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, 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 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:
9,487,516.

                                      - 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, 2001 and December 31, 2000...........................4

Consolidated Statements of Income
         For the three and nine month periods ended
         September 30, 2001 and September 30, 2000..........................7

Consolidated Statements of Cash Flows
         For the three and nine month periods ended
         September 30, 2001 and September 30, 2000.........................11

Notes to Consolidated Financial Statements.................................15

Item 2. Management's Discussion and Analysis of
         Financial Conditions and Results of Operations....................18

Item 3. Quantitative and Qualitative Disclosures
         About Market Risk ................................................28

Part II

Other  Information.........................................................29

Signature  Page............................................................32




                                      - 3 -
 <page>

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

<table>

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

ASSETS

Investments other than investments in affiliate:

Fixed maturities available for sale at  market value
 (amortized cost of $454,491 and $78,249 at September
 30, 2001 and December 31, 2000, respectively)                          $     470,067     $   79,786

Fixed maturities at amortized cost (market approximates
 $1,450 at September 30, 2001)                                                  1,450              0

Equity securities at market (cost approximates $40 at
 September 30, 2001 and $11 at December 31, 2000)                                  46              4

Policy loans                                                                   49,828          3,699

Mortgage loans and other investments                                            4,758              0

Invested real estate and other invested assets                                 56,113              0

Short-term investments                                                        179,840         15,624

     Total investments                                                        762,102         99,113

Cash                                                                           12,922          2,733

Investment in affiliate                                                             0         79,105

Accrued investment income                                                       9,487          1,172

Agency advances and other receivables                                          23,112          7,604

Reinsurance receivables                                                        34,588         17,466

Due and deferred premiums                                                      18,707         12,537

Real estate occupied by the Company                                            20,135              0

Property and equipment, net                                                     3,805          1,318

Deferred policy acquisition costs                                              77,252         56,161

Present value of future profits of acquired businesses                         33,002         19,440

Other assets                                                                   15,976          4,117

Separate account assets                                                       389,432              0

     Total Assets                                                       $   1,400,520     $  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>
                                                                              September 30,              December 31,
                                                                                   2001                      2000
                                                                                            (unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:

Policy liabilities and contract holder deposit funds:

Future policy benefits                                                        $   194,668                $  62,462

Contract holder deposit funds                                                     559,122                   43,301

Unearned premiums                                                                       0                        0

Other policy claims and benefits payable                                           15,849                    2,931
                                                                                  769,639                  108,694

Subordinated notes payable to affiliate                                                 0                   35,349

Deferred federal income taxes                                                      36,989                   24,437

Excess of net assets acquired over cost                                            13,381                        0

Other liabilities                                                                  12,335                    3,734

Separate account liabilities                                                      381,998                        0

Total Liabilities                                                               1,214,342                  172,214

</table>



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



                                      - 5 -
<page>



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





<table>

                                                                                     <c>                     <c>
                                                                                   September 30,            December 31,
                                                                                      2001                     2000
                                                                                               (unaudited)
Commitments and Contingencies
Shareholders' equity:

Common stock, $.20 par value, 25,000,000 shares
 authorized; 11,727,860 and 5,845,300 shares issued,
 9,487,516 and 5,054,661 shares outstanding in 2001 and
 2000, respectively.                                                                   2,345                   1,169

Additional paid-in capital                                                            68,025                   7,225

Accumulated other comprehensive income                                                 8,174                   2,107

Retained earnings                                                                    130,100                 125,426
                                                                                     208,644                 135,927
Common treasury stock, at cost, 2,240,344 at 2001 and
 790,639 at 2000.                                                                    (22,466)                 (7,375)

Total Shareholders' Equity                                                           186,178                 128,552

Total Liabilities and Shareholders' Equity                                       $ 1,400,520               $ 300,766





</table>


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


                                      - 6 -

<page>

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


<table>

                                                                             <c>              <c>


                                                                          Three Months Ended September 30,
                                                                                 2001           2000
                                                                                     (unaudited)

Revenues:

 Premiums                                                                      $ 10,225       $ 8,503

 Net investment income                                                           12,694         1,780

 Earned insurance charges                                                        10,361           824

 Other                                                                              685             3
                                                                                 33,965        11,110
Benefits and expenses:

 Policyholder benefits and expenses                                              10,321         3,528

 Interest expense on contract holders
  deposit funds                                                                   7,439           496

 Amortization of present value of future
  profits of acquired businesses                                                    875         1,112

 Amortization of deferred policy
  acquisition costs                                                               1,745         1,417

 Operating expenses                                                               8,042         2,674

 Interest expense                                                                     0           501
                                                                                 28,422         9,728
Income before federal income tax and
 equity in net earnings of affiliates                                             5,543         1,382

Provision for federal income taxes                                                1,737           256

Income before equity in net earnings of affiliates                                3,806         1,126

Equity in net earnings of affiliate, net of tax                                       0         1,041

Net Income                                                                     $  3,806       $ 2,167

</table>

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


                                      - 7 -
<page>

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

<table>

                                                                            <c>             <c>

                                                                        Three Months Ended September 30,
                                                                              2001             2000
                                                                                  (unaudited)
Net Income Per Share

 Basic:

  Average weighted shares outstanding                                         9,483           5,055

  Basic earnings per share                                                  $  0.40        $   0.43

Diluted:

  Common stock and common stock equivalents                                   9,536           5,160

  Diluted earnings per share                                                $  0.40        $   0.42


</table>




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


                                      - 8 -
<page>

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

                                                                                  <c>             <c>
                                                                                 Nine Months Ended September 30,
                                                                                     2001              2000
                                                                                          (unaudited)
Revenues:
 Premiums                                                                       $    27,324         $  25,347

 Net investment income                                                               21,466             5,220

 Earned insurance charges                                                            16,953             3,196

 Other                                                                                  939                 6

                                                                                     66,682            33,769
Benefits and expenses:

 Policyholder benefits and expenses                                                  19,615            10,749

 Interest expense on contract holders
  deposit funds                                                                      12,135             1,555

 Amortization of present value of future
  profits of acquired businesses                                                      2,651             2,984

 Amortization of deferred policy
  acquisition costs                                                                   4,678             3,860

 Operating expenses                                                                  16,558             8,612

 Interest expense                                                                       616             1,513

   Total                                                                             56,253            29,273

Income before federal income tax and
 equity in net earnings of affiliates                                                10,429             4,496

Provision for federal income taxes                                                    3,091               834

Income before equity in net earnings
 of affiliates                                                                        7,338             3,662

Equity in net earnings of affiliate,
 net of tax                                                                           1,317             2,924

Net Income                                                                      $     8,655         $   6,586

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


                                      - 9 -
<page>

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

                                                                           <c>           <c>

                                                                        Nine Months Ended September 30,
                                                                              2001              2000
                                                                                   (unaudited)
Net Income Per Share

Basic:

 Average weighted shares outstanding                                          7,261             5,055

 Basic earnings per share                                                 $    1.19           $  1.30

Diluted:

 Common stock and common stock equivalents                                    7,292             5,163

 Diluted earnings per share                                               $    1.18           $  1.28



</table>



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


                                     - 10 -
<page>


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

<table>

                                                                           <c>           <c>

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

Net Income                                                              $     3,806        $  2,167

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

Amortization of present value of future
 profits of acquired business                                                   875           1,112

Amortization of deferred policy
 acquisition costs                                                            1,745           1,417

Equity in undistributed earnings of  affiliate                                    0          (1,534)

Changes in assets and liabilities:

Decrease in accrued investment income                                             1              62

Decrease (Increase) in agent advances and
 other  receivables                                                           3,006             (73)

Decrease (Increase) in due and deferred premiums                              3,494             (26)

Increase in deferred policy acquisition costs                                (3,324)         (2,624)

Decrease in other assets                                                        184              13

Decrease in policy liabilities and accruals                                  (4,503)           (308)

(Decrease) Increase in other liabilities                                       (937)            281

Increase in deferred federal income taxes                                       162             102

Other, net                                                                    1,484            (246)

Net cash provided by operating activities                              $      5,993        $    343
</table>

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



                                     - 11 -
<page>



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

<table>

                                                                              <c>            <c>


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

Fixed maturities purchased                                                  $   (6,063)          $    (500)

Proceeds from sales and maturities of
 fixed maturities                                                               27,841               3,279

Real estate development                                                        (10,861)                  0

Decrease (Increase) in policy loans                                              1,933                 (73)

Net change in short-term investments                                           (16,234)             (1,080)

Purchase of property
 and equipment                                                                     (43)                  0

Net cash (used in) provided by  investing activities                        $   (3,427)          $   1,626


CASH FLOW FROM FINANCING ACTIVITIES

Dividends Paid                                                                  (2,051)                  0

Issuance of common capital stock                                                   271                   0

Issuance of treasury stock                                                          57                   0

Repayment of subordinated notes payable                                              0              (1,537)

Net cash used in financing activities                                           (1,723)             (1,537)

Net  Increase (Decrease) in cash                                                   843                 432

Cash, beginning of period                                                       12,079               1,181

Cash, end of period                                                        $    12,922           $   1,613
</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
                                 (in thousands)
<table>

                                                             <c>             <c>


                                                         Nine Months Ended September 30,
                                                            2001                2000
                                                                   (unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES

Net Income                                             $   8,655           $   6,586

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

Amortization of present value of future
 profits of acquired business                              2,931               2,984

Amortization of deferred policy
 acquisition costs                                         4,662               3,860

Equity in undistributed earnings of  affiliate            (2,137)             (4,565)

Changes in assets and liabilities:

Increase in accrued investment income                      (103)                 (2)

Decrease (Increase) in agent advances and
 other  receivables                                        3,003              (1,582)

Decrease (Increase) in due and deferred premiums           3,067                (149)

Increase in deferred policy acquisition costs             (7,864)             (6,817)

Decrease (Increase) in other assets                          229                 (20)

Decrease in policy liabilities and accruals               (5,208)               (399)

Decrease in other liabilities                               (800)                (48)

Increase (Decrease) in deferred federal income taxes          12                 (22)

Other, net                                                 2,212                  59

Net cash provided by (used in) operating activities    $   8,659           $    (115)
</table>


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


                                     - 13 -
<page>


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

<table>

                                                      <c>            <c>



                                                   Nine Months Ended September 30,
                                                     2001                2000
                                                            (unaudited)

CASH FLOWS FROM INVESTING ACTIVITIES


Fixed maturities purchased                        $    (37,253)    $    (10,788)

Proceeds from sales and maturities of
 fixed maturities                                       70,406            9,917

Real estate development                                (13,656)               0

Decrease (Increase) in policy loans                      1,825              (81)

Net change in short-term investments                   (19,229)           7,469

Purchase & retirement of property
 and equipment                                             (53)              37

Net cash provided by  investing activities               2,040            6,554


CASH FLOW FROM FINANCING ACTIVITIES

Dividends Paid                                          (3,982)            (907)

Issuance of common capital stock                           271                0

Purchase of insurance holding company                    6,979                0

Purchase of treasury stock                              (2,241)               0

Repayment of subordinated notes payable                 (1,537)          (4,611)

Net cash used in financing activities             $       (510)    $     (5,518)

Net Increase (Decrease) in cash                         10,189              921

Cash, beginning of year                                  2,733              692

Cash, end of period                               $     12,922     $      1,613
</table>

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



                                     - 14 -
<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
which FIC held in  InterContinental  Life Corporation  ("ILCO") prior to the May
18,  2001  merger  of  ILCO  with  a  subsidiary  of  FIC  (see  Acquisition  of
InterContinental Life Corporation, below), 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 September 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                               6,063                       4                      6,067

Balance at September 30, 2001                   $   8,170                $      4                  $   8,174
</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  preceding  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 the consolidated
result of  operations  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  book of business,  which  estimate is subject to  adjustment  based on
actuarial and other  analysis of the assets and  liabilities  acquired.  For the
period from  January 1, 2001 to May 17,  2001,  and for the first nine 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. -


                                -15 -
<page>

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

                                Nine Months Ended
                                  September 30
                      (In thousands, except per share data)

                                 2001            2000

         Total Revenues          $104,337       $109,366

         Net Income              $ 10,959       $ 13,079

         Net Income per share:
              Basic             $    1.14       $   1.34
              Diluted           $    1.13       $   1.32


New Accounting Pronouncements

In June 1998, the Financial  Accounting Standard Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 (FAS 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 137,
"Accounting for Derivative  Instruments and Hedging Activities - Deferral of the
Effective Date of FAS 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.

                                      - 16 -
<page>


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 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 of FAS 141 in the first  quarter of 2002,  FIC will  allocate the
unamortized  balance of excess of net assets  acquired  over cost to net income.
This amount will be recorded 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.

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".  The adoption of FAS 144 did not materially
affect FIC's financial position.


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 financial position.

Dividend Paid

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 paid on July 2, 2001, to record holders as of the close of business
on June 18, 2001.

                                      - 17 -
<page>


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

     Results of Operations - Nine Months Ended September 30, 2001 and 2000

For the  nine-month  period  ended  September  30,  2001,  Financial  Industries
Corporation's  ("FIC") net income was  $8,655,000  (basic  earnings of $1.19 per
common  share,  or diluted  earnings  of $1.18 per common  share) as compared to
$6,586,000  (basic  earnings of $1.30 per common share,  or diluted  earnings of
$1.28 per common share) in the first nine 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 nine months ended  September 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  September  30,  2001,  the  number  of  FIC's  common  shares
outstanding was 9,487,516, as compared to 5,054,661 as of September 30, 2000.

On May 18, 2001,  FIC  completed the merger of a subsidiary of FIC with and into
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 September 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 nine months of 2000,  FIC's net income
included  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 nine-month  period ended September 30, 2001, was $10,429,000 (on revenues of
$66,682,000),  as compared to $4,496,000  (on revenues of  $33,769,000),  in the
first nine months of 2000. The consolidation of ILCO's operations for the period
from May 18, 2001 to September 30, 2001 contributed  approximately $5,509,000 to
income  from  operations  and  approximately  $35,935,000  to  revenues  for the
nine-month period ended September 30, 2001.

                                      - 18 -
<page>

Revenues

Premium income for the first nine months of 2001, net of reinsurance  ceded, was
$27.32 million,  as compared to $25.35 million in the first nine 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 $3.4 million to premium
income for the nine-month period ended September 30, 2001.

Net  investment  income for the first nine months of 2001 was $21.47  million as
compared  to $5.22  million in the same  period of 2000.  The  consolidation  of
ILCO's  operations  for the  period  from May 18,  2001 to  September  30,  2001
contributed  approximately  $17.4  million  to net  investment  income  for  the
nine-month  period ended  September  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 nine-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 nine months of 2001 were $16.95 million,
as compared to $3.20 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 $14.1 million to earned insurance charges
for the  nine-month  period ended  September  30, 2001.  At Family Life,  earned
insurance  charges declined from $3.2 million in the 2000 period to $2.6 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 $859.1  million at September 30, 2000 as compared to $737.6 million
at September 30, 2001.

Benefits and Expenses

Policyholder  benefits and expenses were $19.62 million in the first nine months
of 2001,  as  compared to $10.75  million in the first nine months of 2000.  The
consolidation of ILCO's operations for the period from May 18, 2001 to September
30, 2001 contributed  approximately  $10.6 million to policyholder  benefits and
expenses for the nine-month period ended September 30, 2001. At Family Life, the
level of policyholder benefits and expenses decreased from $10.7 million for the
first nine months of 2000 to $8.8  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 $12.14  million in the
first nine months of 2001,  as  compared to $1.56  million in the same period of
the year 2000.  This  increase is  primarily  attributable  to $10.2  million of
interest   expense  on  contract   holders  deposit  funds  resulting  from  the
consolidation of ILCO's operations following the May 18th merger transaction.

                                      - 19 -
<page>

In the first nine months of 2001,  the  amortization  of present value of future
profits of acquired  business was $2.65  million as compared to $2.98 million in
the first nine months of 2000.  The decreases in  amortization  was expected and
should  continue to decrease as the  underlying  asset,  present value of future
profits, decreases.

The amortization of deferred policy  acquisition  costs was $4.68 million in the
first nine months of 2001, as compared to $3.86 million in the first nine 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 September 30, 2001, in the amount of $0.47 million.

The operating expenses for the first nine months of 2001 were $16.56 million, as
compared to $8.61 million in the first nine months of 2000. The consolidation of
ILCO's  operations  for the  period  from May 18,  2001 to  September  30,  2001
contributed approximately $7.53 million to operating expenses for the nine-month
period ended September 30, 2001.

Interest  expense  for the  first  nine  months of 2001 was  $0.62  million,  as
compared to $1.51 million in the first nine months of 2000.  The decrease in the
amount of interest expenses from the first nine months of 2000 to the first nine
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 and thus the  interest  expense  amount for the three
month period ended September 20, 2001 is $0.

The  provision  for  federal  income  taxes was $3.09  million in the first nine
months of 2001 as  compared  to $0.83  million in the first nine months of 2000.
The  inclusion  of ILCO's  results for the period from May 18, 2001 to September
30, 2001 contributed  approximately $1.67 million to the level of federal income
taxes.

          Results of Operations - Three Months Ended September 30, 2001
            as compared to the Three Months Ended September 30, 2000

For the three-month  period ended September 30, 2001, FIC's net income was $3.81
million  (basic and diluted  earnings of $0.40 per common  share) on revenues of
$33.97  million as compared to net income of $2.17  million  (basic  earnings of
$0.43 per common share and diluted  earnings of $0.42 per common share) on total
revenues of $11.11  million in the same three month period of 2000. The increase
in net income and total revenues from 2000 to 2001 is primarily  attributable to
the  consolidation of ILCO's  operations into FIC's Statements of Income for the
third quarter of 2001.

                                      - 20 -
<page>

            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 $2.92 million for the first nine 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.


                         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  source  of  capital   consists  of  dividends  from  its
subsidiaries.

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  September  30,  2001,
Investors-NA had earned surplus of $77.8 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 $28.0 million at September 30, 2001.

                                      - 21 -
<page>


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.

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 provided by (used in) operating activities was $8.66 million
in the first nine months of 2001,  as  compared to $(0.12)  million in the first
nine months of 2000. Net cash used in financing  activities was $(0.51)  million
in the first nine months of 2001,  as  compared to $(5.52)  million in the first
nine months of 2000.  Net cash flow provided by investing  activities  was $2.04
million for the nine  months  ended  September  30,  2001,  as compared to $6.55
million for the same period in 2000.

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 September 30, 2001,  the
outstanding  balance of such indebtedness was $30.74 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.

The guaranty  commitments of FIC under the loans incurred in connection with the
acquisition of Family Life relate to the $34.5 million loaned by Investors-NA to
a subsidiary of FIC.  Prior to September 12, 2001,  FIC's  guaranty  commitments
also  consisted  of a $22.5  million note issued by Family Life  Corporation  to
Investors Life Insurance Company of North America.  That loan was fully paid off
as of September 12, 2001.

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.

                                     - 22 -
<page>


                                   Investments

As of September 30, 2001,  FIC's investment  assets totaled $762.10 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 September 30, 2001, the market value of the fixed maturities available for
sale  segment was $470.07  million as compared to an  amortized  cost of $454.49
million  or  an  unrealized  gain  of  $15.58  million.  The  increase  reflects
unrealized  gains on such  investments  related  to changes  in  interest  rates
subsequent to the purchase of such investments. A portion ($1.96 million) of the
unrealized gain has been recorded as a decrease in deferred  policy  acquisition
costs on the consolidated  balance sheet. The net of tax effect of the remainder
of  this  increase   ($8.17  million)  has  been  recorded  as  an  increase  in
shareholders' equity.

The level of short-term  investments at September 30, 2001 was $179.84  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.

Invested real estate and other invested assets at September 30, 2001 were $56.11
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  investment  is  related to the  development  of the River  Place  Pointe
project  ("River  Place  Pointe") by  Investors-NA,  a  subsidiary  of ILCO.  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  completed  in the  second  quarter  of  2001.
Construction on the second section  continued  during the third quarter of 2001,
including work on buildings six and seven.

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".



                                     - 23 -
<page>

The Company's fixed maturities portfolio (including short-term investments),  as
of  September  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  September  30,  2001,  Investors-NA  owned
mortgage  bonds in Pacific Gas & Electric  which were purchased for $515,000 and
had a market value as of September  30, 2001 of $450,000  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 September 30, 2001 of $1.30 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
September  30, 2001,  only 5.8% 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 0.1% of the Company's total assets at
September 30, 2001.

The investments of FIC's insurance  subsidiaries in  mortgage-backed  securities
included  collateralized  mortgage  obligations  ("CMOs") of $182.0 million, and
mortgage-backed pass-through securities of $34.6 million, at September 30, 2001.
Mortgage-backed  pass-through  securities,  sequential  CMO's and support bonds,
which comprised  approximately 51.5% of the book value of FIC's mortgage- backed
securities  at September 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 September 30, 2001, PAC and
TAC instruments and scheduled bonds represented  approximately 48.5% of the book
value  of FIC's  mortgage-backed  securities.  Sequential  and  support  classes
represented  approximately  35.5%  of the book  value  of FIC's  mortgage-backed
securities  at September  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 September 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.



                                     - 24 -
<page>


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 September 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 September 30, 2001.

The  investment  portfolio of  Investors-NA  includes  $30.74 million of notes ,
represented  by (i) 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  of  Family  Life  Insurance  Company  by a
wholly-owned  subsidiary of FIC and (ii) 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.  Prior to September 12, 2001,  the
investment  portfolio  also included a $22.5 million loan 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 fully paid on September 12, 2001.

As of June 12, 1996,  the provisions of the notes from  Investors-NA  to FLC and
FLIIC were modified as follows:  (a) 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%, and (b) 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%.

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.



                                     - 25 -
<page>

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.

                             Accounting Developments

In June 1998, the Financial  Accounting Standard Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 (FAS 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 137,
"Accounting for Derivative  Instruments and Hedging Activities - Deferral of the
Effective Date of FAS 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 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 of FAS 141 in the first  quarter of 2002,  FIC will  allocate the
unamortized  balance of excess of net assets  acquired  over cost to net income.
This amount will be recorded as a change in accounting principle.



                                     - 26 -
<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.

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".  The adoption of FAS 144 did not materially
affect FIC's financial position.

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 financial position.

                               Other Developments

Dividend Paid

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 paid on July 2, 2001, to record holders as of the close of business
on June 18, 2001.

Events of September 11, 2001

As of the date of this report,  FIC's  subsidiaries have only received one claim
arising from the events of September  11, 2001.  As a result,  claims  resulting
from  September  11th did not have a material  effect on results of  operations,
liquidity or financial condition during the third quarter.

                                     - 27 -
<page>

Item 3. Quantitative and Qualitative Disclosures About Market Risk

General

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

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

The primary market risk to the Company's  investment  portfolio is interest rate
risk. 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 $16.1  million at
September 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 $646.7  million at September  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 $228.0 million at September
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 $4.2
million at September 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.



                                     - 28 -
<page>

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.

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 has filed a Motion
for Summary Judgment to dismiss the lawsuit, which will be heard by the court on
November  20,  2001.  The  plaintiffs  have  filed a motion  with the  court for
certification,  which motion will be heard by the court in December,  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.

                                     - 29 -
<page>

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.

Item 2.  Changes in Securities

                  None

Item 3.  Defaults Upon Senior Securities

                  None


Item 4.  Submission of Matters to a Vote of Security Holders

     The Annual  Meeting of the  Shareholders  was held on August 24, 2001.  The
only  matter  submitted  at the  meeting to a vote of the  Shareholders  was the
election of directors. All of the nominees had previously served as directors of
the Company, and all were reelected as directors.

The voting tabulation as to each nominee was as follows:



       Name                           In Favor                  Withheld

     John D. Barnett                  6,214,861                  602,493
     S. Tim Casey                     6,194,199                  623,155
     Joseph F. Crowe                  6,214,911                  602,443
     Jeffrey H. Demgen                6,194,434                  622,920
     Theodore A. Fleron               6,194,549                  622,805
     W. Lewis Gilcrease               6,199,161                  618,193
     James M. Grace                   6,194,844                  622,510
     Roy F. Mitte                     6,201,044                  616,310
     M. Scott Mitte                   6,220,261                  597,093
     Elizabeth T. Nash                6,193,256                  624,098
     Frank Parker                     6,217,511                  599,843
     Thomas C. Richmond               6,214,461                  602,893
     Steven P. Schmitt                6,194,974                  622,380


                                     - 30 -
<page>

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:

                  None




                                     - 31 -
<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/ Jeffrey Demgen
Jeffrey Demgen
Vice-President

 /s/ David Hopkins
David Hopkins
Chief Accounting Officer



Date:   November 14, 2001


















                                     - 32 -