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 June 30,  2001
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 office           (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:
9,446,099.

                                      - 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
Companys 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
         June 30, 2001 and December 31, 2000................................ 4

Consolidated Statements of Income
         For the three and six month periods ended
         June 30, 2001 and June 30, 2000.................................... 6

Consolidated Statements of Cash Flows
         For the three and six month periods ended
         June 30, 2001 and June 30, 2000................................... 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 ..............................................26

Part II

Other  Information..........................................................27

Signature  Page.............................................................31





                                      - 3 -
<page>


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

                                                               <c>                       <c>
                                                                June 30,             December 31,
                                                                    2001                     2000
                                                                             (unaudited)

ASSETS
Investments other than investments in affiliate:

Fixed maturities available for sale at
 market value (amortized cost of $476,471 and
 $78,249 at June 30, 2001 and
 December 31, 2000, respectively)                         $    483,773             $       79,786

Fixed maturities at amortized cost (market
 approximates $1,023 at June 30, 2001)                           1,016                          0

Equity securities at market (cost approximates
 $45 at June 30 at June 30, 2001 and $11
 at December 31, 2000)                                              51                          4

Policy loans                                                    51,761                      3,699

Mortgage loans and other investments                             4,790                          0

Invested real estate and other invested assets                  45,252                          0

Short-term investments                                         163,606                     15,624

     Total investments                                         750,249                     99,113

Cash                                                            12,079                      2,733

Investment in affiliate                                              0                     79,105

Accrued investment income                                        9,488                      1,172

Agency advances and other receivables                           25,787                      7,604

Reinsurance receivables                                         34,919                     17,466

Due and deferred premiums                                       22,201                     12,537

Real estate occupied by the Company                             20,143                          0

Property and equipment, net                                      3,762                      1,318

Deferred policy acquisition costs                               77,628                     56,161

Present value of future profits of
 acquired businesses                                            34,333                     19,440

Other assets                                                    16,160                      4,117

Separate account assets                                        421,142                          0

     Total Assets                                         $  1,427,891             $      300,766
</table>

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



                                      - 4 -
<page>


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

                                                                               <c>                  <c>
                                                                                 June 30,         December31,
                                                                                    2001                 2000
                                                                                          (unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
Policy liabilities and contract holder deposit funds:

Future policy benefits                                                    $       192,310         $    62,462

Contract holder deposit funds                                                     567,899              43,301

Other policy claims and benefits payable                                           13,933               2,931
                                                                                  774,142             108,694

Subordinated notes payable to affiliate                                                 0              35,349

Deferred federal income taxes                                                      33,931              24,437

Excess of net assets acquired over cost                                            13,955                   0

Other liabilities                                                                  13,272               3,734

Separate account liabilities                                                      413,970                   0

Total Liabilities                                                               1,249,270             172,214

Commitments and Contingencies

Shareholders' equity:
Common stock, $.20 par value, 25,000,000 shares authorized at
June 30, 2001 and 10,000,000 shares authorized at December
31, 2000; 11,689,546 and 5,845,300 shares issued, 9,446,099 and                     2,338               1,169
5,054,661 shares outstanding in 2001 and 2000, respectively

Additional paid-in capital                                                         67,761               7,225

Accumulated other comprehensive income                                              4,751               2,107

Retained earnings                                                                 126,293             125,426
                                                                                  201,143             135,927
Common treasury stock, at cost, 2,243,447 at 2001 and
 790,639 at 2000.                                                                 (22,523)             (7,375)

Total Shareholders' Equity                                                        178,620             128,552

Total Liabilities and Shareholders' Equity                              $       1,427,891         $   300,766

                The accompanying notes are an integral part of these consolidated financial statements.
</table>
                                                       - 5 -
<page>


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                      (in thousands except per share data)
 <table>
  
                                                                                <c>               <c>
                                                                                    Three Months Ended June 30,
                                                                                       2001               2000
                                                                                             (unaudited)

Revenues:
 Premiums                                                                       $     9,061           $   8,443

 Net investment income                                                                7,141               1,700

 Earned insurance charges                                                             5,658               1,225

 Other                                                                                  254                   3
                                                                                     22,114              11,371
Benefits and expenses:
 Policyholder benefits and expenses                                                   6,703               3,870

 Interest expense on contract holders
  deposit funds                                                                       4,126                 469

 Amortization of present value of future
  profits of acquired businesses                                                        938                 856

 Amortization of deferred policy
  acquisition costs                                                                   1,494               1,094

 Operating expenses                                                                   5,376               2,991

 Interest expense                                                                       189                 484
                                                                                     18,826               9,764
Income before federal income tax and
 equity in net earnings of affiliates                                                 3,288               1,607

Provision for federal income taxes                                                      994                 319

Income before equity in net earnings of affiliates                                    2,294               1,288

Equity in net earnings of affiliate, net of tax                                         472                 917

Net Income                                                                      $     2,766           $   2,205


</table>
              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)
<table>

                                                    <c>                <c>

                                                    Three Months Ended June 30,
                                                     2001                  2000

                                                            (unaudited)
Net Income Per Share

Basic:

Average weighted shares outstanding                  7,193               5,055

Basic earnings per share                      $       0.38        $       0.44

Diluted:

Common stock and common stock equivalents            7,250               5,168

Diluted earnings per share                    $       0.38        $       0.43
</table>


              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)
<table>

                                                          <c>               <c>

                                                          Six  Months Ended June 30,
                                                             2001              2000
                                                                  (unaudited)

Revenues:
 Premiums                                           $      17,099       $   16,844

 Net investment income                                      8,772            3,440

 Earned insurance charges                                   6,592            2,372

 Other                                                        254                3
                                                           32,717           22,659
Benefits and expenses:
 Policyholder benefits and expenses                         9,294            7,221

 Interest expense on contract holders
  deposit funds                                             4,696            1,059

 Amortization of present value of future
  profits of acquired businesses                            1,776            1,872

 Amortization of deferred policy
  acquisition costs                                         2,933            2,443

 Operating expenses                                         8,516            5,938

 Interest expense                                             616            1,012

   Total                                                   27,831           19,545

Income before federal income tax and
 equity in net earnings of affiliates                       4,886            3,114

Provision for federal income taxes                          1,354              578

Income before equity in net earnings
 of affiliates                                              3,533            2,536

Equity in net earnings of affiliate,
 net of tax                                                 1,317            1,883

Net Income                                          $       4,849       $    4,419
</table>

                 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)
<table>

                                                        <c>                <c>
                                                          Six Months Ended June 30,
                                                            2001               2000
                                                                 (unaudited)
Net Income Per Share

Basic:
Average weighted shares outstanding                        6,130              5,055

Basic earnings per share                              $     0.79         $     0.87

Diluted:
Common stock and common stock equivalents                  6,160              5,167

Diluted earnings per share                            $     0.79         $     0.86
</table>



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



                                      - 9 -
<page>



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

                                                                      <c>           <c>

                                                                      Three Months Ended June 30,
                                                                          2001            2000
                                                                              (unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES

Net Income                                                         $     2,766      $    2,205

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

Amortization of present value of future
 profits of acquired business                                            1,218             856

Amortization of deferred policy
 acquisition costs                                                       1,478           1,094

Equity in undistributed earnings of  affiliate                            (776)         (1,505)

Changes in assets and liabilities:

Increase in accrued investment income                                       72            (113)

(Increase) Decrease in agent advances and
 other receivables                                                       2,917          (1,252)

Increase in due and deferred premiums                                     (101)           (260)

Increase in deferred policy acquisition costs                           (2,567)         (2,222)

Decrease in other assets                                                  (381)           (133)

Decrease in policy liabilities and accruals                               (953)            129

Increase (Decrease) in other liabilities                                (1,620)            136

Increase (Decrease) in deferred federal income taxes                       114             (77)

Other, net                                                               1,089             445

Net cash provided by (used in) operating activities                  $   4,018      $     (697)
</table>

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



                                     - 10 -
<page>



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

                                                                      <c>          <c>


                                                                  Three  Months Ended June 30,
                                                                    2001                  2000
                                                                           (unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES

Fixed maturities purchased                                     $   (28,785)     $       (8,826)

Proceeds from sales and maturities of
 fixed maturities                                                   34,069               6,406

Increase in policy loans                                               (61)                 (5)

Net change in short-term investments                                (3,757)              5,837

Purchase & retirement of property
 and equipment                                                         (10)                 37

Net cash provided by  investing activities                           1,456               3,449

CASH FLOW FROM FINANCING
 ACTIVITIES

Dividends Paid                                                      (1,931)               (907)

Net cash from purchase of insurance holding company                  6,979                   0

Purchase of treasury stock                                          (2,298)                  0

Repayment of subordinated notes payable                                  0              (1,537)

Net cash provided by (used in) financing activities                  2,750              (2,444)

Net  Increase (Decrease) in cash                                     8,224                 308

Cash, beginning of period                                            3,855                 873

Cash, end of period                                            $    12,079      $        1,181

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



                                     - 11 -
<page>


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

                                                     <c>                <c>
                                                         Six Months Ended June 30,
                                                            2001           2000
                                                                (unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES

Net Income                                        $        4,849       $   4,419

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

Amortization of present value of future
 profits of acquired business                              2,056           1,872

Amortization of deferred policy
 acquisition costs                                         2,917           2,443

Equity in undistributed earnings of  affiliate            (2,137)         (3,031)

Changes in assets and liabilities:

Increase in accrued  investment income                      (104)            (64)

Increase in agent advances and
 other  receivables                                           (3)         (1,509)

Increase in due and deferred premiums                       (427)           (123)

Increase in deferred policy acquisition costs             (4,540)         (4,193)

Decrease in other assets                                      45             (33)

Decrease in policy liabilities and accruals                 (705)            (91)

Increase (Decrease) in other liabilities                     137            (329)

Decrease in deferred federal
 income taxes                                               (150)           (124)

Other, net                                                   728             305

Net cash provided by (used in)
 operating activities                             $        2,666       $    (458)
</table>

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


                                     - 12 -
<page>



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

                                                      <c>                  <c>

                                                         Six Months Ended June 30,
                                                           2001               2000
                                                                 (unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES

Fixed maturities purchased                        $      (33,985)       $   (10,288)

Proceeds from sales and maturities of
 fixed maturities                                         42,565              6,638

Increase in policy loans                                    (108)                (8)

Net change in short-term investments                      (2,995)             8,549

Purchase & retirement of property
 and equipment                                               (10)                37

Net cash provided by investing activities                  5,467              4,928

CASH FLOW FROM FINANCING
 ACTIVITIES

Dividends Paid                                            (1,931)              (907)

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

Purchase of treasury stock                                (2,298)                 0

Repayment of subordinated notes payable                   (1,537)            (3,074)

Net cash provided by (used in)
 financing activities                                      1,213             (3,981)

Net Increase in cash                                       9,346                489

Cash, beginning of year                                    2,733                692

Cash, end of period                               $       12,079        $     1,181

</table>

              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 reflect all adjustments which are, in
the opinion of management,  necessary to present a fair statement of the interim
results.  The statements  have been prepared to conform to the  requirements  of
Form 10-Q and do not necessarily  include all disclosures  required by generally
accepted accounting  principles (GAAP). The reader should refer to Form 10-K for
the year ended  December  31, 2000,  previously  filed with the  Commission  for
financial  statements  prepared  in  accordance  with GAAP.  Certain  prior year
amounts have been reclassified to conform with current year presentation.

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

Other Comprehensive Income

The following is a reconciliation of accumulated other comprehensive income from
December 31, 2000 to June 30, 2001 (in thousands):
<table>

                                               <c>                  <c>             <c>
                                                                       Net              Total
                                            Net unrealized             appreciation     accumulated
                                            gain on investments        (depreciation)   other
                                            in fixed maturities        of equity        comprehensive
                                            available for sale          securities      income

Balance at December 31, 2000                $   2,107                  $     0          $   2,107
Current Period Change                           2,640                        4              2,644
Balance at June 30, 2001                    $   4,747                  $     4          $   4,751
</table>


Acquisition of InterContinental Life Corporation

On May 18, 2001, Financial  Industries  Corporation ("FIC") completed the merger
of a subsidiary of FIC with and into ILCO,  with ILCO  surviving the merger as a
wholly-owned  subsidiary of FIC. In connection with the transaction,  FIC issued
1.1 shares of its common stock for each share of ILCO common  stock  outstanding
at the time of the merger and not held  directly  by FIC or ILCO.  In  addition,
each  option to  purchase  ILCO  common  stock was  assumed by FIC and became an
option to purchase  FIC common  stock with the number of shares and the exercise
price adjusted for the exchange ratio in the merger.  The  consideration for the
transaction  was  $50.536  million  represented  by the  issuance of 4.7 million
shares of FIC stock, at $10 per share, to ILCO  shareholders.  The $10 per share
price was  calculated  based on the average price of FIC common stock on the two
days  immediately  precedding  and  following  the date of the merger  agreement
between FIC and ILCO.  Prior to the  merger,  FIC owned  approximately  48.1% of
ILCO's common stock.  The  acquisition  of ILCO was accounted for as a purchase;
accordingly,  the results of ILCO's  operations  are included in income from the
date of the  acquisition  to June 30, 2001. The allocation of the purchase price
to the net assets acquired  resulted in excess of net assets acquired which have
been estimated to be approximately  $14.1 million.  This estimate is based on an
analysis, as of May 18, 2001, of the acquired block of business,  which estimate
is subject to  adjustment  based on actuarial  analysis of the book of business.
For the  period  from  January  1, 2001 to May 17,  2001,  and for the first six
months of 2000,  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.

                                      -14-
<page>

The pro forma unaudited  results of operations for the six months ended June 30,
2001 and 2000, assuming the ILCO  acquisition  had been  consummated  as of the
beginning of the respective periods, are as follows:

                                            Six Months Ended
                                                 June 30
                                   (In thousands, except per share data)
                                          2001              2000

         Total Revenues                 $ 71,129         $ 72,318

         Net Income                     $  7,870         $  8,950

         Net Income per share:
              Basic                     $   0.82         $   0.91
              Diluted                   $   0.81         $   0.90


New Accounting Pronouncements

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

During 2001, the Financial Accounting Standards Board (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 business  combinations
under one method, the purchase method. The most significant  changes made by FAS
141 are: (1)  requiring  that the purchase  method of accounting be used for all
business  combinations  initiated after June 30, 2001, (2) establishing specific
criteria for the recognition of intangible assets separately from goodwill,  and
(3) requiring  unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized).

As of the earlier of the first day of the fiscal year  beginning  after December
15, 2001, or the date Financial Accounting Standards Statement No. 142 (FAS 142)
is initially  applied in its entirety,  the amount of any  unamortized  deferred
credit related to an excess of net assets  acquired over cost 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,  shall  be  written  off and  recognized  as the  effect  of a  change  in
accounting principle. The effect of the accounting change and related income tax
effects  shall  be  presented  in the  income  statement  between  the  captions
extraordinary items and net income. The per-share  information  presented in the
income  statement shall include the per-share  effect of the accounting  change.
Upon  adoption fo FAS 141 in the first  quarter of 2002,  FIC will  allocate the
unamortized  balance of excess of net assets  acquired over costs to net income.
This amount will be recorded in  extraordinary  items as a change in  accounting
principle.

                                     - 15 -
<page>




During 2001, the FASB issued 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 will
be  effective  for fiscal years  beginning  after  December  15, 2001.  The most
significant  changes  made by FAS 142 are: (1)  goodwill  and  indefinite  lived
intangible  assets will no longer be amortized,  (2) goodwill will be tested for
impairment at least annually at the reporting unit level, (3) intangible  assets
deemed  to have an  indefinite  life  will be  tested  for  impairment  at least
annually, and (4) the amortization period of intangible assets with finite lives
will no  longer  be  limited  to forty  years.  The  adoption  of FAS 142 is not
expected to materially affect FIC's financial position.

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 has approved a dividend  policy.  The
policy adopted by the Board  anticipates  that the Company will declare and pay,
on a semi-annual  basis,  a dividend on the common stock of the Company so as to
provide to  shareholders  with an annualized  yield of  approximately  3% on the
market  value  (based on the  NASDAQ  National  Market  quotation  system).  The
implementation  of this  policy and the future  declarations  of  dividends  are
subject to change depending on future circumstances.

Also, in May,  2001,  FIC announced that its Board of Directors has approved the
payment of a semi- annual cash  dividend in the amount of $.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.




                                     - 16 -
<page>
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operation

         Results of Operations - Six Months Ended June 30, 2001 and 2000

For the six-month period ended June 30, 2001, Financial Industries  Corporation'
("FIC") net income was $4,849,000  (basic earnings of $0.79 per common share, or
diluted  earnings of $0.79 per common  share) as compared to $4,419,000  (basic
earnings  of $0.87 per common  share,  or diluted  earnings  of $0.86 per common
share) in the  first  six  months  of 2000.  Earnings  per  share are  stated in
accordance with the requirements of FAS No. 128, which  establishes two measures
of earnings per share:  basic earnings per share and diluted earnings per share.
Basic  earnings  per share is computed by dividing  income  available  to common
shareholders by the weighted average number of common shares  outstanding during
the period. Diluted earnings per share reflect the potential dilution that would
occur if securities or other  contracts to issue common stock were  converted or
exercised.

Earnings per share for the six months ended June 30, 2001,  were affected by the
increase  in the number of FIC's  common  shares  outstanding.  The  increase is
attributable to the shares issued to InterContinental  Life Corporation ("ILCO")
shareholders in connection with the merger described in the following paragraph.
As of June  30,  2001,  the  number  of  FIC's  common  shares  outstanding  was
9,446,099, as compared to 5,054,661 as of June 30, 2000.

On May 18, 2001,  FIC  completed the merger of a subsidiary of FIC with and into
InterContinental  Life Corporation  ("ILCO"). In connection with the merger, FIC
issued  1.1  shares of its  common  stock for each  share of ILCO  common  stock
outstanding at the time of the merger and not held directly by FIC or ILCO. As a
result of the merger, ILCO became a wholly-owned subsidiary of FIC. 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 period  from May 18, 2001 to June 30,
2001, the operations of ILCO are reported on a consolidated  basis with FIC. For
the period from January 1, 2001 to May 17, 2001, and for the first six months of
2000,  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.

FIC's  income from  operations - as  determined  before  federal  income tax and
equity in net earnings of its affiliate, InterContinental Life Corporation - for
the  six-month  period ended June 30,  2001,  was  $4,886,000  (on revenues of $
32,717,000),  as compared to  $3,114,000  (on revenues of  $22,659,000),  in the
first six months of 2000. The  consolidation of ILCO's operations for the period
from May 18,  2001 to June 30,  2001  contributed  approximately  $1,674,000  to
income  from  operations  and  approximately  $11,540,000  to  revenues  for the
six-month period ended June 30, 2001.

Revenues.

Premium income for the first six months of 2001, net of reinsurance  ceded,  was
$17.1  million,  as compared  to $16.8  million in the first six months of 2000.
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
following the May 18th merger contributed  approximately $1.1 million to premium
income for the six-month period ended June 30, 2001.


                                     - 17 -
<page>



Net  investment  income  for the first six  months of 2001 was $8.8  million  as
compared to $3.4 million in the same period of 2000. The consolidation of ILCO's
operations  for the  period  from  May 18,  2001 to June  30,  2001  contributed
approximately  $5.65 million to net investment  income for the six-month  period
ended  June  30,  2001.  The  level  of  investment  income  contributed  by the
investment  portfolio  of  Family  Life  Insurance  Company  (which  has  been a
subsidiary  of FIC for both of the  six-month  periods  covered by this  report)
during the current period was adversely  affected by the decline in the level of
interest  income  received from fixed income and  short-term  investments.  This
decline is attributable to lower interest rates during the period.

Earned insurance charges for the first six months of 2001 were $6.6 million,  as
compared to $2.4  million in the same period of 2000.  This source of revenue is
related to the  universal  life  insurance and annuity book of business of FIC's
insurance subsidiaries. The consolidation of ILCO's operations following the May
18th merger  contributed  approximately $4.5 million to earned insurance charges
for the six-month  period ended June 30, 2001. At Family Life,  earned insurance
charges  declined  from $2.4  million in the 2000 period to $2.1  million in the
2001  period.  This  change is  attributable  to a  decrease  in  Family  Life's
universal life and annuity business.  The face amount of in force universal life
policies  was $902.9  million at June 30, 2000 as compared to $816.7  million at
June 30, 2001.

Benefits and Expenses.

Policyholder benefits and expenses were $9.29 million in the first six months of
2001,  as  compared  to $7.22  million  in the  first six  months  of 2000.  The
consolidation of ILCO's  operations for the period from May 18, 2001 to June 30,
2001  contributed  approximately  $3.31  million to  policyholder  benefits  and
expenses for the six-month period ended June 30, 2001. At Family Life, the level
of policyholder benefits and expenses decreased from $7.22 million for the first
six months of 2000 to $5.98 million for the same period in 2001,  which decrease
is attributable to a decrease in death benefit claims.

Interest  expense on contract  holders  deposit  funds was $4.70  million in the
first six months of 2001, as compared to $1.06 million in the same period of the
year 2000. This increase is primarily  attributable to $3.38 million of interest
expense on contract  holders deposit funds resulting from the  consolidation  of
ILCO's operations following the May 18th merger transaction.

In the first six months of 2001,  the  amortization  of present  value of future
profits of acquired  business was $1.78  million as compared to $1.87 million in
the first six months of 2000.  The  decreases in  amortization  was expected and
should  continue to decrease as the  underlying  asset,  present value of future
profits, decreases.



                                     - 18 -
<page>


The amortization of deferred policy  acquisition  costs was $2.93 million in the
first six months of 2001,  as compared to $2.44  million in the first six months
of 2000. The increase in amortization is attributable to the  capitalization  of
expenses  incurred  in  connection  with  the  writing  of  new  business.   The
amortization  of  deferred  policy  acquisition  costs  for the  current  period
includes costs associated with Investors-NA and Investors-IN only for the period
from May 18, 2001 to June 30, 2001, in the amount of $0.28 million.

The operating  expenses for the first six months of 2001 were $8.52 million,  as
compared to $5.94 million in the first six months of 2000. The  consolidation of
ILCO's  operations for the period from May 18, 2001 to June 30, 2001 contributed
approximately  $2.19  million to  operating  expenses  for the six- month period
ended June 30, 2001.

Interest expense for the first six months of 2001 was $0.62 million, as compared
to $1.01 million in the first six months of 2000.  The decrease in the amount of
interest  expenses  from the first six months of 2000 to the first six months of
2001 is  attributable  to the scheduled  reduction in the amount of  outstanding
indebtedness.  This  interest  expense is related  to the  indebtedness  owed to
Investors-NA  by Family  Life  Corporation  and FIC and  includes  the amount of
interest for the period from January 1, 2001 to May 18, 2001. The  consolidation
of ILCO's operations with those of FIC for periods following the May 18th merger
results in the elimination of this interest expense in the income  statements of
FIC.

The provision for federal income taxes was $1.35 million in the first six months
of 2001 as  compared  to $0.58  million  in the  first six  months of 2000.  The
inclusion  of ILCO's  results  for the period from May 18, 2001 to June 30, 2001
contributed approximately $767,000 to the level of federal income taxes.

            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 InterContinental  Life Corporation  ('ILCO"),  net of federal income
tax, was $1.32 million, as compared to $1.88 million for the first six months of
2000. Following the merger of ILCO with FIC on May 18, 2001, the results of ILCO
were consolidated with those of FIC. Accordingly,  the equity in net earnings of
affiliate  results  for the 2001 period are not fully  comparable  with the 2000
period.

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.



                                     - 19 -
<page>



                         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 a holding company
whose principal assets  currently  consists of the common stock of its insurance
subsidiaries   -   Investors   Life   Insurance   Company   of   North   America
("Investors-NA"),  Investors Life Insurance Company of Indiana  ("Investors-IN")
and Family Life Insurance  Company ("Family  Life").  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.   FIC's  primary   sources  of  capital  consist  of  dividends  from  its
subsidiaries and the proceeds from bank and institutional borrowings.

The cash  requirements  of FIC,  and its  subsidiary,  Family  Life  Corporation
("FLC"),  consist  primarily  of its  service  of the  indebtedness  created  in
connection  with  FIC's  ownership  of Family  Life.  As of June 30,  2001,  the
outstanding  balance of such indebtedness was $32.28 million on the Subordinated
Notes granted by Investors-NA.  FIC believes that the resources  available to it
within the holding  company group are sufficient to provide for FLC's service of
its indebtedness to Investors-NA.

Prior to the May 18th merger of ILCO with FIC, the principal source of liquidity
for FIC's  subsidiaries  consisted  of the  periodic  payment of  principal  and
interest by Family Life pursuant to the terms of a Surplus  Debenture.  In June,
2001, the outstanding  principal balance of the Surplus Debenture was completely
paid off.  For future  periods,  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
Investors-NA to pay shareholder  dividends is and will continue to be subject to
restrictions set forth in the insurance laws and regulations of Washington,  its
domiciliary state. The Washington insurance law limits how and when Investors-NA
can pay shareholder dividends by including the "greater of" standard for payment
of  dividends  to  shareholders,  and  requiring  that prior  notification  of a
proposed  dividend be given to the Washington  Insurance  Commissioner  and that
cash  dividends  may be paid only from earned  surplus.  Under the  "greater of"
standard, an insurer may pay a dividend in an amount equal to the greater of (i)
10% of the  policyholder  surplus or (ii) the insurer's net gain from operations
for the previous year. As of June 30, 2001,  Investors-NA  had earned surplus of
$77.17 million.

Investors-IN is domiciled in the State of Indiana.  Under the Indiana  insurance
code, a domestic insurer may make dividend  distributions  upon proper notice to
the  Department  of  Insurance,  as long as the  distribution  is  reasonable in
relation to adequate  levels of  policyholder  surplus and quality of  earnings.
Under Indiana law the dividend must be paid from earned  surplus.  Extraordinary
dividend  approval would be required where a dividend exceeds the greater of 10%
of  surplus  or the  net  gain  from  operations  for  the  prior  fiscal  year.
Investors-IN had earned surplus of $24.2 million at June 30, 2001.

Family  Life is  domiciled  in the State of  Washington  and its  ability to pay
dividends to FIC is subject to the insurance regulatory  requirements  described
above.  Family Life does not  presently  have  earned  surplus as defined by the
regulations adopted by the Washington Insurance Commissioner and, therefore,  is
not permitted to pay cash dividends.


                                     - 20 -
<page>




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

FIC's net cash flow (used in) provided by operating  activities was $2.7 million
in the first six months of 2001, as compared to $(0.46) million in the first six
months of 2000.  Net cash flow  provided by (used in) financing  activities  was
$1.2 million in the first six months of 2001, as compared to $(3.98)  million in
the first six months of 2000. Net cash flow provided by investing activities was
$5.47  million  for the six months  ended June 30,  2001,  as  compared to $4.93
million for the same period in 2000.

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

Management  believes that its cash, cash  equivalents and short term investments
are  sufficient  to meet the needs of its business and to satisfy debt  service.
There are no trends, commitments or capital asset requirements that are expected
to have an adverse effect on the liquidity of FIC.

                                   Investments

As of June 30,  2001,  FIC's  investment  assets  totaled  $750.25  million,  as
compared to $99.11  million as of December 31,  2000.  The increase is primarily
attributable  to the  inclusion  of  the  assets  of  ILCO  in the  consolidated
financial statements of FIC.

As of June 30, 2001, the market value of the fixed maturities available for sale
segment was $483.77  million as compared to an amortized cost of $476.47 million
or an unrealized gain of $7.30 million.  The increase reflects  unrealized gains
on such  investments  related to changes in  interest  rates  subsequent  to the
purchase  of such  investments.  The net of tax effect of this  increase  ($4.75
million at June 30,  2001) has been  recorded as an  increase  in  shareholders'
equity.

The level of short-term  investments  at June 30, 2001 was $163.61  million,  as
compared  to $15.62  million as of  December  31,  2000.  This  increase is also
primarily   attributable  to  the  inclusion  of  the  assets  of  ILCO  in  the
consolidated financial statements of FIC.

                                     - 21 -
<page>

Invested  real  estate and other  invested  assets at June 30,  2001 were $45.25
million.  At December  31,  2000,  FIC did not have any assets  invested in real
estate.  The change is attributable  to the  consolidation  of ILCO's  financial
results with FIC  following the May 18th merger of the two  companies.  The real
estate  investments  are related to the  development  of the River Place  Pointe
project ("River Place Pointe") by Investors-NA.  In October, 1998,  Investors-NA
purchased  River Place Pointe,  two adjoining  tracts of land located in Austin,
Texas totaling 47.995 acres.  The aggregate  purchase price for these tracts was
$8.1 million.  Prior to the closing of the transaction,  Investors-NA obtained a
Site  Development  Permit  for the  tracts  from  the City of  Austin.  The Site
Development  Permit  allows  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 entirely  completed by the second  quarter of 2001. A single
tenant moved into the entire third  building and another  tenant moved into half
of the fourth  building  during the second  quarter.  Construction on the second
section began during the second  quarter of 2001,  including  building five, the
second parking garage and related infrastructure.

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

The Company's fixed maturities portfolio (including short-term investments),  as
of  June  30,  2001,  included  a  non-material  amount  (0.3 % of  total  fixed
maturities and short-term  investments) of debt securities  which, in the annual
statements  of the  companies as filed with state  insurance  departments,  were
designated under the National  Association of Insurance  Commissioners  ("NAIC")
rating  system as "3"  (medium  quality)  or  below.  This  number is  primarily
attributable to mortgage bonds which one of the Company's insurance subsidiaries
owns in  California  utilities,  which  have been  downgraded  to a "6"  (lowest
quality)  rating by the NAIC. As of June 30, 2001,  Investors-NA  owned mortgage
bonds in Pacific Gas & Electric  which were  purchased  for  $515,000  and had a
market value as of June 30, 2001 of $410,000 and  Investors-NA  and Investors-IN
owned bonds in Southern California Edison which were purchased for $1.47 million
and had a market value as of June 30, 2001 of $1.23 million.

The investment objective of the Company's insurance subsidiaries  emphasizes the
selection of short to medium term high quality  fixed income  securities,  rated
Baa-3 (investment grade) or better by Moody's Investors Service, Inc. As of June
30, 2001,  only 4.6% of the  Company's  total  assets were  invested in mortgage
loans  or real  estate.  Non-affiliated  corporate  debt  securities  that  were
non-investment grade represented only 0.2% of the Company's total assets at June
30, 2001.

                                     - 22 -
<page>


The investments of FIC's insurance  subsidiaries in  mortgage-backed  securities
included  collateralized  mortgage  obligations  ("CMOs") of $187  million,  and
mortgage-backed  pass-through  securities  of $40.7  million,  at June 30, 2001.
Mortgage-backed  pass-through  securities,  sequential  CMO's and support bonds,
which comprised  approximately 53.2% of the book value of FIC's  mortgage-backed
securities at June 30, 2001,  are sensitive to prepayment  and extension  risks.
FIC's insurance subsidiaries have reduced the risk of prepayment associated with
mortgage-backed  securities by investing in planned  amortization class ("PAC"),
target  amortization  class  ("TAC")  instruments  and  scheduled  bonds.  These
investments  are  designed to amortize in a  predictable  manner by shifting the
risk of prepayment  of the  underlying  collateral  to other  investors in other
tranches  ("support  classes")  of the  CMO.  At  June  30,  2001,  PAC  and TAC
instruments  and scheduled  bonds  represented  approximately  46.8% of the book
value  of FIC's  mortgage-backed  securities.  Sequential  and  support  classes
represented  approximately  35.4%  of the book  value  of FIC's  mortgage-backed
securities at June 30, 2001. 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 June 30, 2001.  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  2001,  the  investment
objectives  of FIC's  insurance  subsidiaries  include  the  making of  selected
investments in CMOs.

FIC's  insurance  subsidiaries  do not make  new  mortgage  loans on  commercial
properties.  Substantially all of the Company's  mortgage loans were made by its
subsidiaries  prior to their acquisition by the Company.  At June 30, 2001, none
of the mortgage loans held by the  subsidiaries had defaulted as to principal or
interest for more than 90 days, and none of the Company's mortgage loans were in
foreclosure.

Another  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  approximately  0.2%  of  the
Company's invested assets at June 30, 2001.

The  investment  portfolio of  Investors-NA  includes  $32.3  million of notes ,
represented  by (i) a loan of $22.5  million  from  Investors-NA  to Family Life
Corporation and a $2.5 million loan from  Investors-CA  to Financial  Industries
Corporation  (which is now owned by  Investors-NA  as a result of the  merger of
Investors-CA  into  Investors-NA)  and $2.0  million  of  additions  to the $2.5
million note made in  accordance  with the terms of such note;  these loans were
granted in connection with the 1991 acquisition of Family Life Insurance Company
by a wholly-owned  subsidiary of FIC (ii) a loan of $30 million by  Investors-NA
to Family Life Corporation made in July, 1993, in connection with the prepayment
by the FIC  subsidiaries  of indebtedness  which had been  previously  issued to
Merrill Lynch as part of the 1991  acquisition  and (iii) a loan of $4.5 million
by Investors-NA to Family Life Insurance  Investment Company made in July, 1993,
in connection with the same transaction described above.


                                     - 23 -
<page>




As of June 12, 1996, the provisions of the notes from  Investors-NA  to FIC, FLC
and FLIIC were  modified as follows:  (a) the $22.5  million note was amended to
provide for twenty  quarterly  principal  payments,  in the amount of $1,125,000
each, to commence on December 12, 1996; the final quarterly principal payment is
due on September 12, 2001; the interest rate on the note remains at 11%, (b) the
$30 million note was amended to provide for forty 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%,  (c) the $4.5  million  note was  amended  to  provide  for forty  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%, (d) the $2.5  million  note was amended to provide that
the  principal  balance  of  the  note  is  to be  repaid  in  twenty  quarterly
installments  of  $125,000  each,  commencing  December  12, 1996 with the final
payment due on September 12, 2001;  the rate of interest  remains at 12% and (e)
the Master PIK note,  which was  issued to  provide  for the  payment in kind of
interest  due under the terms of the $2.5  million  note prior to June 12, 1996,
was amended to provide that the principal  balance of the note, in the amount of
$1,977,119,  is to be paid in twenty quarterly principal payments, in the amount
of $98,855.95 each, to commence  December 12, 1996 with the final payment due on
September 12, 2001; the interest rate on the note remains at 12%.

In December, 1998, FLIIC was dissolved. In connection with the dissolution,  all
of the assets and  liabilities  of FLIIC became the  obligations of FLIIC's sole
shareholder (FIC). Accordingly, the obligations under the provisions of the $4.5
million note described above are now the obligations of FIC.

The NAIC continued its rating of "3" to the "Notes  receivable from affiliates",
as amended.  These loans have not been included in the preceding  description of
NAIC rating percentages.

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

                                     - 24 -
<page>



                             Accounting Developments

In  June,  1998,  the  FASB  issued  FAS No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities",  which establishes accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts,  (collectively  referred to as derivatives) and for
hedging  activities.  FAS No. 133, as amended by FAS No.  138,  "Accounting  for
Certain Derivative  Instruments and Certain Hedging Activities - An Amendment of
FASB  Statement No. 133", is applicable to financial  statements  for all fiscal
quarters of fiscal years  beginning after June 15, 2000 as amended by FAS No 137
"Accounting for Derivative  Instruments and Hedging Activities - Deferral of the
Effective  Date  of FAS No  133".  As the  Company  does  not  have  significant
investments in derivative financial instruments, the adoption of FAS 133 did not
have a material  impact on the  Company's  results of  operations,  liquidity or
financial position.

During 2001, the Financial Accounting Standards Board (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 business  combinations
under one method, the purchase method. The most significant  changes made by FAS
141 are: (1)  requiring  that the purchase  method of accounting be used for all
business  combinations  initiated after June 30, 2001, (2) establishing specific
criteria for the recognition of intangible assets separately from goodwill,  and
(3) requiring  unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized).

As of the earlier of the first day of the fiscal year  beginning  after December
15, 2001, or the date Financial Accounting Standards Statement No. 142 (FAS 142)
is initially  applied in its entirety,  the amount of any  unamortized  deferred
credit related to an excess of net assets  acquired over cost 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,  shall  be  written  off and  recognized  as the  effect  of a  change  in
accounting principle. The effect of the accounting change and related income tax
effects  shall  be  presented  in the  income  statement  between  the  captions
extraordinary items and net income. The per-share  information  presented in the
income  statement shall include the per-share  effect of the accounting  change.
Upon  adoption fo FAS 141 in the first  quarter of 2002,  FIC will  allocate the
unamortized  balance of excess of net assets  acquired over costs to net income.
This amount will be recorded in  extraordinary  items as a change in  accounting
principle.

During 2001, the FASB issued 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 will
be  effective  for fiscal years  beginning  after  December  15, 2001.  The most
significant  changes  made by FAS 142 are: (1)  goodwill  and  indefinite  lived
intangible  assets will no longer be amortized,  (2) goodwill will be tested for
impairment at least annually at the reporting unit level, (3) intangible  assets
deemed  to have an  indefinite  life  will be  tested  for  impairment  at least
annually, and (4) the amortization period of intangible assets with finite lives
will no  longer  be  limited  to forty  years.  The  adoption  of FAS 142 is not
expected to materially affect FIC's financial position.


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<page>


                               Other Developments

NASDAQ Listing

On January 24,  2001,  FIC  submitted  an  application  to have its common stock
traded on the NASDAQ  National  Market  under the symbol FNIN.  Previously,  the
common stock of FIC was traded on the NASDAQ Small-Cap  Market.  The application
was  approved  and the  common  stock of FIC  commenced  trading  on the  NASDAQ
National Market on April 9, 2001.

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 has approved a dividend  policy.  The
policy adopted by the Board  anticipates  that the Company will declare and pay,
on a semi-annual  basis,  a dividend on the common stock of the Company so as to
provide to  shareholders  with an annualized  yield of  approximately  3% on the
market  value  (based on the  NASDAQ  National  Market  quotation  system).  The
implementation  of this  policy and the future  declarations  of  dividends  are
subject to change depending on future circumstances.

Also, in May,  2001,  FIC announced that its Board of Directors has approved the
payment of a semi- annual cash  dividend in the amount of $.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. The dividend has been accrued in other liabilities on
the consolidated balance sheet at June 30, 2001.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

General.

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



                                     - 26 -
<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 which could be taken by management in response to the assumed changes in
market rates. In addition, the discussion does not take into account other types
of risks which may be involved in the business  operations of the Company,  such
as the reinsurance recoveries on reinsurance treaties with third party insurers.

The primary market risk to the Company's  investment  portfolio is interest rate
risk. The Company does not use derivative financial instruments.

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 $22.4 million at June
30, 2001 and $22.0  million at December 31, 2000.  For purposes of the foregoing
estimate,  the following  categories of the Company's  fixed income  investments
were  taken into  account:  (i) fixed  maturities,  including  fixed  maturities
available  for sale and (ii)  short-term  investments.  The market value of such
assets was $648.4  million at June 30, 2001 and $702.7  million at December  31,
2000.

The fixed income  investments  of the Company  include  certain  mortgage-backed
securities.  The market value of such  securities was $236.3 million at June 30,
2001 and $251.0 million at December 31, 2000.  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 $8.2 million
at June 30, 2001 and $12.6 million at December 31, 2000.

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.

Part II. Other Information

Item 1.  Legal Proceedings

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

                                     - 27 -
<page>




Universal Life Litigation:

ILCO and  Investors-NA  are  defendants in a lawsuit which was filed in October,
1996, in Travis County, Texas. CIGNA Corporation,  an unrelated Company, is also
a named  defendant in the lawsuit.  The named  plaintiffs in the suit (a husband
and wife), allege that the universal life insurance policies sold to them by INA
Life Insurance  Company (a company which was merged into  Investors-NA  in 1992)
utilized unfair sales  practices.  The named  plaintiffs seek reformation of the
life  insurance  contracts  and an  unspecified  amount  of  damages.  The named
plaintiffs  also seek a class action as to similarly  situated  individuals.  In
April, 2001, the named plaintiffs filed an amended  complaint,  so as to include
various post-sale  allegations,  including  allegations related to the manner in
which  increases  in the cost of  insurance  were  applied,  the  allocation  of
portfolio  yields to the  universal  life  policies  and  changes  in the spread
between the earned rate and the  credited  rate.  The Company  filed a motion to
strike  the  amended  Complaint,  which  motion  was  denied by the  Court.  The
plaintiffs  have filed a motion with the court for  certification,  which motion
will be heard by the court in October,  2001. The Company believes that the suit
is without merit and intends to vigorously defend this matter.

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 and its  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.  We do 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.


                                     - 28 -
<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

          A Special  Meeting of the  Shareholders  was held on May 18, 2001. The
          following  matters  were  submitted  at the  meeting  to a vote of the
          Shareholders:

               Proposal No. 1: To consider and vote on a proposal to approve the
               issuance of shares of  Financial  Industries  Corporation  common
               stock  pursuant to the Agreement and Plan of Merger,  dated as of
               January 17, 2001 by and among Financial  Industries  Corporation,
               InterContinental  Life Corporation and a wholly-owned  subsidiary
               of Financial Industries Corporation;

               Proposal  No. 2: To consider and vote on a proposal to approve an
               amendment   to  the  articles  of   incorporation   of  Financial
               Industries  Corporation  to  increase  its  number of  authorized
               shares of common stock from 10,000,000 to 25,000,000.

         The  voting tabulation as to each proposal was as follows:

                  Proposal No. 1:

                           For:             3,336,185 shares
                           Against:            14,671 shares
                           Abstain:            43,304 shares






                                     - 29 -
<page>



                  Proposal No. 2:

                           For:             3,334,585 shares
                           Against:            35,549 shares
                           Abstain:            50,299 shares

Item 5.  Other Information

                  None

Item 6.  Exhibits and Reports on Form 8-K:

         (a)      Exhibits

                    Form 10-K  Annual  Report of  Registrant  for the year ended
                    December 31, 2000  heretofore  filed by Registrant  with the
                    Securities   and  Exchange   Commission,   which  is  hereby
                    incorporated by reference.

         (b)      Reports on Form 8-K:

               (i)  On May 30, 2001, the Registrant  filed a report on Form 8-K.
                    The report  pertained to the  announcement by the Registrant
                    that it had completed  the purchase of the remaining  common
                    shares   (approximately   52%)  of   InterContinental   Life
                    Corporation  ("ILCO") which it did not  previously  own. The
                    terms and provisions of the  transaction are set forth in an
                    Agreement  and Plan of Merger  dated as of January 17, 2001,
                    among the Registrant, ILCO and ILCO Acquisition Company (the
                    "Merger  Agreement").  In accordance  with the provisions of
                    the Merger  Agreement,  the Registrant  issued 1.1 shares of
                    common  stock,  par value  $0.20 per share for each share of
                    common stock, par value $0.22 per share, of ILCO outstanding
                    at the time of the Merger.  The  transaction was approved by
                    the  shareholders  of the Registrant at a special meeting of
                    shareholders held on May 18, 2001.

               (ii) On June 8, 2001, the Registrant  filed a report on Form 8-K.
                    The report  pertained to an  announcement  by the Registrant
                    that, on May 22, 2001, its Board of Directors had approved a
                    dividend  policy.  As  announced in the Form 8-K, the policy
                    adopted  by the  Board  anticipates  that the  Company  will
                    declare and pay, on a semi-annual  basis,  a dividend on the
                    common stock of the Company so as to provide to shareholders
                    with an annualized  yield of  approximately 3% on the market
                    value  (based  on  the  NASDAQ  National  Market   quotation
                    system).  The  implementation  of this policy and the future
                    declarations of dividends are subject to change depending on
                    future circumstances.

                    The press  release  which was  included as an exhibit to the
                    Form 8-K report filed on June 8, 2001 also stated  that,  as
                    previously  reported,  in  response  to  unsolicited  verbal
                    communications  from a few companies that were interested in
                    acquiring FIC, Philo Smith Capital  Corporation was retained
                    by  FIC  to  explore  the  possible  sale  of  the  company.
                    Subsequently,  FIC received an indication of interest  which
                    led to further discussions with a potential  purchaser.  The
                    Form  8-K  filed  on  June  8,  2001  stated  that  FIC  had
                    determined not to pursue further  discussions with any party
                    that has  submitted an indication of interest to acquire the
                    company.


                                     - 30 -
<page>

                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES



                                    SIGNATURE



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





FINANCIAL INDUSTRIES CORPORATION

 /s/ James M. Grace
James M. Grace, Treasurer



Date:   August 14, 2001






                                     - 31 -