<PAGE>

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               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-Q

(MARK ONE)

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

                 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999

                                      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. [_] Yes [X] 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 August 12, 1999
                                  18,675,832

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<PAGE>

                          VESTA INSURANCE GROUP, INC.

                                     INDEX

<TABLE>
<CAPTION>
     PART I   FINANCIAL INFORMATION
     ------   ---------------------
     <S>      <C>                                                                    <C>
     Item 1.  Financial Statements:
              Consolidated Balance Sheets at June 30, 1999 and
              December 31, 1998..................................................... 1
              Consolidated Statements of Operations and Comprehensive Income for the
              Three Months and Six Months Ended June 30, 1999 and 1998.............. 2
              Consolidated Statements of Cash Flows for the
              Six Months Ended June 30, 1999 and 1998............................... 3
              Notes to Consolidated Financial Statements............................ 4
     Item 2.  Management's Discussion and Analysis of
              Financial Condition and Results of Operations......................... 9
<CAPTION>
     PART II  OTHER INFORMATION
     -------  -----------------
     <S>      <C>                                                                    <C>
     Item 1.  Legal Proceedings..................................................... 18
     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.....................................................
     Item 6.  Exhibits and Reports on Form 8-K......................................
</TABLE>
<PAGE>

                                     PART I

                          ITEM 1. FINANCIAL STATEMENTS

                          VESTA INSURANCE GROUP, INC.
                          CONSOLIDATED BALANCE SHEETS
             (AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                        JUNE 30,    DECEMBER 31,
                                                          1999          1998
                                                       -----------  ------------
                                                       (UNAUDITED)
<S>                                                    <C>          <C>
Assets:
 Investments:
  Fixed maturities available for sale--at fair value
   (cost: 1999--$402,175;
   1998--$446,516)....................................  $ 397,474     $ 457,219
  Equity securities--at fair value: (cost: 1999--
   $1,540; 1998--$18,127).............................      4,121        21,099
  Short-term investments..............................    140,617       131,029
                                                       ----------    ----------
  Total investments...................................    542,212       609,347
 Cash.................................................     28,723        25,321
 Accrued investment income............................      6,444         7,194
 Premiums in course of collection.....................     91,457       121,948
 Reinsurance balances receivable......................    223,083       265,903
 Reinsurance recoverable on paid losses...............     76,550       111,577
 Deferred policy acquisition costs....................     69,863       100,957
 Property and equipment...............................     17,904        18,442
 Income tax receivable................................        --         17,950
 Deferred income taxes................................     19,493        19,090
 Other assets.........................................     15,577        35,681
 Goodwill.............................................     13,818        14,292
                                                       ----------    ----------
  Total assets........................................ $1,105,124    $1,347,702
                                                       ==========    ==========
Liabilities:
 Reserves for:
 Losses and loss adjustment expenses.................. $  426,594    $  504,911
 Unearned premiums....................................    209,284       309,515
                                                       ----------    ----------
                                                          635,878       814,426
 Deferred gain on retroactive reinsurance.............      7,254         9,848
 Reinsurance balances payable.........................     15,976        49,028
 Other liabilities....................................     31,486        48,071
 Short term debt......................................     55,660        70,000
 Long term debt.......................................     98,325        98,302
                                                       ----------    ----------
  Total liabilities...................................    844,579     1,089,675
Commitments and contingencies: See Note C
 Deferrable Capital Securities........................    100,000       100,000
Stockholders' equity
 Preferred stock, 5,000,000 shares authorized, none
  issued..............................................        --            --
 Common stock, $.01 par value, 32,000,000 shares au-
  thorized,
  issued: 1999--18,964,322 shares; 1998--18,964,322...        190           190
 Additional paid-in capital...........................    154,001       156,465
 Accumulated other Comprehensive Income, net of appli-
  cable taxes (benefit) of $(742) and $4,786 in 1999
  and 1998, respectively..............................     (1,378)        8,889
 Retained earnings....................................     22,716        10,120
 Receivable from issuance of restricted stock.........     (1,936)       (2,045)
 Treasury stock.......................................    (13,048)      (15,592)
                                                       ----------    ----------
  Total stockholders' equity..........................    160,545       158,027
                                                       ----------    ----------
  Total liabilities and stockholders' equity.......... $1,105,124    $1,347,702
                                                       ==========    ==========
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                       1
<PAGE>

                          VESTA INSURANCE GROUP, INC.

         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                  (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                       THREE MONTHS ENDED   SIX MONTHS ENDED
                                            JUNE 30,            JUNE 30,
                                       ------------------- -------------------
                                        1999       1998      1999      1998
                                       -------  ---------- --------  ---------
                                                (RESTATED)           (RESTATED)
                                           (UNAUDITED)         (UNAUDITED)
<S>                                    <C>      <C>        <C>       <C>
Revenues:
 Net premiums written................. $92,835   $169,292  $153,451  $301,177
 (Increase) decrease in unearned pre-
  miums...............................   8,348     (5,216)   71,889     2,192
                                       -------   --------  --------  --------
 Net premiums earned.................. 101,183    164,076   225,340   303,369
 Net investment income................   7,896      8,800    16,305    18,100
 Gain on sale of assumed reinsurance
  renewal rights......................     --         --     15,000       --
 Other, including realized gains and
  losses..............................   7,870      1,843     9,205     3,093
                                       -------   --------  --------  --------
  Total revenues...................... 116,949    174,719   265,850   324,562
Expenses:
 Loss and loss adjustment expenses in-
  curred..............................  72,005    113,894   145,209   204,291
 Policy acquisition expenses..........  17,131     63,681    57,963    95,721
 Operating expenses...................  15,899     17,330    31,966    34,586
 Interest on debt.....................   3,346      3,345     7,103     6,453
 Goodwill amortization................     270      1,611       540     3,280
                                       -------   --------  --------  --------
  Total expenses...................... 108,651    199,861   242,781   344,331
Income (loss) before income taxes and
 deferrable
 capital securities...................   8,298    (25,142)   23,069   (19,769)
Income taxes (benefit)................   2,433     (9,319)    7,049    (7,379)
Deferrable capital securities inter-
 est, net of income tax...............   1,362      1,362     2,724     2,724
                                       -------   --------  --------  --------
  Net income (loss)................... $ 4,503   $(17,185) $ 13,296  $(15,114)
                                       =======   ========  ========  ========
 Basic net income (loss) per common
  share............................... $   .24   $   (.93) $    .71  $   (.82)
                                       =======   ========  ========  ========
 Diluted net income (loss) per common
  share............................... $   .24   $   (.93) $    .71  $   (.82)
                                       =======   ========  ========  ========
 Dividends declared per common share..     --    $    .04       --   $    .08
                                       =======   ========  ========  ========

STATEMENTS OF COMPREHENSIVE INCOME

Net income (loss)..................... $ 4,503   $(17,185) $ 13,296  $(15,114)
Other comprehensive income, net of
 tax:
 Unrealized holding gains (losses) on
  available-for-sale
  securities, net of applicable taxes
  (benefit) of $(340), $(26), $(1,342)
  and $122, respectively..............    (631)      (48)    (2,492)      226
 Less realized gains on available-for-
  sale securities, net of
  applicable taxes of $2,256, $0,
  $2,252 and $73, respectively........   4,182        --      4,182       135
                                       -------   --------  --------  --------
                                        (4,813)       (48)   (6,674)       91
Comprehensive income (loss)........... $  (310)  $(17,233) $  6,622  $(15,023)
                                       =======   ========  ========  ========
</TABLE>

          See accompanying Notes to Consolidated Financial Statements

                                       2
<PAGE>

                          VESTA INSURANCE GROUP, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                            SIX MONTHS ENDED
                                                                JUNE 30,
                                                          ---------------------
                                                            1999        1998
                                                          ---------  ----------
                                                                     (RESTATED)
                                                              (UNAUDITED)
<S>                                                       <C>        <C>
Operating Activities:
 Net income (loss)....................................... $  13,296   $(15,114)
 Adjustments to reconcile net income to cash from operat-
  ing activities:
  Change in:
   Loss and LAE reserves.................................   (78,317)     3,097
   Unearned premium reserve..............................  (100,230)    13,029
   Reinsurance balances payable..........................   (33,053)    28,313
   Accrued income taxes..................................    23,124     11,502
   Other liabilities.....................................   (17,458)   (33,249)
   Premiums in course of collection......................    30,491     (5,639)
   Reinsurance balances receivable.......................    42,819     31,351
   Reinsurance recoverable on paid losses................    35,027    (56,766)
   Other assets..........................................    21,014      7,413
  Policy acquisition costs deferred......................   (15,581)   (66,867)
  Policy acquisition costs amortized.....................    44,951     64,264
  Amortization and depreciation..........................     3,170      5,935
  Investment gains.......................................    (6,117)      (135)
  (Gain) Loss on disposition of property, plant and
   equipment.............................................      (370)       173
                                                          ---------   --------
   Net cash (used in) operating activities...............   (37,234)   (12,693)
Investing Activities:
 Investments sold or matured:
 Fixed maturities available for sale-matured, called.....   153,138     78,386
 Equity securities.......................................    18,284        --
Investments acquired:
 Fixed maturities available for sale.....................  (104,155)   (59,820)
 Equity securities.......................................         0     (4,119)
Net increase in short-term investments...................    (9,587)   (40,706)
Additions to property, plant and equipment...............    (1,588)    (2,237)
Dispositions of property, plant and equipment............       777        292
                                                          ---------   --------
  Net cash provided from (used in) investing activities..    56,869    (28,204)
Financing Activities:
 Issuance (repayment) of long and short term debt........   (14,976)    24,747
 Dividends paid..........................................      (698)    (1,379)
 Capital contributions from exercising options...........      (559)     1,298
                                                          ---------   --------
  Net cash provided from financing activities............   (16,233)    24,666
Increase (Decrease) in cash..............................     3,402    (16,231)
Cash at beginning of year................................    25,321     21,801
                                                          ---------   --------
Cash at end of period.................................... $  28,723   $  5,570
                                                          =========   ========
</TABLE>

          See accompanying Notes to Consolidated Financial Statements

                                       3
<PAGE>

                          VESTA INSURANCE GROUP, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         (DOLLAR AMOUNTS IN THOUSANDS)

NOTE A--SIGNIFICANT ACCOUNTING POLICIES

  Basis of Presentation: The accompanying unaudited 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 restated financial
statements and related notes which have been issued by the Company and filed
with the Securities and Exchange Commission (see Note B below). Amounts in the
prior financial statements presented have been adjusted in order to conform to
the restatement. There were no adjustments to the Company's Statement of
Operations for the three months or the six months ended June 30, 1999.

  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.

  Income per share: Basic weighted average common shares outstanding for the
six month period ended June 30, 1999 and 1998 was 18,685,631 and 18,454,982
respectively. Basic weighted average common shares outstanding for the three
month period ended June 30, 1999 and 1998 was 18,680,202 and 18,453,010,
respectively. 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. Diluted weighted average shares
outstanding for the six month period ended June 30, 1999 and 1998 was
18,685,631 and 18,454,982, respectively. Diluted weighted average shares
outstanding for the three month period ended June 30, 1999 and 1998 was
18,680,202 and 18,453,010, respectively.

  Recently Issued Accounting Standards: In December 1997, the ACSEC issued SOP
97-3, "Accounting by Insurance and Other Enterprises for Insurance Related
Assessments." SOP 97-3 provides guidance on when an insurance enterprise
should recognize a liability for guaranty fund or other assessments and how to
measure the liability. SOP 97-3 was effective January 1, 1999. The adoption of
SOP 97-3 did not have a significant impact on Vesta's consolidated operating
results or financial position.

                                       4
<PAGE>

                          VESTA INSURANCE GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE B--RESTATEMENT OF FINANCIAL STATEMENTS

  The Company determined subsequent to the issuance of the 1997 financial
statements, that a specific reinsurance ceded contract entered into in 1997
contains retroactive elements as defined in SFAS 113. A contract is deemed
retroactive when an assuming enterprise agrees to reimburse a ceding
enterprise for liabilities incurred as a result of a past insurable events.
For such contracts, SFAS 113 requires that any initial gain and any benefit
due from a reinsurer as a result of subsequent covered losses be deferred in
the financial statements of the ceding enterprise and recognized into income
over the settlement period of the underlying claims. The Company erroneously
recorded a gain on this contract in the fourth quarter of 1997 and has
adjusted its previously issued financial statements to appropriately defer and
recognize such gain. Analysis of this contract under the recovery method
resulted in the following adjustments to the six month period June 30, 1998
financial statements included herein:

<TABLE>
<CAPTION>
                                           AS PREVIOUSLY
                                             REPORTED    RESTATEMENT AS RESTATED
                                           ------------- ----------- -----------
<S>                                        <C>           <C>         <C>
 Losses incurred and loss adjustment ex-
  penses.................................    $204,243     $     48    $204,291
Income taxes.............................      (7,360)         (19)     (7,379)
  Net income.............................     (15,085)         (29)    (15,114)
Basic net income per common share........        (.82)         --         (.82)
Diluted net income per common share......        (.82)         --         (.82)
Deferred income taxes....................      23,628       (5,947)     17,681
Deferred gain on retroactive reinsurance.      (5,947)     (16,994)    (16,994)
Retained earnings........................     148,622      (11,047)    137,575
</TABLE>

  The deferred gain, which is included in the accompanying balance sheets,
associated with this contract at December 31, 1998 and June 30, 1999 is $9.8
million and $7.3 million, respectively.

NOTE C--CONTINGENCIES

  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 stockholder's equity of
$75.2 million through March 31, 1998.


                                       5
<PAGE>

                          VESTA INSURANCE GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
  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 place 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 purported 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. The consolidated amended complaint also added as defendants
Torchmark Corporation and the Company's predecessor 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 class
certification. 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.

  The Company intends to vigorously resist Cincinnati's efforts to avoid
coverage. Because these matters are in their early stages, their ultimate
outcome cannot be determined. Accordingly, no provision for any liability that
may result there from has been made in the accompanying consolidated financial
statements.

  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 treaty
participants accordingly. The aggregate amount included herein as recoverable
from such reinsurers totaled $54.0 million at June 30, 1999. The Company has
collected $34.5 million from NRMA, the largest participant on the treaty
through the draw down of a letter of credit which was required to be posted
since NRMA is a foreign reinsurer. NRMA 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 the
$34.5 million. The Company has filed a demand for arbitration as provided for
in the treaty and has filed a motion to compel arbitration which is currently
pending in the United States District Court action. The Company recently filed
for arbitration against the other two participants on the treaty. While
mangement 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.

                                       6
<PAGE>

                          VESTA INSURANCE GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

  The Company, through its subsidiaries, is routinely a party to other pending
or threatened legal proceedings and arbitrations. These proceedings involve
alleged breaches of contract, torts, including bad faith and fraud claims and
miscellaneous other causes of action. These lawsuits may include claims for
punitive damages in addition to 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 or arbitration to be material.

  As previously reported in the Company's Form 10-K for the period ended
December 31, 1998, A.M. Best, which rates insurance companies based on factors
of concern to policyholders, lowered its rating on the Company's insurance
subsidiaries on February 24, 1999 to "B++" (Very Good, its fifth highest
rating category) from "A-" (Excellent, its fourth highest rating category).
Some of the factors noted by A.M. Best as contributing to the downgrade
include the Company's operating performance, which was affected in part by
heavy catastrophe losses, the Company's debt level, and the uncertainty
associated with the Company's then ongoing negotiations with its lenders to
amend its credit agreement in light of then existing covenant defaults. The
Company determined that the impact of the A.M. Best downgrade on the
commercial line of business would necessitate corrective actions in excess of
what the marketplace will accept. Therefore, the Company elected to withdraw
from certain commercial lines of business in the second quarter of 1999. The
Company also determined that the impact of the downgrade on the reinsurance
segment significantly impaired the Company's ability to compete effectively in
the current reinsurance marketplace. Therefore, effective March 24, 1999 the
Company sold substantially all of its reinsurance business and operations to
another reinsurer in exchange for $15 million as disclosed in Note D.

  On May 3, 1999, A.M. Best further lowered its rating on the Company's
insurance subsidiaries from "B++" to "B" (Fair). As a result of the further
downgrade, the Company has elected to withdraw from its remaining commercial
lines. Also, the further downgrade may negatively impact the Company's current
homeowners lines, and remaining reinsurance lines of business.

NOTE D--SALE OF ASSUMED REINSURANCE BUSINESS

  On March 24, 1999, the Company entered into an agreement to transfer certain
of its reinsurance assumed business to Hartford Fire Insurance Company (Hart
Re). The agreement calls for the Company to reinsure its North American
assumed business underwritten in the Birmingham office with a January 1, 1999
effective date to Hart Re under a 100% quota share treaty and for the Company
to use its best efforts to novate the policies to Hart Re and encourage
renewals with Hart Re for policies not novated. The Company received $15
million in consideration of the transaction, such payment having been
conditioned on certain Company employees entering into employment
relationships with Hart Re.

  The Company is exiting the reinsurance assumed business with this
transaction and continued conversion or commutation and termination of all
other assumed reinsurance business. First quarter results include recognition
of recoverables and payables under the terms of the Hart Re agreement and
recognition of $15 million as gain associated with the agreement. As of June
30, 1999, the Company had novated certain policies to Hart Re which had
written premiums of $43.8 million for the six months ended June 30, 1999.

                                       7
<PAGE>

                          VESTA INSURANCE GROUP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE E--SEGMENT INFORMATION

<TABLE>
<CAPTION>
                                                        SIX MONTHS ENDED JUNE
                                                                 30,
                                                        ----------------------
                                                           1999        1998
                                                        ----------  ----------
<S>                                                     <C>         <C>
Reinsurance operations
 Net premiums earned................................... $   57,013  $  149,905
 Net investment income and realized gain/(loss)........      5,752       9,010
 Other income..........................................     15,000         --
 Underwriting gain (loss)..............................     (7,391)    (11,849)
Personal operations
 Net premiums earned...................................    132,336     118,782
 Net investment income and realized gain/(loss)........     13,353       7,140
 Other income..........................................      2,180       2,290
 Underwriting gain (loss)..............................      1,386     (14,603)
Commercial operations
 Net premiums earned...................................     35,991      34,682
 Net investment income and realized gain/(loss)........      3,632       2,085
 Other income..........................................        593         668
 Underwriting gain (loss)..............................     (3,793)     (4,777)
Other operations
 Interest expense......................................      7,103       6,453
 Goodwill amortization.................................        540       3,280
                                                        ----------  ----------
  Total pretax income (loss) from operations........... $   23,069  $  (19,769)
                                                        ==========  ==========
Total indentifiable assets
 Reinsurance operations
  Investments and other assets......................... $  307,816  $  451,667
  Deferred acquisition costs...........................     22,494      57,764
 Personal operations
  Investments and other assets.........................    433,596     520,200
  Deferred acquisition costs...........................     40,341      35,465
 Commercial operations
  Investments and other assets.........................    293,849     274,878
  Deferred acquisition costs...........................      7,028       7,728
                                                        ----------  ----------
   Total assets........................................ $1,105,124  $1,347,702
                                                        ==========  ==========
</TABLE>

                                       8
<PAGE>

    ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

  Vesta Insurance Group, Inc. (the "Company" or "Vesta") is a holding company
for a group of property and casualty insurance companies (the "Vesta Group").
The Company writes treaty reinsurance and primary insurance on selected
personal and commercial lines risks. In its reinsurance operations, the
Company focuses principally on property coverages, for which ultimate losses
generally can be more promptly determined than on casualty risks. In the past,
the Company's primary operations have emphasized writing property coverages
more than liability. With the addition of the liability portions of the Shelby
automobile lines, the Company's writings are also now more evenly balanced
between property and liability exposures. The Company's revenues from
operations are derived primarily from net premiums earned on risks written or
reinsured by the Company, investment income and investment gains or losses,
while expenses consist primarily of payments for claim losses and underwriting
expenses, including agents' commissions and operating expenses.

KNOWN TRENDS AND UNCERTAINTIES

  The financial position, results of operations, and cash flows of property
and casualty insurers have historically been subject to significant
fluctuations due to competition, A.M. Best ratings, and other factors. Certain
known trends and uncertainties which may affect future results of the Company
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. The Company also faces
competition from foreign insurance companies captive insurance companies and
risk retention groups. In the future, the industry, including the Company, may
face increasing insurance underwriting competition from banks and other
financial institutions.

  Adverse impacts of insurance rating downgrades: A.M. Best, which rates
insurance companies based on factors of concern to policy holders, lowered
it's rating on the Company's insurance subsidiaries from "B++" to "B". See
Note C of consolidated financial statement for further information.

  Litigation: See Part II, Item 1 for discussion of current status of
litigation.

  Reliance on Performance of Reinsurers: The Company evaluates the credit
quality of the reinsurers and retrocessionaires to which it cedes business. No
assurance can be given regarding the future ability of any of the Company's
reinsurers to meet their obligations.

  Year 2000: The failure to correct a material Year 2000 ("Y2K") problem could
result in an interruption in, or failure of, the normal business operations of
the Company including the delay in premium or claim processing and the
disruption of service to its customers.

 Comparison of Second Quarter 1999 to Second Quarter 1998

  Net income increased by $21.7 million, or 126.2%, to $4.5 million for the
quarter ended June 30, 1999, from a loss of $17.2 million for the quarter
ended June 30, 1998. On a diluted per share basis, net income for the second
quarter of 1999 was $.24 per share versus a net loss of $.93 per share for the
second quarter of 1998. The increase in net income is primarily attributable
to improved operating results and a $4.2 million after tax increase in
realized investment gains.

                                       9
<PAGE>

 Premiums, Loss and LAE--Personal Lines

  Gross premiums written for personal lines decreased by $22.1 million, or
23.7%, to $71.3 million for the quarter ended June 30, 1999, from $93.4
million for the quarter ended June 30, 1998. The decline in personal lines
gross written premiums is primarily attributable to declines in the Financial
Services, Vesta County Mutual and Hawaiian Insurance and Guaranty partially
offset by the continued rollover of certain homeowners business from the
assumed reinsurance lines.

  Net premiums written for personal lines decreased by $1.8 million, or 2.8%,
to $63.1 million for the quarter ended June 30, 1999, from $64.9 million for
the quarter ended June 30, 1998. Net premiums earned for personal lines
increased $3.6 million, or 6.4% to $59.9 million for the quarter ended June
30, 1999, from $56.3 million for the quarter ended June 30, 1998. The increase
in net premiums earned was largely attributable to the termination on a run
off basis of the 20% whole account quota share treaty effective July 1, 1998.

  Loss and loss adjustment expenses ("LAE") for personal lines increased by
$.8 million, or 2.2%, to $38.0 million for the quarter ended June 30, 1999,
from $37.2 million for the quarter ended June 30, 1998. The loss and LAE ratio
for personal lines for the quarter ended June 30, 1999 was 63.4% as compared
to 66.1% at June 30, 1998. The decrease in the loss and LAE ratio is primarily
attributable to rate increases for the auto and homeowners lines in certain
states and general improvement in the overall experience of the block of
business.

 Premiums, Loss and LAE--Commercial Lines

  Gross premiums written for commercial lines decreased by $15.3 million, or
46.6%, to $17.5 million for the quarter ended June 30, 1999, from $32.8
million for the quarter ended June 30, 1998. The decrease in gross premiums
for commercial lines is primarily attributable to declining volume as a result
of the Company's election to exit the commercial lines business.

  Net premiums written for commercial lines decreased by $4.1 million or
25.8%, to $11.8 million for the quarter ended June 30, 1999, from $15.9
million for the quarter ended June 30, 1998. Net premiums earned for
commercial lines increased by $1.1 million, or 6.7%, to $17.4 million for the
quarter ended June 30, 1999, from $16.3 million for the quarter ended June 30,
1998. The increase in net earned premiums was largely attributable to the
termination on a run off basis of the 20% whole account quota share treaty
effective July 1, 1998.

  Loss and LAE for commercial lines decreased by $4.7 million, or 24.4%, to
$14.6 million for the quarter ended June 30, 1999, from $19.3 million for the
quarter ended June 30, 1998. The loss and LAE ratio for the quarter ended June
30, 1999 was 83.9% as compared to 118.4% for the quarter ended June 30, 1998.

 Premiums, Loss and LAE--Reinsurance

  Gross premiums written for reinsurance decreased by $113.9 million, or 89.6%
to $13.2 million for the quarter ended June 30, 1999 from $127.1 million for
the quarter ended June 30, 1998. The decrease was primarily attributable to
the Company's election to withdraw from the assumed reinsurance line of
business, the novation of certain treaties to HartRe and the continued roll
over of certain homeowners business to personal lines.

  Net premiums written for reinsurance decreased by $70.5 million, or 79.8% to
$17.9 million for the quarter ended June 30, 1999 from $88.4 million for the
quarter ended June 30, 1998. The decline in net written premiums for
reinsurance is primarily attributable to the decline in gross written premiums
and the 100% reinsurance quota share treaty entered into effective January 1,
1999. Net premiums earned decreased $67.8 million, or 74.0% to $23.8 million
for the quarter ended June 30, 1999, from $91.6 million for the quarter ended
June 30, 1998.

  Loss and LAE for reinsurance decreased by $37.9 million, or 66.1%, to $19.4
million for the quarter ended June 30, 1999, from $57.3 million for the
quarter ended June 30, 1998. The loss and LAE ratio for reinsurance for the
quarter ended June 30, 1999 was 81.5% as compared to 64.0% for the quarter
ended June 30, 1998.

                                      10
<PAGE>

 Policy Acquisition Expenses and Other Expenses

  Policy acquisition expenses decreased by $46.6 million, or 73.2% to $17.1
million for the quarter ended June 30, 1999, from $63.7 million for the
quarter ended June 30, 1998. The decrease in policy acquisition expenses is
primarily attributable to declines in assumed reinsurance premiums earned.
Other expenses include operating expenses not directly related to the
generation of premium revenue, premium taxes and fees, interest on debt and
goodwill amortization. Operating expenses decreased $1.4 million. The decline
in operating expenses is primarily attributable to declines in salary and
information systems expense related to the consolidation of the Shelby
operations to Birmingham. These factors caused the underwriting expense ratio
to decrease from 49.4% in the second quarter of 1998 to 32.7% in the second
quarter of 1999. Goodwill amortization decreased $1.3 million. The decrease in
goodwill amortization is attributable to the effect of the 1998 fourth quarter
write down of $74.5 million of goodwill acquired on June 30, 1997 in
connection with the Shelby acquisition.

 Net Investment Income

  Net investment income decreased by $.9 million, or 10.3%, to $7.9 million
for the quarter ended June 30, 1999, from $8.8 million for the quarter ended
June 30, 1998. The weighted average yield on invested assets (excluding
realized gains) was 5.4% for the quarter ended June 30, 1999, compared with
6.1% for the quarter ended June 30, 1998. The decrease in net investment
income is primarily attributable to the decrease in average invested assets.


 Federal Income Taxes

  Federal income taxes increased by $11.7 million, or 125.8%, to $2.4 million
for the quarter ended June 30, 1999. The effective rate on pre-tax income
decreased from 37.1% to 29.3% for the quarter ended June 30, 1999. The
decrease in the effective rate is primarily attributable to the decrease in
non-deductible goodwill amortization.

 Net Income

  For the reasons discussed above, net income increased by $21.7 million, or
126.2%, to $4.5 million for the quarter ended June 30, 1999, from $(17.2)
million for the quarter ended June 30, 1998.

 Comparison of Six Months Ended June 30, 1999 with Six Months Ended June 30,
1998

  Net income increased by $28.4 million, or 188.1%, to $13.3 million for the
period ended June 30, 1999, from a net loss of $15.1 million for the period
ended June 30, 1998. On a diluted per share basis, net income for the period
ended June 30, 1999 was $.71 per share versus net loss of $.82 per share for
the period ended June 30, 1998. The increase in net income is primarily
attributable to a $9.8 million after tax gain from the sale of substantially
all of the reinsurance operations, a $4.2 million after tax increase in
realized investment gains and improved operating results.

 Premiums, Loss and LAE--Personal Lines

  Gross premiums written for personal lines decreased by $34.8 million, or
19.3%, to $145.2 million for the period ended June 30, 1999, from $180.0
million for the period ended June 30, 1998. The decline in personal lines
gross written premiums is primarily attributable to declines in the Financial
Services, Vesta County Mutual and Hawaiian Insurance and Guaranty partially
offset by the continued roll over of certain homeowners business from the
assumed reinsurance lines.

                                      11
<PAGE>

  Net premiums written for personal lines increased by $2.8 million, or 2.2%,
to $129.0 million for the period ended June 30, 1999, from $126.2 million for
the period ended June 30, 1998. Net premiums earned for personal lines
increased $13.5 million, or 11.4% to $132.3 million for the period ended June
30, 1999, from $118.8 million for the period ended June 30, 1998. The increase
in net premiums written and net premiums earned was largely attributable to
the termination on a run off basis of the 20% whole account quota share treaty
effective July 1, 1998.

  Loss and loss adjustment expenses ("LAE") for personal lines increased by
$6.1 million, or 7.8%, to $84.6 million for the period ended June 30, 1999,
from $78.5 million for the period ended June 30, 1998. The loss and LAE ratio
for personal lines for the period ended June 30, 1999 was 63.9% as compared to
66.1% at June 30, 1998. The decrease in the loss and LAE ratio is primarily
attributable to the implementation of rate increases in the auto and
homeowners lines in certain states and a general improvement in the overall
experience of the block of business.

 Premiums, Loss and LAE--Commercial Lines

  Gross premiums written for commercial lines decreased by $27.4 million, or
39.3%, to $42.3 million for the period ended June 30, 1999, from $69.7 million
for the period ended June 30, 1998, The decrease in gross premiums for
commercial lines is primarily attributable to declining volume in the Shelby
operations as a result of the Company's election to exit the commercial lines
business.

  Net premiums written for commercial lines decreased by $3.7 million or
11.4%, to $28.8 million for the period ended June 30, 1999, from $32.5 million
for the period ended June 30, 1998. Net premiums earned for commercial lines
increased by $1.3 million, or 3.7%, to $36.0 million for the period ended June
30, 1999, from $34.7 million for the period ended June 30, 1998.

  Loss and LAE for commercial lines decreased by $.3 million, or 1.1%, to
$26.1 million for the period ended June 30, 1999, from $26.4 million for the
period ended June 30, 1998. The loss and LAE ratio for the period ended June
30, 1999 was 76.1% as compared to 72.5% for the period ended June 30, 1998.

 Premiums, Loss and LAE--Reinsurance

  Gross premiums written for reinsurance decreased by $237.9 million, or
100.5% to $(1.1)million for the period ended June 30, 1999 from $236.8 million
for the period ended June 30, 1998. The decrease was primarily attributable to
the commutation and unearned portfolio transfers of several large reinsurance
contracts, novations of certain reinsurance contracts related to the sale of
the reinsurance business and the continued roll over of certain homeowners
business to personal lines.

  Net premiums written for reinsurance decreased by $146.9 million, or 103.1%
to $(4.4) million for the period ended June 30, 1999 from $142.5 million for
the period ended June 30, 1998. The decline in net written premiums for
reinsurance is primarily attributable to the decline in gross written
premiums, the novation of certain reinsurance contracts and the 100%
reinsurance quota share treaty entered into effective January 1, 1999. Net
premiums earned decreased $92.9 million, or 62.0% to $57.0 million for the
period ended June 30, 1998, from $149.9 million for the period ended June 30,
1998.

  Loss and LAE for reinsurance decreased by $64.8 million, or 65.3%, to $34.5
million for the period ended June 30, 1999, from $99.3 million for the period
ended June 30, 1998. The loss and LAE ratio for reinsurance for the period
ended June 30, 1999 was 60.5% as compared to 66.2% for the period ended June
30, 1998. The decrease in the loss and LAE ratio was primarily due to an
increased percentage being ceded to the retrocessionares pursuant to the
Company's ceded reinsurance program including the 100% quota share reinsurance
treaty.

                                      12
<PAGE>

Policy Acquisition Expenses and Other Expenses

  Policy acquisition expenses decreased by $37.7 million, or 39.4% to $58.0
million for the period ended June 30, 1999, from $95.7 million for the period
ended June 30, 1998. The decrease in policy acquisition expenses is primarily
attributable declines in assumed reinsurance premiums earned. The change in
method for recording commission expense for Financial Services has no effect
on net income. Other expenses include operating expenses not directly related
to the generation of premium revenue, premium taxes and fees, interest on debt
and goodwill amortization. Operating expenses decreased $2.6 million. The
decline in operating expenses is primarily attributable to declines in salary
and information systems expense related to the consolidation of the Shelby
operations. These factors caused the underwriting expense ratio to decrease
from 43.0% for the period ended June 30, 1998 to 39.9% for the period ended
June 30, 1999. Goodwill amortization decreased $2.7 million. The decrease in
goodwill amortization is attributable to the effect of the 1998 fourth quarter
write down of $74.5 million of goodwill acquired on June 30, 1997 in
connection with the Shelby acquisition.

 Net Investment Income

  Net investment income decreased by $1.8 million, or 9.9%, to $16.3 million
for the period ended June 30, 1999, from $18.1 million for the period ended
June 30, 1998. The weighted average yield on invested assets (excluding
realized gains) was 5.5% for the period ended June 30, 1999, compared with
6.3% for the period ended June 30, 1998. The decrease in net investment income
is primarily attributable to a decrease in average invested assets.

 Federal Income Taxes

  Federal income taxes increased by $14.4 million, or 194.6%, to $7.1 million
for the period ended June 30, 1999. The effective rate on pre-tax income
decreased from 37.3% to 30.6% for the period ended June 30, 1999. The decrease
in the effective rate is primarily attributable to the decrease in non-
deductible goodwill amortization.

 Net Income

  For the reasons discussed above, net income increased by $28.4 million, or
188.1%, to $13.3 million for the period ended June 30, 1999, from a net loss
of $15.1 million for the period ended June 30, 1998.

LIQUIDITY AND CAPITAL RESOURCES

  The Company 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 the principal
operating subsidiary of the Company.

Sources

  As a holding company with no other business operations, the Company relies
primarily upon dividend payments from Vesta Fire to meet its cash requirements
(including its debt service) and to pay dividends to its stockholders.
Transactions between Vesta Fire, and the Company, including the payment of
dividends by Vesta Fire, are subject to certain limitations under the
insurance laws of Alabama. Specifically, Alabama law permits 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. In 1998, Vesta Fire voluntarily agreed that it will not
declare any dividends, except for those required to service the Company's
debt, until December 31, 1999, without the prior written approval of the
Alabama Department of Insurance.

  In light of these dividend restrictions and the anticipated cash
requirements needed to pay principal and interest on the Amended Facility
(discussed in detail below), the Company determined to seek additional equity
capital and other alternative sources of funds during 1999.


                                      13
<PAGE>

  In June 1999, the Company signed an agreement for a private placement of its
Series A Preferred Stock with the Birmingham Investment Group, LLC. (the
"Group"). The Group has agreed to purchase from the Company 2,950,000 shares
of the Company's preferred stock at $8.50 per share for an aggregate of $25.1
million.. Each share of the preferred stock will be convertible into two
shares of the Company's common stock and will carry a dividend rate of 9%. The
preferred stock will automatically be converted into shares of common stock at
the date at which the common stock of the Company achieves an average closing
price of $8.00 per share for twenty consecutive trading days.

  In June 1999, the Company entered into an agreement with Employers
Reinsurance Corporation to sell the authority and the right to control and
manage the affairs of Vesta County Mutual Insurance Company for $11.2 million.
The closing of the transaction is contingent on the approval from the Texas
Department of Insurance.

  The principal sources of funds for the Company's 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) provided from operations for the quarter ended June
30, 1999 and 1998, was ($26.7) million and $12.7 million, respectively.

  As of June 30, 1999, the Company's investment portfolio consisted of short-
term investments (25.7%), U.S. Government securities (12.7%), mortgage-backed
securities (14.8%), corporate bonds (26.4%), foreign government securities
(0.7%), municipal bonds (19.4%) and equity securities (.3%). 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. Beginning in June of each
year, the Company begins to increase its holdings of cash and short-term
investments. This practice facilitates the Company's ability to meet its
higher short-term cash needs during the hurricane season. As of June 30, 1999
and December 31, 1998, the Company had cash on deposit in various banking
institutions in the amount of $28.7 million and $25.3 million respectively.

Uses

  The principal uses of funds at the holding company level are to pay
operating expenses, principal and interest on outstanding indebtedness and
dividends to stockholders if declared by the Board of Directors. During the
last three years, the insurance subsidiaries of the Company have produced
operating results and paid dividends sufficient to fund the needs of the
Company. However, the Amended Facility will mature on July 31, 2000 and
management does not believe the Alabama Department of Insurance would permit
the insurance subsidiaries to pay the dividends required to repay the existing
short term bank debt. Accordingly, Management believes that the Company's
ability to repay and restructure the short term owing under the Amended
Facility depends, in large part, upon the consummation of the transactions
described above. In the event any or all of these transactions fail to close,
the Company may be compelled to take other actions in order to repay this
debt, including the sale of profitable assets, which could limit the Company's
operational capacity to maintain and increase premium volume.

  The Company is required to make semi-annual interest payments of $4.4
million on its $100 million of 8.75% Senior Debentures due 2025 (the "Senior
Notes"). As required by the Company's amended bank facility, the Company will
defer the semi-annual interest payments of $4.3 million on its $100 million of
8.525% Junior Subordinated Deferrable Interest Debentures due 2007 (the "Trust
Debentures") issued to Vesta Capital Trust I in connection with its sale of
$100 million of 8.525% Capital Securities. The Company will not pay any common
stock dividends in 1999.

  In April 1999, the Company restructured its $200 million line of credit into
a $70 million senior revolving credit facility, maturing July 31, 2000 (the
"Amended Facility"). The interest rate on the Amended Facility is the prime
rate plus 1%, provided that from and after September 30, 1999 the rate shall
be increased to the prime rate plus 3% if the Company has not made permanent
principal prepayments on the Amended Facility aggregating at least $25
million. The Amended Facility also provides for warrants equal to
approximately 6.6%

                                      14
<PAGE>

of the Company's outstanding shares being issued to the banks participating on
the Amended Facility, which become exercisable in the event the Company does
not make $25 million of permanent principal prepayments on the facility by
March 15, 2000. The Company made a permanent principal prepayment on the
Amended Facility of approximately $14.6 million in April, 1999. As of June 30,
1999, the Company had an outstanding balance of $55.6 million under the senior
revolving credit facility.

  The Amended Facility requires the Company to suspend dividends on its common
stock and defer payments of interest on its Trust Debentures unless the
Company has made $25 million of permanent principal prepayments on the Amended
Facility by March 15, 2000. The Amended Facility contains certain covenants
that require the Company to maintain minimum statutory surplus levels, minimum
cumulative statutory net income levels and minimum cumulative GAAP net income
levels. As of June 30, 1999 the Company was in compliance with the amended
facility covenants.

  In connection with the preferred stock purchase agreement with the Group,
the Company has received a commitment from The Banc Corporation and its
subsidiary, The Bank, to refinance $20 million of the Amended Facility. The
new facility with the Bank will have an initial term of two years and will
accrue interest at the Bank's daily prime rate. The commitment is contingent
on the closing of the preferred stock transaction with the Group.

INFLATION

  The Company does not believe its results have been materially affected by
inflation due in part to the predominantly short-tail nature of its business.
The potential adverse impacts of inflation include: (i) a decline in the
market value of the Company's fixed maturity investment portfolio; (ii) an
increase in the ultimate cost of settling claims which remain unresolved for a
significant period of time; and (iii) an increase in the Company's operating
expenses. Historically, the effect of inflation on the Company's reserves has
not been material.

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.

                                      15
<PAGE>

YEAR 2000

  The Company and it subsidiaries are proceeding on schedule with efforts to
convert its computer systems to be Y2K compliant. The Company has implemented
a phased approach to transition computer systems to be Y2K compliant.

  The Company has completed the first six of seven phases of the transition
for its defined mission critical systems. Extraneous systems are either being
discontinued or are in the remediation phase at this time. Implementation of
Y2K compliance for these remaining systems is scheduled for completion by
third quarter of 1999.

  The Company began the assessment phase in October, 1996. From that time
forward, system development and major enhancements to existing systems took
Y2K process requirements into consideration. During the Assessment Phase, a
comprehensive inventory of systems was completed and all date related fields
and code that handled these dates were identified. The Assessment Phase was
completed in December, 1996.

  Once the Company had an understanding of the lines of code and number of
date fields that must be addressed to ensure systems would be made Y2K
compliant, the second phase, Methodology Development, began. The purpose of
this phase was to develop a methodology that would ensure the Company's
systems would be made Y2K compliant and at the same time allow the Company to
continue to address the day-to-day business needs. This phase was completed in
March, 1997.

  Part of the Methodology Development Phase was the selection of a business
partner (BP) to assist the Company in the Y2K Compliance effort. This BP had
proven experience in the migration of applications to becoming Y2K compliant
and would provide project management leadership and a team of programming
resources to perform the actual migration.

  The third phase of the Y2K effort was the Pilot Project Phase that purpose
of which was to test/prove the Y2K methodology developed in the prior phase.
The Company selected the reinsurance system as the application to be made Y2K
compliant as the Pilot System. This effort began in March, 1997 and was
completed in June, 1997.

  The fourth phase of the Y2K effort was the Accounting Project Phase the
purpose of which was to verify that the methodology would support the
integration of Y2K compliant systems with non-Y2K compliant systems. Since the
accounting systems interface with the core insurance processing systems in the
transfer of information, the development of interface modules to correctly
handle the translation of dates in both formats was begun and was completed in
October, 1997.

  The fifth phase of the Y2K effort was the All Systems Project Phase the
purpose of which was to convert the core insurance processing systems to Y2K
compliance. Additional personnel were added to the effort for the primary
purpose of testing and validating results. This effort, which was completed on
August 3, 1998 completed the conversion/migration of all the Company's in-
house developed system to Y2K compliance.

  The Post-Implementation Support and Assurance Phase includes continued
monitoring of Y2K compliance and executing programs to test compliance.

  The Shelby Insurance Companies (SIC) had migrated its commercial lines,
claims, and billing applications to Policy Management Systems Corporation's
(PMSC) Y2K compliant systems prior to its acquisition in 1997. SIC's personal
lines and other miscellaneous internally developed systems remain to be
converted to their Y2K counterpart. The migration effort was completed in
October, 1998. Presently, the core insurance processing systems for SIC are
Y2K compliant while work remains with respect to miscellaneous in-house
developed systems. PMSC will continue to test all systems through 1999.

                                      16
<PAGE>

  As of June 30, 1999, the Company had spent approximately $7.0 million to
bring its systems to Y2K compliance. The Company estimates it will incur an
additional $.5 million to complete Y2K readiness efforts (i.e., upgrade PC
hardware, servers, routers, PC related software, etc.). These costs do not
include contingency planning and implementation of contingency plans.

  In January, 1999, the Company began its Non-Application Y2K Compliance
Phase. This phase consists of the activities for identifying, evaluating, and
remediating/replacing non mission critical hardware and software.

  As of the first of March, inventories have been completed for hardware and
corresponding systems. External service providers have been identified and
letters requesting the status of their Y2K compliance level have been sent and
responses are currently being received.

  The Company is currently developing it Y2K contingency plans for its
business areas by developing detailed plans to allow the Company to process
its business should one or more systems, internal and/or external, cause a
disruption in the normal daily processing. Such plans are scheduled to be
completed by the end of the third quarter of 1999, and tested by the user
community in October of 1999.

  The failure to correct a material Y2K problem could result in an
interruption in, or failure of, the normal business operations of the Company
including the disruption or delay in premium or claim processing and the
disruption in service to its customers. Also the inability to be Y2K compliant
of significant third-party providers of the Company and SIC could result in an
interruption in the normal business operations. Due to the general uncertainty
inherent in the Y2K problem, such failures could materially and adversely
affect the Company's financial position, result of operations and liquidity.

  The Y2K issue is also a concern from an underwriting standpoint regarding
the extent of liability for coverage under various general liability, property
and directors and officers liability and product policies. The Company
believes that minimal as commercial lines business has historically excluded
any manufacturing risks which produce computer and computer dependent
products.

  The Insurance Services Office (ISO) recently developed policy language that
clarifies that there is no coverage for certain Y2K occurrences. The liability
exclusion has been accepted in over 40 states and a companion filing for
property has been accepted in at least 20 states at this time. Several states
have not adopted or approved the property exclusion form citing specifically
that there is no coverage under the current property contracts and therefore,
there is no reason to accept a clarifying endorsement. The Company is
currently addressing the Y2K issue by attaching the ISO exclusionary language
to all general liability policies with a rating classification the Company
believes could potentially have Y2K losses. The ISO exclusionary language
endorsement is included on all property policies. These actions should
minimize the Company's exposure to Y2K losses.

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.

                                      17
<PAGE>

                                    PART II

                           ITEM 1. LEGAL PROCEEDINGS

  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 1997 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 item by
issuance of a current report on Form 8-K dated August 19, 1998. These
restatements resulted in a cumulative decrease to stockholder' equity of $75.2
million through March 31, 1998.

  Commencing in June, 1998, the Company 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 purported 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. The consolidated amended complaint also added as defendants
Torchmark Corporation and the Company's predecessor 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 states and there has been no discovery
or class certification. The Company intends to vigorously to 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 law suit 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. The Company intends
to vigorously resist Cincinnati's efforts to avoid coverage. Because these
matters are in the early states, their ultimate outcome cannot be determined.
Accordingly, no provision for any liability that may result therefrom has been
made in the accompanying consolidated financial statements.

                                      18
<PAGE>

  The Company, through its subsidiaries, is routinely a party to pending or
threatened legal proceedings and arbitration. These proceedings involve
alleged breaches of contract, torts, including bad faith and fraud claims and
miscellaneous other causes of action. These lawsuits may include claims for
punitive damages in addition to 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 or arbitration 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 Insurance Corporation
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 treaty
participants accordingly. The aggregate amount included herein as recoverable
from such reinsurers totaled $75.4 million at December 31, 1998. The Company
collected $34,483,513.50 from NRMA Insuranc Ltd ("NRMA"), the largest
participant on the treaty through the draw down of a letter of credit which
NRMA was required to post since it is a foreign reinsurer. NRMA filed a
lawsuit in the United States Districe Court for the Northern District of
Alabama contesting the Company's claim and the validity of the treaty, and is
seeking return of the $34,483,513.50. The Company filed a demand for
arbitration as provided for in the treaty and has filed a motion to compel
arbitration which is currently pending in the United State District Court
action. The Company also recently filed for arbitration against the other two
participants on the treaty. While mangement believes its interpretation of the
treaty's terms and computations based theron are correct, these matters are in
their early stages and their ultimate outcome cannot be determine at this
time.

                         ITEM 2. CHANGES IN SECURITIES

  None.

                    ITEM 3. DEFAULTS UPON SENIOR SECURITIES

  As of December 31, 1998, the Company had borrowed $70 million under its $200
million line of credit for general corporate purposes and for a capital
contribution of $25 million to the Company's principal insurance subsidiary,
Vesta Fire. The credit agreement related to this line of credit contained
certain covenants that require, among other things, the Company to maintain a
certain consolidated net worth ("Consolidated Net Worth Covenant"), maintain a
certain amount of earnings before interest and taxes available for the payment
of interest and dividend expense, ("Fixed Charge Coverage Ratio"), cause each
insurance subsidiary to maintain a certain total adjusted statutory capital,
("Adjusted Statutory Capital Covenant"), and that limits the amount of
indebtedness of the companies. As of December 31, 1998, the Company was not in
compliance with all of its financial covenants.

  Subsequent to March 31, 1999, the Company's banks agreed to amend the
covenants and waive any event of default arising from non-compliance with the
covenants as of March 31, 1999. The amended credit facility was restructured
into a $70 million senior revolving credit facility, maturing July 31, 2000
(the "Amended Facility"). The interest rate on the Amended Facility will be
the prime rate plus 1%, Provided that from and after September 30, 1999 the
rate shall be increased to the prime rate plus 3% if the Company has not made
permanent principal prepayments on the Amended Facility aggregating at least
$25 million ($14.3 million of which had been prepaid as of June 30, 1999).

                                      19
<PAGE>

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

  At the annual meeting of stockholders held May 18, 1999, the following
matters were submitted to a vote of stockholders. (Shares Eligible to Vote
18,686,322; Shares Voted 17,247,082)

1. ELECTION OF DIRECTORS

  Messrs. Norman W. Gayle III and James E. Tait were elected to additional
three year terms on the Board of Directiors.

<TABLE>
<CAPTION>
                                                               FOR     WITHHELD
                                                            ---------- ---------
<S>                                                         <C>        <C>
Gayle...................................................... 15,978,181 1,268,901
Tait....................................................... 16,894,930   352,152
</TABLE>

  Messrs. Walter M. Beale, Jr., Ehney A. Camp III, Robert A. Hershberger,
Clifford F. Palmer, and Jarvis W. Palmer continue to serve on the Board of
Directors. On July 27, 1998, Messrs. Norman W. Gayle, III and James E. Tait
were elected by the Board of Directors to fill a vacancy and a newly created
directorship on the Board of Directors.

2. ELECTION OF AUDITORS

  PricewaterhouseCoopers was appointed as the principal independent auditor of
the Company and its subsidiaries for the year ending December 31, 1999.

<TABLE>
<CAPTION>
                                                         FOR     AGAINST ABSTAIN
                                                      ---------- ------- -------
<S>                                                   <C>        <C>     <C>
PricewaterhouseCoopers LLP........................... 17,164,064 70,096  12,922
</TABLE>

                                      20
<PAGE>

                                 EXHIBITS INDEX

<TABLE>
<CAPTION>
EXHIBIT NO.  DESCRIPTION
-----------  -----------
<S>          <C>
2.1          Agreement, dated March 24, 1999, by and among Hartford Fire Insurance Company, J. Gordon
             Gaines, Inc. and Vesta Fire Insurance Corporation. (filed as an exhibit to the Company's Form 8-K,
             filed on March 25, 1999, and Incorporated herein by reference (File No. 112338)).
3.1          Restated Certificate of Incorporation of the Company, dated September 1, 1993 (filed as an exhibit
             to the Company's Form 10-Q for the quarter ended June 30, 1998, filed on June 16, 1998 and
             incorporated herein by reference (File No. 1-12338)).
3.2          By-Laws of the Company (Amended and Restated as of October 1, 1993) (filed as an exhibit to
             Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 33-68114) of Vesta
             Insurance Group, Inc., filed on October 18, 1993 and incorporated herein by reference
             (File No. 1-12338)).
4.1          Indenture between the Company and Southtrust Bank of Alabama, National Association, dated as
             of July 19, 1995 (filed as an exhibit to the Company's Form 10-K for the year ended December 31,
             1995, filed on March 28, 1996 and incorporated herein by reference (File No. 1-12338)).
4.2          Supplemental Indenture between the Company and Southtrust Bank of Alabama, National
             Association, dated July 19, 1995 (filed as an exhibit to the Company's Form 10-K for the year
             ended December 31, 1995, filed on March 28, 1996 and incorporated herein by reference
             (File No. 1-12338)).
4.3          Indenture dated as of January 31, 1997, between the Company and First Union National Bank of
             North Carolina, as trustee (filed as an exhibit to the Company's Form 10-Q for the quarter ended
             March 31, 1997, filed on May 13, 1997 and incorporated herein by reference (File No. 1-12338)).
4.4          Amended and Restated Declaration of Trust, dated as of January 31, 1997, of Vesta Capital Trust I
             (filed as an exhibit to the Company's Form 10-Q for the quarter ended March 31, 1997, filed on
             May 13, 1997 and incorporated herein by reference (File No. 1-12338)).
4.5          Capital Securities Guarantee Agreement, dated as of January 31, 1997, between the Company and
             First Union National Bank of North Carolina, as trustee (filed as an exhibit to the Company's
             Form 10-Q for the quarter ended March 31, 1997, filed on May 13, 1997 and incorporated by
             reference (File No. 1-12338)).
10.1         Separation and Public Offering Agreement between Torchmark Corporation and the Company dated
             September 13, 1993 (filed as an exhibit to the Company's Form 10-K for the year ended
             December 31, 1993, filed on March 28, 1994 and incorporated herein by reference
             (FileP No. 1-2338)).
10.2         Marketing and Administrative Services Agreement between Liberty National Fire Insurance
             Company, Liberty National Insurance Corporation and Liberty National Life Insurance Company
             dated September 13, 1993 (filed as an exhibit to the Company's Form 10-K for the year ended
             December 31, 1993, filed on March 28, 1994 and incorporated herein by reference
             (File No. 1-2338)).
10.3         Investment Services Agreement between Waddell & Reed Asset Management Company and the
             Company (filed as an exhibit to Amendment No. 1 to the Registration Statement on Form S-1
             (Registration No. 33-68114) of Vesta Insurance Group, Inc., filed on October 18, 1993 and
             incorporated herein by reference (File No. 1-12338)) dated September 13, 1993.
</TABLE>

                                       21
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.  DESCRIPTION
-----------  -----------
<S>          <C>
10.5         Management Agreement between J. Gordon Gaines, Inc., Liberty National Fire Insurance Company,
             Sheffield Insurance Corporation, Liberty National Insurance Corporation and Vesta Insurance
             Corporation dated November 15, 1994 (filed as an exhibit to the Company's Form 10-K for the
             year ended December 31, 1993, filed on March 28, 1994 and incorporated herein by reference
             (File No. 1-2338)).
10.6         Form of Restricted Stock Agreement (filed as an exhibit to the Registration Statement on Form S-1
             (Registration No. 33-68114) of Vesta Insurance Group, Inc., filed on August 31, 1993 and
             incorporated herein by reference (File No. 1-12338)).
10.7*        The Company's Long Term Incentive Plan as amended effective as of May 16, 1995 (filed as an
             exhibit to the Company's Form 10-Q for the quarter ended June 30, 1995, filed on August 14, 1995
             and incorporated herein by reference (File No. 1-12338)). 10.8* Form of Non-Qualified Stock
             Option Agreement entered into by and between the Company and certain of its executive officers
             and directors (filed as an exhibit to the Company's Form 10-K for the year ended December 31,
             1995, filed on March 28, 1996 and incorporated herein by reference (File No. 1-12338)).
10.9*        Cash Bonus Plan of the Company (filed as an exhibit to the Company's Form 10-K for the year
             ended December 31, 1993, filed on March 28, 1994 and incorporated herein by reference
             (File No. 1-2338)).
10.10*       J. Gordon Gaines, Inc. Post Retirement Benefits Plan (filed as an exhibit to the Company's
             Form 10-K for the year ended December 31, 1994, filed on March 29, 1995 and incorporated herein
             by reference (File No. 1-12338)).
10.11*       J. Gordon Gaines, Inc. Retirement Savings Plan (filed as an exhibit to the Company's Form 10-K
             for the year ended December 31, 1994, filed on March 29, 1995 and incorporated herein by
             reference (File No. 1-12338)).
10.12*       The Company's Non-Employee Director Stock Plan (filed as an exhibit to the Company's 10-Q for
             the quarter ended June 30, 1995, filed on August 14, 1995 and incorporated herein by reference
             (File No. 1-12338)).
10.13        Office Lease between the Company and Torchmark Development Corporation, dated as of April 20,
             1992 (filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1993, filed
             on March 28, 1994 and incorporated herein by reference (File No. 1-12338)).
10.14        Agency Agreement between Liberty National Fire Insurance Company, Vesta Insurance
             Corporation, Sheffield Insurance Corporation, and Overby-Seawell Company (filed as an exhibit to
             Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 33-68114) of Vesta
             Insurance Group, Inc., filed on October 18, 1993 and incorporated herein by reference
             (File No. 1-12338)).
10.15        Commercial/Personal Property Risk Excess Reinsurance Contracts, dated July 1, 1993, constituting
             the Company's Direct Per Risk Treaty Program, between Vesta Fire Insurance Corporation, and its
             subsidiary and affiliated companies and various reinsurers (filed as an exhibit to Amendment No. 1
             to the Registration Statement on Form S-1 (Registration No. 33-68114) of Vesta Insurance Group,
             Inc., filed on October 18, 1993 and incorporated herein by reference (File No. 1-12338)) renewed
             July 1, 1997.
</TABLE>

                                       22
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.  DESCRIPTION
-----------  -----------
<S>          <C>
10.17        Specific Regional Catastrophe Excess Contracts, dated January 1, 1996, constituting the Company's
             Regional Property Catastrophe Program, between Vesta Fire Insurance Corporation and various
             reinsurers (filed as an exhibit to the Company's Form 10-K for the year ended December 31, 1995,
             filed on March 28, 1996 and incorporated herein by reference (File No.1-12338)). Renewed
             January 1, 1998.
10.18        Casualty Excess of Loss Reinsurance Agreements, dated January 1, 1998, constituting the
             Company's Casualty Excess of Loss Reinsurance Program, between Vesta Fire Insurance
             Corporation, Vesta Insurance Corporation, Sheffield Insurance Corporation, Vesta Lloyds Insurance
             Company and Employers Reinsurance Corporation, (filed as an exhibit to the Company's
             Form 10-Q for the quarter ended March 31, 1998, filed on May 13, 1998 and incorporated herein
             by reference (File No. 1-12338)).
10.19        Amendment to Catastrophe Reinsurance Contracts, dated July 1, 1995, constituting the Company's
             Direct Property Catastrophe Program, between Vesta Fire Insurance Corporation, Vesta Insurance
             Corporation, Sheffield Insurance Corporation, Vesta Lloyds Insurance Company, Hawaiian
             Insurance & Guaranty Company, Limited and various reinsurers. (Filed as an exhibit to the
             Company's Form 10-Q for the quarter ended September 30, 1995, filed on November 14, 1995 and
             incorporated herein by reference (File No. 1-12338)). Renewed July 1, 1997.
10.20        Amendment to Catastrophe Reinsurance Contracts, dated January 1, 1996, constituting the
             Company's Direct Property Catastrophe Program, between Vesta Fire Insurance Corporation, Vesta
             Insurance Corporation, Sheffield Insurance Corporation, Vesta Lloyds Insurance Company,
             Hawaiian Insurance & Guaranty Company, Limited and various reinsurers (filed as an exhibit to
             the Company's Form 10-K for the year ended December 31, 1995, filed on March 28, 1996 and
             incorporated herein by reference (File No. 1-12338)). Renewed January 1, 1998.
10.21        Amended and Restated Credit Agreement between Vesta Insurance Group, Inc. and Southtrust Bank
             of Alabama, N.A., ABN Amro Bank B.V., Bank of Tokyo-Mitsubishi Trust Company, The First
             National Bank of Chicago, Wachovia Bank of Georgia, N.A. and First Union National Bank of
             North Carolina (as agent), dated April, 1997 (filed as an exhibit to the Company's Form 10-Q for
             the quarter ended March 31, 1997, filed on May 13, 1997, and incorporated herein
             by reference (File No. 1-12338)).
10.22        First amendment, dated April 14, 1999, to amended and Restated Credit Agreement between Vesta
             Insurance Group, Inc. and Southtrust Bank of Alabama, N.A., ABN Amro Bank B.V., Bank of
             Tokyo-Mitsubishi Trust Company, The First National Bank of Chicago, Wachovia Bank of Georgia,
             N.A. and First Union National Bank of North Carolina (as agent), dated April 8, 1997 (filed as an
             exhibit to the Company's Form 10-K for the period ended December 31, 1998, filed on April 19,
             1999, and incorporated herein by reference (File No. 1-12338)).
10.23        Stock Purchase Agreement between Anthem Casualty Insurance Group, Inc. and Vesta Insurance
             Group, Inc., Dated April 23, 1997 (filed as an exhibit to the Company's Form 10-Q for the year
             ended September 30, 1997, filed on November 13, 1997 and incorporated herein by reference
             (File No. 1-12338)).
10.24        Business Transfer and Management Agreement between Vesta Fire Insurance Corporation and its
             affiliated Companies and CIGNA Property and Casualty Insurance Company and its affiliated
             companies, dated January 28, 1998 (filed as an exhibit to the Company's Form 10-K for the year
             ended December 31, 1997, filed on March 27, 1998 (File No. 1-12338)).
</TABLE>

                                       23
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.  DESCRIPTION
-----------  -----------
<S>          <C>
10.25        Agreement for Data Processing Services between Shelby Insurance Company and Policy
             Management Systesm Corporation, dated January 1, 1998 (filed as an exhibit to the Company's
             Form 10-Q for the period from June 30, 1998, filed on August 20, 1998 and incorporated herein
             by reference (File No. 1-12338)).
10.26        Convertible Preferred Stock Purchase agreement by and between Vesta Insurance Group, Inc. and
             Birmingham Investment Group, LLC. (filed as an exhibit to Form 8-K, filed on June 29, 1999 and
             incorporated herein by reference (File No. 1-12338)).
10.27        Acquistion Agreement between Vesta Insurance Group, Inc., Vesta Management Corporation of
             Texas and Employers Reinsurance Corporation (filed as an exhibit to Form 8-K, filed on June 29,
             1999 and incorporated herein by reference (File No. 1-1238)).
</TABLE>

--------
* These are the Company's compensatory plans.

B)REPORTS ON FORM 8-K.

  On June 29, 1999, the Company announced the execution of a Convertible
Preferred Stock Puchase agreement relating to the issuance of preferred stock
and an Acquisition Agreement relating to the sale of control of Vesta County
Mutual Insurance Company.

Exhibit 11. Statement re computation of per share earnings

                          VESTA INSURANCE GROUP, INC.

                       COMPUTATION OF EARNINGS PER SHARE

<TABLE>
<CAPTION>
                                                                PERIOD ENDED
                                                                  JUNE 30,
                                                              ----------------
                                                               1999     1998
                                                              ------- --------
                                                               (IN THOUSANDS
                                                              EXCEPT PER SHARE
                                                                   DATA)
                                                                      RESTATED
<S>                                                           <C>     <C>
BASIC EARNINGS PER SHARE:
 Weighted average common shares outstanding..................  18,686   18,455
 Net income.................................................. $13,296 $(15,114)
 Basic earnings per share.................................... $   .71 $   (.82)
DILUTED EARNINGS PER SHARE:
 Weighted average common shares outstanding..................  18,686   18,455
 Net effect of the assumed exercise of stock options and
  nonvested restricted
  stock-based on the treasury stock method using average mar-
  ket price for the year.....................................       0        0
                                                              ------- --------
 Total weighted average common shares and common stock equiv-
  alents outstanding.........................................  18,686   18,455
 Net income.................................................. $13,296 $(15,114)
 Diluted earnings per share.................................. $   .71 $   (.82)
                                                              ======= ========
</TABLE>

                                      24