---

## 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 September 30, 2001

OR

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

For the transition period from
to
Commission file number 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 November 12, 2001
34,759,494

---

# Vesta
Insurance Group, Inc.

Index

|Part I  | Financial Information                                                                       | Page
|------- | ------------------------------------------------------------------------------------------- | ----
|Item 1. | Financial Statements:                                                                       |     
|        | Consolidated Balance Sheets at September 30, 2001 and December 31, 2000                     | 1   
|        | Consolidated Statements of Income and Comprehensive Income for the                          |     
|        | Three Months and Nine Months ended September 30, 2001 and 2000                              | 2   
|        | Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 | 3   
|        | Notes to Consolidated Financial Statements                                                  | 4-10
|Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations       | 11  
|        |                                                                                             |     
|
|Item 1. | Legal Proceedings                                                                           | 15  
|Item 2. | Changes in Securities                                                                       | 17  
|Item 3. | Defaults Upon Senior Securities                                                             | 17  
|Item 4. | Submission of Matters to a Vote of Securities                                               | 17  
|Item 5. | Other Information                                                                           | 17  
|Item 6. | Exhibits and Reports on Form 8-K                                                            | 18  

---

# Part I
Item 1. Financial Statements

Vesta Insurance Group, Inc.

Consolidated Balance Sheets

(amounts in thousands except share and per share data)

`September 30,     December 31,
                                                                                  2001             2000
                                                                             ---------------  ---------------
                                                                               (unaudited)
Assets:
    Investments:
    Fixed maturities available for sale - at fair value
          (cost: 2001 - $808,984; 2000 - $795,118)                                $ 831,321        $ 798,205
    Equity securities-at fair value: (cost: 2001-$29,340; 2000-$30,221)              29,798           31,285
    Mortgage and collateral loans                                                    54,774           63,060
    Policy loans                                                                     64,137           61,413
    Short-term investments                                                           23,607           22,586
    Other invested assets                                                            35,607           29,343
                                                                             ---------------  ---------------
                     Total investments                                            1,039,244        1,005,892
    Cash                                                                             33,375           13,374
    Accrued investment income                                                        16,157           17,017
    Premiums in course of collection (net of allowances for losses
         of $4,106 in 2001 and $3,937 in 2000)                                       46,646           23,882
    Reinsurance balances receivable                                                 355,418          353,949
    Reinsurance recoverable on paid losses                                           67,560           57,325
    Deferred policy acquisition costs                                                52,394           45,954
    Deferred income taxes                                                            38,180           22,457
    Other assets                                                                    124,417           82,149
                                                                             ---------------  ---------------
                     Total assets                                               $ 1,773,391      $ 1,621,999
                                                                             ===============  ===============

Liabilities:
    Policy liabilities                                                            $ 689,068        $ 660,284
    Losses and loss adjustment expenses                                             281,212          263,689
    Unearned premiums                                                               145,259          104,755
    Federal Home Loan Bank advances                                                 162,599          150,691
    Short term debt                                                                   9,973            5,000
    Long term debt                                                                   79,432           86,419
    Other liabilities                                                               118,514          102,825
                                                                             ---------------  ---------------
                     Total liabilities                                            1,486,057        1,373,663

Commitments and contingencies: See Note B

Deferrable Capital Securities                                                        29,750           33,225

Stockholders' equity:
    Preferred stock, $.01 par value, 5,000,000 shares authorized, issued:
         2001 - 0 and 2000 - 2,950,000                                                   --               30
    Common stock, $.01 par value, 100,000,000 shares authorized,  issued:
         2001 - 34,907,966 and 2000 - 18,964,322                                        319              190
    Additional paid-in capital                                                      229,962          167,382
    Accumulated other comprehensive income, net of  tax expense
         of $7,978 and $1,453  in 2001 and 2000, respectively                        14,817            2,698
    Retained earnings                                                                34,113           57,643
    Treasury stock (148,472 shares and 166,294 shares at cost
         at September 30, 2001 and December 31, 2000, respectively)                  (1,644)          (5,865)
    Unearned stock                                                                  (19,983)          (6,967)
                                                                             ---------------  ---------------
                 Total stockholders' equity                                         257,584          215,111
                                                                             ---------------  ---------------
                 Total liabilities, deferrable capital securities
                   and stockholders' equity                                      $1,773,391      $ 1,621,999
                                                                             ===============  ===============`

See accompanying Notes to Consolidated Financial Statements

---

# Vesta
Insurance Group, Inc.

Consolidated Statements of Income and Comprehensive Income
Statements of Income
(amounts in thousands except per share data)

`Three months ended            Nine months ended
                                                                           September 30,                 September 30,
                                                                        2001            2000          2001           2000
                                                                    --------------  -------------  ------------   ------------
                                                                             (unaudited)                   (unaudited)
Revenues:
    Net premiums written                                                 $ 80,152       $ 55,431     $ 215,619       $160,454
    Change in unearned premiums                                            (6,455)        (2,129)       (2,336)         1,551
                                                                    --------------  -------------  ------------   ------------
    Net premiums earned                                                    73,697         53,302       213,283        162,005
    Policy fees                                                             2,230          1,438         5,211          1,677
    Net investment income                                                  15,450         16,854        48,163         29,115
    Realized gains (losses)                                                   757         (1,829)        4,985         (2,321)
    Other                                                                   3,183            898         7,925          2,802
                                                                    --------------  -------------  ------------   ------------
        Total revenues                                                     95,317         70,663       279,567        193,278
Expenses:
    Policyholder benefits                                                   8,436          4,302        25,431          4,302
    Losses and loss adjustment expenses incurred                           43,896         29,421       121,668         95,015
    Policy acquisition expenses                                            17,506         13,532        48,883         37,969
    Litigation settlement charge                                           30,000             --        30,000             --
    Operating expenses                                                     17,575         12,369        47,464         31,295
    Interest on debt                                                        4,054          4,188        13,199         10,354
    Goodwill and other intangible amortization                                935            351         2,430          1,105
                                                                    --------------  -------------  ------------   ------------
        Total expenses                                                    122,402         64,163       289,075        180,040
Income (loss) from continuing operations before taxes,
    minority interest, and deferrable capital securities                  (27,085)         6,500        (9,508)        13,238
Income tax expense (benefit)                                               (9,510)         2,078        (3,324)         4,262
Minority interest, net of tax                                                 200            858           981            858
Deferrable capital security distributions, net of tax                         387            571         1,153          1,713
                                                                    --------------  -------------  ------------   ------------
Net income (loss) from continuing operations                              (18,162)         2,993        (8,318)         6,405
Income (loss) from discontinued operations, net of tax                    (19,800)         1,003       (19,958)         2,083
Extraordinary gain on debt extinguishments, net of tax                        910             --           910          5,250
                                                                    --------------  -------------  ------------   ------------
        Net income (loss)                                                 (37,052)         3,996       (27,366)        13,738
Preferred stock dividend                                                       --         (1,272)         (163)        (2,398)
Gain on redemption of preferred securities, net of tax                      5,099             --         5,099             --
                                                                    --------------  -------------  ------------   ------------
Net income (loss) available to common shareholders                      $ (31,953)       $ 2,724     $ (22,430)      $ 11,340
                                                                    ==============  =============  ============   ============
Net income (loss) from continuing operations per share - Basic            $ (0.57)        $ 0.17       $ (0.33)        $ 0.35
                                                                    ==============  =============  ============   ============
Net income (loss) available to common shareholders per share - Basic      $ (1.00)        $ 0.15       $ (0.90)        $ 0.62
                                                                    ==============  =============  ============   ============
Net income (loss) from continuing operations per share - Diluted          $ (0.57)        $ 0.12       $ (0.33)        $ 0.26
                                                                    ==============  =============  ============   ============
Net income (loss) available to common shareholders per share - Diluted    $ (1.00)        $ 0.14       $ (0.90)        $ 0.53
                                                                    ==============  =============  ============   ============

                Statements of Comprehensive Income
Net income (loss)                                                       $ (37,052)       $ 3,996     $ (27,366)      $ 13,738
Other comprehensive income, net of tax:
        Unrealized holding gains on available-for-sale securities net of tax
           of $4,224, $1,292, $8,270 and $2,515, respectively               7,845          2,400        15,359          4,671
        Less realized gains on available-for-sale securities net of tax
            of $265, $(12), $1, 745 and $(184), respectively                  492            (22)        3,240           (342)
                                                                    --------------  -------------  ------------   ------------
                                                                            7,353          2,422        12,119          5,013
Gain on redemption of preferred securities, net of tax                      5,099             --         5,099             --
                                                                    --------------  -------------  ------------   ------------
Comprehensive income                                                    $ (24,600)       $ 6,418     $ (10,148)      $ 18,751
                                                                    ==============  =============  ============   ============`

See accompanying Notes to Consolidated Financial Statements

---

# Vesta
Insurance Group, Inc.

Consolidated Statements of Cash Flows

(amounts in thousands)

`Nine months ended September 30,
                                                                                  2001               2000
                                                                             ---------------   ------------------
                                                                                        (unaudited)
Operating Activities:
    Net income (loss)                                                             $ (27,366)            $ 13,738
    Adjustments to reconcile net income (loss) to cash used in operations
       Changes in:
       Loss and LAE reserves, and future policy liabilities                          (3,935)             (82,382)
       Unearned premium reserves                                                      4,689              (18,392)
       Reinsurance balances receivable                                               12,671               12,138
       Premiums in course of collection                                              (7,539)              27,242
       Reinsurance recoverable on paid losses                                       (10,259)              12,084
       Other assets and liabilities                                                  (5,136)             (36,808)
    Policy acquisition costs deferred                                               (15,166)             (19,073)
    Policy acquisition costs amortized                                               16,506               27,110
    Realized (gains) losses                                                          (4,985)               2,321
    Amortization and depreciation                                                     6,921                4,496
    Extraordinary gain                                                                 (910)              (5,250)
                                                                             ---------------   ------------------
             Net cash used in operations                                            (34,509)             (62,776)

Investing Activities:
    Investments sold, matured, and called:
       Fixed maturities available for sale                                          282,566              117,802
       Other invested assets                                                          9,824                   --
    Investments acquired:
       Fixed maturities available for sale                                         (227,224)             (91,037)
       Equity securities                                                            (11,244)              (2,306)
       Other invested assets                                                         (5,311)               5,028
    Net cash paid for acquisition                                                   (46,674)             (13,561)
    Net decrease in short-term investments                                            5,374               92,462
    Additions to property and equipment                                              (4,701)              (3,698)
                                                                             ---------------   ------------------
             Net cash provided from investing activities                              2,610              104,690

Financing Activities:
    Net change in FHLB borrowings                                                     8,636                   --
    Change in short-term debt                                                         4,973                   --
    Net deposits and withdrawals from insurance liabilities                          (3,877)              (4,970)
    Retirement of long term debt and  preferred securities                               --              (43,911)
    Issuance of common stock                                                         96,381               30,923
    Acquisition of common stock                                                     (52,322)             (33,285)
    Dividends paid                                                                   (1,891)              (1,256)
                                                                             ---------------   ------------------
             Net cash provided by (used in) financing activities                     51,900              (52,499)
Increase (decrease) in cash                                                          20,001              (10,585)
Cash at beginning of period                                                          13,374               17,677
                                                                             ---------------   ------------------
Cash at end of period                                                              $ 33,375              $ 7,092
                                                                             ===============   ==================`

See accompanying Notes to Consolidated Financial Statements

---

# 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 (FASB) issued Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (Statement 142). Statement 142 supersedes Accounting Principles Board Opinion
17, Intangible Assets, and addresses how intangible assets acquired individually or within a group of other assets are accounted for
in financial statements upon their acquisition. Statement 142 is effective for fiscal years beginning after December 15, 2001.

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Business Combinations (Statement 141).
Statement 141 requires the use of the purchase method for all business combinations.  Statement 141 is effective for all business
combinations occurring after June 30, 2001.

In August, 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for  the Impairment or Disposal
of Long-Lived Assets (Statement 144).  Statement 144 revises Statement 121 by requiring the use of a single accounting model for
long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and by modifying the use of
discontinued operations accounting on future transactions.  Statement 144 is effective for fiscal years beginning after December 15,
2001.

The Company is currently evaluating the impact of these statements on our operating results and financial condition.

In June 1998, the FASB issued Statement of Financial  Accounting  Standards No. 133,  Accounting for Derivative  Instruments and
Hedging Activities (Statement 133).  Statement 133 and subsequent amendments standardize the accounting for derivative  instruments,  including certain
derivative  instruments embedded in other contracts,  by requiring that an entity recognize those items as assets or liabilities in the
financial  statements and measure them at fair value.  Management  has evaluated our activities and has determined  that Vesta does not
currently  have any  material  derivative  exposures  and that the  adoption  of the  Statement  133 on  January 1, 2001 did not have a
material impact on the financial statements.

Change in  Compensation  Plan:  Effective  June 30,  2001,  the Board of  Directors  approved  a change to the  Executive  Officer
Incentive  Compensation Plan such that Messrs.  Gayle,  Tait, and Thornton agreed to accept 1.25 million shares of restricted stock and
a $5.0 million loan as satisfaction  of Vesta's  obligations  under the terms of the plan. The  restrictions on the stock award and the
loan  repayments  are lifted  over a 10 year  vesting  period in  accordance  with the terms of the plan and  charged  to  compensation
expense.

Discontinued  Operations:  Although our reinsurance  assumed  operations and our commercial  operations have been discontinued and
segregated  from our  continuing  operations,  we continue  to incur and pay losses on  policies  with  coverage  periods  prior to the
relevant  measurement  dates under APB 30. At the time these  operations were  discontinued,  we established  reserves that we believed
were adequate to fund the ultimate  settlement  and  administration  of current and future claims from these  discontinued  operations.
Reserves  are  estimates  involving  actuarial  projections  at a given point in time of what we expect to be the costs of the ultimate
settlement and administration of claims based on facts and circumstances  then known,  estimates of trends in claims severity and other
variables such as inflation.

In the third quarter of 2001, we undertook an analysis of our assumed  reinsurance  and commercial  results for 2001.  This review
of paid losses and other  activity,  in  particular  those losses paid in the third  quarter  resulted in a  conclusion  that we should
increase the reserves  associated with our discontinued  operations by approximately  $30.0 million.  Remaining gross reserves,  before
reinsurance, for loss and loss adjustment expenses for our discontinued operations approximated $123.7 million at September 30, 2001.

Litigation  Settlement:  As discussed more fully in the  Commitment  and  Contingencies  footnote,  we settled a securities  class
action  lawsuit in the third quarter.  Related to this we recorded a pre-tax  charge of $30.0 million to cover the amount we funded on
behalf of Cincinnati Insurance Company and other expenses incurred related to this litigation.  See Note B for further discussion.

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

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Reconciliation
of income available to common shareholders and average shares outstanding for
the nine months ending September 30, 2001 and 2000 and the three months ending September
30, 2001 and 2000 are as follows:

`Three months ended September 30,
                                                                   2001                2000
                                                            -------------------  -----------------
Net (loss) income available to common shareholders                   $ (31,953)           $ 2,724
Preferred stock dividends on convertible preferred stock                                      563
                                                            -------------------  -----------------
Adjusted net (loss) income available to common shareholders          $ (31,953)           $ 3,287
                                                            ===================  =================

Weighted average shares outstanding-basic (1)                           31,837             17,918
Stock options and restricted stock (2)                                      --                232
Weighted average convertible preferred stock (1)                            --              5,900
                                                            -------------------  -----------------
Weighted average shares outstanding-diluted (1)                         31,837             24,050
                                                            ===================  =================`

`Nine months ended September 30,
                                                                   2001               2000
                                                            ------------------- ------------------
Net (loss) income available to common shareholders                   $ (22,430)          $ 11,340
Preferred stock dividends on convertible preferred stock                   163              1,689
                                                            ------------------- ------------------
Adjusted net (loss) income available to common shareholders          $ (22,267)          $ 13,029
                                                            =================== ==================

Weighted average shares outstanding-basic (1)                           24,848             18,231
Stock options and restricted stock (2)                                      --                233
Weighted average convertible preferred stock (1), (2)                       --              5,900
                                                            ------------------- ------------------
Weighted average shares outstanding-diluted (1)                         24,848             24,364
                                                            =================== ==================`

| | (1)    Reflects weighted averages. At September 30, 2001, Vesta had 34.7 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, and shares issued as restricted stock that represent unearned
amounts.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2)    Under the provisions of SFAS No. 128, Earnings per Share, contingently issuable shares that would have the effect of being
anti-dilutive are excluded for the average shares outstanding calculation.  Potentially dilutive securities for the three month
and nine month periods ending September 30, 2001 are .8 million shares and 1.2 million shares respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Earnings per share for discontinued  operations and  extraordinary  gains for the three and nine months ended September 30,
2001 and 2000 are as follows:

`2001                            2000
                                     3 month        9 month         3 month        9 month
                                   ------------  -------------    -------------  ------------
Basic Earnings per share:
    Discontinued Operations            $ (0.62)       $ (0.80)          $ 0.06        $ 0.11
    Extraordinary Gain                    0.03           0.04               --          0.29
Diluted Earnings per share:
    Discontinued Operations            $ (0.62)       $ (0.80)          $ 0.04        $ 0.09
    Extraordinary Gain                    0.03           0.04               --          0.22`

5

---

## Note
BCommitments and Contingencies

Securities Litigation

On October 26, 2001, Vesta executed a definitive agreement to settle the securities litigation that has been pending since June
1998 against Vesta and certain current and former officers and directors.  Subject to court approval, the consolidated class action
securities litigation in U.S. District Court in Alabama is being settled 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 is being dismissed with
prejudice.  Vesta will fund $18.5 million towards the settlement and the Company's excess directors and officers liability insurance
carriers will fund the remaining $42.5 million.  Vesta used its line of credit to finance its portion of the settlement and recorded
a pre-tax one-time charge of approximately $30 million against earnings to cover Vesta's contribution to the settlement and other
expenses incurred.

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 primary $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.

Indemnification Agreements and Liability Insurance

Pursuant to Delaware law and our Bylaws,  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 agreed to advance 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 our Annual Report on Form 10-K for the year ended December 31, 2000, we corrected our accounting for assumed  reinsurance  business through restatement
of our previously-issued 1997 financial  statements and our first quarter 1998 Form 10-Q.  Similar corrections were made on a statutory accounting basis by 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% 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  approximately  $55.2
million as of September 30, 2001. We have 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  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 filed  for
arbitration  against the other two  participants  in the treaty and all of these  arbitrations  are in their  discovery  stages.  While
management  believes its  interpretation  of the treaty's terms and  computations  based thereon are correct,  the ultimate  outcome of
these arbitrations is uncertain 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 us. F&G Re is seeking to rescind  the  treaties  and avoid its  obligation.  Under the terms of the two
treaties,  we believe we will be entitled to recoveries of  approximately  $28.2  million as losses mature from prior  accident  years.
Vesta has recorded a reinsurance  recoverable of approximately  $28.2 million as of September 30, 2001 and December 31, 2000 related to
these two  treaties.  The hearing in this  arbitration  is currently  scheduled for February  2002 and the ultimate  outcome  cannot be
determined at this time.

We are in  arbitration  with CIGNA  Property  and  Casualty  Insurance  Company  ("CIGNA")  (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 of 2000,  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  has been bifurcated into two
phases with phase one concentrating on the  interpretation  of the agreement and phase two relating to damages.  This arbitration is in
the discovery stage with the phase one hearing  currently  scheduled for February,  2002 and the ultimate  outcome cannot be determined
at this time.

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

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 us and our  subsidiaries,  management  does not consider  liability  from any  threatened or pending  litigation
regarding routine matters to be material.

6

---

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
Homeowners and Personal Auto coverages.  Vesta's  products are  distributed  through  approximately  1,900  independent  agencies in 24
states.  Our personal auto line targets  drivers over age thirty-five  with above average  driving records and our homeowners  products
cover the full range of homes.

Life and Health Insurance

On June 30, 2000, we entered the life and annuity business through a 71% 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  $2.2 billion (face
value) of life and  annuity  products  in force  and $22.5  million  of health  insurance  premiums  in force at  September  30,  2001.
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 through
captive agents throughout the United States.

Specialty Lines

In 2000, we began utilizing our licenses to write business for the benefit of certain reinsurance  companies.  In this segment, we
enter into arrangements  whereby 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 in this segment is primarily generated on a fee-for-service basis.

Non-Standard

In December 2000, we acquired a 52% economic interest in Instant Auto Insurance Holdings, Inc.  Instant Auto operates as a
non-standard insurance agency.  Its principal revenue stream is agents' fees and commissions.

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.

7

---

A summary of segment results for the nine months ended September 30, 2001 and 2000 is as follows:

`Standard        Life and
2001                                                 Property-        Health      Specialty                    Corporate and
                                                     Casualty        Insurance      Lines       Non-Standard       Other
                                                   ------------   -------------  ------------  -------------- --------------
Revenues:                                                                       (in thousands)
    Premiums earned                                   $185,443        $ 22,312       $ 5,528
    Net investment income                                   --          32,138            --           $ 309       $ 15,716
    Policy fees                                          2,285           2,926            --              --             --
    Realized gains                                          --           2,258            --              --          2,727
    Other                                                  586             549         3,150           1,097          2,543
                                                   ------------   -------------  ------------ --------------- --------------
                Total revenues                         188,314          60,183         8,678           1,406         20,986
Expenses:
    Loss, LAE and policyholder benefits                117,371          25,431         4,297              --             --
    Policy acquisition costs                            41,096           6,558         1,229              --             --
    Litigation settlement charge                            --              --            --              --         30,000
    Operating expenses                                  22,143           9,815           211           4,400         10,895
    Interest on debt                                        --           6,695            --              --          6,504
    Goodwill and other intangible amortization              --              --            --              --          2,430
                                                   ------------   -------------  ------------ --------------- --------------
                Total expenses                         180,610          48,499         5,737           4,400         49,829

Pre-tax income (loss) from continuing operations       $ 7,704        $ 11,684       $ 2,941        $ (2,994)     $ (28,843)
                                                   ============   =============  ============ =============== ==============

Operating segment assets:
    Investments and other assets                      $323,819       $ 940,395      $ 35,876        $ 21,320      $ 266,735
    Deferred acquisition costs                          30,485          20,955           434              --             --
                                                   ------------   -------------  ------------ --------------- --------------
                                                      $354,304       $ 961,350      $ 36,310        $ 21,320      $ 266,735
                                                   ============   =============  ============ =============== ==============`

`Standard        Life and
2000                                                 Property-        Health      Specialty                    Corporate and
                                                     Casualty        Insurance      Lines       Non-Standard       Other
                                                   ------------ ---------------   ------------  ------------ ---------------
Revenues:                                                                     (in thousands)
    Premiums earned                                   $160,286         $ 1,578          $ 141            --
    Net investment income                                   --          10,618             --            --        $ 18,497
    Policy fees                                            503           1,174             --            --              --
    Realized losses                                         --              --             --            --          (2,321)
    Other                                                   --             511            158            --           2,133
                                                   ------------ ---------------   ------------  ------------ ---------------
                Total revenues                         160,789          13,881            299            --          18,309
Expenses:
    Loss, LAE and policyholder benefits                 94,960           4,302             55            --              --
    Policy acquisition costs                            36,844           1,091             34            --              --
    Operating expenses                                  20,693           3,024             --            --           7,578
    Interest on debt                                        --           2,497             --            --           7,857
    Goodwill and other intangible amortization              --              --             --            --           1,105
                                                   ------------ ---------------   ------------  ------------ ---------------
                Total expenses                         152,497          10,914             89            --          16,540

Pre-tax income (loss) from continuing operations       $ 8,292         $ 2,967          $ 210            --         $ 1,769
                                                   ============ ===============   ============  ============ ===============

Operating segment assets:
    Investments and other assets                      $363,961       $ 873,077          1,862            --       $ 213,138
    Deferred acquisition costs                          32,320          33,380             --            --
                                                   ------------ ---------------   ------------  ------------ ---------------
                                                      $396,281       $ 906,457        $ 1,862           $ -       $ 213,138
                                                   ============ ===============   ============  ============ ===============`

8

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A summary of segment results for the three months ended September 30, 2001 and 2000 is as follows:

`Standard        Life and
2001                                                Property-        Health       Specialty                   Corporate and
                                                    Casualty        Insurance       Lines      Non-Standard       Other
                                                  -------------   ------------  ------------   ------------   -------------
Revenues:                                                               (in thousands)
    Premiums earned                                  $ 63,890        $ 7,365        $ 2,442
    Net investment income                                  --         10,348             --           $ 49         $ 5,053
    Policy fees                                         1,254            976             --             --              --
    Realized gains (losses)                                --            860             --             --            (103)
    Other                                                 166            314          1,346            299           1,058
                                                  -------------   ------------   ------------   ------------   -------------
                 Total revenues                        65,310         19,863          3,788            348           6,008
Expenses:
    Loss, LAE and policyholder benefits                41,896          8,436          2,000             --              --
    Policy acquisition costs                           14,519          2,401            586             --              --
    Litigation settlement charge                           --             --             --             --          30,000
    Operating expenses                                  7,738          3,248             54          1,573           4,962
    Interest on debt                                       --          2,067             --             --           1,987
    Goodwill and other intangible amortization             --             --             --             --             935
                                                  -------------   ------------   ------------   ------------   -------------
                 Total expenses                        64,153         16,152          2,640          1,573          37,884

Pre-tax income (loss) from continuing operations      $ 1,157        $ 3,711        $ 1,148       $ (1,225)      $ (31,876)
                                                  =============   ============   ============   ============   =============`

`Standard        Life and
2000                                                Property-        Health       Specialty                   Corporate and
                                                    Casualty        Insurance       Lines      Non-Standard       Other
                                                  -------------    -----------  ------------   ------------   -------------
Revenues:                                                              (in thousands)
    Premiums earned                                  $ 51,583        $ 1,578          $ 141             --
    Net investment income                                  --         10,618             --             --         $ 6,236
    Policy fees                                           264          1,174             --             --              --
    Realized gains (losses)                                --             --             --             --          (1,829)
    Other                                                  --            511            158             --             229
                                                  ------------    -----------   ------------   ------------   -------------
                Total revenues                         51,847         13,881            299                          4,636
Expenses:
    Loss, LAE and policyholder benefits                29,366          4,302             55             --              --
    Policy acquisition costs                           12,407          1,091             34             --              --
    Operating expenses                                  7,566          3,024             --             --           1,779
    Interest on debt                                       --          2,497             --             --           1,691
    Goodwill and other intangible amortization             --            --              --             --             351
                                                  ------------    ------------    ------------   ------------   -------------
                 Total expenses                        49,339         10,914             89             --           3,821

Pre-tax income (loss) from continuing operations      $ 2,508        $ 2,967          $ 210            $--           $ 815
                                                  ============    ============    ============  ============    =============`

9

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## Note
DStock Transactions

In the first quarter of 2001, we engaged in a number of stock transactions.  On January 20, 2001, we issued approximately 380,000
shares of common stock in exchange for $3.475 million face amount of Deferrable Capital Securities.  On January 26, 2001, the holders
of our Series A Convertible Preferred Stock converted their shares into 5.9 million shares of common stock pursuant to their original
conversion terms.  We repurchased that common stock for approximately $47.2 million.  In separate transactions, we sold 5.5 million
shares of common stock to a number of investors for approximately $32.3 million.  These transactions and other transactions resulted
in Vesta repurchasing 6.4 million shares of its common stock for approximately $50.8 million and issuing 5.9 million shares of its
common stock for approximately $32.3 million of cash and $3.475 million face amount of Deferrable Capital Securities.

In the second quarter of 2001, we engaged in a follow-on offering of our common stock.  We sold 8.625 million shares of common
stock for approximately $64.0 million after expenses.

In the third  quarter of 2001,  we issued  568,644  shares of our  common  stock for $7 million  face  amount of our 8.75%  Senior
Debentures  due 2025.  In connection  with this  transaction,  we recorded an after-tax  extraordinary  gain of $.9 million.  Also in
the third  quarter,  we redeemed  $7.0 million face amount of a  subsidiary's  preferred  stock for $3.5 million.  In addition,  a $3.5
million  payable  related to a prior  redemption  of the  subsidiary's  preferred  stock  was  determined  to not be due as the  preferred
stockholder  had not fulfilled  certain  obligations of the  redemption  agreement.  In connection  with these two  redemptions,  Vesta
recorded an after-tax gain, net of minority interest, of $5.1 million

## Note
EAcquisition of Florida Select Insurane Holdings, Inc.

Effective April 1, 2001, we acquired Florida Select Insurance Holdings Inc., the parent company of Florida Select Insurance
Company.  Florida Select is the 8th largest residential homeowners insurer in the State of Florida with approximately $140.0 million
of assets and $60.0 million of annual gross written premium.  The transaction has been accounted for as a purchase.  Summarized below
is a preliminary allocation of assets and liabilities acquired and the consolidated results of operations for the nine-month periods
ended September 30, 2001 and 2000 on an unaudited pro forma basis as if the acquisition had occurred as of January 1, 2000.  The pro
forma information is based on our consolidated results of operations for the nine months ended September 30, 2001 and 2000 and on
data provided by the acquired company, after giving effect to certain pro forma adjustments, including the issuance of 8.625 million
shares of common stock.  The pro forma financial information does not purport to be indicative of results of operations that would
have occurred had the transactions occurred on the basis assumed above nor are they indicative of results of the future operations of
the combined enterprises.

Assets and liabilities acquired (in thousands except per share amounts and unaudited):

`Assets acquired:
                                Invested assets                  $ 56,707
                                Cash                               20,764
                                Other assets                       27,107
                                Goodwill                           35,288
                                                             -------------
                                     Total assets                 139,866

                             Liabilities acquired:
                                Loss and LAE reserves              22,019
                                Unearned premiums                  35,100
                                Other liabilities                  16,334
                                                             -------------
                                     Total liabilities             73,453`

Pro forma consolidated results of operations are as follows (unaudited):

`Nine months ended September 30,
                                                                       2001               2000
                                                                -----------------  ------------------
Total revenues                                                         $ 296,148           $ 231,849
Income (loss) available to common shareholders                         $ (18,628)          $  19,078
Income (loss) available to common shareholders per share - basic       $   (0.75)          $    1.05
Income (loss) available to common shareholders per share - diluted     $   (0.75)          $    0.85`

10

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## Note
FSubsequent Events

Subsequent to September 30, 2001, Instant Auto completed the acquisition of SpaceCoast Agency for $2.3 million and A-Affordable
Insurance Agency for approximately $8.5 million.  These acquisitions will be accounted for as purchased in accordance with Statement
141.

In November, 2001, we announced our intention to purchase up to 1.3 million shares of our common stock.  As of November 13, 2001,
we had purchased  approximately 350 thousand shares under this plan.

11

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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 and operating expenses.

Comparison of Third Quarter 2001 to Third Quarter 2000

Income available to common  shareholders  decreased by $34.7 million, to a $32.0 million loss for the quarter ended September 30,
2001,  from $2.7  million for the quarter  ended  September  30,  2000.  On a diluted per share  basis,  net loss  available  to common
shareholders  for the third  quarter of 2001 was $(1.00) per share versus net income of $0.14 per share for the third  quarter of 2000.
The decrease in income available to common  shareholders is primarily  attributable to a $30.0 million pre-tax charge for settlement of
a securities class action litigation and a $30.0 million pre-tax charge for our discontinued operations.

Standard Property-Casualty

Net premiums written for standard  property-casualty  lines increased by $16.5 million, or 30.8%, to $70.0 million for the quarter
ended  September  30,  2001,  from $53.5  million  for the  quarter  ended  September  30,  2000.  Net  premiums  earned  for  standard
property-casualty  lines  increased  $12.3  million,  or 23.8% to $63.9  million for the quarter ended  September 30, 2001,  from $51.6
million for the quarter  ended  September  30,  2000.  The  increase in net  premiums  written  and net  premiums  earned is  primarily
attributable to the acquisition of Florida Select, offset by decreases in other lines of business.

Loss and loss adjustment  expenses  ("LAE") for standard  property-casualty  lines increased by $12.5 million,  or 42.5%, to $41.9
million for the quarter ended  September  30, 2001,  from $29.4  million for the quarter  ended  September  30, 2000.  The loss and LAE
ratio for  property-casualty  lines for the quarter  ended  September  30, 2001 was 64.3% as compared to 56.6% at  September  30, 2000.
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 and an increase in earned premium.  The  deterioration  in our  underwriting  results is being  primarily  driven
by increases in frequency and severity of claims.

Policy acquisition expenses increased $2.1 million for the quarter-to-quarter  comparison,  consistent with the increase in earned
premium.  Operating  expenses  increased  by $.2 million,  to $7.7  million for the quarter  ended  September  30,  2001,  as increased
expenses from Florida Select were offset by expense reductions.

Life and Health Insurance

In June, 2000, we entered the life and annuity business through a 71% 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,  a holding  company for two life and health  insurance  companies  domiciled in Texas, in
December,  2000.  American  Founders and Aegis have  approximately  $2.2 billion (face value) of life and annuity products in force and
$21.8 million of health  insurance  premiums in force at September 30, 2001. Life insurance  premiums and policy fees were $2.4 million
for the quarter ended  September 30, 2001 compared to $1.6 million for the comparable  prior period in 2000. The increase is due to the
acquisition  of Aegis in December 2000 and  Washington  Life in August 2001.  Health  insurance  premiums  totaled $5.0 million for the
quarter  ended  September 30, 2001 versus zero 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.

Specialty Lines

In 2000, we began  utilizing our licenses to write business for the benefit of reinsurance  companies.  In this segment,  we enter
into  arrangements  whereby 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 in this segment is primarily  generated on a  fee-for-service  basis. For the quarter ended September
30, 2001,  this segment  reported a $.2 million  underwriting  loss on net premiums  written of $2.8 million and net premiums earned of
$2.4 million.  Additionally, we earned approximately $1.3 million of fees for the quarter ended September 30, 2001.

Non-Standard

In December 2000, we acquired a 52% economic interest in Instant Auto Insurance Holdings, Inc.  Instant Auto operates as a
non-standard insurance agency.  Its principal revenue stream is agents' fees and commissions.  Fees and commissions totaled $.3
million for the three months ended September 30, 2001 as Instant Auto began executing its strategy of building its agency business.
Effective October 1, 2001, Instant Auto acquired the assets of SpaceCoast Agency in Florida and A-Affordable Insurance Agency in
Texas for a total purchase price of $10.8 million.  These acquisitions are expected to make Instant Auto profitable in 2002.

12

---

Discontinued Operations

In the third quarter of 2001, we undertook an analysis of our assumed  reinsurance  and commercial  results for 2001.  This review
of paid losses and other  activity,  in  particular  those losses paid in the third  quarter, resulted in a conclusion that we should
increase the reserves associated with our discontinued operations by approximately $30.0 million.

Net Investment Income

Net investment  income  decreased by $1.4 million,  or 8.3%, to $15.5 million for the quarter ended September 30, 2001, from $16.9
million for the quarter ended  September 30, 2000. The weighted  average yield on invested  assets  (excluding  realized and unrealized
gains) was 6.2% for the quarter ended  September 30, 2001,  compared with 7.0% for the quarter ended  September 30, 2000.  The decrease
in  investment  income is primarily  attributable  to a decrease in the weighted  average  yield as yields have  generally  declined in
recent months.

Federal Income Taxes

Federal income taxes  decreased by $11.6 million to a $9.5 million  benefit for the quarter ended  September 30,  2001 as a result
of less income in the current period compared to the prior period.

Comparison of Nine Months Ended September 30, 2001 with Nine Months Ended September 30, 2000

Income available to common  shareholders  decreased by $33.7 million, or 298.2% to a $22.4 million loss for the nine months ended
September  30, 2001,  from $11.3  million for the nine months ended  September  30, 2000.  On a diluted per share basis,  income (loss)
available to common  shareholders  for the nine months  ended  September  30, 2001 was $(.90) per share  versus  income of available to
common  shareholders of $.53 per share for the  corresponding  period of 2000. The decrease in income available to common  shareholders
is primarily  attributable  to a $30 million  pre-tax charge for the  settlement of our securities  litigation and a $30 million pre-tax charge
associated with our  discontinued  operations.  The charge for  discontinued  operations was a result of recent adverse  development in
our assumed reinsurance and commercial lines that caused us to increase the reserves associated with these lines.

Standard Property-Casualty

Net premiums  written for standard  property-casualty  lines  increased by $28.5 million,  or 18.0%,  to $187 million for the nine
months ended  September 30, 2001,  from $158.5 million for the nine months ended  September 30, 2000. Net premiums  earned for standard
property-casualty  lines increased $25.1 million,  or 15.7% to $185.4 million for the nine months ended September 30, 2001, from $160.3
million for the nine months ended  September  30,  2000.  The  increase in net  premiums  written and net premiums  earned is primarily
attributable to the acquisition of Florida Select.

Loss and loss adjustment  expenses ("LAE") for standard  property-casualty  lines increased by $22.4 million,  or 23.6%, to $117.4
million for the nine months ended  September 30, 2001,  from $95.0 million for the  corresponding  period ended September 30, 2000. The
loss and LAE ratio  for  property-casualty  lines for the nine  months  ended  September  30,  2001 was 62.5% as  compared  to 59.1% at
September  30, 2000.  The increase in the loss and LAE  incurred  and the loss and LAE ratio is primarily  attributable  to an increase
in earned premium,  estimated salvage and subrogation  recoverable  recorded in the prior year, and deteriorating  underwriting results
in the current year.   The deterioration in our underwriting results is being primarily driven by increases in frequency and severity of claims.

Policy acquisition  expenses increased for the  period-to-period  comparison,  consistent with earned premium.  Operating expenses
increased by $1.4  million,  or 6.8% to $22.1  million for the nine months ended  September  30, 2001,  from $20.7 million for the nine
months ended September 30, 2000, due to increased expenses related to Florida Select, partially offset by expense reductions.

Life and Health Insurance

In June, 2000, we entered the life and annuity business through a 71% 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,  a holding  company for two life and health  insurance  companies  domiciled in Texas, in
December,  2000.  American  Founders and Aegis have  approximately  $2.2 billion (face value) of life and annuity products in force and
$21.8 million of health  insurance  premiums in force at September 30, 2001. Life insurance  premiums and policy fees were $9.0 million
for the nine months ended  September 30, 2001 compared to $1.6 million for the comparable  prior period due to the acquisition of Aegis
in December  2000 and  Washington  Life in August 2001.  Health  insurance  premiums  totaled  $15.3  million for the nine months ended
September 30, 2001 versus zero for the comparable prior period.  Health insurance  benefits  incurred totaled $8.8 million for the nine
months and health insurance commission expense was $4.0 million.

Specialty Lines

In 2000, we began utilizing our licenses to write business for the benefit of reinsurance companies.  In this segment, we
enter into arrangements whereby 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 in this segment is primarily generated on a fee-for-service basis. For the nine months ended
September 30, 2001, the segment reported a $.2 million underwriting loss on net premiums  written of $6.3 million and net premiums  earned of $5.5  million.  Additionally,  we earned  approximately  $3.2
million of fees for the nine months ended September 30, 2001.

13

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Non-Standard

In December 2000, we acquired a 52% economic interest in Instant Auto Insurance Holdings, Inc.  Instant Auto operates as a
non-standard insurance agency.  Its principal revenue stream is agents' fees and commissions.  Fees and commissions totaled $1.1
million for the nine months ended September 30, 2001 as Instant Auto began executing its strategy of building its agency business.
Effective October 1, 2001, Instant Auto acquired the assets of SpaceCoast Agency in Florida and A-Affordable Insurance Agency in
Texas for a total purchase price of $10.8 million.  These acquisitions are expected to make Instant Auto profitable in 2002.

Net Investment Income

Net investment  income  increased by $19.1 million,  or 65.6%, to $48.2 million for the nine months ended September 30, 2001, from
$29.1 million for the nine months ended  September 30, 2000.  The weighted  average yield on invested  assets  (excluding  realized and
unrealized  gains) was 6.3% for the nine months ended  September 30, 2001,  compared with 6.4% for the nine months ended  September 30,
2000.  The decrease in  investment  income is primarily  attributable  to an increase in average  invested  assets  resulting  from our
acquisitions,  particularly  American  Founders,  partially offset by a decrease in yield as yields have generally  declined in
recent months.

Federal Income Taxes

Federal  income  taxes  decreased by $7.6 million to a $3.3  million  benefit for the nine months  ended  September 30,  2001 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.  The insurance  subsidiaries  comprising the Vesta Group are
individually  supervised  by various  state  insurance  regulators.  Vesta  Fire and  American  Founders  are our  principal  operating
subsidiaries.

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 2000.
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 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.  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.

Credit Facilities

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 management  contract between our wholly owned management  company,  J. Gordon Gaines,  Inc., and our operating
          insurance subsidiaries.

Each of these credit  facilities  mature on December 31, 2002. These credit  agreements  contain covenants which require us to
maintain  minimum (i) statutory  consolidated net income,  (ii) GAAP  consolidated  net income,  (iii) statutory  surplus and (iv) risk
based capital.  For the period ending September 30, 2001, our GAAP consolidated net income and statutory surplus did not meet the minimum requirements as set forth in our credit agreements.
First  Commercial has agreed that any such non-compliance will not be deemed an event of default under the credit  agreements.  As of  September  30,  2001,  $20.0  million of
credit line was available.

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Long Term Debt

In the third quarter of 2001, we exchanged  $7.0 million face amount of our Senior  Debentures  for 569 thousand  shares of common
stock. We recorded a $.9 million  after-tax  extraordinary  gain in connection  with this  transaction.  Also in the third quarter,  we
redeemed $7.0 million face amount of a subsidiary's  preferred  stock for $3.5 million.  In addition,  a $3.5 million payable related to a
prior  redemption of the  subsidiary's  preferred  stock was  determined to not be due as the preferred  stockholder  had not fulfilled
certain  obligations of the redemption  agreement.  In connection with these two redemptions,  Vesta recorded an after-tax gain, net of
minority interest, of $5.1 million.

Annual distribution obligations for the Company's long-term debt outstanding at September 30, 2001 are as follows:

|Security                                      | Principal     | Annual Interest Obligation
|--------------------------------------------- | ------------- | --------------------------
|8.75% Senior Debentures due 2025              | $80 million   | $7.0 million              
|8.525% Deferrable Capital Securities due 2027 | $29.8 million | $2.5 million              

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 used in operations  for the nine months ended  September 30, 2001 and 2000, was $34.5 million
and $62.8 million,  respectively.  Cash flow from operations was negative for the current period due to the continued  payout of claims
from our  discontinued  operations,  the payout of  standard-property  casualty  claims  incurred in prior  periods,  and the timing of
payment of certain  payables  and other  operational  items.  Net cash  provided by  investing  activities  was $2.6 million and $104.7
million for the nine months  ended  September  30,  2001 and 2000,  respectively  as we funded the  discontinuance  of the  reinsurance
assumed and commercial  lines of business.  Net cash provided by (used in) financing  activities was $51.9 million and $(52.5)  million
for the nine month periods ending  September 30, 2001 and 2000,  respectively  as we engaged in a number of stock  transactions  in the
nine month  period  ended  September  30, 2001  including  the  issuance of 8.625  million  shares of stock in a follow on offering for
approximately  $64.0 million,  net of  underwriting  discount and expenses and  repurchased  outstanding  debt in the nine month period
ending September 30, 2000.

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, 2000.

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.

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# Part II
Item 1. Legal Proceedings

Securities Litigation

On October 26, 2001, Vesta executed a definitive agreement to settle the securities litigation that has been pending since June
1998 against Vesta and certain current and former officers and directors.  Subject to court approval, the consolidated class action
securities litigation in U.S. District Court in Alabama is being settled 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 is being dismissed with
prejudice.  Vesta will fund $18.5 million towards the settlement and the Company's excess directors and officers liability insurance
carriers will fund the remaining $42.5 million.  Vesta used its line of credit to finance its portion of the settlement and recorded
a pre-tax one-time charge of approximately $30 million against earnings to cover Vesta's contribution to the settlement and other
expenses incurred.

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 primary $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.

Indemnification Agreements and Liability Insurance

Pursuant to Delaware law and our Bylaws,  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 agreed to advance 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 our Annual Report on Form 10-K for the year ended December 31, 2000, we corrected our accounting for assumed  reinsurance  business through restatement
of our previously-issued  1997 financial  statements and our first quarter 1998 Form 10-Q.  Similar corrections were made on a statutory accounting basis by 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% 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  approximately  $55.2
million as of September  30, 2001. We have 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  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 filed  for
arbitration  against the other two  participants  in the treaty and all of these  arbitrations  are in their  discovery  stages.  While
management  believes its  interpretation  of the treaty's terms and  computations  based thereon are correct,  the ultimate  outcome of
these arbitrations is uncertain 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 us. F&G Re is seeking to rescind  the  treaties  and avoid its  obligation.  Under the terms of the two
treaties,  we believe we will be entitled to recoveries of  approximately  $28.2  million as losses mature from prior  accident  years.
Vesta has recorded a reinsurance  recoverable of approximately  $28.2 million as of September 30, 2001 and December 31, 2000 related to
these two  treaties.  The hearing in this  arbitration  is currently  scheduled for February  2002 and the ultimate  outcome  cannot be
determined at this time.

We are in  arbitration  with CIGNA  Property  and  Casualty  Insurance  Company  ("CIGNA")  (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 of 2000,  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  has been bifurcated into two
phases with phase one concentrating on the  interpretation  of the agreement and phase two relating to damages.  This arbitration is in
the discovery stage with the phase one hearing  currently  scheduled for February,  2002 and the ultimate  outcome cannot be determined
at this time.

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

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 us and our  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 third quarter of 2001, we exchanged 568,644 shares of our common stock for $7.0 million principal amount of our 8.75% Senior
Notes due 2025.  At the time of each transaction, we issued shares having a market value (based on the five trading days preceding
the closing date of each transaction) equal to 80% of the total principal amount of the 8.75% Senior Notes exchanged.   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 Securities

None.

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

None.

# Item 5. Other
information

None.

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## Item 6.
Exhibits and Reports on Form 8-K

## a) EXHIBITS

10.25     Employment agreement between the registrant and William P. Cronin, dated as of February 5, 2001.

__________

## b) Reports on
Form 8-K.

Current reports were filed on Form 8-K on August 1, 2000 and September 17, 2001 in connection with press releases and on July 18, 2001 in connection with the acquisition of Florida Select Insurance Holdings Inc.

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Signatures

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

Vesta Insurance Group, Inc.

Date:  November 14, 2001

Date: November 14, 2001

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