UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q


             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

                         SECURITIES EXCHANGE ACT OF 1934


                  For the Quarterly Period Ended June 30, 2003
                          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  [  ]

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X]     NO  [  ]

Number of common  shares  outstanding,  $0.20 par  value,  as of June 30,  2003:
9,567,211.


                                      - 1 -


<PAGE>



                           Forward-Looking Statements


Except for historical factual  information set forth in this Quarterly Report on
Form 10-Q of Financial  Industries  Corporation  (the  "Company" or "FIC"),  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 -


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                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES


                                      INDEX


                                                                      Page No.



Part I - Financial Information

Item 1. Financial Statements
Consolidated Balance Sheets
         June 30, 2003 and December 31, 2002................................ 4

Consolidated Statements of Income
         For the three and six month periods ended
         June 30, 2003 and June 30, 2002, as restated....................... 6

Consolidated Statements of Cash Flows
         For the six month periods ended
         June 30, 2003 and June 30, 2002, as restated...................... 10

Notes to Consolidated Financial Statements................................. 12

Item 2. Management's Discussion and Analysis of
         Financial Conditions and Results of Operations.................... 33

Item 3. Quantitative and Qualitative Disclosures
            About Market Risk ............................................. 46

Item 4.  Controls and Procedures........................................... 47

Part II

Other  Information......................................................... 48

Signature  Page............................................................ 51


                                      - 3 -


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


                                                June 30,            December 31,
                                                 2003                  2002
ASSETS                                        (unaudited)

Investments:

Fixed maturities held to maturity, at
amortized cost (market value
approximates $31 and $1,069 at
June 30, 2003 and December 31, 2002,
respectively)                                   $        29       $      1,090

Fixed maturities available for sale, at
market value (amortized cost of
$590,407 and $479,433 at June 30, 2003
and December 31, 2002,respectively)                 604,220            493,827

Trading securities, at market value                  19,995                  0

Equity securities, at market value (cost
approximates $6,348 and $6,381 at June
30, 2003 and December 31, 2002, respectively)         7,023              6,351

Policy loans                                         45,033             46,607

Mortgage loans                                            0                 17

Invested real estate                                 74,569             75,393

Short-term investments                               29,349            137,944

        Total investments                           780,218            761,229

Cash and cash equivalents                             9,239             24,975

Accrued investment income                             8,802              8,308

Agency advances and other receivables                18,549             19,728

Reinsurance receivables                              12,743             12,330

Due and deferred premiums                            11,394             11,981

Real estate occupied by Company                      19,495             19,702

Property and equipment, net                           1,776              1,367

Deferred policy acquisition costs                    76,375             77,210

Present value of future profits of
acquired businesses                                  21,764             23,796

Other assets                                         20,206             15,739

Separate account assets                             348,194            334,637

     Total Assets                               $ 1,328,755        $ 1,311,002

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


                                      - 4 -


<PAGE>



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



                                                June 30,            December 31,
                                                 2003                  2002
LIABILITIES AND SHAREHOLDERS' EQUITY          (unaudited)



Liabilities:

Policy liabilities and contractholder
deposit funds:

Contractholder deposit funds                    $   562,616       $    557,466

Future policy benefits                              168,490            172,008

Other policy claims and benefits payable             14,027             17,035
                                                    745,133            746,509

Deferred federal income taxes                        23,518             25,814

Notes payable                                        15,000                  0

Other liabilities                                    26,574             29,400

Separate account liabilities                        348,194            334,637

Total Liabilities                                 1,158,419          1,136,360

Commitments and Contingencies

Shareholders' equity:

Common stock, $.20 par value, 25,000
shares authorized in 2003 and 2002,
12,363 and 11,856 shares issued in
2003 and 2002, 9,566 and 9,601 shares
outstanding in 2003 and 2002                          2,474              2,372

Additional paid-in capital                           67,562             66,541

Unearned compensation                                (2,368)                 0

Accumulated other comprehensive income                5,385              4,949

Retained earnings                                   121,275            123,046
                                                    194,328            196,908

Common treasury stock, at cost, 2,797
and 2,255 shares in 2003 and 2002                   (23,992)           (22,266)

Total Shareholders' Equity                          170,336            174,642

Total Liabilities and Shareholders' Equity      $ 1,328,755        $ 1,311,002

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


                                      - 5 -


<PAGE>



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


                                                  Three Months Ended June 30,
                                                     2003           2002
                                                                  RESTATED

Revenues:

 Premiums                                       $     7,612        $     8,996

 Net investment income                               10,634              9,376

 Real estate income                                     629                712

 Net realized investment gains                          360                  4

 Earned insurance charges                            10,180             10,676

 Other                                                  631                238
                                                     30,046             30,002
Benefits and expenses:

Policyholder benefits and expenses                   10,054             11,531

Interest expense on contract holders deposit funds    7,310              7,109

Amortization of present value of future profits
of acquired businesses                                1,060              1,275

 Amortization of deferred policy acquisition costs    2,641              2,310

 Operating expenses                                   9,681              7,897

 Interest expense                                        79                  0
                                                     30,825             30,122

Loss before federal income tax                         (779)              (120)

Provision for federal income taxes                     (272)               127

Net loss                                        $      (507)       $      (247)

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


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


                                                  Three Months Ended June 30,
                                                     2003           2002
Net Loss Per Share                                                RESTATED

Basic:

Weighted average shares outstanding                   9,593              9,541

Basic earnings per share:

Basic earnings per share                        $     (0.05)       $     (0.03)

Diluted:

Common stock and common stock equivalents             9,593              9,541

Diluted earnings per share:

Diluted earnings per share                      $     (0.05)       $     (0.03)

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


                                      - 7 -

<PAGE>



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

                                                Six  Months Ended June 30,
                                                     2003           2002
                                                                  RESTATED

Revenues:

 Premiums                                       $    15,551        $    18,912

 Net investment income                               19,677             19,810

 Real estate income                                     917              1,325

 Net realized investment gains                        1,990                  5

 Earned insurance charges                            20,598             21,501

 Other                                                  889                690
                                                     59,622             62,243
Benefits and expenses:

Policyholder benefits and expenses                   19,706             22,399

Interest expense on contract holders
deposit funds                                        14,649             15,094

Amortization of present value of future
profits of acquired business                          2,174              2,361

Amortization of deferred policy acquisition
costs                                                 5,273              4,320

Litigation settlement                                 2,915                  0

Operating expenses                                   17,550             16,983

Interest expense                                         79                  0

Total                                                62,346             61,157

Income (loss) before federal income tax and
cumulative effect of change in accounting principle  (2,724)             1,086

Provision for federal income taxes                     (953)               751

Income (loss) before cumulative effect of
change in accounting principle                       (1,771)               335

Cumulative effect of change in accounting principle       0             10,429

Net (Loss) Income                               $    (1,771)       $    10,764

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


                                      - 8 -


<PAGE>


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

                                                     Six Months Ended June 30,
                                                   2003             2002
Net Income (Loss) Per Share                                       RESTATED

Basic:

Weighted average shares outstanding                   9,598              9,515

Basic earnings per share

Income (loss) per share before cumulative
effect of change in accounting principle        $     (0.18)       $      0.03

Cumulative effect of change in accounting
principle                                                 0               1.10

Basic earnings per share                        $     (0.18)       $      1.13

Diluted:

Common stock and common stock equivalents             9,598              9,594

Diluted earnings per share

Income (loss) per share before cumulative effect
of change in accounting principle               $     (0.18)       $      0.03

Cumulative effect of change in accounting principle       0               1.09

Diluted earnings per share                      $     (0.18)       $      1.12

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

                                      - 9 -


<PAGE>


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

                                                     Six Months Ended June 30,
                                                     2003           2002
                                                                  RESTATED
CASH FLOWS FROM OPERATING ACTIVITIES

Net (Loss) Income                               $   (1,771)        $    10,764

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

Amortization of present value of future
profits of acquired business                         2,174               2,361

Amortization of deferred policy acquisition costs    5,273               4,320

Depreciation                                         1,760               1,282

Cumulative effect of change in accounting principle      0             (10,429)

Realized gain on investments                        (1,990)                  0

Changes in assets and liabilities:

(Increase) decrease in accrued  investment income     (494)                176

Decrease (increase) in agent advances and other
receivables                                            924              (5,152)

Decrease in due and deferred premiums                  587                 859

Increase in deferred policy acquisition costs       (4,383)             (5,006)

Increase in other assets                               (37)             (2,489)

(Decrease) increase in policy liabilities
and accruals                                          (243)              3,463

Increase in other liabilities                        4,258               2,237

Decrease in deferred federal income taxes           (2,285)             (2,159)

Net activity from trading securities               (19,995)                  0

Other, net                                             540                 916

Net cash (used in) provided by operating
activities                                      $  (15,682)        $     1,143

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


                                     - 10 -


<PAGE>


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


                                                     Six Months Ended June 30,
                                                     2003           2002
                                                                  RESTATED
CASH FLOWS FROM INVESTING ACTIVITIES

Fixed maturities purchased                      $ (332,392)       $   (106,587)

Real estate capitalized                               (439)            (10,380)

Proceeds from sales and maturities of
fixed maturities                                   214,302             115,313

Net change in policy loans                           1,574               1,597

Net change in short-term investments               108,595              11,840

Net change in property and equipment                  (411)               (175)

Acquisition of subsidiaries, net of cash
acquired                                            (4,037)                  0

Net cash (used in) provided by investing
activities                                         (12,808)             11,608

CASH FLOW FROM FINANCING
ACTIVITIES

Dividends Paid                                        (483)             (2,207)

Contractholder fund deposits                        29,738              25,628

Contractholder fund withdrawals                    (30,871)            (36,379)

Issuance of common capital stock                     1,123                 989

Purchase of treasury stock                          (1,753)               (460)

Proceeds from bank borrowings                       15,000                   0

Net cash provided by (used in) financing
activities                                          12,754             (12,429)

Net (decrease) increase in cash                    (15,736)                322

Cash, beginning of year                             24,975               7,094

Cash, end of period                             $    9,239         $     7,416

              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, unaudited)


Supplemental Schedule of Noncash Investing and Financing Activities

In June 2003,  the Company  purchased  all of the  capital  stock of the New Era
Marketing  companies  (as defined and  described  in Note 6) for $4.2 million in
cash  and  consideration  in the form of  restricted  FIC  common  stock of $0.6
million.  In  conjunction  with  the  acquisition,   assets  were  acquired  and
liabilities were assumed as follows:


Estimated fair value of assets acquired                 $5.0 million


Estimated fair value of liabilities assumed             $0.2 million


                                     - 12 -


<PAGE>


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The financial  statements  included herein have been presented to conform to the
requirements  of Form 10-Q.  This  presentation  includes year end balance sheet
data which was  derived  from  audited  financial  statements.  The notes to the
financial  statements do not  necessarily  include all  disclosures  required by
generally accepted accounting principles (GAAP). The reader should refer to Form
10-K for the year ended December 31, 2002  previously  filed with the Securities
and Exchange  Commission for financial  statements  prepared in accordance  with
GAAP.  Management  believes the  financial  statements  reflect all  adjustments
necessary to present a fair  statement of interim  results.  Certain  prior year
amounts have been  reclassified to conform with current year  presentation.  All
adjustments made to the interim periods are of a normal recurring nature, except
for the 2002 restatement described in Note 9.

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

Certain prior year amounts have been reclassified to conform to the current year
presentation.

1.   Other Comprehensive Income

The  following  is  a  reconciliation   of  the  change  in  accumulated   other
comprehensive income from December 31, 2002 to June 30, 2003 (in thousands):

<TABLE>
<S>                                <C>             <C>             <C>            <C>

                                Net
                                unrealized
                                gain (loss)
                                on invest-
                                ments in                                        Total
                                fixed           Net                             accumulated
                                maturities      appreciation                    other com-
                                available       of equity                       prehensive
                                for sale        securities      Other           income

Balance at December 31, 2002    $  6,601        $    (20)       $ (1,632)       $  4,949
Current Period Change               (250)            459             227             436
Balance at June 30, 2003        $  6,351        $    439        $ (1,405)       $  5,383
</TABLE>


                                     - 13 -


<PAGE>


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

2.   Earnings per Share

The following table reflects the  calculation of basic and diluted  earnings per
share (amounts in thousands, except per share amounts):

<TABLE>
<S>     <C>                                          <C>            <C>               <C>           <C>


                                                    Three months ended                Six months ended
                                                         June 30,                         June 30,
                                                    2003          2002              2003          2002
                                                                Restated                        Restated
BASIC:

Net (loss) income available to common
shareholders                                    $    (507)      $    (247)       $  (1,771)     $   10,764

Weighted average common shares outstanding          9,593           9,541            9,598           9,515

Basic earnings per share                        $   (0.05)      $   (0.03)       $   (0.18)     $     1.13

DILUTED:

Net (loss) income available to common
shareholders                                    $   (507)       $    (247)       $  (1,771)     $   10,764

Weighted average common shares outstanding         9,593            9,541            9,598           9,515

Common stock options                                   0                0                0             295

Repurchase of treasury stock                           0                0                0            (216)

Common stock and common stock equivalents          9,593            9,541            9,598           9,594

Diluted earnings per share                      $  (0.05)       $   (0.03)       $   (0.18)     $     1.12
</TABLE>


Options to purchase  202,250 shares of common stock at prices ranging from $8.18
to $14.30  were  outstanding  at June 30,  2003,  but were not  included  in the
computation of diluted  earnings per share because the inclusion would result in
an antidilutive  effect in periods where a loss from  continuing  operations was
incurred.

3.   Stock Option Plans and Other Equity Incentive Plans

The Company follows the disclosure-only  provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock
Based  Compensation - Transition and Disclosure."  SFAS No. 123 allows companies
to follow existing accounting rules (APB 25) provided that pro forma disclosures
are made of what net  income  and  earnings  per share  would  have been had the
company  recognized  expense for stock-based awards based on their fair value at
date of grant.


                                     - 14 -


<PAGE>


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

For purpose of pro forma disclosures, the estimated fair value of the options is
amortized  to  expense  over the  options'  vesting  period.  Pro  forma  income
information is as follows (in thousands except for net income per share) for the
three and six months ended June 30:

<TABLE>
<S>     <C>                                <C>            <C>              <C>            <C>


                                            Three months ended            Six months ended
                                                 June 30,                       June 30,
                                           2003            2002           2003            2002
                                                         RESTATED                       RESTATED

Net (loss) income as reported           $   (507)       $   (247)       $ (1,771)       $ 10,764

Pro forma compensation expense,
net of tax benefits                            0              39               0              76

Pro forma net (loss) income             $   (507)       $   (286)       $ (1,771)       $ 10,688

Net (loss) income per share:

  Basic as reported, restated           $  (0.05)       $  (0.03)       $  (0.18)       $   1.13

  Diluted as reported, restated         $  (0.05)       $  (0.03)       $  (0.18)       $   1.12

  Basic - Pro Forma                     $  (0.05)       $  (0.03)       $  (0.18)       $   1.12

  Diluted - Pro Forma                   $  (0.05)       $  (0.03)       $  (0.18)       $   1.11
</TABLE>

4.   Dividends Declared

The Board  declared a dividend of $0.05 per common share  payable on January 24,
2003 to record holders as of January 3, 2003.

5.   Trading Securities

FIC's  trading  securities  consist  of  Collateralized   Mortgage   Obligations
("CMO's")  of the type which are  generally  referred to as  "inverse  floaters"
which have coupon  rates that vary in an inverse  relationship  with a specified
benchmark  rate.  The value of FIC's trading  securities as of June 30, 2003 was
$20.0 million.  The change in the market value of trading  securities during the
period is included in net realized  investment  income on the income  statement.
The change in market  value  included in income  during the three and six months
ended June 30, 2003 is $ 756,000 and  $761,000,  respectively.  FIC did not have
any trading securities at December 31, 2002.


                                     - 15 -


<PAGE>


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


6.   Acquisition of Subsidiaries and Related Transactions

On June 5, 2003,  FIC,  through a subsidiary,  acquired  three  companies in the
secondary education financial services market. Each of the three transactions is
described below. In connection with the acquisitions,  FIC, or its subsidiaries,
entered into the transactions which are described below:

     A.   Acquisition of Marketing Companies:

A newly  created  subsidiary  of FIC, FIC  Financial  Services,  Inc.  ("FICFS")
acquired  all  of the  issued  and  outstanding  capital  stock  of:  (i)  Total
Consulting  Group,  Inc.  ("TCG"),  (ii) JNT Group, Inc. ("JNT") and (iii) three
companies  collectively  referred to as "Paragon" - Paragon Benefits,  Inc., The
Paragon  Group,  Inc., and Paragon  National,  Inc.  (collectively  the "New Era
Marketing  Companies").  The  Acquisitions  were  consummated  pursuant to three
separate Stock Purchase Agreements by and among the parties.  The effective date
of the acquisitions is May 30, 2003.

The  consideration  paid by FICFS for the purchase of TCG was $1,984,824 in cash
and 97,417 shares of restricted  common stock of FIC. The value  assigned to the
restricted common stock was $1,327,794 and was based on the 10-day average price
of  FIC  common  stock  as of  two  days  prior to  the  effective  date  of the
acquisition.  The  restricted  common stock is subject to a lock-up period of 12
months for  shareholders  other than two key  employees of TCG.  The  restricted
common  stock  issued to two key  employees  of TCG is  locked-up  pursuant to a
three-year vesting schedule, which is subject to the continued employment of the
employees under employment agreements between the employees and FICFS. The value
of the  restricted  common  stock  issued  to the  two  key  employees  will  be
recognized as compensation expense over the vesting period.

The consideration paid by FICFS for the purchase of JNT was $514,583 in cash and
17,899  shares of  restricted  common  stock of FIC.  The value  assigned to the
restricted  common stock was $243,964 and was based on the 10-day  average price
of  FIC  common  stock  as of  two  days  prior to  the  effective  date  of the
acquisition.  The restricted stock portion of the  consideration is subject to a
three-year  vesting  restriction  based on the three-year  employment  agreement
entered into by and between  FICFS and one key employee of JNT. The value of the
restricted  common  stock  issued  to the key  employee  will be  recognized  as
compensation expense over the vesting period.

The  consideration  paid by FICFS for the purchase of Paragon was  $1,410,750 in
cash and 105,593 shares of restricted common stock of FIC. The value assigned to
the  restricted  common stock was $1,439,233 and was based on the 10-day average
price  of FIC  common  stock as of two days  prior to the effective  date of the
acquisition.  A portion of the restricted  stock  consideration  is subject to a
vesting  restriction  based on the  employment  agreements  entered  into by and
between  FICFS and three key employees of Paragon.  A portion of the  restricted
stock is subject to  forfeiture  if certain  business  targets are not met.  The
value  of the  restricted  common  stock  issued  to the key  employees  will be
recognized as compensation expense over the vesting period.


                                     - 16 -


<PAGE>


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

The results of operations of the New Era Marketing Companies are included in the
Consolidated  Statement of Income from the  effective  date of the  acquisitions
(May  30,  2003).  The pro  forma  results  as if FIC had  acquired  the New Era
Marketing  Companies on January 1, 2003 are as follows (in thousands  except per
share amounts):

                                    Three Months              Six Months
                                   Ending June 30,          Ending June 30,
                                       2003                      2003
--------------------------      ------------------      ------------------------
Revenues                           $   30,625                $   60,774
Net income                         $     (525)               $   (1,824)
Basic earnings per share           $    (0.05)               $    (0.19)
Diluted earnings per share         $    (0.05)               $    (0.19)
--------------------------      ------------------      ------------------------

The pro forma information for the corresponding  2002 periods is not provided as
it is not practicable to obtain.

The  acquisition  of the New Era Marketing  Companies has been  accounted for in
accordance with Statement of Financial  Accounting  Standards No. 141, "Business
Combinations"  ("SFAS No. 141").  This statement  requires that FIC estimate the
fair value of assets acquired and  liabilities  assumed by the Company as of the
date of the  acquisition  and allocate  the  purchase  price to those assets and
liabilities.  The  purchase  price  paid  for the New  Era  Marketing  Companies
(including  transaction  fees and  excluding  contingent  consideration  amounts
accounted for as  compensation  as described  above) was  $4,239,591 in cash and
41,889  shares of  restricted  common  stock of FIC with an  estimated  value of
$570,947.  FIC has not finalized the allocation of the purchase price as of June
30, 2003. An estimation of this  allocation was prepared and included as part of
these  financial  statements.  The purchase price has been allocated as follows:
$116 thousand to cash, $158 thousand to agency  advances and other  receivables,
$288 thousand to property,  plant and  equipment,  $28 thousand to other assets,
$182  thousand  to other  liabilities  and $4.4  million to  goodwill  and other
intangibles (included in other assets).

     B.   Marketing Agreement:

In addition to the acquisitions  described above, and the establishment of FICFS
as a wholly-owned  subsidiary of FIC, the life insurance company subsidiaries of
FIC (Investors Life Insurance Company of North America  ("Investors  Life"), and
Family Life Insurance Company ("Family Life") entered into a marketing agreement
with Equita  Financial  and  Insurance  Services of Texas,  Inc.  ("Equita"),  a
Dallas-based  company  engaged in the marketing and sale of insurance  policies,
annuity  contracts  and  related  financial  products.  Under  the  terms of the
agreement,  Equita  was  granted an  exclusive  appointment  to market  products
underwritten  by Investors Life and Family Life  ("Products")  to individuals in
the "senior  market"  (individuals  over the age of fifty-five)  (the "Exclusive
Market").  The  appointment  is for a ten-year  period;  however,  the exclusive
rights of Equita terminate unless certain production targets are met.


                                     - 17 -


<PAGE>


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


     C.   Stock  Purchase  and Option  Agreement - American  Physicians  Service
          Group, Inc. ("APS"):

In  consideration  of the role that APS served in having brought the opportunity
to  acquire  the New Era  Marketing  Companies  to FIC and  APS's  intention  to
actively  assist FIC in promoting FIC's business plan; FIC sold 27,395 shares of
its  common  stock,  par value  $.20  ("Common  Stock")  per share to APS,  at a
purchase  price of $14.64 per share.  These  shares  represent  a portion of the
shares that FIC recently  purchased from Roy F. Mitte (former Chairman and Chief
Executive Officer of FIC) pursuant to the provisions of the previously announced
settlement of the litigation  between FIC, Mitte family  members,  and the Mitte
Foundation  (the  "Settlement  Agreement").  In addition,  FIC granted to APS an
option to acquire up to 323,000  shares of Common Stock at a per share  exercise
price  equal to $16.42  per share,  but only if  "Qualifying  Premiums"  for the
"Determination Period" exceed $200,000,000.  The Qualifying Premiums requirement
refers,  with certain  exceptions,  to the amount of premiums collected for life
insurance and annuity products  marketed  through  FICFS, the  newly-established
subsidiary of FIC which  purchased the New Era Marketing  Companies and includes
premiums  received by FIC's life insurance  subsidiaries  in connection with the
Equita Marketing Agreement  described above. The Determination  Period means the
period beginning on July 1, 2003 and ending on December 31, 2005. Unless earlier
exercised,  the  option  expires on  December  31,  2006.  The fair value of the
options at the date the Qualifying Premium targets, if met, are achieved will be
recognized  as expense at that date in  accordance  with  Statement of Financial
Accounting  Standards No. 123,  "Accounting for Stock Based Compensation" ("SFAS
No.  123") and  Emerging  Issues  Task Force  Issue No.  96-18  ("EITF  96-18"),
"Accounting for Equity  Instruments  That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."

     D.   Stock Purchase and Option  Agreement - Equita  Financial and Insurance
          Services of Texas, Inc. ("Equita"):

In  consideration  of the  role  which  Equita  served  in  having  brought  the
opportunity  to acquire  the New Era  Marketing  Companies  to FIC and  Equita's
intention to assist FIC in the  implementation  of its business plan through the
marketing  agreement described above, FIC granted to Equita an option to acquire
up to 169,000  shares of Common  Stock at a per share  exercise  price  equal to
$16.42 per  share,  but only if  "Qualifying  Premiums"  for the  "Determination
Period"  exceed  $200,000,000.   The  definitions  of  Qualifying  Premiums  and
Determination  Period are the same as those for the  option  granted to APS with
respect  to the base  option  only.  In  addition,  FIC  granted  to  Equita  an
additional  option to  purchase  up to 158,000  shares of Common  Stock at a per
share exercise  price equal to $16.42 per share,  but only at the rate of 10,000
shares for each  $10,000,000  increment  by which  Qualifying  Premiums  for the
Determination Period exceed $200,000,000.  Unless earlier exercised, the options
granted to Equita expire on December 31, 2006.  The fair value of the options at
the date the Qualifying Premium targets, if met, are achieved will be recognized
as expense in accordance with SFAS No. 123 and EITF 96-18 at that date.


                                     - 18 -


<PAGE>


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

     E.   Employment Agreement and Option Agreement - William P. Tedrow:

In order to implement its business plan for the New Era Marketing Companies, FIC
appointed  William P. Tedrow as President of FICFS and a Vice  President of FIC.
FIC and Mr. Tedrow entered into an employment agreement, for a term ending March
31,  2009.  In  addition,  the  agreement  provides  Mr.  Tedrow with a 6% stock
interest in FICFS subject to a right of repurchase by FIC and a lump sum payment
of $400,000 for Mr.  Tedrow's  efforts in organizing and integrating the New Era
Marketing Companies to FIC. The lump sum payment has been included as an expense
in the Consolidated Income Statement for the three months ended June 30, 2003.

The  restricted  stock  interest is subject to repurchase by FIC on December 31,
2008, or earlier upon termination of the employment agreement or the termination
of the  employment  of Mr.  Tedrow.  The  repurchase  price  is  based  upon the
valuation  of FICFS and an actuarial  valuation  of the block of  insurance  and
annuity  policies  produced  by or  through  FICFS;  provided,  however,  if the
repurchase is made in connection with the termination of Mr. Tedrow's employment
for cause,  or if Mr. Tedrow  terminates his employment  without good reason (as
defined in the  agreement),  the  repurchase  price is  limited  to $10.  If the
repurchase  price exceeds $5 million,  FIC may, in lieu of paying such excess in
cash,  deliver to Mr. Tedrow a  subordinated  note of FIC, such note to be for a
ten-year  term,  with equal  payments of principal and interest on a semi-annual
basis,   and  bearing  interest  at  the  then-  prevailing  rate  for  ten-year
U.S.Treasury  notes, plus 2.5%. A liability equal to the estimated fair value of
the repurchase obligation to Mr. Tedrow will be estimated at each reporting date
with  changes in the fair value of the  obligation  recorded in earnings in each
reported period.  The estimated fair value of the repurchase  obligation at June
30, 2003 was $0.

In  addition,  FIC  granted to Mr.  Tedrow an option to  purchase  up to 150,000
shares of Common  Stock at a per share  exercise  price of  $13.07,  but only if
"Qualifying  Premiums" for the "Determination  Period" exceed $200,000,000.  The
definitions  of  Qualifying  Premiums and  Determination  Period are the same as
those for the option granted to APS described above.  Unless earlier  exercised,
the  options  expire  on  December  31,  2006,  or  earlier  in the event of the
termination  of Mr.  Tedrow's  employment  for  cause  or if he  terminates  his
employment  without  good  cause.  The options  granted to Mr.  Tedrow are being
accounted  for in  accordance  with  APB  25 and  FASB  Interpretation  No.  28,
"Accounting  for Stock  Appreciation  Rights and Other  Variable Stock Option or
Award  Plans,  an  interpretation  of APB  Opinions  No. 15 and 25." No  expense
related to the options  granted to Mr. Tedrow was recognized in the three months
ended June 30, 2003.


                                     - 19 -


<PAGE>


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


7.   Notes Payable

In May 2003, FIC issued $15,000,000  aggregate principal amount of Floating Rate
Senior  Notes due 2033 (the  "Senior  Notes")  and entered  into a Senior  Notes
Subscription  Agreement  ("Subscription  Agreement") with InCapS Funding I, Ltd.
("InCapS"), wherein InCapS agreed to purchase the Senior Notes. The Senior Notes
were issued on May 22, 2003 pursuant to an indenture  between FIC and Wilmington
Trust Company,  as Trustee (the "Indenture").  Sandler O'Neill & Partners,  L.P.
acted as the placement agent for the Senior Notes under the terms of a placement
agreement dated May 13, 2003 (the "Placement  Agreement",  and  collectively the
Subscription Agreement, Indenture and Placement Agreement are referred to as the
"Operative Documents").

The  principal  amount  of the  Senior  Notes is to be paid on May 23,  2033 and
interest shall be paid  quarterly,  beginning on August 23, 2003, at the rate of
4.20% over LIBOR (LIBOR is recalculated  quarterly and the interest rate may not
exceed 12.5% prior to May 2008).  FIC may redeem the Senior Notes at any time on
or after May 23, 2008 by payment of 100% of the  principal  amount of the Senior
Notes being  redeemed  plus unpaid  interest  accrued to the  payment  date.  In
accordance with the terms of the Operative  Documents,  the entire principal and
any interest accrued, but unpaid, may become immediately due and payable upon an
event of default, which includes:  failure to pay interest within 30 days of any
due date;  failure to pay  principal  when due; the  bankruptcy or insolvency of
FIC; or the merger of FIC or sale of all or  substantially  all of FIC's  assets
unless the  successor  entity to a merger is a United States  corporation  (or a
foreign  corporation which agrees to be bound by certain tax provisions included
in the Indenture). The Operative Documents also place certain limitations on the
offer or sale of securities  of FIC, if such offer or sale would render  invalid
the Senior Notes' exemption from the registration requirements of the Securities
Act of 1933; and further  restrict,  for a two year period,  purchases of senior
notes which are restricted securities.

Proceeds from the Senior Notes were used to fund the  acquisition of the New ERA
Marketing Companies (See Note 6) and to pay down intercompany payables.

8.   New Accounting Pronouncements

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


                                     - 20 -


<PAGE>


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


In December  2002,  the FASB issued SFAS No. 148,  "Accounting  for  Stock-Based
Compensation - Transition and  Disclosure."  The statement amends SFAS No.123 to
provide alternative methods of transition for voluntary change to the fair value
based method of accounting for stock-based employee  compensation.  In addition,
SFAS No.  148  amends  the  disclosure  requirements  of SFAS No. 123 to require
prominent  disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported  results.  SFAS No. 148  prescribes  a specific  tabular
format for the pro forma disclosures required by SFAS No. 123 and requires their
disclosure  in  the  "Summary  of  Significant   Accounting   Policies"  or  its
equivalent.  In  addition,  SFAS No. 148  requires  inclusion of these pro forma
disclosures in financial reports for interim periods.  SFAS No. 148 is effective
for financial  statements  for fiscal years ending after  December 15, 2002. FIC
continues  to  account  for its stock  option  plans  under  APB 25 and  related
interpretations  as allowed by this  statement.  FIC has adopted the  disclosure
provisions of SFAS No. 148.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure  Requirements for Guarantees,  Including  Indirect  Guarantees of
Indebtedness  of Others" ("FIN 45"). FIN 45 elaborates on the  disclosures to be
made by a guarantor  in its interim and annual  financial  statements  about its
obligations under certain  guarantees that it has issued. It also clarifies that
a  guarantor  is required to  recognize,  at the  inception  of a  guarantee,  a
liability  for the fair  value  of the  obligation  undertaken  in  issuing  the
guarantee.  The initial  measurement  provisions  of FIN 45 are  applicable on a
prospective basis to guarantees issued or modified after December 31,  2002. The
disclosure  requirements  of  FIN  45  are  effective  for  years  ending  after
December 15, 2002. FIN 45 did not have a material effect on the Company.

In  January  2003,  the FASB  issued  Interpretation  No. 46  "Consolidation  of
Variable Interest Entities, an interpretation of ARB 51" ("FIN 46"). The primary
objectives of FIN 46 are to provide guidance on the  identification  of entities
for which  control is achieved  through  means other than through  voting rights
("variable  interest  entities" or "VIEs") and how to  determine  when and which
business enterprise should consolidate the VIE (the "primary beneficiary"). This
new model for  consolidation  applies to an entity which either  (1) the  equity
investors  (if any) do not have a  controlling  financial  interest  or  (2) the
equity  investment at risk is insufficient  to finance that entity's  activities
without receiving additional  subordinated financial support from other parties.
In addition,  FIN 46 requires  that both the primary  beneficiary  and all other
enterprises  with a  significant  variable  interest  in a VIE  make  additional
disclosures. FIN 46 is not expected to have a material effect on the Company.


                                     - 21 -


<PAGE>


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


In April 2003,  the FASB issued SFAS No. 149,  "Amendment  of  Statement  133 on
Derivative  Instruments and Hedging Activities".  This statement amends SFAS No.
133,  "Accounting  for  Derivative  Instruments  and  Hedging  Activities,"  for
decisions  made  (1) as  part of the  FASB's  Derivatives  Implementation  Group
process that effectively  required amendments to SFAS No. 133, (2) in connection
with  other  FASB  projects  dealing  with  financial  instruments,  and  (3) in
connection with  implementation  issues raised in relation to the application of
the definition of a derivative.  The adoption of SFAS No. 149 is not expected to
materially affect FIC's results of operations, liquidity or financial position.

In April 2003, the FASB issued Statement No. 133  Implementation  Issue No. B36,
"Embedded  Derivatives:  Modified Coinsurance  Arrangements and Debt Instruments
That  Incorporate  Credit Risk  Exposures  That Are Unrelated or Only  Partially
Related  to  the  Creditworthiness  of the  Obligor  Under  Those  Instruments."
Implementation  Issue No. B36 indicates that a modified coinsurance  arrangement
("modco"),  in which funds are  withheld  by the ceding  insurer and a return on
those withheld funds is paid based on the ceding  company's return on certain of
its investments,  generally contains an embedded  derivative feature that is not
clearly and closely  related to the host  contract and should be  bifurcated  in
accordance  with  the  provisions  of  SFAS  133,   "Accounting  for  Derivative
Instruments and Hedging Activities."

The effective date of Implementation Issue No. B36 is the first day of the first
fiscal  quarter  beginning  after  September  15, 2003.  Beginning in the fourth
quarter of 2003,  FIC intends to apply the guidance  prospectively  for existing
contracts  and all  future  transactions.  As  permitted  by SFAS No.  133,  all
contracts  entered  into prior to January 1, 1999,  were  grandfathered  and are
exempt from  provisions  of SFAS No. 133 that  relate to  embedded  derivatives.
Based upon FIC's  current  level of modco and funds  withheld  reinsurance,  the
application of  Implementation  Issue No. B36 is not expected to have a material
impact on consolidated financial position or results of operations.

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with  Characteristics  of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and is
effective for financial  instruments entered into or modified after May 31, 2003
and  otherwise  is  effective  at the  beginning  of the  first  interim  period
beginning  after June 15,  2003,  except for  mandatorily  redeemable  financial
instruments  of  a  nonpublic  entity.  For  mandatorily   redeemable  financial


                                     - 22 -


<PAGE>


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


instruments  of a nonpublic  entity,  SFAS 150 is effective  for existing or new
contracts for fiscal  periods  beginning  after December 15, 2003. For financial
instruments  created  before the issuance date of SFAS 150 and still existing at
the  beginning  of the interim  period of  adoption,  transition  is achieved by
reporting  the  cumulative  effect of a change  in an  accounting  principle  by
initially measuring the financial instruments at fair value or other measurement
attribute  required by SFAS 150. The provisions of SFAS 150, which we adopted in
2003, did not have a material impact on our consolidated  financial  statements.
We  will  continue  to  evaluate  the  potential  impact  of  SFAS  150  on  our
consolidated financial position and results of operations.

9.   Restatement

The  financial  statements  as of and for the three and six month  periods ended
June 30, 2002 have been  restated.  In the fourth  quarter of 2002,  the Company
identified  uncollectible  receivables for which adequate allowance had not been
made and  policyholder  benefits and expenses  that were  understated  due to an
interface error between the policy administration system and the general ledger.
The Company  extended  its  investigation  to determine  the years  affected and
expanded  the scope of its  review to include  other  areas,  including  certain
adjustments  that were deemed not material in prior  years.  As a result of this
review,  the  financial  statements  for 2001 and 2000 and  previously  reported
unaudited quarterly financial data were restated for the following items:

A.   Family Life (a wholly  owned  subsidiary  of the  Company) did not properly
     apply the accounting  requirements of SFAS No. 87,  "Employers'  Accounting
     for  Pensions," in accounting  for its defined  benefit  pension plan.  The
     Company had accounted for its pension expense on a cash basis. As a result,
     the Company had not properly  recognized pension expense or benefit and had
     not recorded a prepaid pension asset in years prior to January 1, 2000.

B.   Agency   advances  and  other   receivables   had  not  been  analyzed  for
     collectibility and contained  balances  pertaining to to agents that should
     have been written off.

C.   Depreciation on certain  property and equipment had not been recorded since
     purchase.

D.   Certain lease  incentives had been recognized in income as received in 1997
     instead of being  deferred and recognized  over the lease period.  Further,
     certain other lease termination benefits had been deferred instead of being
     recognized in income in the period the lease was terminated.

                                     - 23 -


<PAGE>


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


E.   Deferred acquisition cost amortization for traditional life policies issued
     prior to January 1, 2002 had been  calculated  using  amortization  factors
     which did not properly take into account the pattern of commission  expense
     recognized on these policies, which understated amortization of these costs
     in early years of the policies and overstated  amortization  of these costs
     in  later  years  of  the  policies.   Also,   deferred   acquisition  cost
     amortization  for universal  life policies  issued prior to January 1, 2002
     was  based  on  undiscounted  estimates  of  future  gross  profits,  which
     overstated amortization of these costs.

F.   Present value of future  profits  amortization  had not  reflected  certain
     adjustments that reduced the present value of future profits asset.

G.   Certain  death benefit and annuity  benefit  expenses  incurred  during the
     years ended 1999, 2000, 2001 and 2002 were not recorded due to an interface
     error between the Company's  policy  administration  system and its general
     ledger.

H.   InterContinental  Life  Corporation  ("ILCO") had been  accounted for as an
     investment of the Company  under the equity  method of accounting  prior to
     May 18, 2001 and consolidated  after that upon FIC's  acquisition of ILCO's
     remaining  outstanding  shares.  ILCO's financial  statements also required
     adjustment for the following items:

     i.   ILCO had not recorded dividend and capital gain distributions prior to
          1998  on  its  investment  in one of  its  variable  annuity  separate
          accounts (which  understated  ILCO January 1, 2000 retained  earnings)
          and had not recorded unrealized gains or losses to adjust the carrying
          value of its investment in the separate account to market value (which
          understated  ILCO  January  1, 2000  accumulated  other  comprehensive
          income).


                                     - 24 -


<PAGE>


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


     ii.  Agency  advances  and other  receivables  and and other assets had not
          been analyzed for  recoverability  and contained  balances that should
          have been written off.

     iii. Certain  adjustments  to  reinsurance  recoverables  that  related  to
          periods prior to January 1, 2000 were recorded during 2000.

     iv.  ILCO did not properly  apply the accounting  requirements  of SFAS No.
          87,  "Employers'  Accounting  for  Pensions,"  in  accounting  for its
          defined  benefit  pension  plan.  ILCO had  accounted  for its pension
          expense on a cash basis.  As a result,  the  Company had not  properly
          recognized  pension  expense or benefit and had not recorded a prepaid
          pension asset in years prior to January 1, 2000.

     v.   Certain lease  incentives had been recognized in income as received in
          1997 instead of being deferred and  recognized  over the lease period.
          Further,  certain other lease  termination  benefits had been deferred
          instead  of being  recognized  in income in the  period  the lease was
          terminated.

     vi.  An unreconciled  differnce  between suspense account balances included
          in the  Company's  general  ledger  and those  included  in its policy
          administration  system  resulted in an unsupported net asset (included
          in other  liabilities on the  consolidated  balance sheet) that should
          have been written off.

I.   The negative goodwill  recognized as a result of the Company's  acquisition
     of the  remaining  common  shares  of  ILCO  on May 18,  2001  and  related
     amortization  of  negative  goodwill  in 2001 was  adjusted  to reflect the
     impact on ILCO of the above items.

J.   Deferred federal income tax balances were adjusted for the above items.

     Net income for the three and six months  ended June 30, 2002 was  decreased
     from amounts previously reported by $462,000 and $6,334,000,  respectively,
     as a result of the  restatement,  as follows (in thousands except per share
     data):


                                     - 25 -


<PAGE>


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


                                                   Three
                                                Months Ended          Three
                                                June 30, 2002      Months Ended
                                                As Previously      June 30, 2002
                                                  Reported          As Restated
                                                ______________    ______________

Net income (loss) before cumulative
effect of change in accounting
principle                                     $      215          $       (247)

Net income                                    $      215          $       (247)

Basic earnings per share:

Net income (loss) before cumulative
effect of change in accounting
principle                                     $     0.02          $      (0.03)

Net income (loss)                             $     0.02          $      (0.03)

Diluted earnings per share:

Net income (loss) before
cumulative effect of change
in accounting principle                       $     0.02          $      (0.03)

Net income (loss)                             $     0.02          $      (0.03)


                                     - 26 -


<PAGE>


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


                                               Six Months Ended        Six
                                                June 30, 2002      Months Ended
                                                As Previously      June 30, 2002
                                                   Reported         As Restated
                                                _____________      _____________
Net income before cumulative effect of
change in accounting principle                $     1,371         $       335

Cumulative effect of change in
accounting principle                          $    15,727         $    10,429

Net income                                    $    17,098         $    10,764

Basic earnings per share:

Net income before cumulative effect
of change in accounting principle             $      0.14         $      0.03

Cumulative effect of change in
accounting principle                                 1.65                1.10

Net income                                    $      1.80         $      1.13

Diluted earnings per share:

Net income before cumulative effect
of change in accounting principle             $       0.14        $      0.03

Cumulative effect of change in
accounting principle                                 1.64                1.09

Net income                                    $      1.78         $      1.12


                                     - 27 -


<PAGE>


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


The change in net income  for the three and six months  ended June 30,  2002 was
due to the  following  adjustments  that  increased  (decreased)  net income (in
thousands):

                                                Three Months        Six Months
                                                   Ended              Ended
                                                June 30, 2002      June 30, 2002
                                                ______________      ____________

Premiums                                      $         0         $         2

Policyholder benefits and expenses                   (410)               (994)

Amortization of present value of
future profits                                        (15)                (31)

Amortization of deferred policy acquisition
costs                                                 (86)               (173)

Provision for uncollectible receivables              (200)               (398)

Provision for deferred federal income taxes           249                 558

Cumulative effect of change in
accounting principle                                    0              (5,298)

Net income                                    $      (462)        $    (6,334)


                                     - 28 -


<PAGE>



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


A summary of the effects of the restatement on the Company's consolidated
balance sheet as of June 30, 2002 is as follows (in thousands):

                                                   As
                                               Previously              As
                                                Reported             Restated
                                              _____________       ______________
ASSETS

Equity securities                             $        35         $     7,263

Invested real estate                               70,435              73,473

   Total Investments                              746,923             757,119

Agency advances and other receivables              36,251              21,774

Property and equipment, net                         3,573                 777

Deferred policy acquisition costs                  81,232              77,907

Present value of future profits of
acquired businesses                                28,735              27,984

Other assets                                       16,564              17,687

Separate account assets                           364,060             356,261

   Total Assets                               $ 1,340,922         $ 1,323,162

LIABILITIES AND SHAREHOLDERS' EQUITY

Deferred federal income taxes                      31,857              26,183

Other liabilities                                  11,365              19,383

   Total liabilities                            1,143,250           1,145,594

Accumulated other comprehensive income              5,044               2,344

Retained earnings                                 146,353             128,949

   Total shareholders' equity before
   treasury stock                                 220,029             199,925

   Total shareholders' equity                     197,672             177,568

   Total liabilities and shareholders'        $ 1,340,922         $ 1,323,162
   equity


                                     - 29 -


<PAGE>


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


The  consolidated  balance sheet as of June 30, 2002 was restated to reflect the
following:

*    An increase of $7.2 million in FIC's  investments  in equity  securities to
     properly  refect  the  market  value  of the  Company's  investment  in the
     separate account;

*    An  increase  $3.0  million in  invested  real  estate  primarily  due to a
     reclassification  of certain real estate  expenditures that were classified
     as property and equipment;

*    A  decrease  of $14.5  million  in agency  advances  and other  receivables
     primarily due to a write-off of uncollectible  agent balances,  a write-off
     of a  reinsurance  receivable,  and a  write-off  of assets  related  to an
     interface error between the Company's policy  administration system and its
     general ledger;

*    A decrease of $2.8 million in property  and  equipment  primarily  due to a
     reclassification of certain amounts classified as property and equipment to
     invested  real  estate  and  a  write-off  of  assets  that  had  not  been
     depreciated since purchase;

*    A decrease of $3.3 million in deferred  policy  acquisition  costs due to a
     revision of the factors used to calculate  Family  Life's  deferred  policy
     acquisition costs;

*    A decrease  of  $751,000  in present  value of future  profits of  acquired
     businesses due to an adjustment in calculation of this asset;

*    An  increase  of $1.1  million  in other  assets  primarily  related to the
     establishment of unrecorded prepaid pension assets related to Family Life's
     and ILCO's pension plans;

*    A  decrease  of  $7.8  million  in  separate   account   assets  due  to  a
     reclassification of separate acount assets to equity securities;

*    A decrease of $5.7 million in the  liability  for deferred  federal  income
     taxes as a result of the restatement adjustments described herein;

*    An increase of $8.0 million in other  liabilities  primarily  related to an
     unreconciled  difference  between suspense account balances included in the
     Company's  general ledger and those  included in its policy  administration
     system.

*    A decrease of $2.7 million of accumulated other comprehensive income due to
     the changes in the accounting  treatment for the pre-paid pension asset and
     the separate account investment; and

*    A decrease in retained  earnings  of $17.4  million due to the  restatement
     adjustments described herein.


                                     - 30 -


<PAGE>


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

10.  Commitments and Contingencies

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  matters  will not have a material  impact on the  financial
statements.

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 calass 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.  There have been no material  developments
since the Company's  filing of its Annual Report on Form 10-K for the year ended
December 31, 2002.

Litigation  Relating to Former  Chairman and CEO. As previously  reported in its
Annual  Report on Form 10-K for the year ended  December 31,  2002,  the Company
filed a lawsuit against Roy F. Mitte ("Mitte"),  The Roy F. and Joann Cole Mitte
Foundation (the "Foundation") and Joann Mitte  (collectively  referred to as the
"Defendants").  Mitte was the Chairman, President and Chief Executive Officer of
FIC  until  he  was  placed  on  administrative   leave  in  August,  2002.  The
administrative  leave,  and the  subsequent  action by the Board of Directors in
October,  2002 to  terminate  the  employment  agreement  between FIC and Mitte,
resulted from an investigation conducted by the FIC Audit Committee.  Subsequent
to the filing of the lawsuit, Mr. Mitte filed a counterclaim against the Company
alleging that the Company breached the employment  agreement between the Company
and Mr. Mitte by refusing to pay Mitte the severance  benefits and  compensation
provided for under the employment agreement and amendment thereto.

On May 15,  2003,  the Company  entered  into a  settlement  agreement  with the
Defendants  and Scott Mitte (a director of the Company and the son of Roy Mitte)
(the  "Mitte  Parties").  Under the  terms of the  agreement  the Mitte  Parties
released the Company from any past, present or future claims which they may have
against the Company,  including  any claims which Roy Mitte may assert under the
employment  agreement.  In  addition,  the  Company  agreed to release the Mitte
Parties  from any past,  present or future  claims  which the  Company  may have
against the Mitte Parties.


                                     - 31 -


<PAGE>


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


The  settlement  provides for payments by the Company to Roy Mitte of $1 million
on June 1, 2003, $1 million on June 1, 2004 and $1 million on June 1, 2005, with
a provision  for  acceleration  of payments in the event of a change in control.
The settlement  agreement also includes provisions  whereby,  the Company agrees
(i) to use commercially  reasonable  efforts to locate a purchaser or purchasers
of specified  installments over a two year period of the 1,552,206 shares of FIC
common  stock owned by the  Foundation  during  future  periods set forth in the
settlement  agreement,  at a price of $14.64 per share,  (ii) to  purchase  (or,
alternatively,  locate a  purchaser)  on or before  June 1, 2003 of the 39,  820
shares of FIC common  stock  owned by Roy Mitte and the 35,502  shares of common
stock held in the ESOP account of Roy Mitte, at a price of $14.64 per share. The
agreement  also  includes  provisions  related  to the  continuation  of  health
insurance  of Roy and Joann Mitte and payment  for the  cancellation  of options
held by Roy Mitte to purchase 6,600 shares of FIC common stock.  The Company has
recognized  a charge of $2.9 million  (before tax) in the first  quarter of 2003
for  amounts  to be  paid  under  the  settlement  agreement,  representing  the
discounted amount of the non-interest bearing settlement.

As a condition of the obligations of the Company under the settlement agreement,
the  Mitte  Parties  agreed  to grant a limited  proxy to the  persons  named as
proxies by FIC in any proxy statement filed by FIC with the SEC. With respect to
the future shareholders  meetings, the proxy may be voted "for" all nominees for
the Board of Directors named on FIC's proxy statement, "against" any proposal by
a  person  other  than  FIC for the  removal  of any  members  of the  Board  of
Directors,  "withheld" as to nominees for the Board of Directors proposed by any
person other than FIC and "against" any proposal by any person other than FIC to
amend the bylaws or articles of FIC. The proxy also  extends to certain  matters
which may be proposed by FIC at the 2004 annual meeting of shareholders,  or any
later annual or special meeting,  regarding changes in the ownership  percentage
required in order for a shareholder  to call a special  meeting of  shareholders
and the elimination of cumulative voting. The granting of the proxy is generally
conditioned upon the performance of the scheduled purchases of the shares of FIC
common stock owned by the Foundation.

Litigation with Otter Creek Partnership I, L.P.

On June 13, 2003, Otter Creek  Partnership I, L.P. ("Otter Creek") filed a civil
action lawsuit against FIC in the District Court in Travis County,  Texas, Cause
No.  GN302872,  for the purpose of seeking an injunction  against the Company to
compel the Company to schedule and hold an Annual  Meeting of  Shareholders  and
either  not to  exercise  the  proxy it  acquired  from  the  Mitte  Parties  in
connection  with the settlement of the litigation  referenced  under the caption
"Litigation  Relating to the Former  Chairman and CEO" or to vote such shares in
the same  proportion as the other  outstanding  shares of the Company are voted.
The court refused to order the Company to set a specific  record date or meeting
date  for  the  2003  Annual  Meeting.  However,  the  2003  Annual  Meeting  of
Shareholders of FIC was, in fact, held on July 31, 2003.


                                     - 32 -


<PAGE>


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


On July 29, 2003, FIC released the proxy  acquired from the Mitte Parties,  with
respect to 312,484 shares  acquired prior to the record date for the 2003 Annual
Meeting from the Mitte  Foundation  by American  Physicians  Service  Group Inc.
("APS") and 204,918 shares  acquired from the Mitte  Foundation by M&W Insurance
Services,  Inc. ("M&W"). Said release was granted at the request of APS and M&W.
Accordingly, APS and M&W each voted their respective shares directly at the 2003
Annual  Meeting.  The proxy  granted to  management  by the Mitte  Parties  with
respect  to the  remaining  shares was voted at the 2003  Annual  Meeting by the
persons named as Proxies in FIC's Proxy  Statement.  Otter Creek has objected to
the release of proxy to APS and M&W.

FIC believes that the  provisions  of the  settlement  agreement  with the Mitte
Parties  pertaining to the grant of proxy,  and the  conditions set forth in the
settlement  agreement  pertaining to said grant,  are consistent with applicable
legal  requirements.  Accordingly,  FIC  intends to defend its right to vote the
shares  subject to the proxy from the Mitte  Parties and the partial  release of
said proxy to APS and M&W.

A trial date has been set for the second week of September, 2003.



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

The  following   discussion  addresses  the  financial  condition  of  Financial
Industries  Corporation  ("FIC") as of June 30, 2003, compared with December 31,
2002,  and its results of  operations  for the six months  ended June 30,  2003,
compared  with the same  period  last year.  This  discussion  should be read in
conjunction with Management's Discussion and Analysis included in FIC's 10-K for
the year ended December 31, 2002, to which the reader is directed for additional
information.


                                  Restatement

In this Item 2, references to results for the three and six-month  periods ended
June 30,  2002  are to  restated  results.  See the  Notes  to the  Consolidated
Financial Statements.


                                     - 33 -


<PAGE>


           Transactions Affecting Comparability of Results of Operations

In the first six months of 2002, net income and earnings per share were affected
by the cumulative  effect of a change in accounting  principle of $10.4 million.
This amount represents the excess of fair value of net assets acquired over cost
as of the  beginning  of 2002  related  to the merger of  InterContinental  Life
Corporation  ("ILCO")  with and into a subsidiary  of FIC on May 18,  2001.  The
Company recorded this cumulative  effect in conjunction with adopting  Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations,"
in the first quarter of 2002, as required by SFAS 141.

In the first six  months of 2003,  net  income was  affected  by a $2.9  million
expense  related to the settlement of the  litigation  between FIC, Roy F. Mitte
(the former Chairman and Chief Executive Officer of the Company), and the Roy F.
and Joann Cole Mitte Foundation (see Registrant's  Quarterly Report on Form 10-Q
for the  three-month  period ended March 31, 2003 for a further  description  of
this settlement,  referred to therein as the "Mitte Settlement").  Net income in
the  first six  months  of 2003 was also  affected  by the  following  operating
expenses  including:  (i) a $476,000  expense accrual for payments to be made to
Jeffrey Demgen pursuant to his employment agreement;  (ii) a $400,000 payment to
William P. Tedrow;  (iii) legal and other  expenses  related to  litigation  and
proxy  matters;  and (iv) fees  paid to  Salomon  Smith  Barney.  "Benefits  and
Expenses" below for a further explanation of these items.


         Results of Operations - Six Months Ended June 30, 2003 and 2002

For the  six-month  period ended June 30, 2003,  FIC's net loss was $1.8 million
(basic and diluted loss of $0.18 per common  share) on revenues of $59.6 million
as compared to net income of $10.8 million  (basic  earnings of $1.13 per common
share,  or diluted  earnings  of $1.12 per common  share) on  revenues  of $62.2
million in the first six months of 2002.  Net income for the first six months of
2002, before the cumulative effect of change in accounting  principle,  was $0.3
million (basic and diluted earnings of $0.03 per common share).

Revenues.

Premium revenues reported for traditional life insurance products are recognized
when due.  Premium  income for the first six months of 2003,  net of reinsurance
ceded,  was $15.6 million,  as compared to $18.9 million in the first six months
of 2002.  This source of revenues is related to the  traditional  life insurance
book of business of FIC's  insurance  subsidiaries.  The level of net  collected
premiums  for  traditional  life  insurance  products at Family Life for the six
months ending June 30, 2003 was $11.0  million,  as compared to $14.0 million in
the same period in 2002. The decrease in net collected  premium is  attributable
to the decrease in the traditional life insurance book of business.


                                     - 34 -


<PAGE>


Income from universal life and annuity  charges for the first six months of 2003
was $20.6 million,  as compared to $21.5 million in the same period of 2002. The
face amount of in force  universal  life  policies  was $4.8 billion at June 30,
2002 as compared to $5.2 billion at June 30, 2003.

Net  investment  income  for the first six  months of 2003 was $19.7  million as
compared to $19.8 million in the same period of 2002. Net  investment  income in
the first six months of 2003 has been adversely affected by the current interest
rate environment.

Real estate income is primarily earned from the leases on the buildings at River
Place  Pointe,  an office  complex in Austin,  Texas which is owned by Investors
Life. Real estate income was $0.9 for the six-month  period ended June 30, 2003,
as compared to $1.3  million for the same period in 2002.  The  decrease in real
estate  income from the six months  ended June 30, 2003 to the same period ended
June 30, 2002 is due to the  completion  of the  remainder  of the  buildings in
River Place Pointe and the related expenses and depreciation of those buildings.
These three  buildings did not generate rental income in the first six months of
2003.

Net realized investment gains were $2.0 million in the first six months of 2003,
as  compared  to $0.005  million in the first six  months of 2002.  This gain is
related to sales of fixed maturity securities which were sold in anticipation of
the securities being called.

Other  income was $0.9  million in the first six months of 2003,  as compared to
$0.7 million in the first six months of 2002.  Other income includes income from
FIC's  non-insurance  subsidiaries,  Actuarial  Risk  Consultants,  Inc. and FIC
Financial  Services,  Inc.  ("FICFS").  During the second quarter of 2003, FICFS
acquired three companies in the secondary  education  financial services market:
(i) Total  Consulting  Group,  Inc.  ("TCG") (a consulting  firm and  registered
investment advisor with clients in the secondary  education  marketplace),  (ii)
JNT Group,  Inc.  ("JNT") (an independent  fee-based  third party  administrator
operating  principally  in Texas  and  California)  and  (iii)  three  companies
collectively  referred to as  "Paragon" - Paragon  Benefits,  Inc.,  The Paragon
Group, Inc., and Paragon National, Inc. (a provider of employee benefit products
and services to the secondary education marketplace).  FICFS intends to continue
the business  operations of each company and believes that the synergies created
by the  acquisitions  will help  position  FICFS  and FIC to become an  industry
leader in the secondary education financial services market.  Because the income
attributable   to  the   subsidiaries  of  FICFS  was  only  included  on  FIC's
consolidated statements of income from May 30, 2003 through June 30, 2003, there
was not a significant impact to other income for the six-month period ended June
30, 2003.  For a further  description of FICFS and the  acquisitions,  see FIC's
Current Report on Form 8-K filed with the Securities and Exchange  Commission on
June 10, 2003.


                                     - 35 -


<PAGE>


Benefits and Expenses.

Policyholder benefits and expenses were $19.7 million in the first six months of
2003, as compared to $22.4 million in the first six months of 2002. The decrease
in  policyholder  benefits and expenses from June 30, 2002 to the same period in
2003 was due primarily to a decrease in death benefits claims as well as reserve
adjustments related to lower premiums received and withdrawal payments at a less
than expected level.

Interest  expense on contract  holders  deposit  funds was $14.6  million in the
first six months of 2003, as compared to $15.1 million in the same period of the
year 2002. This expense is related to crediting of interest to policyholders for
cash values  accumulated in their  accounts.  This decrease was due primarily to
the lowering of credited rates on these accounts  starting in the fourth quarter
of 2002.

The costs related to acquiring new business,  including certain costs of issuing
policies and certain other variable selling expenses (principally  commissions),
are  deferred  policy  acquisition  costs  ("DAC").  The expense  related to the
amortization  of DAC was $5.3  million  in the  first  six  months  of 2003,  as
compared  to $4.3  million  in the  first  six  months  of 2002.  See  "Critical
Accounting  Policies,  Deferred  Policy  Acquisition  Costs and Present Value of
Future  Profits  of  Acquired  Business"  herein  for a  further  discussion  of
capitalization  of expenses  related to acquiring new business.  The increase in
the amortization of DAC of $1.0 million from the six-month period ended June 30,
2002 to the same period in 2003 reflects the withdrawal  experience  during this
period.

In the first six months of 2003,  the  expense  related to the  amortization  of
present  value of future  profits  of  acquired  business  was $2.2  million  as
compared to $2.4 million in the first six months of 2002.

Operating  expenses  for the first six  months of 2003 were  $17.6  million,  as
compared  to $17.0  million  in the  first  six  months  of 2002.  The  level of
operating  expenses for the six-month period ending June 30, 2003 included:  (i)
$476,000  related to payments  to be made to retired  chief  marketing  officer,
Jeffrey  Demgen,  pursuant  to his  employment  agreement;  (ii) legal and other
expenses related to litigation and proxy matters; (iii) $400,000 paid to William
P. Tedrow for his efforts in organizing  and  integrating  the New Era Marketing
Companies  to FIC (see  Notes to  Consolidated  Financial  Statements,  note 6E,
herein for  information  regarding  the payment to and  employment  agreement of
William P.  Tedrow);  and (iv) fees paid to Salomon  Smith Barney related to the
matter  set forth in the  Company's  Current  Report on Form 8-K filed  with the
Securities  and  Exchange  Commission  ("SEC") on January  28,  2003.  Operating
expenses for the  six-month  period ended June 30, 2002  included  approximately
$1.5 million of executive  bonus payments and the repurchase of James M. Grace's
employment contract, as well as a $1 million donation to  the  Roy F. and  Joann
Cole Mitte Foundation.


                                     - 36 -


<PAGE>


Expenses for the six-month period ended June 30, 2003 also include an expense of
$2.9 million related to the Mitte Settlement (see Registrant's  Quarterly Report
on Form  10-Q  for the  quarter  period  ended  March  31,  2003  for a  further
description of the Mitte Settlement).

The  provision  for  federal  income  taxes was ($1.0)  million in the first six
months of 2003 as compared to $0.8 million in the first six months of 2002.  The
decrease  was due to the  decrease in income for the six month period ended June
30, 2003 compared to the same period in 2002.


            Results of Operations - Three Months Ended June 30, 2003
               as compared to the Three Months Ended June 30, 2002

For the three-month  period ended June 30, 2003, FIC's net loss was $0.5 million
(basic and diluted loss of $0.05 per common  share) on revenues of $30.0 million
as compared to a net loss of $0.2  million  (basic and diluted loss of $0.03 per
common share) on total  revenues of $30.0 million in the same three month period
of 2002.

                        Liquidity and Capital Resources

Liquidity  describes the ability of a company to generate  sufficient cash flows
to meet  the cash  requirements  of  business  operations.  FIC is an  insurance
holding company whose principal assets consist of the outstanding  capital stock
of its insurance subsidiaries, Family Life Insurance Company ("Family Life") and
Investors Life Insurance Company of North America ("Investors Life"), as well as
the outstanding capital stock of Actuarial Risk Consultants,  Inc. ("ARC"),  its
actuarial subsidiary,  and 94% of the outstanding capital stock of FIC Financial
Services,  Inc.("FICFS"),  a  subsidiary  which  concentrates  on the  secondary
education financial services market. As a holding company, FIC's ability to meet
its cash  requirements,  pay interest on any debt,  pay expenses  related to its
affairs  and pay  dividends  on its  common  stock  substantially  depends  upon
dividends from its subsidiaries.

Applicable  state  insurance  laws  generally  restrict the ability of insurance
companies to pay cash  dividends  in excess of  prescribed  limitations  without
prior approval. The ability of Family Life and Investors Life to pay shareholder
dividends is and will  continue to be subject to  restrictions  set forth in the
insurance  laws  and  regulations  of  Washington,   their  domiciliary   state.
Washington  limits  how  and  when  Family  Life  and  Investors  Life  can  pay
shareholder  dividends by (a) including the "greater of" standard for payment of
dividends to shareholders,  (b) requiring that prior  notification of a proposed
dividend be given to the  Washington  Insurance  Commissioner  and (c) requiring
that cash  dividends  be paid only from earned  surplus.  Under the "greater of"
standard,  an insurer may pay a dividend in an amount  equal to the greater of :
(i) 10% of the  policyholder  surplus  or  (ii)  the  insurer's  net  gain  from
operations  for the  previous  year.  For the  year  ended  December  31,  2002,
Investors  Life  had  earned  surplus  of  $35.4  million  and a net  gain  from


                                     - 37 -


<PAGE>


operations of $1.4 million,  and Family Life had earned  surplus of $0.4 million
and a net gain from  operations of $3.3  million.  Neither  Investors  Life  nor
Family Life paid any dividends  during the first six months of 2003. For the six
month  period ended June 30, 2003,  Investors  Life had earned  surplus of $36.7
million  and a net gain from  operations  of $.34  million,  and Family Life had
earned surplus of $2.5 million and a net gain from operations of $1.2 million.

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

FIC expects to have the ability to receive unrestricted dividends from its newly
created  subsidiary,  FICFS, of which FIC owns 94% of the outstanding  stock, as
well as dividends from ARC.

FIC's cash and cash equivalents at June 30, 2003 was $9.2 million as compared to
$25.0 million at December 31, 2002. The decrease in cash and cash equivalents at
June 30, 2003 from December 31, 2002 was due primarily to  reinvestment  of cash
into purchases of fixed maturity  securties.  Cash and cash  equivalents at June
30, 2002 was $7.4 million.

FIC's net cash flow used in operating  activities  was $15.7 million for the six
month  period  ending June 30,  2003,  as compared to $1.1  million  provided by
operating  activities for the same period in the year 2002. The decrease in cash
flows  provided by operating  activities  is due  primarily to net activity from
trading  securities,  which are  required  to be  reported  in cash  flows  from
operations.

Net cash flow used in investing  activities  was $12.8  million in the six month
period ending June 30, 2003, as compared to $11.6 million  provided by investing
activities in the same period of 2002.  The $24.4 million  increase in cash used
in investing  activities  in 2003 from 2002 was due  primarily to  investment of
cash into fixed  maturity  securities.  Additionally,  $4.0  million was used to
invest in the acquisition of the above-mentioned subsidiaries of FICFS.

Net cash flow  provided by financing  activities  was $12.8 million in the first
six months of 2003, as compared to $12.3 million used in financing activities in
the first  six  months of 2002.  The  increase  in cash  provided  by  financing
activities  of $25.1  million is primarily  attributable  to the issuance of the
Senior  Notes  (see  description  of Senior  Notes  below)  and a  reduction  in
surrender benefits paid on certain contractholder  balances.


                                     - 38 -


<PAGE>


A primary  liquidity  consideration  with respect to life  insurance and annuity
products  is the  risk of  early  policyholder  and  contractholder  withdrawal.
Deposit fund  liabilities for universal life and annuity products as of June 30,
2003 were $562.6  million,  as compared to $557.5  million at December 31, 2002.
Individual life insurance  policies are less  susceptible to withdrawal than are
annuity contracts because  policyholders may incur surrender charges and undergo
a new underwriting  process in order to obtain a new insurance  policy.  At June
30, 2003, the bulk of the liabilities for contractholder  deposit funds on FIC's
balance sheet, $414.3 million,  were related to insurance products,  as compared
to only $148.4 million of annuity product liabilities.

The cash  requirements of FIC, and its holding company  subsidiary,  Family Life
Corporation, consist primarily of (i) its service of the indebtedness created in
connection  with  FIC's  ownership  of  Family  Life;  and (ii)  service  of the
indebtedness  created by the Senior  Notes (see  description  of Senior Notes in
"Liquidity and Capital Reserves", below).

The  indebtedness  created in  connection  with FIC's  ownership  of Family Life
includes  $18.44  million of notes payable to FIC's  subsidiary,  Investors Life
(the "Affiliate  Notes"),  represented by (i) a loan of $30 million by Investors
Life to Family  Life  Corporation  made in July  1993,  in  connection  with the
prepayment of indebtedness  which had been previously issued to Merrill Lynch as
part of the 1991 acquisition of Family Life by a wholly-owned subsidiary of FIC,
and (ii) a loan of $4.5  million  by  Investors  Life to Family  Life  Insurance
Investment  Company made in July 1993, in connection  with the same  transaction
described above.

The Affiliate  Notes owned by Investors  Life include the following  provisions:
(a) the $30 million  note  provides for  quarterly  principal  payments,  in the
amount of $1,336,458;  the final quarterly principal payment is due on September
12,  2006;  the  interest  rate on the note is 9%, and (b) the $4.5 million note
provides for quarterly principal payments, in the amount of $200,469;  the final
quarterly  principal  payment is due on September 12, 2006; the interest rate on
the note is 9%.

On June 30, 2003, Investors Life exercised its option to purchase 500,411 shares
of FIC's common stock,  which were granted to Investors Life in connection  with
the Affiliate Notes (see FIC's 10-K for the year ended December 31, 2002,  "Item
1. Business - Investors  Life  Loans").  Pursuant to the  Affiliate  Notes,  and
subsequent amendments thereto, Investors Life paid FIC $1.05 million to purchase
the FIC shares.


                                     - 39 -


<PAGE>


Due to the merger of  InterContinental  Life Corporation (which owns 100% of the
outstanding  stock of Investors  Life) with a subsidiary of FIC on May 18, 2001,
the  indebtedness  created by the Affiliate Notes is not included as a liability
on the  consolidated  financial  statements  of FIC.  Additionally,  the 500,411
shares  obtained by Investors  Life pursuant to the option  exercise are held as
treasury shares and do not affect the consolidated balance sheet of FIC.

In May, 2003, FIC issued $15,000,000 aggregate principal amount of Floating Rate
Senior  Notes due 2033 (the  "Senior  Notes")  and entered  into a Senior  Notes
Subscription  Agreement  ("Subscription  Agreement") with InCapS Funding I, Ltd.
("InCapS"), wherein InCapS agreed to purchase the Senior Notes. The Senior Notes
were issued on May 22, 2003 pursuant to an indenture  between FIC and Wilmington
Trust Company,  as Trustee (the "Indenture").  Sandler O'Neill & Partners,  L.P.
acted as the placement agent for the Senior Notes under the terms of a placement
agreement dated May 13, 2003 (the "Placement  Agreement",  and  collectively the
Subscription Agreement, Indenture and Placement Agreement are referred to as the
"Operative Documents").

The  principal  amount  of the  Senior  Notes is to be paid on May 23,  2033 and
interest shall be paid  quarterly,  beginning on August 23, 2003, at the rate of
4.20% over LIBOR (LIBOR is recalculated  quarterly and the interest rate may not
exceed 12.5% prior to May 2008).  FIC may redeem the Senior Notes at any time on
or after May 23, 2008 by payment of 100% of the  principal  amount of the Senior
Notes being  redeemed  plus unpaid  interest  accrued to the  payment  date.  In
accordance with the terms of the Operative  Documents,  the entire principal and
any interest accrued, but unpaid, may become immediately due and payable upon an
event of default, which includes:  failure to pay interest within 30 days of any
due date;  failure to pay  principal  when due; the  bankruptcy or insolvency of
FIC; or the merger of FIC or sale of all or  substantially  all of FIC's  assets
unless the  successor  entity to a merger is a United States  corporation  (or a
foreign  corporation which agrees to be bound by certain tax provisions included
in the Indenture). The Operative Documents also place certain limitations on the
offer or sale of securities  of FIC, if such offer or sale would render  invalid
the Senior Notes' exemption from the registration requirements of the Securities
Act of 1933; and further  restrict,  for a two year period,  purchases of senior
notes which are  restricted  securities.  (See Note 7 for  description on use of
proceeds)

FIC's other liquidity  requirements relate principally to the need for cash flow
to meet  operating  expenses,  as well as the  liabilities  associated  with its
insurance subsidiaries' various life insurance and annuity products. In order to
ensure that cash flow is  sufficient  to meet these needs,  management  monitors
benefits and surrenders of insurance  products to provide  projections of future
cash requirements.  As part of this monitoring  process,  FIC performs cash flow
testing of assets and  liabilities  to evaluate the adequacy of reserves.  There
can be no assurance  that future  experience  regarding  benefits and surrenders
will be similar to historic experience since withdrawal and surrender levels are
influenced by such factors as the interest rate environment and general economic
conditions as well as the claims-paying and financial  strength ratings of FIC's
insurance subsidiaries.


                                     - 40 -


<PAGE>


In 2002,  management  reviewed the Company's  liquidity to determine whether the
cash, cash equivalents and short term investments of the Company were sufficient
to meet the Company's needs for cash for operations,  capital  requirements  and
commitments.   Management   has  reduced  the  amount  of   dividends   paid  to
shareholders,  discontinued  donations  to  the  Roy F.  and  Joann  Cole  Mitte
Foundation,  and implemented  plans to streamline the operations of the Company.
Management  believes that the cash, cash  equivalents and short term investments
of FIC and its subsidiaries are sufficient to meet the needs of its business and
to satisfy  debt  service.  There are no trends,  commitments  or capital  asset
requirements  that are  expected to have an adverse  effect on the  liquidity of
FIC.


                                   Investments

As of June  30,  2003,  FIC's  invested  assets,  excluding  separate  accounts,
totalled  $780.2  million,  compared to $761.2 million at December 31, 2002. The
increase is primarily  attributable  to  investments of cash into fixed maturity
securities.  The significant differences between the portfolio composition as of
June 30, 2003 as compared to December  31, 2002 are: (i) the addition of trading
securities,  which comprise 3.2% of the investment portfolio at June 30, 2003 as
compared to 0% at December 31, 2002;  (ii) fixed  maturities  available for sale
comprise  77.4% at June 30, 2003  compared to 64.9% at December  31,  2002;  and
(iii) short-term investments comprise 3.8% at June 30, 2003 compared to 18.1% at
December 31, 2002.

The assets held by FIC's life insurance subsidiaries must comply with applicable
state  insurance  laws  and  regulations.   In  selecting  investments  for  the
portfolios  of its  life  insurance  subsidiaries,  the  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 general
investment  objective of the Company 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.

FIC determines the allocation of our assets  primarily on the basis of cash flow
and  return  requirements  of our  products  and  secondarily  by the  level  of
investment  risk. In order to ensure that  investments are sufficient to satisfy
cash flow needs, FIC establishes a level of cash and securities which,  combined
with expected net cash inflows from  operations,  maturities  of fixed  maturity
investments and principal payments on mortgage-backed  securities,  are believed
adequate  to meet  anticipated  short-term  and  long-term  benefit  and expense
payment obligations.


                                     - 41 -


<PAGE>


During the first six months of 2003, FIC invested  $342.5 million of its assets,
of which $218.2 million  consisted of  reinvestments of matured and called fixed
maturities,  and  $124.3  million  consisted  of  investments  from  cash,  cash
equivalents  and  short-term  investments.  The  $342.5  million  was  primarily
invested  in  short-  and  medium-  term  securities.   Collateralized  mortgage
obligations  ("CMOs")  comprised  $179.8 million of new  investments,  corporate
securities  comprised  $62.1 million,  asset-backed  securities  comprised $57.6
million, and agency bonds comprised $43.0 million.  Management believes that the
asset   allocation  is  sufficient  to  satisfy  current   projected  cash  flow
requirements.

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 only $17,107 of invested assets
as of June 30, 2003 and $26,049 of invested assets at December 31, 2002.

Fixed Maturity Securities

The Company's fixed maturity securities portfolio is predominately  comprised of
low  risk,  investment  grade,  available  for sale  publicly  traded  corporate
securities, mortgage-backed securities and United States Government bonds. As of
June 30, 2003, the market value fixed  maturities  available for sale was $604.2
million as compared to an amortized cost of $590.4 million or an unrealized gain
of $13.8 million.  The increase  reflects  unrealized  gains on such investments
related  to  changes  in  interest  rates  subsequent  to the  purchase  of such
investments.  At December  31, 2002,  the market  value of the fixed  maturities
available for sale segment was $493.8  million as compared to an amortized  cost
of $479.4 million.

The investments of FIC's insurance  subsidiaries in  mortgage-backed  securities
included  CMOs of  $267.1  million  as of June 30,  2003 as  compared  to $175.4
million at December 31, 2002,  and  mortgage-backed  pass-through  securities of
$95.1  million as of June 30,  2003 and $29.6  million  at  December  31,  2002.
Mortgage-backed  pass-through  securities,  sequential  CMO's and support bonds,
which comprised  approximately 42.4% of the book value of FIC's  mortgage-backed
securities at June 30, 2003,  are sensitive to prepayment  and extension  risks.
FIC's insurance subsidiaries have reduced the risk of prepayment associated with
mortgage-backed  securities by investing in planned  amortization class ("PAC"),
target  amortization  class  ("TAC")  instruments  and  scheduled  bonds.  These
investments  are  designed to amortize in a  predictable  manner by shifting the
risk of prepayment  of the  underlying  collateral  to other  investors in other
tranches  ("support  classes")  of the  CMO.  At  June  30,  2003,  PAC  and TAC
instruments  and scheduled  bonds  represented  approximately  41.2% of the book
value  of FIC's  mortgage-backed  securities.  Sequential  and  support  classes
represented  approximately  16.2%  of the book  value  of FIC's  mortgage-backed
securities  at June 30, 2003.  Additionally,  the  insurance  subsidiaries  make


                                     - 42 -


<PAGE>


selected investments in CMOs of the inverse floater category.  Such instruments,
which are subject to strict  quantitative  and  qualitative  standards,  carry a
higher  current  interest  rate which varies in an inverse  relationship  with a
specified  benchmark interest rate. The investment  guidelines do not permit the
purchase of CMOs which are interest  only or  principal  only  instruments.  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.  Conversely,  in periods of rising interest rates mortgages
are  generally  not  repaid  as  rapidly  which  would   adversely   affect  the
anticipation  duration of the CMO. For the year 2003, the investment  objectives
of FIC's insurance subsidiaries include a strategy of reducing the concentration
in  short-term  investments  by making  selected  investments  in a  variety  of
medium-term CMO instruments.

The securities  valuation office (SVO) of the National  Association of Insurance
Commissioners evaluates all public and private bonds purchased as investments by
insurance  companies.  The SVO assigns one of six investment  categories to each
security it reviews. Category 1 is the highest quality rating, and Category 6 is
the lowest.  As of June 30, 2003, the majority of our bonds are investment grade
(Category  1  and  2).  The  Company's  fixed  maturities  portfolio  (including
short-term investments),  included only a non-material amount of debt securities
which,  in the annual  statements of the companies as filed with state insurance
departments, were designated by the SVO as "3" (medium quality) or below.

Trading Securities

FIC's  trading  securities  consist  of  Collateralized   Mortgage   Obligations
("CMO's")  of the type which are  generally  referred to as  "inverse  floaters"
which have coupon  rates that vary in an inverse  relationship  with a specified
benchmark  rate.  The value of FIC's trading  securities as of June 30, 2003 was
$19.9 million.  The change in the market value of trading  securities during the
period,  $0.761 million,  is included in net realized  investment  income on the
consolidated  income  statement.  FIC did not have  any  trading  securities  at
December 31, 2002.

Equity Securities

FIC's equity  securities  consist  primarily of its  investment  in the separate
account of Investors Life. As of June 30, 2003, the market value of FIC's equity
securities  was $7.0 million,  as compared to $6.3 million at December 31, 2002.
The increase is related to an increase in the value of the  underlying  funds in
the separate account.


                                     - 43 -


<PAGE>


Policy Loans

Policy  loans  totaled  $45.2  million at June 30,  2003,  as  compared to $46.6
million at December 31, 2002.

Mortgage Loans

As of June 30, 2003, the Company did not have any investments in mortgage loans,
as compared  to $17,000 at  December  31,  2002.  The Company  does not make new
mortgage loans on commercial properties.

Real Estate

Invested  real  estate at June 30,  2003 was $74.6  million as compared to $75.4
million at December 31, 2002. The real estate investment is primarily related to
the  development  of the River Place Pointe  project  ("River Place  Pointe") by
Investors  Life. In October 1998,  Investors Life purchased  River Place Pointe,
which  consisted  of two  adjoining  tracts of land  located  in  Austin,  Texas
totaling  47.995 acres.  The aggregate  purchase price for these tracts was $8.1
million.  Investors Life obtained a Site Development  Permit for the tracts from
the City of Austin  allowing  for the  construction  of seven  office  buildings
totaling  600,000  square  feet,  with  associated  parking,  drives and related
improvements.  Construction on the first section of the project,  which consists
of  four  office   buildings,   an  associated   parking  garage,   and  related
infrastructure  was completed  during 2000 and 2001.  Construction on the second
section of the project, which consists of three office buildings,  an associated
parking garage, and related infrastructure was completed in 2002.

As of  June  30,  2003,  Investors  Life  had  invested  $92.7  million  in  the
construction of River Place Pointe,  of which $19.5 million is recorded on FIC's
balance  sheet as real estate  occupied  by the  Company.  As of June 30,  2003,
307,403  rentable  square feet of office space was leased to third party tenants
and 276,869  rentable  square feet was  available  for lease.  According  to the
Federal Deposit  Insurance  Corporation's  ("FDIC") National Edition of Regional
Outlook,  Fourth Quarter, 2002, the Austin office market vacancy rate (including
sublease space available) was 27.2% as of September 30, 2002, the highest in the
nation.

The Company views the River Place Pointe  investment as a long term  commitment.
Based on this assumption,  the Company has examined future anticipated cash flow
on the development and has determined that the investment is not impaired.

Short-term investments

FIC's short-term  investments  consist  primarily of U.S.  Government bonds. The
level of short-term  investments at June 30, 2003 was $29.3 million, as compared
to  $137.9  million  as  of  December  31,  2002.  The  decrease  in  short-term
investments  was  due to  reinvestments  of  short-term  assets  into  primarily
medium-term fixed maturity securities and trading securities.


                                     - 44 -


<PAGE>


                          Critical Accounting Policies

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

Cumulative Effect of Accounting  Changes.  During the first quarter of 2002, the
Company  adopted  Statement of Financial  Accounting  Standards  (SFAS) No. 141,
"Business  Combinations." SFAS No. 141 eliminates the practice of amortizing and
deferring  excess of net assets  acquired  over costs and  requires  unallocated
negative goodwill to be recognized immediately. In accordance with the standard,
FIC ceased negative goodwill  amortization on January 1, 2002 and recognized the
unamortized  balance  of $10.4  million of  negative  goodwill  acquired  in the
Merger.

Accounting  for  Business  Combinations.   The  Company  accounts  for  business
combinations  using the purchase  method of accounting.  The cost of an acquired
entity is  allocated to the assets  acquired  (including  identified  intangible
assets)and  liabilities assumed based on their estimated fair values. The excess
of the cost of an acquired entity over the net total of the amounts  assigned to
assets acquired and  liabilities  assumed is an asset referred to as "goodwill".
Indirect and general expenses  related to business  combinations are expensed as
incurred.

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


                                     - 45 -


<PAGE>


Deferred  Policy  Acquisition  Costs  and  Present  Value of Future  Profits  of
Acquired Business.

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

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

For  a  further   discussion  of  accounting   standards,   see  New  Accounting
Pronouncements beginning on page 12, herein.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

The primary market risk to the Company's  investment  portfolio is interest rate
risk.  The Company's  investment  portfolio  includes  $20.0 million of "inverse
floater" CMOs.  These contain a derivative  which is "embedded" in the financial
instrument.


                                     - 46 -


<PAGE>


   Interest Rate Risk. The Company  manages the interest rate risk inherent in
our assets  relative to the  interest  rate risk  inherent  in our  liabilities.
Generally,  we manage  interest rate risk based on the application of a commonly
used model. The model projects the impact of interest rate changes on a range of
factors,  including duration and potential prepayment.  For example, assuming an
immediate  increase of 100 basis points in interest rates,  the net hypothetical
loss in fair market value  related to the financial  instruments  segment of the
Company's  balance  sheet is estimated to be $34.6  million at June 30, 2003 and
$16.6  million at December 31, 2002.  For  purposes of the  foregoing  estimate,
fixed  maturities,  including  fixed  maturities  available for sale and trading
securities, and short-term investments were taken into account. The market value
of such assets was $664 million at June 30, 2003 and $632.8  million at December
31, 2002.

The fixed income  investments  of the Company  include  certain  mortgage-backed
securities.  The market value of such  securities was $362.1 million at June 30,
2003 and $205.4 million at December 31, 2002.  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 $19.6
million at June 30, 2003 and $4.7 million at December 31, 2002.

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

The Company  generally does not use derivative  financial  instruments to manage
our  exposure  to  fluctuations  in  interest  rates.   However,  the  Company's
investments  in inverse  floater CMO's at June 30, 2003  described  above have a
coupon rate which varies in an inverse  relationship with a specified  benchmark
rate.

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.

Item 4. Controls and Procedures

The Company's  principal  executive officer and principal financial officer have
evaluated  the   effectiveness  of  the  Company's   "disclosure   controls  and
procedures,"  as such term is defined  in Rule  13a-15(e)  under the  Securities
Exchange  Act of 1934,  as amended,  (the  "Exchange  Act") as of June 30, 2003.
Based upon their  evaluation,  the  principal  executive  officer and  principal
financial  officer  concluded  that  the  Company's   disclosure   controls  and
procedures  are  effective  to provide  reasonable  assurance  that  information
required to be disclosed by the Company in the reports  filed or submitted by it
under the Exchange Act is recorded,  processed,  summarized and reported  within
the time  periods  specified  in the  SEC's  rules  and  forms,  and to  provide
reasonable assurance that information required to be disclosed by the Company in
such  reports is  accumulated  and  communicated  to the  Company's  management,
including its principal  executive officer and principal  financial officer,  as
appropriate to allow timely decisions regarding required disclosure.

                                     - 47 -


<PAGE>


There was no change in the Company's "internal control over financial reporting"
(as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred
during the quarter  ended June 30, 2003,  that has  materially  affected,  or is
reasonably  likely to materially  affect,  the Company's  internal  control over
financial reporting.


                        Part II. Other Information


Item 1.  Legal Proceedings

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

     Litigation  Relating to the FIC/ ILCO  Merger.  There have been no material
developments  since the  Company's  filing of its Annual Report on Form 10-K for
the year ended December 31, 2002.

     Litigation Relating to Former Chairman and CEO. There have been no material
developments in this matter since the Company's  filing of its Quarterly  Report
on Form 10-Q for the quarterly period ended March 31, 2003.


                 Litigation with Otter Creek Partnership I, L.P.

On June 13, 2003, Otter Creek  Partnership I, L.P. ("Otter Creek") filed a civil
action lawsuit against FIC in the District Court in Travis County,  Texas, Cause
No.  GN302872,  for the purpose of seeking an injunction  against the Company to
compel the Company to schedule and hold an Annual  Meeting of  Shareholders  and
either  not to  exercise  the  proxy it  acquired  from  the  Mitte  Parties  in
connection  with the settlement of the litigation  referenced  under the caption
"Litigation  Relating to Former  Chairman and CEO" or to vote such shares in the
same proportion as the other  outstanding  shares of the Company are voted.  The
court refused to order the Company to set a specific record date or meeting date
for the 2003 Annual Meeting. However, the 2003 Annual Meeting of Shareholders of
FIC was, in fact, held on July 31, 2003.


On July 29, 2003, FIC released the proxy  acquired from the Mitte Parties,  with
respect to 312,484 shares  acquired prior to the record date for the 2003 Annual
Meeting from the Mitte  Foundation  by American  Physicians  Service  Group Inc.
("APS") and 204,918 shares  acquired from the Mitte  Foundation by M&W Insurance
Services,  Inc. ("M&W"). Said release was granted at the request of APS and M&W.
Accordingly, APS and M&W each voted their respective shares directly at the 2003
Annual  Meeting.  The proxy  granted to  management  by the Mitte  Parties  with
respect  to the  remaining  shares was voted at the 2003  Annual  Meeting by the
persons named as Proxies in FIC's Proxy  Statement.  Otter Creek has objected to
the release of proxy to APS and M&W.

                                     - 48 -


<PAGE>


FIC believes that the  provisions  of the  settlement  agreement  with the Mitte
Parties  pertaining to the grant of proxy,  and the  conditions set forth in the
settlement  agreement  pertaining to said grant,  are consistent with applicable
legal  requirements.  Accordingly,  FIC  intends to defend its right to vote the
shares  subject to the proxy from the Mitte  Parties and the partial  release of
said proxy to APS and M&W.

A trial date has been set for the second week of September, 2003.

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

Item 2. Changes in Securities and Use of Proceeds

          None

Item 3. Defaults Upon Senior Securities

          None

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

          There were no matters  submitted to a vote of security  holders during
          the second quarter of 2003.

Item 5. Other Information

          None

Item 6. Exhibits and Reports on Form 8-K

     (a)  Exhibits

          31.1 Certification  of  Chief  Executive   Officer  pursuant  to  Rule
               13a-14(a)  or Rule  15d-14(a) of the  Securities  Exchange Act of
               1934

          31.2 Certification  of  Chief  Financial   Officer  pursuant  to  Rule
               13a-14(a)  or Rule  15d-14(a) of the  Securities  Exchange Act of
               1934


                                     - 49 -


<PAGE>


          32.1 Certification of Chief Executive Officer of Financial  Industries
               Corporation  pursuant to Rule  13a-14(b) or Rule  15-14(b) and 18
               U.S.C. Section 1350

          32.2 Certification of Chief Financial Officer of Financial  Industries
               Corporation  pursuant to Rule  13a-14(b) or Rule  15-14(b) and 18
               U.S.C. Section 1350

     (b)  Reports on Form 8-K

          (i)  On April 21, 2003 the  Registrant  filed a Current Report on Form
               8-K. The current report referred to a press release issued by FIC
               on April 17, 2003 announcing the Registrant's  financial  results
               for the year  ended  December  31,  2002 and  restated  financial
               results for the years ended December 31, 2001 and 2000.

          (ii) On May 16,  2003 the  Registrant  filed a Current  Report on Form
               8-K. The current report referred to a press release issued by FIC
               on May 15, 2003 announcing the Registrant's financial results for
               the three-month period ended March 31, 2003.

          (iii)On June 10, 2003 the  Registrant  filed a Current  Report on Form
               8-K.  The current  report  referred to (a) FIC's  acquisition  of
               marketing  companies;  (b) a marketing  agreement entered into by
               and  among  FIC  and  certain  of its  subsidiaries,  and  Equita
               Financial and Insurance Services of Texas, Inc. ("Equita"); (c) a
               stock  purchase and option  agreement  entered into with American
               Physicians Service Group, Inc. ("APS");  (d) a stock purchase and
               option  agreement  entered into with Equita;  (e) a  registration
               rights  agreement  entered  into  with  APS  and  Equita;  (f) an
               employment  agreement  and  option  agreement  entered  into with
               William P. Tedrow;  and (g) the issuance,  by FIC, of $15,000,000
               senior notes.


                                     - 50 -


<PAGE>


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES

                                   SIGNATURES

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/ Eugene E. Payne
_____________________________________
Eugene E. Payne
President and Chief Executive Officer




   /s/ George M. Wise, III
_____________________________________
George M. Wise, III
Chief Financial Officer



Date:   August 14, 2003


                                     - 51 -