---

# UNITED STATES SECURITIES AND EXCHANGE COMMISSION

# Washington, D.C. 20549

# FORM 10-Q

# OR

# Commission file number 1-12338

`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.

# 18,825,832

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# INDEX

`PART I       FINANCIAL INFORMATION                                                                                 Page
       Item 1.      Financial Statements:
                    Consolidated Balance Sheets at June 30, 2000 and
                    December 31, 1999...................................................................................    1
                    Consolidated Statements of Income and Comprehensive Income for the
                    Three Months and Six Months Ended June 30, 2000 and 1999............................................    2
                    Consolidated Statements of Cash Flows for the
                    Six Months Ended June 30, 2000 and 1999.............................................................    3
                    Notes to Consolidated Financial Statements..........................................................    4
       Item 2.      Management's Discussion and Analysis of
                    Financial Condition and Results of Operations.......................................................   10

       PART II      OTHER INFORMATION
       Item 1.      Legal Proceedings...................................................................................   17
       Item 2.      Changes in Securities...............................................................................   19
       Item 3.      Defaults Upon Senior Securities.....................................................................   19
       Item 4.      Submission of Matters to a Vote of Security Holders.................................................   20
       Item 5.      Other Information...................................................................................   20
       Item 6.      Exhibits and Reports on Form 8-K....................................................................   21`

`PART I

                                Item 1. Financial Statements
                                 VESTA INSURANCE GROUP, INC.
                                CONSOLIDATED BALANCE SHEETS
                 (Amounts in thousands except share and per share data)
                                                                                                   June 30,         December 31,

                                                                                                     2000                 1999

                                                                                                           (Unaudited)
          Assets:
Investments

          Fixed maturities available for sale-at fair value (cost: 2000-$737,168;
          1999-$348,760)..............................................................              $ 731,285            $ 339,429
          Equity securities-at fair value: (cost: 2000-$8,158; 1999-$2,092)                             8,732                1,865
          Mortgage and collateral loans...............................................                 56,101
          Policy loans................................................................                 64,764
          Short-term investments......................................................                 52,187              125,026
          Other invested assets.......................................................                 19,686                 --
          Total investments..........................................................                 932,755              466,320
    Cash..............................................................................                 33,759               17,677
    Accrued investment income.........................................................                 13,026                5,460
    Premiums in course of collection..................................................                 22,209               41,206
    Reinsurance balances receivable...................................................                223,949              193,345
    Reinsurance recoverable on paid losses............................................                 71,286               77,925
    Value of business acquired........................................................                 32,713
    Deferred policy acquisition costs.................................................                 33,525               40,357
    Deferred income taxes.............................................................                 15,874               13,489
    Other assets......................................................................                 70,288               60,030
          Total assets................................................................             $ 1,449,384             $915,809
Liabilities:
    Future policy benefits............................................................                508,531
    Losses and loss adjustment expenses...............................................                276,329              354,709
    Unearned premiums.................................................................                115,146              133,029
    Federal home loan bank notes......................................................                143,123
    Other liabilities.................................................................                 31,686               39,905
    Short term debt...................................................................                  5,000                5,000
    Long term debt....................................................................                 85,594              141,876
    Minority interest  ................................................................                34,479                 --                                                           --
          Total liabilities ............................................................            1,199,888              674,519
Commitments and contingencies: See Note C

Deferrable Capital Securities............................................................              41,225               41,225
Stockholders' equity:
    Preferred stock, $.01 par value, 5,000,000 shares authorized, issued: 2,950,000........                30                   30
    Series B Junior participating preferred stock $.01 par value, 300,000 shares authorized,
          issued: none....................................................................
    Common stock, $.01 par value, 100,000,000 shares authorized, issued: 2000- 18,964,322
         shares; 1999-18,964,322..........................................................                190                  190
    Additional paid-in capital ...........................................................            170,368              172,272
    Accumulated other comprehensive income, net of applicable tax (benefit) of $(2,195) and
          $(3,346) in 2000 and 1999, respectively.........................................            (4,262)              (6,213)
    Retained earnings .....................................................................            50,021               41,862
    Treasury stock (138,490 shares at cost at June 30, 2000 and December 31, 1999)..........          (6,274)              (6,274)
    Receivable from issuance of restricted stock.............................                         (1,802)              (1,802)
                            Total stockholders' equity                                                208,271              200,065
                            Total liabilities and stockholders' equity                            $ 1,449,384            $ 915,809

                                     See accompanying Notes to Consolidated Financial Statements.`

`CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                                             (Amounts in thousands except per share data)

                                                         STATEMENTS OF INCOME

                                                                              Three months ended           Six months ended
                                                                                  June 30,                    June 30,
                                                                            2000           1999           2000         1999

                                                                                  (unaudited)                 (unaudited)
Revenues:
   Net premiums written..............................................         $61,215     $ 81,011        $117,888     $124,652
   Decrease in unearned premiums.....................................             275        2,734          11,508       64,697
   Net premiums earned...............................................          61,490       83,745         129,396      189,349
   Net investment income.............................................           5,320        6,159          12,385       12,723
   Gain on sale of assumed reinsurance renewal rights................              --          --                --      15,000
   Other, including realized gains and losses........................           1,324        7,871           1,651        9,206
        Total revenues..................................................       68,134       97,775         143,432      226,278
Expenses:
      Loss and loss adjustment expenses incurred.....................          33,648       57,430          80,709      119,140
      Policy acquisition expenses....................................          16,832       15,424          27,110       51,236
      Operating expenses.............................................           9,206       11,664          19,456       23,339
      Interest on debt...............................................           2,763        3,346           6,166        7,103
      Goodwill and other intangible amortization.....................             603          270             754          540
        Total expenses......................................                   63,052        88,134         134,195      201,358
Income from continuing operations before income taxes and deferrable
      Capital securities..........................................              5,082       9,641             9,237       24,920
Income tax expense................................................              1,728       2,903             3,058        7,697
Deferrable capital securities interest, net of income tax.........                571       1,362             1,142        2,724
Income from continuing operations.................................              2,783       5,376             5,037       14,499
Loss from discontinued operations, net of tax....................               (544)       (873)             (544)       (1,203)
Income before extraordinary item................................                2,239       4,503             4,493        13,296
Gain on debt extinguishments, net of tax.........................                 683                         5,250
 Net income......................................................               2,922       4,503             9,743        13,296
Preferred stock dividend.........................................                 563                         1,126
Income available to common shareholders .........................              $2,359     $ 4,503           $ 8,617      $ 13,296
Basic net income from continuing operations per common share......             $  .15      $  .29           $  .27         $  .77
Basic income available to common shareholders per common share                 $  .13      $  .24            $  .47       $   .71
Diluted net income from continuing operations per common share.....              $  .11      $  .29            $  .21       $   .77
Diluted income available to common shareholders per common share..             $  .12      $  .24            $  .40        $  .71
Dividends declared per common share..........................                  $ .0125      $ --            $  .025          $ --

                                               STATEMENTS OF COMPREHENSIVE INCOME

Net income .......................................................           $ 2,359       $ 4,503         $ 8,617     $13,296
Other comprehensive income, net of tax:
         Unrealized   holding  gains   (losses)  on   available-for-sale
securities,net of applicable tax expense (benefit) of $(26),$(2,176),                   (48)        (4,224)           1,356      (6,085)
              $698 and $(3,135), respectively........................
         Less realized losses gains on available-for-sale securities,
         net of
             applicable tax of $(306), $2,252, $(306) and $2,252,              (595)         4,182           (595)       4,182
             respectively...........................................
                                                                                 547        (8,406)           1,951     (10,267)
Comprehensive income (loss).......................................           $ 2,906     $  (3,903)        $ 10,568     $ 3,029

                                      See accompanying Notes to Consolidated Financial Statements`

`CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                        (Amounts in thousands)

                                                                                                              Six months ended
                                                                                                                  June 30,
                                                                                                              2000       1999

                                                                                                                (Unaudited)
Operating Activities:
   Net income ..........................................................................................      $  9,743   $ 13,296
   Adjustments to reconcile net income to cash from operating activities:
     Change in:
        Loss and LAE reserves...........................................................................      (78,380)    (78,317)
        Unearned premium reserve........................................................................      (17,883)   (100,230)
        Reinsurance balances payable....................................................................         1,368    (33,053)
        Accrued income taxes............................................................................         4,098     23,124
        Other assets and liabilities....................................................................      (18,652)       3,186
        Premiums in course of collection................................................................        18,997     30,491
        Reinsurance balances receivable.................................................................        26,391     42,819
        Reinsurance recoverable on paid losses..........................................................         6,639     35,027
     Policy acquisition costs deferred..................................................................      (10,967)    (15,581)
     Policy acquisition costs amortized.................................................................        17,799     44,951
     Amortization and depreciation......................................................................         2,753      3,170
     Investment (gains) losses..........................................................................           901     (6,117)
     Extraordinary gain.................................................................................       (5,250)
     Net cash used in operating activities.............................................................       (42,443)    (37,234)
Investing Activities:
   Investments sold or matured:
           Fixed maturities available for sale-matured, called or sold.................................         60,948    153,138
           Equity securities...........................................................................            491     18,284
     Investments acquired:
               Fixed maturities available for sale......................................................      (18,178)   (104,155)
        Net cash paid for acquisition...................................................................       (4,634)         --
        Net (increase)  decrease in short-term investments..............................................        72,839     (9,587)
        Additions to property, plant and equipment......................................................       (1,692)     (1,588)
        Dispositions of property, plant and equipment                                                                                                                                        101        777
     Net cash provided from  investing activities.......................................................       109,875     56,869
Financing Activities:
    Repayment of long and short term debt...............................................................      (47,967)    (14,976)
   Dividends paid.......................................................................................       (1,021)       (698)
    Purchase of treasury stock.........................................................................       (23,625)         --
    Issuance of treasury stock.........................................................................         21,263         --
   Capital contributions from exercising options........................................................
                                                                                                                   --       (559)
     Net cash used in financing activities..............................................................      (51,350)    (16,233)
Increase in cash........................................................................................        16,082      3,402
Cash at beginning of year...............................................................................        17,677     25,321
Cash at end of period...................................................................................      $ 33,759    $ 28,723



                                      See accompanying Notes to Consolidated Financial Statements`

# NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

## Note ASignificant Accounting Policies

Basis of Presentation:
The accompanying unaudited interim financial statements have been prepared in
conformity with generally accepted accounting principles 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.

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 period involved.

New  Accounting  Standards.  In June 1998,  the  Financial
Accounting  Standards  Board  ("FASB")  issued  Statement of Financial
Accounting  Standards  ("SFAS") No. 133,  "Accounting  for Derivative  Instruments
 and Hedging  Activities."  SFAS No. 133 requires all derivatives to be recorded
 on the balance sheet at fair value,  In June 1999, the FASB issued SFAS No. 137,
  "Accounting for Derivative Instruments  and Hedging  Activities--Deferral  of
 the Effective Date of FASB  Statement No. 133. This  statement  defers the
effective date of SFAS No.  133.  As a result,  SFAS No.  133 will not be
effective  for the  Company,  until the  year  2001.  The impact of the reporting
  requirements  of SFAS No. 133 on the Company  will  depend on the nature and
amount of  derivative  instruments  the Company might have at date of implementation.
 The Company does not currently believe the impact will be material.

In December
1999, the staff of the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements. SAB No. 101 summarizes the SEC
staffs views in applying generally accepted accounting principles to the
recognition of revenues. The Company has evaluated the impact of the reporting
requirements of SAB No. 101 and has determined that there will be no material
impact on its consolidated results of operations, financial position or cash
flows.

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

Reconciliation
of income available to common shareholder and average shares outstanding for the
six months ending June 30, 2000 and 1999 and three months ending June 30, 2000
and 1999 are as follows:

`Six months ended June 30
                                                                 2000             1999
Income available to common shareholders                       $ 8,617         $ 13,296
Preferred stock dividends                                       1,126             --
Adjusted income available to common shareholders              $ 9,743          $13,296

Average shares outstanding-basic                               18,387           18,686
Stock options and restricted stock                                234
Convertible preferred stock                                     5,900              --

Average shares outstanding-diluted                             24,521           18,686`

`Three months ended June 30
                                                                 2000             1999
Income available to common shareholders                       $ 2,359          $ 4,503
Preferred stock dividends                                         563              --

Adjusted  income available to common shareholders             $ 2,922           $ 4,503

Average shares outstanding-basic                               18,099            18,680
Stock options and restricted stock                                250
Convertible preferred stock                                     5,900              --
Average shares outstanding-diluted                             24,249            18,680`

Earnings per
share for discontinued operations and extraordinary gains for the three and
six-month periods ended June 30, 2000 and 1999 are as follows:

`2000                               1999
                                                           3 month        6 month              3 month      6 month
                    Basic Earnings per share:
                        Discontinued Operations             $(.03)        $ (.03)             $(.05)         $(.06)
                        Extraordinary Gain                  $ .04          $  .29                --            --
                    Diluted Earnings per share:
                        Discontinued Operations             $(.02)        $ (.02)             $(.05)         $(.06)
                        Extraordinary Gain                  $ .03          $ .21                 --            --`

Change in
estimate - During the second quarter, the Company began a new program to enhance
the timeliness and amount of collections of salvage and subrogation. An
evaluation of amounts available for collection, when considered with other
factors, resulted in an adjustment to calculated reserves of approximately $9.5
million.

The Company
recorded extraordinary gains, net of tax and related debt issue costs of
$.7 million and $5.3 million for thethree and six-month periods ended June
 30, 2000, respectively as a result of the early redemption of long term debt.
 In the three months ended June 30, 2000, the Company redeemed $22.5 million of
 its 12.5% Senior Notes. For the six months ended June 30, 2000, the Company
has redeemed $44.1 million of its 12.5% Senior Notes and approximately $13.1
 million of its 8.75% Senior Debentures. The redemptions were funded with
 internally generated cash. The warrants attached to the 12.5% Senior Notes
 have been cancelled.

## Note CCommitments and Contingencies

## Securities Litigation

Subsequent to
the filing of its quarterly report on Form 10-Q for the period ended March 31,
1998 with the Securities and Exchange Commission, the Company became aware of
certain accounting irregularities consisting of inappropriate reductions of reserves
and overstatements of premium income in the Company's reinsurance business that
 had been recorded in the fourth quarter of 1997 and the first quarter of 1998.
 The Company promptly commenced an internal investigation to determine the exact
scope and amount of such reductions and overstatements. This investigation concluded
 that inappropriate amounts had, in fact, been recorded and the Company determined
 it should restate its previously issued 1997 financial statements and first quarter
 1998 Form 10-Q. Additionally, during its internal investigation the Company
re-evaluated the accounting methodology being utilized to recognize earned premium
 income in its reinsurance business. The Company had historically reported certain
 assumed reinsurance premiums as earned in the year in which the related reinsurance
 contracts were entered even though the terms of those contracts frequently
bridged two years.  The Company determined that reinsurance premiums should be
 recognized as earned over the contract period and corrected the error in its
accounting methodology by restating previously issued financial statements. The
 Company issued press releases, which were filed with the Securities and Exchange
 Commission, on June 1, 1998 and June 29, 1998 announcing its intention to restate
its historicalfinancial statements.

The Company restated
its previously issued financial statements for 1995, 1996 and 1997 and its first
quarter 1998 Form 10-Q for the above items by issuance of a current report on
Form 8-K dated August 19, 1998. These restatements resulted in a cumulative
decrease to stockholders' equity of $75.2 million through March 31, 1998.

Commencing in June
 1998, Vesta and several of its current and former officers and directors were
named in several purported class action lawsuits in the United States District
 Court for the Northern District of Alabama and in one purported class action
lawsuit in the Circuit Court of Jefferson County, Alabama. Several of Vesta's
officers and directors also have been named in a derivative action lawsuit in
the Circuit Court of Jefferson County, Alabama, in which Vesta is a nominal defendant.

The class action
 lawsuit filed in the Circuit Court of Jefferson County,Alabama has been dismissed
 and the derivative case has been placed on the administrative docket. The class
 actions filed in the United States District Court for the Northern District of
Alabama have been consolidated into a single action in that district. The class
 representatives in that action have filed (a) a consolidated amended complaint
 alleging that the defendants violated the federal securities laws and (b) a motion
 for class certification, which was granted in 1999. The consolidated amended
 complaint also added as defendants Torchmark Corporation and the Company's former
 auditors, KPMG Peat Marwick, LLP. The consolidated amended complaint alleges various
violations of the federal securities law and seeks unspecified but potentially
 significant damages.

The Company has
notified its directors and officers liability insurance companies of these lawsuits
 and the consolidated amended complaint. The litigation is still in the preliminary
 stages and there has been no discovery conducted in the securities case. The
Company intends to vigorously defend this litigation and intends to explore all
 available rights and remedies it may have under the circumstances. In related
 litigation, in September, 1998, Cincinnati Insurance Company ("Cincinnati"),
one of the Company's directors and officers liability insurance carriers, filed
 a lawsuit in the United States District Court for the Northern District of
Alabama seeking to avoid coverage under its directors and officers liability and
 other policies. The Company filed a motion to dismiss Cincinnati's complaint
on jurisdictional grounds in federal court (which was granted), and filed a
lawsuit against Cincinnati in the Circuit Court of Jefferson County, Alabama
seeking damages arising out of Cincinnati's actions. Cincinnati has filed an answer
and counterclaim in that case again seeking to avoid coverage.

Indemnification Agreements And Liability Insurance

Pursuant to
Delaware law and by-laws, the Company is obligated to  indemnify its current and
 former officers and directors for certain liabilities arising from their
employment with or service to the Company. The Company believes that these
 indemnification obligations extend to its current and former officers' and directors'
 costs of defense and other liabilities which may arise out of the securities
 litigation described above.

The Company has
 purchased directors' and officers' liability insurance ("D and O insurance")
for the purposes of covering among other things the costs incurred in connection
 with these indemnification obligations. For the period in which most of the claims
against the Company and certain of its directors and officers were asserted, the
 Company had in place a primary D and O insurance policy providing $25 million
 in coverage and an excess  D and O insurance policy covering for an additional
 $25 million in coverage. The issuer of the primary D and O insurance policy,
Cincinnati, has attempted to avoid coverage as discussed above, and the Company
is vigorously resisting its efforts to do so.

Subsequent to
 the initiation of the class actions described above, the Company secured additional
 excess D and O insurance providing coverage for losses in excess of $50 million
up to $110 million, or additional excess coverage of $60 million for the class
actions. The Company  paid for this additional excess policy in full in 1998.

These matters are in their early stages and their ultimate
outcome cannot be determined. Accordingly, the Company has not
currently set aside any financial reserves relating to any of the above-referenced actions.

## Other Litigation and Arbitration

The Company, 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 the
 Company and its subsidiaries, management does not consider liability from any
 threatened or pending litigation regarding routine matters to be material.

As discussed above,
 the Company corrected its accounting for assumed reinsurance business through
 restatement of its previously issued financial statements. Similar corrections
 were made on a statutory accounting basis through recording cumulative adjustments
in Vesta Fire's 1997 statutory financial statements. The impact of this correction
 has been reflected in amounts ceded under the Company's 20 percent whole account
 quota share treaty which was terminated on June 30, 1998 on a run-off basis. The
 Company believes such treatment is appropriate under the terms of this treaty
 and has calculated the quarterly reinsurance billings presented to the three
 treaty participants accordingly. The aggregate amount included herein as
recoverable from such reinsurers totaled $54.4 million at June 30, 2000 exclusive
 of approximately $48.5 million that the company collected from significant
reinsurers via the conversion of collateral on hand.

NRMA, one of the
 participants in the 20 percent whole account quota share treaty,  has filed a
 lawsuit in the United States District Court for the Northern District of Alabama
 contesting the Company's claim and the validity of the treaty, and is seeking
return of $34.5 million collected by the conversion of collateral on hand. The
 Company filed a demand for arbitration as provided for by the treaty and  filed
 a motion to compel arbitration which was granted in the United States District
 Court action. The Company has filed for arbitration against the other two
 participants on the treaty and those arbitrations are in their early stages. While
management believes its interpretation of the treaty's terms and computations
 based thereon are correct, these matters are in their early stages and their
 ultimate outcome cannot be determined at this time.

A dispute has
 arisen with F and G Re (on behalf of USF and G) under two aggregate stop loss
 reinsurance treaties whereby F and G assumed certain risk from the Company.
  During 1999, F and G Re filed for arbitration under those two treaties.

While management
 believes its interpretation of the treaties' terms and computations based thereon
 are correct, this arbitration is in its early stages and its ultimate outcome
cannot be determined at this time.

On September 23,
1999, Torchmark Corporation, formerly the Company's largest common stockholder,
 filed a lawsuit in theCircuit Court of Jefferson County, Alabama against the
 Company asserting breach of contract, conversion and breach of duty in
connection with the Company's preparation and filing of a registration statement
 covering its shares in accordance with certain registration rights claimed by
 Torchmark. This claim seeks an injunction requiring a registration statement to
 be filed, as well as compensatory and punitive damages. This litigation is in
 its early stages, and management is unable to assess the damages that may be
awarded, if any. However, management does not believe that such damages, if any,
 would materially and adversely affect the Company's financial position or
 results of operations.

On June 23, 1999,
 a subsidiary of Torchmark filed suit in the Circuit Court of Jefferson County, Alabama against two
subsidiaries of the Company. The lawsuit claims that the Company's subsidiaries
 have failed to pay certain sums due under a marketing and administrative services
 agreement between the parties. The suit also seeks payment of certain commissions
 and administrative expenses. This litigation is in its early stages, and management
is unable to assess the damages that may be awarded, if any. However, management
does not believe that such damages, if any, would materially and adversely affect
 the Company's financial position or results of operations.

## Other Commitments

On June 13, 2000
Vesta purchased 3.75 million shares of the total of 5.13 million share of its common
 stock held by Torchmark for $6.30 per share.   On June 29, 2000, Vesta sold the
 3.75 million shares in three separate transactions to unrelated third parties.
Simultaneously with these transactions, Vesta entered into contracts that allow
 it to repurchase those securities or otherwise arrange for the sale of those
 securities to third parties by December 29, 2000 such that the unrelated third parties
 will receive $6.30 per share.

## Note E-Segment Information<pre>

`Six Months Ended June 30,
                                                                                                           2000          1999
Reinsurance operations

   Net premiums earned..........................................................................         $ 20,712     $ 57,013
   Net investment income and realized gain/(loss)...............................................            2,276        5,752
   Gain on sale of renewal rights...............................................................                        15,000
   Underwriting gain (loss).....................................................................            2,601      (7,391)                                                                                                                     (7,391)
          Total reinsurance operations                                                                      4,877       13,361
Personal operations
   Net premiums earned..........................................................................          108,684      132,336
   Net investment income and realized gain/(loss)...............................................           10,109       13,353
   Other income.................................................................................            1,651        2,180
   Underwriting gain (loss).....................................................................            (480)        1,386
          Total personal operations                                                                        11,280       16,919
Commercial operations (discontinued)...........................................................
   Net premiums earned..........................................................................            5,207       35,991
   Net investment income and realized gain/(loss)...............................................              523        3,632
   Other income.................................................................................                9          593
   Underwriting loss............................................................................           (1,357)      (6,076)
           Total discontinued commercial operations                                                          (825)      (1,851)
Other operations
   Interest expense.............................................................................           (6,166)      (7,103)
   Goodwill amortization........................................................................             (754)        (540)

     Total pretax income  from operations.......................................................           $ 8,412    $ 23,069
Total indentifiable assets
   Reinsurance operations
     Investments and other assets...............................................................           69,506    $ 307,816
     Deferred acquisition costs.................................................................            5,681       22,494
   Personal operations
     Investments and other assets...............................................................          532,574      433,596
     Deferred acquisition costs.................................................................           27,784       40,341
   Commercial operations
     Investments and other assets...............................................................           83,843      293,849
     Deferred acquisition costs.................................................................               60        7,028

Life Insurance operations

        Investments and other assets...........................                                             697,223
        Value of business acquired.............................                                              32,713
        Total assets............................................................................        $ 1,449,384  $ 1,105,124`

## Note F - Acquisition of American Founders Financial Corporation

On June 30, 2000
the Company completed the acquisition of a 71% controlling interest in American
Founders Financial Corporation for $25 million.   American Founders is a life
insurance holding company with approximately $2 billion (face value) of
life products in force and approximately $185 million of annuity deposits as of
December 31, 1999, American Founders is currently rated B+ by A.M. Best and
operates in 40 states and the District of Columbia. 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
six-months ended June 30, 2000 and 1999 on an unaudited pro forma basis as if
the acquisition had occurred as of January 1, 1999.The pro forma information is
 based on the Company's consolidated results of operations for the six-months
ended June 30, 2000 and 1999 and on data provided by the acquired company, after
 giving effect to certain pro forma adjustments.  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  .........          $594,554
                                    Value of business acquired            32,713
                                    Other assets     .........           102,669
                                    ........Total assets......          $729,936

                           Liabilities acquired:
                                    Future policy benefits              $508,531
                                    FHLB notes payable........           143,123
                                    Other liabilities........             53,282
                                    ........         .........          $704,936`

`Six Months ended
---------------------------------------------------------------------------------------------------------------------------------------
                                                                          June 30
---------------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------  ----------------
Total revenues                                                          $ 163,940  $248,108
---------------------------------------------------------------  ----------------  ----------
Income available to common shareholders                                   $ 9,713  $  14,173
---------------------------------------------------------------  ----------------  ----------
Income available to common shareholders per share-basic                   $  .53   $     .76
---------------------------------------------------------------  ----------------  ----------
Income available to common shareholders per share-diluted                 $  .44   $     .76
---------------------------------------------------------------------------------------------------------------------------------------`

---

## Note G. Shareholder Rights Plan

On June 15, 2000,
 our Board of Directors adopted a stockholder rights plan which provides for the
 payment of a dividend of one preferred stock purchase right to be attached to
each outstanding share of our common stock.  Generally, each Right, if and when
it becomes exercisable, will entitle the registered holder to purchase from the
 Company one one-hundredth (1/100) of a share of Vesta's Series B Junior Participating
 Preferred Stock at a price of $30.00 per one one-hundredth of a share.  The
value of the one one-hundredth interest in a share of Series B Preferred Stock
 purchasable upon exercise of each Right should, because of the nature of the
Series B Preferred Stock's dividend, liquidation and voting rights, approximate
 the value of one share of our common stock. In addition, upon the occurrence
 of certain events, the holder of a Right may elect to receive, upon payment of
 the exercise price, securities in lieu of one one-hundredth (1/100) of a share
 of the Series B Preferred Stock which would have a then current market
value of two times the amount of the exercise price.

In the event any
 person acquires in excess of 10% of Vesta's outstanding common stock, each holder
 of a Right would be able to elect to receive, upon payment of the exercise price
 of the Right, a number of shares of our common stock having a then current market
 value of two times that exercise price.  In the event Vesta did not have a
sufficient number of shares of common stock available for issuance at that time,
it could issue an economically equivalent security, such as the Series B Preferred Stock, in
satisfaction of the exercise of the Right.  Importantly, the person who acquired
in excess of 10% of Vesta's common stock would not be entitled to exercise its
 Rights, and its interest in Vesta would be substantially diluted after giving
 effect to the exercise of all other Rights.   For purposes of determining
 whether any person has acquired in excess of 10% of Vesta's outstanding common stock
(an "Acquiring Person"), the common stock issuable upon conversion of Vesta's
 Series A Convertible Preferred Stock originally issued to the Birmingham Investment
 Group (described below) is deemed to be outstanding.

Vesta has also
agreed that, once a person has become an "Acquiring Person," it will not merge or
 otherwise combine with another entity, or sell 50% or more of its consolidated
assets or earning power to another entity, unless adequate provision is made to
ensure that each holder of a Right (other than the Acquiring Person, whose Rights
 will be void) will thereafter have the right to receive that number of shares
 of common stock of the acquiring company which, at the time of such transaction,
 will have a market value of two times the exercise price of the Right.

## Note H. Subsequent Event

# and Results of Operations

## Results of Operations

The Company
writes primary insurance on selected Personal lines risks only, balanced between
risks of property damage (which is susceptible to faster determination of
ultimate loss but is highly unpredictable) and casualty exposure (which is more
predictable but takes longer to determine the ultimate loss).

In the past, we
also wrote primary insurance on a variety of Commercial Lines risks, as well as
treaty Reinsurance for small and mid-size insurance companies and regional
specific Reinsurance for large insurance companies. In each of these segments,
we focused principally on property coverages, for which ultimate losses
generally can be more promptly determined than on casualty risks. In 1999, we
sold the rights to a substantial portion of our reinsurance assumed business for
a pre-tax gain of $15 million (a large block of policies 100% reinsured from
CIGNA was retained and is being converted from assumed to direct), and decided
to discontinue our commercial lines segment. The commercial lines segment is
discussed herein as a discontinued operation.

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

## Known Trends and Uncertainties

Significant
factors influencing results of operations include the supply and demand for
property and casualty insurance as well as the number and magnitude of
catastrophic losses such as hurricanes, windstorms, fires and severely cold
weather.

The Company
seeks to manage its risk exposure by adjusting the mix and volume of business
written in response to changes in price and maintaining extensive reinsurance.

The Company has
historically followed a practice of reinsuring a portion of its primary business
to spread the risk of loss to reinsurers. The Companys loss reserve
levels historically have remained relatively stable from year to year despite
changes in premium volume. The Company is continuing to cede portions of
insurance risks while using its capital base to gradually increase, on a
selective basis, its retention of certain property risks.

Because
catastrophe loss events are by their nature unpredictable, historical results of
operations may not be indicative of expected results of future operations. The
Company markets its primary personal insurance products throughout the United
States. While the Company seeks to reduce its exposure to catastrophic events
through the purchase of reinsurance, the occurrence of one or more major
catastrophes in any given period could have a material adverse impact on the
Companys results of operations and financial condition and could result in
substantial outflows of cash as losses are paid.

Other certain
known trends and uncertainties which may affect our future results are discussed
more fully below.

Competition: The
property and casualty insurance industry is highly competitive on the basis of
both price and service. In recent years there has been a trend in the property
and casualty industry toward consolidation which could result in even more
competitive pricing. We also face competition from foreign insurance companies,
captive insurance companies and risk retention groups. In the future, the
industry, including us, may face increasing insurance underwriting competition
from banks and other financial institutions.

Reliance on
Performance of Reinsurers: We evaluate the credit quality of the reinsuresr
 to which it cedes business. No assurance can be given regarding the future ability
of any of our reinsurers to meet their obligations.

Inflation: We do
not believe our results over the last three fiscal years have been materially
affected by inflation due in part to the predominantly short-tail nature of our
business. The potential adverse impacts of inflation include: (i) a decline in
the market value of our fixed maturity investment portfolio, (ii) an increase in
the ultimate cost of settling claims which remain unsettled for a significant
period of time, and (iii) an increase in our operating expenses. Historically,
the effect of inflation on our reserves has not been material.

Income  available
 to common  shareholders  decreased by $2.1 million,  or 46.7% to $2.4 million for
 the quarter ended June 30, 2000,  from $4.5 million for the quarter ended June
 30, 1999.  On a diluted per share basis,  income  available to common  shareholders
for the second  quarter of 2000 was $.10 per share  versus net income of $.24 per
 share for the second  quarter of 1999.  The  decrease in income available to common
  shareholder is primarily  attributable to a $4.2 mill after tax investment
 gain from the sale of Vesta's interest in Vesta County Mutual recognized during
 the second quarter of 1999.

## Premiums, Loss and LAE-Personal Lines

Gross premiums
written for personal lines decreased by $11.9 million, or 16.7%, to $59.4
million for the quarter ended June 30, 2000, from $71.3 million for the quarter
ended June 30, 1999. The decline in personal lines gross written premiums is
primarily attributable to declines in the homeowners and automobile lines.

Net premiums
written for personal lines decreased by $7.2 million, or 11.5%, to $55.9 million
for the quarter ended June 30, 2000, from $63.1 million for the quarter ended
June 30, 1999. Net premiums earned for personal lines decreased $7.8 million, or
13.0% to $52.1 million for the quarter ended June 30, 2000, from $59.9 million
for the quarter ended June 30, 1999. The decrease in net premiums written and
net premiums earned are primarily attributable to the decrease in gross written
premiums, partially offset by lower ceded reinsurance premiums.

Loss and loss
adjustment expenses (LAE) for personal lines decreased by $11.5
million, or 30.3%, to $26.5 million for the quarter ended June 30, 2000, from
$38.0 million for the quarter ended June 30, 1999. The loss and LAE ratio for
personal lines for the quarter ended June 30, 2000 was 50.9% as compared to
63.5% at June 30, 1999. The decrease in loss and LAE incurred is primarily
attributable to the decline in earned premium. The decrease in the loss and LAE
ratio is primarily attributable to increased salvage and subrogation recoverable
from prior years partially offset by increased severity in claims incurred in
the second quarter.

## Premiums. Loss and LAE-Reinsurance Assumed

Gross premiums
written for reinsurance decreased by $5.2 million, or 39.4% to $8.0 million for
the quarter ended June 30, 2000, from $13.2 million for the quarter ended June
30, 1999. The decrease in gross written premiums is primarily attributable to
continued decrease in this line of business as a block of policies acquired from
Cigna is converted to personal lines.

Net premiums
written for reinsurance decreased by $12.6 million, or 70.4% to $5.3 million for
the quarter ended June 30, 2000, from $17.9 million for the quarter ended June
30, 1999. Net premiums earned decreased $14.5 million, or 60.9% to $9.3 million
for the quarter ended June 30, 2000, from $23.8 million for the quarter ended
June 30, 1999. The decline in net premiums written and net premiums earned was
primarily attributable to the decline in gross premiums written.

Loss and LAE for
reinsurance decreased by $12.3 million, or 63.3% to $7.1 million for the quarter
ended June 30, 2000, from $19.4 million for the quarter ended June 30, 1999. The
loss and LAE ratio for assumed reinsurance for the quarter ended June 30, 2000
was 76.0% as compared to 81.5% for the quarter ended June 30, 1999. The decrease
in loss and LAE incurred for assumed reinsurance was primarily due to a decrease
in net premiums earned. The decrease in the loss and LAE ratio is primarily
attributed to improved claims experience in the assumed business.

## Policy Acquisition Expenses and Other Expenses from
Continuing Operations

Policy
acquisition expenses increased by $1.4 million, or 9.1% to $16.8 million for the
quarter ended June 30, 2000, from $15.4 million for the quarter ended June 30,
1999. Other expenses include operating expenses not directly related to the
generation of premium revenue, interest on debt and goodwill amortization.
Operating expenses decreased $2.5 million as the company continued its cost
reduction efforts.

## Net Investment Income from Continuing Operations

Net investment
income decreased by $.9 million, or 14.5%, to $5.3 million for the quarter ended
June 30, 2000, from $6.2 million for the quarter ended June 30, 1999. The
weighted average yield on invested assets (excluding realized and unrealized
gains) was 6.0% for the quarter ended June 30, 2000, compared with 5.4% for the
quarter ended June 30, 1999. The decrease in investment income is primarily
attributable to a decrease in average invested assets (excluding the AFFC
acquisiton) partially offset by an increased investment yield resulting from a
lower percentage of tax exempt securities in the current portfolio.

## Federal Income Taxes

Federal income
taxes decreased by $1.2 million, or 41.4%, to $1.7 million for the quarter ended
June 30, 2000. The effective rate on pre-tax income increased to 34.0% for the
quarter ended June 30, 2000 versus 30.1% for the quarter ended June 30, 1999 due
to lower tax exempt investment income.

## Income/(Loss) from Discontinued Operations, Net of
Tax

Net premiums
earned for commercial lines decreased by $14.5 million, or 83.4%, to $2.9
million for the quarter ended June 30, 2000, from $17.4 million for the quarter
ended June 30, 1999 as a result of the Companys exit from the commercial
lines.

Loss and LAE for
commercial lines decreased by $11.9 million, or 82.1%, to $2.6 million for the
quarter ended June 30, 2000, from $14.5 million for the quarter ended June 30,
1999. The loss and LAE ratio for the quarter ended June 30, 2000 was 91.2% as
compared to 83.9% for the quarter ended June 30, 1999. The increase in loss and
LAE ratio is primarily attributable to higher than anticipated claims expense.
Policy acquisition expenses decreased $1.3 million as a result of decreased
earned premium. Operating expenses decreased $3.6 million, from $4.3 million for
the quarter ended June 30, 1999 to $0.7 million for the quarter ended June 30,
2000. The decrease was largely attributable to reduced expenses from workforce
reductions consistent with discontinuing the business.

Income  available
to common  shareholders  decreased  by $4.7  million,  or 35.3%,  to $8.6 million
 for the period ended June 30, 2000,  from $13.3 million for the period ended
June 30, 1999.  On a diluted per share basis,  income  available to common  shareholders
for the period ended June 30, 2000 was $.35 per share versus income  available
to common  shareholders of $.71 per share for the period ended June 30, 1999.
The decrease in income  available to common  shareholders  is primarily  attributable
  to a $9.8 million after tax gain from the sale of certain  reinsurance  renewal
 rights in the reinsurance segment and a $4.2 million after tax investment gain
 from the sale of  Vesta's  interest  in Vesta  County  Mutual  in the  period
  ended  June  30,  1999  partially  offset  by a $5.3  million extraordinary
 gain from extinguishments of debt in the six months ended June 30, 2000.

## Premiums. Loss and LAE-Personal Lines

Gross premiums
written for personal lines decreased by $31.4 million, or 21.6%, to $113.7
million for the period ended June 30, 2000, from $145.1 million for the period
ended June 30, 1999. The decline in personal lines gross written premiums is
primarily attributable to the sale of Vesta County Mutual which accounted for
$16.9 million of gross written premium in the period ended June 30, 1999. The
remaining decrease in gross premium written was due to declines in the
homeowners and auto lines.

Net premiums
written for Personal lines decreased by $24.0 million, or 18.6%, to $105.0
million for the period ended June 30, 2000, from $129.0 million for the period
ended June 30, 1999. Net premiums earned for personal lines decreased $23.7
million, or 17.9% to $108.6 million for the period ended June 30, 2000, from
$132.3 million for the period ended June 30, 1999. The decrease in net premiums
written and net premiums earned are primarily attributable to the decrease in
gross written premiums partially offset by reduced ceded reinsurance premiums.

Loss and loss
adjustment expenses (LAE) for personal lines decreased by $18.3
million, or 21.6%, to $66.3 million for the period ended June 30, 2000, from
$84.6 million for the period ended June 30, 1999. The loss and LAE ratio for
personal lines for the period ended June 30, 2000 was 61.0% as compared to 63.9%
at June 30, 1999. The decrease in loss and LAE incurred is primarily
attributable to the decline in earned premium. The decrease in the loss and LAE
ratio is primarily attributable increased salvage and subrogation recoverable
from prior years partially offset by increased claim severity and higher losses
from multiple storms occurring during the six months ended June 30, 2000.

## Premiums, Loss and LAE-Reinsurance

Gross premiums  written
for  reinsurance  increased by $18.0 million to $16.9 million for the period
ended June 30, 2000, from ($1.1) million for the period ended June 30, 1999.
 The increase in gross written  premiums is primarily  attributable  to the novation
and resulting  unearned  portfolio  transfer related to the 100% reinsurance
 quota share treaty entered into effective January 1, 1999 with Hart Re in the
 six months ended June 30, 1999.

Net premiums
written for reinsurance increased by $17.3 million to $12.9 million for the
period ended June 30, 2000, from ($4.4) million for the period ended June 30,
1999. Net premiums earned decreased $36.3 million, or 63.7% to $20.7 million for
the period ended June 30, 2000, from $57.0 million for the period ended June 30,
1999. The decline in net premiums earned was primarily attributable to the Hart
Re novation noted above and the subsequent runoff of those assumed reinsurance
treaties not novated to Hart Re.

Loss and LAE for
reinsurance decreased by $20.1 million, or 58.3% to $14.4 million for the period
ended June 30, 2000, from $34.5 million for the period ended June 30, 1999. The
loss and LAE ratio for assumed reinsurance for the period ended June 30, 2000
was 69.5% as compared to 60.5% for the period ended June 30, 1999. The decrease
in loss and LAE incurred for assumed reinsurance was primarily due to a decrease
in net premiums earned. The increase in loss and LAE ratio is primarily
attributable to development of prior year claims.

## Policy Acquisition Expenses and Other Expenses from
Continuing Operations

Policy
acquisition expenses decreased by $24.1 million, or 47.1% to $27.1 million for
the period ended June 30, 2000, from $51.2 million for the period ended June 30,
1999. The decrease in policy acquisition expenses is primarily attributable to
the decline in earned premium. Other expenses include operating expenses not
directly related to generation of premium revenue, interest on debt and goodwill
amortization. Operating expenses decreased $3.9 million as Vesta has continued
to reduce costs. These factors caused the underwriting expense ratio to decrease
from 39.4% in the period ended June 30, 1999 to 36.0% in the period ended June
30, 2000.

## Net Investment Income from Continuing Operations

Net investment
income decreased by $.3 million, or 2.4%, to $12.4 million for the period ended
June 30, 2000, from $12.7 million for the period ended June 30, 1999. The
weighted average yield on invested assets (excluding realized and unrealized
gains) was 5.9% for the period ended June 30, 2000, compared with 5.5% for the
period ended June 30, 1999. The decrease in investment income is primarily
attributable to a decrease in average invested assets partially offset by the
increased investment yield resulting from a lower percentage of tax exempt
securities in the current portfolio.

## Federal Income Taxes

Federal income
taxes decreased by $4.6 million, or 59.7%, to $3.1 million for the period ended
June 30, 2000. The effective tax on pre-tax income increased to 33.1% for the
period ended June 30, 2000 versus 30.9% for the period ended June 30, 1999
primarily due to decreased tax exempt investment income.

## Income/(Loss) from Discontinued Operations, Net of
Tax

Net premiums
earned for commercial lines decreased by $30.8 million, or 85.5%, to $5.2
million for the period ended June 30, 2000, from $36.0 million for the period
ended June 30, 1999 as a result of the Companys exit from the commercial
lines.

Loss and LAE for
commercial lines decreased by $22.0 million, or 84.4%, to $4.1 million for the
period ended June 30, 2000, from $26.1 million for the period ended June 30,
1999. The loss and LAE ratio for the period ended June 30, 2000 was 78% as
compared to 72.4% for the period ended June 30, 1999. The increase in loss and
LAE and the loss ratio is primarily attributable to run off of the commercial
lines business. Policy acquisition expenses decreased $5.4 million as a result
of decreased earned premium. Operating expenses decreased $7.5 million, from
$8.6 million for the period ended June 30,1999 to $1.1 million for the period
ended June 30, 2000. The decrease was largely attributable to reduced expenses
from workforce reductions consistent with discontinuing the business.

## 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 Group,  a group of wholly owned  property
and casualty  insurance  companies  including  Vesta Fire.  The insurance  subsidiaries
comprising the Vesta Group are individually  supervised by various state insurance
 regulators.  Vesta Fire is our principal  operating subsidiary and reinsures
 substantially all business from our other operating  subsidiaries.  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 shareholders if declared by the Board of Directors.

Dividends

The principal
internal source of liquidity is dividends from our insurance subsidiaries.
During the last three years, our insurance subsidiaries have produced operating
results and paid dividends sufficient to fund our needs. Except for the
regulatory restrictions described below, we are not aware of any demands or
commitments of the insurance subsidiaries that would prevent them from paying
dividends sufficient to meet our anticipated needs (including debt service) for
at least the next twelve months.

As a holding
company with no other business operations, we rely primarily upon dividend
payments from Vesta Fire to meet our cash requirements (including its debt
service) and to pay dividends to our stockholders. Transactions between Vesta
and its insurance subsidiaries, including the payment of dividends 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 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 February 29,
2000 we repaid the remaining $5 million outstanding on our credit facility with
The Bank and cancelled the related credit agreement effective February 29, 2000.

On March 3, 2000
we established a revolving credit facility with First Commercial Bank,
Birmingham, Alabama (First Commercial) which consists of the
following lines of credit:

`o        a $7.5 million unsecured line which bears interest at First Commercial's prime rate +1/4%;

o        an  additional  $7.5  million  line  which  bears  interest  at First  Commercial's  prime  rate,
         secured  by a pledge of the management  contract  between our wholly owned  management  company,
         J. Gordon  Gaines,  Inc.,  and our operating  insurance subsidiaries.`

Each of these newly established credit facilities mature on
December 31, 2002. In addition, the credit agreements related to these
facilities contain typical financial covenants which require us to maintain
certain financial standards.

Long Term Debt and Preferred
Stock

In the six
months ended June 30, 2000, Vesta has extinguished $13.1 million of its 8.75%
Senior Debentures for approximately $9.8 million plus accrued interest and all
$44.1 million of our 12.5% Senior Notes for approximately $38.2 million, plus
accrued interest.

`Security                            Principal              Annual Interest Obligation
                8.75%Senior Debentures due 2025                   $86.8 million                   $7.6 million
                8.525% Deferrable Capital Securities
                due 2027                                          $41.2 million                   $3.5 million
                Series A convertible Preferred Stock                $25 million                  $2.25 million`

## Subsidiaries

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. On a consolidated basis, net cash used in operations
for the period ended June 30, 2000 and 1999, was $42.4 million and $37.2
million, respectively. The net cash used in operations is primarily attributable
to the declines in loss reserves and unearned premium reserves as a result of
the Companys exit from the reinsurance assumed and commercial lines
business.

As of June 30,
2000, the Companys investment portfolio consisted of short-term
investments (8.7%), U.S. Government securities (8.1%), mortgage-backed
securities (47.2%), corporate bonds (31%), municipal bonds (3.9%) and equity
securities (1.1%). The Company expects current cash flow to be sufficient to
meet operating needs, although invested assets have been categorized as
available for sale in the event short-term cash needs exceed available
resources. The Company adjusts its holdings of cash, short-term investments and
invested assets available for sale according to its seasonal cash flow needs.

## 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. The
Companys primary risk exposures are interest rate risk on fixed maturity
investments and equity price risk for domestic 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.

## 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
the Companys filings with the Securities and Exchange Commission,
including its 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.

# PART II

# Item 1. Legal Proceedings

## Securities Litigation

Subsequent to the
\filing of its quarterly report on Form 10-Q for the period ended March 31, 1998
 with the Securities and Exchange Commission, the Company became aware of certain
 accounting irregularities consisting of inappropriate reductions of reserves
and overstatements of premium income in the Company's reinsurance business that
 had been recorded in the fourth quarter of 1997 and the first quarter of 1998.
 The Company promptly commenced an internal investigation to determine the exact
 scope and amount of such reductions and overstatements. This investigation
concluded that inappropriate amounts had, in fact, been recorded and the Company
determined it should restate its previously issued 1997 financial statements and
 first quarter 1998 Form 10-Q. Additionally, during its internal investigation the
 Company re-evaluated the accounting methodology being utilized to recognize earned
 premium income in its reinsurance business. The Company had historically reported
certain assumed reinsurance premiums as earned in the year in which the related
reinsurance contracts were entered even though the terms of those contracts
frequently bridged two years.  The Company determined that reinsurance premiums
 should be recognized as earned over the contract period and corrected the error
 in its accounting methodology by restating previously issued financial statements.
 The Company issued press releases, which were filed with the Securities and Exchange
 Commission, on June 1, 1998 and June 29, 1998 announcing its intention to restate
 its historical financial statements.

The Company restated
 its previously issued financial statements for 1995, 1996 and 1997 and its first
 quarter 1998 Form 10-Q for the above items by issuance of a current report on
 Form 8-K dated August 19, 1998. These restatements resulted in a cumulative
decrease to stockholders' equity of $75.2 million through March 31, 1998.

Commencing in June
1998, Vesta and several of its current and former officers and directors were
 named in several purported class action lawsuits in the United States District
 Court for the Northern District of Alabama and in one purported class action
lawsuit in the Circuit Court of Jefferson County, Alabama. Several of Vesta's
 officers and directors also have been named in a derivative action lawsuit in
 the Circuit Court of Jefferson County, Alabama, in which Vesta is a nominal defendant.

The class action
 lawsuit filed in the Circuit Court of Jefferson County,Alabama has been dismissed
 and the derivative case has been placed on the administrative docket. The class
 actions filed in the United States District Court for the Northern District of
Alabama have been consolidated into a single action in that district. The class
representatives in that action have filed (a) a consolidated amended complaint
alleging that the defendants violated the federal securities laws and (b) a
 motion for class certification, which was granted in 1999. The consolidated
amended complaint also added as defendants Torchmark Corporation and the Company's
 former auditors, KPMG Peat Marwick, LLP. The consolidated amended complaint
 alleges various violations of the federal securities law and seeks unspecified
but potentially significant damages.

The Company has
notified its directors and officers liability insurance companies of these lawsuits
and the consolidated amended complaint. The litigation is still in the preliminary
 stages and there has been no discovery conducted in the securities case. The
 Company intends to vigorously defend this litigation and intends to explore all
 available rights and remedies it may have under the circumstances. In related
 litigation, in September, 1998, Cincinnati Insurance Company ("Cincinnati"),
one of the Company's directors and officers liability insurance carriers, filed
a lawsuit in the United States District Court for the Northern District of Alabama
 seeking to avoid coverage under its directors and officers liability and other
 policies. The Company filed a motion to dismiss Cincinnati's complaint on
jurisdictional grounds in federal court (which was granted), and filed a lawsuit
against Cincinnati in the Circuit Court of Jefferson County, Alabama seeking
 damages arising out of Cincinnati's actions. Cincinnati has filed an answer
and counterclaim in that case again seeking to avoid coverage.

Indemnification Agreements And Liability Insurance

Pursuant to Delaware
 law and by-laws, the Company is obligated to indemnify its current and former
 officers and directors for certain liabilities arising from their employment
 with or service to the Company. The Company believes that these indemnification
obligations extend to its current and former officers' and directors' costs of
 defense and other liabilities which may arise out of the securities litigation
 described above.

The Company has
 purchased directors' and officers' liability insurance ("D and O insurance")
 for the purposes of covering among other things the costs incurred in connection
with these indemnification obligations. For the period in which most of the claims
against the Company and certain of its directors and officers were asserted, the
Company had in place a primary D and O insurance policy providing $25 million in
 coverage and an excess D and O insurance policy covering for an additional $25
 million in coverage. The issuer of the primary D and O insurance policy, Cincinnati,
 has attempted to avoid coverage as discussed above, and the Company is vigorously
resisting its efforts to do so.

Subsequent to the
initiation of the class actions described above, the Company secured additional
 excess D and O insurance providing coverage for losses in excess of $50 million
 up to $110 million, or additional excess coverage of $60 million for the class
actions. The Company  paid for this additional excess policy in full in 1998.

These matters are
 in their early stages and their ultimate outcome cannot be determined. Accordingly,
 the Company has not currently set aside any financial reserves relating to any
 of the above-referenced actions.

## Other Litigation and Arbitration

The Company, 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 the
Company and its subsidiaries, management does not consider liability from any
threatened or pending litigation regarding routine matters to be material.

As discussed above,
 the Company corrected its accounting for assumed reinsurance business through
 restatement of its previously issued financial statements. Similar corrections
were made on a statutory accounting basis through recording cumulative adjustments
in Vesta Fire's 1997 statutory financial statements. The impact of this correction
 has been reflected in amounts ceded under the Company's 20 percent whole account
 quota share treaty which was terminated on June 30, 1998 on a run-off basis. The
 Company believes such treatment is appropriate under the terms of this treaty
and has calculated the quarterly reinsurance billings presented to the three
 treaty participants accordingly. The aggregate amount included herein as recoverable
 from such reinsurers totaled $54.4 million at June 30, 2000 exclusive of
approximately $48.5 million  that the company collected from significant reinsurers
 via the conversion of collateral on hand.

NRMA, one of the
 participants in the 20 percent whole account quota share treaty,  has filed a
 lawsuit in the United States District Court for the Northern District of Alabama
 contesting the Company's claim and the validity of the treaty, and is seeking
return of $34.5 million collected by the conversion of collateral on hand. The
 Company filed a demand for arbitration as provided for by the treaty and  filed
 a motion to compel arbitration which was granted in the United States District
 Court action. The Company has filed for arbitration against the other two
participants on the treaty and those arbitrations are in their early stages. While
management believes its interpretation of the treaty's terms and computations
 based thereon are correct, these matters are in their early stages and their
 ultimate outcome cannot be determined at this time.

A dispute has
arisen with F and G Re (on behalf of USF and G)under two aggregate stop loss
reinsurance treaties whereby F and G assumedcertain risk from the Company.
  During 1999, F and G Re filed for arbitration under those two treaties.

While management
 believes its interpretation of the treaties' terms and computations based thereon
 are correct, this arbitration is in its early stages and its ultimate outcome
 cannot be determined at this time.

On September 23,
1999, Torchmark Corporation, formerly the Company's largest common stockholder,
 filed a lawsuit in the Circuit Court of Jefferson County, Alabama against the
 Company asserting breach of contract, conversion and breach of duty in connection
with the Company's preparation and filing of a registration statement covering its
 shares in accordance with certain registration rights claimed by Torchmark.
 This claim seeks an injunction requiring a registration statement to be filed,
as well as compensatory and punitive damages. This litigation is in its early
stages, and management is unable to assess the damages that may be awarded, if any.
 However, management does not believe that such damages, if any, would materially
 and adversely affect the Company's financial position or results of operations.

On June 23, 1999,
 a subsidiary of Torchmark filed suit in the Circuit Court of Jefferson County,
 Alabama against two subsidiaries of the Company. The lawsuit claims that the
 Company's subsidiaries have failed to pay certain sums due under a marketing
and administrative services agreement between the parties. The suit also seeks
 payment of certain commissions and administrative expenses. This litigation is
 in its early stages, and management is unable to assess the damages that may be
awarded, if any.However, management does not believe that such damages, if any,
would materially and adversely affect the Company's financial position or results
 of operations.

`Item 2. Changes in Securities

                                                                 None.


                                                Item 3. Defaults Upon Senior Securities

                                                                 None.`

`At the annual meeting of stockholders  held May 8, 2000, the following  matters were submitted to a vote of stockholders.  (Shares
Eligible to Vote 24,725,832; Shares Voted 12,440,264)


2.       Election of Directors

     Messrs. Walter M. Beale, Jr. and Stephen R. Windom were elected to additional three year terms on the Board of Directiors.

                                                                                                            For        Withheld
Beale.................................................................................................   12,271,296     168,968
Windom................................................................................................   12,273,896     166,368

     Messrs.  Robert B.D.  Batlivala.,  Ehney A. Camp III, Norman W. Gayle III,  Clifford F. Palmer,  Larry D. Striplin,  Jr., James E.
Tait,  and James H. Taylor  continue to serve on the Board of Directors.  On January 31, 2000, Mr. Stephen R. Windom was elected by the
Board of Directors to fill a vacancy on the Board of Directors.`

`2.       Amendment of Non Employee Director Stock Plan


     The Company's  Non-Employee  Director  Stock Plan (the "Plan") was amended to (i) increase the share reserve by 600,000 shares and
(ii) to permit the  Compensation  Committee to increase the number of shares of Common Stock subject to Initial Option grants or Annual
Option grants, in its discretion, subject to certain limitations.

                                                                                                     For       Against    Abstain
Ammendment of the Non-Employee Director Stock Plan.............................................. 11,179,550   1,184,190    76,524


3. Election of Auditors

     PricewaterhouseCoopers  was  appointed  as the  principal  independent  auditor of the Company and its  subsidiaries  for the year
ending December 31, 2000.

                                                                                                      For      Against  Abstain
PricewaterhouseCoopers LLP......................................................................   12,317,912   54,113   68,239`

`Item 5. Other information`

`a)    EXHIBITS

  Exhibit No.                   ________________________________Description_________________________________

  2.1         Note Purchase Agreement, dated June 30, 2000, by and between American Founders Financial Corp., Vesta and Vesta
              Fire (Filed as exhibit 2.1 to Form 8-K filed July 14, 2000)

  27          Financial Data Schedule

  99.1        Risk Factors (filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1999, filed on
              March 30, 2000 and incorporated herein by reference (File No. 1-12338)).

--------------


b)   Reports on Form 8-K.

         Current reports were filed on Form 8-K's dated July 14, 2000 and June 21, 2000  reporting the acquisition of American
      Founders Financial Corporation and the adoption of a Shareholder's Rights Plan, respectively.`

`Pursuant  to the  requirements  of the  Securities  Act of 1933,  the  registrant  has duly caused this report to be signed on its
behalf by the undersigned "hereunto duly authorized.


                                                                        VESTA INSURANCE GROUP, INC.

Date: August 13, 2000

                                                                                          /s/   James E. Tait
---------------------------------------------------------------------------------------------------------------------------------------

                                                                                                James E. Tait
                                                                                           Executive Vice President
                                                                                         and Chief Financial Officer
                                                                                        (Principal Financial Officer)

Date: August 13, 2000

                                                                                        /s/   W. Perry Cronin
---------------------------------------------------------------------------------------------------------------------------------------

                                                                                                 W. Perry Cronin
                                                                                             Senior Vice President,
                                                                                            Controller and Treasurer
                                                                                         (Principal Accounting Officer)`