---

## UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

## FORM 10-Q

(Mark One)

|X|               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

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 1-12338

VESTA INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)

|Delaware                                 | 63-1097283         
|---------------------------------------- | -------------------
|(State of other jurisdiction of          | (I.R.S. Employer   
|incorporation or organization)           | Identification No.)
|                                         |                    
|3760 River Run Drive                     | 35243              
|Birmingham, Alabama                      | (Zip Code)         
|(Address of principal executive offices) |                    

(205) 970-7000(Registrant's telephone number, including area code)

Not Applicable(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. |X|   Yes      |_|    No

Indicate the number of
shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date.

The number of shares outstanding of the registrant's common stock,
$.01 par value, as of May 9, 2003
36,678,060

---

Vesta Insurance Group, Inc.

Index

|Part I  | Financial Information                                                                 | Page
|------- | ------------------------------------------------------------------------------------- | ----
|Item 1. | Financial Statements:                                                                 |     
|        | Consolidated Balance Sheets at March 31, 2003 and December 31, 2002                   | 1   
|        | Consolidated Statements of Income and Comprehensive Income for the                    |     
|        | Three Months ended March 31, 2003 and 2002                                            | 2   
|        | Consolidated Statements of Cash Flows for three months ended March 31, 2003 and 2002  | 3   
|        | Notes to Consolidated Financial Statements                                            | 4   
|Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 10  
|Item 3. | Quantitative and Qualitative Disclosures About Market Risk                            | 15  
|Item 4. | Controls and Procedures                                                               | 15  
|        |                                                                                       |     
|
|Item 1. | Legal Proceedings                                                                     | 16  
|Item 2. | Changes in Securities                                                                 | 18  
|Item 3. | Defaults Upon Senior Securities                                                       | 18  
|Item 4. | Submission of Matters to a Vote of Securities                                         | 18  
|Item 5. | Other Information                                                                     | 18  
|Item 6. | Exhibits and Reports on Form 8-K                                                      | 19  
|        | Certifications                                                                        | 21  

---

##### Part I
Item 1. Financial Statements
Vesta Insurance Group, Inc.
Consolidated Balance Sheets
(amounts in thousands, except share and per share data)

|                                                                             | March 31,
2003 | December 31,
2002
|---------------------------------------------------------------------------- | -------------- | -----------------
|
|Assets:                                                                      |                |                  
|Fixed maturities available for sale - at fair value (cost:  2003 - $856,810; |                |                  
|2002 - $829,682)                                                             |                |                  
|Equity securities-at fair value: (cost: 2003- $29,781; 2002- $26,072)        |                |                  
|Mortgage loans                                                               |                |                  
|Policy loans                                                                 |                |                  
|Short-term investments                                                       |                |                  
|Other invested assets                                                        |                |                  
|                                                                             |                |                  
|Total investments                                                            |                |                  
|Cash                                                                         |                |                  
|Accrued investment income                                                    |                |                  
|Premiums in course of collection (net of allowances for losses               |                |                  
|of $897 in 2003 and 2002)                                                    |                |                  
|Reinsurance balances receivable                                              |                |                  
|Reinsurance recoverable on paid losses                                       |                |                  
|Deferred policy acquisition costs                                            |                |                  
|Property and equipment                                                       |                |                  
|Deferred income taxes                                                        |                |                  
|Assets held for sale                                                         |                |                  
|Goodwill                                                                     |                |                  
|Other intangible assets                                                      |                |                  
|Other assets                                                                 |                |                  
|                                                                             |                |                  
|Total assets                                                                 |                |                  
|                                                                             |                |                  
|Liabilities:                                                                 |                |                  
|Policy liabilities                                                           |                |                  
|Losses and loss adjustment expenses                                          |                |                  
|Unearned premiums                                                            |                |                  
|Federal Home Loan Bank advances                                              |                |                  
|Reinsurance balances payable                                                 |                |                  
|Short term debt                                                              |                |                  
|Long term debt                                                               |                |                  
|Liabilities held for sale                                                    |                |                  
|Other liabilities                                                            |                |                  
|                                                                             |                |                  
|Total liabilities                                                            |                |                  
|Commitments and contingencies: See Note B                                    |                |                  
|Deferrable Capital Securities                                                |                |                  
|Stockholders' equity:                                                        |                |                  
|Preferred stock, $.01 par value, 5,000,000 shares authorized, issued:        |                |                  
|2003 - 0 and 2002 - 0                                                        |                |                  
|Common stock, $.01 par value, 100,000,000 shares authorized,  issued:        |                |                  
|2003 and 2002 - 38,143,037                                                   |                |                  
|Additional paid-in capital                                                   |                |                  
|Accumulated other comprehensive income, (net of  tax expense                 |                |                  
|of $7,763 and $8,131 in 2003 and 2002, respectively)                         |                |                  
|Retained earnings                                                            |                |                  
|Treasury stock (2,464,977 shares at cost at March 31, 2003 and               |                |                  
|December 31, 2002, respectively)                                             |                |                  
|Unearned stock                                                               |                |                  
|                                                                             |                |                  
|Total stockholders' equity                                                   |                |                  
|                                                                             |                |                  
|Total liabilities, deferrable capital securities                             |                |                  
|and stockholders' equity                                                     |                |                  
|                                                                             |                |                  

See accompanying Notes to Consolidated Financial Statements

1

---

##### Vesta Insurance Group, Inc.
Consolidated Statements of Operations and Comprehensive Income
Statements of Operations
(amounts in thousands, except per share data)

|                                                                          | Three months ended
March 31, | 
|------------------------------------------------------------------------- | ---------------------------- | 
|
|
|Revenues:                                                                 |                              | 
|Net premiums written                                                      |                              | 
|Change in unearned premiums                                               |                              | 
|                                                                          |                              | 
|Net premiums earned                                                       |                              | 
|Policy fees                                                               |                              | 
|Agency fees and commissions                                               |                              | 
|Net investment income                                                     |                              | 
|Realized gains                                                            |                              | 
|Other                                                                     |                              | 
|                                                                          |                              | 
|Total revenues                                                            |                              | 
|Expenses:                                                                 |                              | 
|Policyholder benefits                                                     |                              | 
|Losses and loss adjustment expenses incurred                              |                              | 
|Policy acquisition expenses                                               |                              | 
|Operating expenses                                                        |                              | 
|Interest on debt                                                          |                              | 
|Gain on debt extinguishment                                               |                              | 
|Other intangible amortization                                             |                              | 
|                                                                          |                              | 
|Total expenses                                                            |                              | 
|Income (loss) from continuing operations before taxes, minority interest, |                              | 
|and deferrable capital securities                                         |                              | 
|Income tax expense                                                        |                              | 
|Minority interest, net of tax                                             |                              | 
|Deferrable capital security distributions, net of tax                     |                              | 
|                                                                          |                              | 
|Net income (loss) from continuing operations                              |                              | 
|Gain (loss) from discontinued operations, net of tax                      |                              | 
|                                                                          |                              | 
|Net income (loss)                                                         |                              | 
|Gain on redemption of preferred securities, net of tax                    |                              | 
|                                                                          |                              | 
|Net income (loss) available to common shareholders                        |                              | 
|                                                                          |                              | 
|Net income (loss) from continuing operations per share - Basic            |                              | 
|                                                                          |                              | 
|Net income (loss) available to common shareholders per share - Basic      |                              | 
|                                                                          |                              | 
|Net income (loss) from continuing operations per share - Diluted          |                              | 
|                                                                          |                              | 
|Net income (loss) available to common shareholders per share - Diluted    |                              | 
|                                                                          |                              | 
|Statements of Comprehensive Income (Loss)                                 |                              | 
|Net income (loss)                                                         |                              | 
|Other comprehensive income, net of tax:                                   |                              | 
|Unrealized holding (losses) gains on available-for-sale                   |                              | 
|securities net of tax of $559 and $(2,943), respectively                  |                              | 
|Less realized (losses) gains on available-for-sale                        |                              | 
|securities net of tax of $1,228 and $380, respectively                    |                              | 
|                                                                          |                              | 
|                                                                          |                              | 
|Gain on redemption of preferred securities, net of tax of                 |                              | 
|$0 and $113, respectively                                                 |                              | 
|                                                                          |                              | 
|Comprehensive (loss) income                                               |                              | 
|                                                                          |                              | 

See accompanying Notes to Consolidated Financial Statements

2

---

##### Vesta Insurance Group, Inc.
Consolidated Statement of Cash Flows
(amounts in thousands)

|                                                                           | Three months ended March 31, | 
|-------------------------------------------------------------------------- | ---------------------------- | 
|
|
|Operating Activities:                                                      |                              | 
|Net income                                                                 |                              | 
|Adjustments to reconcile net loss to cash provided by (used in) operations |                              | 
|Changes in:                                                                |                              | 
|Loss and LAE reserves, and future policy liabilities                       |                              | 
|Unearned premium reserves                                                  |                              | 
|Reinsurance balances receivable                                            |                              | 
|Premiums in course of collection                                           |                              | 
|Reinsurance recoverable on paid losses                                     |                              | 
|Reinsurance balances payable                                               |                              | 
|Other assets and liabilities                                               |                              | 
|Policy acquisition costs deferred                                          |                              | 
|Policy acquisition costs amortized                                         |                              | 
|Realized gains                                                             |                              | 
|Amortization and depreciation                                              |                              | 
|Gain on extinguishment of debt                                             |                              | 
|                                                                           |                              | 
|Net cash provided by (used in) operations                                  |                              | 
|Investing Activities:                                                      |                              | 
|Investments sold:                                                          |                              | 
|Fixed maturities available for sale                                        |                              | 
|Equity securities                                                          |                              | 
|Investments acquired:                                                      |                              | 
|Fixed maturities available for sale                                        |                              | 
|Equity securities                                                          |                              | 
|Maturities, paydowns, calls and other                                      |                              | 
|Fixed maturities available for sale                                        |                              | 
|Net decrease in other invested assets                                      |                              | 
|Net cash received (paid) for acquisition                                   |                              | 
|Net increase in short-term investments                                     |                              | 
|Assets held for sale                                                       |                              | 
|Additions to property and equipment                                        |                              | 
|Disposal of property and equipment                                         |                              | 
|                                                                           |                              | 
|Net cash used in investing activities                                      |                              | 
|Financing Activities:                                                      |                              | 
|Net change in FHLB borrowings                                              |                              | 
|Change in long and short-term debt                                         |                              | 
|Net deposits and withdrawals from insurance liabilities                    |                              | 
|Acquisition of common stock                                                |                              | 
|Dividends paid                                                             |                              | 
|                                                                           |                              | 
|Net cash provided by (used in) financing activities                        |                              | 
|Decrease in cash                                                           |                              | 
|Cash at beginning of period                                                |                              | 
|                                                                           |                              | 
|Cash at end of period                                                      |                              | 
|                                                                           |                              | 

See accompanying Notes to Consolidated Financial Statements

3

---

##### Vesta Insurance Group, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands except per share amounts)

Note A-Significant Accounting Policies

Basis of Presentation:The accompanying  unaudited interim financial  statements have been prepared in conformity with accounting
principles  generally  accepted in the United States and, in the opinion of management,  reflect all adjustments  (consisting of normal
recurring  accruals)  necessary for a fair  presentation of results for such periods.  The results of operations and cash flows for any
interim period are not necessarily  indicative of results for the full year. These financial  statements  should be read in conjunction
with the  financial  statements  and related  notes which have been issued by the Company and filed with the  Securities  and  Exchange
Commission.

Reclassifications:  Certain  amounts  in the  financial  statements  presented  have been  reclassified  from  amounts  previously
reported in order to be  comparable  between  periods.  These  reclassifications  have no effect on previously  reported  stockholders'
equity or net income during the periods involved.

New Accounting  Standards:  Effective January 1, 2002, Vesta adopted SFAS No. 144,  "Accounting for the Impairment or Disposal of
Long-Lived  Assets",  which had been issued by the FASB in October  2001.  SFAS No. 144  provides a single  model for  treatment of the
disposal of  long-lived  assets.  SFAS  No. 144  supersedes  SFAS No. 121  "Accounting  for  Impairment  of  Long-Lived  Assets and for
Long-Lived  Assets to be Disposed of" and the  accounting  and reporting  provisions of APB Opinion  No. 30,  "Reporting the results of
Operations-Reporting  the Effects of Disposal of a Segment of a Business, and Extraordinary,  Unusual and Infrequently Occurring Events
and  Transactions."  Adoption of SFAS  No. 144 did not have a material  impact on Vesta's  financial  position,  results of
operations  or cash  flows  other  than the  classification  of certain  items in our  statements  of  financial  position,  results of
operations and cash flow.

Effective July 1, 2002,  Vesta adopted SFAS No. 145,  "Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement
No.  13,  and  Technical  Corrections",  which had been  issued by the FASB in April  2002.  SFAS No.  145  rescinds  SFAS No. 4, which
required all gains and losses from  extinguishments  of debt to be aggregated and, if material,  classified as an  extraordinary  item,
net of related  income tax effect.  As a result,  the  criteria  in APB  Opinion  No. 30, will now be used to classify  those gains and
losses.  SFAS No.  64  amended  SFAS No. 4, and is no  longer  necessary  because  SFAS No. 4 has been  rescinded.  SFAS No. 44 and the
amended  sections  of SFAS No.  13 are not  applicable  to Vesta  and,  therefore,  have no  effect  on our  financial  statements.  In
connection  with our adopting SFAS No. 145 on July 1, 2002, we  reclassified  gains on the  extinguishment  of debt from  extraordinary
gain on debt  extinguishment  to other expense in our third quarter  financial  statements.  These  reclassifications  decreased  other
expense by $.0 million and $1.4 million for the quarters ending March 31, 2003 and 2002, respectively.

In November 2002, the FASB issued FASB  Interpretation No. ("FIN") 45, "Guarantor's  Accounting and Disclosures  Requirements for
Guarantees,  Including  Indirect  Guarantees of Indebtedness of Others." FIN 45 clarifies the  requirements of SFAS No. 5,  "Accounting
for Contingencies,"  related to a guarantors accounting for, and disclosures of, the issuance of certain types of guarantees.  Vesta is
required to adopt the provisions  for initial  recognition  and  measurement  for all guarantees  issued or modified after December 31,
2002 on a prospective  basis.  Management has determined that there will be no material impact on Vesta's financial position or results
of operations related to the initial recognition and measurement guarantees of this Interpretation.

In December 2002, the FASB issued SFAS No. 148,  "Accounting  for  Stock-Based  Compensation - Transition and  Disclosure".  This
statement is effective for 2003 and amends SFAS No. 123,  "Accounting for Stock-Based  Compensation" by providing  alternative  methods
of transition for a voluntary change to the fair value based method of accounting for stock-based employee  compensation.  In addition,
SFAS No. 148 requires additional  disclosures related to the effect of stock-based  compensation on reported results. Vesta is currently reviewing its treatment of stock-based compensation as well as the impact of this pronouncement.

In January 2003,  the FASB issued FIN 46,  "Consolidation  of Variable  Interest  Entities"  which  clarifies the  application of
Accounting  Research  Bulletin  No.  51,   "Consolidated   Financial   Statements."  This  Interpretation   provides  guidance  on  the
identification and consolidation of variable interest entities  ("VIEs"),  whereby control is achieved through means other than through
voting rights. Implementation of FIN 46 did not have a material impact on Vesta's financial  position,  results of operations or cash flows
other than the classification of certain items in our statements of financial position, results of operations and cash flow.

In May 2002, the Derivatives  Implementation Group of the FASB exposed for comment issue No. B36, "Bifurcation of Embedded Credit
Derivatives"  ("DIG B36").  DIG B36 would require the bifurcation of potential  embedded  derivatives  within modified  coinsurance and
funds withheld  coinsurance  arrangements in which the terms require the future payment of a principal  amount plus a return based on a
specified  proportion of the ceding  company's  return on either its general account assets or a specified  block of those assets.  The
proposed  effective date of the  implementation  guidance in DIG B36 is for the first fiscal quarter  beginning after June 15, 2003 and
would be applied on a prospective basis.  The Company is currently evaluating the impact of this pronouncement.

Restricted  Assets:  As part of a modified  coinsurance  agreement with Employers  Reinsurance  Corporation,  American Founders is
holding $167.6 million of assets for the benefit of Employers,  of which $165.8 million are included in fixed maturities  available for
sale herein.

Income per Share: Basic EPS is computed by dividing income available to common  shareholders by the weighted average common shares
outstanding  for the period.  Diluted EPS is  calculated  by adding to shares  outstanding  the  additional  net effect of  potentially
dilutive  securities or contracts  which could be exercised or converted  into common shares  except when the  additional  shares would
produce anti-dilutive results.

4

---

Reconciliation of income available to common shareholders and average shares outstanding for the three months ending March 31, 2003
and 2002 are as follows:

|                                            | Three months ended March 31, | 
|------------------------------------------- | ---------------------------- | 
|
|Net income available to common shareholders |                              | 
|                                            |                              | 
|Weighted average shares outstanding-basic   |                              | 
|Stock options and restricted stock          |                              | 
|                                            |                              | 
|Weighted average shares outstanding-diluted |                              | 
|                                            |                              | 

Earnings per share for discontinued operations for the three months ended March 31, 2003 and 2002 are as follows:

|                            | 2003 | 2002
|--------------------------- | ---- | ----
|Basic Earnings per share:   |      |     
|Discontinued Operations     |      |     
|Diluted Earnings per share: |      |     
|Discontinued Operations     |      |     

Note B-Commitments and Contingencies

Securities Litigation

In 2001, Vesta settled a securities class action that had been pending since 1998.  In connection with that settlement, the issuer of our primary directors' and officers' insurance policy, which was intended
to cover the initial $25 million of settlement costs and related expenses, denied coverage and refused to fund its share of the
settlement costs.  We sued that insurer in Alabama state court alleging that its action was taken in bad faith.   In February 2003,
we settled that claim and collected $16 million in cash.

Health insurance related lawsuits

Vesta and two  former  officers  of Vesta are  defendants  in a lawsuit  styled  James H.  Cashion,  Jr.  d/b/a  American  Health
Underwriters v. Vesta Insurance Group,  Inc., et al, Plaintiff,  a former general agent of our subsidiary States General Life Insurance
Company,  which we purchased in 2001,  alleges that the defendants  engaged in an actionable civil  conspiracy to tortiously  interfere
with his agency  contracts.  The civil conspiracy claim is premised,  in part, on certain payments made to these two former officers of
Vesta by another  agent who replaced Mr.  Cashion.  The  plaintiff is seeking  actual and  punitive  damages.  Vesta denies  tortiously
interfering with plaintiff's agency contract,  believes the claims asserted against it have no merit, and is vigorously  defending this
lawsuit.  In the opinion of  management, resolution of this lawsuit is not expected to have a material adverse effect on our financial position.

On December 30, 2002, States General provided the  contractually  required notice of termination of its exclusive agency contract
with Jimmy  Walker,  Sr., and that contract  will expire in  accordance  with its terms on June 30, 2003. At the same time,  another of
our  affiliates  ceased  loaning money to Mr. Walker and exercised its right to receive  certain  commissions  earnings on the policies
placed in force by Mr.  Walker,  which Mr. Walker had assigned to us as collateral  for his  indebtedness  to us. At December 31, 2002,
the  outstanding  balance owed by Mr. Walker was  approximately  $2.5 million.  Mr. Walker  contended that these actions  constituted a
premature  termination of his agency contracts and threatened  litigation.  In the interest of resolving this issue  expeditiously,  we
filed a lawsuit in Jefferson  County,  Alabama  seeking a declaratory  judgment that our receipt of these  assigned  commissions  is in
accordance  with an enforceable  collateral  assignment of commissions  document and otherwise  lawful.  We also filed for  arbitration
seeking a declaration  that our actions were in accordance  with our agency  contracts  with Mr.  Walker and otherwise  lawful.  In the
opinion of management, resolution of this lawsuit is not expected to have a material adverse effect on our financial position.

Life insurance related lawsuits

Our subsidiary,  American Founders, is a defendant in a lawsuit brought by a judgment creditor of IFS Holdings, Inc. - the former
holder of American  Founders'  series A and C preferred  stock - alleging  that  American  Founders  redeemed its Series A and Series C
preferred stock from IFS Holdings,  Inc. for less than "reasonably equivalent value," and, therefore,  engaged in a voidable fraudulent
transfer.  American  Founders  believes (i) that the redemption  transaction  was for reasonably  equivalent  value;  and (ii) that the
allegations  brought  against it in this  lawsuit are  without  merit.  We have  vigorously  defended  this  action.  In the opinion of
management,  resolution  of the  lawsuit  is not  expected  to have a  material  adverse  effect on our  financial  position.  However,
depending upon the amount and timing,  an unfavorable  resolution of this matter could  materially  affect  American  Founders'  future
operations or cash flows in a particular period.

Indemnification Agreements and Liability Insurance

Pursuant to Delaware law and our by-laws, we are obligated to indemnify our current and former officers and directors for
certain liabilities arising from their employment with or services to Vesta, provided that their conduct complied with certain
requirements.  Pursuant to these obligations, we have been funding costs of defense and other expenses on behalf of certain current
and former officers and directors, subject to an undertaking from such individuals to repay any amounts advanced in the event a court
determines that they are not entitled to indemnification.

5

---

Reinsurance Arbitration/Litigation

As discussed in previous SEC filings,  in 1998 we corrected our accounting for assumed  reinsurance  business through restatement
of our previously  issued  financial  statements.  Similar  corrections  were made on a statutory  accounting  basis through  recording
cumulative  adjustments  in Vesta Fire's 1997  statutory  financial  statements.  The impact of this  correction  has been reflected in
amounts  ceded under our 20 percent  whole account  quota share treaty which was  terminated  on June 30, 1998 on a run-off  basis.  We
believe such treatment is appropriate under the terms of this treaty and have calculated the quarterly  reinsurance  billings presented
to the three treaty  participants  accordingly.  The aggregate amount included herein as recoverable from such reinsurers totaled $33.4
million at March 31, 2003.  Additionally,  we have previously collected  approximately $48.5 million from the drawdown of collateral on
hand.  Such amount, net of related expenses, has been reflected in the 2002 financial statements.

NRMA Insurance Ltd.  ("NRMA"),  one of the  participants  in the 20 percent whole account quota share treaty,  filed a lawsuit in
the United States District Court for the Northern  District of Alabama  contesting our billings.  NRMA sought  rescission of the treaty
and a temporary  restraining  order preventing us from drawing down  approximately  $34.5 million of collateral.  We filed a demand for
arbitration  as  provided  for in the treaty  and also  filed a motion to compel  arbitration  which was  granted in the United  States
District  Court action.  Vesta reached an agreement  with NRMA to collect the $34.5 million of collateral in exchange for posting a $25
million  letter of credit in favor of NRMA to fund any  amounts  NRMA may  recover  as a result of the  arbitration.  We also filed for
arbitration  against Alfa Mutual Insurance  Company and Dorinco  Reinsurance  Company,  the other two  participants on the treaty.  All
those  arbitrations  are in the discovery  stages.  Additionally,  Alfa filed a Motion for Declaratory  Judgment asking the arbitration
panel to order  that  there is no  enforceable  agreement  between  Alfa and Vesta or  alternatively,  that  there is no  coverage  for
developmental  losses under the treaty.  After a hearing in June 2002, the arbitration  panel denied Alfa's motion.  The hearing on the
merits of the  arbitration  with Alfa was scheduled for May 2003.  However,  on April 21, 2003, Alfa filed a lawsuit against Vesta Fire
in state court in  Montgomery,  Alabama  seeking a declaration  from the Court on certain  procedural  and  organizational  matters and
requesting that the Court stay the arbitration  proceedings  during the pendency of the litigation in state court in Alabama.  On April
24, 2003, the Court issued a temporary  restraining  order staying the proceedings in the ongoing  arbitration in order to maintain the
status quo until the merits of Alfa's  petition can be heard and  determined.  The lawsuit  filed by Alfa will delay  indefinitely  the
Alfa  arbitration  proceedings  but it is  too  early  to  determine  if the  litigation  will  delay  proceedings  in  the  other  two
arbitrations.  On June 19, 2002,  the panel in the NRMA  arbitration  issued an order to bifurcate  the  arbitration,  and  scheduled a
hearing for the week of October 28, 2002 to decide the issue of coverage for  developmental  losses  under the treaty.  On September 6,
2002, the panel notified the parties that it would make such  determination on this specific issue on the papers and filings  submitted
by the parties  without the  necessity  of a live  hearing.  On November 6, 2002,  the Company was  notified by the panel that it ruled
that the treaty  does not apply to loss  occurrences  prior to July 1,  1997.  As a result,  Vesta  recorded  a $23.6  million  pre-tax
non-operating  charge as a revision of our estimated  reinsurance  recoverable  in the third quarter of 2002.  This ruling does not set
a binding precedent  regarding  Vesta's other  arbitrations  and,  accordingly,  we have not recorded any change in our estimate of our
recoverable  from the other treaty  participants  as a result of this ruling.  In February  2003,  Vesta filed a petition to vacate the
NRMA panel ruling in the U.S.  District  Court for the Northern  District of Alabama.  On April 8, 2003, the Court ruled that since the
arbitration  proceedings have not been fully  exhausted,  it was dismissing  Vesta's petition without  prejudice of the parties to seek
the Court's review of any final  arbitration  award.  The hearing in the NRMA  arbitration  is currently  scheduled to begin on October
20, 2003,  and is estimated to take  approximately  two weeks.  On December 16, 2002,  Dorinco filed a motion seeking an order that the
treaty  does not  cover  developmental  losses.  On May 1,  2003,  the panel in the  Dorinco  arbitration  ruled  that  Dorinco  is not
responsible  for losses on any policy or any other  insurance or  reinsurance  contract  terminated  prior to July 1, 1997 and that the
arbitration  will continue with respect to losses whenever  occurring,  on policies or any other  insurance or reinsurance  contract in
force at July 1, 1997.  The hearing in the Dorinco  arbitration  is currently  scheduled to begin on December 1, 2003, and is estimated
to take  approximately  two weeks.  Based on a current  estimate of the impact of this ruling and the ruling  previously  received from
the NRMA panel, we currently believe our estimated  recoverable is appropriate.  However,  we are continuing to evaluate the effects of
complying with these rulings and our estimate may change in the future as a result of this evaluation.

While management continues to believe its interpretation of the treaty's terms and computations based thereon are correct,  these
matters are being  contested in these  arbitration  proceedings  and their  ultimate  outcome  cannot be  determined  at this time.  If
rescission on all three treaties was awarded by three  separate  arbitration  panels,  we would incur a charge of  approximately  $57.0
million.

We are in arbitration  with CIGNA Property and Casualty  Insurance  Company (now ACE USA) under a personal lines  insurance quota
share  reinsurance  agreement,  whereby we assumed certain risks from CIGNA.  During September 2000, CIGNA filed for arbitration  under
the reinsurance  agreement,  seeking  payment of the balances that CIGNA claimed were due under the terms of the treaty.  At that time,
the treaty was  terminated on a cut-off  basis.  In the pending  arbitration  Vesta is seeking,  among other things,  recoupment of all
believed  improper claims payments and excessive  expense  allocations and charges from CIGNA.  The arbitration was bifurcated into two
phases with Phase I concentrating on the  interpretation of the intent of the parties related to the expense  reimbursement  provisions
of the treaty at the time it was entered.  Phase II, which is ongoing,  relates to any remaining issues between the parties,  including
those that exist with  regard to an audit of expenses  ceded to the treaty  which  Vesta  intends to  conduct.  The Phase I hearing was
held in February 2002 and the panel ruled that (i) the Company is  responsible  for the payment of ceding  commissions  provided for in
the treaty and should pay any outstanding  billings for commissions and paid claims,  plus interest;  (ii) the Company may proceed with
an audit of  expenses  ceded to the  treaty;  and (iii) the  parties  should  identify  any  further  issues to be  brought  before the
arbitration panel for phase two of the hearing.    The Phase II hearing has not yet been scheduled.

If the amounts  recoverable under the relevant treaties are ultimately  determined to be materially less than the amounts that we
have reported as  recoverable,  we may incur a  significant,  material,  and adverse  impact on our financial  condition and results of
operations.

Muhl vs. Vesta is a case pending in the supreme Court of the State of New York, County of New York,  brought by the Liquidator of
Midland Insurance Company  ("Midland"),  claiming  recoveries under two alleged  retrocession  agreements (Pool I and Pool III) between
Midland and Interstate Fire Insurance  Company,  Vesta's  predecessor in interest.  The Liquidator's  claims against Vesta under Pool I
and Pool III have been severed.

Third party auditors hired by Vesta have  identified  coverage  issues that cast doubt on the validity of a number of claims.  In
addition,  there is no actual  retrocessional  agreement that evidences the terms and conditions of Pool III which involves 71% or more
of the incurred  losses at issue.  Although  there are other  tangential  documents that the Liquidator may attempt to rely on to prove
liability  under Pool III, we believe  that the  Liquidator  will not be able to  establish  liability  for any portion of the Pool III
claims.  We also believe that a number of the losses allegedly  incurred in connection with Pool I may be avoided on specific  coverage
grounds.  We are defending this matter vigorously and are reasonably  optimistic  regarding the ultimate  outcome,  although an adverse
ruling in this case could have a material effect on our financial condition.

6

---

Nichols vs. Vesta Fire  Insurance  Corporation is a lawsuit  brought by the  Liquidator of Delta America Re Insurance  Company in
Kentucky state court to recover  losses alleged under  reinsurance  contracts  entered into in the 1970's.  Vesta removed the action to
federal  court and  successfully  moved to compel  arbitration.  Each  party has  selected  a party  arbitrator  but as yet there is no
neutral  umpire.  There has been no  discovery  as yet and no  organizational  meeting of the panel.  Given the  preliminary  nature of
these proceedings, it is too early to evaluate the likelihood of a favorable or unfavorable outcome.

Vesta vs. New Cap Re is an arbitration  against an Australian  reinsurer,  to collect  reinsurance  recoverables  pursuant to two
accident  year excess of loss ratio  reinsurance  agreements.  In the  arbitration,  New Cap Re  challenged  Vesta's  earlier draw on a
Letter  of  Credit  for $7.5  million  which was held in  connection  with one of the two  contracts.  Shortly  after  the  arbitration
commenced,  New Cap Re became the subject of insolvency  proceedings  in Australia and an ancillary  proceeding in the U.S.  Bankruptcy
Court in New York.  The  Bankruptcy  Court  stayed all pending  litigation  and  arbitration  against New Cap Re, and we appealed  that
ruling to the  Southern  District of New York,  and  ultimately  to the U.S.  Court of Appeals for the Second  Circuit  which  recently
affirmed the Bankruptcy  Court's stay of the  arbitration  against New Cap Re. Hence,  our efforts to recover losses as well as New Cap
Re's efforts to challenge the earlier draw on the $7.5 million Letter of Credit by us are stayed.

On September 5, 2002,  New Cap Re served us with an  Application  pursuant to Section 588FF of the  Australian  Corporations  Act
seeking  an order  directing  us to pay New Cap Re and its  liquidator  $1.0  million  that  Vesta  allegedly  received  as an  "unfair
preference"  and/or  arising out of an  "uncommercial  transaction,"  as those terms are  defined by the  Corporations  Act. We filed a
Notice of Appearance on October 31, 2002. While management  intends to vigorously defend this matter,  given the preliminary  nature of
these proceedings, it is too early to evaluate the likelihood of success.

Other

Vesta, through its subsidiaries,  is routinely a party to pending or threatened legal proceedings and arbitration relating to the
regular conduct of its insurance  business.  These  proceedings  involve alleged breaches of contract,  torts,  including bad faith and
fraud claims and miscellaneous  other specified relief.  Based upon information  presently  available,  and in light of legal and other
defenses  available to Vesta and its  subsidiaries,  management does not consider  liability from any threatened or pending  litigation
regarding routine matters to be material.

Note C-Segment Information

We report financial  results according to five business  segments,  which are distinguished by their product offerings or business
activities.  The accounting  policies of the operating  segments are described in Note A. Segment  pre-tax  income is generally  income
before income tax and minority  interest.  Premiums,  policy fees,  other income,  loss and benefit  expenses,  operating  expenses and
policy  acquisition  expenses are  attributed  directly to each  operating  segment.  Net  investment  income and interest  expense are
allocated only to those segments for which such amounts are considered an integral part of the financial results for that segment.

A brief description of each segment is as follows:

Standard property-casualty segment

The standard  property-casualty  segment consists of two principal lines of business:  (1) underwriting residential  property
insurance in capacity  constrained states; and (2) underwriting  residential  property and automobile  insurance in states where we can
profitably  offer  both  products  through   independent  agents.   Vesta's  insurance  products  are  distributed   primarily  through
approximately  2,475  independent  agencies in 24 states.  Our residential  property lines target families (1) with multiple  insurance
policies;  (2) who own more than one  automobile;  and (3) who live in a home  valued  between  $100,000  and  $250,000.  Our  standard
personal auto line targets drivers over age thirty-five with above average driving records.

Non-standard agency segment

Our  non-standard  agency  segment does not engage in  underwriting  activities.  The primary  focus of our agency  segment is the
distribution of non-standard auto insurance  products for various retail and wholesale  insurance  carriers in exchange for commissions
and fees. Our  non-standard  agencies  primary target (1)  individuals  specifically  required by law to purchase auto  insurance;  (2)
individuals  with accidents or violations on their driving  records;  (3) new drivers;  and (4) drivers of  high-performance  vehicles.
Typically,  non-standard auto insurance  customers are considered  higher-risk than standard  customers,  and premiums for non-standard
insurance are generally more expensive.

Non-standard underwriting segment

Our non-standard  underwriting  segment consists of two lines of business:  (1) underwriting  non-standard auto insurance products
sold by our affiliated agency operations and (2) underwriting  non-standard  auto insurance sold by unaffiliated  agencies.  In each of
these lines of business,  we utilize quota share  reinsurance to minimize our exposure to loss. The non-standard  underwriting  segment
includes our fronting operations and any underwriting risk retained from premiums written through our non-standard auto agencies.

With respect to fronting arrangements,  we write property-casualty insurance coverages and reinsure substantially all of the risks
to reinsurers  in exchange for fees.  This  business  takes  advantage of our  certificates  of authority  granting us license to write
insurance in many states.  Income from  fronting  arrangements  is primarily  generated  on a  fee-for-service  basis.  For the premium
written  through our  non-standard  auto  agencies,  we determine,  based upon market  conditions  and the  prospective  results of the
underlying  business,  whether to keep 100% of the underwriting risk or reinsure this risk to various  reinsurers.  Our decision on how
much  underwriting  risk to retain is  dependent  on the  current  rating  environment  and the  amount of  commissions  offered by the
reinsurers.

7

---

Life insurance segment

We provide a variety of life insurance  products through American Founders Financial  Corporation,  a holding company for two life
insurance  companies  domiciled  in Texas.  In 2000,  we  purchased a 72%  interest in American  Founders.  On February  18,  2003,  we
purchased the remaining shares held by minority holders and now own 100% of American  Founders.  At March 31, 2003,  American  Founders
had in force  approximately  $2.3  billion  (face value) of life and annuity  products.  American  Founders  markets  traditional  life
products,  universal life products,  fixed-rate  annuities,  pension contracts and related products through  independent agents located
throughout  the U.S.  In the fourth  quarter  of 2002,  we decided to exit the  health  insurance  business  line which was  previously
included in the life insurance  segment.  The results for the health insurance line have been  reclassified to discontinued  operations
for all periods presented in this report.

Corporate and other segment

Our corporate and other segment consists primarily of (1) net income earned on investments;  (2) interest expenses associated with
all debt; (3) financial  results for a small life insurance agency;  and (4) overhead  expenses not directly  associated with any other
business segment.

A summary of segment results for the three months ended March 31, 2003 and 2002 is as follows:

|2003                                | Standard
Property-
Casualty | Life
Insurance | Non-Standard
Underwriting | Non-Standard
Agency | Corporate
& Other | Eliminations | Total  
|----------------------------------- | --------------------------- | -------------- | ------------------------- | ------------------- | ----------------- | ------------ | -------
|
|Revenues:                           |                             |                |                           |                     |                   |              |        
|Premiums earned                     |                             |                | $                         | 77,819              |                   | $            | 2,410  
|Agency fees and commissions         |                             |                |                           | --                  |                   |              | --     
|Net investment income               |                             |                |                           | --                  |                   |              | 7,695  
|Policy fees                         |                             |                |                           | 2,062               |                   |              | 493    
|Realized gains (losses)             |                             |                |                           | --                  |                   |              | (8     
|Other                               |                             |                |                           | 242                 |                   |              | 642    
|                                    |                             |                |                           |                     |                   |              |        
|Total revenues                      |                             |                |                           | 80,123              |                   |              | 11,232 
|Expenses:                           |                             |               
|Loss, LAE and policyholder benefits |                             |                |                           | 53,445              |                   |              | 5,090  
|Policy acquisition costs            |                             |                |                           | 18,800              |                   |              | 368    
|Operating expenses                  |                             |                |                           | 11,104              |                   |              | 2,452  
|Interest on debt                    |                             |                |                           | --                  |                   |              | 1,453  
|Gain on extinguishment of debt      |                             |                |                           | --                  |                   |              | --     
|Intangible asset amortization       |                             |                |                           | --                  |                   |              | --     
|                                    |                             |                |                           |                     |                   |              |        
|Total expenses                      |                             |                |                           | 83,349              |                   |              | 9,363  
|Pre-tax income (loss) from          |                             |               
|continuing operations               |                             |                | $                         | (3,226              | )                 | $            | 1,869  
|                                    |                             |                |                           |                     |                   |              |        
|Operating segment assets:           |                             |               
|Investments and other assets        |                             |                | $                         | 416,590             |                   | $            | 887,696
|Deferred acquisition costs          |                             |                |                           | 42,203              |                   |              | 19,256 
|                                    |                             |                |                           |                     |                   |              |        
|                                    |                             |                | $                         | 458,793             |                   | $            | 906,952
|                                    |                             |                |                           |                     |                   |              |        

|2002                                | Standard
Property-
Casualty | Life
Insurance | Non-Standard
Underwriting | Non-Standard
Agency | Corporate
& Other | Eliminations | Total  
|----------------------------------- | --------------------------- | -------------- | ------------------------- | ------------------- | ----------------- | ------------ | -------
|
|Revenues:                           |                             |                |                           |                     |                   |              |        
|Premiums earned                     |                             |                | $                         | 67,843              |                   | $            | 3,057  
|Agency fees and commissions         |                             |                |                           | --                  |                   |              | --     
|Net investment income               |                             |                |                           | --                  |                   |              | 9,306  
|Policy fees                         |                             |                |                           | 1,302               |                   |              | 983    
|Realized gains (losses)             |                             |                |                           | --                  |                   |              | 942    
|Other                               |                             |                |                           | --                  |                   |              | 337    
|                                    |                             |                |                           |                     |                   |              |        
|Total revenues                      |                             |                |                           | 69,145              |                   |              | 14,625 
|Expenses:                           |                             |               
|Loss, LAE and policyholder benefits |                             |                |                           | 47,079              |                   |              | 7,828  
|Policy acquisition costs            |                             |                |                           | 15,415              |                   |              | 269    
|Operating expenses                  |                             |                |                           | 9,172               |                   |              | 2,458  
|Interest on debt                    |                             |                |                           | --                  |                   |              | 1,576  
|Gain on extinguishment of debt      |                             |                |                           | --                  |                   |              | --     
|Intangible asset amortization       |                             |                |                           | --                  |                   |              | --     
|                                    |                             |                |                           |                     |                   |              |        
|Total expenses                      |                             |                |                           | 71,666              |                   |              | 12,131 
|Pre-tax income (loss) from          |                             |               
|continuing operations               |                             |                | $                         | (2,521              | )                 | $            | 2,494  
|                                    |                             |                |                           |                     |                   |              |        
|Operating segment assets:           |                             |               
|Investments and other assets        |                             |                | $                         | 288,866             |                   | $            | 908,188
|Deferred acquisition costs          |                             |                |                           | 51,955              |                   |              | 23,987 
|                                    |                             |                |                           |                     |                   |              |        
|                                    |                             |                | $                         | 340,821             |                   | $            | 932,175
|                                    |                             |                |                           |                     |                   |              |        

8

---

Note D-Stock & Debt Transactions

In the first  quarter of 2002,  we issued  533,647  shares of common  stock in exchange  for $4.6 million face amount of our 8.75%
Senior Notes and $.8 million face amount of our 8.5% Deferrable  Capital  Securities.  In connection with this  transaction we recorded
a pre-tax gain on extinguishment  of debt of $1.4 million in other expense and an after tax gain on redemption of preferred  securities
of $.2 million.

Note E-Acquisitions

In February 2003, we completed the  acquisition of the  approximate  27% remaining  ownership from the minority owners of American
Founders  Financial  Corporation.  The purchase price for this  acquisition  was $12.9 million.  The transaction has been accounted for
as a purchase.  Summarized  below is a preliminary  allocation of 100% of the assets and  liabilities of American  Founders (in thousands
and unaudited):

|                                  | 
|--------------------------------- | 
|Assets acquired:                  | 
|Invested assets                   | 
|Deferred policy acquisition costs | 
|Other assets                      | 
|Goodwill                          | 
|                                  | 
|Total assets                      | 
|                                  | 
|Liabilities acquired:             | 
|Future policy benefits            | 
|Other liabilities                 | 
|                                  | 
|Total liabilities                 | 
|                                  | 

Note F-Subsequent Events

In the first week of April, a severe hailstorm caused approximately $1.2 billion of total losses to the industry, including an
estimated $540 million of residential property losses in Texas, according to the Insurance Services Office.  Texas Select, Vesta's
residential property subsidiary in Texas, is currently estimated to have approximately $10 to $12 million in pre-tax losses, net of
its 50% Texas quota share, in the second quarter as a result of this storm.

A Vesta subsidiary acquired 20% of InsureOne Agency from a minority owner for $9.6 million, effective April 1, 2003.  As a result of this purchase,
we now own 100% of the InsureOne Agency.

9

---

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

The following  discussion should be read in conjunction with management's  discussion and analysis of the financial  condition and
results of operations and all of the other information,  including the discussion of Vesta's critical  accounting  policies,  appearing
in Vesta's 2002 Annual Report as filed with the  Securities  and Exchange  Commission  on Form 10-K and with the  financial  statements
included therein and the notes thereto.

Results of Operations

Overview

Vesta conducts business in three areas of the personal  insurance  industry:  (1) standard property and casualty  insurance;  (2)
non-standard  automobile  insurance;  and (3) life  insurance.  Our  consolidated  revenue is  derived  principally  from  risk-bearing
premiums,  commissions and fees,  investment  income and investment gains and losses.  Our consolidated  expenses consist  primarily of
payments for claims and expenses associated with underwriting activities, agents' commissions and operations.

We report financial information according to five business segments: (1) standard  property-casualty  insurance; (2) non-standard
agency; (3) non-standard  underwriting;  (4) life insurance;  and (5) corporate and other. Since 1999, we have discontinued a number of
business lines.  We have segregated the reporting for these discontinued operations in our financial statements.

Since 2000,  we have pursued a strategy to diversify  into various  segments of the  personal  insurance  markets.  While we have
experienced  significant  and profitable  growth in various  personal lines businesses since 2000, we have also  experienced  significant
declines in our property and casualty  subsidiaries'  statutory  capital and surplus during the same period.  These declines in capital
and surplus are primarily  attributable  to lower than  expected  arbitration  awards and changes in estimates of disputed  reinsurance
recoverable  balances,  reserve  strengthening in our  discontinued  commercial and assumed  reinsurance  segments and increased policy
acquisitions  costs associated with significant  premium growth.  This decline in statutory surplus coupled with significant  growth in
premium  written is the primary  reason that A.M. Best Company  recently  adjusted the financial  strength  ratings of our property and
casualty  insurance  subsidiaries  from B+ (Very Good) to B (Fair).  Management  is unable to quantify the impact that this  adjustment
will have on our business;  however,  this  adjustment  could lead to significant  deterioration  in selected  portions of our standard
property and casualty  premium  volume and  adversely  impact the  financial  results of this segment  going  forward.  In an effort to
strengthen  our statutory  capital  position,  we have  undertaken an evaluation of a possible sale or  divestiture of a portion of our
property and casualty business.

Standard property-casualty and non-standard underwriting

The financial results of our property-casualty  underwriting activities (including our standard property-casualty segment and the
non-standard  underwriting  segment)  primarily  depend upon two variables:  (1) the amount of premiums we collect,  which is dependent
upon rates and volume; and (2) the costs we incur to adjust and pay claims submitted by individuals we have insured.

Subject to  competitive  and market  trends and  regulatory  approval,  premium rates are  generally  within our control,  and we
continuously  monitor and seek to adjust rates as  appropriate.  During the first quarter of 2003, we  implemented 4 rate  increases in
our standard  automobile  business line, which  represented an average premium increase of approximately  7.4%. In the first quarter of
2003, we also implemented 11 rate increases in our standard  residential  property line, which  represented an average premium increase
of approximately  16.7%. In our non-standard  underwriting  segment,  we enacted 9 rate increases for an average increase of 2.2%. With
respect to volume, our ability to increase written premium in our property-casualty  underwriting  activities is largely dependent upon
our surplus leverage ratio,  which reflects our underwriting  operations' net written premiums relative to statutory surplus at the end
of a period.  As of December  31,  2002,  our surplus  leverage  ratio did not  indicate  capacity  for  significant  growth in our net
premiums  written,  and, in March of 2003, we commenced an evaluation  of a possible sale or  divestiture  of a portion of our property
and casualty business in an effort to maximize shareholder value and strengthen our statutory capital position.

The costs we incur to adjust and pay claims,  known as loss and loss  adjustment  expenses,  are  largely  beyond our control and
depend  primarily upon the frequency and/or severity of claims made by our  policyholders.  One measure of performance in the insurance
industry  is the  "loss  ratio,"  which is the  ratio of (i) the sum of loss and loss  adjustment  expenses;  to (ii) the sum of earned
premiums and policy fees.  Our loss ratio will  generally  increase or decrease  according to the frequency  and/or  severity of claims
made by our policyholders.

Another key  performance  measure for insurance  companies is the "combined  ratio." The combined  ratio  compares (i) the sum of
loss, loss adjustment expenses,  operating expenses and policy acquisition  expenses;  to (ii) total earned premiums and policy fees. A
combined ratio of less than 100% indicates  underwriting  profitability,  without regard to investment income earned from investing the
premium received.

Non-standard agency

The financial  results of our agency  activities  primarily depend upon the amount of fees and commissions we can collect from the
sale of  insurance  products  and the  expenses  we incur to  conduct  our  day-to-day  operations.  Although  we  expect  the  minimum
commissions  and policy fees that we earn under a typical  agency  contract to be  relatively  stable,  we expect to earn a substantial
amount of additional  "profit  sharing"  commissions  in excess of the  contractual  minimums.  These profit  sharing  commissions  are
dependent upon whether the  non-standard  auto policies that we produce for other  insurers  result in a level of losses in relation to
written  premium  (i.e.,  loss ratios)  below the levels  stated in our agency  contracts.  Accordingly,  the frequency and severity of
claims made on the policies our agencies produce may impact our profit sharing commissions.

Life insurance

The financial results of our life insurance operations primarily depend upon (1) the amount we collect as premium;  (2) the amount of
investment income earned on invested premium; and (3) the benefits we pay to insureds upon their death.  Unlike the standard
property-casualty reporting segments, we include the investment income earned on invested premium in the results for our life
insurance segment.  The greatest variable in our revenue in the life segment is the amount of income we can earn on invested assets,
which is dependent upon general interest rates and market conditions.  The greatest variable in our expense from period to period is
the mortality rate of our insureds, as mortality rates in excess of our actuarially predicted levels will adversely impact financial
results in any given period.

10

---

Corporate and other

The  financial  results of our  corporate  and other  segment  reflect  other  revenue and expenses  that are not allocated to any
particular segment, including (i) investment income related to our property-casualty  underwriting operations;  (ii) corporate interest
expense;  (iii) general corporate operating expenses;  and (iv) realized gains and losses from the sale of investment securities or the
repurchases of our own debt securities at a discount.

In addition to the  above-mentioned  factors,  our  financial  results  may also be  impacted  by  weather-related  events such as
hurricanes and tornadoes.  Also,  our ability to effectively  compete in the insurance  markets we serve is influenced by the financial
strength ratings assigned to our companies by A.M. Best.

Comparison of First Quarter 2003 to First Quarter 2002

For the period ended March 31, 2003, we reported net income available to common  shareholders of $3.7 million ($0.11 diluted per
share), compared with net income available to shareholders of $2.0 million ($.06 diluted per share) reported for the previous year.

- The first quarter is typically one of the strongest for  non-standard  auto  business,  and the  non-standard  agency  segment
              produced $2.9 million in net income in the quarter.  The non-standard  underwriting  segment  generated  approximately $2
              million in net income on a 95.2% combined ratio.

- Our combined  ratio in the  standard  property-casualty  segment was 104.3%,  which is made up of a 106.9%  combined  ratio on
              residential  property  business  and a 95.6%  combined  ratio  for  standard  auto.  The  106.9%  combined  ratio  in the
              residential  property  business was primarily driven by large fire and freeze losses along the eastern coastal states and
              $3.2 million in losses from catastrophes.

For a depiction of the various  components of revenue,  expense and financial  results for each of our business segments for the
quarter ending March 31, 2003 please refer to Note C included in this report.

Standard property-casualty segment

In our standard  property-casualty segment, we underwrite or sell personal automobile and residential property insurance through
approximately  2,475  independent  insurance  sales  agencies.  In the first quarter of 2003,  the standard  property-casualty  segment
generated approximately $80.1 million in revenue, or approximately 48.7% of consolidated revenue.

For the quarter ended March 31, 2003, net premiums  written in our standard  property-casualty  lines decreased by $14.7 million
(down  15.1%),  to $83.0  million from $97.7  million in the prior year  quarter.  Net premiums  earned for standard  property-casualty
lines  increased  by $10.0  million in 2003,  up 14.7%,  to $77.8  million  from $67.8  million in 2002.  The  decrease in net premiums
written is primarily  attributable to the Texas residential  property 50% quota share as well as decreased  writings in the Midwest and
Mid-Atlantic  regions in connection  with our decision to terminate  agents and withdraw  from certain  states.  Effective  December 1,
2002,  we ceded 50% of the premiums  and losses on our Texas  residential  property  business to third party  reinsurers  pursuant to a
quota share reinsurance contract.    Net premiums earned increased as increases in premiums written in prior periods was earned.

Although we expect our net written premium will decrease in 2003 on a net basis, we have  implemented  rate increases to address
emerging loss trends and to protect our net written  premium  relative to expenses,  or underwriting  margin.  During the first quarter
of 2003, we implemented 4 rate increases in our standard  automobile  business line,  which  represented an average premium increase of
approximately  7.4%. We also  implemented 11 rate increases in our standard  residential  property line,  which  represented an average
increase of approximately 16.7%.

Loss and loss  adjustment  expenses for standard  property  casualty lines for the period ended March 31, 2003 increased by $6.3
million  (up  13.6%) to $53.4  million  from  $47.1  million in the prior  year.  The  increase  in loss and loss  adjustment  expenses
incurred was primarily  attributable to our growth in business in Texas.  Loss and loss adjustment  expenses in Texas were $9.0 million
in the first quarter of 2003, compared with $6.1 million in the prior year.

For the quarter ended March 31, 2003,  the loss ratio for standard  property-casualty  segment was 66.7%  compared with 68.1% at
March 31,  2002.  The  decrease  in the loss ratio was  primarily  attributable  to improved  results  from the  standard  auto book of
business.

For the period ended March 31, 2003,  policy  acquisition  expenses  increased by $3.4 million (up 22.1%) to $18.8  million from
$15.4  million  for the same  period of the prior  year.  In the first  quarter of 2003,  policy  acquisition  expenses  related to our
activities in Texas increased to $5.6 million from $2.3 million in 2002.  Operating  expenses  increased by $1.9 million,  or 20.7%, to
$11.1 million from $9.2 million, primarily as a result of our growth in Texas.

Non-standard agency segment

Our non-standard  agency segment does not engage in underwriting  activities.  Rather, the primary focus of our agency segment is
the distribution of non-standard  auto insurance  products for various  insurance  carriers in exchange for commissions and fees. Since
our entry into the non-standard auto business in late 2000,  revenue for our agency segment has increased  significantly.  In the first
quarter of 2003, our  non-standard  agency segment  generated  approximately  $38.9 million of commission  and fees-based  revenue,  or
approximately 21.3% of consolidated revenue, before eliminations.

For the quarter  ended March 31, 2003,  fees and  commissions  in our agency  segment  increased by $6.3 million due primarily to
increased sales of non-standard  products.  Our agency segment continued to improve its financial  performance
in the first quarter of 2003,  achieving  pre-tax  income from  continuing  operations of  approximately  $5.0 million  compared with a
pre-tax income of $2.7 million in 2002.

Non-standard underwriting segment

Our non-standard  underwriting segment can be separated into two lines of business: (1) underwriting  non-standard auto insurance
products sold by our affiliated agency operations and (2) underwriting  non-standard auto insurance sold by unaffiliated  agencies.  In
each of these  business  lines,  we utilize quota share  reinsurance  to minimize our exposure to loss.  Under a quota share  contract,
reinsurers share losses and certain allocated expenses in the same percentage as they share in premiums.

11

---

Since  entering the  non-standard  auto business in late 2000, our revenue has increased  significantly.  In the first quarter of
2003, our non-standard  underwriting  segment generated  approximately  $44.7 million of revenue,  representing  approximately 27.2% of
consolidated revenue.

For the quarter ended March 31, 2003, net premiums written for  non-standard  lines increased by $1.7 million (up 3.8%), to $47.0
million from $45.3  million in 2002.  For the same period,  net premiums  earned for  non-standard  lines  increased by $2.8 million to
$38.7  million from $35.9  million.  The increase in net premiums  written and net premiums  earned was primarily  attributable  to new
business produced by our affiliated agency operations, which acquired several agencies in late 2001 and early 2002.

Of our total  non-standard  net written  premiums of $47.0 million during the first quarter of 2003, the net premiums  written produced by our  affiliated  agencies was  approximately  $38.3  million.  The largest  component of our net premiums  written on
policies sold by affiliated  agencies was  approximately  $22.3 million net premium written through  InsureOne,  our affiliated  agency
operation  based in Chicago,  Illinois.  Until December 1, 2002, we bore 100% of the  underwriting  risk on these  policies.  Effective
December 1, 2002,  we ceded 40% of the  premiums and losses on the  InsureOne  business to third party  reinsurers  pursuant to a quota
share reinsurance contract.  As a result, we expect our total non-standard underwriting net written premiums will decrease in 2003.

Of our total net  written  premiums  of $47.0  million  during the first  quarter  of 2003,  net  written  premiums  produced  by
unaffiliated  agencies was approximately  $8.7 million,  with approximately $22 million of gross written premium ceded to third party
reinsurers.  For the quarter  ended March 31, 2003,  we also  collected  "issuing  carrier" or  "fronting"  fees of  approximately  $.9
million,  down from $1.6  million in 2002.  The decrease in fronting  fees was  primarily  attributable  to a decrease in the amount of
ceded earned premium fronted for a program in California to $.6 million in 2003, compared with $1.1 million in 2002.

Although  we expect  our net  written  premium  will  remain  flat in 2003 on an  absolute  basis as a result of the quota  share
reinsurance  contract  placed on the Insure One business,  we have  implemented  rate increases to address  emerging loss trends and to
protect our underwriting  margin.  During the first quarter of 2003, we implemented 7 rate increases in our  non-standard  underwriting
segment, which represented an average premium increase of approximately 2.2%.

Loss and loss adjustment  expenses for the  non-standard  underwriting  segment  increased by $2.9 million (up 12.3%) in 2003, to
$26.5 million from $23.6 million in 2002. The increase in loss and loss  adjustment  expenses  incurred was primarily  attributable  to
the increase in earned  premium  produced by affiliated  agencies  acquired in our agency  segment  during 2002. The loss ratio for our
non-standard  underwriting  segment at March 31, 2003 was 60.6%,  compared  with 63.8% at March 31, 2002.  The decrease in the loss and
loss adjustment expense ratio was primarily  attributable to favorable loss ratios on premium produced by affiliated  agencies acquired
in our agency segment during 2002.

Consistent with the corresponding  increase in earned premium,  policy  acquisition  expenses for the period ended March 31, 2003
increased by $1.9 million from the same period of the prior year.

Life insurance segment

We provide a variety of life  insurance  products  through American  Founders  Financial  Corporation,  a holding
company for two life insurance  companies  domiciled in Texas.  American  Founders' business is driven primarily by the acquisitions of
closed blocks of life insurance  policies and, to a lesser extent, by marketing and distributing its fixed annuity  products.  Our life
insurance  products are sold through marketing firms,  financial  institutions and 700 independent  agents located throughout 41 states
and the District of Columbia.  At March 31, 2003,  American  Founders had  approximately  $2.3 billion (face value) of life and annuity
products in force, and approximately $664.6 million in invested assets.

In the first quarter,  our life insurance  segment generated  approximately  $11.2 million in revenue,  or approximately  6.8% of
consolidated revenue.

Life  insurance  premiums and policy fees  decreased to $2.9 million from $4.0 million in the prior year as a result of increased
reinsurance.  Investment  income  decreased from the prior year because of an overall  decline in market interest rates during 2002 and
a reduction in invested assets.

Corporate and other segment

For the period ended March 31, 2003, net investment income related to our  property-casualty  underwriting  operations  decreased
by $.5  million to $3.9  million  from $4.4  million  in 2002.  The  weighted  average  yield on  invested  assets for 2003  (excluding
realized  and  unrealized  gains)  was 4.6%  compared  with 6.7% for the prior year  period.  The  decrease  in  investment  income was
primarily attributable to a decline in overall market interest rates, partially offset by increased average invested assets.

Our overall interest expense includes  interest payable on our 8.75% senior  debentures due in 2025,  interest on certain Federal
Home Loan Bank borrowings and our commercial  credit  borrowings.  Interest expense decreased by $.7 million compared with 2002, due to
debt repurchased in 2002.

In 2003, operating expenses decreased by $1.3 million from the prior year primarily due to decreasing compensation costs.

Discontinued operations

In the fourth quarter of 2002, we made the decision to exit the health  insurance and  consulting  business  lines.  Accordingly,
our health insurance and consulting lines results for 2002 have been  reclassified in our financial  statements as part of discontinued
operations  and are  classified  as  operations  held for sale.  For the period ended March 31, 2003, we recorded a pre-tax loss of $.9
million for our health operations and $.6 million from the sale of our consulting business.

Previously, in 2000 and 1999, we exited the reinsurance assumed and commercial lines businesses,  respectively.  As a result, the
reporting  for these  business  lines is included in  discontinued  operations  in our  financial  statements.  At the time we made the
decision to exit each of these business  lines,  we estimated the reserves  required to fulfill our expected  future  obligations  with
respect to these discontinued  operations.  However,  we continue to monitor our recorded estimates with respect to ultimate settlement
on an ongoing  basis.  For the period  ended March 31,  2003,  we recorded a pre-tax  loss of $.4 million for  reinsurance  assumed and
commercial lines businesses.

Based upon available  information,  we believe the recorded  reserves for discontinued  operations at March 31, 2003 is adequate.
However,  we will continue to monitor these  reserves and their related  claims  activity and  experience.  Further  adjustments to our
estimates could be necessary as we continue to run off the remaining outstanding claims.

12

---

For the period ended March 31, 2003,  we recorded an income tax expense of $3.0  million,  compared with an income tax expense of
$1.2 million  recorded in the prior year.  Our  effective  tax rate of 35% in 2003 was  consistent  with our  effective tax rate in the
prior year.

Liquidity and Capital Resources

Liquidity and Capital Resources - Holding Company

Vesta is a holding company whose principal asset is its investment in the capital stock of the companies  constituting  the Vesta
Insurance  Group.  The  principal  uses of funds at the holding  company  level are to pay (1)  operating  expenses;  (2) principal and
interest on outstanding  indebtedness and deferrable capital securities;  and (3) dividends to stockholders as declared by the Board of
Directors.

Vesta's  principal  source of liquidity and capital  resources to meet its holding  company  obligations is dividends paid by our
subsidiaries.  Many of our  subsidiaries  are  insurance  companies  that  are  individually  supervised  by  various  state  insurance
regulators,  and other unregulated  companies that we own, such as Instant  Insurance  Holdings,  Inc., are owned indirectly  through a
regulated  insurance  company.  Given our  organizational  structure,  we rely on two  subsidiaries  to pay  dividends  to our  holding
company or  otherwise  fund the  obligations  of our  holding  company on its behalf - Vesta Fire  Insurance  Corporation,  an Illinois
domiciled insurer, and J. Gordon Gaines, Inc., a Delaware business corporation.

Dividends from Vesta Fire

Transactions  between  Vesta and its  insurance  subsidiaries,  including  the  payment  of  dividends,  are  subject  to certain
limitations under the insurance laws of those  subsidiaries'  domiciliary  states.  The insurance laws of the state of Illinois,  where
Vesta Fire is domiciled,  permit the payment of dividends out of unassigned  surplus in any year which,  together with other  dividends
or  distributions  made within the  preceding  12 months,  do not exceed the greater of 10% of  statutory  surplus as of the end of the
preceding  year or the net income for the  preceding  year,  with  larger  dividends  payable  only after  receipt of prior  regulatory
approval.  The Illinois  Insurance  Department  has  indicated  that these  dividend  limitations  prohibit the payment of dividends if
the insurer has  negative or zero  "unassigned  funds" at the end of the prior year,  as reported on its  statutorily  required  annual
statement.  Our lead insurance  subsidiary,  Vesta Fire, reported negative  "unassigned funds" on its annual statement for 2002, and is
expected to continue to report negative  unassigned funds for the foreseeable  future.  Accordingly,  we may not be able to declare and
pay a dividend  from our lead  insurance  company  subsidiary  for the  foreseeable  future  without  prior  approval.  There can be no
assurance that Vesta Fire will be able to obtain the requisite regulatory approval for the payment of dividends.

Dividends from J. Gordon Gaines

J. Gordon Gaines, Inc. provides  administrative services to all of our property - casualty insurance subsidiaries in exchange for
fees  pursuant  to an  administrative  services  agreement  and,  with  respect  to our  Texas  Select  Lloyds  Insurance  Company,  an
attorney-in-fact  agreement.  These management  agreements are subject to certain  regulatory  standards which generally  require their
terms and fees to be fair and  reasonable.  The Illinois or Texas  Departments  of Insurance may review these  agreements  from time to
time to insure the  reasonableness  of their terms and fees,  and it is  possible  that such terms and fees could be modified to reduce
the amounts  available  to our holding  company.  Assuming  these  management  agreements  are not modified in a material  respect,  we
believe that J. Gordon Gaines,  Inc. will be able to pay dividends to our holding  company,  or otherwise  fund the  obligations of our
holding company on its behalf, sufficient to fund our anticipated needs (including debt service) for at least the next twelve months.

Credit Facilities

Effective  February 1, 2003, we entered into a new revolving  credit  arrangement  with First  Commercial to replace the previous
facility.  The new  facility  is a $30  million  line  secured  by a pledge of  358,375  shares of common  stock of  Instant  Insurance
Holdings,  Inc.,  representing  approximately 70% of Instant's issued and outstanding  shares of capital stock as of December 31, 2002.
The new  facility  bears  interest at First  Commercial's  prime rate and will mature no earlier  than June 30,  2005.  As of March 31,
2003, we had drawn the entire $30 million available under this Agreement.

This new credit agreement  contains  covenants which require us to maintain (i) consolidated GAAP net income (excluding  realized
gains and losses) of at least $15 million for any calendar  year,  beginning in 2003,  (ii)  Consolidated  debt to capital  ratio of no
more than 39%, (iii) an A.M. Best rating of "B" or better,  (iv) consolidated GAAP net worth of at least $208 million,  (v) an interest
coverage ratio of not less than 1.5 to 1 and (vi) risk-based capital of not less than 150% of the NAIC's authorized control level.  As of March 31, 2003, we were in compliance with
all required covenants.

Liquidity and Capital Resources - Subsidiary Operations

The principal  sources of funds for our insurance  subsidiaries  are  premiums,  investment  income and proceeds from the sale or
maturity  of  invested  assets.  The  principal  uses of funds in our  subsidiary  operations  are the  payment  of  claims,  operating
expenses,  commissions and the purchase of investments.  Our  subsidiaries  also borrow funds from the Federal Home Loan Bank from time
to time and invest the proceeds at higher interest rates.

Contingent Obligations

Our subsidiary  operations are also involved in ongoing  reinsurance  recoverable  disputes that could result in an obligation to
repay certain amounts to reinsurers from whom we have collected  funds.  In connection  with these  disputes,  our principal  operating
subsidiary,  Vesta Fire, has obtained  letters of credit for the benefit of reinsurers for which it is  contingently  liable.  At March
31, 2003, Vesta Fire was  contingently  liable for $33.7 million under the terms of letters of credit obtained in connection with these
reinsurance disputes.

Additionally,  we regularly  obtain letters of credit or otherwise  pledge  securities for the benefit of ceding  insurers in our
nonstandard  underwriting segment pursuant to reinsurance  contracts.  As of March 31, 2003, we had pledged  approximately $7.9 million
in securities pursuant to these reinsurance contracts.

13

---

Inter-company obligations

In addition to the  contractual  obligations of our holding company to third parties  presented in the tables above,  our holding
company  owes  contractual  obligations  to  certain  of our  subsidiaries  that  are  eliminated  in  the consolidation  of our  financial
statements.  As of March 31, 2003, our insurance  company  subsidiaries  held $13.2 million face amount of our 8.75% Senior  Debentures
due  2025 and  $44.1  million  face  amount  of our  12.5%  Senior  Notes  due  2005.  Our  holding  company  paid  these  subsidiaries
approximately $1.7 million in interest payments in the first quarter of 2003 which was eliminated in consolidation.

Cash Flows

As is typical in the  insurance  industry,  we collect  cash in the form of premiums  and invest that cash until claims are paid.
Cash  collected  from  premiums  and cash paid for claims are  included  in cash flow from  operations,  while the cash impact from our
investing  activities  is included in cash flow from  investing  activities.  In periods  such as 2001 and 2000,  when we were  exiting
certain lines of business such as commercial  lines and  reinsurance  assumed lines, we funded the payout of commercial and reinsurance
assumed claims through the liquidation of invested  assets,  consistent with the historical  insurance  business model.  However,  this
generates cash outflows from operations that can be misleading.

On a  consolidated  basis,  net cash provided by (used in)  operations  for the periods ended March 31, 2003 and 2002,  was $(6.6)
million and $1.1 million,  respectively.  Cash flow from operations was negative for the current period primarily due to the funding of
the unearned  premium  reserve on our 50% Texas quota share  reinsurance  contract.  Net cash used in investing  activities was $(44.4)
million  and $(6.8)  million  for the  periods  ended  March 31, 2003 and 2002,  respectively  as we  invested  cash  generated  by our
operations in prior periods.  Net cash  provided by (used in)  financing  activities  was $(12.3)  million and $3.9 million for the period  ending March
31, 2003 and 2002,  respectively.  In 2003, our financing  activities  were driven by repayments of outstanding  Federal Home Loan Bank
borrowings.

New Accounting Pronouncements

Effective January 1, 2002, Vesta adopted SFAS No. 144,  "Accounting for the Impairment or Disposal of Long-Lived  Assets",  which
had been  issued by the FASB in October  2001.  SFAS No. 144  provides a single  model for  treatment  of the  disposal  of  long-lived
assets.  SFAS No. 144  supersedes  SFAS No. 121  "Accounting  for  Impairment  of  Long-Lived  Assets and for  Long-Lived  Assets to be
Disposed of" and the accounting and reporting  provisions of APB Opinion  No.30,  "Reporting the results of  Operations-Reporting  the
Effects of  Disposal of a Segment of a Business,  and  Extraordinary,  Unusual and  Infrequently  Occurring  Events and  Transactions."
Adoption of SFAS No. 144 will not have a material impact on Vesta's financial  position,  results of operations or cash flows
other than the classification of certain items in our statements of financial position, results of operations and cash flow.

Effective July 1, 2002,  Vesta adopted SFAS No. 145,  "Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement
No.  13,  and  Technical  Corrections",  which had been  issued by the FASB in April  2002.  SFAS No.  145  rescinds  SFAS No. 4, which
required all gains and losses from  extinguishments  of debt to be aggregated and, if material,  classified as an  extraordinary  item,
net of related  income tax effect.  As a result,  the  criteria  in APB  Opinion  No. 30, will now be used to classify  those gains and
losses.  SFAS No.  64  amended  SFAS No. 4, and is no  longer  necessary  because  SFAS No. 4 has been  rescinded.  SFAS No. 44 and the
amended  sections  of SFAS No.  13 are not  applicable  to Vesta  and,  therefore,  have no  effect  on our  financial  statements.  In
connection  with our adopting SFAS No. 145 on July 1, 2002, we  reclassified  gains on the  extinguishment  of debt from  extraordinary
gain on debt  extinguishment  to other expense in our third quarter  financial  statements.  These  reclassifications  decreased  other
expense by $.0 million and $1.4 million for the quarters ending March 31, 2003 and 2002, respectively.

In November 2002, the FASB issued FASB  Interpretation No. ("FIN") 45, "Guarantor's  Accounting and Disclosures  Requirements for
Guarantees,  Including  Indirect  Guarantees of Indebtedness of Others." FIN 45 clarifies the  requirements of SFAS No. 5,  "Accounting
for Contingencies,"  related to a guarantors accounting for, and disclosures of, the issuance of certain types of guarantees.  Vesta is
required to adopt the provisions  for initial  recognition  and  measurement  for all guarantees  issued or modified after December 31,
2002 on a prospective  basis.  Management has determined that there will be no material impact on Vesta's financial position or results
of operations related to the initial recognition and measurement guarantees of this Interpretation.

In December 2002, the FASB issued SFAS No. 148,  "Accounting  for  Stock-Based  Compensation - Transition and  Disclosure".  This
statement is effective for 2003 and amends SFAS No. 123,  "Accounting for Stock-Based  Compensation" by providing  alternative  methods
of transition for a voluntary change to the fair value based method of accounting for stock-based employee  compensation.  In addition,
SFAS No. 148 requires additional  disclosures related to the effect of stock-based  compensation on reported results. Vesta has adopted
the disclosure  provisions of SFAS No. 148 and is currently  reviewing its treatment of stock-based  compensation as well as the impact
of this pronouncement.

In January 2003,  the FASB issued FIN 46,  "Consolidation  of Variable  Interest  Entities"  which  clarifies the  application of
Accounting  Research  Bulletin  No.  51,   "Consolidated   Financial   Statements."  This  Interpretation   provides  guidance  on  the
identification and consolidation of variable interest entities  ("VIEs"),  whereby control is achieved through means other than through
voting rights. Implementation of FIN 46 did not have a material impact on Vesta's financial  position,  results of operations or cash flows
other than the classification of certain items in our statements of financial position, results of operations and cash flow.

In May 2002, the Derivatives  Implementation group of the FASB exposed for comment issue No. B36, "Bifurcation of Embedded Credit
Derivatives"  ("DIG B36").  DIG B36 would require the bifurcation of potential  embedded  derivatives  within modified  coinsurance and
funds withheld  coinsurance  arrangements in which the terms require the future payment of a principal  amount plus a return based on a
specified  proportion of the ceding  company's  return on either its general account assets or a specified  block of those assets.  The
proposed  effective date of the  implementation  guidance in DIG B36 is for the first fiscal quarter  beginning after June 15, 2003 and
would be applied on a prospective basis.  The Company is currently evaluating the impact of this pronouncement.

Special Note Regarding Forward-Looking Statements

Any  statement  contained in this report which is not a historical  fact,  or which might  otherwise be  considered an opinion or
projection  concerning the Company or its business,  whether express or implied, is meant as and should be considered a forward-looking
statement as that term is defined in the Private  Securities  Litigation  Reform Act of 1996.  Forward-looking  statements are based on
assumptions and opinions  concerning a variety of known and unknown risks,  including but not necessarily  limited to changes in market
conditions,  natural disasters and other catastrophic events,  increased competition,  changes in availability and cost of reinsurance,
changes in governmental  regulations,  and general economic conditions, as well as other risks more completely described in our filings
with the  Securities  and Exchange  Commission,  including our most recent Annual Report on Form 10-K. If any of these  assumptions  or
opinions prove incorrect,  any  forward-looking  statements made on the basis of such assumptions or opinions may also prove materially
incorrect in one or more respects.

14

---

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Vesta's  principal  assets are  financial  instruments,  which are subject to the market  risk of  potential  losses from  adverse
changes in market rates and prices.  Our primary risk  exposures are interest rate risk on fixed  maturity  investments,  mortgages and
collateral  loans and annuity  liabilities  and equity  price risk for stocks.  Vesta  manages its exposure to market risk by selecting
investment assets with characteristics such as duration,  yield and liquidity to reflect the underlying  characteristics of the related
insurance.  There have been no material  changes to the  information  about our market risk set forth in our Annual Report on Form 10-K
for  the year ended December 31, 2002.

Item 4.  Controls and Procedures

Within 90 days prior to the date of this report,  we carried out an evaluation,  under the supervision and with the participation
of our  principal  executive  officer  and  principal  financial  officer,  of the  effectiveness  of the design and  operation  of our
disclosure  controls and  procedures.  Based on this  evaluation,  except as noted in the next paragraph, our  principal  executive  officer and principal  financial  officer
concluded that our disclosure  controls and procedures are effective in timely alerting them to material  information  concerning Vesta
and its consolidated subsidiaries required to be included in our periodic SEC reports.

Management, in consultation with the Company's independent accountants, identified deficiencies in our consolidation
process, which constitute a "Reportable Condition" under standards established by the American Institute of Certified Public
Accountants.  Management, also in consultation with the Company's independent accountants, believes that this matter has not had any material impact on our consolidated financial statements.
Management has established a plan to strengthen the processes and controls surrounding the consolidation process.  Implementation and
completion of this plan will be completed in the second quarter of 2003.

15

---

##### PART II
Item 1. Legal Proceedings

Securities Litigation

In 2001, Vesta settled a securities class action that had been pending since 1998.  In connection with that settlement, the issuer of our primary directors' and officers' insurance policy, which was intended
to cover the initial $25 million of settlement costs and related expenses, denied coverage and refused to fund its share of the
settlement costs.  We sued that insurer in Alabama state court alleging that its action was taken in bad faith.   In February 2003,
we settled that claim and collected $16 million in cash.

Health insurance related lawsuits

Vesta and two  former  officers  of Vesta are  defendants  in a lawsuit  styled  James H.  Cashion,  Jr.  d/b/a  American  Health
Underwriters v. Vesta Insurance Group,  Inc., et al, Plaintiff,  a former general agent of our subsidiary States General Life Insurance
Company,  which we purchased in 2001,  alleges that the defendants  engaged in an actionable civil  conspiracy to tortiously  interfere
with his agency  contracts.  The civil conspiracy claim is premised,  in part, on certain payments made to these two former officers of
Vesta by another  agent who replaced Mr.  Cashion.  The  plaintiff is seeking  actual and  punitive  damages.  Vesta denies  tortiously
interfering with plaintiff's agency contract,  believes the claims asserted against it have no merit, and is vigorously  defending this
lawsuit.  In the opinion of  management, resolution of this lawsuit is not expected to have a material adverse effect on our financial position.

On December 30, 2002, States General provided the  contractually  required notice of termination of its exclusive agency contract
with Jimmy  Walker,  Sr., and that contract  will expire in  accordance  with its terms on June 30, 2003. At the same time,  another of
our  affiliates  ceased  loaning money to Mr. Walker and exercised its right to receive  certain  commissions  earnings on the policies
placed in force by Mr.  Walker,  which Mr. Walker had assigned to us as collateral  for his  indebtedness  to us. At December 31, 2002,
the  outstanding  balance owed by Mr. Walker was  approximately  $2.5 million.  Mr. Walker  contended that these actions  constituted a
premature  termination of his agency contracts and threatened  litigation.  In the interest of resolving this issue  expeditiously,  we
filed a lawsuit in Jefferson  County,  Alabama  seeking a declaratory  judgment that our receipt of these  assigned  commissions  is in
accordance  with an enforceable  collateral  assignment of commissions  document and otherwise  lawful.  We also filed for  arbitration
seeking a declaration  that our actions were in accordance  with our agency  contracts  with Mr.  Walker and otherwise  lawful.  In the
opinion of management, resolution of this lawsuit is not expected to have a material adverse effect on our financial position.

Life insurance related lawsuits

Our subsidiary,  American Founders, is a defendant in a lawsuit brought by a judgment creditor of IFS Holdings, Inc. - the former
holder of American  Founders'  series A and C preferred  stock - alleging  that  American  Founders  redeemed its Series A and Series C
preferred stock from IFS Holdings,  Inc. for less than "reasonably equivalent value," and, therefore,  engaged in a voidable fraudulent
transfer.  American  Founders  believes (i) that the redemption  transaction  was for reasonably  equivalent  value;  and (ii) that the
allegations  brought  against it in this  lawsuit are  without  merit.  We have  vigorously  defended  this  action.  In the opinion of
management,  resolution  of the  lawsuit  is not  expected  to have a  material  adverse  effect on our  financial  position.  However,
depending upon the amount and timing,  an unfavorable  resolution of this matter could  materially  affect  American  Founders'  future
operations or cash flows in a particular period.

Indemnification Agreements and Liability Insurance

Pursuant to Delaware law and our by-laws, we are obligated to indemnify our current and former officers and directors for
certain liabilities arising from their employment with or services to Vesta, provided that their conduct complied with certain
requirements.  Pursuant to these obligations, we have been funding costs of defense and other expenses on behalf of certain current
and former officers and directors, subject to an undertaking from such individuals to repay any amounts advanced in the event a court
determines that they are not entitled to indemnification.

Reinsurance Arbitration/Litigation

As discussed in previous SEC filings,  in 1998 we corrected our accounting for assumed  reinsurance  business through restatement
of our previously  issued  financial  statements.  Similar  corrections  were made on a statutory  accounting  basis through  recording
cumulative  adjustments  in Vesta Fire's 1997  statutory  financial  statements.  The impact of this  correction  has been reflected in
amounts  ceded under our 20 percent  whole account  quota share treaty which was  terminated  on June 30, 1998 on a run-off  basis.  We
believe such treatment is appropriate under the terms of this treaty and have calculated the quarterly  reinsurance  billings presented
to the three treaty  participants  accordingly.  The aggregate amount included herein as recoverable from such reinsurers totaled $33.4
million at March 31, 2003.  Additionally,  we have previously collected  approximately $48.5 million from the drawdown of collateral on
hand.  Such amount, net of related expenses, has been reflected in the 2002 financial statements.

NRMA Insurance Ltd.  ("NRMA"),  one of the  participants  in the 20 percent whole account quota share treaty,  filed a lawsuit in
the United States District Court for the Northern  District of Alabama  contesting our billings.  NRMA sought  rescission of the treaty
and a temporary  restraining  order preventing us from drawing down  approximately  $34.5 million of collateral.  We filed a demand for
arbitration  as  provided  for in the treaty  and also  filed a motion to compel  arbitration  which was  granted in the United  States
District  Court action.  Vesta reached an agreement  with NRMA to collect the $34.5 million of collateral in exchange for posting a $25
million  letter of credit in favor of NRMA to fund any  amounts  NRMA may  recover  as a result of the  arbitration.  We also filed for
arbitration  against Alfa Mutual Insurance  Company and Dorinco  Reinsurance  Company,  the other two  participants on the treaty.  All
those  arbitrations  are in the discovery  stages.  Additionally,  Alfa filed a Motion for Declaratory  Judgment asking the arbitration
panel to order  that  there is no  enforceable  agreement  between  Alfa and Vesta or  alternatively,  that  there is no  coverage  for
developmental  losses under the treaty.  After a hearing in June 2002, the arbitration  panel denied Alfa's motion.  The hearing on the
merits of the  arbitration  with Alfa was scheduled for May 2003.  However,  on April 21, 2003, Alfa filed a lawsuit against Vesta Fire
in state court in  Montgomery,  Alabama  seeking a declaration  from the Court on certain  procedural  and  organizational  matters and
requesting that the Court stay the arbitration  proceedings  during the pendency of the litigation in state court in Alabama.  On April
24, 2003, the Court issued a temporary  restraining  order staying the proceedings in the ongoing  arbitration in order to maintain the
status quo until the merits of Alfa's  petition can be heard and  determined.  The lawsuit  filed by Alfa will delay  indefinitely  the
Alfa  arbitration  proceedings  but it is  too  early  to  determine  if the  litigation  will  delay  proceedings  in  the  other  two
arbitrations.

16

---

On June 19, 2002,  the panel in the NRMA  arbitration  issued an order to bifurcate  the  arbitration,  and  scheduled a
hearing for the week of October 28, 2002 to decide the issue of coverage for  developmental  losses  under the treaty.  On September 6,
2002, the panel notified the parties that it would make such  determination on this specific issue on the papers and filings  submitted
by the parties  without the  necessity  of a live  hearing.  On November 6, 2002,  the Company was  notified by the panel that it ruled
that the treaty  does not apply to loss  occurrences  prior to July 1,  1997.  As a result,  Vesta  recorded  a $23.6  million  pre-tax
non-operating  charge as a revision of our estimated  reinsurance  recoverable  in the third quarter of 2002.  This ruling does not set
a binding precedent  regarding  Vesta's other  arbitrations  and,  accordingly,  we have not recorded any change in our estimate of our
recoverable  from the other treaty  participants  as a result of this ruling.  In February  2003,  Vesta filed a petition to vacate the
NRMA panel ruling in the U.S.  District  Court for the Northern  District of Alabama.  On April 8, 2003, the Court ruled that since the
arbitration  proceedings have not been fully  exhausted,  it was dismissing  Vesta's petition without  prejudice of the parties to seek
the Court's review of any final  arbitration  award.  The hearing in the NRMA  arbitration  is currently  scheduled to begin on October
20, 2003,  and is estimated to take  approximately  two weeks.  On December 16, 2002,  Dorinco filed a motion seeking an order that the
treaty  does not  cover  developmental  losses.  On May 1,  2003,  the panel in the  Dorinco  arbitration  ruled  that  Dorinco  is not
responsible  for losses on any policy or any other  insurance or  reinsurance  contract  terminated  prior to July 1, 1997 and that the
arbitration  will continue with respect to losses whenever  occurring,  on policies or any other  insurance or reinsurance  contract in
force at July 1, 1997.  The hearing in the Dorinco  arbitration  is currently  scheduled to begin on December 1, 2003, and is estimated
to take  approximately  two weeks.  Based on a current  estimate of the impact of this ruling and the ruling  previously  received from
the NRMA panel, we currently believe our estimated  recoverable is appropriate.  However,  we are continuing to evaluate the effects of
complying with these rulings and our estimate may change in the future as a result of this evaluation.

While management continues to believe its interpretation of the treaty's terms and computations based thereon are correct,  these
matters are being  contested in these  arbitration  proceedings  and their  ultimate  outcome  cannot be  determined  at this time.  If
rescission on all three treaties was awarded by three  separate  arbitration  panels,  we would incur a charge of  approximately  $57.0
million.

We are in arbitration  with CIGNA Property and Casualty  Insurance  Company (now ACE USA) under a personal lines  insurance quota
share  reinsurance  agreement,  whereby we assumed certain risks from CIGNA.  During September 2000, CIGNA filed for arbitration  under
the reinsurance  agreement,  seeking  payment of the balances that CIGNA claimed were due under the terms of the treaty.  At that time,
the treaty was  terminated on a cut-off  basis.  In the pending  arbitration  Vesta is seeking,  among other things,  recoupment of all
believed  improper claims payments and excessive  expense  allocations and charges from CIGNA.  The arbitration was bifurcated into two
phases with Phase I concentrating on the  interpretation of the intent of the parties related to the expense  reimbursement  provisions
of the treaty at the time it was entered.  Phase II, which is ongoing,  relates to any remaining issues between the parties,  including
those that exist with  regard to an audit of expenses  ceded to the treaty  which  Vesta  intends to  conduct.  The Phase I hearing was
held in February 2002 and the panel ruled that (i) the Company is  responsible  for the payment of ceding  commissions  provided for in
the treaty and should pay any outstanding  billings for commissions and paid claims,  plus interest;  (ii) the Company may proceed with
an audit of  expenses  ceded to the  treaty;  and (iii) the  parties  should  identify  any  further  issues to be  brought  before the
arbitration panel for phase two of the hearing.    The Phase II hearing has not yet been scheduled.

If the amounts  recoverable under the relevant treaties are ultimately  determined to be materially less than the amounts that we
have reported as  recoverable,  we may incur a  significant,  material,  and adverse  impact on our financial  condition and results of
operations.

Muhl vs. Vesta is a case pending in the supreme Court of the State of New York, County of New York,  brought by the Liquidator of
Midland Insurance Company  ("Midland"),  claiming  recoveries under two alleged  retrocession  agreements (Pool I and Pool III) between
Midland and Interstate Fire Insurance  Company,  Vesta's  predecessor in interest.  The Liquidator's  claims against Vesta under Pool I
and Pool III have been severed.

Third party auditors hired by Vesta have  identified  coverage  issues that cast doubt on the validity of a number of claims.  In
addition,  there is no actual  retrocessional  agreement that evidences the terms and conditions of Pool III which involves 71% or more
of the incurred  losses at issue.  Although  there are other  tangential  documents that the Liquidator may attempt to rely on to prove
liability  under Pool III, we believe  that the  Liquidator  will not be able to  establish  liability  for any portion of the Pool III
claims.  We also believe that a number of the losses allegedly  incurred in connection with Pool I may be avoided on specific  coverage
grounds.  We are defending this matter vigorously and are reasonably  optimistic  regarding the ultimate  outcome,  although an adverse
ruling in this case could have a material effect on our financial condition.

Nichols vs. Vesta Fire  Insurance  Corporation is a lawsuit  brought by the  Liquidator of Delta America Re Insurance  Company in
Kentucky state court to recover  losses alleged under  reinsurance  contracts  entered into in the 1970's.  Vesta removed the action to
federal  court and  successfully  moved to compel  arbitration.  Each  party has  selected  a party  arbitrator  but as yet there is no
neutral  umpire.  There has been no  discovery  as yet and no  organizational  meeting of the panel.  Given the  preliminary  nature of
these proceedings, it is too early to evaluate the likelihood of a favorable or unfavorable outcome.

Vesta vs. New Cap Re is an arbitration  against an Australian  reinsurer,  to collect  reinsurance  recoverables  pursuant to two
accident  year excess of loss ratio  reinsurance  agreements.  In the  arbitration,  New Cap Re  challenged  Vesta's  earlier draw on a
Letter  of  Credit  for $7.5  million  which was held in  connection  with one of the two  contracts.  Shortly  after  the  arbitration
commenced,  New Cap Re became the subject of insolvency  proceedings  in Australia and an ancillary  proceeding in the U.S.  Bankruptcy
Court in New York.  The  Bankruptcy  Court  stayed all pending  litigation  and  arbitration  against New Cap Re, and we appealed  that
ruling to the  Southern  District of New York,  and  ultimately  to the U.S.  Court of Appeals for the Second  Circuit  which  recently
affirmed the Bankruptcy  Court's stay of the  arbitration  against New Cap Re. Hence,  our efforts to recover losses as well as New Cap
Re's efforts to challenge the earlier draw on the $7.5 million Letter of Credit by us are stayed.

On September 5, 2002,  New Cap Re served us with an  Application  pursuant to Section 588FF of the  Australian  Corporations  Act
seeking  an order  directing  us to pay New Cap Re and its  liquidator  $1.0  million  that  Vesta  allegedly  received  as an  "unfair
preference"  and/or  arising out of an  "uncommercial  transaction,"  as those terms are  defined by the  Corporations  Act. We filed a
Notice of Appearance on October 31, 2002. While management  intends to vigorously defend this matter,  given the preliminary  nature of
these proceedings, it is too early to evaluate the likelihood of success.

Other

Vesta, through its subsidiaries,  is routinely a party to pending or threatened legal proceedings and arbitration relating to the
regular conduct of its insurance  business.  These  proceedings  involve alleged breaches of contract,  torts,  including bad faith and
fraud claims and miscellaneous  other specified relief.  Based upon information  presently  available,  and in light of legal and other
defenses  available to Vesta and its  subsidiaries,  management does not consider  liability from any threatened or pending  litigation
regarding routine matters to be material.

17

---

Item 2. Changes in Securities

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other information

None.

18

---

Item 6. Exhibits and Reports on Form 8-K

a)           EXHIBITS

99.1         Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2         Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

b)           Reports on Form 8-K.

Current reports were filed on Form 8-K on February 18, February 27 and March 31, 2003 in connection with press releases.

19

---

Signatures

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

Vesta Insurance Group, Inc.

Date:  May 14, 2003

20

---

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Norman W. Gayle, III, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Vesta Insurance Group, Inc.;

2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly report;

3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;

4.   The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)         designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this quarterly report is being prepared;

b)   evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date"); and

c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

5.    The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)         all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any
material weaknesses in internal controls; and

b)        any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls; and

6.    The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  May 14, 2003

21

---

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Hopson B. Nance, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Vesta Insurance Group, Inc.;

2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly report;

3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;

4.   The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)         designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this quarterly report is being prepared;

b)   evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date"); and

c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

5.    The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)         all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any
material weaknesses in internal controls; and

b)        any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls; and

6.    The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  May 14, 2003

22

---

[This Page Intentionally Left Blank]