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, 1998
Commission File Number 0-4690



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

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



The Austin Centre, 701 Brazos, 12th Floor
Austin, Texas                                     78701
(Address of principal executive offices)       (Zip Code)

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




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

                                           YES  X    NO

Number of common shares outstanding ($.20 par value) at end of period:5,427,965.


                                      - 1 -

<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES


                                      INDEX

                                                                       Page No.


Part I - Financial Information

Consolidated Balance Sheets at September 30, 1998 
and December 31, 1997....................................................    3

Consolidated Statements of Income
For the three and nine month periods ended September 30, 1998 and 1997...    5

Consolidated Statements of Cash Flows
For the three and nine month periods ended September 30, 1998 and 1997....   7

Notes to Consolidated Financial Statements................................  11

Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations.....................................................  13


Part II

Other  Information........................................................  23

Signature  Page...........................................................  25



                                      - 2 -

<PAGE>



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

<TABLE>
<S>                                                         <C>             <C>   
                                                          Sept 30,      Dec. 31,
ASSETS                                                      1998          1997
                                                        (unaudited)
Investments:
     Fixed  maturities  available for sale,
      at market value  (amortized  cost of
      $79,427 and $79,054 at 1998 and 1997,
      respectively) ................................      $ 83,019      $ 81,854
     Equity securities, at market value
      (cost approximates $11) ......................             4             4
     Policy loans ..................................         3,039         2,748
     Short-term investments ........................        32,851        34,475
                                                          --------      --------
          Total Investments ........................       118,913       119,081
Cash and cash equivalents ..........................         1,257           508
Investment in affiliate ............................        71,723        66,752
Accrued investment income ..........................           918         1,184
Agent advances and other receivables ...............         7,758         6,474
Reinsurance receivables ............................        12,473        11,134
Property and equipment, net ........................         1,758         1,724
Deferred policy acquisition costs ..................        47,769        45,122
Present value of future profits of
 acquired businesses ...............................        29,627        34,437
Due and deferred premiums ..........................        11,769        11,086
Other assets .......................................         5,413         6,346
Separate account assets ............................           441           476
                                                          --------      --------
Total Assets .......................................      $309,819      $304,324
                                                          ========      ========
</TABLE>







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



<PAGE>



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



<TABLE>
<S>                                                     <C>               <C>   
LIABILITIES AND SHAREHOLDERS' EQUITY                   Sept 30,         Dec. 31,
                                                         1998             1997
                                                     (unaudited)
Liabilities:
Policy liabilities and contract holder
 deposit funds
Future policy benefits ...........................     $  60,562      $  59,987
Contract holder deposit funds ....................        44,693         44,304
Unearned premiums ................................            90             90
Other policy claims and benefits payable .........         4,495          5,315
                                                       ---------      ---------
                                                         109,840        109,696

Subordinated notes payable to affiliate ..........        49,182         53,792
Deferred federal income taxes ....................        23,759         21,631
Other liabilities ................................         4,103          4,880
Separate account liabilities .....................           441            476
                                                       ---------      ---------
Total Liabilities ................................       187,325        190,475

Shareholders' Equity:

Common stock, $.20 par value,10,000,000
 shares authorized;  5,845,300 issued and
 5,427,965 shares outstanding in 1998 and
 1997                                                      1,169          1,169
Additional paid-in capital .......................         7,225          7,225
Accumulated other comprehensive income ...........         8,358          6,692
Retained earnings ................................       106,164         99,185
                                                       ---------      ---------
                                                         122,916        114,271
Common treasury stock, at cost, 417,335
 shares in 1998 and 1997 .........................          (422)          (422)
                                                       ---------      ---------

Total Shareholders' Equity .......................       122,494        113,849
                                                       ---------      ---------

Total Liabilities and Shareholders' Equity .......     $ 309,819      $ 304,324
                                                       =========      =========
</TABLE>











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


<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                        FOR THE THREE MONTH PERIOD ENDED
                           SEPTEMBER 30, 1998 AND 1997
              (in thousands of dollars, except for per share data)
                                   (unaudited)

                                                                
<TABLE>
<S>                                                           <C>           <C>
                                                                3 Months Ended 
                                                                 September 30,
Revenues:                                                    1998          1997
                                                         

Net premiums .......................................       $ 9,629       $10,003
Net investment income ..............................         1,949         2,080
Earned insurance charges ...........................         1,533         1,697
Other ..............................................           350           762
                                                           -------       -------
   Total ...........................................        13,461        14,542

Benefits & expenses:

Policyholder benefits and expenses .................         4,480         4,635
Interest expense on contractholder
 deposit  funds ....................................           577           674
Amortization of present value of
 future profits of acquired businesses .............         1,541         1,515
Amortization of deferred policy
 acquisition costs .................................         1,272         1,234
Operating expenses .................................         2,954         3,263
Interest expense ...................................           809           884
                                                           -------       -------
   Total ...........................................        11,633        12,205
                                                           -------       -------
Income before federal income taxes
 and equity in net earnings
 of affiliate ......................................         1,828         2,337

Provision for federal income taxes .................           419           231
                                                           -------       -------
Income before equity in net earnings
 of affiliate ......................................         1,409         2,106
                                                           -------       -------

Equity in net earnings of affiliate ................           744           497
                                                           -------       -------
  Net Income .......................................       $ 2,153       $ 2,603
                                                           =======       =======
Net income per share:
Basic:
Weighted average common stock outstanding ..........         5,428         5,428
                                                           =======       =======
Basic earnings per share ...........................       $  0.40       $  0.48
                                                           =======       =======
Diluted:
Common stock and common stock equivalents ..........         5,602         5,590
                                                           =======       =======
Diluted earnings per share .........................       $  0.38       $  0.47
                                                           =======       =======
</TABLE>




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

<PAGE>




                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                         FOR THE NINE MONTH PERIOD ENDED
                           SEPTEMBER 30, 1998 AND 1997
              (in thousands of dollars, except for per share data)
                                   (unaudited)
<TABLE>
<S>                                                           <C>          <C> 

                                                             9 Months Ended
                                                              September 30,
Revenues:                                                   1998          1997
                                                       

Net premiums .......................................       $29,350       $30,284
Net investment income ..............................         5,870         6,583
Earned insurance charges ...........................         4,698         5,214
Other ..............................................         1,047         2,091
                                                           -------       -------
   Total ...........................................        40,965        44,172

Benefits & expenses:

Policyholder benefits and expenses .................        12,384        15,028
Interest expense on contractholder
 deposit funds .....................................         1,783         1,944
Amortization of present value of
 future profits of acquired businesses .............         4,810         4,589
Amortization of deferred policy
 acquisition costs .................................         3,538         3,516
Operating expenses .................................         9,553         9,405
Interest expense ...................................         2,210         2,623
                                                           -------       -------
   Total ...........................................        34,278        37,105
                                                           -------       -------
Income before federal income taxes
 and equity in net earnings
 of affiliate ......................................         6,687         7,067

Provision for federal income taxes .................         1,552         1,497
                                                                           
Income before equity in net
 earnings of  affiliate ............................         5,135         5,570

Equity in net earnings of affiliate ................         1,844         1,482
                                                           -------       -------
Net Income .........................................       $ 6,979       $ 7,052

Net income per share:
Basic:

Weighted average common stock  outstanding .........         5,428         5,428

Basic  earnings  per  share ........................       $  1.29       $  1.30

Diluted:
Common stock and common stock equivalents ..........         5,604         5,586
                                                           =======       =======
Diluted earnings per share .........................       $  1.25       $  1.26
                                                           =======       =======
</TABLE>




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


<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE THREE MONTH PERIOD ENDED
                           SEPTEMBER 30, 1998 and 1997
                            (in thousands of dollars)
                                   (unaudited)
<TABLE>
<S>                                                           <C>           <C>
                                                               3 Months Ended
                                                               September 30,
                                                           1998            1997
                                                            
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .........................................      $ 2,153       $ 2,603
Adjustments to reconcile net income
 to net cash provided by operating
 activities:
Amortization of present value of
 future profits of acquired
 businesses ........................................        1,541         1,515
Amortization of deferred policy
 acquisition costs .................................        1,272         1,234
Equity in undistributed earnings
 of affiliate ......................................       (1,260)       (1,235)
Changes in assets and liabilities:
Decrease in accrued investment income ..............          334           304
Increase in agent advances and other
 receivables .......................................       (1,357)       (1,369)
Policy acquisition costs deferred ..................       (2,115)       (2,092)
Increase in policy liabilities and
 contractholder deposit funds ......................           23         1,887
Increase in due and deferred premiums ..............         (437)         (107)
Increase (decrease) in other liabilities ...........          417           (48)

Increase in deferred federal income taxes ..........          870           595
Increase in other assets ...........................          (75)         (537)
Other, net .........................................         (195)        1,125
                                                          -------       -------
Net cash provided by operating activities ..........      $ 1,171       $ 3,875
                                                          -------       -------
</TABLE>



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


<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE THREE MONTH PERIOD ENDED
                           September 30, 1998 and 1997
                            (in thousands of dollars)
                                   (unaudited)
<TABLE>
<S>                                                     <C>        <C>   
                                                         3 Months Ended
                                                          September 30,
                                                       1998       1997
                                                             
CASH FLOWS FROM INVESTING ACTIVITIES

Investments purchased ...........................     $ -0-    $(3,919)
Proceeds from sales and maturities of investments     2,377      5,734
Net change in short-term investments ............    (1,886)      (757)



Increase in policy loans ........................       (78)       (91)
Purchases & retirements of equipment, net .......       -0-     (2,790)
                                                    -------    -------
Net cash used in investing activities ...........       413     (1,823)
                                                    -------    -------


CASH FLOWS FROM FINANCING ACTIVITIES:

Repayment of debt ...............................    (1,537)    (1,537)
                                                    -------    -------
Net cash used in financing activities ...........    (1,537)    (1,537)
                                                    -------    -------
Net increase in cash and cash  equivalents ......        47        515
Cash and cash equivalents, beginning of period ..     1,210        324
                                                    -------    -------
Cash and cash equivalents, end of period ........   $ 1,257    $   839
                                                    =======    =======
</TABLE>









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


<PAGE>




                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                         FOR THE NINE MONTH PERIOD ENDED
                           SEPTEMBER 30, 1998 and 1997
                            (in thousands of dollars)
                                   (unaudited)
<TABLE>
<S>                                             <C>       <C>    
                                               9 Months Ended
                                                 Septemeber 30,
                                               1998      1997
                                                             
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..............................   $ 6,979    $ 7,052
Adjustments to reconcile net income
 to net cash provided by operating
 activities:
Amortization of present value of
 future profits of acquired
 businesses .............................     4,810      4,589
Amortization of deferred policy
 acquisition costs ......................     3,538      3,516
Equity in undistributed earnings
 of affiliate ...........................    (3,733)    (3,793)

Changes in assets and liabilities:
Decrease in accrued investment income ...       266        318
Increase in agent advances and other
 receivables ............................    (2,623)    (1,745)
Policy acquisition costs deferred .......    (6,185)    (6,284)
Increase in policy liabilities and
 contractholder deposit funds ...........       144      2,862
Increase in due and deferred premiums ...      (683)      (219)
Decrease in other liabilities ...........      (777)    (1,344)

Increase in deferred federal income taxes     2,128      1,327
Decrease in other assets ................       933        525
Other, net ..............................      (404)       642
                                            -------    -------
Net cash provided by operating activities   $ 4,393    $ 7,446
                                            -------    -------
</TABLE>





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


<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                         FOR THE NINE MONTH PERIOD ENDED
                           September 30, 1998 and 1997
                            (in thousands of dollars)
                                   (unaudited)
<TABLE>
<S>                                                      <C>          <C> 


                                                          9 Months Ended
                                                           September 30,
                                                        1998         1997
                                                     
CASH FLOWS FROM INVESTING ACTIVITIES

Investments purchased .............................   $(9,082)   $(6,975)
Proceeds from sales and maturities of  investments      8,749      9,335
Net change in short-term investments ..............     1,624      1,386

Increase in policy loans ..........................      (291)      (290)
Purchases & retirements of equipment, net .........       (34)    (5,760)
                                                      -------    -------
Net cash provided by (used in) investing activities       966     (2,304)
                                                      -------    -------

CASH FLOWS FROM FINANCING ACTIVITIES:

Repayment of debt .................................    (4,610)    (4,611)
                                                      -------    -------
Net cash used in financing  activities ............    (4,610)    (4,611)
                                                      -------    -------
Net increase in cash and cash equivalents .........       749        531
Cash and cash equivalents, beginning of period ....       508        308
                                                      -------    -------
Cash and cash equivalents, end of period ..........   $ 1,257    $   839
                                                      =======    =======
</TABLE>













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

<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



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,  1997  previously  filed with the  Commission  for
financial  statements  prepared  in  accordance  with GAAP.  Certain  prior year
amounts have been  reclassified to conform with current year  presentation.  The
consolidated  financial  statements include the accounts of Financial Industries
Corporation ("FIC") and its wholly-owned subsidiaries.  The investment of FIC in
InterContinental Life Corporation ("ILCO") is presented using the equity method.
All significant intercompany items and transactions have been eliminated.

New Accounting Pronouncements

In June 1997, the FASB issued Statement of Financial  Accounting  Standard (FAS)
130, "Reporting  Comprehensive Income." The new standard, which is effective for
financial  statements  issued  for  periods  ending  after  December  15,  1997,
established  standards for reporting,  in addition to net income,  comprehensive
income and its components  including,  as applicable,  foreign  currency income,
minimum pension liability adjustments and unrealized gains and losses on certain
investments  in debt and equity  services.  Upon  adoption,  the Company is also
required to reclassify  financial  statements for earlier  periods  provided for
comparative purposes.  The Company adopted this standard in the first quarter of
1998.  Total  comprehensive  income for the nine months ended September 30, 1998
and September 30, 1997 is $8.65 million and $10.56 million, respectively.

The following is a reconciliation of accumulated other comprehensive income from
December 31, 1997 to September 30, 1998 (in thousands):

<TABLE>
<S>                                 <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, 1997        $  6,660             $    32          $  6,692
Current Period Change                  1,704                 (38)            1,666
                                    ---------            --------         ---------
Balance at September 30, 1998       $  8,364             $   ( 6)         $  8,358
                                    ========             ========         ========

</TABLE>



                

<PAGE>

               FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


New Accounting Pronouncements, continued

In June 1997,  the FASB issued FAS No. 131,  "Disclosures  about  Segments of an
Enterprise and Related  Information," which establishes  standards for reporting
information about operating segments. Generally, FAS 131 requires that financial
information  be reported  on the basis that is used  internally  for  evaluating
performance.  The  Company  adopted  FAS 131  effective  January  1,  1998,  and
comparative  information for earlier years will be restated. This statement does
not need to be applied to interim  financial  statements  in the initial year of
application.  The adoption of FAS No. 131 did not have a material  impact on the
Company's results of operations, liquidity or financial position.

In February  1998,  the FASB issued FAS No. 132,  "Employers  Disclosures  about
Pensions and Other  Postretirement  Benefits," which revises current  disclosure
requirements for employers' pension and other retiree benefits. FAS 132 does not
change the measurement or recognition of pension or other postretirement benefit
plans. The Company adopted FAS 132 effective January 1, 1998, with the effect of
such adoption to be reflected in year-end financial statements.  The adoption of
FAS No. 132 is not expected to have a material  impact on the Company's  results
of operations, liquidity or financial position.

In December 1997, the Accounting  Standards Executive Committee issued Statement
of Position  ("SOP") 97-3,  "Accounting by Insurance and Other  Enterprises  for
Insurance-Related  Assessments,"  which  provides  guidance  on  accounting  for
insurance-related  assessments.  The  Company  is  required  to  adopt  SOP 97-3
effective January 1, 1999.  Previously issued financial statements should not be
restated  unless the SOP is adopted  prior to the  effective  date and during an
interim  period.  The  adoption  of SOP 97-3 is not  expected to have a material
impact on the Company's results of operations, liquidity or financial position

In  June  1998,  the  FASB  issued  FAS  No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities",  which establishes accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts,  (collectively  referred to as derivatives) and for
hedging activities. FAS 133 is applicable to financial statements for all fiscal
quarters of fiscal years  beginning after June 15, 1999. As the Company does not
have significant  investments in derivative financial instruments,  the adoption
of FAS  133  does  not  have a  material  impact  on the  Company's  results  of
operations, liquidity or financial position.

<PAGE>





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


For the  nine-month  period  ended  September  30,  1998,  Financial  Industries
Corporation's  ("FIC") net income was  $6,979,000  (basic  earnings of $1.29 per
common  share,  or diluted  earnings  of $1.25 per common  share) as compared to
$7,052,000  (basic  earnings of $1.30 per common share,  or diluted  earnings of
$1.26 per common share) in the first nine months of 1997. 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.  For the nine month period  ended  September  30, 1997,
earnings per share have been restated to reflect the effect of FAS No. 128.


                              Results of Operations

FIC's  income from  operations - as  determined  before  federal  income tax and
equity in net earnings of its affiliate, InterContinental Life Corporation - for
the nine-month  period ended  September 30, 1998, was $6,687,000 (on revenues of
$40,965,000),  as compared to  $7,067,000  (on revenues of  $44,172,000)  in the
first nine months of 1997.

Premiums for the first nine months of 1998, net of reinsurance ceded, were $29.4
million,  as  compared  to $30.3  million  in the  first  nine  months  of 1997.
Policyholder  benefits and expenses  were $12.4  million in the 1998 period,  as
compared to $15.0 million in the first nine months of 1997.

As of September 30, 1998, the market value of the fixed maturities available for
sale  segment  was $83.0  million as  compared  to an  amortized  value of $79.4
million, or an unrealized gain of $3.6 million. The increase reflects unrealized
gains on such investments related to changes in interest rates subsequent to the
purchase  of such  investments.  There is no  assurance  that  this gain will be
realized in the future.  The net of tax effect of this increase ($2.3 million at
September 30, 1998) has been recorded as an increase in shareholders' equity. As
required under the provisions of FAS No. 130, the  determination of "Accumulated
other  comprehensive  income" includes separate  identification of the change in
values which occurred during the current period.

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




                                      - 3 -

<PAGE>



            Equity in Net Income of InterContinental Life Corporation

General:

Prior to the  acquisition of Family Life Insurance  Company  ("Family  Life") in
June of 1991,  FIC's  primary  involvement  in the life  insurance  business was
through its equity interest in InterContinental Life Corporation  ("ILCO").  For
the nine-month period ended Septemeber 30, 1998, the Company's equity in the net
earnings of ILCO,  net of federal  income tax,  was  $1,844,000,  as compared to
$1,482,00 for the first nine months of 1997.

FIC  currently  owns  1,795,146  shares of  ILCO's  common  stock,  and prior to
September 30, 1998, held options to acquire an additional  1,702,155 shares. The
options were granted  under an option  agreement  between FIC and ILCO which was
entered into in March,  1986  ("Option  Agreement").  In  addition,  Family Life
currently owns 171,200 shares of ILCO common stock.  As a result,  FIC currently
owns,   directly  and   indirectly   through  Family  Life,   1,966,346   shares
(approximately  45%) of ILCO's common stock. The Option Agreement provided that
it continued in effect as long as FIC guaranteed indebtedness of ILCO. Since the
Senior Loan of ILCO was fully repaid on September  30, 1998,  FIC's rights under
the Option Agreement expired on September 30, 1998.

As of September 30, 1998, the market value of ILCO's fixed maturities  available
for sale segment was $470.0  million as compared to an amortized  cost of $447.9
million,  or  an  unrealized  gain  of  $22.1  million.  The  increase  reflects
unrealized  gains on such  investments  related  to changes  in  interest  rates
subsequent to the purchase of such investments. Since FIC owns approximately 45%
of the  common  stock of ILCO,  the net of tax  effect  of this  increase  ($6.0
million at September 30, 1998) is included in "Accumulated  other  comprehensive
income" on the Consolidated  Balance Sheets and has been recorded as an increase
in shareholders' equity.

Liquidity and Capital Resources of ILCO:

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

On June 30, 1998, ILCO,  through a subsidiary,  acquired Grinnell Life Insurance
Company ("Grinnell Life") for a base purchase price of $16.4 million, subject to
certain post-closing adjustments. As part of the transaction,  Grinnell Life was
immediately merged with and into that subsidiary, with that subsidiary being the
surviving entity.

The  cash  requirements  of  ILCO  consist  primarily  of  its  service  of  the
indebtedness  created in connection  with the 1988  acquisition of the Investors
Life  Companies  and the 1995  acquisition  of Meridian Life  Insurance  Company
(which company was subsequently merged into another life insurance subsidiary of
ILCO). As of December 31, 1997, the outstanding principal balance of

                                      - 4 -

<PAGE>



ILCO's senior loan obligations was $11.0 million, which reflected the prepayment
by ILCO of the  payment  originally  scheduled  for  January 1, 1998.  A regular
payment  in the  amount  of $3.7  million  was  made on  April  1,  1998,  and a
prepayment of the July 1, 1998 installment,  in the amount of $3.7 million,  was
made on June 30, 1998. The outstanding  principal  balance of ILCO's senior loan
obligations  was $3.6 million at June 30,  1998.  The final  installment  on the
senior loan  obligation  scheduled for October 1, 1998, was prepaid on September
30, 1998. As a result,  the senior loan obligation of ILCO was fully  discharged
effective September 30, 1998.

ILCO's  principal  source of  liquidity  consists  of the  periodic  payment  of
principal and interest to it by  Investors-NA,  pursuant to the terms of the two
surplus  debentures.  The surplus  debentures were originally issued by Standard
Life  Insurance  Company  and  their  terms  were  previously  approved  by  the
Mississippi  Insurance  Commissioner.  In  connection  with the 1993  merger  of
Standard Life into Investors-NA,  the obligations of the surplus debentures were
assumed by  Investors-NA.  As of September 30, 1998, the  outstanding  principal
balances  of the  surplus  debentures  were  $4.4  million  and  $11.5  million,
respectively.  Since  Investors-NA is domiciled in the State of Washington,  the
Washington  insurance  law  applies  to the  administration  of the terms of the
surplus  debentures.  Under the provisions of the surplus debentures and current
law, no prior approval of the Washington Insurance  Commissioner is required for
Investors-NA  to pay interest or principal on the surplus  debentures;  provided
that,  after  giving  effect  to  such  payments,   the  statutory   surplus  of
Investors-NA  is in  excess  of $10  million  (the  "surplus  floor").  However,
Investors-NA has voluntarily agreed with the Washington  Insurance  Commissioner
that it will provide at least five days advance notice of payments which it will
make under the surplus  debenture.  As of  September  30,  1998,  the  statutory
capital and surplus of Investors-NA was $66.1 million,  an amount  substantially
in excess of the surplus floor.  The funds required by  Investors-NA to meet its
obligations to ILCO under the terms of the surplus debentures are generated from
operating income generated from insurance and investment operations.

In addition to the payments under the terms of the Surplus Debentures,  ILCO has
received  dividends from Standard Life (now,  from  Investors-NA).  Washington's
insurance  code  includes  the "greater of" standard for payment of dividends to
shareholders,  but has a  requirement  that  prior  notification  of a  proposed
dividend  be given  to the  Washington  Insurance  Commissioner  and  that  cash
dividends may be paid only from earned surplus. Under the "greater of" standard,
an insurer  may pay a dividend  in an amount  equal to the greater of (i) 10% of
policyholder  surplus or (ii) the  insurer's  net gain from  operations  for the
previous  year. As of September  30, 1998,  Investors-NA  had earned  surplus of
$37.5 million.  Since the law applies only to dividend payments,  the ability of
Investors-NA  to  make  principal  and  interest   payments  under  the  Surplus
Debentures is not affected. ILCO does not anticipate that Investors-NA will have
any  difficulty  in  making  principal  and  interest  payments  on the  Surplus
Debentures for the foreseeable future.

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

                                      - 5 -

<PAGE>



approval  would be  required  where a  dividend  exceeds  the  greater of 10% of
surplus or the net gain from operations for the prior fiscal year.  Investors-IN
had earned surplus of $17.4 million at September 30, 1998.

The Form 10-Qs of ILCO for the nine-month  periods ended  September 30, 1998 and
September 30, 1997, set forth the business  operations and financial  results of
ILCO and its life insurance  subsidiaries.  Such 10-Q reports of ILCO, including
the discussion by ILCO's management under the caption  "Management's  Discussion
and Analysis of Financial Conditions and Results of Operations" are incorporated
herein by reference.


                        Liquidity and Capital Resources

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

The cash  requirements  of FIC and its  subsidiaries  consist  primarily  of its
service of the  indebtedness  created in connection with its ownership of Family
Life. As of September 30, 1998, the outstanding balance of such indebtedness was
$49.2 million on the Notes granted by Investors-NA.

The  principal  source of  liquidity  for  FIC's  subsidiaries  consists  of the
periodic  payment of principal and interest by Family Life pursuant to the terms
of a Surplus  Debenture.  The terms of the  Surplus  Debenture  were  previously
approved by the Washington Insurance  Commissioner.  Under the provisions of the
Surplus Debenture and current law, no prior approval of the Washington Insurance
Department  is required  for Family Life to pay  interest  or  principal  on the
Surplus  Debenture;  provided that,  after giving effect to such  payments,  the
statutory  surplus  of Family  Life is in excess of 6% of assets  (the  "surplus
floor").  However,  Family  Life has  voluntarily  agreed  with  the  Washington
Insurance Commissioner that it will provide at least five days advance notice of
payments  which it will make under the surplus  debenture.  As of September  30,
1998,  the statutory  capital and surplus of Family Life was $30.9  million,  an
amount  substantially  in excess of the surplus floor. As of September 30, 1998,
the  principal  balance of the Surplus  Debenture was $25.1  million.  The funds
required by Family Life to meet its  obligations  under the terms of the Surplus
Debenture  are generated  primarily  from premium  payments from  policyholders,
investment  income and the proceeds  from the sale and  redemption  of portfolio
investments.

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

                                      - 6 -

<PAGE>



in making  principal  and  interest  payments  on the Surplus  Debenture  in the
amounts  necessary to enable Family Life Corporation to service its indebtedness
for the foreseeable future.

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

FIC's net cash flow  provided by  operating  activities  was $4.4 million in the
first nine months of 1998,  as compared to $7.4 million in the first nine months
of 1997.  Net cash flow used in financing  activities  was $(4.6) million in the
1998 period, as compared to $(4.6) million in the first nine months of 1997.

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

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

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

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

                                   Investments

As of  September  30, 1998,  the  Company's  investment  assets  totaled  $118.9
million, as compared to $119.1 million as of December 31, 1997.

The level of short-term  investments at September 30, 1998 was $32.9 million, as
compared  to $34.5  million  as of  December  31,  1997.  The  fixed  maturities
available for sale portion  represents $83.0 million of investment  assets as of
September 30, 1998, as compared to $81.9 million at December 31,

                                      - 7 -

<PAGE>



1997. The amortized cost of fixed maturities  available for sale as of September
30, 1998 was $79.4 million  representing a net unrealized  gain of $3.6 million.
This unrealized  gain  principally  reflects  changes in interest rates from the
date the  respective  investments  were  purchased.  To reduce the  exposure  to
interest rate changes,  portfolio  investments  are selected so that  diversity,
maturity  and  liquidity   factors   approximate   the  duration  of  associated
policyholder liabilities.

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

The fixed  maturities  portfolio  of Family  Life,  as of  September  30,  1998,
consisted solely of fixed maturities investments which, in the annual statements
of the companies,  as filed with state  insurance  departments,  were designated
under the National Association of Insurance Commissioners ("NAIC") rating system
as a "1" (highest quality).

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


                              Year 2000 Compliance

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

The Company has evaluated its centralized  computer  systems and has developed a
plan to reach Y2K  compliance.  A central feature of the plan is to convert most
of the  centralized  systems to a common  system which is already in  compliance
with Y2K requirements.  The Company is in the process of this systems conversion
and anticipates  that the project will be completed in advance of the year 2000.
Based on its initial analysis, the Company expects that the cost of implementing
and  completing  the Plan will  result in a after-tax  expense of  approximately
$760,000 for the three-year (1997 - 1999) conversion  period. For the nine month
period ended  September 30, 1998, the Company has incurred an after-tax  expense
of approximately $226,000 in connection with the completion of the Plan.

                                      - 8 -

<PAGE>



Between  January 1, 1997 and  September  30,  1998,  the  Company  has  expended
approximately 64% of the three-year expected after-tax cost discussed above.

The Plan calls for an upgrade of the  Family  Life's  administrative  systems by
changing  individual lines of computer code in order to modify current operating
software  such  that  it  will  become  Y2K  compliant.  This  process  includes
approximately 29 sub-systems  which provide data input to the main systems.  The
administrative  systems  which  are not  modified  will be  converted  onto  the
Company's CK/4 System,  a system  designed to be Y2K compliant  according to the
representations of the vendor.

The systems which  administer a substantial  number of Family Life policies will
be  modified  rather  than  converted.   The  modification  of  the  PMS  system
(administering  approximately 122,000 policies for Family Life) was completed in
March, 1998. The conversion of the Cypros AP system (administering approximately
19,600 active  policies for Family Life) is scheduled for  completion at the end
of September, 1999.

A small number of Family Life  policies are  administered  by systems which also
administer  policies for ILCO and its subsidiaries.  With regard to ILCO and its
subsidiaries,  the ALIS system (administering  approximately 49,280 policies for
Investors-NA  at the time of  conversion)  was  converted  to CK/4 in January of
1998. The conversion of the Life 70 system  (administering  approximately 16,120
active policies for  Investors-IN)  is scheduled for completion in April,  1999.
The  modification  of the Lifecomm-B  system which is responsible for the 19,205
policies  assumed after ILCO's  acquisition of State Auto Life is also scheduled
for  completion  in  April,  1999.  The  conversion  of the  Lifecomm-  A system
(administering  approximately  62,400 active policies for  Investors-NA)  is now
scheduled for completion in September of 1999.

The Company  also faces the risk that one or more of its  external  suppliers of
goods  or  services  ("third  party  providers")  will not be in a  position  to
properly  interact  with the  Company due to the  inability  of such third party
provider to resolve its own Y2K issues.  The Company has  completed an inventory
of its third party provider relationships.  In order to assess the Y2K readiness
of such third  party  providers,  the  Company  has  developed  and  forwarded a
detailed questionnaire to such providers. As the responses to the questionnaires
are  received,  the Company will evaluate the overall Y2K readiness of its third
party  provider  relationships.  However,  the Company does not have  sufficient
information at the current time to determine whether the computer systems of its
third party  providers will be in compliance  with the Y2K  requirements  as the
year 2000 approaches.

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

With respect to non-centralized  systems (i.e. desktop  computers),  the Company
anticipates that updated software  releases will be commercially  available well
in advance of the year 2000.

                                      - 9 -

<PAGE>



Accordingly, to the extent that such systems rely on date sensitive information,
the Company  expects that the effort  needed to correct for Y2K problems will be
less time  intensive  than the  effort  needed  to  achieve  compliance  for its
centralized systems.

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


                             Accounting Developments

In February  1997,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Financial Accounting Standard (FAS) No. 128, "Earnings Per Share," which revises
the  standards  for computing  earnings per share  previously  prescribed by APB
Opinion No. 15, "Earnings Per Share." The Statement  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  reflects the  potential  dilution that
could  occur  if  securities  or other  contracts  to issue  common  stock  were
converted or exercised.  The Statement  requires dual  presentation of basic and
diluted  earnings per share on the face of the income statement for all entities
with potential dilutive  securities  outstanding.  The Statement also requires a
reconciliation  of the numerator and denominator of the basic earnings per share
computation to the numerator and  denominator of the diluted  earnings per share
computation.  The Statement is effective for interim and annual  periods  ending
after December 15, 1997. The Company adopted FAS No. 128 in its annual financial
statements for the year ended December 31, 1997.

In June, 1997, the FASB issued FAS No. 130,  "Reporting  Comprehensive  Income",
which  establishes  standards for reporting and display of comprehensive  income
and its components in a financial  statement  with the same  prominence as other
financial  statements.  Total comprehensive income is required to be reported in
condensed interim financial  statements.  Comprehensive income is defined as net
income adjusted for changes in stockholders'  equity resulting from events other
than net income or transactions related to an entity's capital instruments.  The
Company  adopted FAS 130 effective  January 1, 1998,  with  reclassification  of
financial statements for earlier years.

In June,  1997,  the FASB issued FAS No. 131,  "Disclosure  About Segments of an
Enterprise and Related  Information",  which establishes standards for reporting
information  about  operating  segments.  Generally,  FAS No. 131 requires  that
financial information be reported on the basis that

                                     - 10 -

<PAGE>



it is used  internally for evaluating  performance.  The Company adopted FAS 131
effective January 1, 1998 and comparative  information for earlier years will be
restated.  This  statement  does not need to be  applied  to  interim  financial
statements in the initial year of  application.  The adoption of FAS No. 131 did
not have a material impact on the Company's results of operations,  liquidity or
financial position.

In February,  1998, the FASB issued FAS No. 132,  "Employers'  Disclosures About
Pensions and Other  Postretirement  Benefits",  which revises current disclosure
requirements for employers' pension and other retiree benefits. FAS No. 132 does
not change the  measurement or  recognition  of pension or other  postretirement
benefit plans.  The Company adopted FAS No. 132 effective  January 1, 1998, with
the effect of such  adoption to be reflected in year-end  financial  statements.
The  adoption of FAS No. 132 is not  expected  to have a material  impact on the
Company's results of operations, liquidity or financial position.

In December, 1997, the Accounting Standards Executive Committee issued Statement
of Position  ("SOP") 97-3,  "Accounting by Insurance and Other  Enterprises  for
Insurance-Related  Assessments",  which  provides  guidance  on  accounting  for
insurance-related  assessments.  The  Company  is  required  to adopt  SOP 97-3,
effective January 1, 1999.  Previously issued financial statements should not be
restated  unless the SOP is adopted  prior to the  effective  date and during an
interim  period.  The  adoption  of SOP 97-3 is not  expected to have a material
impact on the Company's results of operations, liquidity or financial position.

In  June,  1998,  the  FASB  issued  FAS No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities",  which establishes accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts,  (collectively  referred to as derivatives) and for
hedging  activities.  FAS No. 133 is applicable to financial  statements for all
fiscal  quarters of fiscal years  beginning  after June 15, 1999. As the Company
does not have significant  investments in derivative financial instruments,  the
adoption of FAS 133 does not have a material impact on the Company's results of
operations, liquidity or financial position.


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

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

                                     - 11 -

<PAGE>



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES


Part II. Other Information

Item 1.  Legal Proceedings

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

ILCO and  Investors-NA are defendants in two lawsuits which were filed in Travis
County,  Texas in which  the  named  plaintiffs  in the  suit,  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 a class action as to similarly  situated
individuals.  A more  detailed  discussion of these two lawsuits is contained in
Part II, Item 1 Legal Proceedings of the Company's Form 10-Q for the three-month
period  ended  March 31,  1998 and the  Company's  Form 10-K for the year  ended
December 31, 1997.

Item 2.  Changes in Securities

         None

Item 3.  Defaults Upon Senior Securities

         None

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

          None

                                     - 12 -

<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, 1997  heretofore  filed by  Registrant  with the
                  Securities   and   Exchange   Commission,   which  is   hereby
                  incorporated by reference.

         (b)      Reports on Form 8-K:

                  None

                                     - 13 -

<PAGE>






                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES



                                    SIGNATURE



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





                        FINANCIAL INDUSTRIES CORPORATION

                               /s/ James M. Grace 
                               James M. Grace, Treasurer
Date:November 13, 1998


                                     - 14 -

<PAGE>