income  tax  under  section  501(a)  of  the  Code  as an
organization described in section 501(c)(3) of the Code, and based upon the most
recent information provided to the Company by the Foundation owned 16.31% of the
outstanding shares of FIC's common stock. The sole members of the Foundation are
Roy F. Mitte,  former  Chairman,  President and Chief Executive  Officer of FIC,
ILCO and their  insurance  subsidiaries,  and his wife,  Joann  Cole  Mitte.  On
January 2, 2002, FIC made a donation of $1,000,000 to the Foundation. For recent
events  concerning  Roy F.  Mitte  see  "Item 2 -  Management's  Discussion  and
Analysis of Financial Conditions and Results of Operation - Subsequent Events."

New Accounting Pronouncements

During 2001, the FASB issued Statement of Financial Accounting Standards No. 141
(FAS 141), "Business Combinations," which supersedes Accounting Principles Board
Opinion No. 16 (APB 16), "Business  Combinations," and establishes guidelines to
account for all acquisitions of a controlling  interest,  regardless of the form
of consideration.  The most significant changes made by FAS 141 are that it: (1)
requires the purchase method of accounting,  rather than the pooling method,  be
used  for  all  business  combinations   initiated  after  June  30,  2001;  (2)
establishes   specific   criteria  for  the  recognition  of  intangible  assets
separately from goodwill;  and (3) requires unallocated negative goodwill (which
is an excess of net assets  acquired over cost) to be recognized  immediately as
an extraordinary gain (instead of being deferred and amortized).

As of the first quarter of 2002, the amount of any  unamortized  deferred credit
related to negative  goodwill arising from (a) a business  combination for which
the acquisition date was before July 1, 2001, or (b) an investment accounted for
by the equity method acquired before July 1, 2001, is recognized and reported as
the effect of a change in  accounting  principle.  The effect of the  accounting
change and  related  income tax  effects is  presented  in the income  statement
between the  captions  "extraordinary  items" and "net  income".  The  per-share
information  presented in the income statement  includes the per-share effect of
the  accounting  change.  During the first quarter of 2002,  FIC  recognized the
unamortized   balance  of  $15,727,000  of  negative  goodwill.   There  was  no
amortization of negative  goodwill recorded during the first quarter of 2002.

During 2001, the FASB issued Statement of Financial Accounting Standards No. 142
(FAS 142),  "Goodwill and Other Intangible Assets," which supersedes  Accounting
Principles  Board  Opinion  No.  17 (APB  17),  "Intangible  Assets,"  and which
addresses  financial  accounting  and reporting for acquired  goodwill and other
intangible  assets upon and subsequent to their  acquisition.  The provisions of
FAS 142 are effective for FIC's fiscal year beginning  January 1, 2002. The most
significant  changes  made by FAS 142 are: (1)  goodwill  and  indefinite  lived
intangible  assets will no longer be  amortized,  but instead will be tested for
impairment  at  least  annually  at  the  reporting  unit  level,  and  (2)  the
amortization  period of  intangible  assets with finite  lives will no longer be
limited to forty years. The adoption of FAS 142 did not materially  affect FIC's
results of operations, liquidity or financial position.


                                     - 15 -



<PAGE>



During 2001, the FASB issued Statement of Financial Accounting Standards No. 143
(FAS  143),  "Accounting  for Asset  Retirement  Obligations",  which  addresses
financial   accounting  and  reporting  for  obligations   associated  with  the
retirement of tangible  long-lived  assets and the associated  asset  retirement
costs.  FAS 143 is effective  for financial  statements  issued for fiscal years
beginning  after  June 15,  2002,  the  adoption  of which  is not  expected  to
materially affect FIC's results of operations, liquidity or financial position.

During 2001, the FASB issued Statement of Financial Accounting Standard No. 144,
"Accounting for Impairment or Disposal of Long-Lived  Assets" (FAS 144). FAS 144
supersedes  Statement of Financial  Accounting Standard No. 121, "Accounting for
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of"
(FAS 121) and amends Accounting  Principles  Bulletin Opinion No. 30, "Reporting
Results of  Operations  -  Reporting  the  Effects of Disposal of a Segment of a
Business  and  Extraordinary,  Unusual  and  Infrequently  Occurring  Events and
Transactions"  (APB  30) and  Accounting  Research  Bulletin  No.  51  (ARB  51)
"Consolidated  Financial  Statements".  FAS 144 is  effective  for fiscal  years
beginning  after  December 15, 2001.  The adoption of FAS 144 did not materially
affect FIC's results of operations, liquidity or financial position.

In May 2002, the FASB issued Statement of Financial Accounting Standards No. 145
(FAS  145),  "Rescission  of FAS Nos.  4, 44, and 64,  Amendment  of FAS 13, and
Technical  Corrections as of April 2002." This Statement rescinds FASB Statement
No. 4, Reporting Gains and Losses from  Extinguishment of Debt, and an amendment
of that  Statement,  FASB  Statement  No.  64,  Extinguishments  of Debt Made to
Satisfy  Sinking-Fund  Requirements.  This  Statement also amends other existing
authoritative  pronouncements  to make various  technical  corrections,  clarify
meanings,  or describe their applicability under changed conditions.  FAS 145 is
effective for financial  statements  issued for fiscal years beginning after May
15, 2002, and is not expected to affect FIC's results of  operations,  liquidity
or financial position.

The AICPA also  recently  issued  Statement of Position No. 01-06 ("SOP  01-06")
"Accounting by Certain Entities (Including Entities with Trade Receivables) That
Lend to or Finance the Activities of Others." The guidance in SOP 01-06 relating
to  financing  and lending  activities  is  explicitly  applicable  to insurance
companies.  SOP 01-06  reconciles  and conforms  the  accounting  and  financial
reporting guidance presently contained in other accounting  guidance.  SOP 01-06
is effective for financial  statements  issued for fiscal years  beginning after
December 15, 2001. The Company's accounting practices for its lending activities
are already consistent with the guidance contained in SOP 01-06. The adoption of
SOP  01-06  did  not  have  a  significant  effect  on the  Company's  financial
statements.


                                     - 16 -



<PAGE>



In June 2002, the FASB issued  Statement of Financial  Accounting  Standards No.
146  ("FAS  146"),  "Accounting  for  Costs  Associated  with  Exit or  Disposal
Activities,"  which  addresses  financial  accounting  and  reporting  for costs
associated with exit or disposal  activities and nullifies  Emerging Issues Task
Force  (EITF)  Issue No.  94-3,  "Liability  Recognition  for  Certain  Employee
Termination  Benefits  and Other  Costs to Exit an Activity  (including  Certain
Costs Incurred in a  Restructuring)."  FAS 146 is effective for exit or disposal
activities  that are initiated after December 31, 2002, the adoption of which is
not expected to  materially  affect FIC's  results of  operations,  liquidity or
financial position.

Restatement of Form 10Q for period ending June 30, 2002

During the quarter ended  September  30, 2002,  the Company  identified  certain
death benefit expenses incurred during the quarter ended June 30, 2002 that were
not  recorded  until the quarter  ended  September  30, 2002 due to an interface
error between the Company's policy administration system and its  general ledger
as well as certain surrender benefits expenses incurred during the quarter ended
June 30, 2002 that were not recorded until the quarter ended September 30, 2002.

The June 30, 2002 financial  statements  included in the  previously  filed Form
10-Q for the three and six months  ended June 30, 2002 will be restated as shown
in the table below to correct the above errors and reflect the related effect of
income  taxes.  The Company will file an amended Form 10-Q for the three and six
months ended June 30, 2002 to reflect these restatements.

                                        As Reported             As Restated

Other liabilities                       $10,467,000             $11,365,000

                                          3 month ended June 30, 2002

Policyholder benefits and expenses      $ 9,739,000             $11,121,000

Provision for federal income taxes      $   860,000             $   376,000

Net income                              $ 1,113,000             $   215,000

Basic earnings per share                $      0.12             $      0.02

Diluted earnings per share              $      0.12             $      0.02

                                            6 month ended June 30, 2002

Policyholder benefits and expenses      $20,023,000             $21,405,000

Provision for federal income taxes      $ 1,793,000             $ 1,309,000

Net income before cumulative
 effect of change in accounting
 principle                              $ 2,269,000             $ 1,371,000

  Basic earnings per share              $      0.24             $      0.14

  Diluted earnings per share            $      0.24             $      0.14

Cumulative effect of change in
  accounting principle                  $15,727,000             $15,727,000

  Basic earnings per share              $      1.65             $      1.65

  Diluted earnings per share            $      1.64             $      1.64

Net income                              $17,996,000             $17,098,000

  Basic earnings per share              $      1.89             $      1.80

  Diluted earnings per share            $      1.88             $      1.78


                                     - 17 -



<PAGE>



Item 2. Management's Discussion and Analysis of Financial Conditions and Results
        of Operations

The  following  discussion  addresses  the  financial  condition  of  FIC  as of
September  30,  2002,  compared  with  December  31,  2001,  and its  results of
operations for the three and nine months ended September 30, 2002, compared with
the same period last year.  This discussion  should be read in conjunction  with
Management's Discussion and Analysis included in FIC's 10-K dated April 1, 2002,
to which the reader is directed for additional information.

          Transactions Affecting Comparability of Results of Operations

On May 18, 2001,  pursuant to an Agreement  and Plan of Merger,  as amended (the
"Merger Agreement"),  dated as of January 17, 2001, among FIC,  InterContinental
Life Corporation ("ILCO"), and ILCO Acquisition Company, a Texas corporation and
wholly-owned  subsidiary of FIC ("Merger  Sub"),  Merger Sub was merged with and
into ILCO (the "Merger").  ILCO was the surviving  corporation of the Merger and
became  a  wholly-owned  subsidiary  of  FIC.  In  accordance  with  the  Merger
Agreement,  FIC  issued 1.1 shares of common  stock,  par value  $0.20 per share
("FIC Common Stock"), for each share of common stock, par value $0.22 per share,
of ILCO  outstanding  at the  time  of the  Merger  ("ILCO  Common  Stock").  In
addition,  each share of ILCO Common  Stock  issuable  pursuant  to  outstanding
options was assumed by FIC and became an option to acquire FIC Common Stock with
the number of shares and exercise  price  adjusted for the exchange ratio in the
Merger.  Prior to the merger,  FIC owned  approximately  48.1% of ILCO's  common
stock. Since ILCO was a wholly-owned subsidiary of FIC for the nine month period
ending September 30, 2002, the operations of ILCO are reported on a consolidated
basis with FIC. For the period from January 1, 2001 through May 17, 2001,  FIC's
net income  includes  its equity  interest in the net income of ILCO,  with such
equity interest being based on FIC's  percentage  ownership of ILCO, and for the
period from May 18, 2001 through September 30, 2001, the operations of ILCO were
reported on a consolidated basis with FIC.

      Results of Operations - Nine Months Ended September 30, 2002 and 2001

For the  nine-month  period  ended  September  30,  2002,  Financial  Industries
Corporation's  ("FIC") net income was  $17,995,000  (basic earnings of $1.89 per
common  share,  or diluted  earnings  of $1.87 per common  share) on revenues of
$92,760,000 as compared to net income of $8,655,000 (basic earnings of $1.19 per
common  share,  or diluted  earnings  of $1.18 per common  share) on revenues of
$66,682,000  in the first  nine  months of 2001.  Net  income in the nine  month
period ended  September 30, 2002,  before the  cumulative  effect of a change in
accounting principle,  was $2,268,000 (basic earnings of $0.24 per common share,
or diluted earnings of $0.24 per common share).

Earnings per share for the nine months ended September 30, 2002 were affected by
the increase in the number of FIC's common shares outstanding due to the Merger.
As of September 30, 2002,  the number of FIC's  weighted  average  common shares
outstanding was 9,543,000, as compared to weighted average shares outstanding of
7,261,000 as of September 30, 2001.  The  September  30, 2001  weighted  average
hares  outstanding  takes into  account  the fact that  additional  shares were
issued  on May 18,  2001 due to the  Merger  and were  outstanding  only for the
period from May 18, 2001 to  September  30, 2001.  Additionally,  net income and
earnings  per  share  were  affected  by the  cumulative  effect  of a change in
accounting principle of $15.7 million. This amount represents the excess of fair
value of net assets  acquired  over cost as of the  beginning of 2002 related to
the Merger.  The Company  recorded this  cumulative  effect in conjunction  with
adopting  Statement  of  Financial  Accounting  Standards  No.  141  (FAS  141),
"Business Combinations," in the first quarter of 2002, as required by FAS 141.


                                     - 18 -



<PAGE>



Revenues

Premium revenues reported for traditional life insurance products are recognized
when due.  Premium  income for the first nine months of 2002, net of reinsurance
ceded, was $27.5 million,  as compared to $27.3 million in the first nine months
of 2001.  This source of revenues is related to the  traditional  life insurance
book of business of FIC's insurance  subsidiaries.  The  consolidation of ILCO's
operations contributed approximately $6.9 million to premium income for the nine
month period ended September 30, 2002 and $3.4 million to premium income for the
period from May 18, 2001 to September 30, 2001. At Family Life Insurance Company
("Family  Life",  which has been a subsidiary of FIC for the nine-month  periods
ending  September  30, 2002 and 2001),  first year net  collected  premiums  for
traditional  life insurance  products for the nine month period ending September
30, 2002 were $2.0  million as  compared to $2.7  million for the same period in
2001. The level of renewal premiums for traditional  life insurance  products at
Family  Life for the nine  month  period  ending  September  30,  2002 was $17.9
million,  as compared to $19.8 million for the same period in 2001. The decrease
in renewal  premium is  attributable  to the  decrease in the  traditional  life
insurance book of business.

Income from universal life and annuity charges for the first nine months of 2002
was $31.4 million,  as compared to $17.0 million in the same period of 2001. The
consolidation of ILCO's operations  contributed  approximately  $29.3 million to
earned insurance  charges for the nine month period ended September 30, 2002 and
$14.1  million to earned  insurance  charges for the period from May 18, 2001 to
September 30, 2001. At Family Life,  earned insurance charges declined from $2.6
million in the 2001 nine month period ending  September  30th to $2.2 million in
the 2002 nine month period ending September 30th. This change is attributable to
(i) a decrease in Family Life's  universal life and annuity  business;  and (ii)
reinsuring all of Family Life's new interest  sensitive  products with Investors
Life.  The face amount of Family  Life's in force  universal  life  policies was
$626.6  million at September 30, 2002 as compared to $737.6 million at September
30, 2001.

Net  investment  income for the first nine  months of 2002 was $32.8  million as
compared  to $21.5  million in the same  period of 2001.  The  consolidation  of
ILCO's  operations  contributed  approximately  $28.5 million to net  investment
income for the nine month period ended  September 30, 2002 and $17.4 million for
the period from May 18, 2001 to September  30, 2001.  FIC and its  subsidiaries'
investment  portfolios  were  adversely  affected  by the  decrease in yields on
short-term  investments,  calls in long-term  investments that were subsequently
reinvested in short-term  assets at lower yields,  and reinvestment of assets in
real estate.


                                     - 19 -



<PAGE>



Real estate income is primarily earned from the leases on the buildings at River
Place  Pointe,  an office  complex  in  Austin,  Texas  which is owned and being
developed by  Investors  Life  Insurance  Company of North  America  ("Investors
Life"), a subsidiary of ILCO. Net real estate income, included in net investment
income,  was $4.9 million for the nine month period ended September 30, 2002, as
compared to $2.4 million for the same period in 2001.  ILCO's real estate income
was only included in FIC's income statements from May 18, 2001 through September
30, 2001 for the first nine months of 2001 and for the entire nine month  period
in 2002.

Benefits and Expenses

Policyholder  benefits and expenses  were $32.0 million in the first nine months
of 2002,  as  compared to $19.6  million in the first nine  months of 2001.  The
consolidation  of ILCO's  operations for the nine month period ending  September
30, 2002 contributed  approximately  $24.7 million to policyholder  benefits and
expenses  and  contributed  $10.6  million  for the period  from May 18, 2001 to
September  30, 2001.  At Family  Life,  the level of  policyholder  benefits and
expenses  was $8.8  million for the first nine  months of 2001  compared to $7.0
million for the same period in 2002.

Interest  expense on contract  holders  deposit  funds was $22.5  million in the
first nine months of 2002,  as  compared to $12.1  million in the same period of
the year 2001.  This  increase  is  attributable  to $21.0  million of  interest
expense on contract  holders deposit funds resulting from the  consolidation  of
ILCO's  operations for the nine month period ended September 30, 2002,  compared
to $10.2 million of ILCO's interest  expense for the period from May 18, 2001 to
September 30, 2001.

The expense related to the  amortization of deferred  policy  acquisition  costs
increased by $2.2 million to $6.9 million in the first nine months of 2002, from
$4.7  million in the first nine  months of 2001.  A portion of the  increase  in
amortization  is  attributable  to the  Merger . In the first  quarter  of 2002,
expenses  related to acquiring  new business  were $3.6  million,  of which $2.3
million has been capitalized as deferred policy acquisition costs. In the second
quarter of 2002,  expenses  related to acquiring new business were $3.9 million,
of which $2.7 million has been capitalized as deferred policy acquisition costs.
In the third  quarter of 2002,  expenses  related to acquiring new business were
$4.0 million,  of which $2.8 million has been  capitalized  as deferred  policy
acquisition  costs. The amounts not capitalized in each quarter were recorded as
expenses in the relevant quarter. See "Critical  Accounting  Policies,  Deferred
Policy  Acquisition  Costs and  Present  Value of  Future  Profits  of  Acquired
Business" herein for a further  discussion of capitalization of expenses related
to acquiring new business.


                                     - 20 -



<PAGE>



In the first nine months of 2002,  the  amortization  of present value of future
profits of acquired business was $3.4 million as compared to $2.7 million in the
first nine months of 2001. The consolidation of ILCO's amortization expense with
FIC's contributed  approximately  $1.1 million in the period ended September 30,
2002 and $62 thousand for the period from May 18, 2001 to September 30, 2001.

Operating  expenses  for the first nine  months of 2002 were $24.4  million,  as
compared to $16.6 million in the first nine months of 2001. The consolidation of
ILCO's operations contributed  approximately $14.1 million to operating expenses
for the nine month period ended  September  30, 2002 as compared to $7.5 million
for the period from May 18, 2001 to September  30, 2001.  The level of operating
expenses for the nine month  period  ending  September  30, 2002  included:  (i)
expenses  related  to  acquiring  new  business;  (ii)  $477,234  related to the
repurchase  of James M.  Grace's  employment  contract;  (iii) a donation  of $1
million  to the Roy F. and Joann  Cole  Mitte  Foundation  which was made in the
first quarter of 2002,  as compared to a $375,000  donation in the first quarter
of 2001;  and (iv) $200,000 of costs  incurred due to the  investigation  of the
matters described in the Registrant's  Current Report on Form 8-K filed with the
Securities and Exchange  Commission on August 15, 2002. For a further discussion
of the  repurchase of Mr.  Grace's  employment  contract and the donation to the
Foundation,  see FIC's 10-K for the year ended December 31, 2001, dated April 1,
2002.

Interest  expense  for the first nine months of 2002 was $0, as compared to $0.6
million in the first nine months of 2001.  This  interest  expense is related to
indebtedness  owed to Investors Life by Family Life  Corporation (a wholly owned
subsidiary of FIC) and FIC. The consolidation of ILCO's operations with those of
FIC for the entire nine month period  ending  September  30, 2002 results in the
elimination of this interest expense in the income statements of FIC.

The provision for federal income taxes was $1.2 million in the first nine months
of 2002 as  compared  to $3.1  million  in the first  nine  months of 2001.  The
decrease was due to the $6.9 million  decrease in income (before  federal income
tax,  equity in net earnings of affiliates  and  cumulative  effect of change in
accounting  principle)  for the nine  month  period  ended  September  30,  2002
compared to the nine month period ended  September 30, 2001.  Additionally,  the
Company was able to credit  $350,000 in the third quarter  provision for federal
income  taxes  related to the  compensation  of its former  president  and chief
executive officer,  Roy F. Mitte. In the first two quarters of 2002, the Company
expected to incur federal income taxes related to  non-deductible  compensation.
However,  since Mr. Mitte is not expected to be an executive with the company on
December 31, 2002,  which is the relevant  date for measuring  deductibility  of
compensation under Section 162(m) of the Code, his entire  compensation for 2002
is deductible and thus the Company will not incur the $350,000 in federal income
taxes which had been  reflected in the provision for federal income taxes in the
first and second quarter of 2002.

Equity in Net Income of InterContinental Life Corporation

For the period from  January 1, 2001 to May 17,  2001,  FIC's  equity in the net
earnings of ILCO,  net of federal  income tax, was $1.3  million.  Following the
merger of ILCO with FIC on May 18, 2001,  the results of ILCO were  consolidated
with those of FIC. Accordingly,  there is no equity in net earnings of affiliate
results for the period ended September 30, 2002.


                                     - 21 -



<PAGE>



Prior to the  merger  with ILCO,  FIC owned  3,591,534  shares of ILCO's  common
stock. In addition,  Family Life owned 342,400 shares of ILCO common stock. As a
result, FIC owned, directly and indirectly through Family Life, 3,933,934 shares
(approximately  48.1%) of ILCO's  common stock.  Upon  completion of the merger,
ILCO became a wholly-owned subsidiary of FIC.

          Results of Operations - Three Months Ended September 30, 2002
            as compared to the Three Months Ended September 30, 2001

For the three-month  period ended September 30, 2002,  FIC's net income was $0.9
million (basic earnings of $0.09 per common share and diluted  earnings of $0.09
per common share) on revenues of $30.5 million as compared to net income of $3.5
million (basic earnings of $0.40 per common share and diluted  earnings of $0.40
per common  share) on total  revenues  of $34.0  million in the same three month
period of 2001.  The decrease in net income from September 30, 2001 to September
30, 2002 was primarily attributable to $1.2 million of increased expenses due to
the  acquisition  of new business that was not  capitalized  as deferred  policy
acquisition costs as well as a decrease in investment income of $1.0 million.

                         Liquidity and Capital Resources

Liquidity  describes the ability of a company to generate  sufficient cash flows
to meet  the cash  requirements  of  business  operations.  FIC is an  insurance
holding company whose principal assets consist of the outstanding  capital stock
of its insurance  subsidiaries - Family Life Insurance  Company ("Family Life"),
Investors Life Insurance Company of North America  ("Investors Life"), and prior
to  February   19,   2002,   Investors   Life   Insurance   Company  of  Indiana
("Investors-IN").  Prior  to the  merger  of FIC and ILCO on May 18,  2001,  the
principal  assets  of  FIC  consisted  of the  common  stock  of  its  insurance
subsidiary,  Family  Life - and its  equity  ownership  in  ILCO.  As a  holding
company, FIC's ability to meet its cash requirements,  pay interest on any debt,
pay  expenses  related to its  affairs  and pay  dividends  on its common  stock
substantially depends upon dividends from its subsidiaries.

Prior  to  June  2001,  the  principal  source  of  liquidity  for  FIC  and its
wholly-owned  subsidiary,  Family Life  Corporation,  consisted  of the periodic
payment of principal  and  interest by Family Life  pursuant to the terms of the
surplus  debenture  issued in connection with the Family Life  acquisition  from
Merrill Lynch.  For periods  subsequent to June 30, 2001, FIC's available source
of liquidity  will be  dividends  paid to it from its  subsidiaries.  Applicable
state  insurance laws generally  restrict the ability of insurance  companies to
pay cash dividends in excess of prescribed limitations without prior approval.

The ability of Family Life and Investors  Life to pay  shareholder  dividends is
and will continue to be subject to restrictions  set forth in the insurance laws
and regulations of Washington,  their domiciliary  state.  Washington limits how
and when Family Life and  Investors  Life can pay  shareholder  dividends by (a)
including  the "greater  of" standard for payment of dividends to  shareholders,
(b) requiring  that prior  notification  of a proposed  dividend be given to the
Washington Insurance  Commissioner and (c) requiring that cash dividends 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 the  policyholder
surplus or (ii) the insurer's net gain from  operations  for the previous  year.
Neither  Investors Life nor Family Life paid any dividends during the first nine
months of 2002.  For the nine month period ended  September 30, 2002,  Investors
Life had earned surplus of $48.9 million and a net gain from  operations of $2.9
million,  and Family Life had earned surplus of $3.4 million and a net gain from
operations of $3.1 million.


                                     - 22 -



<PAGE>



Prior to the  merger  of  Investors  Life and  Investors-IN  in  February  2002,
Investors-IN was 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.
Investors-IN did not make any dividend payments in 2002.

Sources of cash for FIC's  insurance  subsidiaries  consist of premium  payments
from  policyholders  and annuity  holders,  charges on policies  and  contracts,
investment income, and proceeds from the sale of investment assets.  These funds
are applied  primarily to provide for the payment of claims under  insurance and
annuity policies, payment of policy withdrawals, surrenders and loans, operating
expenses, taxes, investments in portfolio securities, and shareholder dividends.

FIC's  cash and cash  equivalents  at  September  30,  2002 was $8.0  million as
compared to $7.1  million at December  31, 2001.  Cash and cash  equivalents  at
September 30, 2001 was $12.9 million.

FIC's net cash used in  operating  activities  was ($12.2) million for the nine
month period ending  September 30, 2002, as compared to $6.5 million provided by
operating  activities for the same period in the year 2001. The decrease in cash
provided by operating  activities of $18.7 million from the first nine months of
2001 to the same period in 2002 was  attributable to a decrease in net income of
$4.3  million,  a decrease of $6.3 million in poilcy  liabilities  and accruals,
$2.0 million less cash from due and  deferred  premiums,  $1.6 million less of a
decrease in agent advances and other receivables, and a $3.4 million increase in
other assets.

Net cash flow  provided by  investing  activities  was $8.7  million in the nine
month period ending  September 30, 2002, as compared to $1.1 million in the same
period of 2001. The cash used in investing activities was positively affected by
an increase in proceeds  from sales and  maturities  of fixed  maturities.  This
amount  was  offset  by  reinvestment  of  the  sale  proceeds  into  short-term
investments and purchase of other fixed maturities.

Net cash flow  provided by  financing  activities  was $4.5 million in the first
nine months of 2002,  as  compared  to $2.5  million in the first nine months of
2001.  The $2.0 million  increase in cash  provided by financing  activities  is
primarily  due to less cash  dividends  paid to  stockholders  in the first nine
months of 2002 as compared to the first nine months of 2001.


                                     - 23 -



<PAGE>



The cash  requirements of FIC, and its holding company  subsidiary,  Family Life
Corporation,  consist  primarily of its service of the  indebtedness  created in
connection  with FIC's  ownership of Family Life. As of September 30, 2002,  the
investment   portfolio  of  Investors  Life  included  $24.6  million  of  notes
receivable  from  affiliates,  represented  by (i) a  loan  of  $30  million  by
Investors Life to Family Life  Corporation made in July 1993, in connection with
the prepayment of indebtedness which had been previously issued to Merrill Lynch
as  part  of  the  1991  acquisition  of  Family  Life  Insurance  Company  by a
wholly-owned  subsidiary  of FIC,  and (ii) a loan of $4.5  million by Investors
Life  to  Family  Life  Insurance  Investment  Company  made in  July  1993,  in
connection with the same transaction described above.

The  provisions  of the notes owned by  Investors  Life  include  the  following
provisions:  (a) the $30 million note provides for quarterly principal payments,
in the amount of $163,540 each for the period December 12, 1996 to September 12,
2001;  beginning with the principal payment due on December 12, 2001, the amount
of the principal payment increases to $1,336,458;  the final quarterly principal
payment is due on September  12, 2006;  the interest rate on the note remains at
9%, and (b) the $4.5 million note provides for quarterly principal payments,  in
the amount of $24,531 each for the period  December  12, 1996 to  September  12,
2001;  beginning with the principal payment due on December 12, 2001, the amount
of the principal  payment increases to $200,469;  the final quarterly  principal
payment is due on September  12, 2006;  the interest rate on the note remains at
9%.

Due to the Merger,  this  indebtedness  is not  included  as a liability  on the
consolidated  financial  statements of FIC. FIC's other  liquidity  requirements
relate principally to the need for cash flow to meet operating expenses, as well
as the  liabilities  associated  with its insurance  subsidiaries'  various life
insurance and annuity products.

Additionally,  in  2002  and  2001,  FIC  has  used  cash  to pay  dividends  to
shareholders.  In May, 2001, the Board of Directors approved a policy pertaining
to the payment of  dividends  to the  shareholders  of the  Company  whereby the
Company will endeavor to declare and pay, on a semi-annual  basis, a dividend on
the common  stock of the  Company so as to  provide to the  shareholders  of the
Company an  annualized  yield of  approximately  3% on the  market  value of the
common  stock of the Company at the time of the  declaration  of such  dividend.
Based on this policy, a dividend of $0.23 per share was paid on June 21, 2002 to
shareholders  of record on June 7, 2002.  The total amount of cash that FIC paid
to  shareholders  for the June 21, 2002  dividend  was  $2,207,000.  There is no
guarantee that FIC will continue to pay a cash dividend to shareholders.

Given the historical  cash flow of our  subsidiaries  and the current  financial
results,  management  believes that the cash,  cash  equivalents  and short term
investments of FIC and its  subsidiaries are sufficient to meet the needs of its
business and to satisfy debt service.  There are no commitments or capital asset
requirements  that are  expected to have an adverse  effect on the  liquidity of
FIC.


                                      - 24 -



<PAGE>



                                   Investments

As of September 30, 2002, FIC's invested assets,  excluding  separate  accounts,
totaled $756.0 million,  compared to $756.3 million at December 31, 2001. During
the nine-month  period from December 31, 2001 to September 30, 2002,  short-term
investments  increased by $34.4  million and invested  real estate  increased by
$10.2 million.  These increases were offset by a $38.0 million decrease in fixed
maturities.

The assets held by Family Life and  Investors  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". FIC determines
the  allocation  of our  assets  primarily  on the basis of cash flow and return
requirements of our products and secondarily by the level of investment risk.

A key element of the Company's investment strategy is to avoid large exposure in
other  investment  categories  which the Company believes carry higher credit or
liquidity   risks,   including   private   placements,   partnerships  and  bank
participations.  These categories  accounted for only $31,051 of invested assets
as of September 30, 2002 and $45,479 of invested assets at December 31, 2001.

Our fixed maturity securities portfolio is predominately  comprised of low risk,
investment  grade,  available for sale  publicly  traded  corporate  securities,
mortgage-backed  securities and United States  Government bonds. As of September
30, 2002,  the market value of the fixed  maturities  available for sale segment
was $463.3  million as compared  to an  amortized  cost of $449.2  million or an
unrealized gain of $14.1 million. The increase reflects unrealized gains on such
investments  related to changes in interest rates  subsequent to the purchase of
such investments. At December 31, 2001, the market value of the fixed maturities
available for sale segment was $501.4  million as compared to an amortized  cost
of $496.7  million.  The $38.1 million  decline in the market value of the fixed
maturities  available  for sale from  December 31, 2001 to September 30, 2002 is
attributable  to calls on  long-term  fixed  maturities  that were  subsequently
reinvested in short-term assets.


                                     - 25 -



<PAGE>



The investments of FIC's insurance  subsidiaries in  mortgage-backed  securities
included  collateralized  mortgage  obligations ("CMOs") of $153.3 million as of
September  30, 2002 as compared to $210.0  million at  December  31,  2001,  and
mortgage-backed  pass-through  securities  of $22.4  million as of September 30,
2002 and $32.7  million  at  December  31,  2001.  Mortgage-backed  pass-through
securities,  sequential CMO's and support bonds,  which comprised  approximately
31.3% of the market value of FIC's  mortgage-backed  securities at September 30,
2002,  are  sensitive  to  prepayment  and  extension  risks.   FIC's  insurance
subsidiaries   have   reduced   the   risk   of   prepayment   associated   with
mortgage-backedsecurities  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, 2002,  PAC and TAC
instruments and scheduled bonds  represented  approximately  43.2% of the market
value  of FIC's  mortgage-backed  securities.  Sequential  and  support  classes
represented  approximately  16.7% of the market  value of FIC's  mortgage-backed
securities  at September  30, 2002. In addition,  FIC's  insurance  subsidiaries
limit the risk of prepayment of CMOs by not paying a premium for any CMOs. FIC's
insurance  subsidiaries  do  not  invest  in  mortgage-backed   securities  with
increased   prepayment  risk,  such  as  interest-only   stripped   pass-through
securities and inverse floater bonds. FIC's insurance  subsidiaries did not have
any z-accrual  bonds as of September 30, 2002. 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.  For the year 2002, the
investment  objectives  of FIC's  insurance  subsidiaries  include the making of
selected investments in CMOs.

The securities  valuation office (SVO) of the National  Association of Insurance
Commissioners evaluates all public and private bonds purchased as investments by
insurance  companies.  The SVO assigns one of six investment  categories to each
security it reviews. Category 1 is the highest quality rating, and Category 6 is
the lowest.  As of September 30, 2002,  the majority of our bonds are investment
grade (Category 1 and 2). The Company's fixed  maturities  portfolio  (including
short-term investments), included only a non- material amount of debt securities
which,  in the annual  statements of the companies as filed with state insurance
departments,  were  designated  by the SVO as "3"  (medium  quality)  or  below.

FIC's short-term  investments  consist  primarily of U.S.  Government bonds. The
level of short-term  investments  at September 30, 2002 was $172.7  million,  as
compared to $138.3 million as of December 31, 2001.  The $34.4 million  increase
in short-term  investments was due to the maturity of medium and long-term bonds
which were reinvested in short-term assets.


                                     - 26 -



<PAGE>



Invested  real estate at  September  30,  2002 was $71.2  million as compared to
$61.0  million at December 31,  2001.  The real estate  investment  is primarily
related to the  development  of the River Place  Pointe  project  ("River  Place
Pointe") by Investors  Life. In October 1998,  Investors  Life  purchased  River
Place Pointe, which consisted of two adjoining tracts of land located in Austin,
Texas,  totaling 47.995 acres. The aggregate purchase price for these tracts was
$8.1 million.  Investors Life obtained a Site Development  Permit for the tracts
from the City of Austin allowing for the  construction of seven office buildings
totaling  600,000  square  feet,  with  associated  parking,  drives and related
improvements.  Construction on the first section of the Project,  which consists
of  four  office   buildings,   an  associated   parking  garage,   and  related
infrastructure  was completed  during 2000 and 2001.  Construction on the second
section  continued  during  the first  nine  months of 2002,  including  work on
buildings  five,  six and seven.  Building five was completed  during the second
quarter of 2002,  building six was  completed  during the third quarter of 2002,
and completion of the remainder of the project is expected by the end of 2002.

As of September  30, 2002,  Investors  Life had  invested  $92.4 million  in the
construction of River Place Pointe,  of which $19.8 million is recorded on FIC's
balance sheet as real estate occupied by the Company.  Investors Life paid $11.4
million during the first nine months of 2002 on  construction of the project and
expects  to pay an  additional  $1.8  million to  complete  the  project.  As of
September 30, 2002,  302,589 rentable square feet of office space was leased and
214,731 rentable square feet was available for lease. Upon the completion of the
remainder of the project, which includes one more office building, there will be
66,951  additional  rentable  square feet available for lease.  According to the
Federal Deposit  Insurance  Corporation's  ("FDIC") National Edition of Regional
Outlook,  Second  Quarter,  2002,  the Austin  office market posted the nation's
greatest  increase in office vacancy rate (15.2  percentage  points) from first-
quarter 2001 to  first-quarter  2002, and, at 23.3 percent,  ranks second in the
country.  Additionally,  the FDIC report states that sublease space in Austin is
nearly 3.5 million  square feet,  or 44 percent of the metro area's total vacant
space, and will remain an obstacle to on the recovery of Austin's office market.

As of September  30,  2002,  only  $73,000 was  invested in mortgage  loans,  as
compared to $4.7  million at December  31,  2001.  The Company does not make new
mortgage  loans on commercial  properties.  All of the Company's  mortgage loans
were made by its  subsidiaries  prior to their  acquisition  by the Company.  At
September 30, 2002, none of the mortgage loans held by the Company had defaulted
as to  principal or interest  for more than 90 days,  and none of the  Company's
mortgage  loans were in  foreclosure.  The decrease in mortgage loans was due to
the pay off of two mortgage  loans during the third quarter of 2002. The Company
participated  with a third  party  in two  mortgage  loans  in New  York  state,
Champlain  Centre  Mall and Salmon Run Mall,  with a total  balance  due of $4.6
million at June 30,  2002.  On June 18, 2002,  the Company  agreed to a proposed
payoff of these loans at a discount.  The borrower paid off the loans in August,
2002, with a payment of $3.6 million.  The Company reduced the carrying value of
the two  loans  by $1.0  million  as of June  30,  2002 as an  impairment  of an
invested asset.

Policy loans  totaled  $47.6 million at September 30, 2002, as compared to $49.8
million at December 31, 2001.

Management  believes that the absence of "high-yield" or "non-investment  grade"
investments  (as  defined  above)  in the  portfolios  of FIC's  life  insurance
subsidiaries  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.


                                     - 27 -



<PAGE>



                          Critical Accounting Policies

The  financial  statements  contain  a  summary  of  FIC's  critical  accounting
policies,  including a discussion of recently-issued  accounting pronouncements.
Certain of these  policies are  considered  to be important to the  portrayal of
FIC's  financial  condition,  since they require  management to make  difficult,
complex or  subjective  judgments,  some of which may relate to matters that are
inherently  uncertain.  These policies  include  valuation of : investments  and
deferred  acquisition  costs and present value of future  profits.  For the nine
month period  ended  September  30,  2002,  the  Company's  critical  accounting
policies also included the cumulative effect of accounting changes regarding the
goodwill acquired from the merger with ILCO.

Cumulative Effect of Accounting  Changes.  During the first quarter of 2002, the
Company  adopted  Statement of Financial  Accounting  Standards  (SFAS) No. 141,
"Business  Combinations." SFAS No. 141 eliminates the practice of amortizing and
deferring  excess of fair value of net assets  acquired  over cost and  requires
unallocated negative goodwill to be recognized  immediately.  In accordance with
the standard,  FIC ceased negative goodwill  amortization on January 1, 2002 and
recognized  the  unamortized  balance  of $15.7  million  of  negative  goodwill
acquired in the Merger.

Investments.  The  Company's  investments  primarily  consist of fixed  maturity
securities,  which include bonds,  notes and redeemable  preferred stocks.  Fair
values of investments  in fixed  securities are based on quoted market prices or
dealer quotes.  Fixed  maturities are classified as "available for sale" and are
reported at fair value,  with  unrealized  investment  gains and losses,  net of
income taxes,  credited or charged directly to shareholder's  equity.  Generally
accepted accounting  principles require that investments be written down to fair
value when  declines in value are  considered  other than  temporary.  When such
impairments occur, the decrease in value is reported in net income as a realized
investment loss and a new cost basis is established.

Deferred  Policy  Acquisition  Costs  and  Present  Value of Future  Profits  of
Acquired Business. The costs of acquiring new business,  including certain costs
of issuing  policies and certain other variable  selling  expenses  (principally
commissions),  are deferred policy acquisition costs ("DAC"). DAC is capitalized
and then amortized to reflect an expense in relation to the projected  stream of
profits (for universal life and annuity products) or to the premium revenue (for
traditional life products). Such projections require use of certain assumptions,
including interest margins,  product loads, mortality rates,  persistency rates,
and maintenance expense levels. Effective with respect to new business issued on
and after January 1, 2002, the Company has  capitalized  DAC based on an updated
analysis of its cost structure and  assumptions as to product  performance.  For
business  written  previously,  DAC is amortized  using  previously  established
methods  and  practices.   Management   periodically   reviews  the  assumptions
associated with the amortization models prospectively.


                                     - 28 -



<PAGE>



Present  value of future  profits of acquired  business  ("PVFP")  are the costs
associated  with acquiring  blocks of insurance from other  companies or through
the  acquisition  of other  companies.  PVFP is  capitalized  and amortized in a
manner that matches these costs against the associated revenues.

From the  period of  January  1, 2001  through  May 18,  2001,  FIC's net income
includes  its  equity  interest  in the net  income of ILCO,  with  such  equity
interest being based on FIC's percentage ownership of ILCO.

For a further discussion of accounting standards,  refer to the discussion under
the caption New Accounting Pronouncements herein.

                               Subsequent Events

Appointment of President, Chief Executive Officer and Chairman of the Board

On November 4, 2002,  FIC's Board of  Directors  elected  Eugene E. Payne as the
Company's new President, Chief Executive Officer, and Chairman of the Board. The
appointment was effective immediately. Payne had been acting as Interim Chairman
of the Board since August 27, 2002. He took over the CEO  responsibilities  from
Interim CEO,  Thomas C.  Richmond.  Mr.  Richmond  continues in his role as Vice
President-Operations and Secretary of the Company.

Termination of Roy F. Mitte's Employment Contract

Effective  as of October 31,  2002,  FIC's  Board of  Directors  terminated  the
employment  agreement between the Company and Roy F. Mitte, the former Chairman,
President,  Chief Executive  Officer of the Company.  The Company has designated
Mr. Mitte as Chairman  Emeritus.  Mr. Mitte will  continue as an employee of the
Registrant in the newly created position of Chairman Emeritus. His salary is set
at the same annual rate which  non-employee  directors of the Registrant receive
for service on the Board,  and he shall be entitled to certain  employee medical
and life insurance benefits.

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 "Management's Discussion and Analysis of Financial Condition and Operations -
Investments".


                                     - 29 -



<PAGE>



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 that 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 that 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. The Company does not use derivative financial instruments.

     Interest  Rate Risk The Company  manages the interest rate risk inherent in
our assets  relative to the  interest  rate risk  inherent  in our  liabilities.
Generally,  we manage  interest rate risk based on the application of a commonly
used model. The model projects the impact of interest rate changes on a range of
factors,  including duration and potential prepayment.  For example, 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 $20.0 million at September 30, 2002
and $24.6 million at December 31, 2001. For purposes of the foregoing  estimate,
fixed maturities and short-term  investments were taken into account. The market
value of such assets was $637.0 million at September 30, 2002 and $640.7 million
at December 31, 2001.

The fixed income  investments  of the Company  include  certain  mortgage-backed
securities.  The market value of such securities was $153.3 million at September
30, 2002 and $209.9 million at December 31, 2001. Assuming an immediate increase
of 100 basis points in interest  rates,  the net  hypothetical  loss in the fair
market value related to such mortgage-backed  securities is estimated to be $1.4
million at September 30, 2002 and $6.7 million at December 31, 2001.

Separate account assets have not been included,  since gains and losses on those
assets generally accrue to the policyholders.

The Company does not use derivative financial instruments to manage our exposure
to fluctuations in interest rates.

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.


                                     - 30 -



<PAGE>



Item 4. Controls and Procedures

(a) The chief executive  officer and chief financial officer of the Company have
evaluated the effectiveness of the Company's  disclosure controls and procedures
pursuant to Rule 13a-14 under the  Securities  Exchange Act of 1934 as of a date
within  90  days  prior  to the  filing  date  of  this  report.  Based  on that
evaluation,  such officers have concluded that the Company's disclosure controls
and procedures,  as modified following implementation of the procedure described
in paragraph  (b),  below,  are  effective to ensure that  material  information
relating to the Company and its subsidiaries is made known to such officers in a
timely manner for inclusion in the Company's periodic filings with the SEC.

(b) In  connection  with the  preparation  of its financial  statements  for the
quarter ended September 30, 2002, the Company  identified  certain  transactions
that occurred in the quarter  ended June 30, 2002,  but were not recorded in the
financial  results for that  period.  These  accounting  errors  relate to death
benefits for a relatively new annuity product line. The errors were inadvertent,
unintentional and were due to a failure in the mechanical  interface between the
Company's  policy  administration  system and the general  ledger system used to
record consolidated  transactions for GAAP reporting purposes. The effect on the
financial  statements  for the quarter  ended June 30, 2002  resulting  from the
correction of these errors is described in the notes to the financial statements
included in this Report.

As a result  of the  identification  of these  accounting  errors,  the  Company
initiated  and completed a review of all product  lines,  to assure that benefit
payments were properly recorded for the current period. The Company intends that
this manual  review  will be  continued  on at least a  quarterly  basis until a
resolution of the mechanical  interface  system is implemented and tested.  This
modification,  when  implemented,  would  eliminate the need for a manual review
procedure to assure the proper recording of benefit payments.

Except as described  above,  there were no significant  changes in the Company's
internal  controls or in other  factors  that could  significantly  affect these
controls subsequent to the date of their most recent evaluation by the Company's
chief executive officer and chief financial officer.

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  on the
financial statements.


                                     - 31 -



<PAGE>



Litigation  Relating to the FIC/ ILCO Merger.  On the day that FIC and ILCO each
publicly  announced the formation of a special committee to evaluate a potential
merger,  two class action lawsuits were filed against ILCO, FIC and the officers
and  directors  of ILCO.  The actions  allege that a cash  consideration  in the
proposed merger is unfair to the shareholders of ILCO, that it would prevent the
ILCO  shareholders  from  realizing the true value of ILCO, and that FIC and the
named officers and directors had material conflicts of interest in approving the
transaction.  In their initial pleadings, the plaintiffs sought certification of
the cases as class actions and the named  plaintiffs  as class  representatives,
and  among  other  relief,  requested  that  the  merger  be  enjoined  (or,  if
consummated,  rescinded  and set aside) and that the  defendants  account to the
class members for their damages.  The  defendants  believe that the lawsuits are
without  merit and intend to  vigorously  contest the  lawsuits.  Management  is
unable to  determine  the  impact,  if any,  that the  lawsuits  may have on the
results of operations of the Company.

Other  Litigation.  Additionally,  FIC's  insurance  subsidiaries  are regularly
involved in  litigation,  both as a defendant and as plaintiff.  The  litigation
naming  the  insurance   subsidiaries  as  defendant   ordinarily  involves  our
activities as a provider of insurance protection  products.  Management does not
believe that such litigation, either individually or in the aggregate, will have
a material  adverse  effect on the Company's  business,  financial  condition or
results of operations.


                                     - 32 -



<PAGE>



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.


                                     - 33 -



<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, 2001  heretofore  filed by Registrant with the Securities and
               Exchange Commission, which is hereby incorporated by reference.

               Material Contracts - Relating to Management Compensation Plans or
               Arrangements

               10.31 Employment  Agreement between  Registrant and Dr. Eugene E.
               Payne dated as of  November 4, 2002 and  ratified by the Board of
               Directors on November 4, 2002.

               10.32 Financial  Industries  Corporation  Equity  Incentive Plan,
               dated November 4, 2002.

         (b)   Reports on Form 8-K:

               (i) On August 28, 2002, the Registrant  filed a Current Report on
               Form 8-K. The current report  pertained to the filing,  on August
               26,  2002,  of FIC's Form 10-Q for the period ended June 30, 2002
               (the "Form  10-Q"),  which had been due on August 14,  2002.  FIC
               reported  that as a result of the late  filing,  the  Company had
               received  a  Nasdaq  Staff   Determination  on  August  20,  2002
               indicating  that since Nasdaq had not received the Company's Form
               10-Q  for  the  period   ended  June  30,  2002  as  required  by
               Marketplace Rule 4310(c)(14),  the Company's  securities would be
               delisted  from the Nasdaq Stock Market at the opening of business
               on August 28,  2002  unless the  Company  requested  a hearing in
               accordance  with the  Marketplace  Rules. As a result of the late
               filing,  the trading  symbol for the  Company's  securities  were
               changed  from FNIN to FNINE at the  opening of business on August
               23, 2002.

               The Form 8-K  further  reported  that on  August  27,  2002,  FIC
               received a letter from Nasdaq stating that based on the filing of
               the  Form  10-Q,  FIC  is in  compliance  with  Marketplace  Rule
               4310(c)(14) and the delisting matter has been closed. As a result
               of FIC's compliance with the  aforementioned  Rule, the Company's
               trading symbol was changed from FNINE back to FNIN at the opening
               of business on August 29, 2002.


                                     - 34 -



<PAGE>



               (ii) On November 6, 2002, the  Registrant  filed a Current Report
               on Form 8-K. The current report  pertained to the  appointment of
               Dr.  Eugene  Payne  as  the  Registrant's  new  President,  Chief
               Executive  Officer,  and Chairman of the Board.  The 8-K reported
               that Dr.  Payne had been acting as Interim  Chairman of the Board
               since  August 27,  2002.  He takes over the CEO  responsibilities
               from Interim CEO, Thomas C. Richmond.  Mr. Richmond will continue
               in his role as Vice President-Operations and Secretary.

               The Form 8-K  further  reported  that  the  employment  agreement
               between the  Registrant  and Roy F. Mitte,  the former  Chairman,
               President,  Chief  Executive  Officer,  was terminated  effective
               October  31,  2002.  While  the  employment  agreement  has  been
               terminated,  the employment of Mr. Mitte has not been terminated.
               He will  continue as an employee of the  Registrant  in the newly
               created position of Chairman  Emeritus.  His salary is set at the
               same annual rate which  non-employee  directors of the Registrant
               receive  for  service on the Board,  and he shall be  entitled to
               certain employee medical and life insurance benefits.


                                     - 35 -



<PAGE>



                                    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


________________________________                ________________________________
Eugene E. Payne                                 Jeffrey Demgen
Chief Executive Officer                         Vice-President &
                                                  Chief Financial Officer


Date: November 14, 2002


                                      - 36 -



<PAGE>



                                  CERTIFICATION

I, Eugene E. Payne, Chief Executive Officer of Financial Industries  Corporation
("FIC"), certify that:

1. I have reviewed this quarterly report on Form 10-Q of FIC;

2. Based on my  knowledge,  this  quarterly  report  does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made, not  misleading  with respect to the period covered by this quarterly
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included in this quarterly  report,  fairly present in all material
respects the financial  condition,  results of operations  and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;

4.  The  Registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

     a) designed such disclosure controls and procedures to ensure that material
     information   relating  to  the  Registrant,   including  its  consolidated
     subsidiaries,  is  made  known  to  us by  others  within  those  entities,
     particularly  during  the period in which  this  quarterly  report is being
     prepared;

     b) evaluated the effectiveness of the Registrant's  disclosure controls and
     procedures  as of a date  within 90 days prior to the  filing  date of this
     quarterly report (the "Evaluation Date"); and

     c)  presented  in  this  quarterly   report  our   conclusions   about  the
     effectiveness  of the  disclosure  controls  and  procedures  based  on our
     evaluation as of the Evaluation Date;

5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):

     a) all  significant  deficiencies  in the design or  operation  of internal
     controls which could adversely affect the  Registrant's  ability to record,
     process,  summarize and report  financial data and have  identified for the
     Registrant's auditors any material weaknesses in internal controls; and

     b) any fraud,  whether or not material,  that involves  management or other
     employees  who  have  a  significant  role  in  the  Registrant's  internal
     controls; and


                                     - 37 -



<PAGE>



6. The  Registrant's  other  certifying  officers  and I have  indicated in this
quarterly  report  whether or not there  were  significant  changes in  internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.


Date: November 14, 2002                         By:/s/ Eugene E. Payne

                                                   Eugene E. Payne
                                                   Chief Executive Officer




                                     - 38 -



<PAGE>



                                  CERTIFICATION

I,  Jeffrey  H.  Demgen,   Chief  Executive  Officer  of  Financial   Industries
Corporation ("FIC"), certify that:

1. I have reviewed this quarterly report on Form 10-Q of FIC;

2. Based on my  knowledge,  this  quarterly  report  does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made, not  misleading  with respect to the period covered by this quarterly
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included in this quarterly  report,  fairly present in all material
respects the financial  condition,  results of operations  and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;

4.  The  Registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

     a) designed such disclosure controls and procedures to ensure that material
     information   relating  to  the  Registrant,   including  its  consolidated
     subsidiaries,  is  made  known  to  us by  others  within  those  entities,
     particularly  during  the period in which  this  quarterly  report is being
     prepared;

     b) evaluated the effectiveness of the Registrant's  disclosure controls and
     procedures  as of a date  within 90 days prior to the  filing  date of this
     quarterly report (the "Evaluation Date"); and

     c)  presented  in  this  quarterly   report  our   conclusions   about  the
     effectiveness  of the  disclosure  controls  and  procedures  based  on our
     evaluation as of the Evaluation Date;

5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):

     a) all  significant  deficiencies  in the design or  operation  of internal
     controls which could adversely affect the  Registrant's  ability to record,
     process,  summarize and report  financial data and have  identified for the
     Registrant's auditors any material weaknesses in internal controls; and

     b) any fraud,  whether or not material,  that involves  management or other
     employees  who  have  a  significant  role  in  the  Registrant's  internal
     controls; and


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<PAGE>



6. The  Registrant's  other  certifying  officers  and I have  indicated in this
quarterly  report  whether or not there  were  significant  changes in  internal
controls or in other factors that could  significantly  affect internal controls
subsequent to the date of our most recent  evaluation,  including any corrective
actions with regard to significant deficiencies and material weaknesses.


Date: November 14, 2002                         By:/s/ Jeffrey H. Demgen

                                                   Jeffrey H. Demgen
                                                   Chief Financial Officer


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<PAGE>



                                  EXHIBIT 10.31

                              EMPLOYMENT AGREEMENT

     This EMPLOYMENT  AGREEMENT (the  "Agreement")  dated as of November 4, 2002
("Agreement  Date") by and between  Financial  Industries  Corporation,  a Texas
company  ("Company"),  and Eugene E. Payne  ("Executive"),  a resident of Texas.
Executive is currently  serving as Interim Chairman of the Board of Directors of
the Company. The parties desire to enter into this Agreement,  which is intended
to  more  fully  embody  the  agreement  among  the  parties  as to  Executive's
employment.  In consideration of the mutual  agreements  contained  herein,  the
Company and Executive agree as follows:

                                   ARTICLE I.

                                   DEFINITIONS

The terms set forth  below have the  following  meanings  (such  meanings  to be
applicable  to both the  singular  and  plural  forms,  except  where  otherwise
expressly indicated):

     1.1 "Accrued  Annual Bonus" means the amount of any Annual Bonus earned but
     not yet paid with  respect  to any Fiscal  Year ended  prior to the Date of
     Termination.

     1.2 "Accrued Base Salary" means the amount of Executive's Base Salary which
     is accrued but not yet paid as of the Date of Termination.

     1.3 "Affiliate" means any Person that directly or indirectly  controls,  is
     controlled by, is under common control with, a Company. For the purposes of
     this  definition,  the term  "control" when used with respect to any Person
     means  (a) the power to direct or cause  the  direction  of  management  or
     policies  of such  Person,  directly  or  indirectly,  whether  through the
     ownership  of voting  securities,  by  contract  or  otherwise,  or (b) for
     purposes  of Section  1.11 and  Article  VII,  the power  substantially  to
     influence  the direction of strategic  management  policies of such Person,
     and  provided a Company  has a direct or indirect  commercial  relationship
     with such Person,  all as determined by the  Compensation  Committee of the
     Board or its successor.

     1.4  "Agreement"  -- as  defined  in the  introductory  paragraph  of  this
     Agreement.


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<PAGE>



     1.5 "Agreement  Date" -- as defined in the  introductory  paragraph of this
     Agreement.

     1.6 "Anniversary Date" means any annual anniversary of the Agreement Date.

     1.7 "Annual Bonus" -- as described in Section 4.2.

     1.8 "Base Salary" -- as described in Section 4.1.

     1.9 "Beneficiary" -- as defined in Section 8.36.

     1.10 "Board"  means the Board of  Directors  of Company  unless the context
     indicates otherwise.

     1.11 "Cause" means any of the following:

          (a)  Executive's  conviction  of,  plea of guilty  to, or plea of nolo
          contendere to a felony or  misdemeanor  (other than a  traffic-related
          felony  or  misdemeanor)  that  involves  fraud,  dishonesty  or moral
          turpitude,

          (b) any willful  action by Executive  resulting in criminal,  civil or
          internal  Company  conviction,  sanction or judgment  under Federal or
          State workplace  harassment or discrimination laws or internal Company
          workplace  harassment,  discrimination or other workplace policy under
          which such  action  could be and could  reasonably  be  expected to be
          grounds for  immediate  termination  of a member of Senior  Management
          (other than mere failure to meet  performance  goals,  objectives,  or
          measures),

          (c)  Executive's  willful  and  intentional  material  breach  of this
          Agreement,

          (d) Executive's habitual neglect of duties, (other than resulting from
          Executive's  incapacity  due to  physical  or  mental  illness)  which
          results  in  substantial  financial  detriment  to the  Company or any
          Affiliate,


                                      - 42 -



<PAGE>



          (e) Executive's  personally  engaging in such conduct as results or is
          likely to result in (i)  substantial  damage to the  reputation of the
          Company  or  any  Affiliate,  as  a  respectable  business,  and  (ii)
          substantial  financial detriment (whether immediately or over time) to
          the Company or any Affiliate,

          (f)  Executive's  willful and intentional  material  misconduct in the
          performance  or gross  negligence  of his duties under this  Agreement
          that results in substantial  financial detriment to the Company or any
          Affiliate,

          (g)  Executive's  intentional  failure  (including a failure caused by
          gross negligence) to cause the Company or any Affiliate to comply with
          applicable law and regulations material to the business of the Company
          which results in substantial financial detriment to the Company or any
          Affiliate, or

          (h)  Executive's  willful  or  intentional  failure  to  comply in all
          material  respects with a specific written direction of the Board that
          is consistent with normal business  practice and not inconsistent with
          this Agreement and Executive's responsibilities hereunder.

For purposes of clauses (c), (d),  (e), (f) and (g) of the  preceding  sentence,
Cause shall not mean the mere  existence or occurrence of any one or more of the
following, and for purposes of clause (h) of the preceding sentence, Cause shall
not mean the mere existence or occurrence of item (iv) below:

          (i) bad judgment,

          (ii) negligence,  other than Executive's habitual neglect of duties or
          gross negligence;

          (iii) any act or  omission  that  Executive  believed in good faith to
          have been in the interest of the Company  (without intent of Executive
          to gain  therefrom,  directly or indirectly,  a profit to which he was
          not legally entitled), or

          (iv)  failure  to meet  performance  goals,  objectives  or  measures;
          provided,  that for purposes of clauses (c),  (d),  (e),  (f), (g) and
          (h), any act or omission  that is curable shall not  constitute  Cause
          unless  the  Company  gives  Executive  written  notice of such act or
          omission that specifically  refers to this Section and, within 10 days
          after such notice is received by  Executive,  Executive  fails to cure
          such act or omission.


                                     - 43 -



<PAGE>



          1.12 "Code" means the Internal  Revenue Code of 1986,  as amended from
          time to time.

          1.13  "Company"   as  defined in the  introductory  paragraph  to this
          Agreement.

          1.14 "Common  Stock" means the common stock of the Company,  par value
          $0.20 per share;

          1.15  "Competitive  Business"  means as of any date any corporation or
          other  Person  (and any  branch,  office or  operation  thereof)  that
          engages in, or proposes to engage in:

               (a) the underwriting,  reinsurance,  marketing or sale of (i) any
               form of  insurance  of any kind that any of the  Companies  as of
               such date does, or has under active  consideration a proposal to,
               underwrite, reinsure, market or sell (any such form of insurance,
               a  "Company  Insurance  Product")  or  (ii)  any  other  form  of
               insurance  that  is  marketed  or sold in  competition  with  any
               Company Insurance Product, or

               (b) any  other  business  that as of such  date is a  direct  and
               material competitor of a Company and its Affiliates to the extent
               that prior to the Date of Termination any of the Companies or its
               Affiliates  engaged at any time  within 12 months in or had under
               active  consideration  a proposal  to engage in such  competitive
               business; and that is located anywhere in the United States where
               such Company or its  Affiliates  is then engaged in, or has under
               active  consideration  a  proposal  to  engage  in,  any of  such
               activities.

     1.16 "Date of  Termination"  means the date of the receipt of the Notice of
     Termination  by  Executive  (if such  Notice  is given by or on  behalf  of
     Company) or by Company (if such Notice is given by Executive), or any later
     date,  not more than 15 days after the giving of such Notice,  specified in
     such notice, as of which Executive's employment with the Companies shall be
     terminated; provided, however, that:


                                     - 44 -



<PAGE>



          (i) if  Executive's  employment is terminated by reason of death,  the
          Date of Termination shall be the date of Executive's death; and

          (ii) if Executive's  employment is terminated by reason of Disability,
          the  Date of  Termination  shall be the  30th  day  after  Executive's
          receipt of the physician's certification of Disability, unless, before
          such date,  Executive shall have resumed the full-time  performance of
          Executive's  duties; and (iii) if Executive  terminates his employment
          without Good  Reason,  the Date of  Termination  shall be the 30th day
          after the giving of such Notice; and

          (iv) if no Notice of  Termination  is given,  the Date of  Termination
          shall be the last date on which Executive is employed by the Company

     1.17  "Disability"  means a mental  or  physical  condition  which  renders
     Executive   unable  or   incompetent   to  carry  out  the   material   job
     responsibilities  which such Executive held or the material duties to which
     Executive was assigned at the time the disability  was incurred,  which has
     existed for at least six months.  1.18 "Employment Period" -- as defined in
     Section 3.1.

     1.19  "Executive"  -- as  defined  in the  introductory  paragraph  of this
     Agreement.

     1.20 "Fair Market Value" means,  on any date,  the price of the last trade,
     regular way, in the Common Stock on such date on the Nasdaq National Market
     or, if at the  relevant  time,  the Common  Stock is not listed to trade on
     Nasdaq,  on such other  recognized  quotation  system on which the  trading
     prices of the Common Stock are then quoted (the "applicable exchange").  In
     the event that there are no Common  Stock  transactions  on the  applicable
     exchange on any relevant  date,  Fair Market Value for such date shall mean
     the closing price on the  immediately  preceding date on which Common Stock
     transactions were so reported.

     1.21  "Fiscal  Year" means the calendar  year,  which is the period used in
     connection with the preparation of the consolidated financial statements of
     Company.


                                     - 45 -



<PAGE>



     1.22 "Good Reason" means the occurrence of any one of the following  events
     unless Executive  specifically  agrees in writing that such event shall not
     be Good Reason:

          (a) any material breach of the Agreement by the Company, including any
          of the following, each of which shall be deemed material:

               (i) any adverse  change in the title,  status,  responsibilities,
               authorities  or  perquisites  of  Executive;

               (ii) any  failure of  Executive  to be  nominated,  appointed  or
               elected  and  to  continue  to  be  nominated,   re-elected,   or
               re-appointed as Chairman,  President and Chief Executive  Officer
               of the Company;

               (iii) any failure of  Executive  to be  nominated,  appointed  or
               elected  and  to  continue  to  be  nominated,   re-elected,   or
               re-appointed as Chairman,  President and Chief Executive  Officer
               of each of the Life Company Subsidiaries;

               (iv) any  failure of  Executive  to be  nominated,  appointed  or
               elected  and  to  continue  to  be  nominated,   re-elected,   or
               re-appointed  as a  member  of  the  Board  of  Directors  of the
               Company;

               (v) any  failure  of  Executive  to be  nominated,  appointed  or
               elected  and  to  continue  to  be  nominated,   re-elected,   or
               re-appointed as a member of the Board of Directors of each of the
               Life Company Subsidiaries;

               (vi)  causing or  requiring  Executive  to report to anyone other
               than the Board of the Company;

               (vii) assignment to Executive of duties  materially  inconsistent
               with  his  position  and  duties  described  in  this  Agreement,
               including status,  offices,  or  responsibilities as contemplated
               under Section 2.1or any other action by the Company or any of the
               Life Company  Subsidiaries  which results in an adverse change in
               such position, status, offices, titles or responsibilities;


                                     - 46 -



<PAGE>



               (viii) any reduction or failure to pay Executive's Base Salary in
               violation  of Section  4.1 or his Annual  Bonus in  violation  of
               Section 4.2;

               (ix) any failure to grant the SAR  described in Section 4.3 or to
               make any of the payments required to be made under the provisions
               of the SAR described in Section 4.3; or

               (x) any  reduction  in bonus or incentive  opportunity;  provided
               that no such  reduction  shall be deemed to occur merely  because
               the Company  revises or modifies the structure of or  performance
               factors  taken  into  account  (or the  degree  to which any such
               performance  factors are taken into  account)  under any bonus or
               incentive  plan  or  arrangement;   provided   further  that  the
               Executive  shall not be  treated  less  favorably  than the other
               members of Senior Management;

     provided that the creation,  existence or appointment of a Chief  Executive
     Officer  other than  Executive of any  subsidiary of the Company other than
     the Life Company Subsidiaries shall not be deemed to be Good Reason if such
     other  Chief  Executive  Officer  reports,   directly  or  indirectly,   to
     Executive;  and  provided,  further,  that no act or omission  described in
     clauses (i) through (x) of this Section shall constitute Good Reason unless
     Executive  gives  Company  written  notice of such act or omission  and the
     Company fails to cure such act or omission within 30-days after delivery of
     such notice  (except that  Executive  shall not be required to provide such
     notice in case of  intentional  acts or omissions by a Company or more than
     once in cases of repeated acts or omissions); or

     (b) relocation of the Company's executive offices or Executive's own office
     location to a location that is outside the Austin, Texas metropolitan area;


                                     - 47 -



<PAGE>



     In the  event  of an  occurrence  or  omission  constituting  Good  Reason,
     Executive shall not be entitled to terminate his employment for Good Reason
     unless within 3 months after  Executive  first obtains actual  knowledge of
     such an event  constituting  Good Reason, he notifies Company of the events
     constituting such Good Reason and of his intention to terminate  employment
     for Good Reason by a Notice of Termination.

     1.23 "including" means including without limitation.

     1.24 "Life Company  Subsidiaries" means Investors Life Insurance Company of
     North  America and Family  Life  Insurance  Company,  which  companies  are
     indirect,  wholly owned  subsidiaries of the Company as of the date of this
     Agreement.  The term also includes any life insurance company which becomes
     an Affiliate of the Company on or after the date of this Agreement.

     1.25  "Notice of  Termination"  means a written  notice of  termination  of
     Executive's  employment  given in accordance with Section 6.1 by Company on
     behalf of the  Companies,  or by Executive,  as the case may be, which sets
     forth (a) the specific termination  provision in this Agreement relied upon
     by the party  giving such  notice,  (b) in  reasonable  detail the specific
     facts and circumstances  claimed to provide a basis for such Termination of
     Employment,  and (c) if the Date of  Termination  is other than the date of
     receipt of such Notice of Termination, the Date of Termination.

     1.26 "Person" means any individual, sole proprietorship, partnership, joint
     venture,  limited liability company,  trust,  unincorporated  organization,
     corporation,  institution, public benefit corporation, entity or government
     instrumentality, division, agency, body or department.

     1.27  "Prorata  Annual  Bonus"  means the product of (i) the Target  Annual
     Bonus  (provided  that no effect  shall be given to any  reduction  in such
     Target Annual Bonus that would qualify as Good Reason if Executive  were to
     terminate his employment on account thereof)  multiplied by (ii) a fraction
     of which the  numerator  is the number of days  which have  elapsed in such
     Fiscal Year through the Date of Termination and the denominator of which is
     365.

     1.28  "Retirement"  means any  Termination  of Employment  after  Executive
     reaches age 65, other than for Cause and other than for Good Reason.


                                     - 48 -



<PAGE>



     1.29 "SAR" means a stock  appreciation  right  granted  under the terms and
     provisions of the Financial Industries Corporation Equity Incentive Plan

     1.30 "Senior  Management" means Vice Presidents or higher level officers of
     the Company.

     1.31 "Target Annual Bonus" -- as described in 4.2.

     1.32 "Target Annual Goals" - as described in Section 4.2.

     1.33 "Taxes" means the incremental  federal,  state, and local income taxes
     payable by Executive with respect to any applicable item of income.

     1.34  "Termination  For Good Reason" means a  Termination  of Employment by
     Executive for a Good Reason.

     1.35  "Termination  of  Employment"  means a termination  by the Company or
     Executive of Executive's employment with the Company and its Affiliates.

     1.36  "Termination  Without Cause" means a Termination of Employment by the
     Company for any reason other than Cause or Executive's death or Disability.


                                     - 49 -



<PAGE>



                                   ARTICLE II.

                                     DUTIES

     2.1 Duties.  Company shall employ Executive during the Employment Period as
     its Chairman,  President and Chief Executive  Officer,  and Executive shall
     have the authority,  duties, and  responsibilities  as are commensurate and
     consistent  with such  position and title,  and as provided  in,  Company's
     by-laws.  Executive  shall  also  serve as  Chairman,  President  and Chief
     Executive  Officer of the Life  Company  Subsidiaries.  It is  contemplated
     that, in connection  with each annual meeting or action by written  consent
     in lieu thereof of the  stockholders of the Company and of the Life Company
     Subsidiaries  during the Employment Period, the stockholders of the Company
     and of the Life Company Subsidiaries,  respectively will elect Executive to
     their  respective  Boards and  Executive  agrees to serve on such Boards if
     elected.  Executive  shall  report  directly and solely to the Board of the
     Company.  During the Employment Period,  Executive shall be the most senior
     executive of the Company and shall have broad  discretion  and authority to
     manage and direct the day-to-day affairs and operations of the Companies in
     compliance with applicable law,  including the sole authority to direct the
     strategic  direction  of the  Company  and the Life  Company  Subsidiaries,
     except to the extent  required in connection with the exercise by the Board
     of its corporate  governance  duties and  responsibilities  under Company's
     by-laws and other applicable law. During the Employment  Period,  Executive
     shall follow the directives of the Board and shall meet with the Board on a
     periodic  basis  sufficient  to enable the Board to fulfill  its  corporate
     governance  responsibilities.  All operating,  staff, other executives, and
     divisions of the Company and the Life Company  Subsidiaries,  excluding the
     internal audit department which may at the Board's discretion report to the
     Board or its delegate, shall report solely to Executive, either directly or
     indirectly  through  subordinates  of  Executive  who report to  Executive.
     During the Employment  Period,  Executive shall perform the duties assigned
     to him hereunder,  and shall devote his full business  time,  attention and
     effort,  excluding any periods of  disability,  vacation,  or sick leave to
     which  Executive is  entitled,  to the affairs of the Company and shall use
     his best efforts to promote the  interests of the  Company.  The  Executive
     acknowledges  that his  business  time is not limited to a fixed  number of
     hours per week.

                                  ARTICLE III.

                                EMPLOYMENT PERIOD

     3.1 Employment Period.  Subject to the termination  provisions  hereinafter
     provided,  the term of  Executive's  employment  under this  Agreement (the
     "Employment  Period")  shall  begin  on the  Agreement  Date and end on the
     Anniversary  Date which is three years  after such date or, if later,  such
     later  date to which the  Employment  Period is  extended  pursuant  to the
     following  sentence.  On the first  anniversary  of the Agreement  Date and
     thereafter,  the Employment Period shall be automatically extended each day
     by one day to create a new two year term until, at any time after the first
     anniversary  of the Agreement  Date,  Company  delivers  written notice (an
     "Expiration  Notice") to  Executive  or  Executive  delivers an  Expiration
     Notice to Company,  in either case, to the effect that the Agreement  shall
     expire on a date specified in the Expiration Notice (the "Expiration Date")
     that is not less than two years  after  the date the  Expiration  Notice is
     delivered to Company or the  Executive,  respectively.  The  employment  of
     Executive by Company shall not be terminated  other than in accordance with
     Article VI.


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<PAGE>



                                   ARTICLE IV.

                                  COMPENSATION

     4.1 Salary.  Executive  shall be paid in  accordance  with  normal  payroll
     practices (but not less frequently than monthly) an annual salary at a rate
     of $360,000 per year ("Base  Salary").  During the Employment  Period,  the
     Base Salary shall be reviewed  periodically  and may be increased from time
     to time as shall be determined by the Board.  After any such increase,  the
     term "Base Salary" shall  thereafter  refer to the  increased  amount.  Any
     increase in Base Salary shall not limit or reduce any other  obligation  of
     the Company to  Executive  under this  Agreement.  Base Salary shall not be
     reduced at any time without the express written consent of Executive.

     4.2 Annual Bonus.

          (a)  Executive  shall be paid an  annual  bonus  ("Annual  Bonus")  in
          accordance  with the terms hereof for each Fiscal Year which begins or
          ends during the Employment Period.  Executive shall be eligible for an
          Annual Bonus based upon target  performance  goals (the "Target Annual
          Goals"),  as  determined  by  the  Board  on an  annual  basis,  after
          consultation  with  Executive  and in accordance  with normal  Company
          administrative  practices for Senior Management,  which provides for a
          payment  opportunity  of at least the highest  target level  generally
          available  to Senior  Management  under any Company  annual bonus plan
          ("Target Annual Bonus") upon the Executive's achievement of the Target
          Annual  Goals.  Each such Annual  Bonus is intended to comply with the
          provisions of section 162(m) of the Code.

          (b) The entire Annual Bonus that is payable to Executive  with respect
          to the Fiscal Year shall be paid in cash as soon as practicable  after
          the Board has determined whether and the degree to which Target Annual
          Goals have been achieved following the close of such Fiscal Year.

     4.3 Stock Appreciation Rights (SARs).

          (a) As of the Agreement  Date,  Company shall award to Executive stock
          appreciation rights (SARs) with respect to 30,000 shares of the Common
          Stock  of  the  Company,  pursuant  to  terms  and  provisions  of the
          Financial  Industries  Corporation Equity Incentive Plan (the "Plan").
          Such award shall constitute an "Award",  within the meaning of section
          2.1 of the Plan.  The terms and  provisions  of this Section 4.3 shall
          constitute the Award Notice for purposes of the Plan;



                                     - 51 -



<PAGE>



          (b) The exercise  price of each unit is $14.11,  which was 100% of the
          Fair Market Value of the Common Stock of the Company on the  Agreement
          Date;

          (c)  Executive  may exercise the SARs granted  hereunder in accordance
          with the following vesting schedule:

               Date                             Percentage of Units Exercisable

               November 1, 2004                              20%
               November 1, 2005                              40%
               November 1, 2006                              60%
               November 1, 2007                              80%
               November 1, 2008                             100%

          (d) In the event of a Change of Control  (as defined in Section 2.4 of
          the  Plan)  each SAR  then  outstanding  shall  be  fully  exercisable
          regardless  of the  exercise  schedule  set  forth in  Section  4.3(c)
          hereof.

          (d) Executive  may exercise the vested  percentage of his Award at any
          time on or before November 1, 2009. Executive may defer payment of any
          exercised  portion  of  his  SARs  in  accordance  with  the  deferral
          provisions of section 12 of the Plan.

     4.4  Savings  and  Retirement   Plans.   Executive  shall  be  eligible  to
     participate  during the  Employment  Period in any  Company's  savings  and
     retirement plans, practices,  policies and programs, in accordance with the
     terms thereof, at the highest available level, if any, applicable from time
     to time  to  members  of  Senior  Management,  including  any  supplemental
     executive retirement plan.


                                     - 52 -



<PAGE>



                                   ARTICLE V.

                                 OTHER BENEFITS

     5.1 Welfare  Benefits.  During the  Employment  Period,  Executive  and his
     family shall be eligible to participate in at the highest level,  and shall
     receive all benefits under, any Company's welfare benefit plans, practices,
     policies and programs  provided or made generally  available by the Company
     to  Senior  Management  (including  medical,  dental,  disability,   salary
     continuance,  employee life, group life,  dependent life,  accidental death
     and travel accident insurance plans and programs), in accordance with their
     terms as in effect from time to time.

     5.2 Fringe  Benefits.  During the  Employment  Period,  Executive  shall be
     entitled to fringe benefits  generally  applicable to Senior  Management in
     accordance with their terms as in effect from time
         to time.

     5.3 Vacation.  During the Employment Period, Executive shall be entitled to
     paid  vacation  time under the plans,  practices,  policies,  and  programs
     generally  applicable to members of Senior  Management  in accordance  with
     their terms as in effect from time to time.

     5.4 Expenses.  Executive  shall be promptly  reimbursed  for all actual and
     reasonable  employment-related  business  expenses  he  incurs  during  the
     Employment Period in accordance with any Company's practices, policies, and
     procedures   generally  applicable  to  members  of  Senior  Management  in
     accordance  with their terms as in effect from time to time,  including the
     timely  submission  of required  receipts  and  accountings.  In  addition,
     Executive  shall be  entitled  to  first-class  air  travel  for  business.
     Notwithstanding  the  foregoing,  no expense shall be reimbursed  more than
     once.


                                     - 53 -



<PAGE>



                                  ARTICLE VI.

                              TERMINATION BENEFITS

     6.1 Termination for Cause or Other than for Good Reason, etc.

          (a) If Company  terminates  Executive's  employment with the Companies
          for Cause or Executive  terminates his employment  other than for Good
          Reason,  death or  Disability,  the  Executive  shall be  entitled  to
          receive  immediately  after the Date of  Termination a lump sum amount
          equal to the sum of Executive's Accrued Base Salary and Accrued Annual
          Bonus, and Executive shall not be entitled to receive any severance or
          other payment, other than compensation and benefits which relate to or
          derive from Executive's employment with the Company on or prior to the
          Date  of  Termination  and  which  are  otherwise  payable  in case of
          termination  for  Cause  or  other  than  for  Good  Reason,  death or
          Disability, as applicable.

          (b)  Executive's  employment  may be terminated  for Cause only if (i)
          Company  provides  Executive  (before  the Date of  Termination)  with
          written notice of the Board meeting referred to in clause (ii) of this
          Section  6.1(b)  at  least  twenty  days  prior  to such  meeting  and
          specifies  in  detail  in  writing  the  basis of a claim of Cause and
          provides Executive,  with or without counsel, at Executive's election,
          an  opportunity  to be heard and  present  arguments  and  evidence on
          Executive's  behalf  at such  meeting,  (ii)  the  Company  Board,  by
          affirmative vote of not less than 2/3 of the entire  membership of the
          Board  (excluding the  Executive's  vote from any such  determination)
          determines that the acts or omissions constitute Cause which Executive
          failed to cure after being given an opportunity to cure if required by
          Section 1.11, and to the effect that Executive's  employment should be
          terminated for Cause and (iii) Company thereafter provides Executive a
          Notice of  Termination  which  specifies  in detail  the basis of such
          Termination of Employment  for Cause.  Nothing in this Section 6.1 (b)
          shall preclude the Board, by majority vote, from suspending  Executive
          from his duties, with pay at any time.

     6.2 Termination for Retirement,  Death or Disability. If, before the end of
     the  Employment  Period,  Executive's  employment  terminates  due  to  his
     Retirement,  death or Disability,  Executive or his  Beneficiaries,  as the
     case may be,  shall be  entitled to receive  immediately  after the Date of
     Termination,  a lump sum  amount  which is equal to the sum of  Executive's
     Accrued  Base Salary,  Accrued  Annual  Bonus,  and Prorata  Annual  Bonus.
     Executive's SARs shall be paid according to the terms of the SAR.

     6.3  Termination  Without  Cause  or for  Good  Reason.  In the  event of a
     Termination  Without Cause or a Termination for Good Reason (in either case
     occurring  during the Employment  Period),  Executive  shall be entitled to
     receive the following:

          (a)  promptly  after the Date of  Termination,  (but in no event later
          than ten  business  days  after  the Date of  Termination)  a lump sum
          amount equal to the sum of  Executive's  Accrued Base Salary,  Accrued
          Annual Bonus and Prorata Annual Bonus;


                                     - 54 -



<PAGE>



          (b)  promptly  after the Date of  Termination,  (but in no event later
          than ten  business  days  after the Date of  Termination),  a lump sum
          amount  equal to the product of (i) the sum of Base Salary plus Target
          Annual Bonus for the Fiscal Year during which the Date of  Termination
          occurs  (provided  that no effect  shall be given to any  reduction in
          Target  Annual  Bonus that would  qualify as Good Reason if  Executive
          were to terminate his employment on account  thereof),  and multiplied
          by (ii) two;

          (c)  promptly  after the Date of  Termination,  (but in no event later
          than ten  business  days  after the Date of  Termination),  a lump sum
          amount  equal to the  product  of (i) the  number  of shares of Common
          Stock with respect to which SARs granted to Executive  pursuant to the
          provisions  of  Section  4.3 that  have not  vested  as of the Date of
          Termination  multiplied by (ii) the excess, if any, of the Fair Market
          Value of a share of Common Stock on the Date of Termination;

          (d) the  benefits  specified  in Section  5.1 and Section 5.2 to which
          Executive  is  entitled as of the Date of  Termination,  for two years
          following his Date of Termination,  subject to the terms of applicable
          plans, programs or policies; provided that the Executive shall pay the
          same amount for such benefits as covered members of Senior  Management
          who are  actively  employed  would  pay;  provided  further  that  any
          coverage  required to be offered by the  Consolidated  Omnibus  Budget
          Reconciliation  Act of  1985,  as  amended,  shall  begin  after  such
          benefits otherwise cease hereunder;

     Notwithstanding  anything herein to the contrary,  the benefits provided in
     Section 6.3 shall be provided only upon Executive's  execution of a release
     and waiver as described in Section 6.5.

     6.4 Other Rights.  This  Agreement  shall not prevent or limit  Executive's
     continuing  or future  participation  in any benefit,  bonus,  incentive or
     other  plan,  program  or  policy  provided  by the  Company  and for which
     Executive may qualify,  and shall not impair the Company's  rights to amend
     or terminate any benefit, bonus, incentive or other plan program or policy;
     provided  however  that  no  such  amendment  or  termination  shall  treat
     Executive  less  favorably  than other Senior  Management  and  Executive's
     benefits,  bonus and  incentives  in the  aggregate  shall not be  reduced.
     Amounts which are vested benefits or which Executive is otherwise  entitled
     to  receive  under any plan,  program  or policy  and any other  payment or
     benefit  required  by law at or  after  the  Date of  Termination  shall be
     payable in accordance  with such plan,  program or policy or applicable law
     except as expressly modified by this Agreement.


                                     - 55 -



<PAGE>



     6.5 Waiver and Release.  Notwithstanding  anything  herein to the contrary,
     upon any Termination of Employment (other than due to death)

          (a) the Executive  shall execute a release and waiver in form mutually
          agreed by Executive and the Board of Company (which agreement  neither
          party shall unreasonably withhold) which releases, waives, and forever
          discharges  the  Company,   its  Affiliates,   and  their   respective
          subsidiaries,  affiliates, employees, officers, shareholders, members,
          partners, directors, agents, attorneys,  predecessors,  successors and
          assigns,  from and against any and all claims,  liabilities,  demands,
          causes of  action,  costs,  expenses,  attorneys'  fees,  damages  and
          obligations  of every kind and nature in law,  equity,  or  otherwise,
          known  and  unknown,   suspected   and   unsuspected,   disclosed  and
          undisclosed,  including but not limited to any and all such claims and
          demands directly or indirectly  arising out of or in any way connected
          with the Executive's employment with and services as a director of the
          Company and its Affiliates;  claims or demands related to compensation
          or other  amounts under any  compensatory  arrangement,  stock,  stock
          options,  or any  other  ownership  interests  in the  Company  or any
          Affiliate,  vacation pay,  fringe  benefits,  expense  reimbursements,
          severance  benefits,  or any other  form of  compensation  or  equity;
          claims pursuant to any federal,  state, local law, statute of cause of
          action including,  but not limited to, the federal Civil Rights Act of
          1964, as amended;  the federal Age Discrimination in Employment Act of
          1967, as amended; the federal Americans with Disabilities Act of 1990;
          tort  law,   contract   law;   wrongful   discharge,   discrimination;
          defamation;   harassment;   or  emotional   distress;   provided  that
          Executive's  waiver and release shall not relieve the  Companies  from
          any  of  the  following  obligations,  to the  extent  they  are to be
          performed  after the date of the release  and  waiver:  (i) payment of
          amounts due under  Sections 6.1, 6.2 or 6.3, as  applicable,  (ii) any
          obligations  under the.  second  sentence  of Section  6.4,  and (iii)
          payment of any gross-up  amount due under Article  VIII;  and provided
          further that (x) neither party shall release the other from his or its
          obligations  under  Article IX of this  agreement,  to the extent such
          obligations are to be performed after the Date of Termination, and (y)
          Executive  shall not be precluded from defending  against Cause Claims
          (as defined in Section 6.5(b)); and


                                     - 56 -



<PAGE>



          (b) the Company  shall  execute a release and waiver in form  mutually
          agreed by Executive and the Board of Company (which agreement  neither
          party shall unreasonably withhold) which releases, waives, and forever
          discharges the Executive and his executors, administrators, successors
          and  assigns,  from  and  against  any  and all  claims,  liabilities,
          demands,  causes of action, costs, expenses,  attorneys' fees, damages
          and obligations of every kind and nature in law, equity, or otherwise,
          known  and  unknown,   suspected   and   unsuspected,   disclosed  and
          undisclosed,  including but not limited to any and all such claims and
          demands directly or indirectly  arising out of or in any way connected
          with the  Executive's  employment with or service as a director of the
          Company and its Affiliates, but excluding any such claims liabilities,
          demands,  causes of action, costs, expenses,  attorneys' fees, damages
          or  obligations  arising out of or in any way  connected  with events,
          acts  or  conduct  giving  rise  to  or  in  any  way  connected  with
          Executive's  Termination  of Employment  for Cause  ("Cause  Claims"),
          provided, however, that (i) neither party shall release the other from
          his or its  obligations  under  Article IX of this  agreement,  to the
          extent  such  obligations  are  to be  performed  after  the  Date  of
          Termination,  and (ii) Executive shall not be precluded from defending
          against Cause Claims.

          (c) Executive  hereby  agrees that the execution of this  Agreement is
          adequate consideration for the execution of such a release, and hereby
          acknowledges  that the Company would not have executed this  Agreement
          had Executive not agreed to execute such a release.

                                  ARTICLE VII.

                              RESTRICTIVE COVENANTS

     7.1  Non-Competition.  Executive  shall not at any time  during  the period
     beginning on the Agreement Date and ending on the second anniversary of the
     Date  of  Termination  (whether  or  not  during  the  Term),  directly  or
     indirectly, in any capacity:

          (a) engage or participate  in, become employed by, serve as a director
          of, or render  advisory or consulting or other  services in connection
          with, any Competitive Business; provided, however, that after the Date
          of Termination  this Section 7.1(a) shall not preclude  Executive from
          being an  employee  of,  or  consultant  to,  any  business  unit of a
          Competitive  Business if (i) such  business unit does not qualify as a
          Competitive Business in its own right and (ii) Executive does not have
          any direct or indirect  involvement  in, or  responsibility  for,  any
          operations of such Competitive  Business that cause it to qualify as a
          Competitive Business; or


                                     - 57 -



<PAGE>



          (b) make or retain any  financial  investment,  whether in the form of
          equity or debt,  or own any  interest,  in any  Competitive  Business;
          provided,  however,  that nothing in this  subsection  shall  restrict
          Executive  from making an  investment in any  Competitive  Business if
          such investment (i) represents no more than 1% of the aggregate market
          value of the outstanding capital stock or debt (as applicable) of such
          Competitive  Business,  (ii)  does not  give  Executive  any  right or
          ability,  directly or  indirectly,  to control or influence the policy
          decisions or management of such Competitive  Business,  and (iii) does
          not create a conflict of interest  between  Executive's  duties  under
          this Agreement and his interest in such investment.

     7.2  Non-Solicitation.  Executive  shall not at any time  during the period
     beginning on the Agreement Date and ending on the second anniversary of the
     Date  of  Termination  (whether  or  not  during  the  Term),  directly  or
     indirectly:

          (a) other than in connection  with the  good-faith  performance of his
          duties as an officer of any of the  Companies,  encourage any employee
          or agent of the Company or any Affiliate to terminate his relationship
          with the Company or any Affiliate;

          (b) solicit the  employment  of or the  engagement  as a consultant or
          advisor  of, any  employee  or agent of the  Company or any  Affiliate
          (other than by the Company or an Affiliate), or cause or encourage any
          Person to do any of the foregoing;

          (c)  establish  (or take  preliminary  steps to  establish) a business
          with, or encourage others to establish (or take  preliminary  steps to
          establish)  a business  with,  any employee or agent of the Company or
          any Affiliate; or

          (d) interfere with the  relationship  of any of the Companies with, or
          endeavor to entice away from any of the  Companies,  any Person who or
          which at any time during the period  commencing  one year prior to the
          Agreement Date was or is a material client or material supplier of, or
          maintained a material  business  relationship  with, the Company or an
          Affiliate.


                                     - 58 -




<PAGE>




     7.3  Confidentiality.  The  Executive  acknowledges  that in the  course of
     performing  services  for the  Companies  and  Affiliates,  he may  create,
     develop,  learn of, receive or contribute  non-public  information,  ideas,
     processes,  methods, designs, devices,  inventions,  data, models and other
     information  relating  to the  Companies  and  their  Affiliates  or  their
     products, services, businesses, operations, employees or customers, whether
     in  tangible or  intangible  form,  and that the Company or its  Affiliates
     desire to protect and keep secret and confidential, including trade secrets
     and information  from third parties that the Companies or their  Affiliates
     are   obligated   to  keep   confidential   ("Confidential   Information").
     Confidential  Information  shall not include:  (i)  information  that is or
     becomes  generally  known through no fault of Executive;  (ii)  information
     received  from a third  party  outside of the  Company  that was  disclosed
     without a breach of any  confidentiality  obligation;  or (iii) information
     approved for release by written authorization of the Company. The Executive
     recognizes that all such Confidential Information is the sole and exclusive
     property  of the  Company  and  its  Affiliates,  and  that  disclosure  of
     Confidential  Information  would cause  damage to the  Companies  and their
     Affiliates.  The Executive agrees that, except as required by the duties of
     his  employment  with  any of the  Companies  or any of  their  and/or  its
     Affiliates and except in connection with enforcing the  Executive's  rights
     under this Agreement or if compelled by a court or governmental  agency, in
     each case provided that prior written  notice is given to Company,  he will
     not,  without the consent of Company,  willfully  disseminate  or otherwise
     disclose,  directly or indirectly,  any Confidential  Information  obtained
     during his employment with the Company or its Affiliates, and will take all
     necessary precautions to prevent disclosure, to any unauthorized individual
     or entity inside or outside the Company,  and will not use the Confidential
     Information  or permit its use for the  benefit of  Executive  or any other
     person  or  entity  other  than  the  Company  or  the  Affiliates.   These
     obligations  shall continue during and after the termination of Executive's
     employment (whether or not during the Employment Period).

     7.4 Reasonableness of Restrictive Covenants.

          (a) Executive  acknowledges  that the covenants  contained in Sections
          7.1,  7.2  and 7.3 are  reasonable  in the  scope  of  the  activities
          restricted,  the geographic area covered by the restrictions,  and the
          duration of the  restrictions,  and that such covenants are reasonably
          necessary to protect the Company's  relationships  with its employees,
          clients and suppliers.  Executive further  acknowledges such covenants
          are  essential  elements  of this  Agreement  and  that,  but for such
          covenants, the Company would not have entered into this Agreement.


                                     - 59 -



<PAGE>



          (b)  The  Company  and  Executive   have  each  consulted  with  their
          respective  legal  counsel  and  have  been  advised   concerning  the
          reasonableness and propriety of such covenants. Executive acknowledges
          that his  observance of the  covenants  contained in Sections 7.1, 7.2
          and 7.3 will not deprive him of the ability to earn a livelihood or to
          support his dependents.

     7.5 Right to Injunction; Survival of Undertakings.

          (a) In  recognition  of the  necessity  of  the  limited  restrictions
          imposed by Sections  7.1, 7.2 and 7.3, the parties agree that it would
          be impossible  to measure  solely in money the damages that any of the
          Companies  would  suffer  if  Executive  were  to  breach  any  of his
          obligations  under  such  Sections.  Executive  acknowledges  that any
          breach of any provision of such Sections would irreparably  injure the
          Company.  Accordingly,  Executive  agrees  that the  Company  shall be
          entitled,  in addition to any other  remedies to which  Company may be
          entitled  under this  Agreement or  otherwise,  to an injunction to be
          issued by a court of  competent  jurisdiction,  to restrain any actual
          breach, or threatened breach, of such provisions, and Executive hereby
          waives any right to assert any defense  that any of the Company has to
          adequate remedy at law for any such breach.

          (b) If a court  determines that any of the covenants  included in this
          Article  VII are  unenforceable  in whole or in part  because  of such
          covenant's  duration or  geographical  or other scope,  such court may
          modify the duration or scope of such provision, as the case may be, so
          as to cause such covenant as so modified to be enforceable.

          (c) All of the  provisions  of this  Article  VII  shall  survive  any
          Termination  of Employment  without regard to (i) the reasons for such
          termination or (ii) the expiration of the Employment Period.

          (d)  Company  shall  have any  further  obligation  to pay or  provide
          severance or benefits under Section 6.3 if a court determines that the
          Executive has breached any covenant in this Article VII.


                                      - 60 -



<PAGE>



                                  ARTICLE VIII.

                                  MISCELLANEOUS

     8.1  Approvals.  The Company  represents  and  warrants to Executive it has
     taken all corporate action necessary to authorize this Agreement.

     8.2 No Mitigation.  In no event shall  Executive be obligated to seek other
     employment  or take any other  action to mitigate  the  amounts  payable to
     Executive  under any of the  provisions  of this  Agreement,  nor shall the
     amount of any payment hereunder be reduced by any compensation  earned as a
     result of  Executive's  employment  by another  employer,  except  that any
     continued  welfare  benefits  provided  for by  Section  6.3(d)  shall  not
     duplicate  any benefits  that are  provided to Executive  and his family by
     such other employer and shall be secondary to any coverage provided by such
     other employer.

     The  Company's  obligation  to  make  the  payments  provided  for in  this
     Agreement and otherwise perform the obligations hereunder shall not (unless
     Executive  is  terminated  for  Cause) be  affected  by any  circumstances,
     including set-off, counterclaim,  recoupment, defense or other claim, right
     or action which the Company may have against Executive.

     8.3  Beneficiary.  If Executive  dies prior to receiving all of the amounts
     payable  to him in  accordance  with  the  terms  and  conditions  of  this
     Agreement,  such amounts shall be paid to the  beneficiary  ("Beneficiary")
     designated by Executive in writing to the Company  during his lifetime,  or
     if no such Beneficiary is designated,  to Executive's estate. Such payments
     shall be made in a lump sum to the extent so payable and, to the extent not
     payable in a lump sum, in accordance with the terms of this Agreement. Such
     payments  shall not be less than the  amount  payable  to  Executive  as if
     Executive  had lived to the date of payment and were the payee.  Executive,
     without the consent of any prior Beneficiary, may change his designation of
     Beneficiary or Beneficiaries at any time or from time to time by submitting
     to the Company a new designation in writing.

     8.4 Assignment;  Successors. This Agreement is personal to Executive and he
     may not assign his duties or  obligations  under it. Company may not assign
     its respective  rights and  obligations  under this  Agreement  without the
     prior written consent of Executive,  except to a successor to the Company's
     business which  expressly  assumes the Company's  obligations  hereunder in
     writing.  This Agreement  shall be binding upon and inure to the benefit of
     Executive, his estate and Beneficiaries, the Company and its successors and
     permitted   assigns.   Company  shall  require  any  successor  to  all  or
     substantially  all of the business  and/or assets of such Company,  whether
     direct or indirect,  by purchase,  merger,  consolidation,  acquisition  of
     stock,  or  otherwise,  expressly  to  assume  and  agree to  perform  this
     Agreement in the same manner and to the same extent as such  Company  would
     be required to perform if no such succession had taken place.


                                     - 61 -



<PAGE>



     8.5  Non-alienation.  Except as is  otherwise  expressly  provided  herein,
     benefits payable under this Agreement shall not be subject in any manner to
     anticipation,  alienation, sale, transfer, assignment, pledge, encumbrance,
     charge,  garnishment,  execution or levy of any kind,  either  voluntary or
     involuntary,  prior to actually being  received by Executive,  and any such
     attempt to  dispose of any right to  benefits  payable  hereunder  shall be
     void.

     8.6  Severability.  If all or any part of this  Agreement is declared to be
     unlawful or invalid,  such  unlawfulness  or invalidity  shall not serve to
     invalidate  any portion of this  Agreement  not  declared to be unlawful or
     invalid.  Any  provision  so declared to be unlawful or invalid  shall,  if
     possible,  be  construed in a manner which will give effect to the terms of
     such provision to the fullest extent  possible while  remaining  lawful and
     valid.

     8.6  Amendment;  Waiver.  This  Agreement  shall not be amended or modified
     except by written instrument executed by Company and Executive. A waiver of
     any term,  covenant or condition  contained in this Agreement  shall not be
     deemed a waiver of any other term, covenant or condition, and any waiver of
     any default in any such term,  covenant or condition  shall not be deemed a
     waiver of any later  default  thereof  or of any other  term,  covenant  or
     condition.


                                      - 62 -



<PAGE>



     8.7  Arbitration,  Any dispute,  controversy  or claim arising out of or in
     connection  with or  relating  to this  Agreement  or any breach or alleged
     breach thereof shall be submitted to and settled by binding  arbitration in
     Austin,  Texas, in accordance with the Commercial  Arbitration Rules of the
     American Arbitration  Association (or at any other place or under any other
     form of arbitration  mutually  acceptable to the parties so involved).  Any
     dispute,  controversy or claim submitted for resolution  shall be submitted
     to three (3) arbitrators, each of whom is a nationally recognized executive
     compensation  specialist.  The Company  shall  select one  arbitrator,  the
     Executive  shall select one  arbitrator and the third  arbitrator  shall be
     selected by the first two  arbitrators.  Any award  rendered shall be final
     and  conclusive  upon the parties and a judgment  thereon may be entered in
     the highest court of a forum, state or federal,  having  jurisdiction.  The
     expenses of the arbitration  shall be borne equally by the parties,  except
     that in the  discretion of the  arbitrators  any award may include the fees
     and costs of a party's  attorneys if the  arbitrator  expressly  determines
     that the party  against  whom such award is entered has caused the dispute,
     controversy  or claim to be submitted to  arbitration  in bad faith or as a
     dilatory  tactic.  No  arbitration  shall be commenced  after the date when
     institution  of legal or  equitable  proceedings  based  upon such  subject
     matter  would  be  barred  by  the  applicable   statute  of   limitations.
     Notwithstanding  anything to the contrary  contained in this Section 8.7 or
     elsewhere in this Agreement, either party may bring an action in the Travis
     County,  Texas District  Court, in order to maintain the status quo ante of
     the  parties.  The  "status  quo ante" is  defined  as the last  peaceable,
     uncontested status between the parties. However, neither the party bringing
     the action nor the party  defending the action  thereby waives its right to
     arbitration  of any  dispute,  controversy  or claim  arising  out of or in
     connection or relating to this Agreement.  Notwithstanding  anything to the
     contrary  contained in this  Section 8.7 or  elsewhere  in this  Agreement,
     either  party  may  seek  relief  in  the  form  of  specific  performance,
     injunctive  or other  equitable  relief in order to enforce the decision of
     the  arbitrator.  The  parties  agree  that  in any  arbitration  commenced
     pursuant to this Agreement, the parties shall be entitled to such discovery
     (including  depositions,  requests  for the  production  of  documents  and
     interrogatories) as would be available in a federal district court pursuant
     to Rules 26  through 37 of the  Federal  Rules of Civil  Procedure.  In the
     event that  either  party fails to comply  with its  discovery  obligations
     hereunder,  the arbitrator(s) shall have full power and authority to compel
     disclosure or impose sanctions to the full extent of Rule 37, Federal Rules
     of Civil Procedure.

     8.8 Notices.  All notices  hereunder  shall be in writing and  delivered by
     hand, by  nationally-recognized  delivery service that guarantees overnight
     delivery,  or by first-class,  registered or certified mail, return receipt
     requested, postage prepaid, addressed as follows:

     If to Company, to:         Financial Industries Corporation
                                6500 River Place Blvd., Building One
                                Austin, Texas 78730
                                Attention: Theodore A. Fleron,
                                Vice President and General Counsel
                                Facsimile No.:  (512) 404-5041

         If to Executive, to:   At his most recent home address or facsimile
                                number on file with the Company)

     Either party may from time to time  designate a new address by notice given
     in accordance  with this Section.  Notice shall be effective  when actually
     received by the addressee.


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     8.9 Counterparts.  This Agreement may be executed in multiple counterparts,
     each of which shall be deemed to be an original,  but all of which together
     will constitute one and the same instrument.

     8.10  Captions.  The  captions  of  this  Agreement  are  not a part of the
     provisions hereof and shall have no force or effect.

     8.11 Entire  Agreement.  This Agreement forms the entire agreement  between
     the parties  hereto with  respect to the subject  matter  contained  in the
     Agreement  and  shall   supersede  all  prior   agreements,   promises  and
     representations  regarding  employment,  compensation,  severance  or other
     payments  contingent upon termination of employment,  whether in writing or
     otherwise.

     8.12  Applicable  Law, This Agreement shall be interpreted and construed in
     accordance  with the laws of the  State of  Texas,  without  regard  to its
     choice of law principles.

     8.13 Survival of Executive's  Rights.  All of Executive's rights hereunder,
     including  his rights to  compensation  and benefits,  and his  obligations
     under Article VIII hereof,  shall survive the  termination  of  Executive's
     employment or the termination of this Agreement.

     8.14  Joint and  Several  Liability.  The  obligations  of the  Company  to
     Executive under this Agreement shall be joint and several.

IN WITNESS  WHEREOF,  the parties have executed this Agreement on the date first
above written.

Financial Industries Corporation

        By: /s/ Thomas C. Richmond

        Title:  Secretary


           /s/ Eugene E. Payne
           Eugene E. Payne


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                                  EXHIBIT 10.32

                        FINANCIAL INDUSTRIES CORPORATION
                              EQUITY INCENTIVE PLAN

1.   Purpose:

     The purpose of the Plan is to provide  motivation  to Key  Employees of the
     Company  and its  Subsidiaries  to put forth  maximum  efforts  toward  the
     continued  growth,  profitability,  and  success  of the  Company  and  its
     Subsidiaries  by  providing   incentives  to  such  Key  Employees  through
     performance-related   incentives,   including,   but  not  limited  to  the
     performance of the Common Stock of the Company. Toward this objective,  the
     Committee may grant stock  appreciation  rights or performance units to Key
     Employees of the Company and its  Subsidiaries  on the terms and subject to
     the conditions set forth in the Plan.

2.   Definitions:

     2.1  "Award"  means  any  form  of  stock  appreciation  right  ("SAR")  or
     performance  unit  granted  under  the  Plan,  whether  individually  or in
     combination,  to a  Participant  by the  Committee  pursuant to such terms,
     conditions,  restrictions, and/or limitations, if any, as the Committee may
     establish by the Award Notice or otherwise.

     2.2 "Award Notice" means a written notice from the Company to a Participant
     that establishes the terms,  conditions,  restrictions,  and/or limitations
     applicable to an Award in addition to those established by this Plan and by
     the Committee's exercise of its administrative powers.

     2.3 "Board" means the Board of Directors of the Company.

     2.4  "Change of  Control"  means the  occurrence  of any one or more of the
     following:

          (i) any SEC Person becomes the Beneficial  Owner of 50% or more of the
          Common Stock or of Voting  Securities  representing 50% or more of the
          combined voting power of all Voting Securities of the Company (such an
          SEC Person, a "50% Owner"); or




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<PAGE>



          (ii) the  Incumbent  Directors  cease for any reason to  constitute at
          least a majority of the Board; or

          (iii)  approval  by the  stockholders  of  the  Company  of a plan  or
          agreement for the sale or other  disposition  of all or  substantially
          all of the consolidated assets of the Company or a plan of liquidation
          of the Company; or

          (iv)  any  other  event  or  circumstance  (or  series  of  events  or
          circumstances)  that the Board shall  determine to constitute a Change
          of Control.

     2.5 "Change of Control  Price" means the highest  price per share of Common
     Stock offered in conjunction with any transaction  resulting in a Change of
     Control (as  determined  in good faith by the  Committee if any part of the
     offered price is payable other than in cash) or, in the case of a Change of
     Control  occurring  solely by reason of a change in the  composition of the
     Board,  the highest  Fair Market Value of the Common Stock on any of the 30
     trading days  immediately  preceding  the date on which a Change of Control
     occurs.

     2.6 "Code" means the Internal Revenue Code of 1986, as amended from time to
     time.

     2.7  "Committee"  means the  Compensation  Committee of the Board,  or such
     other committee designated by the Board,  authorized to administer the Plan
     under paragraph 3 hereof.  The Committee shall consist of not less than two
     members, each of whom shall be a "disinterested  person" within the meaning
     of Rule  16b-3  promulgated  under  Section  16 of the  Exchange  Act.  The
     Committee  shall from time to time designate the Key Employees who shall be
     eligible for Awards pursuant to this Plan.

     2.8 "Common  Stock" means common stock,  par value $0.20 per share,  of the
     Company.

     2.9 "Company" means Financial Industries Corporation.


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     2.10 "Effective Date" means November 4, 2002.

     2.11 "Exchange Act" means the Securities Exchange Act of 1934, as amended.

     2.12 "Fair Market Value" means,  on any date, the  price of the last trade,
     regular way, in the Common Stock on such date on the Nasdaq National Market
     or, if at the  relevant  time,  the Common  Stock is not listed to trade on
     Nasdaq,  on such other  recognized  quotation  system on which the  trading
     prices of the Common Stock are then quoted (the "applicable exchange").  In
     the event that there are no Common  Stock  transactions  on the  applicable
     exchange on any relevant  date,  Fair Market Value for such date shall mean
     the closing price on the  immediately  preceding date on which Common Stock
     transactions were so reported.

     2.13 "Incumbent Directors" means the individuals who are serving as members
     of the  Board as of the  Effective  Date of the Plan.  Individuals  who are
     nominated  to serve as members of the Board by at least  two-thirds  of the
     individuals  who are  serving as  members of the Board as of the  Effective
     Date shall also be  considered  as Incumbent  Directors for purposes of the
     Plan.

     2.14 "Key  Employee"  means officers of the Company or a Subsidiary and any
     other  employee  of  the  Company  or a  Subsidiary  so  designated  by the
     Committee.

     2.15  "Participant"  means any individual to whom an Award has been granted
     by the Committee under this Plan.

     2.16 "Plan" means the Financial  Industries  Corporation  Equity  Incentive
     Plan.

     2.17 "SAR" means a stock  appreciation right granted under Section 7 of the
     Plan in respect of one or more  shares of Common  Stock that  entitles  the
     holder  thereof to receive,  in cash,  an amount per share of Common  Stock
     equal to the excess,  if any, of the Fair Market  Value on the date the SAR
     is exercised over the Fair Market Value on the date the SAR is granted.

     2.18 "SEC  Person"  means any  person  (as such term is  defined in Section
     3(a)(9) of the  Exchange  Act) or group (as such term is used in Rule 13d-5
     under the Exchange  Act),  other than an affiliate or any employee  benefit
     plan (or any related trust) of the Company or any of its affiliates.


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<PAGE>



     2.19 "Subsidiary" means a corporation or other business entity in which the
     Company  directly or indirectly has an ownership  interest of 50 percent or
     more.

          2.20 "Unit"  means a  bookkeeping  entry used by the Company to record
          and account for the grant of performance  units until such time as the
          Award is paid, cancelled, forfeited or terminated, as the case may be.

3.   Administration:

          The Plan shall be  administered  by the  Committee.  The President and
          Chief   Executive   Officer,   shall  have  the   authority   to  make
          recommendations  to the Committee with respect to Awards to be granted
          to Key  Employees  other  than  himself.  Except  as  provided  in the
          preceding  sentence,  the  Committee  shall have the  authority to (a)
          interpret the Plan and make factual  determinations;  (b) establish or
          amend such rules and  regulations as it deems necessary for the proper
          operation and administration of the Plan; (c) receive  recommendations
          from the President and Chief Executive Officer as to the Key Employees
          to receive  Awards  under the Plan,  except that the  Committee  shall
          determine  Awards with respect to the President  and Chief  Executive;
          (d) determine the form of an Award, whether a stock appreciation right
          or performance unit, the number of Units subject to the Award, all the
          terms,  conditions,  restrictions  and/or  limitations,  if any, of an
          Award,  including the time and conditions of exercise or vesting,  and
          the  terms of any  Award  Notice,  which  may  include  the  waiver or
          amendment  of prior  terms and  conditions  or  acceleration  or early
          vesting or payment of an Award under certain circumstances  determined
          by the  Committee;  (e)  determine  whether  Awards  will  be  granted
          individually  or in  combination;  (f) grant  waivers  of Plan  terms,
          conditions, restrictions, and limitations; (g) accelerate the vesting,
          exercise, or payment of an Award or the performance period of an Award
          when  such  action or  actions  would be in the best  interest  of the
          Company;  and (h) take any and all other action it deems  necessary or
          advisable for the proper operation or  administration of the Plan. The
          Committee shall also have the authority to grant Awards in replacement
          of Awards  previously  granted under this Plan or any other  executive
          compensation plan of the Company or a Subsidiary.  All  determinations
          of the Committee  shall be made by a majority of its members,  and its
          determinations  shall be final,  binding and  conclusive.  All actions
          required  of the  Committee  under  the  Plan  shall  be  made  in the
          Committee's sole discretion,  not in a fiduciary capacity and need not
          be uniformly applied to other persons,  including  similarly  situated
          persons.


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<PAGE>



4.  Eligibility:

          Any Key Employee is eligible to become a Participant of the Plan.

5.  Term:

          The Plan shall become effective as of November 1, 2002.

          Awards  shall not be granted  pursuant  to the Plan after  November 1,
          2012.

6.  Participation:

          The Committee shall select, from time to time, Participants from those
          Key Employees  who, in the opinion of the  Committee,  can further the
          Plan's  purposes.  Once a  Participant  is so selected,  the Committee
          shall  determine  the  type  or  types  of  Awards  to be  made to the
          Participant  and shall  establish  in the  related  Award  Notices the
          terms, conditions, restrictions and/or limitations, if any, applicable
          to the  Awards  in  addition  to those  set forth in this Plan and the
          administrative rules and regulations issued by the Committee.

7.  Stock Appreciation Rights

          (a)  Grants.  Awards may be granted in the form of stock  appreciation
          rights  ("SARs").  SARs  shall  entitle  the  recipient  to  receive a
          payment,  in cash,  equal to the  appreciation  in  market  value of a
          stated number of shares of Common Stock from the Exercise Price to the
          market value on the date of exercise. No SAR may be exercised for cash
          by an officer or  director of the Company who is subject to Section 16
          of the Exchange Act,  except in  accordance  with Rule 16b-3 under the
          Exchange Act, as such Rule may be amended from time to time.

          (b) Terms and  Conditions of SARS.  SARs shall be exercisable in whole
          or in such  installments and at such times as may be determined by the
          Committee and designated in the Award Notice.  The exercise price of a
          SAR shall be 100 percent of the fair market value of the Common Stock,
          as  determined by the  Committee,  on the date of the SAR's grant (the
          "Exercise Price").


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<PAGE>



          (c) Additional Terms and Conditions.  The Committee may, by way of the
          Award Notice or  otherwise,  determine  such other terms,  conditions,
          restrictions  and/or limitations,  if any, of any SAR Award,  provided
          they are not inconsistent with the Plan.

8.  Performance Units

          (a) Grants.  Awards may be granted in the form of  performance  units.
          Performance  units, as that term is used in this Plan,  shall refer to
          Units valued by reference to designated  criteria  established  by the
          Committee, other than Common Stock.

          (b) Performance Criteria. Performance units shall be contingent on the
          attainment  during  a  performance   period  of  certain   performance
          objectives.  The length of the  performance  period,  the  performance
          objectives  to be  achieved  during the  performance  period,  and the
          measure  of  whether  and to what  degree  such  objectives  have been
          attained  shall be  conclusively  determined  by the  Committee in the
          exercise of its absolute  discretion.  Subject to the  requirements of
          paragraph 9, if applicable,  performance  objectives may be revised by
          the  Committee,  at such  times as it  deems  appropriate  during  the
          performance period, in order to take into consideration any unforeseen
          events or changes in circumstances.

          (c) Additional Terms and Conditions.  The Committee may, by way of the
          Award Notice or  otherwise,  determine  such other terms,  conditions,
          restrictions,  and/or limitations, if any, of any Award of performance
          units, provided they are not inconsistent with the Plan.

9.   Provisions Applicable to Section 162(m) Participants

          (a)  Designation of Participants  and Goals.  Within 90 days after the
          start of each fiscal year (or by such other time as may be required or
          permitted by Section  162(m) of the Code),  the  Committee  shall,  in
          writing: (i) designate the Participants,  if NY, for whom the grant of
          performance  units shall be subject to this  paragraph  9; (ii) select
          the performance  goal or goals  applicable to the fiscal year or years
          included  within any  performance  period;  (iii) establish the number
          performance  units  which  may be earned  for such year or such  years
          within a performance period by each such Participant; (iv) specify the
          relationship  between  performance goals and the number of performance
          units  performance  shares to be earned by each such  Participant  for
          such year or period and  (v)the  method  for  computing  the number of
          performance units payable if the performance goals are attained.


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<PAGE>



          The Committee may specify that the number of performance units will be
          earned if the  applicable  target is achieved  for one goal or for any
          one of a  number  of  goals  for a  fiscal  year  or  years  within  a
          performance  period. The Committee may also provide that the number of
          performance units to be earned for a given fiscal year or years within
          a  performance  period  will  vary  based  upon  different  levels  of
          achievement of the applicable performance targets.

          (b)   Performance   Criteria.   For  purposes  of  this  paragraph  9,
          performance  goals  shall be limited to one or more of the  following:
          (i) future economic value per share of Common Stock, (ii) earnings per
          shares,  (iii) return on average common equity,  (iv) pre-tax  income,
          (v) pre-tax  operating  income,  (vi) net  revenue,  (vii) net income,
          (viii)  profits  before  taxes,  (ix) book value per share,  (x) stock
          price and (xi) earnings available to common stockholders.

          (c) Annual  Payment.  Following the  completion of each fiscal year or
          completion of a  performance  period,  the Committee  shall certify in
          writing  whether the applicable  performance  goals have been achieved
          for such year or  performance  period  and the  number of  performance
          units,  if any,  payable  to a  Participant  for such  fiscal  year or
          performance  period.  The  amounts due to a  Participant  to whom this
          paragraph 9 applies will be paid  following the end of the  applicable
          fiscal year or  performance  period  after such  certification  by the
          Committee. In determining the amount due to a Participant to whom this
          paragraph applies for a given fiscal year or performance  period,  the
          Committee  shall have the right to reduce  (but not to  increase)  the
          amount  payable at a given level of  performance  to take into account
          additional  factors  that  the  Committee  may  deem  relevant  to the
          assessment of individual or corporate performance for the year.

          (d)  Restrictions.  Anything  in  this  paragraph  9 to  the  contrary
          notwithstanding,  the  maximum  annual  amount  that  may be paid to a
          Participant  under the Plan for (i) the fiscal  year in which the Plan
          is approved  by the  Stockholders  of the Company  shall equal no more
          than $2,000,000 and (ii) each subsequent  fiscal year shall equal 110%
          of such maximum amount for the preceding fiscal year.

          (e) Adjustment for Non-Recurring Items, Etc.  Notwithstanding anything
          herein to the contrary,  if the  Company's  financial  performance  is
          affected by any event that is of a non-recurring nature, the Committee
          in its sole  discretion  may make such  adjustments  in the  financial
          criteria as it shall  determine to be  equitable  and  appropriate  in
          order  to  make  the  calculations  of  Awards,  as  nearly  as may be
          practicable,  equivalent to the calculation  that would have been made
          without regard to such event. In the event of a significant  change of
          the business or assets of the Company under circumstances involving an
          acquisition or a merger,  consolidation  or similar  transaction,  the
          Committee  shall,  in good faith,  recommend to the Board for approval
          such  revisions  to the  financial  criteria  and the other  terms and
          conditions  used in calculating  Awards for the then current Plan Year
          as it reasonably deems appropriate in light of any such change.


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<PAGE>



          (f) Repeal of Section 162(m). Without further action by the Board, the
          provisions  of this  paragraph 9 shall cease to apply on the effective
          date of the  repeal of Section  162(m) of the Code (and any  successor
          provision thereto).

(j)      Change of Control

          (a) Accelerated  Vesting and Payment of SARs. In the event of a Change
          of  Control,  each SAR  then  outstanding  shall be fully  exercisable
          regardless of the exercise schedule  otherwise  applicable to such SAR
          and, in connection  with such a Change of Control,  the Committee may,
          in its discretion, provide that each SAR shall, upon the occurrence of
          such  Change of Control,  be  canceled  in exchange  for a payment per
          share (the "Settlement  Payment") in an amount equal to the excess, if
          any,  of the Change of Control  Price over the base price of such SAR.
          Such Settlement Payment shall be in the form of cash and shall be paid
          within 30 days of the Change of Control.

          (b) Payment of Performance Units. In the event of a Change of Control,
          the performance  period assigned to each performance unit with respect
          to which an Award has been previously  granted shall be deemed to have
          been satisfied,  notwithstanding the fact that such performance period
          was  originally  scheduled to extend  beyond the date of the Change of
          Control.  Prior to the  effective  date of the Change of Control,  the
          Committee, in the exercise of its absolute discretion,  may revise the
          performance  objectives  applicable to any such performance  units and
          shall  determine the amount of payment to be made to each  Participant
          to whom an Award has been granted.  Upon the occurrence of such Change
          of Control, the Company shall make payment of the amount so determined
          by the Committee in cash to each Participant.

11.      Payment of Awards

          Payment  of  Awards  shall  be  made  in  cash,   in  a  lump  sum  or
          installments, as determined by the Committee;  provided, however, that
          if a payment  is to be made in  connection  with a Change of  Control,
          such payment shall be made in a lump sum.


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<PAGE>



12.       Deferral of Awards

          At the discretion of the Committee,  payment of a performance unit, or
          any portion  thereof may be deferred by a Participant  until such time
          as  the  Committee  may  establish.   All  such  deferrals   shall  be
          accomplished by the delivery of a written, irrevocable election by the
          Participant  at least six months (and in the  calendar  year) prior to
          such time payment  would  otherwise be made, on a form provided by the
          Company.  Further,  all  deferrals  shall be made in  accordance  with
          administrative  guidelines established by the Committee to ensure that
          such deferrals comply with all applicable requirements of the Code and
          its  regulations.  Deferred  payments  shall  be paid in a lump sum or
          installments,  as determined by the Committee.  The Committee may also
          credit interest,  at such rates to be determined by the Committee,  on
          cash  payments  that are  deferred  and credit  dividends  or dividend
          equivalents  on deferred  payments  denominated  in the form of Common
          Stock.

13.      Termination of Employment

          If a  Participant's  employment  with  the  Company  or  a  Subsidiary
          terminates for a reason other than death, disability,  retirement,  or
          any approved reason, all unexercised,  unearned, and/or unpaid Awards,
          including,  but not by way of limitation,  Awards earned,  but not yet
          paid, all unpaid dividends and dividend equivalents,  and all interest
          accrued on the foregoing shall be cancelled or forfeited,  as the case
          may be, unless the Participant's Award Notice provides otherwise.  The
          Committee shall have the authority to promulgate rules and regulations
          to (i) determine what events  constitute  disability,  retirement,  or
          termination  for an approved reason for purposes of the Plan, and (ii)
          determine the  treatment of a Participant  under the Plan in the event
          of his death, disability,  retirement,  or termination for an approved
          reason.

14.      Nonassignability

          Unless the Committee determines otherwise, no SARs, performance shares
          or  other   derivative   securities  (as  defined  in  the  rules  and
          regulations  promulgated under Section 16 of the Exchange Act) awarded
          under  the  Plan  shall  be  subject  in  any  manner  to  alienation,
          anticipation,  sale,  transfer,  assignment,  pledge,  or encumbrance,
          except for transfers by will or the laws of descent and  distribution;
          provided,  however,  that the Committee may, subject to such terms and
          conditions as the Committee  shall specify,  permit the transfer of an
          Award  to a  Participant's  family  members  or to one or more  trusts
          established in whole or in part for the benefit of one or more of such
          family  members.  During the  lifetime of the  Participant,  a SAR, or
          similar-type  other award shall be  exercisable  only by him or by the
          family  member or trust to whom such  Option,  SAR, or other Award has
          been transferred in accordance with the previous sentence.


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15.      Adjustment of Shares Available

          If there is any change in the number of  outstanding  shares of Common
          Stock through the declaration of stock dividends,  stock splits or the
          like, the number of shares available for Awards, the shares subject to
          any Award and the  exercise  prices of Awards  shall be  automatically
          adjusted.  If there is any change in the number of outstanding  shares
          of Common  Stock  through  any  change in the  capital  account of the
          Company,  or  through  any other  transaction  referred  to in Section
          424(a) of the Code, the Committee shall make  appropriate  adjustments
          and/or modifications to outstanding Awards as it deems appropriate. In
          the  event of any  other  change in the  capital  structure  or in the
          Common Stock of the Company, the Committee shall also be authorized to
          make such  appropriate  adjustments in the maximum number of shares of
          Common Stock available for issuance under the Plan and any adjustments
          and/or modifications to outstanding Awards as it deems appropriate.

16.      Withholding Taxes:

          The Company  shall be  entitled  to deduct from any payment  under the
          Plan,  regardless  of the  form of such  payment,  the  amount  of all
          applicable  income and employment taxes required by law to be withheld
          with respect to such payment or may require the  Participant to pay to
          it such tax prior to and as a condition of the making of such payment.

17.      Noncompetition Provision

          Unless the Award  Notice  specifies  otherwise,  a  Participant  shall
          forfeit all unexercised,  unearned,  and/or unpaid Awards,  including,
          but not by way of limitation,  Awards earned but not yet paid, if, (i)
          in the opinion of the Committee, the Participant,  without the written
          consent of the Company,  engages  directly or indirectly in any manner
          or capacity as principal, agent, partner, officer, director, employee,
          or  otherwise,  in any  business  or  activity  competitive  with  the
          business  conducted  by the  Company  or any  Subsidiary;  or (ii) the
          Participant  performs any act or engages in any activity  which in the
          opinion of the Chief  Executive  Officer of the Company is inimical to
          the best interests of the Company. In addition,  the Committee may, in
          its discretion,  condition the grant, exercise, payment or deferral of
          any Award,  dividend,  or dividend equivalent made under the Plan on a
          Participant's  compliance  with the terms of this paragraph 17 and any
          other terms specified by the Committee in the Award Notice,  and cause
          such a  Participant  to forfeit  any  payment  which is deferred or to
          grant to the  Company  the  right to  obtain  equitable  relief if the
          Participant fails to comply with the terms hereof.


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<PAGE>



18.       Amendments to Awards:

          Subject to the  requirements  of paragraph 9, the Committee may at any
          time unilaterally  amend any unexercised,  unearned,  or unpaid Award,
          including,  but not by way of  limitation,  Awards  earned but not yet
          paid, to the extent it deems appropriate;  provided, however, that any
          such amendment  which, in the opinion of the Committee,  is adverse to
          the Participant shall require the Participant's consent.

19.       Compliance with Law:

          With respect to persons  subject to Section 16 of the Exchange Act, it
          is the intent of the Company that the Plan and all transactions  under
          the Plan comply with all applicable  provisions of Rule 16b-3,  as the
          Rule may be amended or replaced, under the Exchange Act.

20.       No Right to Continued Employment or Grants:

          Participation in the Plan shall not give any Key Employee any right to
          remain in the employ of the Company or any Subsidiary. The Company or,
          in the case of employment with a Subsidiary, the Subsidiary,  reserves
          the right

21.       Amendment:

          The  Committee  may  suspend  or  terminate  the Plan at any time.  In
          addition,  the Committee may, from time to time, amend the Plan in any
          manner,  but may not without Board approval adopt any amendment  which
          would (a) materially  increase the benefits  accruing to  Participants
          under  the  Plan  or (b)  materially  modify  the  requirements  as to
          eligibility for  participation  in the Plan; and provided further that
          the  Committee  shall not amend the Plan  without the  approval of the
          Board if such  approval is required by Rule 16b-3 of the  Exchange Act
          or Section  162(m) of the Code, in each case as such  provision may be
          amended from time to time.


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<PAGE>



22.       Governing Law:

          The Plan shall be governed by and  construed  in  accordance  with the
          laws of the State of Texas, except as superseded by applicable Federal
          Law.

IN WITNESS WHEREOF,  the Company has caused this Plan to be executed by its duly
authorized officers on this 4th day of November, 2002.


Financial Industries Corporation


By:    /s/ Thomas C. Richmond

Title:   Secretary


By: /s/ Theodore A. Fleron

Title:   Vice President and Assistant Secretary


                                     - 76 -