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## 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, 2002

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 10, 2002
36,473,394

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Vesta Insurance Group, Inc.

Index

|Part I  | Financial Information                                                                 | Page
|------- | ------------------------------------------------------------------------------------- | ----
|Item 1. | Financial Statements:                                                                 |     
|        | Consolidated Balance Sheets at March 31, 2002 and December 31, 2001                   | 1   
|        | Consolidated Statements of Income and Comprehensive Income for the                    |     
|        | Three Months ended March 31, 2002 and 2001                                            | 2   
|        | Consolidated Statements of Cash Flows for three months ended March 31, 2002 and 2001  | 3   
|        | Notes to Consolidated Financial Statements                                            | 4   
|Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 10  
|        |                                                                                       |     
|
|Item 1. | Legal Proceedings                                                                     | 13  
|Item 2. | Changes in Securities                                                                 | 15  
|Item 3. | Defaults Upon Senior Securities                                                       | 15  
|Item 4. | Submission of Matters to a Vote of Securities                                         | 15  
|Item 5. | Other Information                                                                     | 15  
|Item 6. | Exhibits and Reports on Form 8-K                                                      | 16  

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


                                                                               March 31,       December 31,
                                                                                  2002             2001
                                                                             ---------------  ---------------
                                                                              (unaudited)
Assets:
    Investments:
    Fixed maturities available for sale - at fair value (cost:  2002 - $810,102;
         2001 - $785,049)                                                         $ 818,747        $ 807,197
    Equity securities-at fair value: (cost: 2002- $34,299; 2001- $32,298)            28,137           31,431
    Mortgage and collateral loans                                                    43,035           43,978
    Policy loans                                                                     63,179           63,949
    Short-term investments                                                           41,622           41,198
    Other invested assets                                                            48,016           47,996
                                                                             ---------------  ---------------
                       Total investments                                          1,042,736        1,035,749
    Cash                                                                             21,781           23,579
    Accrued investment income                                                        17,700           23,090
    Premiums in course of collection (net of allowances for losses
         of $2,684 in 2002 and  2001)                                                77,956           47,589
    Reinsurance balances receivable                                                 397,029          357,827
    Reinsurance recoverable on paid losses                                           93,783           76,757
    Deferred policy acquisition costs                                                91,942           58,832
    Property and equipment                                                           20,080           18,368
    Deferred income taxes                                                            35,754           38,591
    Goodwill and other intangible assets                                            134,089          109,260
    Other assets                                                                     38,127           41,240
                                                                             ---------------  ---------------
                       Total assets                                             $ 1,970,977      $ 1,830,882
                                                                             ===============  ===============

Liabilities:
    Policy liabilities                                                            $ 689,004        $ 695,170
    Losses and loss adjustment expenses                                             298,661          280,997
    Unearned premiums                                                               271,225          179,879
    Federal Home Loan Bank advances                                                 179,692          168,614
    Short term debt                                                                  29,961           29,964
    Long term debt                                                                   74,791           79,432
    Other liabilities                                                               147,238          114,269
                                                                             ---------------  ---------------
                     Total liabilities                                            1,690,572        1,548,325

Commitments and contingencies: See Note B

Deferrable Capital Securities                                                        22,445           23,250

Stockholders' equity:
    Preferred stock, $.01 par value, 5,000,000 shares authorized, issued:
         2002 - 0 and 2001 - 0                                                           --               --
    Common stock, $.01 par value, 100,000,000 shares authorized,  issued:
         2002 - 37,528,111 and 2001 - 36,994,464                                        375              370
    Additional paid-in capital                                                      248,313          244,640
    Accumulated other comprehensive income, net of  tax expense
         of $869 and $4,191 in 2002 and 2001, respectively                            1,614            7,784
    Retained earnings                                                                33,829           32,611
    Treasury stock (1,054,717 shares and 923,972 shares at cost
         at March 31, 2002 and December 31, 2001, respectively)                      (7,412)          (6,591)
    Unearned stock                                                                  (18,759)         (19,507)
                                                                             ---------------  ---------------
                 Total stockholders' equity                                         257,960          259,307
                                                                             ---------------  ---------------
                 Total liabilities, deferrable capital securities
                    and stockholders' equity                                    $ 1,970,977      $ 1,830,882
                                                                             ===============  ===============`

See accompanying Notes to Consolidated Financial Statements

1

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




                                                                         Three months ended
                                                                               March 31,
                                                                        2002            2001
                                                                    --------------   ------------
                                                                              (unaudited)
Revenues:
    Net premiums written                                                $ 151,097       $ 61,212
    Change in unearned premiums                                           (39,306)         4,183
                                                                    --------------   ------------
    Net premiums earned                                                   111,791         65,395
    Policy fees                                                             3,418          1,253
    Agency fees and commissions                                            18,380
    Net investment income                                                  13,681         15,603
    Realized gains (losses)                                                 1,085          1,706
    Other                                                                   3,374          2,088
                                                                    --------------   ------------
        Total revenues                                                    151,729         86,045
Expenses:
    Policyholder benefits                                                  10,645          8,057
    Losses and loss adjustment expenses incurred                           70,694         38,701
    Policy acquisition expenses                                            21,274         14,402
    Operating expenses                                                     42,753         14,653
    Interest on debt                                                        3,951          4,658
    Goodwill and other intangible amortization                                 84            526
                                                                    --------------   ------------
        Total expenses                                                    149,401         80,997
Income from continuing operations before taxes, minority interest,
     and deferrable capital securities                                      2,328          5,048
Income tax expense                                                            859          1,787
Minority interest, net of tax                                                 424            249
Deferrable capital security distributions, net of tax                         129            383
                                                                    --------------   ------------
Net income  from continuing operations                                        916          2,629
Income (loss) from discontinued operations, net of tax                        (64)             5
Extraordinary gain on debt extinguishments, net of tax                        897             --
                                                                    --------------   ------------
        Net income                                                          1,749          2,634
Preferred stock dividend                                                       --           (163)
Gain on redemption of preferred securities, net of tax                        210            565
                                                                    --------------   ------------
Net income available to common shareholders                               $ 1,959        $ 3,036
                                                                    ==============   ============
Net income  from continuing operations per share - Basic                   $ 0.03         $ 0.14
                                                                    ==============   ============
Net income available to common shareholders per share - Basic              $ 0.06         $ 0.16
                                                                    ==============   ============
Net income from continuing operations per share - Diluted                  $ 0.03         $ 0.13
                                                                    ==============   ============
Net income available to common shareholders per share - Diluted            $ 0.06         $ 0.15
                                                                    ==============   ============

                Statements of Comprehensive Income
Net income                                                                $ 1,749        $ 2,634
Other comprehensive income, net of tax:
        Unrealized holding (losses) gains on available-for-sale securities
           net of tax of $(2,943) and $1,666, respectively                 (5,465)         3,094
        Less realized gains on available-for-sale securities net of tax
            of $380 and $597, respectively                                    705          1,109
                                                                    --------------   ------------
                                                                           (6,170)         1,985
Gain on redemption of preferred securities, net of tax of $113
     and $305, respectively.                                                  210            565
                                                                    --------------   ------------
 Comprehensive (loss) income                                             $ (4,211)       $ 5,184
                                                                    ==============   ============`

See accompanying Notes to Consolidated Financial Statements

2

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`Vesta Insurance Group, Inc.
                                     Consolidated Statements of Cash Flows
                                            (amounts in thousands)



                                                                               Three months ended March 31,
                                                                                  2002              2001
                                                                             ---------------   ---------------
                                                                                        (unaudited)
Operating Activities:
    Net income                                                                      $ 1,749           $ 2,692
    Adjustments to reconcile net income  to cash used in operations
       Changes in:
       Loss and LAE reserves, and future policy liabilities                          19,604           (14,739)
       Unearned premium reserves                                                     55,615            (1,359)
       Reinsurance balances receivable                                              (33,702)             (119)
       Premiums in course of collection                                             (28,187)           (2,964)
       Reinsurance recoverable on paid losses                                        (8,748)           (2,247)
       Other assets and liabilities                                                  19,327              (425)
    Policy acquisition costs deferred                                               (49,123)          (12,657)
    Policy acquisition costs amortized                                               25,482            14,402
    Realized gains                                                                   (1,085)           (1,706)
    Amortization and depreciation                                                     1,079             2,573
    Extraordinary gain                                                                 (897)               --
                                                                             ---------------   ---------------
             Net cash provided by (used in) operations                                1,114           (16,549)

Investing Activities:
    Investments sold, matured, and called:
       Fixed maturities available for sale                                           74,629           104,292
       Equity securities                                                                988                --
    Investments acquired:
       Fixed maturities available for sale                                          (89,036)          (47,112)
       Equity securities                                                             (2,989)           (2,057)
    Net increase (decrease) in other invested assets                                  1,693            (6,843)
    Net cash received (paid) for acquisition                                          9,006                --
    Net decrease in short-term investments                                             (421)            3,448
    Additions to property and equipment                                                (670)           (3,590)
                                                                             ---------------   ---------------
             Net cash (used in) provided from investing activities                   (6,800)           48,138

Financing Activities:
    Net change in FHLB borrowings                                                    11,078             9,997
    Change in long and short-term debt                                                   (3)           (3,334)
    Net deposits and withdrawals from insurance liabilities                          (5,441)           (1,508)
    Issuance of common stock                                                             --            32,350
    Acquisition of common stock                                                        (821)          (50,951)
    Dividends paid                                                                     (925)             (413)
                                                                             ---------------   ---------------
             Net cash provided by (used in) financing activities                      3,888           (13,859)
Increase (decrease) in cash                                                          (1,798)           17,730
Cash at beginning of period                                                          23,579            13,374
                                                                             ---------------   ---------------
Cash at end of period                                                              $ 21,781          $ 31,104
                                                                             ===============   ===============`

See accompanying Notes to Consolidated Financial Statements

3

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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 years. These  reclassifications  have no effect on previously reported  stockholders' equity
or net income during the periods involved.

New Accounting  Standards:  In June 2001, the Financial Accounting  Standards Board issued SFAS No. 141, "Business  Combinations."
SFAS No. 141 address financial  accounting and reporting for business  combinations.  The standard  eliminates the pooling of interests
method of accounting  for business  combinations  and requires that all intangible  assets be accounted for  separately  from goodwill.
Vesta has applied the  requirements of SFAS No. 141 to all  acquisitions  after July 1, 2001, as required,  and will account for future
acquisitions in accordance with the new guidance.

In June of 2001,  the Financial  Accounting  Standards  Board issued SFAS No. 142,  "Goodwill and Other  Intangible  Assets." This
statement  addresses how intangible assets that are acquired  individually or with a group of other assets (but not those acquired in a
business  combination)  should be accounted for in financial  statements  upon their  acquisition.  This  statement  also addresses how
goodwill and other  intangible  assets should be accounted for after they have been initially  recognized in the financial  statements.
We adopted SFAS No. 142 effective January 1, 2002.  See Note F for additional disclosures related to the adoption of SFAS 142.

In October of 2001, the FASB issued SFAS No. 144,  "Accounting for the Impairment or Disposal of Long-Lived  Assets." SFAS No. 144
is  effective  for fiscal  years  beginning  after  December 15,  2001 and was  written to provide a single  model for 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 Accounting  Principles Board 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."  Vesta adopted SFAS No. 144  effective  January 1, 2002.  Such adoption  resulted in no material  impact on Vesta's
financial position, results of operations or cash flows.

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.

Reconciliation of income available to common shareholders and average shares outstanding for the three months ending March
31, 2002 and 2001 are as follows:

`Three months ended March 31,
                                                                   2002                2001
                                                            -------------------  -----------------
Net income available to common shareholders                            $ 1,959            $ 3,036
Preferred stock dividends on convertible preferred stock                    --                163
                                                            -------------------  -----------------
Adjusted net income available to common shareholders                   $ 1,959            $ 3,199
                                                            ===================  =================


Weighted average shares outstanding-basic (1)                           33,305             18,857
Stock options and restricted stock                                         591                336
Weighted average convertible preferred stock (1)                            --              1,901
                                                            -------------------  -----------------
Weighted average shares outstanding-diluted (1)                         33,896             21,094
                                                            ===================  =================`

(1) Reflects  weighted  averages.  At March 31, 2002,  Vesta had 36.5 million shares  outstanding  and zero shares of
          convertible  preferred stock outstanding.  Weighted average shares outstanding for earnings per share purposes do not
          include shares held by the Agent's Stock  Incentive Plan Trust that have not been  allocated to  participants.

Earnings  per share for  discontinued  operations  and  extraordinary  gains for the three  months ended March 31, 2002 and 2001 are as
follows:

`2002               2001
                                   --------------     --------------
Basic Earnings per share:
    Discontinued Operations             $ 0.00             $ 0.00
    Extraordinary Gain                  $ 0.03                 --
Diluted Earnings per share:
    Discontinued Operations             $ 0.00             $ 0.00
    Extraordinary Gain                  $ 0.03                 --`

4

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Note B-Commitments and Contingencies

Securities Litigation

On October 26, 2001,  Vesta executed a definitive  agreement to settle the securities  litigation that had been pending since June
1998 against Vesta and certain  current and former officers and directors.  On December 10, 2001, the Court approved  settlement of the
consolidated  class action  securities  litigation in U.S.  District  Court in Alabama as to Vesta and its officers and directors for a
total of $61  million in cash.  A related  derivative  action  lawsuit in the  Circuit  Court of  Jefferson  County,  Alabama  was also
dismissed  with  prejudice.  Vesta  funded $21.0  million  towards the  settlement  and the  Company's  excess  directors  and officers
liability  carriers  funded the remaining  $40.0  million.  Vesta used its line of credit to finance its portion of the  settlement and
recorded a pre-tax  one-time charge of approximately  $25 million against earnings to cover Vesta's  contribution to the settlement and
other  expenses  incurred.  We have  now  filed a claim  with two of our  upper  level  excess D&O  insurers  for  their  part of the
settlement and related  expenses.  We have recorded a receivable of $5.4 million,  which represents the amount currently due from those
two excess D&O insurers.

Vesta  determined to participate in the funding of the settlement and to take the related  one-time  charge against  earnings as a
result of the Cincinnati  Insurance  Company's  attempted  rescission of their $25 million directors and officers  liability policy and
denial of  coverage.  Vesta has sued  Cincinnati  in Alabama  state  court  alleging  that its  actions  were taken in bad faith and is
vigorously pursuing that claim.  The Cincinnati case is scheduled for trial in August 2002.

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 advancing 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.

Arbitration

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 $55.9
million at March 31, 2002.  Additionally,  we have previously collected  approximately $48.5 million from the drawdown of collateral on
hand.

NRMA Insurance Ltd. ("NRMA"),  one of the participants in the 20% 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 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  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 and all those  arbitrations
are in the discovery stages.  Additionally,  Alfa recently filed a Motion for Declatory Judgement asking the arbitration panel to order
that there is no  enforceable  agreement  between  Alfa and Vesta.  We are  vigorously  opposing  such motion,  which is scheduled  for
hearing in June 2002.  Presently,  the hearing in the NRMA  arbitration  is scheduled for October 2002.  Hearing dates for the Alfa and
Dorinco  arbitrations  are  not  presently  scheduled.  While  management  believes  its  interpretation  of  the  treaty's  terms  and
computations based thereon are correct, these matters are in arbitration and their ultimate outcome cannot be determined at this time.

During 1999, F&G Re (on behalf of USF&G),  filed for arbitration  under two aggregate stop loss  reinsurance  treaties whereby F&G
Re assumed  certain  risk from the Vesta.  F&G Re is seeking to cancel the  treaties  and avoid its  obligation.  Based on the terms of
the two treaties,  Vesta will be entitled to  recoveries of  approximately  $30.0 million as losses from prior  accident  years mature.
Vesta has recorded a  reinsurance  recoverable  of $30.0  million at December 31, 2001  related to these two  treaties.  The hearing in
this  arbitration  began on February 11, 2002.  The hearing was  adjourned  on February 15, 2002 and  scheduled  to resume on June 11,
2002.  While management believes that USF&G is not entitled to rescission, the ultimate outcome cannot be determined at this time.

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  claims are due under the terms of the treaty.  In addition,
during the fourth quarter,  the treaty was terminated on a cut-off basis.  Vesta is seeking  recoupment of all improper claims payments
and  excessive  expense  allocations  and  charges  from  CIGNA.  The  arbitration  was  bifurcated  into two  phases  with  phase  one
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 and phase two related to any issues  between the parties  after the Company  conducts an audit of expenses  related
to the  treaty.  The phase one  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;  and (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.

Other Litigation

On January 14, 2002, the Company's  subsidiary,  American  Founders,  was notified of a lawsuit in Texas naming it as a defendant
and  brought by a creditor  of the former  parent of the  subsidiary.  This  lawsuit  (subsequently  identified  as the Blitz  lawsuit)
alleges,  among  other  things,  that  American  Founders  redeemed  its  Series A and  Series C  preferred  stock  issues at less than
"reasonably  equivalent  value".  American Founders believes that the

5

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allegations  brought against it in this lawsuit are without merit and  intends  to mount a  vigorous  defense in this  action.  In the  opinion of  management,  resolution  of the Blitz  lawsuit is not
expected to have a material adverse effect on the financial  position of the Company.  However,  depending on the amount and timing, an
unfavorable  resolution of this matter could  materially  affect  American  Founders'  future  operations or cash flows in a particular
period.

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 operate several  segments,  which are  distinguishable  by their product  offerings.  The accounting  policies of the operating
segments are the same as used in preparing the  consolidated  financial  statements.  Segment pre-tax income is generally income before
income tax, and minority  interest,  if any.  Premiums,  policy fees,  other income,  loss and benefit  expenses,  and  amortization of
deferred  acquisition costs are attributed  directly to each operating  segment.  Operating expenses are allocated to the segments in a
manner which most  appropriately  reflects the  operations of that 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

The standard  property-casualty  segment primarily consists of the marketing and distribution of personal lines products including
residential  property and private  passenger auto coverages.  Vesta's products are distributed  primarily through  approximately  1,500
independent  agencies in 24 states.  Our standard  personal auto line targets drivers over age  thirty-five  with above average driving
records and our residential property products cover the full range of homes.

Life and Health Insurance

On June 30, 2000, we entered the life and annuity business through an investment in American  Founders  Financial  Corporation,  a
holding  company  for two life  insurance  companies  domiciled  in Texas and we entered  the health  insurance  business  through  the
acquisition  of Aegis  Financial  Corporation  in December  2000.  American  Founders and Aegis have  approximately  $2.5 billion (face
value) of life and  annuity  products  in force and  approximately  $22.5  million of health  insurance  premiums in force at March 31,
2002.  American  Founders markets  traditional life products,  universal life products,  fixed-rate  annuities,  pension  contracts and
related products through  independent  agents  throughout the majority of the United States.  Aegis Financial  markets health insurance
products through captive agents throughout the United States.

Specialty Underwriting

Specialty  underwriting  includes our fronting  operations and any  underwriting  risk retained from premiums  written through our
non-standard  auto  agencies.  In  fronting  arrangements,  we  write  targeted  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 on 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.

Agency

The  agency  segment  consists  of our agency  retail and  wholesale  operations.  The  primary  sources  of revenue  are  agents'
commissions  and fees  collected  by retailers  and fees and  commissions  collected  by  wholesalers.  These  revenue  streams are not
risk-bearing.

Corporate and Other

Our corporate and other segment primarily consists of unallocated net investment income, unallocated interest expense, and
certain overhead expenses not directly associated with a particular segment.

6

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A summary of segment results for the three months ended March 31, 2002 and 2001 is as follows:

`Standard     Life and
                                           Property-     Health        Specialty                Corporate
                                           Casualty     Insurance    Underwriting   Agency      and Other    Eliminations    Total
2002                                      ------------ ------------ -------------- -----------  ----------- -------------- ----------
Revenues:                                                               (in thousands)
    Premiums earned                          $ 67,843      $ 8,074       $ 35,874                                           $ 111,791
    Agency fees and commissions                    --           --             --    $ 23,588                    $ (5,208)     18,380
    Net investment income                          --        9,419             --          --      $ 4,382           (120)     13,681
    Policy fees                                 1,302          983          1,133          --           --             --       3,418
    Realized gains                                 --          942             --          --          143             --       1,085
    Other                                          --          337          1,608                    1,429             --       3,374
                                          ------------ ------------ -------------- -----------  ----------- -------------- -----------
                  Total revenues                69,145       19,755         38,615      23,588        5,954         (5,328)  $ 151,729
Expenses:
    Loss, LAE and policyholder benefits        47,079       10,645         23,615          --           --             --      81,339
    Policy acquisition costs                   15,415        1,749          9,318          --           --         (5,208)     21,274
    Operating expenses                          9,172        3,286          3,296      20,736        6,263             --      42,753
    Interest on debt                               --        1,576             --         120        2,375           (120)      3,951
    Goodwill and other intangible amortization     --           --             --          --           84             --          84
                                          ------------ ------------ -------------- -----------  ----------- -------------- -----------
                  Total expenses                71,666       17,256         36,229      20,856        8,722         (5,328)    149,401

Pre-tax income (loss) from
   continuing operations                        (2,521)     $ 2,499        $ 2,386     $ 2,732     $ (2,768)           $ -     $ 2,328
                                          ============ ============ ============== ===========  =========== ============== ===========
Operating segment assets:
    Investments and other assets             $ 288,866    $ 908,188      $ 124,576    $ 63,204    $ 398,451
    Deferred acquisition costs                  51,955       23,987         11,889       4,111           --
                                           ------------ ------------ -------------- -----------  -----------
                                             $ 340,821    $ 932,175      $ 136,465    $ 67,315    $ 398,451
                                          ============ ============ ============== ===========  ===========`

`Standard     Life and
                                           Property-     Health        Specialty                Corporate
                                           Casualty     Insurance    Underwriting   Agency      and Other       Total
2001                                      ------------ ------------ -------------- -----------  ----------- ------------
Revenues:                                                               (in thousands)
    Premiums earned                          $ 56,847      $ 7,465       $ 1,083                               $ 65,395
    Net investment income                          --       10,780            --        $ 157      $ 4,666       15,603
    Policy fees                                   355          898            --           --           --        1,253
    Realized gains                                 --          601            --           --        1,105        1,706
    Other                                          --           52           843          442          751        2,088
                                          ------------ ------------ ------------- ------------ ------------ ------------
                Total revenues                 57,202       19,796         1,926          599        6,522       86,045
Expenses:
    Loss, LAE and policyholder benefits        37,902        8,057           799           --           --       46,758
    Policy acquisition costs                   12,058        2,122           222           --           --       14,402
    Operating expenses                          6,362        3,761            61         1389        3,080       14,653
    Interest on debt                               --        2,430            --           --        2,228        4,658
    Goodwill and other intangible amortization     --           --            --           --          526          526
                                          ------------ ------------ ------------- ------------ ------------ ------------
                Total expenses                 56,322       16,370         1,082        1,389        5,834       80,997

Pre-tax income (loss) from
    continuing operations                       $ 880      $ 3,426         $ 844       $ (790)       $ 688      $ 5,048
                                          ============ ============ ============= ============ ============ ============

Operating segment assets:
    Investments and other assets            $ 206,867    $ 907,847       $ 8,219     $ 27,114    $ 294,593
    Deferred acquisition costs                 26,203       17,660           345           --           --
                                          ------------ ------------ ------------- ------------ ------------
                                            $ 233,070    $ 925,507       $ 8,564     $ 27,114    $ 294,593
                                          ============ ============ ============= ============ ============`

7

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Note D-Stock 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
an after tax extraordinary  gain on  extinguishment of debt of $.9 million and an after tax gain on redemption of preferred  securities
of $.2 million.

Note E-Acquisitions

In January 2002, we completed three acquisitions.  We acquired certain assets of InsureOne Agency and the renewal rights to a book of
non-standard automobile business, the non-standard automobile related assets of Harbor Insurance Group, and the common stock of Old
American Investments.    Combined purchase prices are estimated to be $22.3 million with $15.3 million due at closing and $7.0 million due
upon the occurrence of certain future events.  The transactions have been accounted for as purchases.  Summarized below is an initial
allocation of assets and liabilities acquired (in thousands except per share amounts and unaudited):

`Assets acquired:
     Cash                             $ 27,716
     Propery, Plant & Equipment          3,148
     Other assets                       29,572
     Goodwill and other
       Intangible assets                24,913
                                  -------------
          Total assets                $ 85,349
                                  =============

Liabilities acquired:
     Unearned premiums                  35,731
     Other liabilities                  27,321
                                  -------------
          Total liabilities           $ 63,052
                                  =============`

Note F-Goodwill and Other Intangible Assets

In June, 2001, the FASB issued Statement of Financial  Accounting  Standards No. 141,  "Business  Combinations"  and SFAS No. 142,
"Goodwill and other  Intangible  Assets," having a required  effective date for fiscal years  beginning after December 15, 2001.  Under
the new rules,  Goodwill and other  intangible  assets deemed to have indefinite  lives will no longer be amortized but will be subject
to annual  impairment  tests in accordance  with the  Statements.  Other  intangible  assets will  continue to be amortized  over their
useful lives.

We adopted the new rules on accounting for goodwill and other  intangible  assets  effective  January 1, 2002.  Application of the
non-amortization  provisions of SFAS No. 142 is expected to result in an increase in net income of  approximately  $2.6 million  during
2002.  The  standard  requires a  transitional  impairment  test during the period of adoption to be  completed  by June 30,  2002.  As
implementation  guidance continues to evolve, this transitional  impairment test has not been finalized,  and we do not know the impact
this transitional impairment test may have on our financial position and results of operations.

8

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During the three months ended March 31, 2001, we recorded $.3 million in amortization of goodwill.  The impact of amortization of
goodwill on net income for the three months ended March 31, 2001 was as follows (in thousands, except per share data):

`Three months ended
                                                                 March 31, 2001
                                                               -------------------

Reported net income                                                  $ 2,634
Add back:
     Goodwill amortization, net of income taxes                          342
                                                               -------------------

Net income excluding goodwill amortization, net of income taxes      $ 2,976
                                                               ===================

Basic net income per common share

Reported net income                                                   $ 0.14
Add back:
     Goodwill amortization, net of income taxes                         0.02
                                                               -------------------

Net income excluding goodwill amortization, net of income taxes       $ 0.16
                                                               ===================

Weighted average number of common shares outstanding (basic)          18,857

Diluted net income per common share

Reported net income                                                   $ 0.13
Add back:
     Goodwill amortization, net of income taxes                         0.01
                                                               -------------------

Net income excluding goodwill amortization, net of income taxes       $ 0.15
                                                               ===================

Weighted average number of common shares outstanding (diluted)        21,094`

The changes in the carrying amount of goodwill and other intangible assets for the year ended December 31, 2001 and for the three months ended March 31, 2002
are as follows (in thousands):

`Balance as of January 1, 2000               $ 17,797
Goodwill and other intangible
   assets acquired                            94,857
Amortization                                  (3,394)
                                      ---------------

Balance as of December 31, 2001              109,260
Goodwill and other intangible
   assets acquired                            24,913
Amortization                                     (84)
Transitional impairment charge                    --
                                      ---------------

Balance as of March 31, 2002               $ 134,089
                                      ===============`

The $134.1 million balance at March 31, 2002 consists of $127.4 million of goodwill and $6.7 million of other intangible assets.  Other
intangible assets include brand name, trademark and the value of certain policy renewal rights.

Amortization expense recorded on the intangible assets for each of the three-month periods ended March 31, 2002 and 2001 was $.1
million and $0, respectively.  The estimated amortization expense for each of the five succeeding fiscal years is as follows (in
thousands):

`For the year ended December 31,

         2002                   $ 336
         2003                     300
         2004                     250
         2005                     200
         2006                     200`

9

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

Results of Operations

Vesta writes  insurance  on selected  personal  lines risks only.  Our standard  property-casualty  writings are balanced  between
risks of property damage (faster  determination of ultimate loss but highly  unpredictable) and casualty exposure (more predictable but
takes longer to determine  the ultimate  loss).  We also write life,  annuity,  and health  insurance  business.  Additionally,  we are
actively  involved in the writing of  insurance  on our  policies for the benefit of  reinsurance  companies,  commonly  referred to as
servicing carrier or fronting, which generates fee-for-service income.

Our revenues from  operations  are derived  primarily  from net premiums  earned on risks  written by our insurance  subsidiaries,
investment  income and investment  gains or losses.  Our expenses consist  primarily of payments for claims and underwriting  expenses,
including agents' commissions, fees and operating expenses.

Comparison of First Quarter 2002 to First Quarter 2001

Income  available to common  shareholders  decreased by $1.0  million,  to a $2.0 million  income for the quarter ended March 31,
2002,  from $3.0  million  for the  quarter  ended  March 31,  2001.  On a diluted  per share  basis,  net income  available  to common
shareholders for the first quarter of 2002 was $.06 per share versus net income of $.15 per share for the first quarter of 2001.

Standard Property-Casualty

Net premiums written for standard  property-casualty  lines increased by $45.5 million, or 87.2%, to $97.7 million for the quarter
ended March 31, 2002,  from $52.2  million for the quarter  ended March 31, 2002.  Net premiums  earned for standard  property-casualty
lines  increased  $11.0  million,  or 19.4% to $67.8 million for the quarter  ended March 31, 2002,  from $56.8 million for the quarter
ended March 31, 2001. The increase in net premiums  written and net premiums  earned is primarily  attributable  to the  acquisition of
Florida Select in April 2001, and increased writings in Texas, partially offset by decreases in other lines of business.

Loss and loss adjustment  expenses  ("LAE") for standard  property-casualty  lines  increased by $9.2 million,  or 24.3%, to $47.1
million for the quarter  ended March 31, 2002,  from $37.9  million for the quarter  ended March 31,  2001.  The loss and LAE ratio for
property-casualty  lines for the  quarter  ended  March 31, 2002 was 68.1% as  compared  to 66.3% at March 31,  2001.  The  increase in
the loss and LAE incurred and the loss and LAE ratio is primarily  attributable to  deteriorating  underwriting  results in the current
period in our automobile  lines,  storm losses in Texas,  and an increase in earned  premium.  The  deterioration  in our  underwriting
results is being primarily driven by increases in frequency and severity of claims in certain states.

Policy acquisition expenses increased $3.4 million for the quarter-to-quarter  comparison,  consistent with the increase in earned
premium.  Operating  expenses  increased  by $2.8  million,  to $9.2  million for the  quarter  ended  March 31,  2002,  as we incurred
increased expenses from our Texas operations.

Life and Health Insurance

American Founders and Aegis have  approximately  $2.2 billion (face value) of life and annuity products in force and $22.7 million
of health  insurance  premiums in force at March 31, 2002.  Life  insurance  premiums and policy fees were $4.1 million for the quarter
ended  March 31, 2002  compared  to $3.3  million  for the  comparable  prior  period in 2000.  The  increase  is  attributable  to the
acquisition of Washington  Life in August 2001.  Health  insurance  premiums  totaled $5.0 million for the quarter ended March 31, 2002
versus $5.2 million for the  comparable  prior period.  Health  insurance  benefits  incurred  totaled $3.0 million for the quarter and
health insurance  commission  expense was $1.5 million.  Pre-tax income  decreased by $.9 million  primarily due to higher mortality in
two older acquired blocks and lower than expected investment income.

Specialty Underwriting

Net premiums  written for  specialty  underwriting  increased by $43.8  million to $45.3  million for the quarter  ended March 31,
2002,  from $1.5  million for the quarter  ended March 31, 2002.  Net premiums  earned for  specialty  underwriting  increased to $35.9
million for the quarter  ended March 31,  2002,  from $1.1 million for the quarter  ended March 31, 2001.  The increase in net premiums
written and net premiums  earned is primarily  attributable  to the  acquisition  certain  assets of Insure One and the related book of
business  from its  affiliated  insurance  companies  and  increased  retained  amounts from other  fronting  programs.  Fronting  fees
increased $.8 million to $1.6 million on higher written premium.

Loss and loss adjustment expenses ("LAE") for specialty  underwriting  increased by $22.8 million to $23.6 million for the quarter
ended March 31, 2002,  from $.8 million for the quarter  ended March 31, 2001.  The loss and LAE ratio for the quarter  ended March 31,
2002 was 63.8% as compared to 73.8% at March 31,  2001.  The  increase in the loss and LAE  incurred  and the  decrease in the loss and
LAE ratio is primarily  attributable  to the  inclusion of  underwriting  results of the business  produced by our  affiliated  agency,
Insure One, which are better than the underwriting results from our traditional fronting programs.

Policy acquisition expenses increased $9.1 million for the quarter-to-quarter  comparison,  consistent with the increase in earned
premium.  Operating  expenses  increased  by $3.2  million,  to $3.3  million for the  quarter  ended  March 31,  2002,  as we incurred
increased expenses from our increase operations.

Agency

Our Agency  operations  increased  its revenues by $23.4  million to $23.6  million as a result of  acquisitions  completed in the
fourth  quarter  of 2001 and the  first  quarter  of 2002.  Operating  expenses  increased  by $19.3  million  to $20.7  million  as we
integrated the acquired operations with our existing operations.

10

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Net Investment Income

Net  investment  income  decreased by $1.9 million,  or 12.2%,  to $13.7 million for the quarter ended March 31, 2002,  from $15.6
million for the quarter  ended March 31,  2001.  The weighted  average  yield on invested  assets  (excluding  realized and  unrealized
gains) was 6.7% for the quarter  ended March 31,  2002,  compared  with 6.6% for the quarter  ended  March 31,  2001.  The  decrease in
investment  income is primarily  attributable to a decrease in the weighted  average yield as yields have generally  declined in recent
months,  the investment of funds in our investment  portfolio in new operating  entities and a reduction in investment  income from our
collateral loan portfolio.

Federal Income Taxes

Federal income taxes  decreased by $.9 million to $.9 million for the quarter ended  March 31, 2002 as a result of less income in
the current period compared to the prior period.

Liquidity and Capital Resources

Vesta is a holding company whose principal  asset is its investment in the capital stock of the companies  constituting  the Vesta
Insurance Group, a group of wholly owned insurance companies  including Vesta Fire Insurance  Corporation and a majority ownership in a
life insurance holding company which includes  American  Founders Life Insurance Company and a majority  ownership in Instant Insurance
Holdings,  Inc.  The  insurance  subsidiaries  comprising  the Vesta  Group are  individually  supervised  by various  state  insurance
regulators,  but given our  organizational  structure,  Vesta Fire is our only operating  subsidiary that can pay dividends directly to
our holding company.  Vesta Fire is an Illinois domestic insurance company.

Dividends and Management Fees

The principal  uses of funds at the holding  company level are to pay operating  expenses,  principal and interest on  outstanding
indebtedness  and deferrable  capital  securities and dividends to stockholders if declared by the Board of Directors.  During the last
three years, our insurance  subsidiaries have produced operating results and paid management fees and dividends  sufficient to fund our
needs. As a holding  company with no other business  operations,  we rely primarily on fees generated by our management  agreement with
our insurance  subsidiaries  and dividend  payments from Vesta Fire to meet our cash  requirements  (including our debt service) and to
pay dividends to our stockholders.

Transactions  between Vesta and its insurance  subsidiaries,  including the payment of dividends and  management  fees to Vesta by
such  subsidiaries,  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 earned 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.  On October 29, 2001,  the Illinois  Insurance  Department  published a Company  Bulletin
that  indicates  that the  Department  interprets  these  dividend  limitations to 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 2001.  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.

We believe that the Illinois Insurance Department's  willingness to approve the payment of a dividend by Vesta Fire to our holding
company  will depend on a variety of factors,  such as the impact to the holding  company if the dividend is not paid and the impact to
Vesta Fire if the dividend is paid. For example,  the payment of a dividend may cause  non-compliance  with the Illinois  Department of
Insurance's  "reserve  reconciliation  test," which requires Vesta Fire to maintain a minimum amount of liquid, high quality assets. At
December 31, 2001,  Vesta Fire's  qualifying  assets exceeded its minimum by approximately  $8.8 million.  If the payment of a dividend
would jeopardize Vesta Fire's ability to comply with this reserve  reconciliation  test, then the Illinois  Department of Insurance may
not approve it.  Accordingly,  there can be no assurance that Vesta Fire will be able to obtain the requisite  regulatory  approval for
the payment of dividends.

We rely primarily on fees earned under our management agreement with our insurance company subsidiaries to meet our cash
requirements (including debt service) and to pay dividends to our stockholders.     This management agreement, which provided
approximately $25 million to our holding company in 2001, is subject to certain regulatory standards which generally require its
terms and fees to be fair and reasonable.  The Illinois Department of Insurance may review this agreement from time to time to insure
the reasonableness of its 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 the management agreement is not modified in a material respect, we believe that this
management agreement will provide us with funds sufficient to meet our anticipated needs (including debt service) for at least the
next twelve months.

On
March 3, 2000, we established a revolving credit facility with First Commercial
Bank, Birmingham, Alabama (First Commercial). In May, 2001 we increased the amounts available and increased the term of the credit facility to the following:

- a $15 million unsecured line which bears interest at First Commercial's prime rate +1/4%;

- an additional $15 million line which bears interest at First  Commercial's  prime rate, secured by a pledge of the revenues received under the management
          contract between our wholly owned management company, J. Gordon Gaines, Inc., and our operating insurance subsidiaries.

Each of these credit facilities mature on April 30, 2003.  As of March 31, 2002, the principal amount outstanding under these credit
facilities was approximately $30.0 million.   Effective as of March 30, 2002, each of these credit agreements have been amended to
restructure the financial covenants

11

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contained therein.  The amended covenants require us to maintain certain minimum (i) consolidated net income, (ii) consolidated debt
to capital ratios, (iii) credit ratings, (iv) GAAP net worth, (v) interest coverage ratio and (vi) risk based capital.   As of March
31, 2002, we were in compliance with all of these covenants.

Contingent Obligations

As part of its  ongoing  reinsurance  recoverable  arbitrations,  we have  obtained  letters of credit for the  benefit of certain
parties.  Our principal  operating  subsidiary,  Vesta Fire is contingently  liable under the terms of these letters of credit. For our
reinsurance arbitrations, we have obtained letters of credit totaling $33.7 million for which we are contingently liable.

Additionally,  as part of our specialty  lines  underwriting  retained,  we have  obtained  letters of credit or other pledges of
securities totaling $29.2 million securing our obligations under the various reinsurance agreements.

Cash Flows

The  principal  sources of funds for our insurance  subsidiaries  are  premiums,  investment  income and proceeds from the sale or
maturity of invested  assets.  Such funds are used  principally  for the payment of claims,  operating  expenses,  commissions  and the
purchase of investments.  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 is  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,  where we
are exiting certain lines of business such as commercial  lines and  reinsurance  assumed lines we are funding 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 operations  for the quarter ended March 31, 2002 and 2001,  was $1.1 million and
$(16.5)  million,  respectively.  Net cash (used in)  provided by investing  activities  was $(6.8)  million and $48.1  million for the
quarter  ended  March 31,  2002 and 2001,  respectively  as we used cash to fund the  discontinuance  of the  reinsurance  assumed  and
commercial  lines of business in 2000 through the  liquidation  of our investment  portfolio.  Net cash provided by (used in) financing
activities was $3.9 million and $(13.9) million for the quarter ending March 31, 2002 and 2001.

New Accounting Pronouncements

In June 2001,  the  Financial  Accounting  Standards  Board  issued SFAS No. 141,  "Business  Combinations."  SFAS No. 141 address
financial  accounting and reporting for business  combinations.  The standard  eliminates the pooling of interests method of accounting
for business  combinations  except for  qualifying  business  combinations  and requires  that all  intangible  assets be accounted for
separately  from goodwill.  Vesta has applied the  requirements  of SFAS No. 141 to all  acquisitions  after July 1, 2001, as required,
and will account for future acquisitions in accordance with the new guidance.

In June of 2001,  the Financial  Accounting  Standards  Board issued SFAS No. 142,  "Goodwill and Other  Intangible  Assets." This
statement  addresses how intangible assets that are acquired  individually or with a group of other assets (but not those acquired in a
business  combination)  should be accounted for in financial  statements  upon their  acquisition.  This  statement  also addresses how
goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements.

Vesta adopted the provisions of SFAS No. 142 effective January 1, 2002.   Additionally, SFAS No. 142 requires that goodwill be
tested annually for impairment and the initial goodwill impairment test is required to be completed within six months of adoption.
Vesta has not completed its initial goodwill impairment test and has not yet determined what effect the impairment tests will have on
its financial position or results of operations.  Vesta expects that the elimination of goodwill amortization will positively impact
pretax net income by approximately $2.6 million in fiscal year 2002.

In October of 2001, the FASB issued SFAS No. 144,  "Accounting for the Impairment or Disposal of Long-Lived  Assets." SFAS No. 144
is  effective  for fiscal  years  beginning  after  December 15,  2001 and was  written to provide a single  model for 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 Accounting  Principles Board 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."  Vesta adopted SFAS No. 144  effective  January 1, 2002.  Such adoption  resulted in no material  impact on Vesta's
financial position, results of operations or cash flows.

Market Risk of Financial Instruments

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, 2001.

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 morecompletely 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.

12

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PART IIItem 1. Legal Proceedings

Securities Litigation

On October 26, 2001,  Vesta executed a definitive  agreement to settle the securities  litigation that had been pending since June
1998 against Vesta and certain  current and former officers and directors.  On December 10, 2001, the Court approved  settlement of the
consolidated  class action  securities  litigation in U.S.  District  Court in Alabama as to Vesta and its officers and directors for a
total of $61  million in cash.  A related  derivative  action  lawsuit in the  Circuit  Court of  Jefferson  County,  Alabama  was also
dismissed  with  prejudice.  Vesta  funded $21.0  million  towards the  settlement  and the  Company's  excess  directors  and officers
liability  carriers  funded the remaining  $40.0  million.  Vesta used its line of credit to finance its portion of the  settlement and
recorded a pre-tax  one-time charge of approximately  $25 million against earnings to cover Vesta's  contribution to the settlement and
other  expenses  incurred.  We have  now  filed a claim  with two of our  upper  level  excess D&O  insurers  for  their  part of the
settlement and related  expenses.  We have recorded a receivable of $5.4 million,  which represents the amount currently due from those
two excess D&O insurers

Vesta  determined to participate in the funding of the settlement and to take the related  one-time  charge against  earnings as a
result of the Cincinnati  Insurance  Company's  attempted  rescission of their $25 million directors and officers  liability policy and
denial of  coverage.  Vesta has sued  Cincinnati  in Alabama  state  court  alleging  that its  actions  were taken in bad faith and is
vigorously pursuing that claim.  The Cincinnati case is scheduled for trial in August 2002.

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 advancing 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.

Arbitration

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 $55.9
million at March 31, 2002.  Additionally,  we have previously collected  approximately $48.5 million from the drawdown of collateral on
hand.

NRMA Insurance Ltd. ("NRMA"),  one of the participants in the 20% 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 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  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 and all those  arbitrations
are in the discovery stages.  Additionally,  Alfa recently filed a Motion for Declatory Judgement asking the arbitration panel to order
that there is no  enforceable  agreement  between  Alfa and Vesta.  We are  vigorously  opposing  such motion,  which is scheduled  for
hearing in June 2002.  Presently,  the hearing in the NRMA  arbitration  is scheduled for October 2002.  Hearing dates for the Alfa and
Dorinco  arbitrations  are  not  presently  scheduled.  While  management  believes  its  interpretation  of  the  treaty's  terms  and
computations based thereon are correct, these matters are in arbitration and their ultimate outcome cannot be determined at this time.

During 1999, F&G Re (on behalf of USF&G),  filed for arbitration  under two aggregate stop loss  reinsurance  treaties whereby F&G
Re assumed  certain  risk from the Vesta.  F&G Re is seeking to cancel the  treaties  and avoid its  obligation.  Based on the terms of
the two treaties,  Vesta will be entitled to  recoveries of  approximately  $30.0 million as losses from prior  accident  years mature.
Vesta has recorded a  reinsurance  recoverable  of $30.0  million at December 31, 2001  related to these two  treaties.  The hearing in
this  arbitration  began on February 11,  2002.  The hearing was  adjourned  on February  15, 2002 and  scheduled to resume on June 11,
2002.  While management believes that USF&G is not entitled to rescission, the ultimate outcome cannot be determined at this time.

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  claims are due under the terms of the treaty.  In addition,
during the fourth quarter,  the treaty was terminated on a cut-off basis.  Vesta is seeking  recoupment of all improper claims payments
and  excessive  expense  allocations  and  charges  from  CIGNA.  The  arbitration  was  bifurcated  into two  phases  with  phase  one
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 and phase two related to any issues  between the parties  after the Company  conducts an audit of expenses  related
to the  treaty.  The phase one  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;  and (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.

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Other Litigation

On January 14, 2002, the Company's  subsidiary,  American  Founders,  was notified of a lawsuit in Texas naming it as a defendant
and  brought by a creditor  of the former  parent of the  subsidiary.  This  lawsuit  (subsequently  identified  as the Blitz  lawsuit)
alleges,  among  other  things,  that  American  Founders  redeemed  its  Series A and  Series C  preferred  stock  issues at less than
"reasonably  equivalent  value".  American Founders believes that the allegations  brought against it in this lawsuit are without merit
and  intends  to mount a  vigorous  defense in this  action.  In the  opinion of  management,  resolution  of the Blitz  lawsuit is not
expected to have a material adverse effect on the financial  position of the Company.  However,  depending on the amount and timing, an
unfavorable  resolution of this matter could  materially  affect  American  Founders'  future  operations or cash flows in a particular
period.

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.

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Item 2. Changes in Securities

In the first quarter of 2002, we exchanged 533,647 shares of our common stock for $4.6 million principal amount of our 8.75% Senior
Notes due 2025 and $.8 million of our 8.5% Deferrable Capital Securities.    The transactions were not registered under the
Securities Act of 1933 in reliance on the exemption afforded by Section 3(a)(9) thereof.

Item 3. Defaults Upon Senior SecuritiesNoneItem 4. Submission of Matters to a Vote of Security Holders
NoneItem 5. Other information
None

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Item 6. Exhibits and Reports on Form 8-K

a)   EXHIBITS

10.1   Second Amendment to Credit Agreement (Secured) effective as of March 30, 2002.

10.2   Second Amendment to Credit Agreement (Unsecured) effective as of March 30, 2002.

b)   Reports on Form 8-K.

Current reports were filed on Form 8-K on January 17 and March 4, 2002 in connection with press releases.

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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 13, 2002

Date: May 13, 2002

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