<PAGE>


                       Securities and Exchange Commission
                             Washington, D. C. 20549

                                    FORM 10-K


[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
            EXCHANGE ACT OF 1934

         For the fiscal year ended December 31, 2001 OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
            SECURITIES EXCHANGE ACT OF 1934

         For the transition period from                   to


                         Commission File Number 2-39729

                      COTTON STATES LIFE INSURANCE COMPANY
                      ------------------------------------
             (Exact name of registrant as specified in its charter)

         GEORGIA                                           58-0830929
         -------                                           ------------
(State of incorporation                                  (I.R.S. Employer
  and jurisdiction)                                     Identification No.)

244 PERIMETER CENTER PARKWAY, N.E., ATLANTA, GEORGIA            30346
----------------------------------------------------         ----------
      (Address of principal executive offices)               (Zip code)

       Registrant's telephone number, including area code: (404) 39l-8600

           Securities registered pursuant to Section 12(b) of the Act:

                                      NONE

           Securities registered pursuant to Section 12(g) of the Act:

                        EXEMPT-UNDER SECTION 12(g)(2)(G)

Indicate by check mark whether the registrant 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 and has been subject to the filing requirements for at
least the past 90 days.

                              YES   [X]         NO [ ]


Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of voting stock held by non-affiliates was
$42,330,430 based on the closing price of $10.00 on February 1, 2002, as
reported on the NASDAQ National Market.

As of February 1, 2002, there were 6,335,428 shares of registrant's common stock
outstanding.

The Exhibit Index is located on Page 55.

The total number of pages in this document is 60


                                       1
<PAGE>

                                     PART I


ITEM 1. BUSINESS

GENERAL

         Cotton States Life Insurance Company (the "Company") was organized
under the laws of the State of Georgia in 1955. The Company is currently
licensed to transact business in Alabama, Florida, Georgia, Kentucky, Louisiana,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia. The Company
currently markets only individual life insurance, payroll deduction life
insurance, guaranteed issue and simplified issue life insurance and individual
annuities.

         On February 21, 2002, the Company filed notice of its intent to
withdraw from Kentucky primarily due to losses incurred by the Company's
affiliate, Cotton States Mutual Insurance Company.

         In July of 1989, the Company formed CSI Brokerage Services, Inc.
("CSI"). CSI brokers insurance products for the Company's exclusive agents not
offered by the Company's affiliated property and casualty companies.

         In November of 1989, the Company acquired 60% of the outstanding common
stock of Cotton States Marketing Resources, Inc. ("CSMR"). During 1992, the
Company acquired the remaining 40% of CSMR's stock. CSMR brokers through the
Company's exclusive agents other insurance companies' life and accident and
health products not underwritten by the Company.


                                       2
<PAGE>


FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

         The Company's operations can be grouped into three major segments: (i)
individual life insurance, (ii) guaranteed issue and simplified issue life
insurance, and (iii) brokerage operations. These segments are differentiated
primarily by their respective methods of distribution and the nature of related
products, as the Company's operations in each segment are concentrated within
its southeastern states geographic market. Individual life insurance products
are distributed through the Company's multi-line exclusive agents, guaranteed
issue and simplified issue products are distributed through independent agents
as well as exclusive agents, and brokerage operations involve third party
products distributed through the Company's exclusive and independent agents.


<TABLE>
<CAPTION>
                                                             2001            2000            1999
                                                         ------------     -----------     -----------
<S>                                                      <C>               <C>             <C>
Individual life insurance:
       Premiums                                          $ 18,658,255      17,816,354      16,653,463
       Net investment income                                9,458,445       9,403,578       8,837,008
       Realized investment gains                               24,969         160,104         254,052
                                                         ------------     -----------     -----------
            Total revenue                                  28,141,669      27,380,036      25,744,523

       Policyholder benefits and claims                     8,821,942       8,139,214       7,436,953
       Interest credited                                    5,527,001       5,198,089       4,736,078
       Operating expenses                                   8,505,751       7,103,512       7,525,275
                                                         ------------     -----------     -----------
            Total benefits and expenses                    22,854,694      20,440,815      19,698,306
                                                         ------------     -----------     -----------
            Operating profit                                5,286,975       6,939,221       6,046,217
                                                         ------------     -----------     -----------

Guaranteed issue and simplified issue life insurance:
       Premiums                                            10,529,996       8,106,634       5,843,177
       Net investment income                                  775,780         540,200         316,301
       Realized investment gains                                2,532           9,670           9,093
                                                         ------------     -----------     -----------
            Total revenue                                  11,308,308       8,656,504       6,168,571

       Policyholder benefits and claims                     7,656,444       5,728,786       3,358,022
       Operating expenses                                   3,132,154       2,368,914       1,616,158
                                                         ------------     -----------     -----------
            Total benefits and expenses                    10,788,598       8,097,700       4,974,180
                                                         ------------     -----------     -----------
            Operating profit                                  519,710         558,804       1,194,391
                                                         ------------     -----------     -----------

Brokerage:
       Brokerage commissions                                4,190,482       4,197,173       3,828,087
       Net investment income                                   48,397         147,003          99,061
       Realized investment gains                                   --         236,160         211,483
                                                         ------------     -----------     -----------
            Total revenue                                   4,238,879       4,580,336       4,138,631

       Operating expenses                                   1,106,448       1,154,992       1,086,777
                                                         ------------     -----------     -----------
            Operating profit                                3,132,431       3,425,344       3,051,854
                                                         ------------     -----------     -----------

Combined operating profit                                   8,939,116      10,923,369      10,292,462
Group life insurance and individual
       accident and health results                            (74,560)        (70,097)       (109,127)
                                                         ------------     -----------     -----------

Earnings before Federal income taxes                     $  8,864,556      10,853,272      10,183,335
                                                         ============     ===========     ===========
</TABLE>


                                       3
<PAGE>


NARRATIVE DESCRIPTION OF BUSINESS SEGMENTS

(I)  INDIVIDUAL LIFE

         The major forms of individual life insurance offered by the Company
include universal life, graded premium whole life, participating whole life,
term insurance, various supplemental riders including, but not limited to,
accidental death, disability waiver and guaranteed insurability, and disability
income riders. These products are sold by the Company's 299 multi-line exclusive
agents in Alabama, Florida, Georgia, Kentucky and Tennessee.

         The Company offers its insurance through multi-line exclusive agents
who also write all lines of property and casualty insurance offered by Cotton
States Mutual Insurance Company ("Mutual") and its subsidiary, Shield Insurance
Company ("Shield") (collectively, the "Cotton States Group"). See Item 13 of
this report for an explanation of the relationship between the Company, Mutual
and Shield. Multi-line exclusive agents are under contract to the Company,
Mutual and Shield, and are paid on a commission basis. The Company's multi-line
exclusive agents are located in the following states:

<TABLE>
<CAPTION>
                                   NUMBER OF AGENTS
                                  ------------------
                                     DECEMBER 31,
                                  ------------------
                                  2001          2000           STATE
                                  ----          ----           -----
                  <S>             <C>           <C>           <C>
                                    54            48          Alabama
                                    24            24          Florida
                                   163           159          Georgia
                                    33            30          Kentucky
                                    25            21          Tennessee
                                   ---           ---
                  TOTAL            299           282
                                   ===           ===
</TABLE>

         Unless the need for a medical examination is indicated by the
application or an investigation, the Company writes individual life insurance
based on age without requiring blood and specimen in the following maximum
amounts:

<TABLE>
<CAPTION>
                         AGE GROUP              MAXIMUM INSURANCE
                         ---------              -----------------
                        <S>                     <C>

                               0-17                   $100,000
                              18-40                     74,999
                              41-50                     50,000
                        51 and over                     25,000
</TABLE>

         As of December 31, 2001, less than 2.6% of the Company's individual
life premiums were represented by substandard risks. Substandard life insurance
risks are accepted by the Company at increased rates. The Company has no fixed
maximum on the size of substandard policies and will entertain any application
on which it can obtain suitable reinsurance.

         The Company, as do others in the insurance industry, reinsures with
other companies portions of the individual life insurance policies it
underwrites. Reinsurance enables an insurance company to write a policy in an
amount larger than the risk it desires to assume. A contingent liability exists
on insurance ceded to the reinsurer which might become a liability of the
Company in the event that the reinsurer fails to meet its obligations under the
reinsurance treaty.

         The Company presently retains, with respect to individual life
policies, generally no more than $100,000 of insurance on any one life, which
may be reduced, depending upon the age and the physical classification of the
insured. All accidental death riders are 100% reinsured.


                                       4
<PAGE>

(II)  GUARANTEED ISSUE AND SIMPLIFIED ISSUE WHOLE LIFE INSURANCE

         The Company offers Guaranteed Issue and Simplified Issue whole life
insurance through its multi-line agency force and approximately 4,400
independent agents. The independent agents sell these products in all states in
which the Company is licensed.

         Both plans are level-premium, cash value permanent life insurance
products issued from $2,500 to $25,000 face amounts. Both plans are frequently
used by individuals to cover final expenses. They are designed to be sold as
companion plans using a simple application and no medical exams or tests. If all
health questions can be answered "NO", the Simplified Issue policy may be
issued. Otherwise, the Guaranteed Issue policy will be issued.

         Guaranteed Issue whole life is available for issue ages 46-80. The
death benefit in policy years one through three is limited to a return of
premium plus 10%. However, the full death benefit is payable in all years in
case of accidental death. After three years, the full death benefit is payable
for any cause of death.

         Simplified Issue whole life is available for issue ages 0-80. The full
death benefit is payable from the issue date.

(III)  BROKERAGE

         The Company owns two brokerage subsidiaries, CSI and CSMR. CSI provides
the Company with commission income from brokerage agreements with other property
and casualty insurance carriers. These carriers supply the Company's multi-line
agents with property and casualty products that the Company's affiliated
property and casualty companies do not underwrite, such as non-standard auto
insurance, crop hail insurance, multi-peril crop insurance, mobile home
insurance, poultry house insurance and flood insurance.

         Sixty-five percent of CSI's brokerage revenues come from the sale of
non-standard auto insurance through two carriers. Thirteen percent of CSI's
revenue comes from the sale of crop hail and multi-peril crop insurance through
one carrier.

         CSMR provides the Company with commission income from brokerage
agreements with other life and health insurance companies. These companies
supply the Company's multi-line agents with life and health products that the
Company does not choose to underwrite, such as individual major-medical
policies, impaired risk life insurance, first to die life insurance, and group
life and health insurance. CSMR has contracted with approximately 4,400
independent agents to write the Company's Guaranteed Issue and Simplified Issue
whole life insurance. Fifty-eight percent of CSMR's brokerage revenues come from
the sale of life and health insurance through three carriers.

REGULATION

The Company, like other insurance companies, is subject to regulation and
supervision by the states in which it transacts business. The insurance laws of
these states confer upon supervisory authorities broad administrative powers
relating to (i) the regulation and revocation of licenses to transact business,
(ii) the regulation of trade practices, (iii) the licensing of agents, (iv) the
approval of the form and content of policies and advertising, (v) the depositing
of securities for the benefit of policyholders, (vi) the type and amount of
investments permitted, and (vii) the maintenance of specified reserves and
capital for the protection of policyholders. In general, insurance laws and
regulations are designed primarily to protect policyholders rather than
shareholders.

         The Company is also required under these laws to file detailed annual
reports with the supervisory agencies in each of the states in which it does
business. Under the rules of the National Association of Insurance Commissioners
("NAIC"), the Company's records are examined periodically by one or more of the
state supervisory agencies.


                                       5
<PAGE>


EMPLOYEES

         In addition to its principal officers, the Company shares 124 salaried
employees with Shield and Mutual. The Company pays an allocated portion of the
shared employees' salaries, either based upon the Company's premium income in
relation to the premium income of Mutual and Shield or the actual time expended
on each company's affairs. The Company and its subsidiaries also have 36
salaried employees who work on a full-time basis in its home office, where all
administrative functions, such as underwriting, billing and collection of
premiums, are centralized and from which all sales activities are directed. None
of the Company's employees is subject to a collective bargaining agreement. The
Company believes its employee relations are good.

COMPETITION

         The Company operates in a highly competitive industry. It competes with
a large number of stock and mutual insurance companies. Larger stock and mutual
insurance companies may have a competitive advantage in that they have greater
financial and human resources that enable them to offer more diversified lines
of coverage and develop new products faster. Mutual companies may also have an
additional advantage compared to stock insurers because all profits of mutual
companies accrue to the policyholders.

         The Company has certain advantages that enable it to keep its premium
rates competitive with similar policies offered by competing companies. These
advantages are:

              1.  The Company offers most of its insurance through the same
                  agents who write property and casualty insurance for Mutual
                  and Shield. The sale of insurance through the same agents who
                  sell property and casualty insurance enables the Company to
                  incur less agency development and sales expense than is
                  customary in the industry;

              2.  Because the Company's agents can provide customers with
                  coverage for all major lines of individual insurance they may
                  utilize "account" selling. Account selling enables insureds to
                  contact one agent regarding their total insurance needs; and

              3.  The Company shares certain facilities, equipment and personnel
                  with Mutual and Shield. The Company believes that sharing
                  these expenses has a favorable impact on the ratio of expenses
                  to premium income and enables the Company to enjoy economies
                  of scale.

         In order to keep pace with trends in the industry, the Company
introduces new products with premium rates and benefits that it believes are
competitive with the industry.

ITEM 2.  PROPERTIES

         The Company, Mutual and Shield occupy offices located at 244 Perimeter
Center Parkway, Atlanta, Georgia. The building is owned by a general partnership
composed of Mutual and Gold Kist Inc. ("Gold Kist"). The Company has no
ownership interest in the partnership. The facility consists of a three-story
office building containing approximately 260,000 square feet of space of which
the Company, Mutual and Shield share approximately 90,000 square feet. The
Company believes that the facility is suitable to its business. Rental expense
is allocated to the Company based on its proportionate share of square footage
occupied.


ITEM 3.  LEGAL PROCEEDINGS

         The Company is a defendant in various actions incidental to the conduct
of its business. While the ultimate outcome of these matters cannot be estimated
with certainty, management does not believe the actions are reasonably likely to
result in a material loss to the Company.


                                       6
<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         Not applicable.



                                     PART II

ITEM 5.  MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

         On January 1, 2002, there were approximately 1,900 shareholders of the
Company's common stock. The stock (symbol "CSLI") is traded over-the-counter on
the NASDAQ National Market System. Price history as provided by NASDAQ and
dividends declared during the past two years are presented below:

<TABLE>
<CAPTION>
                                    STOCK PRICE (1)            DIVIDEND
                                 HIGH             LOW          DECLARED
                                -------          -----         --------
<S>                             <C>              <C>           <C>
2001

         First Quarter          $ 15.50           9.25             .04
         Second Quarter           12.97          10.95             .04
         Third Quarter            12.00           8.30             .04
         Fourth Quarter            9.65           8.98             .04


2000

         First Quarter          $  9.00           7.00             .04
         Second Quarter            8.63           7.13             .04
         Third Quarter             9.81           8.00             .04
         Fourth Quarter           11.50           8.25             .04
</TABLE>


(1) The prices presented above are sale prices which represent price between
    broker-dealers and do not include mark-ups or mark-downs or any commission
    to the broker-dealer. Therefore, the prices presented above do not reflect
    prices in actual transactions.


                                       7
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA


                        TEN-YEAR SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                         2001              2000             1999             1998              1997
                                     -------------      -----------      -----------     ------------      -----------
<S>                                  <C>                <C>              <C>              <C>              <C>
AS OF DECEMBER 31
Total assets                         $ 234,780,338      211,300,570      190,516,318      180,773,289      165,337,309
                                     -------------      -----------      -----------     ------------      -----------
Total liabilities                    $ 164,245,816      148,566,691      135,729,241      126,282,437      115,941,296
                                     -------------      -----------      -----------     ------------      -----------
Total shareholders' equity           $  70,534,522       62,733,879       54,787,077       54,490,852       49,396,013
                                     -------------      -----------      -----------     ------------      -----------
Book value per share                 $       11.13             9.89             8.66             8.56             7.72
                                     -------------      -----------      -----------     ------------      -----------
Closing price per share              $        9.60            11.50             8.63            14.88            15.25
                                     -------------      -----------      -----------     ------------      -----------
YEARS ENDED DECEMBER 31
Premiums                             $  30,220,737       26,816,523       23,302,097       19,935,354       17,620,184
                                     -------------      -----------      -----------     ------------      -----------
Net investment income, realized
   investment gains and brokerage
   income                            $  14,500,606       14,693,886       13,555,085       12,365,999       11,308,794
                                     -------------      -----------      -----------     ------------      -----------
Total revenue                        $  44,721,343       41,510,409       36,857,182       32,301,353       28,928,978
                                     -------------      -----------      -----------     ------------      -----------
Benefits and expenses                $  35,856,786       30,657,137       26,673,847       21,916,010       20,451,884
                                     -------------      -----------      -----------     ------------      -----------
Net income                           $   6,445,672        7,606,215        7,327,945        7,240,585        6,304,558
                                     -------------      -----------      -----------     ------------      -----------

Basic net income per share           $        1.02             1.20             1.16             1.13              .99
                                     -------------      -----------      -----------     ------------      -----------
Diluted net income per share         $         .99             1.18             1.14             1.10              .96
                                     -------------      -----------      -----------     ------------      -----------
Dividends per share                  $        .160             .160             .160             .160             .126
                                     -------------      -----------      -----------     ------------      -----------

<CAPTION>

                                          1996              1995             1994             1993             1992
                                     -------------      -----------      -----------     ------------      -----------
<S>                                  <C>                <C>              <C>              <C>              <C>

AS OF DECEMBER 31
Total assets                         $ 148,824,187      139,381,979      124,412,468      116,237,515      111,133,117
                                     -------------      -----------      -----------     ------------      -----------
Total liabilities                    $ 105,910,335       99,694,942       90,855,648       85,285,402       82,346,176
                                     -------------      -----------      -----------     ------------      -----------
Total shareholders' equity           $  42,913,852       39,687,037       33,556,820       30,952,113       28,786,941
                                     -------------      -----------      -----------     ------------      -----------
Book value per share                 $        6.71             6.23             5.28             5.10             4.74
                                     -------------      -----------      -----------     ------------      -----------
Closing price per share              $        7.60             4.80             3.63             3.20             2.77
                                     -------------      -----------      -----------     ------------      -----------

YEARS ENDED DECEMBER 31
Premiums                             $  15,400,543       15,061,541       15,128,529       13,535,407       14,475,370
                                     -------------      -----------      -----------     ------------      -----------
Net investment income, realized
   investment gains and brokerage
   income                            $   9,458,474        8,814,035        7,597,136        7,271,267        7,111,110
                                     -------------      -----------      -----------     ------------      -----------
Total revenue                        $  24,859,017       23,875,576       22,725,665       20,806,674       21,586,480
                                     -------------      -----------      -----------     ------------      -----------
Benefits and expenses                $  18,735,863       18,548,121       18,333,697       18,149,664       19,122,882
                                     -------------      -----------      -----------     ------------      -----------
Net income                           $   4,832,577        4,070,871        3,303,024        2,435,355        2,108,597
                                     -------------      -----------      -----------     ------------      -----------
Basic net income per share           $         .76              .64              .54              .40              .33
                                     -------------      -----------      -----------     ------------      -----------
Diluted net income per share         $         .74              .63              .51              .39              .33
                                     -------------      -----------      -----------     ------------      -----------
Dividends per share                  $        .102             .072             .060             .051             .068
                                     -------------      -----------      -----------     ------------      -----------
</TABLE>

Note: All share and per share amounts have been adjusted for the following stock
splits:

     October 1995                          five-for-four
     April 1997                            five-for-four
     January 1998                          three-for-two


                                       8


<PAGE>


ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                           FORWARD-LOOKING STATEMENTS

Statements made in the following discussion that state the Company's or
management's intentions, hopes, beliefs, expectations or predictions of the
future are forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements which represent the Company's
beliefs concerning future levels of sales and redemption of the Company's
products, investment spreads and yields, or the earnings and profitability of
the Company's activities.

Forward-looking statements are necessarily based on estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company's control
and many of which are subject to change. These uncertainties and contingencies
could cause actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. Whether or not
actual results differ materially from forward-looking statements may depend on
numerous foreseeable and unforeseeable developments. Some may be national in
scope, such as general economic conditions, changes in tax law and changes in
interest rates. Some may be related to the insurance industry generally, such as
pricing competition, regulatory developments and industry consolidation. Others
may relate to the Company specifically, such as credit, volatility and other
risks associated with the Company's investment portfolio. Investors are also
directed to consider other risks and uncertainties discussed in documents filed
by the Company with the Securities and Exchange Commission. If the Company's
assumptions and estimates are incorrect or do not come to fruition, or if the
Company does not achieve all of these key factors, then the Company's actual
performance could vary materially from the forward-looking statements made
herein. The Company disclaims any obligation to update any forward-looking
information.

<TABLE>
<CAPTION>
                                            RESULTS OF OPERATIONS
                                            (DOLLARS IN THOUSANDS)


PREMIUMS                                     2001          2000      INCREASE    1999      INCREASE
                                             ----          ----      --------    ----      --------
<S>                                         <C>          <C>         <C>        <C>        <C>
Guaranteed issue and simplified
    issue life insurance                    $10,530      $ 8,107       30%      $ 5,843       39%

Individual life insurance:
    Traditional life                          6,285        6,057        4%        5,848        4%
    Universal life                           12,373       11,759        5%       10,805        9%
                                            -------       ------                -------
       Total individual life insurance       18,658       17,816        5%       16,653        7%
                                            -------       ------                -------
Other lines                                   1,033          894       16%          806       11%
                                            -------       ------                -------

       TOTAL PREMIUMS                       $30,221      $26,817       13%      $23,302       15%
                                            =======      =======       ==       =======      ===
</TABLE>

Guaranteed issue and simplified issue life insurance premiums continued to show
significant growth for the three year period as a result of higher production by
the Company's independent agency force which increased 13% to approximately
4,400 agents under contract at December 31, 2001 compared to approximately 3,900
in 2000 and approximately 2,700 in 1999. This product is also distributed by the
Company's multi-line exclusive agents and is available for purchase over the
Internet at the Company's home page (www.cottonstatesinsurance.com).

Individual life insurance products are principally sold by the Company's
exclusive agent producers. Growth in individual life premiums largely reflects
the popularity of universal life payroll deduction products. The exclusive
agency force of 299 as of December 31, 2001 compares to 282 as of the same date
in 2000 and 283 in 1999. Other premiums consist of the Company's participation
in a Federally sponsored group life pool and income from a closed block of
individual accident and health business.


                                       9
<PAGE>

INVESTMENT INCOME

Net investment income increased 2% in 2001, 9% in 2000 and 5% in 1999 reflecting
growth in the average investment portfolio. The annualized average yield
decreased to 6.7% compared to 7.2% for 2000 and 7.0% for 1999 due to lower
interest rates.

BROKERAGE COMMISSIONS

Exclusive agents sell products that the Cotton States Group does not underwrite
(both life and property and casualty) but are provided through the Company's
brokerage operations, and for which the Company receives override commission.
Brokerage commissions for the year were flat due to decreased override
commissions on the sale of life products. This was partially offset by a 5%
increase in commissions on the sale of non-standard automobile policies.
Brokerage commissions increased 10% in 2000 due primarily to increased sales of
non-standard automobile policies. Brokerage commissions increased 19% in 1999
due to a new affiliation with an additional non-standard automobile insurance
carrier at higher override commission rates.

BENEFITS AND CLAIMS

Life benefits and claims, including reserve increases on traditional life and
guaranteed issue and simplified issue products are as follows (dollars in
thousands):

<TABLE>
<CAPTION>
                                                      2001                         2000                              1999
                                               -------------------         ----------------------           -------------------
                                               BENEFITS                    BENEFITS                         BENEFITS
                                                 AND        % OF             AND           % OF                AND       % OF
    BENEFITS AND CLAIMS                         CLAIMS     PREMIUM          CLAIMS        PREMIUM            CLAIMS     PREMIUM
                                               --------    -------         --------       -------           --------    -------
<S>                                            <C>         <C>             <C>            <C>               <C>         <C>
    Guaranteed issue and                       $7,656        73%            $5,729           71%             $3,358        57%
          simplified issue

    Individual life insurance:
        Traditional life                        4,622        73%             4,261           70%              4,305        74%

        Universal life                          4,201        34%             3,878           33%              3,136        29%
                                              -------                      -------                          -------
        Total individual life insurance         8,823        47%             8,139           46%              7,441        45%
                                              -------                      -------                          -------

    Other benefits and claims                   1,073       104%               932          104%                901       111%
                                              -------                      -------                          -------
            TOTAL BENEFITS AND CLAIMS         $17,552        58%           $14,800           55%            $11,700        50%
                                              =======                      =======                          =======
</TABLE>

Benefits and claims as a percentage of premium fluctuate within a normal range
reflecting volatility in mortality, changes in mix of business, and age of
policyholders. Benefits and claims increased in 2001 primarily due to high
mortality experience during the first quarter of 2001. Guaranteed issue and
simplified issue experience in 2001 and 2000 is more indicative of the Company's
expectations as the block of business matures. Due to the Company's small size,
quarterly fluctuations, even when they remain within the normal range, do and
will occur. In addition, the Company's general policy is to retain, with
respects to individual life policies, generally no more than $100,000 of
insurance on any one life and has also routinely purchased annual aggregate stop
loss reinsurance coverage in excess of $10 million. The Company did not
experience any impact on reinsurance costs as a result of the events of
September 11, 2001.

The Company has reached partial settlement of a $900,000 reinsurance policy law
suit initiated in the third quarter of 2001. To date, the Company has received
$475,000 and continues to seek additional recoveries through already existing
legal channels. Costs incurred as a result of this settlement were approximately
$0.03 per diluted share. Other benefits and claims consist of participation in a
Federally sponsored group life pool and benefits on a closed block of individual
accident and health business.


                                       10
<PAGE>

INTEREST CREDITED TO POLICYHOLDERS

Interest credited to universal life contracts increased 6% reflecting growth in
universal life policy accumulations. The annual interest rate credited to
policyholders of universal life contracts was 6.2% for 2001, 2000, and 1999.

AMORTIZATION OF POLICY ACQUISITION COSTS AND OPERATING EXPENSES

The amortization of policy acquisition costs as a percentage of premium was 15%
in 2001 compared to 12% in 2000 and 13% in 1999. The amortization of policy
acquisition costs for 2000 reflected a favorable adjustment from updating
actuarial assumptions. This adjustment represented the slow down of amortization
as a result of higher estimated future profits from the improvement in mortality
levels on universal life products. The after tax effect on net income for 2000
was $429,000 and $.07 per share. Amortization in 2001 reflects higher lapses in
the traditional lines of business which reflects increased term rate competition
in the market place.

Operating expense as a percentage of premiums was 28% for 2001 and 2000 and 31%
in 1999. The Company continues to realize increasing cost efficiencies from
digital imaging and automated policy processing technologies. As technological
enhancements are implemented, the Company expects to further maximize operating
efficiencies.

INCOME TAX EXPENSE

The effective tax rate for 2001 was 27% compared to 30% in 2000 and 28% in 1999.
The three percentage point decrease is the result of the decrease in pretax
income and an increase in the allowable small company deduction.

<TABLE>
<CAPTION>

NET INCOME                                                                       PERCENTAGE                     PERCENTAGE
----------                                           2001         2000      INCREASE (DECREASE)   1999      INCREASE (DECREASE)
(dollars in thousands)                              ------       ------     -------------------  ------     ------------------
<S>                                                 <C>          <C>        <C>                  <C>        <C>
 Guaranteed issue and simplified issue              $  397       $  413            (4)%          $  943           (56)%
                                                    ------       ------                          -----
 Individual life insurance:
      Traditional                                      763        1,107           (31)%             805            38%
      Universal life                                 3,276        3,875           (16)%           3,654             6%
                                                    ------       ------                          -----
           Total individual life insurance           4,039        4,982           (19)%           4,459            12%
                                                    ------       ------                          -----
 Brokerage operations                                2,067        2,260            (9)%           2,014            12%
                                                    ------       ------                          -----
 Other lines                                          (57)         (49)           (16)%            (88)            44%
                                                    ------       ------                          -----
 Net Income                                         $6,446       $7,606           (15)%          $7,328             4%
                                                    ======       ======                          ======
</TABLE>

Despite continued growth in premiums and more normal annual expense and
mortality costs, 2001 results reflect higher mortality experienced in the first
quarter in comparison to the prior year, resulting in a decrease in the
Company's net income. In addition, 2000 results reflect a favorable adjustment
to the amortization of policy acquisition costs resulting from updating
actuarial assumptions.

                          CRITICAL ACCOUNTING POLICIES

The accounting policies described below are those the Company considers critical
in preparing its consolidated financial statements. These policies include
significant estimates made by management using information available at the time
the estimates are made. However, as described below, these estimates could
change materially if different information or assumptions were used.


                                       11
<PAGE>


INSURANCE RELATED ASSETS AND LIABILITIES

The Company establishes an insurance related asset for deferred policy
acquisition costs, and insurance related liabilities for future policy benefits
and claims relating to its insurance policies under contract. Such asset and
liabilities are developed using actuarial principles and assumptions which
consider a number of factors, including: investment yields, withdrawal rates,
mortality and morbidity which are described in the Notes to the Consolidated
Financial Statements ("Notes"). As described in the Notes, the Company accounts
for its traditional individual life insurance policies using a net level premium
method and assumptions as to the factors enumerated above and as disclosed in
Note 4. Generally, the Company's earnings in any given calendar year will not be
impacted by differences in emerging experience on its traditional individual
business unless such differences are severe enough to call into question the
profitability of the entire block of traditional life business. The Company
does, however, experience fluctuations in its earnings as a result of current
mortality experience differing from that expected in any given year. During
2001, 2000, and 1999, the Company experienced emerged mortality of 89%, 84% and
86% of expected, respectively, related to its traditional individual life
insurance business. The Company routinely purchases annual aggregate stop loss
reinsurance coverage which limits experience to 120% of expected mortality in
any one year.

Further, as described in the Notes, the Company accounts for its
interest-sensitive and universal life insurance policies and annuities under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 97,
Accounting and Reporting by Insurance Enterprises for Certain Long-Duration
Contracts and for Realized Gains and Losses from the Sale of Investments. SFAS
No. 97 requires the remeasurement of the Company's deferred acquisition costs
each period in a manner that amortizes such deferred costs as a level percentage
of actual emerged profit over the expected gross profits.

Each period, the Company estimates the relevant factors, based primarily on its
emerging experience and uses this information to determine the assumptions
underlying its asset and liability calculations. An extensive degree of judgment
is used in this estimation process.

Any adjustments to prior period claim liabilities are included in the benefit
expense of the period in which the need for the adjustment becomes known.

ACCOUNTING FOR INCOME TAXES

The Company accounts for income taxes using the asset and liability method
prescribed by SFAS No. 109, Accounting for Income Taxes. Under the asset and
liability method of SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities, and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which these temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.

Income tax expense recognized by the Company in any one year is impacted by the
extent to which the Company qualifies for the small life company deduction. The
small life company deduction is 60% of life insurance company taxable income up
to a maximum taxable income of $3 million. This deduction is phased out on
taxable income above $3 million up to and including a maximum of $15 million. To
the extent, if any, that the Company's taxable income exceeds $3 million, its
effective Federal income tax rate will increase.


                         LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW

The Company's insurance operations generate positive cash flows in excess of its
immediate needs. Cash flows provided by operations were $15.6 million in 2001,
$11.8 million in 2000, and $13.4 million in 1999.


                                       12
<PAGE>

Operating cash flow is primarily used to purchase debt securities. The Company
received proceeds of $10.5 million from investment maturities and repayments in
2001, adding to available cash flows. Such proceeds were $7.2 million in 2000
and $8.3 million in 1999. When market opportunities arise, the Company disposes
of selected debt securities available for sale to improve future investment
yields and/or improve duration matching of our assets and liabilities.
Therefore, dispositions before maturity can vary significantly from year to
year. Proceeds from sales prior to maturity were $50.2 million in 2001, $3.4
million in 2000 and $8.1 million in 1999.

The Company's principal financing activity is payment of dividends to the
Company's shareholders. Dividends are normally declared quarterly and must be
approved by the Board of Directors. Under regulatory requirements, the amount of
dividends that may be paid in 2002 by the Company to its shareholders without
prior regulatory approval is approximately $3.0 million.

Other than noted above, the Company does not have any debt, lease obligations,
purchase obligations, lines of credit, guarantees, off-balance sheet
arrangements, trading activities involving non-exchange traded contracts
accounted for at fair value or relationships with persons or entities that
derive benefits from a non-independent relationship with the Company or the
Company's related parties.

LIQUIDITY

Liquidity pertains to a company's ability to meet the demand for cash
requirements of its business operations and financial obligations. The Company's
two sources of short-term liquidity include its positive cash flow from
operations and its portfolio of marketable securities as described above. The
Company believes that these sources are sufficient to meet its liquidity needs
in fiscal 2002.

INVESTMENTS

Since December 31, 2000, there has not been a material change in mix or credit
quality of the Company's investment portfolio. All bond purchases have been
available for sale and over 86% of the holdings at December 31, 2001 and 93% in
2000 are rated "A" or better by Standard & Poor's Corporation. For all fixed
maturities, 14% in 2001 and 7% in 2000 are rated BBB. Ratings of BBB and higher
are considered investment grade by the rating services. Due to the improvement
in bond market conditions, the Company experienced an increase in the fair value
of bonds of approximately $1,583,000 in 2001.

The amortized cost and estimated fair value of debt securities at December 31,
2001, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                             AMORTIZED             ESTIMATED
                                                                COST               FAIR VALUE
                                                            ------------          ------------
         <S>                                                <C>                   <C>
         Held for investment:
             Due in one year or less                        $  4,003,365          $  4,112,940
             Due after one year through five years             7,548,835             7,847,164
                                                            ------------          ------------

                    Total                                   $ 11,552,200          $ 11,960,104
                                                            ============          ============

         Available for sale:
             Due in one year or less                        $  5,003,875          $  5,119,205
             Due after one year through five years            33,270,557            34,061,942
             Due after five years through 10 years            46,478,633            46,989,311
             Due after 10 years                               31,414,378            31,125,027
             Mortgage-backed securities                       14,136,358            14,669,325
                                                            ------------          ------------

                    Total                                   $130,303,801          $131,964,810
                                                            ============          ============
</TABLE>


                                       13


<PAGE>


MORTGAGE LOANS

The Company's mortgage loan policy limits the amounts of loans to no more than
80% of the value on residential loans and no more than 75% of the value on
commercial loans. The Company grants loans only to employees (excluding officers
and directors) and agents.

The geographic distribution of the loan portfolio is:

<TABLE>
<CAPTION>
                                                                         BOOK VALUE
                 NUMBER OF LOANS                                   (DOLLARS IN THOUSANDS)
                 ---------------
       DECEMBER 31,          DECEMBER 31,          STATE         DECEMBER 31,       DECEMBER 31,
       -------------         ------------          ------        ------------       ------------
           2001                  2000                               2001               2000
           ----                  ----                               ----               ----
       <S>                   <C>                   <C>           <C>                <C>

             3                    3                Alabama          $ 113             $  130
             6                    6                Florida            320                354
            30                   36                Georgia          1,239              1,614
            --                   --                                ------             ------
            39                   45                                $1,672             $2,098
            ==                   ==                                ======             ======
</TABLE>

Two loans representing $96,000 in principal are over 30 days delinquent. The
loan-to-value ratio on delinquent loans is 26%.

RECENT ACCOUNTING PRONOUNCEMENTS

Financial Accounting Standards Board ("FASB") SFAS No. 133, as amended,
Accounting for Derivative Instruments and Hedging Activities, became effective
beginning January 1, 2001. However, due to the Company's limited use of
derivative financial instruments, SFAS No. 133 did not impact the Company's
consolidated financial position, results of operations or cash flows in 2001.

The FASB issued four new accounting standards in 2001. SFAS No. 141, SFAS No.
142, SFAS No. 143 and SFAS No. 144 primarily address the accounting for
goodwill, business combinations, and the impairment and disposition of
long-lived assets. The adoption of these standards in 2002 is not expected to
have a material impact on the Company's financial position or results of
operations.

Effective January 1, 2001, the State of Georgia adopted the National Association
of Insurance Commissioner's Codification of Statutory Accounting Practices. The
impact on the Company's statutory surplus upon adoption of the codification
standards was not material.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

CREDIT RISK

Credit risk is the risk that issuers of securities owned by the Company will
default, or other parties, including reinsurers, which owe the Company money,
will not pay. The Company attempts to minimize these risks by following a
conservative investment strategy and by contracting with reinsuring companies
that meet high standards for rating criteria and other qualifications. The
Company invests principally in government, governmental agency and high quality
corporate bonds having an A rating or better. The fixed maturity portfolio had
an average rating of AA-as rated by Standard & Poor's Corporation at December
31, 2001.

INTEREST RATE RISK

Interest rate risk is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. The Company's fixed maturity
investments are subject to interest rate risk. The Company seeks to


                                       14


<PAGE>

manage the impact of interest rate fluctuation through cash flow modeling, which
attempts to match the maturity schedule of its assets with expected payout of
its liabilities. Liabilities for interest sensitive products are carried at full
account value. The fixed maturity portfolio at December 31, 2001 and December
31, 2000 had an effective duration of 4.2 years and 4.8 years, respectively.

The table below summarizes the Company's interest rate risk and shows the effect
of a hypothetical 100 and 200 basis point increase/decrease in interest rates on
the fair values of the fixed investment portfolio. The selection of 100 and 200
basis point increases/decreases in interest rates should not be construed as a
prediction by the Company's management of future market events, but rather, to
illustrate the potential impact of such events. These calculations may not fully
capture the impact of the changes in the ratio of long-term rates to short-term
rates.

<TABLE>
<CAPTION>
                                                                                                         HYPOTHETICAL
                                                                                    ESTIMATED FAIR       PERCENTAGE
                                                                                      VALUE AFTER          INCREASE
                                                          ESTIMATED CHANGE IN         HYPOTHETICAL      (DECREASE) IN
                                  ESTIMATED VALUE           INTEREST RATES             CHANGE IN         SHAREHOLDERS'
                                  DECEMBER 31, 2001        (BP-BASIS POINTS)         INTEREST RATES         EQUITY
                                -------------------------------------------------------------------------------------
                                (dollars in thousands)
<S>                             <C>                       <C>                       <C>                 <C>
Fixed Maturities - Held
      for Investment               $ 11,552                200 bp decrease                12,259               N/A
                                                           100 bp decrease                12,103               N/A
                                                           100 bp increase                11,816               N/A
                                                           200 bp increase                11,673               N/A

Fixed Maturities - Available       $131,965                200 bp decrease               144,839             18.3%
      for Sale                                             100 bp decrease               138,285              9.0%
                                                           100 bp increase               125,899             (8.6)%
                                                           200 bp increase               120,213            (16.7)%
</TABLE>

The following table shows a comparison of average assumed interest rates for
policy reserves and investment yields, based on amortized costs, for the years
ended December 31.


              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2001, 2000, AND 1999


<TABLE>
<CAPTION>
                                                      2001           2000           1999
                                                     ------         ------         ------
<S>                                                  <C>            <C>            <C>
Policies issued during year:
    Required interest on policy reserves              6.7%           6.7%           6.7%
    New money yield on investments                    5.4%           7.2%           7.5%

Policies inforce during year:
    Required interest on policy reserves              6.2%           6.2%           6.1%

Net investment yield                                  6.7%           7.2%           7.0%
</TABLE>


                                       15

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                   -----------------------------------
                          ASSETS                                       2001                  2000
                                                                   -------------         -------------
<S>                                                                <C>                   <C>
Investments:
  Fixed maturities, held for investment, at amortized
     cost                                                          $  11,552,200            15,057,092
  Fixed maturities, available for sale, at fair value                131,964,810           116,584,243
  Equity securities, at fair value                                     3,471,722             3,776,423
  First mortgage loans on real estate                                  1,671,989             2,097,616
  Policy loans                                                         9,661,247             8,841,008
  Other invested assets                                                1,000,000             1,000,000
                                                                   -------------         -------------
      Total investments                                              159,321,968           147,356,382
Cash and cash equivalents                                             13,187,601             6,437,904
Accrued investment income                                              2,592,977             2,465,951
Amounts receivable, principally premiums                               3,298,052             3,315,912
Amount due from reinsurers                                             4,233,046             4,376,910
Deferred policy acquisition costs                                     51,660,808            46,856,705
Other assets                                                             485,886               490,806
                                                                   -------------         -------------
                                                                   $ 234,780,338           211,300,570
                                                                   =============         =============
             LIABILITIES AND SHAREHOLDERS' EQUITY

Policy liabilities and accruals:
  Future policy benefits                                           $ 145,737,310           132,654,587
  Policy claims and benefits payable                                   2,196,620             2,298,224
                                                                   -------------         -------------
      Total policy liabilities and accruals                          147,933,930           134,952,811
Federal income taxes:
  Current                                                                332,624               576,889
  Deferred                                                             8,205,251             5,689,282
Other liabilities                                                      7,774,011             7,347,709
                                                                   -------------         -------------
      Total liabilities                                              164,245,816           148,566,691
                                                                   -------------         -------------
Shareholders' equity:
  Common stock of $1 par value.  Authorized 20,000,000
     shares; issued 6,754,504 shares                                   6,754,504             6,754,504
  Additional paid-in capital                                           1,496,417             1,496,417
  Accumulated other comprehensive income (loss), net of tax              818,720            (1,715,931)
  Retained earnings                                                   65,746,656            60,320,092
  Less:
     Unearned compensation - restricted stock                           (858,781)             (794,276)
     Treasury stock, at cost (419,076 shares in 2001 and
         409,076 shares in 2000)                                      (3,422,994)           (3,326,927)
                                                                   -------------         -------------
      Total shareholders' equity                                      70,534,522            62,733,879
                                                                   -------------         -------------

                                                                   $ 234,780,338           211,300,570
                                                                   =============         =============
</TABLE>

See accompanying notes to consolidated financial statements.


                                       16


<PAGE>

              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                       Consolidated Statements of Earnings


<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31,
                                                         ---------------------------------------------
                                                            2001             2000             1999
                                                         -----------      -----------      -----------
<S>                                                      <C>              <C>              <C>
Revenue:
  Premiums                                               $30,220,737       26,816,523       23,302,097
  Net investment income                                   10,282,623       10,090,780        9,252,370
  Realized investment gains                                   27,501          405,933          474,628
  Brokerage commissions                                    4,190,482        4,197,173        3,828,087
                                                         -----------      -----------      -----------
         Total revenue                                    44,721,343       41,510,409       36,857,182
                                                         -----------      -----------      -----------

Benefits and expenses:
  Benefits and claims                                     17,551,824       14,800,123       11,699,850
  Interest credited                                        5,527,001        5,198,089        4,736,078
  Amortization of deferred policy acquisition costs        4,466,712        3,214,110        3,041,566
  Operating expenses                                       8,311,250        7,444,815        7,196,353
                                                         -----------      -----------      -----------
         Total benefits and expenses                      35,856,787       30,657,137       26,673,847
                                                         -----------      -----------      -----------
         Income before Federal income taxes                8,864,556       10,853,272       10,183,335
                                                         -----------      -----------      -----------
Federal income taxes:
  Current                                                  1,461,027        2,114,917        1,764,630
  Deferred                                                   957,857        1,132,140        1,090,760
                                                         -----------      -----------      -----------
         Total Federal income taxes                        2,418,884        3,247,057        2,855,390
                                                         -----------      -----------      -----------
         Net income                                      $ 6,445,672        7,606,215        7,327,945
                                                         ===========      ===========      ===========
Basic income per share of
  common stock                                           $      1.02             1.20             1.16
                                                         ===========      ===========      ===========
Diluted income per share of
  common stock                                           $      0.99             1.18             1.14
                                                         ===========      ===========      ===========
Weighted-average number of shares used in
  computing income per share:
  Basic                                                    6,342,817        6,345,687        6,341,393
                                                         ===========      ===========      ===========
  Diluted                                                  6,519,933        6,466,069        6,444,202
                                                         ===========      ===========      ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       17


<PAGE>


              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                 Consolidated Statements of Shareholders' Equity


<TABLE>
<CAPTION>
                                                                            YEARS ENDED DECEMBER 31,
                                                              --------------------------------------------------
                                                                 2001                2000               1999
                                                              ------------       ------------       ------------
<S>                                                           <C>                <C>                <C>
Common stock - balance at beginning and
    end of year                                               $  6,754,504          6,754,504          6,754,504
                                                              ------------       ------------       ------------
Additional paid-in capital:
    Balance at beginning of year                                 1,496,417          1,528,178          1,478,639
    Treasury shares acquired                                            --            (83,304)           (91,286)
    Tax benefit arising from issuance of
       restricted stock                                                 --             51,543            140,825
                                                              ------------       ------------       ------------
    Balance at end of year                                       1,496,417          1,496,417          1,528,178
                                                              ------------       ------------       ------------
Accumulated other comprehensive income (loss):
    Balance at beginning of year                                (1,715,931)        (3,466,876)         1,779,920
    Change in unrealized gains (losses):
       Unrealized gains (losses) during year                     4,582,686          3,313,133         (9,637,850)
       Deferred (taxes) benefit                                 (1,558,113)        (1,126,466)         3,276,869
       Deferred acquisition cost adjustment                       (489,922)          (435,722)         1,114,185
                                                              ------------       ------------       ------------
       Other comprehensive income (loss)                         2,534,651          1,750,945         (5,246,796)
                                                              ------------       ------------       ------------
    Balance at end of year                                         818,720         (1,715,931)        (3,466,876)
                                                              ------------       ------------       ------------
Retained earnings:
    Balance at beginning of year                                60,320,092         53,732,985         47,420,827
    Net income                                                   6,445,672          7,606,215          7,327,945
    Dividends of $.16 per share in 2001,
       2000, and 1999                                           (1,019,108)        (1,019,108)        (1,015,787)
                                                              ------------       ------------       ------------
    Balance at end of year                                      65,746,656         60,320,092         53,732,985
                                                              ------------       ------------       ------------
Unearned compensation - restricted stock:
    Balance at beginning of year                                  (794,276)          (362,458)          (317,860)
    Shares awarded                                                (489,231)          (490,964)          (353,004)
    Compensation expense recorded                                  424,726             59,146            308,406
                                                              ------------       ------------       ------------
    Balance at end of year                                        (858,781)          (794,276)          (362,458)
                                                              ------------       ------------       ------------
Treasury stock:
    Balance at beginning of year                                (3,326,927)        (3,399,256)        (2,625,178)
    Cost of shares purchased (10,000 in 2001,
       24,000 in 2000, and 75,000 in 1999)                         (96,067)          (145,945)        (1,007,156)
    Cost of shares issued (0 in 2001,
       49,910 shares in 2000, and 43,502 shares in 1999)                --            218,274            233,078
                                                              ------------       ------------       ------------
    Balance at end of year                                      (3,422,994)        (3,326,927)        (3,399,256)
                                                              ------------       ------------       ------------
               Total shareholders' equity                     $ 70,534,522         62,733,879         54,787,077
                                                              ============       ============       ============
</TABLE>


See accompanying notes to consolidated financial statements.


                                       18


<PAGE>


        COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                             YEARS ENDED DECEMBER 31,
                                                                --------------------------------------------------
                                                                    2001              2000                1999
                                                                ------------       ------------       ------------
<S>                                                             <C>                <C>                <C>
Cash flows from operating activities:
  Net income                                                    $  6,445,672          7,606,215          7,327,945
  Adjustments to reconcile net income to net
    cash provided by operating activities:
     Increase in policy liabilities and accruals                  12,981,119         10,891,757         10,182,099
     (Increase) in deferred policy acquisition costs              (5,294,025)        (6,028,610)        (5,079,456)
     Change in liability for income taxes                            713,591          1,054,461          1,820,865
     Decrease (Increase) in amounts receivable
        and amounts recoverable from reinsurers                      161,724         (1,211,138)        (1,441,681)
     Decrease (Increase) in deferred compensation accruals           426,864           (133,818)           141,321
     Decrease (Increase) in unearned policy charges                 (139,067)           (51,501)           117,790
     Other, net                                                      270,059           (371,611)           290,713
                                                                ------------       ------------       ------------
         Net cash provided by operating
           activities                                             15,565,937         11,755,755         13,359,596
                                                                ------------       ------------       ------------
Cash flows from investing activities:
  Purchase of fixed maturities available for sale                (67,827,757)       (20,141,334)       (27,539,338)
  Purchase of equity securities                                   (1,972,576)        (2,636,020)        (3,236,452)
  Sale of fixed maturities available for sale                     50,204,028          3,403,849          8,059,060
  Sale of equity securities                                        1,970,150          1,496,638            704,605
  Proceeds from maturities of fixed maturities
    held for investment                                            3,500,000          1,010,000            500,000
  Proceeds from maturity and redemption of
    fixed maturities available for sale                            7,043,398          6,154,391          7,751,371
  First mortgage loans originated                                         --                 --           (178,000)
  Principal collected on first mortgage loans                        425,627            801,141            810,971
  Net increase in policy loans                                      (820,239)          (249,399)          (435,857)
  Other, net                                                        (223,696)          (232,568)           (36,186)
                                                                ------------       ------------       ------------
         Net cash used in investing activities                    (7,701,065)       (10,393,302)       (13,599,826)
                                                                ------------       ------------       ------------

Cash flows from financing activities:
  Cash dividends paid                                             (1,019,108)        (1,019,108)        (1,015,787)
  Purchase of treasury stock                                         (96,067)          (145,945)        (1,007,156)
  Stock issued under executive compensation plans                         --            134,970            233,078
                                                                ------------       ------------       ------------
         Net cash used in financing activities                    (1,115,175)        (1,030,083)        (1,789,865)
                                                                ------------       ------------       ------------
         Net increase (decrease) in cash and
           cash equivalents                                        6,749,697            332,370         (2,030,095)

Cash and cash equivalents:
  Beginning of year                                                6,437,904          6,105,534          8,135,629
                                                                ------------       ------------       ------------
  End of year                                                   $ 13,187,601          6,437,904          6,105,534
                                                                ============       ============       ============
Supplemental disclosures of cash paid during
  the year - income taxes                                       $  1,705,292          2,156,832          1,034,326
                                                                ============       ============       ============
</TABLE>


See accompanying notes to consolidated financial statements.


                                       19


<PAGE>

              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                 Consolidated Statements of Comprehensive Income

<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                       -----------------------------------------------
                                                          2001               2000              1999
                                                       -----------       -----------       -----------
<S>                                                    <C>               <C>               <C>
Net income                                             $ 6,445,672         7,606,215         7,327,945
                                                       -----------       -----------       -----------
Other comprehensive income (loss) before tax:
   Unrealized gains (losses) on securities
     available for sale                                  4,120,265         3,283,344        (8,049,037)
   Reclassification adjustment for realized gains
          included in net earnings                         (27,501)         (405,933)         (474,628)
                                                       -----------       -----------       -----------
       Total other comprehensive income
          (loss) before tax                              4,092,764         2,877,411        (8,523,665)
   Income tax expense (benefit) related to items
     of other comprehensive income (loss)                1,558,113         1,126,466        (3,276,869)
                                                       -----------       -----------       -----------
       Other comprehensive income (loss),
          net of tax                                     2,534,651         1,750,945        (5,246,796)
                                                       -----------       -----------       -----------
       Total comprehensive income                      $ 8,980,323         9,357,160         2,081,149
                                                       ===========       ===========       ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       20


<PAGE>


              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         The accompanying consolidated financial statements have been prepared
         in conformity with accounting principles generally accepted in the
         United States of America ("GAAP"), which vary in certain respects from
         reporting practices prescribed or permitted by the Insurance Department
         of the State of Georgia. The preparation of financial statements in
         conformity with accounting principles generally accepted in the United
         States requires management to make estimates and assumptions that
         affect the reported amounts of assets and liabilities and the reported
         amounts of revenues and expenses during the reporting period. Accounts
         that the Company deem to be acutely sensitive to changes in estimates
         include deferred policy acquisition costs and future policy benefits.
         In addition, the Company must determine requirements for disclosure of
         contingent assets and liabilities as of the date of the financial
         statements based upon estimates. In all instances, actual results could
         differ from estimates.

         The significant accounting policies are as follows:

                  CONSOLIDATION POLICY

                  The consolidated financial statements include the accounts of
                  the Company, and its wholly owned subsidiaries, CSI Brokerage
                  Services, Inc. ("CSI") and Cotton States Marketing Resources,
                  Inc. ("CSMR"). All significant intercompany balances and
                  transactions have been eliminated in consolidation.

                  RECOGNITION OF PREMIUMS AND BROKERAGE INCOME

                  Premiums on traditional life and accident and health insurance
                  policies are recognized as income when due. Premiums on
                  universal life policies are recognized when earned.

                  CSI and CSMR receive commissions on insurance policies written
                  by the Company's agents on behalf of unaffiliated insurance
                  companies. This income is recognized when the related
                  insurance policies are written as reported by the insurance
                  companies with which the business is placed.

                  FUTURE POLICY BENEFITS

                  Future policy benefits on traditional individual life
                  insurance policies are computed using a net level premium
                  method based upon various assumptions as to investment yields,
                  withdrawals, morbidity, and mortality. Future policy benefits
                  on universal life insurance policies and annuities represent
                  the contract's accumulated account value.


                                       21

<PAGE>


              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999


                  DEFERRED POLICY ACQUISITION COSTS

                  The costs of acquiring most new individual life business are
                  deferred and amortized with interest over the premium-paying
                  period of the related policies. For traditional life policies,
                  such amounts are amortized in proportion to the ratio of the
                  annual premium income to the total anticipated premium income.
                  Such anticipated premium income is estimated using the same
                  assumptions used for computing future policy benefits. For
                  universal life policies, deferrable costs are amortized in
                  proportion to the ratio of the contract's annual gross profits
                  to total anticipated gross profits. First-year excess expense
                  charges are also deferred and accreted to income in the same
                  manner as deferrable costs are amortized. Total anticipated
                  gross profits are based on assumptions for investment margins,
                  surrender charges, mortality charges, and level expense loads.
                  The principal expenses deferred are commissions and certain
                  expenses of the product development, policy issue,
                  underwriting, and agency departments, all of which vary with
                  and are primarily related to the production of new business.
                  Policy acquisition costs deferred were approximately
                  $9,831,000 in 2001, $9,313,000 in 2000, and $8,121,000 in
                  1999.

                  CASH AND CASH EQUIVALENTS

                  For purposes of presenting its statements of cash flows, the
                  Company considers all short-term investments to be cash
                  equivalents. Short-term investments have original maturity
                  dates of less than three months.

                  INVESTMENTS

                  The Company accounts for investments under the provisions of
                  Statement of Financial Accounting Standards ("SFAS") No. 115,
                  Accounting for Certain Investments in Debt and Equity
                  Securities.

                  Fixed maturities held for investment are stated at amortized
                  cost. Fixed maturities available for sale are stated at fair
                  value. The cost of securities sold is determined by the
                  identified certificate method. First mortgage loans are stated
                  at their aggregate unpaid balance. Policy loans are stated at
                  their aggregate unpaid balance and short-term investments are
                  stated at cost.

                  Investments deemed to have a loss in value which is other than
                  temporary are written down to their fair value. Unrealized
                  gains and losses on fixed maturities available for sale are
                  excluded from earnings and are reported within shareholders'
                  equity as a component of accumulated other comprehensive
                  income, net of deferred taxes and amounts attributable to the
                  Company's universal life and annuity products.

                  INCOME TAXES

                  The Company, CSI and CSMR file a consolidated Federal income
                  tax return.

                  Deferred taxes are recognized for the tax consequences of
                  "temporary differences" by applying enacted statutory rates
                  applicable to future years to differences between the
                  financial statement carrying amounts and the tax bases of
                  existing assets and liabilities. The effect on deferred taxes
                  of a change in tax rates is recognized in income in the period
                  that includes the enactment date.


                                       22

<PAGE>


              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999


                  STOCK BASED COMPENSATION

                  The Company applies the intrinsic value-based method of
                  accounting prescribed by Accounting Principles Board ("APB")
                  Opinion No. 25, Accounting for Stock Issued to Employees, and
                  related interpretations in accounting for its stock based
                  compensation. As such, compensation expense would generally
                  only be recorded if the current market price of the underlying
                  stock on the date of grant exceeded the exercise price.

                  EARNINGS PER SHARE

                  The following table summarizes information relating to the
                  calculation of basic and diluted earnings per share of common
                  stock:

<TABLE>
<CAPTION>
                                                                           YEARS ENDED DECEMBER 31,
                                          ----------------------------------------------------------------------------------------
                                                      2001                          2000                         1999
                                          --------------------------    ----------------------------  ----------------------------
                                             INCOME         SHARES         INCOME         SHARES        INCOME          SHARES
                                           (NUMERATOR)   (DENOMINATOR)   (NUMERATOR)   (DENOMINATOR)  (NUMERATOR)    (DENOMINATOR)
                                          -------------  -------------  -------------  -------------  -------------  -------------
                  <S>                     <C>            <C>            <C>            <C>            <C>            <C>
                  Data for Basic
                  EPS calculation         $   6,445,672      6,342,817  $   7,606,215      6,345,687  $   7,327,945      6,341,393

                      Effect of dilutive
                         securities:
                         Options                     --         13,898             --          2,655             --         35,953
                  Restricted stock                   --        163,218             --        117,727             --         66,856
                                          -------------  -------------  -------------  -------------  -------------  -------------
                  Data for Diluted EPS
                    calculation           $   6,445,672      6,519,933  $   7,606,215      6,466,069  $   7,327,945      6,444,202
                                          =============  =============  =============  =============  =============  =============
</TABLE>

                  RECENT ACCOUNTING PRONOUNCEMENTS

                  Financial Accounting Standards Board ("FASB") SFAS No. 133, as
                  amended, Accounting for Derivative Instruments and Hedging
                  Activities, became effective beginning January 1, 2001.
                  However, due to the Company's limited use of derivative
                  financial instruments, SFAS No. 133 had no impact on the
                  Company's consolidated financial position, results of
                  operations or cash flows.

                  The FASB issued four new accounting standards in 2001. SFAS
                  No. 141, SFAS No. 142, SFAS No. 143, and SFAS No. 144
                  primarily address the accounting for goodwill, business
                  combinations, and the impairment and disposition of long-lived
                  assets. The adoption of these standards in 2002 is not
                  expected to have a material impact on the Company's financial
                  position or results of operations.

                  Effective January 1, 2001, the State of Georgia adopted the
                  National Association of Insurance Commissioner's Codification
                  of Statutory Accounting Practices. The impact on the Company's
                  statutory surplus upon adoption of the codification standards
                  was not material.


                                       23

<PAGE>


              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999


(2)      INVESTMENTS

         The amortized cost and estimated fair values of investments in debt and
         equity securities as of December 31, 2001 and 2000 are as follows:


<TABLE>
<CAPTION>
                                                                             2001
                                                 ------------------------------------------------------------
                                                                    GROSS          GROSS           ESTIMATED
                                                   AMORTIZED      UNREALIZED     UNREALIZED          FAIR
                                                     COST           GAINS          LOSSES           VALUE
                                                 ------------    ------------    ------------    ------------
         <S>                                     <C>             <C>             <C>             <C>
         Held for investment:
             Debt securities issued by
               foreign governments               $    999,765           4,595              --       1,004,360
               Corporate securities                10,552,435         440,505          37,196      10,955,744
                                                 ------------    ------------    ------------    ------------

                    Total                        $ 11,552,200         445,100          37,196      11,960,104
                                                 ============    ============    ============    ============

         Available for sale:
             U.S. Treasury securities and
               obligations of U.S. government
               corporations and agencies         $ 36,763,922         592,847          66,614      37,290,155
             Corporate securities                  79,403,521       1,681,550       1,079,741      80,005,330
             Mortgage-backed securities            14,136,358         532,967              --      14,669,325
                                                 ------------    ------------    ------------    ------------

                    Total                        $130,303,801       2,807,364       1,146,355     131,964,810
                                                 ============    ============    ============    ============

         Equity securities                       $  3,673,660         194,661         396,599       3,471,722
                                                 ============    ============    ============    ============

<CAPTION>
                                                                             2000
                                                 ------------------------------------------------------------
                                                                    GROSS           GROSS         ESTIMATED
                                                   AMORTIZED      UNREALIZED      UNREALIZED         FAIR
                                                     COST           GAINS           LOSSES          VALUE
                                                 ------------    ------------    ------------    ------------
         <S>                                     <C>             <C>             <C>             <C>
         Held for investment:
             U.S. Treasury securities and
               obligations of U.S. government
               corporations and agencies         $  1,499,749           1,661              --       1,501,410
             Debt securities issued by
               foreign governments                  1,997,221          33,509              --       2,030,730
             Corporate securities                  11,560,122         139,103          17,437      11,681,788
                                                 ------------    ------------    ------------    ------------

                    Total                        $ 15,057,092         174,273          17,437      15,213,928
                                                 ============    ============    ============    ============

         Available for sale:
             U.S. Treasury securities and
               obligations of U.S. government
               corporations and agencies         $ 10,070,642         233,263          55,365      10,248,540
             Corporate securities                  93,023,780         932,663       4,570,878      89,385,565
             Mortgage-backed securities            16,718,625         245,121          13,608      16,950,138
                                                 ------------    ------------    ------------    ------------

                    Total                        $119,813,047       1,411,047       4,639,851     116,584,243
                                                 ============    ============    ============    ============

         Equity securities                       $  3,671,233         506,060         400,870       3,776,423
                                                 ============    ============    ============    ============
</TABLE>


                                       24


<PAGE>


              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999


The amortized cost and estimated fair value of debt securities at December 31,
2001, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                           AMORTIZED       ESTIMATED
                                                             COST          FAIR VALUE
                                                          ------------    ------------
<S>                                                       <C>             <C>
         Held for investment:
             Due in one year or less                      $  4,003,365       4,112,940
             Due after one year through five years           7,548,835       7,847,164
                                                          ------------    ------------

                    Total                                 $ 11,552,200      11,960,104
                                                          ============    ============

         Available for sale:
             Due in one year or less                      $  5,003,875       5,119,205
             Due after one year through five years          33,270,557      34,061,942
             Due after five years through 10 years          46,478,633      46,989,311
             Due after 10 years                             31,414,378      31,125,027
             Mortgage-backed securities                     14,136,358      14,669,325
                                                          ------------    ------------

                    Total                                 $130,303,801     131,964,810
                                                          ============    ============
</TABLE>


Bonds with amortized cost of $1,878,000 at December 31, 2001 were on deposit
with state regulatory authorities in accordance with statutory requirements.

Realized and unrealized gains and losses on investments for the years ended
December 31, were as follows:

<TABLE>
<CAPTION>
                                                   2001              2000              1999
                                                -----------       -----------       -----------
<S>                                             <C>               <C>               <C>
Realized gains (losses) on sales and
      redemptions of investments:
      Fixed maturities available for sale:
        Gross gains                             $   874,785            92,433           263,967
        Gross losses                               (709,279)           (9,213)             (822)
                                                -----------       -----------       -----------
           Net realized gains                       165,506            83,220           263,145
                                                -----------       -----------       -----------

      Equity securities:
        Gross gains                                 218,976           450,315           244,159
        Gross losses                               (356,981)         (127,602)          (32,676)
                                                -----------       -----------       -----------
           Net realized (losses) gains             (138,005)          322,713           211,483
                                                -----------       -----------       -----------

           Total                                     27,501           405,933           474,628
                                                -----------       -----------       -----------
Changes in unrealized gains (losses):
    Fixed maturities held for investment            251,068           257,944          (946,135)
    Fixed maturities available for sale           4,889,813         3,299,306        (9,729,213)
    Equity securities                              (307,128)           13,827            91,363
                                                -----------       -----------       -----------
           Net unrealized gains (losses)          4,833,753         3,571,077       (10,583,985)
                                                -----------       -----------       -----------

           Total realized and unrealized
             gains (losses)                     $ 4,861,254         3,977,010       (10,109,357)
                                                ===========       ===========       ===========
</TABLE>


                                       25

<PAGE>



              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999


         Details of net investment income are as follows:

<TABLE>
<CAPTION>
                                                          2001             2000             1999
                                                       -----------      -----------      -----------
<S>                                                    <C>              <C>              <C>
         Investment income:
             Fixed maturities held for investment      $   923,838        1,052,274        1,104,486
             Fixed maturities available for sale         8,405,376        8,063,799        7,241,794
             Equity securities                              44,357           36,582            8,140
             First mortgage loans                          166,808          192,450          259,558
             Policy loans                                  675,825          616,130          600,219
             Short-term investments                        296,987          319,935          283,324
                                                       -----------      -----------      -----------
                    Total investment income             10,513,191       10,281,170        9,497,521

             Less investment expenses                      230,568          190,390          245,151
                                                       -----------      -----------      -----------

                    Net investment income              $10,282,623       10,090,780        9,252,370
                                                       ===========      ===========      ===========
</TABLE>

(3)      DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

         The following methods and assumptions were used to estimate the fair
         value of each class of financial instruments for which it is
         practicable to estimate that value:

                  CASH AND SHORT-TERM INVESTMENTS

                  The carrying amount of cash and short-term investments is a
                  reasonable estimate of fair value.

                  INVESTMENT SECURITIES

                  For investment securities (which include fixed maturities held
                  for investment, fixed maturities available for sale, and
                  equity securities), fair values are based on quoted market
                  prices or dealer quotes. If a quoted market price is not
                  available, fair value is estimated using quoted market prices
                  for similar securities.

                  MORTGAGE LOANS

                  The fair value of mortgage loans is estimated using the quoted
                  market prices for securities backed by similar loans, adjusted
                  for differences in loan characteristics.

                  POLICY LOANS

                  The carrying amount of policy loans is a reasonable estimate
                  of fair value.

                  UNIVERSAL LIFE AND ANNUITY BENEFITS

                  The carrying amount of universal life and annuity benefits is
                  a reasonable estimate of fair value since credited interest
                  approximates current market rates.


                                       26


<PAGE>


              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999


                  The estimated fair values and carrying values of the Company's
                  financial instruments at December 31, 2001 and 2000 are the
                  same except for investment securities which are detailed in
                  footnote 2 and mortgage loans as follows:


<TABLE>
<CAPTION>
                                              MORTGAGE LOANS
                                        -------------------------
                                         CARRYING         FAIR
                                          AMOUNT          VALUE
                                        -----------     ---------
                          <S>           <C>             <C>
                          2001          $ 1,671,989     1,715,738
                          2000          $ 2,097,616     2,126,289
</TABLE>

(4)      FUTURE POLICY BENEFITS AND REINSURANCE

         The composition of future policy benefits, and the significant
         assumptions used in their development, are as follows (dollars in
         thousands):

<TABLE>
<CAPTION>
                                      FUTURE POLICY                                 ASSUMPTIONS
                                        BENEFITS           -------------------------------------------------------------------
                                 ----------------------      YEARS
         LINE OF BUSINESS           2001         2000      OF ISSUE     INTEREST RATES       MORTALITY             WITHDRAWALS
         ----------------        ---------     --------    ---------    --------------       ---------             -----------
         <S>                     <C>           <C>         <C>          <C>                <C>                     <C>
         Life:
           Individual            $   3,518        3,632     l956-65     4%                 l955-60 Basic Table     Company
                                                                                           Select and Ultimate     experience

           Individual                8,012        8,059     l966-79     6.5% -  5% (A)     Same as above           Same as above

           Individual                5,197        5,498     l980-88     7.5% -  6% (A)     l965-70 Basic Table     Same as above
                                                                                           Select and Ultimate

           Individual               25,313       19,748     1989-01     7.5% -  6% (A)     1975-80 Basic Table     Same as above
                                                                                           Select and Ultimate

           Individual                4,721        4,611     Various     3.5% -  2.5%       Statutory               Same as above

           Annuities and                                                                   Accumulated             Same as above
             universal life         98,942       91,071     Various     6.25% - 4.5%       account value

         Group                           5            5     Various             ---        Unearned premiums          ---
                                 ---------     --------
                                   145,708      132,624

         Accident and health -
           Individual                   29           31     Various     3%                        ---                 ---
                                 ---------     --------

           Total future
             policy
             benefits            $ 145,737      132,655
                                 =========     ========
</TABLE>


       (A)  Interest rates are graded to the ultimate rate in 25 years.


                                       27


<PAGE>

              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999


         The Company participates in certain business assumed from Federally
         sponsored group pools. Further, it is the Company's general policy to
         reinsure individual life insurance in excess of $100,000, group life
         insurance in excess of $55,000, major medical payments in excess of
         $85,000 annually per individual, accidental deaths, and certain
         disability income coverage.

         Amounts ceded under reinsurance agreements become liabilities of the
         Company should the reinsurers be unable to meet their obligations under
         the reinsurance agreements.

         The effect of reinsurance assumed and ceded on certain financial
         statement accounts is as follows:

<TABLE>
<CAPTION>
                                          2001               2000               1999
                                      ------------       ------------       ------------
         <S>                         <C>                  <C>                <C>
         Premiums:
             Direct premiums          $ 33,660,529         30,346,024         26,554,116
             Reinsurance assumed           923,435            766,213            667,688
             Reinsurance ceded          (4,363,227)        (4,295,714)        (3,919,707)
                                      ------------       ------------       ------------

                    Net premiums      $ 30,220,737         26,816,523         23,302,097
                                      ============       ============       ============

         Benefits and claims:
             Reinsurance assumed      $    903,187            751,279            660,555
                                      ============       ============       ============
             Reinsurance ceded        $  4,774,926          4,230,022          4,381,820
                                      ============       ============       ============
</TABLE>

(5)      INCOME TAXES

         Deferred income taxes reflect the net tax effects of temporary
         differences between the carrying values of assets and liabilities for
         financial reporting purposes and Federal income tax purposes. The net
         deferred tax liability at December 31, 2001 and 2000 is composed of the
         tax-effected temporary differences related to the following amounts:

<TABLE>
<CAPTION>
                                                              2001               2000
                                                           ------------      ------------
         <S>                                               <C>                  <C>
         Deferred tax assets:
             Fixed maturities available for sale           $         --         1,097,793
             Equity securities                                   68,659                --
             Life insurance reserves                          6,205,996         5,840,261
             Unearned mortality and expense charges             855,149           860,596
             Postretirement health benefits liability            79,625            84,945
             Deferred compensation                              290,968           145,834
             Other, net                                         356,678           280,477
                                                           ------------      ------------
                    Total deferred tax assets                 7,857,075         8,309,906
                                                           ------------      ------------

         Deferred tax liabilities:
             Fixed maturities available for sale                564,743                --
             Equity securities                                       --            35,765
             Deferred policy acquisition costs               15,328,987        13,808,705
             Due and unpaid premiums                             99,475            95,963
             Other, net                                          69,121            58,755
                                                           ------------      ------------
                    Total deferred tax liabilities           16,062,326        13,999,188
                                                           ------------      ------------

                    Net deferred tax liability             $  8,205,251         5,689,282
                                                           ============      ============
</TABLE>


                                       28

<PAGE>


              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999


         SFAS No. 109, Accounting for Income Taxes, specifically identifies
         certain temporary differences for which deferred tax liabilities are
         not recognized unless it becomes apparent that those temporary
         differences will reverse in the foreseeable future. The Company has not
         recorded a deferred tax liability for one such item entitled
         "policyholders' surplus" created by Federal income tax regulations in
         effect prior to 1984. Certain untaxed income accumulated in this
         special memorandum tax account will become taxable if distributions,
         other than stock dividends, are made in excess of certain amounts
         accumulated in another special memorandum tax account entitled
         "shareholders' surplus." The balance in the "policyholders' surplus"
         account at December 31, 2001 was $4,203,000. The balance in the
         "shareholders' surplus" account at December 31, 2001 was $54,254,000.
         The Company does not anticipate any of the "policyholders' surplus"
         account becoming taxable in the foreseeable future.

         In assessing the deferred tax assets, management considers whether it
         is more likely than not that some portion or all of the deferred tax
         assets will not be realized. Management considers the scheduled
         reversal of deferred tax liabilities, projected future taxable income,
         and tax planning strategies in making this assessment. Management has
         concluded that it is more likely than not that all of its deferred tax
         assets are realizable. Therefore, no valuation allowance was
         established at December 31, 2001 and 2000.

         Federal income tax expense is less than amounts determined by
         multiplying earnings before Federal income taxes by the Federal tax
         rate of 35%. The reason for such difference and the tax effect of each
         are as follows:

<TABLE>
<CAPTION>
                                                                     2001              2000              1999
                                                                  -----------       -----------       -----------
<S>                                                               <C>               <C>               <C>
         Federal income tax expense at
             statutory rate                                       $ 3,102,595         3,798,645         3,564,167
         Special deductions available to small
             Life insurance companies                                (611,156)         (559,193)         (572,553)
         Surtax exemption                                             (71,184)          (92,163)          (87,946)
         Other, net                                                    (1,371)           99,768           (48,278)
                                                                  -----------       -----------       -----------

                    Total Federal income taxes                    $ 2,418,884         3,247,057         2,855,390
                                                                  ===========       ===========       ===========
</TABLE>

(6)      RETIREMENT PLANS, OTHER POSTRETIREMENT BENEFIT PLANS AND DEFERRED
         COMPENSATION PLANS

         The Company, in conjunction with Cotton States Mutual ("Mutual") and
         Shield Insurance Company ("Shield"), affiliates, sponsors a
         non-contributory defined benefit pension plan covering all eligible
         employees. Plan benefits are based on the age of the employee, the
         employee's average salary for the highest five consecutive years of
         compensation and the employee's years of service. The Company's funding
         policy is to make annual contributions sufficient to fund the plan's
         normal cost (current service cost) plus amortization of the unfunded
         prior service cost. The Company and its affiliates are charged the
         allocable share of such contributions based on their proportionate
         share of payroll.

         In addition to pension benefits, the Company has a plan which provides
         for postretirement health care and life insurance benefits for certain
         employees. These benefits include major medical insurance with
         deductible and coinsurance provisions. The Company accrues benefits on
         a current basis and the plan is not funded.



                                       29

<PAGE>


              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

The following table summarizes plan assets, obligations, pension cost and
assumptions of the pension plan and other postretirement benefit plan as of
December 31, 2001 and 2000.


<TABLE>
<CAPTION>
                                                                 PENSION BENEFITS               OTHER BENEFITS
                                                                2001           2000           2001           2000
                                                             -----------    -----------    -----------    -----------
         <S>                                                 <C>            <C>            <C>            <C>
         Change in benefit obligation:
            Benefit obligation at beginning of year          $ 1,174,763      1,156,906    $   152,508        136,305
            Benefits accrued/service cost                         65,342         27,521          3,010          2,575
            Interest                                              89,430         88,052         11,383          9,634
            Actuarial gain or loss                                    --             --         (4,072)        35,548
            Benefits paid                                       (113,785)      (112,501)       (18,238)       (31,554)
            Plan amendments                                           --         14,875             --             --
                                                             -----------    -----------    -----------    -----------

            Benefit obligation at end of year                $ 1,215,750      1,174,853    $   144,591        152,508
                                                             ===========    ===========    ===========    ===========

         CHANGE IN PLAN ASSETS:
            Fair value of plan assets at beginning of year   $ 1,816,378      1,936,254    $        --             --
            Actual return on plan assets                         (15,252)            12             --             --
            Administrative expenses                              (16,571)        (7,387)            --             --
            Benefits paid                                       (113,785)      (112,501)            --             --
                                                             -----------    -----------    -----------    -----------

            Fair value of plan assets at end of year         $ 1,670,770      1,816,378    $        --             --
                                                             ===========    ===========    ===========    ===========

         FUNDED STATUS:
            Funded status                                    $  (354,987)       (90,403)   $  (144,591)      (152,508)
            Unamortized prior service cost                        34,183         37,119             --             --
            Unrecognized net gain or loss                        (63,346)      (261,221)       (89,599)       (97,330)
            Unrecognized transition asset                        (10,000)       (18,000)            --             --
                                                             -----------    -----------    -----------    -----------

            Accrued liabilities                              $  (394,150)      (332,505)   $  (234,190)      (249,838)
                                                             ===========    ===========    ===========    ===========

         BENEFIT OBLIGATION FOR NON-VESTED EMPLOYEES         $    20,012         16,220    $        --             --
                                                             ===========    ===========    ===========    ===========

         COMPONENTS OF NET PERIODIC BENEFIT COST:
            Service cost                                     $    93,563         86,514    $     3,010          2,575
            Interest cost                                        135,507        124,313         11,383          9,634
            Expected return on plan assets                      (130,659)      (136,227)            --             --
            Amortization of unrecognized transition asset         (8,000)        (8,000)            --             --
            Amount of unrecognized gains and losses                   --         (7,891)       (14,393)       (12,209)
            Amount of prior service cost recognized                2,936          2,936             --             --
                                                             -----------    -----------    -----------    -----------

            Total net periodic benefit cost                  $    93,347         61,645    $        --             --
                                                             ===========    ===========    ===========    ===========
</TABLE>


                                       30


<PAGE>


              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999


         SIGNIFICANT ACTUARIAL ASSUMPTIONS:

<TABLE>
<CAPTION>

                                                                  PENSION BENEFITS              OTHER BENEFITS
                                                                 2001           2000           2001        2000
                                                               --------       --------       --------     --------

         <S>                                                   <C>            <C>            <C>          <C>
         Discount rate                                           6.21%          6.31%          7.25%          7.50%
         Rate of compensation increase                           5.00           5.00             --             --
         Expected long-term rate of return
            on plan assets                                       8.25           8.25             --             --
         Projected increase in health care costs                   --             --           5.00           5.00
</TABLE>

         A 1% annual increase in assumed health care cost would increase the
         accumulated postretirement benefit obligation at December 31, 2001 by
         approximately $5,500 and the service and interest cost components of
         the net periodic postretirement benefit cost for 2001 by $400. A 1%
         annual decrease in the assumed health care costs would decrease the
         accumulated postretirement benefit obligation at December 31, 2001 by
         approximately $5,000 and the service and interest components of the net
         periodic postretirement benefit cost by $375.

         The Company also sponsors a defined contribution plan for the benefit
         of the Company's employees and the employees of affiliated companies.
         Matching contributions by the Company vary and are determined by the
         Company's prior year profitability measured by return on equity. The
         Company's matching contributions were $38,000 in 2001, $43,838 in 2000
         and $36,451 in 1999.


(7)      TRANSACTIONS WITH AFFILIATES

         Mutual, through its wholly owned subsidiary, Shield, controls
         approximately 33% of the Company's outstanding common stock. Most
         officers and directors of the Company hold similar positions with these
         affiliates.

         Certain general expenses are allocated to the Company from its
         affiliates. These expenses, such as salaries, advertising, rents, etc.,
         represent the Company's share of expenses initially paid by Mutual and
         are allocated based on specific identification or, if undeterminable,
         generally on the basis of each company's premium. Expenditures
         allocated to the Company amounted to $3,992,556 in 2001, $3,386,739 in
         2000, and $2,957,431 in 1999. At December 31, 2001 and 2000, the
         Company owed Mutual $186,482 and $393,926, respectively.

         The Company expensed pension costs of $93,347 in 2001, $61,645 in 2000,
         and $63,354 in 1999.

         Rent for use of software of $106,000 in 2001, 2000, and 1999, has been
         charged to the affiliated companies.


                                       31


<PAGE>


              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999


(8)      STOCK-BASED COMPENSATION

         The Company has various stock option plans for the Company's officers
         and key employees, as well as directors.

         The Company accounts for its various stock-based compensation as
         expense, recorded on the grant date only to the extent that the current
         market price of the underlying stock exceeds the exercise price on the
         grant date.

         Under the employee plan, options may be granted to purchase up to
         937,500 shares of the Company's common stock at a per share price of
         not less than 100% of fair market value at date of grant. Under the
         directors' plan, options are granted based on the level of directors'
         fees at a per share price of 50% of fair market value at date of grant.
         The employee and directors' options have a term of 10 years and are not
         subject to any vesting requirements. The weighted-average remaining
         contractual life on options outstanding at December 31, 2001 is 7.4
         years. The weighted-average grant date fair value of options granted
         during 2001, 2000, and 1999 was $7.69, $5.42, and $9.58, respectively.
         Stock option transactions are summarized below:

<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                          ----------------------------------------------------------------------------------------
                                                           Weighted                      Weighted                       Weighted
                                                            Average                       Average                        Average
                                                           Excercise                     Excercise                      Excerise
                                             2001           Price           2000           Price          1999            Price
                                          -----------    -----------    -----------     -----------    -----------     -----------
         <S>                              <C>            <C>            <C>             <C>            <C>             <C>
         Options outstanding
           at January 1                        70,532    $      4.41         91,541     $      3.82        107,670     $      3.32
         Granted                               16,602           5.75         17,541            4.31          8,736            7.44
         Exercised                                 --             --        (38,550)           2.96        (24,865)           2.96
                                          -----------    -----------    -----------     -----------    -----------     -----------
         Options outstanding
           at December 31                      87,134    $      4.67         70,532     $      4.41         91,541     $      3.82
                                          -----------    -----------    -----------     -----------    -----------     -----------
         Options exercisable
           at December 31                      87,134                        70,532                         91,541
         Options available for grant
           at December 31                     530,045                       546,647                        564,188
                                          -----------    -----------    -----------     -----------    -----------     -----------
</TABLE>


                                       32


<PAGE>


              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999


         The following table summarizes information about stock options
         outstanding at December 31, 2001:


<TABLE>
<CAPTION>
                                         Options Outstanding and Exerciseable
                                      ------------------------------------------
                                                        Weighted
                                                         Average        Weighted
                                                       Remaining        Average
                       Range of          Number       Contractual       Exercise
                    Exercise Price    Outstanding    Life in Years       Price
                    --------------    -----------    -------------      --------
                    <S>               <C>            <C>                <C>
                    $    0 - 2.40        21,314           4.8           $  2.31
                      3.80 - 4.31        31,533           7.7              4.08
                      5.75 - 7.63        34,287           8.7              6.67
                    --------------    -----------    -------------      --------
                    $    0 - 7.63        87,134           7.4           $  4.67
                    --------------    -----------    -------------      --------
</TABLE>


         In addition to the stock options described above, the Company has
         awarded nontransferable, restricted shares of Company common stock to
         various key executives under key executive restricted stock bonus
         plans. The market value of the common stock at the date of issuance is
         recorded as compensation expense using the straight-line method over
         the vesting period of the awards. The Company awarded 47,439, 63,225,
         and 29,298 shares of restricted stock under such plans during 2001,
         2000, and 1999, respectively. The weighted-average grant date fair
         value of such shares was $9.83, $7.04, and $11.41, respectively.
         Aggregate compensation expense with respect to the foregoing restricted
         stock awards was $427,000, $57,000, and $308,000, in 2001, 2000, and,
         1999, respectively.

         In accordance with APB Opinion No. 25, $519,000, $125,000, and
         $373,000, in compensation expense has been recorded in 2001, 2000, and
         1999, respectively, for the various stock option and restricted stock
         awards granted in 2001, 2000, and 1999. Had the Company determined
         compensation cost based on the fair value at the grant date for its
         stock options and restricted stock awards under SFAS No. 123,
         Accounting for Stock-Based Compensation, the Company's net income,
         basic net income per share, and diluted net income per share would have
         been reduced to the pro forma amounts indicated below:


                                       33


<PAGE>


              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999


<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                            ---------------------------------------------------
                                                 2001               2000                1999
                                            -------------        -----------        -----------
         <S>                                <C>                  <C>                <C>
         Net income:
             As reported                    $   6,445,672          7,606,215          7,327,945
             Pro forma                          6,420,950          7,587,201          7,314,529

         Basic net income per share:
             As reported                             1.02               1.20               1.16
             Pro forma                               1.01               1.20               1.15

         Diluted net income per share:
             As reported                              .99               1.18               1.14
             Pro forma                                .98               1.17               1.14
</TABLE>

         The per share weighted-average fair value of stock options and
         restricted stock granted was estimated using an option pricing model
         with the following weighted-average assumptions: expected life of five
         years for options and seven years for restricted stock awarded in 1999,
         and three years for restricted stock awarded in 2001 and 2000; expected
         dividend yield of 1.60% for 2001 grants and 2.10% for all other years;
         risk-free interest rate of 4.5% for 2001, 5.0% for 2000 and 5.50% for
         1999; and an expected volatility of 65% for 2001 grants, 58% for 2000
         grants, and 52% for 1999 grants.

(9)      STATUTORY FINANCIAL STATEMENTS

         Accounting practices used to prepare statutory financial statements for
         regulatory filings of stock life insurance companies differ from GAAP.
         Material differences resulting from these accounting practices include:
         deferred policy acquisition costs; statutory non-admitted assets are
         recognized under GAAP accounting; statutory investment valuation
         reserves are not recognized under GAAP accounting; premiums for
         universal life and investment-type products are recognized as revenues
         for statutory purposes and as deposits to policyholders' accounts under
         GAAP; different assumptions are used in calculating future
         policyholders' benefits; and different methods are used for calculating
         valuation allowances and deferred Federal income taxes for statutory
         and GAAP purposes.

         Net income and shareholders' equity, as reported to regulatory
         authorities in conformity with statutory accounting practices for each
         of the years in the three-year period ended December 31, 2001 is as
         follows:

<TABLE>
<CAPTION>
                                                  2001             2000             1999
                                              ------------     ------------      -----------
         <S>                                  <C>              <C>               <C>
         Statutory net income                 $  2,258,801        8,109,372        2,686,569

         Statutory shareholders' equity       $ 34,431,844       33,330,254       28,607,689
</TABLE>

         The Georgia Insurance Code limits dividends in any one year to the
         greater of statutory earnings, excluding realized capital gains, or 10%
         of statutory surplus, unless the expressed permission of the Georgia
         Insurance Department is obtained. Dividend payments to shareholders are
         further limited by the Georgia Insurance Code to unassigned statutory
         surplus, which at December 31, 2001 was approximately $30,000,000. The
         excess of retained earnings determined in accordance with GAAP over
         unassigned statutory surplus is not available for payment of dividends.
         The Company may pay a dividend amounting to approximately $3,000,000 in
         2002 without prior regulatory approval.


                                       34


<PAGE>


             COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                       December 31, 2001, 2000, and 1999


(10)     LITIGATION

         The Company is a defendant in various actions incidental to the conduct
         of its business. While the ultimate outcome of these matters cannot be
         estimated with certainty, management does not believe the actions will
         result in any material loss to the Company.


                                       35


<PAGE>



              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                        December 31, 2001, 2000, and 1999

(11)     BUSINESS SEGMENTS

         The Company's operations can be grouped into three major segments: (i)
         individual life insurance, (ii) guaranteed issue and simplified issue
         life insurance, and (iii) brokerage operations. These segments are
         differentiated primarily by their respective methods of distribution
         and the nature of related products, as the Company's operations in each
         segment are concentrated within its southeastern states geographic
         market. Individual life insurance products are distributed through the
         Company's multi-line exclusive agents, guaranteed issue and simplified
         issue products are distributed through independent agents as well as
         exclusive agents, and brokerage operations involve third party products
         distributed through the Company's exclusive and independent agents.


<TABLE>
<CAPTION>
                                                                        2001               2000               1999
                                                                    ------------       ------------       ------------
         Individual life insurance:
         <S>                                                        <C>                  <C>                <C>
              Premiums                                              $ 18,658,255         17,816,354         16,653,463
              Net investment income                                    9,458,445          9,403,578          8,837,008
              Realized investment gains                                   24,969            160,104            254,052
                                                                    ------------       ------------       ------------
                      Total revenue                                   28,141,669         27,380,036         25,744,523

              Policyholder benefits and claims                         8,821,942          8,139,214          7,436,953
              Interest credited                                        5,527,001          5,198,089          4,736,078
              Operating expenses                                       8,505,751          7,103,512          7,525,275
                                                                    ------------       ------------       ------------
                      Total benefits and expenses                     22,854,694         20,440,815         19,698,306
                                                                    ------------       ------------       ------------
                  Operating profit                                     5,286,975          6,939,221          6,046,217
                                                                    ------------       ------------       ------------

         Guaranteed issue and simplified issue life insurance:
              Premiums                                                10,529,996          8,106,634          5,843,177
              Net investment income                                      775,780            540,200            316,301
              Realized investment gains                                    2,532              9,670              9,093
                                                                    ------------       ------------       ------------
                      Total revenue                                   11,308,308          8,656,504          6,168,571

              Policyholder benefits and claims                         7,656,444          5,728,786          3,358,022
              Operating expenses                                       3,132,154          2,368,914          1,616,158
                                                                    ------------       ------------       ------------
                      Total benefits and expenses                     10,788,598          8,097,700          4,974,180
                  Operating profit                                       519,710            558,804          1,194,391
                                                                    ------------       ------------       ------------

         Brokerage:
              Brokerage commissions                                    4,190,482          4,197,173          3,828,087
              Net investment income                                       48,397            147,003             99,061
              Realized investment gains                                       --            236,160            211,483
                                                                    ------------       ------------       ------------
                      Total revenue                                    4,238,879          4,580,336          4,138,631

              Operating expenses                                       1,106,448          1,154,992          1,086,777
                                                                    ------------       ------------       ------------
                  Operating profit                                     3,132,431          3,425,344          3,051,854
                                                                    ------------       ------------       ------------

         Combined operating profit                                     8,939,116         10,923,369         10,292,462
         Group life insurance and individual
              accident and health results                                (74,560)           (70,097)          (109,127)
                                                                    ------------       ------------       ------------

         Income before Federal income taxes                         $  8,864,556         10,853,272         10,183,335
                                                                    ============       ============       ============
</TABLE>


                                       36


<PAGE>


                          INDEPENDENT AUDITORS' REPORT


THE BOARD OF DIRECTORS AND SHAREHOLDERS
COTTON STATES LIFE INSURANCE COMPANY:


We have audited the accompanying consolidated balance sheets of Cotton States
Life Insurance Company and subsidiaries (the "Company") as of December 31, 2001
and 2000, and the related consolidated statements of earnings, shareholders'
equity, cash flows, and comprehensive income for each of the years in the
three-year period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cotton States Life
Insurance Company and subsidiaries at December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.


         /s/KPMG LLP
         Atlanta, Georgia
         February 26, 2002


                                       37


<PAGE>


MANAGEMENT'S REPORT TO SHAREHOLDERS OF COTTON STATES LIFE INSURANCE COMPANY AND
SUBSIDIARIES

The accompanying consolidated financial statements for Cotton States Life
Insurance Company and subsidiaries (the "Company") were prepared by management,
which is responsible for the objectivity and integrity of these statements. The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America and,
where appropriate, are based on management's best estimates and judgements.
Other financial data about the Company contained in this annual report is
consistent with that presented in the consolidated financial statements.

The Company's consolidated financial statements have been audited by independent
auditors, KPMG LLP. Their role is to audit the consolidated financial statements
in accordance with auditing standards generally accepted in the United States of
America and render an independent and professional opinion on management's
consolidated financial statements. The auditors' report on the Company's
consolidated financial statements appears on the previous page.

The Board of Directors, through its audit committee composed of outside
directors, monitors management's financial reporting. The independent auditors
have direct access to the audit committee and meet with the committee
periodically to discuss the scope of each audit, the results of the audit and
other matters which they believe should be brought to the committee's attention.


           /s/   J. Ridley Howard                   /s/  William J. Barlow
           ----------------------                   -------------------------
           J. Ridley Howard                         William J. Barlow, CPA
           Chairman of the Board,                   Vice President/Controller
           President and Chief                      and Assistant Treasurer
           Executive Officer


                                       38

<PAGE>


QUARTERLY RESULTS

The following is a summary of the unaudited quarterly results of operations for
the three years ended December 31, 2001.


<TABLE>
<CAPTION>
2001 quarter ended                              March 31          June 30       September 30     December 31
<S>                                           <C>              <C>              <C>              <C>
Premiums                                      $ 7,031,353        7,142,797        7,562,016        8,484,571
Net investment income, realized
  investment gains and brokerage income         3,460,539        3,743,105        3,751,475        3,545,487
                                              -----------      -----------      -----------      -----------
Total revenue                                  10,491,892       10,885,902       11,313,491       12,030,058
                                              -----------      -----------      -----------      -----------
Benefits and expenses                           8,894,448        8,595,265        8,750,623        9,616,451
                                              -----------      -----------      -----------      -----------
Net income                                      1,021,054        1,701,120        1,966,038        1,757,460
                                              ===========      ===========      ===========      ===========

Basic income per share of common stock        $       .16              .27              .31              .28
Diluted income per share of common stock              .16              .26              .30              .27

<CAPTION>
2000 quarter ended                              March 31         June 30        September 3 0    December 31
<S>                                           <C>              <C>              <C>              <C>
Premiums                                      $ 6,125,550        6,384,463        6,772,298        7,534,212
Net investment income, realized
  investment gains and brokerage income         3,425,803        3,621,825        3,542,674        4,103,584
                                              -----------      -----------      -----------      -----------
Total revenue                                   9,551,353       10,006,288       10,314,972       11,637,796
                                              -----------      -----------      -----------      -----------
Benefits and expenses                           7,127,072        7,056,698        7,353,474        9,119,893
                                              -----------      -----------      -----------      -----------
Net income                                      1,523,615        2,061,165        2,124,910        1,896,525
                                              ===========      ===========      ===========      ===========

Basic income per share of common stock        $       .24              .32              .34              .30
Diluted income per share of common stock              .24              .31              .33              .29

<CAPTION>
1999 quarter ended                             March 31           June 3 0      September 30      December 31
<S>                                           <C>              <C>              <C>              <C>
Premiums                                      $ 5,356,327        5,632,482        5,813,507        6,499,781
Net investment income, realized
  investment gains and brokerage income         3,289,533        3,078,423        3,460,705        3,726,424
                                              -----------      -----------      -----------      -----------
Total revenue                                   8,645,860        8,710,905        9,274,212       10,226,205
                                              -----------      -----------      -----------      -----------
Benefits and expenses                           6,829,999        6,316,498        6,555,077        6,972,273
                                              -----------      -----------      -----------      -----------
Net income                                      1,207,422        1,681,506        2,103,386        2,335,631
                                              ===========      ===========      ===========      ===========

Basic income per share of common stock        $       .19              .26              .33              .37
Diluted income per share of common stock              .19              .26              .32              .36
</TABLE>

Note - Failure of individual quarterly income per share to total annual income
per share results from the computation of weighted average number of shares on
an individual quarterly basis.


The fourth quarter results for the three years include participation in
federally sponsored group pools as follows:

<TABLE>
<CAPTION>
                                   2001            2000          1999
                                 ---------       --------      --------
<S>                              <C>             <C>           <C>
Premiums                         $ 923,435        766,213       667,688
Benefits                           903,187        751,279       660,555
</TABLE>

See previous discussion on Results of Operations.


                                       39

<PAGE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         NONE.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

IDENTIFICATION OF DIRECTORS

The By-laws of the Company provide that the Board of Directors shall be divided
into three classes with approximately one-third of the Board of Directors
elected each year. Each director is elected to hold office for a term of three
years or until his or her successor has been duly elected and has qualified or
until he or she attains the age of 72.

TERMS EXPIRING 2002 ANNUAL MEETING- NOMINATED FOR RE-ELECTION

GAYLORD O. COAN
Director Since 1995
Age 66

From 1995 until his retirement in July 2001, Mr. Coan served as Chief Executive
Officer of Gold Kist, Inc. Mr. Coan is Chairman of the Executive Committee and
serves as a member of the Audit Committee and the Compensation Committee of the
Board of Directors of the Company. Mr. Coan also is a member the Board of
Directors of Mutual and Imperial Sugar Company.

E. JENNER WOOD, III
Director Since 1991
Age 50

Since October 2000, Mr. Wood has been Chairman, President and Chief Executive
Officer, SunTrust Bank, Georgia. Prior to his current position, Mr. Wood was
Executive Vice President, Trust and Investment Services, of SunTrust Banks,
Inc., a position he held from October 1993 to October 2000. Mr. Wood was the
Executive Vice President, Trust and Investment Management, of SunTrust Bank,
Atlanta prior to October, 1993. Mr. Wood is Chairman of the Audit Committee and
serves as a member of the Executive Committee of the Board of Directors of the
Company. Mr. Wood also is a member of the Board of Directors of Mutual, CSI,
Oxford Industries, Crawford & Company, and Georgia Power Company.

MATHEWS D. SWIFT
Director Since 1997
Age 54

Since 1998, Mr. Swift has been the President and Chief Operating Officer of W.
C. Bradley Co., Real Estate Division and President of Developers-Investors,
Inc., a subsidiary of W. C. Bradley Co. From 1986 to 1997, Mr.


                                       40
<PAGE>

Swift was the Vice President and General Manager of W. C. Bradley Co., Real
Estate Division. Mr. Swift serves as a member of the Audit Committee and the
Investment Committee of the Board of Directors. Mr. Swift also is a member of
the Board of Directors of Mutual, CSMR, Swift-Illges Foundation, Northstar
Industries, Inc., and serves as a director of the Advisory Board of Columbus
Bank & Trust Company, an affiliate of Synovus Financial Corporation.

TERMS EXPIRING 2003 ANNUAL MEETING

ROBERT C. McMAHAN
Director Since 1987
Age 61

Since 1994, Mr. McMahan has been President and Chief Executive Officer of Golden
Point Group, Inc. Mr. McMahan was President and CEO of Fernbank, Inc., d/b/a
Fernbank Museum of Natural History through November, 1994. Mr. McMahan was Vice
Chairman of First Union National Bank of Georgia through September 1993. Mr.
McMahan was Chairman, Chief Executive Officer and a director of DF Southeastern
Inc., prior to January 15, 1993 and of Decatur Federal Savings & Loan
Association prior to March 1, 1993, and was President of each entity prior to
April, 1989. Mr. McMahan is Chairman of the Compensation Committee and serves as
a member of the Executive Committee of the Board of Directors of the Company.
Mr. McMahan also is a member of the Board of Directors of Mutual, CSMR, First
Union National Bank of Georgia, Golden Point Group, Inc., Media Team Link, Inc.,
and Integration Solutions Group, LLC.

THOMAS A. HARRIS
Director Since 1995
Age 53

Since 1987, Mr. Harris has been the President and Chief Executive Officer of
Merchant Capital Investments, Inc., a Montgomery, Alabama investment and
merchant banking firm. Mr. Harris is Chairman of the Investment Committee and a
member of the Executive Committee and the Audit Committee of the Board of
Directors of the Company. Mr. Harris also serves on the Board of Directors of
Mutual, Corral Southeast, and The Capital Partnership.


                                       41
<PAGE>

TERMS EXPIRING 2004 ANNUAL MEETING

J. RIDLEY HOWARD
Director Since 1989
Age 54

Since 1998, Mr. Howard has been the Chairman of the Board of Directors of the
Company, Mutual, CSI, CSMR and Shield. He has served as President and Chief
Executive Officer since 1989. Mr. Howard held various other offices with the
Company and its affiliates prior to January 1, 1989. Mr. Howard is a member of
the Executive Committee of the Board of Directors of the Company. Mr. Howard is
a member of the Board of Directors of Piedmont Bank.

CAROL D. CHERRY
Director Since 1996
Age 54

Since 1976, Ms. Cherry has been Chairman of the Board of Directors of Shop'n
Chek, Inc., an international marketing service company providing clients with
information relative to the verbal and physical presentation of their products
and/or services at the retail level. From 1976 to 1998, Ms. Cherry was also the
President of Shop'n Chek, Inc. Ms. Cherry also is a member of the Compensation
Committee and the Investment Committee of the Board of Directors of the Company.
Ms. Cherry also is a member of the Board of Directors of Mutual, CSI, and Cherry
Convention Services, Inc.

DARRELL D. PITTARD
Director Since 2001
Age 53

Since November 2000, Mr. Pittard has been the Managing Partner, Chairman and
Chief Executive Officer of Currahee Bridge Development, LLC, a mixed-use resort
development on Lake Hartwell, Georgia. Mr. Pittard is also Vice Chairman of
Branch Banking and Trust of Georgia. From January 2000 through November 2000,
Mr. Pittard served as Executive Vice President, Branch Banking and Trust of
Georgia. From 1993 through January 2000, Mr. Pittard was Chairman and Chief
Executive Officer of Premier Bancshares. Mr. Pittard is also a member of the
Compensation Committee and Investment Committee of the Board of Directors of the
Company. Mr. Pittard is also a member of the Board of Directors of Mutual,
Branch Banking and Trust of Georgia, and Branch Banking and Trust of North
Carolina.

There are no family relationships among the directors or between any director
and any executive officer of the Company. All directors have served continuously
since their first election or appointment.


                                       42
<PAGE>

OTHER INFORMATION ABOUT THE BOARD AND ITS COMMITTEES

         During 2001, the Board of Directors held four meetings. Each Director
attended at least 75% of the aggregate meetings of the Board of Directors and
meetings of committees of which he or she was a member. The Board of Directors
has four standing committees. Certain information regarding the function of the
Board's committees, and the number of meetings held by each committee during
2001 is presented below.

AUDIT COMMITTEE

         The Audit Committee annually reviews and recommends to the Board of
Directors the certified public accounting firm to be engaged as independent
auditors of the Company for the next calendar year. Management is responsible
for the Company's internal controls, financial reporting process and compliance
with the laws and regulations and ethical business standards. The independent
accountants are responsible for performing an independent audit of the financial
statements and to issue a report thereon. The Audit Committee's responsibility
is to monitor and oversee these processes. Each member of the Audit Committee is
independent, as such term is defined under applicable NASD rules. During 2001,
the Audit Committee held three meetings.

COMPENSATION COMMITTEE

         The Compensation Committee periodically reviews the compensation and
other benefits provided to officers of the Company and advises the Board of
Directors with respect to compensation for the officers of the Company. During
2001, the Compensation Committee held three meetings.

INVESTMENT COMMITTEE

         The Investment Committee reviews the Company's investments and advises
the Board of Directors with respect to such investments. During 2001, the
Investment Committee held four meetings.

EXECUTIVE COMMITTEE

         The Executive Committee is authorized to act on behalf of the Board of
Directors on all matters that may arise between regular meetings of the Board of
Directors upon which the Board of Directors would be authorized to act,
including the nomination of directors. During 2001, the Executive Committee held
five meetings.

IDENTIFICATION OF EXECUTIVE OFFICERS

         The executive officers of the Company, their respective ages and all
positions and offices with the Company held by each are as follows:

<TABLE>
<Caption>
                                          YEAR ELECTED
    NAME                    AGE          AS AN OFFICER      POSITION OR OFFICE
    ----                    ---          -------------      ------------------
<S>                         <C>          <C>                <C>
J. Ridley Howard             54               1984          Chairman of the Board, President
                                                            and Chief Executive Officer

Robert L. Fincher            59               1979          Senior Vice President

Harry V. Scott, Jr.          54               1990          Senior Vice President

Roger W. Fisher              49               2000          Senior Vice President, Chief Financial Officer and Treasurer

Norma Y. Christopher         52               1987          Vice President and Actuary
</TABLE>


                                       43
<PAGE>

         J. Ridley Howard was elected Chairman of the Board of Directors of the
Company, Mutual, Shield, CSI, and CSMR, effective January 1, 2001. Mr. Howard
continues to hold the offices of President and Chief Executive Officer of the
Company, Mutual, Shield, CSI, and CSMR, which he has held since 1989.

         Robert L. Fincher held the office of Senior Vice President with the
Company, Mutual and Shield, and has held that position during the previous five
years. Mr. Fincher announced his retirement effective January 1, 2002.

         Harry V. Scott holds the office of Senior Vice President with the
Company, Mutual and Shield. Mr. Scott was elected Senior Vice President
effective July 7, 2001. Mr. Scott previously served as Vice President of
Marketing with the Company, Mutual and Shield for the preceding five years.

         Roger W. Fisher held the office of Senior Vice President, Chief
Financial Officer and Treasurer with the Company, Mutual, Shield, CSI, and CSMR,
until his separation from the Company effective February 14, 2002. Mr. Fisher
previously served as Senior Vice President at Horace Mann Educators Group from
1998 through March 2000. From 1995 through 1997, Mr. Fisher was Vice
President-Controller at Horace Mann Educators Group.

         Norma Y. Christopher holds the office of Vice President-Actuary with
the Company and has held that position during the previous five years.

         Officers are elected at the meeting of the Board of Directors following
the Annual Meeting of Shareholders to serve for one year or until their
successors are elected.

ITEM 11.  EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                          LONG TERM COMPENSATION
                                               ANNUAL COMPENSATION(1)              -------------------------------------
NAME AND                                  ---------------------------------          RESTRICTED             ALL OTHER
PRINCIPAL POSITION                        YEAR         SALARY         BONUS        STOCK AWARDS(2)       COMPENSATION(3)
------------------                        ----         ------         -----        ---------------       ---------------
<S>                                       <C>        <C>            <C>            <C>                   <C>
J. Ridley Howard                          2001       $  52,602      $  95,424         $ 239,594               $   642
 CEO                                      2000          46,873        104,700           253,037                   735
                                          1999          42,370         83,723           203,015                   558

Robert L. Fincher                         2001       $  30,042      $ 40,896          $  75,971               $   642
  Senior Vice President                   2000          26,818        51,303             79,046                   735
                                          1999          24,697        40,612             50,875                   558

Harry V. Scott, Jr.                       2001       $  22,814      $ 27,264          $  23,067               $   642
  Senior Vice President                   2000          17,490        29,054             16,729                   735
                                          1999          16,000        24,367             11,891                   558

Roger W. Fisher (4)                       2001       $  26,870      $ 34,080          $  72,862                    --
  Senior Vice President,                  2000          16,548            --             73,088                    --
  CFO/Treasurer

Norma Y. Christopher                      2001       $ 132,769      $ 19,766          $  22,718               $ 4,980
  Vice President and Actuary              2000         123,000        21,987             13,698                 5,976
                                          1999         117,500        18,744             10,895                 5,000
</TABLE>


                                       44
<PAGE>

(1)      The salaries of certain executive officers of the Company are prorated
         among the Company, Mutual and Shield, based upon the premium income of
         each entity. Ms. Christopher's compensation is allocated entirely to
         the Company. Total compensation of the Company's executive officers for
         2001 from all affiliated corporations was $1,843,880 of which the
         Company paid $489,432.

(2)      The aggregate restricted stock holdings at the end of 2001 for Messrs.
         Howard, Fincher, Scott and Fisher were 86,888, 25,948, 6,418, and
         24,451 shares with values of $834,125, $249,100, $61,613, and $234,730
         respectively, based upon the value of the Company's Common Stock at
         December 31, 2001. Dividends on stock awards are paid at the same rate
         as paid to all share owners.

(3)      This amount equals the Company's 401(k) matching contribution, which is
         allocated on the same prorated basis as salaries.

(4)      Mr. Fisher joined the Company in April, 2000.


                                       45
<PAGE>

COMPENSATION PURSUANT TO PLANS

PENSION PLAN

         The Company is a participating employer in the Cotton States Employee
Retirement Income Plan (the "Plan"), which is a qualified pension plan sponsored
jointly with Mutual. The Plan covers all of the Company's salaried employees.

         The Plan provides a retirement income benefit at age 65 which is based
on the employee's number of years of service (maximum 35 years) and average
earnings during the five consecutive years (in the last ten years of employment)
in which the earnings are highest. Age 65 retirement benefit is derived as the
sum of (i) the product of the number of years of service times 85% of average
earnings and (ii) the product of the number of years of service times 55% of
"excess average earnings." Excess average earnings is the amount, if any, by
which the average earnings for a participant exceeds the 35 year average maximum
social security taxable wage base for all persons born in the same year as the
participant. The Plan also provides an early retirement benefit after age 55,
with no reduction in benefit entitlement due to age, when the sum of the
employee's age and years of credited service equals or exceeds 80. If the
employee has not obtained 80 points at retirement, the benefits are reduced 5%
for each year the retiree's age is less than 65. The Plan also contains a death
benefit for the surviving spouse of an employee (who had at least five years of
credited service) which is equal to 50% of the deceased employee's accrued
benefit. If the death occurs after termination from employment and prior to an
early retirement date, the spouse's benefit is reduced as for early retirement
income benefits. Accrued benefits under the Plan vest after the employee accrues
five years of service.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

         The Company adopted the Cotton States Supplement Executive Retirement
Plan ("SERP") effective January 1, 1992 in order to provide for a supplement
pension plan to replace pension benefits which were affected as a result of
amendments to the Internal Revenue Code of 1986, as amended ("IRC").

         The SERP is an agreement between the Company and employees meeting the
qualification provisions of the SERP in which the Company provides benefits in
excess of the limitations on benefits imposed by the IRC regarding highly
compensated employees. The SERP also replaces the pension accruals set forth
under the Plan as a result of the new benefit formulas mandated by the IRC which
resulted in amendments to the Plan. The SERP incorporates all of the terms and
conditions of the Plan and future amendments to the Plan. Mr. Howard is not a
participant in the SERP plan.


                                       46
<PAGE>

         The following table sets forth the estimated annual benefits payable
upon retirement at age 65 under the plans.

         PENSION PLAN AND SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN INCOME ANNUAL
         BENEFITS PAYABLE UPON RETIREMENT AT AGE 65

<TABLE>
<CAPTION>
FINAL AVERAGE REMUNERATION FROM
THE COMPANY AND MUTUAL FOR THE                                 YEARS OF SERVICE WITH THE
       HIGHEST FIVE YEARS                                         COMPANY AND MUTUAL
-------------------------------                -----------------------------------------------------------
                                                 15           20           25           30            35
                                                 --           --           --           --            --
<S>                                            <C>          <C>          <C>          <C>           <C>
             $125,000                          26,639       35,519       44,398       53,278        54,087

             $150,000                          32,889       43,852       54,815       65,778        66,337

             $175,000                          39,139       52,185       65,232       78,278        78,587

             $200,000                          45,389       60,519       75,648       90,778        90,837

             $225,000                          51,639       77,185       96,482      115,778       115,778

             $250,000                          57,889       77,837       97,297      116,756       116,756

             $300,000                          70,289       93,852      117,315      140,778       140,778

             $350,000                          82,889      110,519      138,148      165,778       165,778

             $400,000                          95,389      127,185      158,982      190,778       190,778

             $450,000                         107,889      143,852      179,815      215,778       215,778

             $500,000                         120,389      160,519      200,778      240,778       240,778
</TABLE>

         The benefits reflected in the preceeding table are in addition to an
employee's social security benefits. The Company has allocated its proportionate
share of retirement costs for the officers it shares with Mutual and Shield.

         Officers named in the summary Compensation Table have been credited
with the following years of service: J. Ridley Howard, 20 years; Roger W.
Fisher, 2 years; Robert L. Fincher, 40 years; Harry V. Scott, 13 years; and
Norma Y. Christopher, 14 years.

         The estimated annual retirement benefits under the plans for all
executive officers of the Company as a group from the participating companies
aggregate $378,192. This estimate assumes no change from 2001 salaries,
retirement at age 65, and continuous employment with the Company. Estimated
annual retirement benefits under the plans attributable solely to service with
the Company cannot be stated due to the allocation of service and compensation
among the Company and its affiliates.

INCENTIVE SAVINGS PLAN

         The Company participates in the Cotton States Incentive Savings and
Investment 401(k) Plan (the "401(k) Plan"). The 401(k) Plan is a qualified
savings incentive plan sponsored by the same companies that sponsor the
Company's Plan. The 401(k) Plan is open to all employees who have completed one
year of service and have


                                       47
<PAGE>

reached their twenty-first birthday. Eligible employees may contribute from 2%
to 10% of their compensation to the 401(k) Plan. The Company makes its matching
contribution based only on the first 6% of an employee's compensation, which is
not to exceed a maximum contribution of $11,000 per employee. The match is based
on the return on equity of the sponsoring companies. The Company's contribution
will not be less than 20% nor more than 60% of the employees contribution
eligible for matching. Employees are fully vested in the Company's contribution
after five years of service. Employees are not permitted to withdraw their
account before age 59 1/2 except in the event of death, disabilitY, termination
of employment or financial hardship.

INCENTIVE STOCK OPTIONS

         The Company has a qualified incentive stock option plan for its
officers and key employees and those of its subsidiaries, CSI and CSMR (the "ISO
Plan"). During 2001, no options were granted under the ISO Plan.

         At December 31, 2001, there were no options outstanding. During 2001,
there were no shares acquired through the exercise of options pursuant to the
ISO Plan.

DIRECTORS' DISCOUNTED STOCK OPTION PLAN

         The Company has a Directors' Discounted Stock Option Plan (the "DSOP").
The DSOP is designed to assist the Company in attracting, retaining and
compensating highly qualified individuals who are not employees of the Company
for service as members of the Board and to provide them with a proprietary
interest in the common stock of the Company. The Board believes the DSOP will be
beneficial to the Company and its shareholders by encouraging and enabling
non-employee directors to have a personal financial stake in the Company, in
addition to emphasizing their common interest with the shareholders in
increasing the value of the common stock of the Company in the long term.

         The DSOP provides for automatic yearly grants of options to purchase
shares of common stock of the Company to each director who elects to participate
in the DSOP. Each director who is not an employee of the Company or any of its
subsidiaries or affiliates may participate by filing with the Company an
irrevocable election to receive the grant of a stock option in lieu of part or
all of the fees which the director would have been entitled to receive for the
immediately preceding year for his or her service on the Board. Options will be
granted automatically on the date of the annual meeting of the Board as to any
director who, prior to the date of such annual meeting, has filed with the
Company an irrevocable election to participate in the DSOP.

         The number of shares of common stock of the Company subject to each
option granted to a director shall be determined by dividing (i) the director's
fee due to a director, by (ii) the fair market value of the common stock of the
Company on the date of grant, minus the option exercise price. The fair market
value of the common stock of the Company under the DSOP shall be the closing
price as reported on the Nasdaq National Market and the option exercise price
for each option granted shall be 50% of the fair market value, to be paid in
cash by the director upon exercise. All options granted under the DSOP will
expire ten years after the date of grant, subject to DSOP provisions relating to
the retirement of the director because of death, disability, or age. That
portion of an option granted under the DSOP which is attributable to any portion
of the directors' fees which is not earned due to termination as a director,
shall automatically abate and be canceled. In the event of the death of the
holder of any unexercised option, all of the holder's outstanding options will
become immediately exercisable upon the date of death by his or her legal
representative. No option may be exercised under the DSOP before the 12 month
anniversary of the date of grant.

         A total of 281,250 shares of Company common stock is reserved for
issuance under the DSOP (subject to adjustment for subsequent stock splits,
stock dividends and certain other changes in the common stock of the Company).
The Company has granted 72,720 options under the DSOP, including 16,602 options
to be granted automatically at the 2002 Annual Meeting. Upon the exercise of an
option, the Company will issue authorized but previously unissued shares.


                                       48
<PAGE>

If an option issued under the DSOP is terminated or canceled without having been
exercised, the shares which were not purchased thereunder will again become
available for issuance under the DSOP.

         Adjustments will be made in the number of shares subject to the DSOP
and in the purchase price of outstanding options in the event of any change in
the number of shares of common stock of the Company outstanding as a result of a
stock split or stock dividend, recapitalization, merger, consolidation, or other
similar corporate change.

PERFORMANCE SHARE AWARDS PLAN

         The Company has a Performance Share Awards Plan (the "PAR Plan"). The
PAR Plan is designed to reward employees of the Company, its subsidiaries and
affiliates for services performed on behalf of the Company, to stimulate
employees' efforts on behalf of the Company, to encourage such employees to
remain with the Company, and to provide them with an ownership interest in the
common stock of the Company. The Board believes the PAR Plan will be beneficial
to the Company and its shareholders by encouraging and enabling employees to
have a personal financial stake in the Company.

         The PAR Plan authorizes the Compensation Committee of the Board of
Directors to grant awards of shares of common stock of the Company to employees
of the Company designated by the Compensation Committee. The Compensation
Committee may grant performance share awards in shares of the common stock if
the performance of the Company, or any subsidiary, division or affiliate of the
Company selected by the Compensation Committee meets certain goals established
by the Compensation Committee during an award period. The Compensation Committee
would determine the goals, the maximum payment value of an award, and the length
of an award. In order to receive payment, a recipient of a performance share
award must remain in the employ of the Company until the completion of the award
period.

         An aggregate of 281,250 shares of common stock of the Company are
subject to the PAR Plan. Adjustments will be made in the number of shares
subject to an award in the event of any change in the number of shares of common
stock outstanding as a result of a stock split or stock dividend,
recapitalization, merger, consolidation, or other similar corporate change. The
Company has granted 259,309 shares under the PAR Plan of which 0 vested in 2001.
In the event of a change of control of the Company, as defined in the PAR Plan,
all awards granted prior to the change of control shall immediately vest and the
shares subject to the award shall be issued to the recipient of the award.

         Awards granted under the PAR Plan provide the recipients with the right
to acquire shares of Common Stock as follows:

<TABLE>
<CAPTION>
YEAR                     NUMBER OF SHARES               DATE GRANTED             EARLIEST VESTING              LATEST VESTING
----                     ----------------               ------------             ----------------              --------------
<S>                      <C>                            <C>                      <C>                           <C>
1999                         29,298                        2/24/99                    2/24/02                     2/24/06
2000                         63,225                        2/22/00                    2/23/03                     2/23/07
2001                         47,439                        2/21/01                    2/22/04                     2/22/08
</TABLE>


                                       49
<PAGE>

As of December 31, 2001, the following executive officers had been granted
awards to receive shares pursuant to the PAR Plan:

<TABLE>
<CAPTION>
                                               NUMBER OF SHARES VESTED
         NAME 1                                   INCLUDING DIVIDENDS                    NUMBER OF SHARES UNVESTED
         ------                                -----------------------                   -------------------------
         <S>                                   <C>                                      <C>
         J. Ridley Howard                                 0                                        86,888

         Robert L. Fincher                                0                                        25,948

         Harry V. Scott                                   0                                         6,418

         Roger W. Fisher                                  0                                        24,451

         Norma Y. Christopher                             0                                         5,683
</TABLE>

OTHER COMPENSATION

         Each executive officer is provided the use of one automobile by the
Company, Mutual and Shield, but is required to reimburse the Company, Mutual and
Shield for the personal use of the automobile. Officers are reimbursed for club
dues. The Company, Mutual and Shield are allocated these expenses under the same
formula on which salaries are prorated. The total cost of these expenses does
not exceed 10% of any executive officer's salary and bonus compensation.

COMPENSATION OF DIRECTORS

         During 2001, no director of the Company received any remuneration from
the Company in his capacity as a director except for fees, or options to receive
common stock in lieu of fees pursuant to the DSOP, and reimbursement for
expenses incurred in connection with attending directors' and committee
meetings. No director received cash compensation in excess of $23,600 for his
services as a director during 2001. Each director, other than J. Ridley Howard,
is paid an annual stipend of $7,000. Mr. Howard did not receive an annual
stipend in 2001. In addition, each director was paid $850 plus travel expenses
for each meeting of directors and $700 for each committee meeting of directors
attended. Each committee member, other than J. Ridley Howard, received an
additional $1,400 as an annual stipend and each committee chairman received
$2,000 as an annual stipend. The aggregate directors' fees for 2001 totaled
$163,464. There were no retirement benefits accrued or set aside during 2001 for
any director for his services as director. Upon reaching the mandatory
retirement age of 72, directors of the Company become directors emeritus and
receive stipends ranging from $600 to $11,000 annually for periods ranging from
15 years to life after the date of retirement. In February, 2000, the Board of
Directors eliminated the retirement stipends for any director retiring after
that date.

         In addition to the director compensation payable by the Company as
disclosed above, directors who are not employees of the Company are eligible to
participate in the DSOP which was approved by the shareholders of the Company at
the 1996 annual meeting. The DSOP, which is administered by the Compensation
Committee, permits the grant of stock options to directors of the Company who
are not employees of the Company at an exercise price equal to 50% of the
current market value at the date of grant as an alternative to the payment of
retainer and meeting fees in cash to the directors. Fractional shares are paid
in cash. During 2001, directors of the Company deferred fees in exchange for
remuneration in the form of stock options in lieu of cash as follows:


                                       50
<PAGE>

<TABLE>
<CAPTION>
                                                          OPTION                  OPTIONS
                                   FEES                  PRICE PER                 TO BE                EXPIRATION
NAME                             DEFERRED                  SHARE                  GRANTED                  DATE
----                             --------                ---------                -------               ----------
<S>                             <C>                       <C>                      <C>                   <C>   <C>
Cherry, Carol D.                $   9,750                 $  5.75                  1,693                 01/02/12
Coan, Gaylord O.                $  22,900                 $  5.75                  3,981                 01/02/12
Harris, Thomas A.               $  11,800                 $  5.75                  2,051                 01/02/12
McMahan, Robert C.              $  20,800                 $  5.75                  3,615                 01/02/12
Pittard, Darrell D.             $  15,650                 $  5.75                  2,720                 01/02/12
Swift, Mathews D.               $  14,625                 $  5.75                  2,542                 01/02/12
</TABLE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         The members of the Compensation Committee of the Board of Directors
during the fiscal year were Messrs. McMahan and Coan and Ms. Cherry. None of
these directors are or have been officers or employees of the Company or its
subsidiaries. With the exception of Mr. Howard, no executive officer of the
Company serves on the board of any other company other than an affiliate of the
Company. Mr. Howard is a member of the Board of Directors of Piedmont Bank.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

         The table below sets forth certain information about persons or
entities known by the Company to own beneficially more than 5% of the Company's
common stock, as of December 31, 2001. Except as noted below, the Company
believes that each of the persons or entities listed has sole investment and
voting power with respect to the shares included in the table.

<TABLE>
<CAPTION>
                                                                                              PERCENT
NAME AND ADDRESS                                     NUMBER OF SHARES OWNED(1)                OF CLASS
----------------                                     -------------------------                --------
<S>                                                  <C>                                      <C>
Shield Insurance Company                                    2,102,385(2)                        33.0
244 Perimeter Center Parkway
Atlanta, Georgia  30346

Fidelity Management & Research Company,                       612,500                            9.6
  a wholly owned subsidiary of
  FMR Corporation
82 Devonshire Street
Boston, Massachusetts 02109

Marvin Schwartz                                               492,982                            7.7
c/o Neuberger & Berman
605 Third Avenue
New York, New York 10158
</TABLE>

(1)      Under the rules of the U. S. Securities and Exchange Commission, a
         person is deemed to be beneficial owner of a security if he or she has
         or shares the power to vote or to direct the voting of such security,
         or the power to dispose or to direct the disposition of such security.
         A person is also deemed to be a beneficial owner of any securities that
         such a person has the right to acquire beneficial ownership of within
         60 days as well as any securities owned by such person's spouse,
         children or relatives living in the same household. Accordingly, more
         than one person may be deemed to be a beneficial owner of the same
         securities.

(2)      Shield is a wholly owned subsidiary of Mutual. The Board of Directors
         of Mutual is identical to the Board of Directors of the Company.


                                       51
<PAGE>

SECURITY OWNERSHIP OF MANAGEMENT

         The following table sets forth certain information about beneficial
ownership of the Company's common stock of each director and executive officer
of the Company and directors and officers as a group as of December 31, 2001.
All shares are owned outright without shared voting and investment power except
as set forth below.

<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER:                                   AMOUNT AND NATURE OF
DIRECTORS                                                   BENEFICIAL OWNERSHIP            PERCENT OF CLASS
-------------------------                                   --------------------            ----------------
<S>                                                         <C>                             <C>
Carol D. Cherry                                                       675(1)                       *

Gaylord O. Coan                                                       500(2)                       *

Thomas A. Harris                                                    5,187(3)                       *

J. Ridley Howard                                                   81,994(4)                      1.3

Robert C. McMahan                                                   2,109(5)                       *

Darrell D. Pittard                                                  2,000(6)                       *

Mathews D. Swift                                                      875(7)                       *

E. Jenner Wood, III                                                 1,405                          *

EXECUTIVE OFFICERS

Robert L. Fincher                                                  32,059(8)                       *

Roger W. Fisher                                                    10,000(9)                      *

Harry V. Scott                                                      6,000(10)                      *

Norma Y. Christopher                                               16,503(11)                      *

ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP (12)
(16 persons)                                                      166,734                         2.6
</TABLE>

(*)      Less than 1% not applicable

(1)      Does not include options to acquire 6,887 shares previously granted or
         options to acquire 1,693 shares to be granted automatically at the 2002
         Annual Meeting under the DSOP.

(2)      Does not include options to acquire 18,363 shares previously granted or
         options to acquire 3,981 shares to be granted automatically at the 2002
         Annual Meeting under the DSOP.

(3)      Does not include options to acquire 10,890 shares previously granted or
         options to acquire 2,051 shares to be granted automatically at the 2002
         Annual Meeting under the DSOP.

(4)      Does not include 86,888 shares plus accrued dividends awarded under the
         PAR Plan that have not vested.

(5)      Does not include options to acquire 13,894 shares previously granted or
         options to acquire 3,615 shares to be granted automatically at the 2002
         Annual Meeting under the DSOP.

(6)      Does not include options to acquire 2,720 shares to be granted
         automatically at the 2002 Annual Meeting under the DSOP.

(7)      Does not include options to acquire 6,084 shares preciously granted or
         options to acquire 2,542 shares to be granted automatically at the 2002
         Annual Meeting under the DSOP.

(8)      Does not include 25,948 shares plus accrued dividends awarded under the
         PAR Plan that have not vested.


                                       52
<PAGE>

(9)      Does not include 24,451 shares plus accrued dividends awarded under the
         PAR plan that have not vested.

(10)     Does not include 6,418 shares plus accrued dividends awarded under the
         PAR plan that have not vested.

(11)     Does not include 5,683 shares plus accrued dividends awarded under the
         PAR plan that have not vested.

(12)     Does not include 163,218 shares plus accrued dividends awarded under
         the PAR Plan that have not vested which would increase the percentage
         of outstanding shares for all officers and directors as a group to
         5.2%. Also does not include options to acquire 56,118 shares previously
         granted or options to acquire 16,602 shares to be granted automatically
         at the 2002 Annual Meeting under the DSOP.

CHANGES IN CONTROL

         None.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS WITH MANAGEMENT AND OTHERS

         Shield, which is wholly owned by Mutual, owns 2,102,385 shares or 33.0%
of the outstanding common stock of the Company. See Item 12.

         Certain general expenses are allocated to the Company by Mutual. These
expenses such as salaries, advertising, rents, and related expenses, represent
the Company's share of expenses initially paid by Mutual and are allocated based
on specific identification or, if indeterminable, generally on the basis of each
company's premium income. Expenditures allocated to the Company amounted to
$3,992,556 in 2001. See Item 1.

         Gaylord O. Coan, a director of the Company, served as President and CEO
of Gold Kist, Inc. through July 2001. Gold Kist Inc. owns no stock of the
Company. The Company shares offices with Mutual and Shield in a building owned
by a partnership of Mutual and Gold Kist. The Company is not a partner in the
partnership which owns the building and has no equity interest in the building.

         Gaylord O. Coan, a director of the Company, served as a director of
SunTrust Bank, Atlanta. E. Jenner Wood, III, a director of the Company, serves
as an executive officer of SunTrust Bank, Inc., and SunTrust Bank, Atlanta.
SunTrust Banks, Inc. received fees from the Company in 2001 for services
rendered as the transfer agent of the Company. SunTrust Bank, Atlanta, a
subsidiary of SunTrust Banks, Inc., received fees from the Company in 2001 for
investment and custodial services and leases of computer hardware.


                                       53
<PAGE>

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

FINANCIAL STATEMENTS

         The following consolidated financial statements and independent
auditors' report are incorporated by reference to Part II, Item 8 of this
report:

                  Independent Auditors' Report
                  Consolidated Balance Sheets, December 31, 2001 and 2000
                  Consolidated Statements of Earnings, Years ended
                       December 31, 2001, 2000 and 1999
                  Consolidated Statements of Shareholders' Equity, Years ended
                       December 31, 2001, 2000 and 1999
                  Consolidated Statements of Cash Flows, Years ended
                       December 31, 2001, 2000 and 1999
                  Consolidated Statements of Comprehensive Income, Years ended
                       December 31, 2001, 2000 and 1999
                  Notes to Consolidated Financial Statements


                                       54
<PAGE>

FINANCIAL STATEMENT SCHEDULES

         The following consolidated financial statement schedules and
independent auditors' report thereon are included herein:

                  Independent Auditors' Report on Financial Statement Schedules
                  Schedule I - Consolidated Summary of Investments,
                    December 31, 2001
                  Schedule IV - Reinsurance, Years ended December 31, 2001
                    2000 and 1999
                  Schedule V - Supplementary Insurance Information, Years
                    ended December 31, 2001, 2000 and 1999

         All other schedules are omitted as the required information is
inapplicable, or the information is presented in the consolidated financial
statements or related notes.

EXHIBITS

<TABLE>
<S>      <C>
3.1      Amended and Restated  Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3 to the
         Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 95074277).

3.2      Bylaws, as amended, of the Registrant (incorporated by reference to Exhibit 3 to the Registrant's Annual Report on
         Form 10-K for the year ended December 31, 1994, File No. 95074227).

10.1.1   Amended and Restated Directors' Discounted Stock Option Plan (incorporation by reference to Exhibit 10.1.1 to the
         Registrant's Annual Report on form 10-K for the year ended December 31, 1999, File No. 2-39729).

10.2     Performance Shares Awards Plan (incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement
         on Form S-8, Registration No. 333-00795).

10.3.1   Amended and Restated 1983 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.3.1 to the Registrant's
         Annual Report on Form 10-K for the year ended December 31, 1999, File No. 2-39729).

10.3.2   Form of Incentive Stock Option Agreement pursuant to the 1983 Incentive Stock Option Plan (incorporated by reference
         to Exhibit 10.3.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 2-39729).

11.      Statement re: Computation of Earnings per Share

21.      Subsidiaries of the Registrant.
</TABLE>

         All other exhibits are omitted as the required documents are
inapplicable.

REPORT ON FORM 8-K

         No report on Form 8-K was filed for the fourth quarter of 2001.


                                       55
<PAGE>

THE BOARD OF DIRECTORS AND SHAREHOLDERS
COTTON STATES LIFE INSURANCE COMPANY

Under date of February 26, 2002, we reported on the consolidated balance sheets
of Cotton States Life Insurance Company and subsidiaries (the "Company") as of
December 31, 2001 and 2000, and the related consolidated statements of earnings,
shareholders' equity, cash flows, and comprehensive income for each of the years
in the three year period ended December 31, 2001, as contained in the 2001
annual report to shareholders. Those consolidated financial statements and our
report thereon are included in the annual report on Form 10-K for the year 2001.
In connection with our audits of the aforementioned consolidated financial
statements, we also have audited the related financial statement schedules as
listed in Item 14. The financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits.

In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.



/s/KPMG LLP
Atlanta, Georgia
February 26, 2002


                                       56
<PAGE>

                                                                      SCHEDULE I

              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                       CONSOLIDATED SUMMARY OF INVESTMENTS
                                DECEMBER 31, 2001

<TABLE>
<CAPTION>
                                                                                                               Amount at Which
                                                                                              Fair               Shown on the
Type of Investments                                                     Cost                  Value             Balance Sheet
-------------------                                                --------------          ------------        ---------------
<S>                                                                <C>                     <C>                 <C>
Fixed maturities, held for investment:
    Bonds:
       Foreign governments                                         $      999,765             1,004,360               999,765
       Public utilities                                                 4,346,431             4,463,059             4,346,431
       All other corporate bonds                                        6,206,004             6,492,685             6,206,004
                                                                   --------------          ------------          ------------

         Total fixed maturities held for investment                    11,552,200            11,960,104            11,552,200

Fixed maturities, available for sale:
    Bonds:
       United States government and government
         agencies and authorities                                      50,859,038            51,917,459            51,917,459
       Foreign governments                                              2,862,035             3,091,612             3,091,612
       Public utilities                                                 8,495,268             8,593,935             8,593,935
       All other corporate bonds                                       68,087,460            68,361,804            68,361,804
                                                                   --------------          ------------          ------------

         Total fixed maturities available for sale                    130,303,801           131,964,810           131,964,810

Equity securities                                                       3,673,660             3,471,722             3,471,722

First mortgage loans on real estate                                     1,671,989             1,715,738             1,671,989

Policy loans                                                            9,661,247             9,661,247             9,661,247

Other investments                                                       1,000,000             1,000,000             1,000,000
                                                                   --------------          ------------          ------------

        Total investments                                          $  157,862,897           159,773,621           159,321,968
                                                                   ==============          ============          ============

</TABLE>

See accompanying independent auditors' report.


                                       57
<PAGE>

                                                                      SCHEDULE I

              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                                   REINSURANCE
                  YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999

<TABLE>
<CAPTION>
                                                                                                                         PERCENTAGE
                                                                      CEDED TO            ASSUMED                         OF AMOUNT
                                                     GROSS              OTHER           FROM OTHER             NET         ASSUMED
                                                    AMOUNT            COMPANIES        COMPANIES(1)          AMOUNT      TO NET (1)
                                               ---------------     --------------     --------------     --------------  ----------
<S>                                            <C>                 <C>                <C>                <C>             <C>
YEAR ENDED DECEMBER 31, 2001

     Life insurance inforce                    $ 5,041,438,000      1,333,597,000      1,229,093,000      4,936,934,000      24.9
                                               ---------------     --------------     --------------     --------------     -----

     Premiums:
         Life insurance                        $    33,524,955          4,329,538            923,435         30,118,852       3.1
         Accident/health insurance                     135,574             33,689                 --            101,885        --
                                               ---------------     --------------     --------------     --------------     -----
              Total                            $    33,660,529          4,363,227            923,435         30,220,737       3.1
                                               ===============     ==============     ==============     ==============     =====


YEAR ENDED DECEMBER 31, 2000

     Life insurance inforce                    $ 4,794,431,000      1,251,895,000        780,840,000      4,323,376,000      18.1
                                               ---------------     --------------     --------------     --------------     -----

     Premiums:
         Life insurance                        $    30,194,291          4,264,239            766,213         26,696,265       2.9
         Accident/health insurance                     151,733             31,475                 --            120,258        --
                                               ---------------     --------------     --------------     --------------     -----
              Total                            $    30,346,024          4,295,714            766,213         26,816,523       2.9
                                               ===============     ==============     ==============     ==============     =====


YEAR ENDED DECEMBER 31, 1999

     Life insurance inforce                    $ 4,444,114,000      1,113,206,000        733,058,000      4,063,966,000      18.0
                                               ---------------     --------------     --------------     --------------     -----

     Premiums:
         Life insurance                        $    26,382,782          3,886,199            667,688         23,164,271       2.9
         Accident/health insurance                     171,334             33,508                 --            137,826        --
                                               ---------------     --------------     --------------     --------------     -----
               Total                           $    26,554,116          3,919,707            667,688         23,302,097       2.9
                                               ===============     ==============     ==============     ==============     =====
</TABLE>

(1)      All reinsurance assumed results from participation in Federally
         sponsored group pools.

See accompanying independent auditors' report.


                                       58
<PAGE>

                                                                      SCHEDULE V

              COTTON STATES LIFE INSURANCE COMPANY AND SUBSIDIARIES
                       SUPPLEMENTARY INSURANCE INFORMATION
                           DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                     DEFERRED                                     POLICY
                                                                      POLICY                 FUTURE             CLAIMS AND
                                                                    ACQUISITION              POLICY              BENEFITS
                                                                       COSTS                BENEFITS              PAYABLE
                                                                   -------------          ------------          ----------
<S>                                                                <C>                    <C>                   <C>
Segment

At December 31, 2001

         Individual                                                $  51,660,808           145,697,477           1,941,494
         Group                                                                --                39,833             255,126
                                                                   -------------          ------------          ----------

             Total                                                 $  51,660,808           145,737,310           2,196,620
                                                                   =============          ============          ==========

At December 31, 2000

         Individual                                                $  46,856,705           132,612,776           2,083,581
         Group                                                                --                41,811             214,643
                                                                   -------------          ------------          ----------

              Total                                                $  46,856,705           132,654,587           2,298,224
                                                                   =============          ============          ==========

</TABLE>

See accompanying independent auditors' report.


                                       59
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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.

COTTON STATES LIFE INSURANCE COMPANY



J. Ridley Howard             02/26/02     William J. Barlow            02/26/02
-------------------------------------     -------------------------------------
                                 DATE                                      DATE
Chairman of the Board of Directors/           Vice President/Controller
President and Chief Executive Officer         and Assistant Treasurer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.



Carol Cherry                 02/26/02     Robert McMahan               02/26/02
-------------------------------------     -------------------------------------
Director                         DATE     Director                         DATE



Gaylord Coan                  2/26/02     Darrell Pittard              02/26/02
-------------------------------------     -------------------------------------
Director                         DATE     Director                         DATE



Thomas Harris                02/26/02     Mathews Swift                02/26/02
-------------------------------------     -------------------------------------
Director                         DATE     Director                         DATE



J. Ridley Howard             02/26/02     Jenner Wood, III             02/26/02
-------------------------------------     -------------------------------------
Director                         DATE     Director                         DATE


                                       60