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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, 2002

OR

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

For the transition period from
to
Commission file number 1-12338

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

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

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

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

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

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

The number of shares outstanding of the registrant's common stock,
$.01 par value, as of August 12, 2002
36,443,294

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Vesta Insurance Group, Inc.

Index

|Part I  | Financial Information                                                                 | Page
|------- | ------------------------------------------------------------------------------------- | ----
|Item 1. | Financial Statements:                                                                 |     
|        | Consolidated Balance Sheets at June 30, 2002 and December 31, 2001                    | 1   
|        | Consolidated Statements of Income and Comprehensive Income for the                    |     
|        | Three Months and Six Months ended June 30, 2002 and 2001                              | 2   
|        | Consolidated Statements of Cash Flows for six months ended June 30, 2002 and 2001     | 3   
|        | Notes to Consolidated Financial Statements                                            | 4   
|Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 12  
|        |                                                                                       |     
|
|Item 1. | Legal Proceedings                                                                     | 17  
|Item 2. | Changes in Securities                                                                 | 19  
|Item 3. | Defaults Upon Senior Securities                                                       | 19  
|Item 4. | Submission of Matters to a Vote of Securities                                         | 19  
|Item 5. | Other Information                                                                     | 19  
|Item 6. | Exhibits and Reports on Form 8-K                                                      | 20  

---

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


                                                                                June 30,       December 31,
                                                                                  2002             2001
                                                                             ---------------  ---------------
                                                                              (unaudited)
Assets:

    Fixed maturities available for sale - at fair value (cost:  2002 - $804,136;
         2001 - $785,049)                                                         $ 819,879        $ 807,197
    Equity securities-at fair value: (cost: 2002- $29,040; 2001- $32,298)            28,471           31,431
    Mortgage and collateral loans                                                    42,385           43,978
    Policy loans                                                                     62,778           63,949
    Short-term investments                                                          102,364           41,198
    Other invested assets                                                            32,175           47,996
                                                                             ---------------  ---------------
                       Total investments                                          1,088,052        1,035,749
    Cash                                                                             36,566           23,579
    Accrued investment income                                                        18,004           23,090
    Premiums in course of collection (net of allowances for losses
         of $2,462 in 2002 and $2,684 in 2001)                                      135,895           47,589
    Reinsurance balances receivable                                                 334,596          357,827
    Reinsurance recoverable on paid losses                                           82,070           76,757
    Deferred policy acquisition costs                                                94,688           58,832
    Property and equipment                                                           21,592           18,368
    Deferred income taxes                                                            41,797           38,591
    Goodwill and other intangible assets                                            134,738          109,260
    Other assets                                                                     48,810           41,240
                                                                             ---------------  ---------------
                       Total assets                                             $ 2,036,808      $ 1,830,882
                                                                             ===============  ===============

Liabilities:
    Policy liabilities                                                            $ 681,222        $ 695,170
    Losses and loss adjustment expenses                                             320,202          280,997
    Unearned premiums                                                               293,915          179,879
    Federal Home Loan Bank advances                                                 173,305          168,614
    Short term debt                                                                  28,974           29,964
    Long term debt                                                                   74,794           79,432
    Reinsurance balances payable                                                     59,364           14,184
    Other liabilities                                                               130,409          100,085
                                                                             ---------------  ---------------
                     Total liabilities                                            1,762,185        1,548,325

Commitments and contingencies: See Note B

Deferrable Capital Securities                                                        22,445           23,250

Stockholders' equity:
    Preferred stock, $.01 par value, 5,000,000 shares authorized, issued:
         2002 - 0 and 2001 - 0                                                           --               --
    Common stock, $.01 par value, 100,000,000 shares authorized,  issued:
         2002 - 37,528,111 and 2001 - 36,994,464                                        375              370
    Additional paid-in capital                                                      248,313          244,640
    Accumulated other comprehensive income, net of  tax expense
         of $3,951 and $4,191 in 2002 and 2001, respectively                          7,337            7,784
    Retained earnings                                                                21,308           32,611
    Treasury stock (1,054,717 shares and 923,972 shares at cost
         at March 31, 2002 and December 31, 2001, respectively)                      (7,540)          (6,591)
    Unearned stock                                                                  (17,615)         (19,507)
                                                                             ---------------  ---------------
                 Total stockholders' equity                                         252,178          259,307
                                                                             ---------------  ---------------
                 Total liabilities, deferrable capital securities
                    and stockholders' equity                                    $ 2,036,808      $ 1,830,882
                                                                             ===============  ===============`

See accompanying Notes to Consolidated Financial Statements

1

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



                                                                          Three months ended           Six months ended
                                                                               June 30,                     June 30,
                                                                          2002          2001           2002         2001
                                                                      -------------- ------------  ------------- ------------
                                                                       (unaudited)                 (unaudited)
Revenues:
    Net premiums written                                                  $ 155,853     $ 74,255       $306,950     $135,467
    Change in unearned premiums                                             (27,212)         (64)       (66,518)       4,119
                                                                      -------------- ------------  ------------- ------------
    Net premiums earned                                                     128,641       74,191        240,432      139,586
    Policy fees                                                               5,505        1,728          8,923        2,981
    Agency fees and commissions                                              20,731          356         39,111          798
    Net investment income                                                    13,799       17,110         27,480       32,713
    Realized gains (losses)                                                    (589)       2,522            496        4,228
    Other                                                                     3,799        2,240          7,173        3,944
                                                                      -------------- ------------  ------------- ------------
        Total revenues                                                      171,886       98,147        323,615      184,250
Expenses:
    Policyholder benefits                                                    11,104        8,938         21,749       16,995
    Losses and loss adjustment expenses incurred                             84,236       39,071        154,930       77,772
    Policy acquisition expenses                                              24,738       16,975         46,012       31,377
    Operating expenses                                                       49,521       15,236         92,274       29,889
    Interest on debt                                                          3,895        4,487          7,846        9,145
    Goodwill and other intangible amortization                                   84          969            168        1,495
                                                                      -------------- ------------  ------------- ------------
        Total expenses                                                      173,578       85,676        322,979      166,673
Income (loss) from continuing operations before taxes, minority interest,
     and deferrable capital securities                                       (1,692)      12,471            636       17,577
Income tax expense (benefit)                                                   (592)       4,341            267        6,186
Minority interest, net of tax                                                   597          532          1,021          780
Deferrable capital security distributions, net of tax                           322          383            451          766
                                                                      -------------- ------------  ------------- ------------
Net income (loss) from continuing operations                                 (2,019)       7,215         (1,103)       9,845
Loss from discontinued operations, net of tax                                (9,464)        (163)        (9,528)        (158)
Extraordinary gain on debt extinguishments, net of tax                                        --            897           --
                                                                      -------------- ------------  ------------- ------------
        Net income (loss)                                                   (11,483)       7,052         (9,734)       9,687
Preferred stock dividend                                                         --           --             --         (163)
Gain on redemption of preferred securities, net of tax                           --           --            210          565
                                                                      -------------- ------------  ------------- ------------
Net income (loss)  available to common shareholders                       $ (11,483)     $ 7,052       $ (9,524)    $ 10,089
                                                                      ============== ============  ============= ============
Net income (loss)   from continuing operations per share - Basic            $ (0.06)      $ 0.30        $ (0.03)      $ 0.46
                                                                      ============== ============  ============= ============
Net income (loss)  available to common shareholders per share - Basic       $ (0.34)      $ 0.30        $ (0.29)      $ 0.47
                                                                      ============== ============  ============= ============
Net income (loss)  from continuing operations per share - Diluted           $ (0.06)      $ 0.30        $ (0.03)      $ 0.43
                                                                      ============== ============  ============= ============
Net income (loss)  available to common shareholders per share - Diluted     $ (0.34)      $ 0.29        $ (0.29)      $ 0.45
                                                                      ============== ============  ============= ============

                 Statements of Comprehensive Income
Net income (loss)                                                         $ (11,483)     $ 7,052       $ (9,734)     $ 9,687
Other comprehensive income, net of tax:
        Unrealized holding (losses) gains on available-for-sale securities
           net of tax of $2,875, $2,380, $67, and $4,046, respectively        5,340        4,420           (125)       7,514
        Less realized (losses) gains on available-for-sale securities net of tax
            of $206, $883, $174, and $1,480, respectively                      (383)       1,639            322        2,748
                                                                      -------------- ------------  -------------- -----------
                                                                              5,723        2,781           (447)       4,766
Gain on redemption of preferred securities, net of tax of
    $113 and $305, respectively.                                                 --           --            210          565

                                                                      -------------- ------------  -------------- -----------
Comprehensive (loss) income                                                $ (5,760)     $ 9,833       $ (9,971)    $ 15,018
                                                                      ============== ============  ============== ===========`

See accompanying Notes to Consolidated Financial Statements

2

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



                                                                                Six months ended June 30,
                                                                                  2002              2001
                                                                             ---------------   ---------------
                                                                              (unaudited)
Operating Activities:
    Net income (loss)                                                              $ (9,734)          $ 9,687
    Adjustments to reconcile net income  to cash used in operations
       Changes in:
       Loss and LAE reserves, and future policy liabilities                          23,717           (36,700)
       Unearned premium reserves                                                     78,305            (1,766)
       Reinsurance balances receivable                                                9,671            17,795
       Premiums in course of collection                                             (86,126)          (15,368)
       Reinsurance recoverable on paid losses                                         2,965           (11,355)
       Reinsurance balances payable                                                  42,900            (5,114)
       Other assets and liabilities                                                  36,101            22,095
    Policy acquisition costs deferred                                               (81,868)          (31,478)
    Policy acquisition costs amortized                                               46,012            31,377
    Realized gains                                                                     (496)           (4,228)
    Amortization and depreciation                                                     2,539             4,347
    Extraordinary gain                                                                 (897)               --
                                                                             ---------------   ---------------
             Net cash provided by (used in) operations                               63,089           (20,708)

Investing Activities:
    Investments sold, matured, and called:
       Fixed maturities available for sale                                          223,994           221,900
       Equity securities                                                              4,655                --
    Investments acquired:
       Fixed maturities available for sale                                         (230,991)         (159,860)
       Equity securities                                                             (5,241)          (10,376)
    Net increase (decrease) in other invested assets                                 18,585            (8,448)
    Net cash received for acquisition                                                 9,006                --
    Net increase in short-term investments                                          (61,166)          (14,178)
    Additions to property and equipment                                                (324)           (3,554)
                                                                             ---------------   ---------------
             Net cash (used in) provided from investing activities                  (41,482)           25,484

Financing Activities:
    Net change in FHLB borrowings                                                     4,691            16,336
    Change in long and short-term debt                                                 (990)
    Net deposits and withdrawals from insurance liabilities                          (9,535)           (2,732)
    Issuance of common stock                                                             --            96,381
    Acquisition of common stock                                                        (949)          (50,788)
    Dividends paid                                                                   (1,837)           (1,019)
                                                                             ---------------   ---------------
             Net cash provided by (used in) financing activities                     (8,620)           58,178
Increase in cash                                                                     12,987            62,954
Cash at beginning of period                                                          23,579            13,374
                                                                             ---------------   ---------------
Cash at end of period                                                              $ 36,566          $ 76,328
                                                                             ===============   ===============`

See accompanying Notes to Consolidated Financial Statements

3

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

Note A-Significant Accounting Policies

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

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

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

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

In October of 2001, the FASB issued SFAS No. 144,  "Accounting for the Impairment or Disposal of Long-Lived  Assets." SFAS No. 144
is  effective  for fiscal  years  beginning  after  December 15,  2001 and was  written to provide a single  model for the  disposal of
long-lived assets.  SFAS No. 144  supersedes SFAS No. 121  "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" and the accounting and reporting  provisions of Accounting  Principles Board Opinion No. 30,  "Reporting the results of
Operations-Reporting  the Effects of Disposal of a Segment of a Business, and Extraordinary,  Unusual and Infrequently Occurring Events
and  Transactions."  Vesta adopted SFAS No. 144  effective  January 1, 2002.  Such adoption  resulted in no material  impact on Vesta's
financial position, results of operations or cash flows.

In April 2002, the FASB issued SFAS 145,  "Rescission of FASB Statement No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and
Technical  Corrections."  SFAS rescinds SFAS 4, which required all gains and losses from  extinguishments  of debt to be aggregated and,
if  material,  classified  as an  extraordinary  item,  net of related  income tax effect.  As a result,  the  criteria  in  Accounting
Principals  Board Opinion 30, will now be used to classify those gains and losses.  SFAS 64 amended SFAS 4, and is no longer  necessary
because SFAS 4 has been  rescinded.  SFAS 44 and the amended  sections of SFAS 13 are not  applicable  to Vesta and  therefore  have no
effect on Vesta's  financial  statements.  SFAS 145 is effective for fiscal years beginning  after May 15, 2002 with early  application
encouraged.  The  adoption  of SFAS  145  will  likely  require  Vesta to reclass any previous gains and losses on the extinguishments of debt as these items will no
longer be considered extraordinary as defined by APB 30.

Restricted Assets.  As part of a modified coinsurance agreement with Employers Reinsurance Corporation, American Founders is holding
$113.0 million of assets for the benefit of Employers, of which $111.8 million are included in fixed maturities
available for sale herein.

On July 31, 2002,  the FASB issued  SFAS No. 146,  "Accounting for Costs  Associated  with Exit or Disposal  Activities."  This
Statement  addresses  financial  accounting  and reporting for costs  associated  with exit or disposal  activities and requires that a
liability for a cost  associated  with an exit or disposal  activity be recognized  when the liability is incurred.  The  provisions of
this  Statement  are  effective  for exit or disposal  activities  that are  initiated  after  December 31, 2002,  with early  adoption
encouraged.  The adoption of this statement is not expected to have a material  impact on Vesta's  consolidated  financial  position or
consolidated results of operations.

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

Reconciliation of income available to common shareholders and average shares outstanding for the three and six months ending
June 30, 2002 and 2001 are as follows:

`Three months ended June 30,
                                                                    2002           2001
                                                                ---------------- -------------
Net (loss) income available to common shareholders                  $ (11,483)        $ 7,052
Preferred stock dividends on convertible preferred stock                   --              --
                                                                ---------------- -------------
Adjusted net income  (loss) available to common shareholders        $ (11,483)        $ 7,052
                                                                ================ =============

Weighted average shares outstanding-basic (1)                          33,780          23,784
Stock options and restricted stock (2)                                     --             498
Weighted average convertible preferred stock (1)                           --              --
                                                                ---------------- -------------
Weighted average shares outstanding-diluted (1)                        33,780          24,282
                                                                ================ =============`

4

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`Six months ended June 30,
                                                                    2002           2001
                                                                ---------------- -------------
Net (loss) income available to common shareholders                   $ (9,524)       $ 10,089
Preferred stock dividends on convertible preferred stock                   --             163
                                                                ---------------- -------------
Adjusted net income  (loss) available to common shareholders         $ (9,524)       $ 10,252
                                                                ================ =============

Weighted average shares outstanding-basic (1)                          33,394          21,334
Stock options and restricted stock (2)                                     --             452
Weighted average convertible preferred stock (1)                           --             945
                                                                ---------------- -------------
Weighted average shares outstanding-diluted (1)                        33,394          22,731
                                                                ================ =============`

(1) Reflects  weighted  averages.  At June 30, 2002,  Vesta had 36.4 million shares outstanding  and zero shares of
          convertible  preferred stock outstanding.  Weighted average shares outstanding for earnings per share purposes do not
          include shares held by the Agent's Stock  Incentive Plan Trust that have not been  allocated to  participants.

(2) Under the provisions of SFAS No. 128, Earnings per Share, contingently issuable shares that would have the effect of being
          anti-dilutive are excluded for the average shares outstanding calculation.  Potentially dilutive securities for the three month and
          six month period ending June 30, 2002 are .4 million shares and .5 million shares respectively.

Earnings per share for discontinued  operations and  extraordinary  gains for the three and six months ended June 30, 2002 and 2001 are
as follows:

`2002                         2001
                                     3 month       6 month        3 month      6 month
                                   ------------  ------------   ------------ -------------
Basic Earnings per share:
    Discontinued Operations            $ (0.28)      $ (0.28)       $ (0.01)      $ (0.01)
    Extraordinary Gain                      --        $ 0.03             --            --
Diluted Earnings per share:
    Discontinued Operations            $ (0.28)      $ (0.28)       $ (0.01)      $ (0.01)
    Extraordinary Gain                      --        $ 0.03             --            --`

Note B-Commitments and Contingencies

Securities Litigation

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

Vesta  determined to participate in the funding of the settlement and to take the related  one-time  charge against  earnings as a
result of the Cincinnati  Insurance  Company's  attempted  rescission of their $25 million directors and officers  liability policy and
denial of  coverage.  Vesta has sued  Cincinnati  in Alabama  state  court  alleging  that its  actions  were taken in bad faith and is
vigorously pursuing that claim.  The Cincinnati case was recently rescheduled for trial in February, 2003.

Indemnification Agreements and Liability Insurance

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

Arbitration

As discussed in previous SEC filings,  in 1998 we corrected our accounting for assumed  reinsurance  business through  restatement
of our previously  issued  financial  statements.  Similar  corrections  were made on a statutory  accounting  basis through  recording
cumulative  adjustments  in Vesta Fire's 1997  statutory  financial  statements.  The impact of this  correction  has been reflected in
amounts  ceded under our 20 percent  whole account  quota share treaty which was  terminated  on June 30, 1998 on a run-off  basis.  We
believe such treatment is appropriate under the terms of this treaty and have calculated the quarterly  reinsurance  billings presented
to the three treaty  participants  accordingly.  The aggregate amount included herein as recoverable from such reinsurers totaled $55.2
million at June 30, 2002.  Additionally,  we have previously  collected  approximately $48.5 million from the drawdown of collateral on
hand.

5

---

NRMA Insurance Ltd. ("NRMA"),  one of the participants in the 20% whole account quota share treaty,  filed a lawsuit in the United
States  District  Court for the Northern  District of Alabama  contesting  our  billings.  NRMA sought  rescission  of the treaty and a
temporary  restraining order preventing us from drawing down  approximately  $34.5 of collateral.  We filed a demand for arbitration as
provided  for in the treaty and also filed a motion to compel  arbitration  which was  granted  in the  United  States  District  Court
action.  Vesta reached an agreement  with NRMA to collect the $34.5 million of collateral in exchange for posting a $25 million  letter
of credit  in favor of NRMA to fund any  amounts  NRMA may  recover  as a result  of the  arbitration.  We also  filed for  arbitration
against  Alfa  Mutual  Insurance  Company  and  Dorinco  Reinsurance  Company,  the other two  participants  on the  treaty.  All those
arbitrations are in the discovery stages.  Additionally,  Alfa filed a Motion for Declaratory  Judgment asking the arbitration panel to
order that there is no  enforceable  agreement  between Alfa and Vesta or  alternatively,  that there is no coverage for  developmental
losses under the treaty.  After a hearing in June,  2002,  the  arbitration  panel denied Alfa's  motion.  The hearing on the merits of
the arbitration is scheduled for May, 2003. The panel in the NRMA  arbitration  recently issued an order to bifurcate the  arbitration,
and scheduled a hearing for the week of  October 28,  2002 to decide the issue of coverage for  developmental  losses under the treaty.
The hearing on any issues  remaining  after the  October 28,  2002  hearing  will be  conducted  in October,  2003.  The hearing in the
Dorinco  arbitration is presently  scheduled for December,  2003. While management  believes its  interpretation  of the treaty's terms
and  computations  based thereon are correct,  these matters are in arbitration and their ultimate outcome cannot be determined at this
time.

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

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

During 1999, F&G Re (on behalf of USF&G),  filed for arbitration  under two aggregate stop loss  reinsurance  treaties whereby F&G
Re assumed  certain risk from Vesta.  F&G Re sought to cancel the treaties and avoid its  obligation.  Vesta had recorded a reinsurance
recoverable of $30.0 million at March 31,  2002 related to these two treaties.  The hearing in this  arbitration  began on February 11,
2002.  The hearing was  adjourned on February 15, 2002 and resumed on June 11, 2002,  and the panel  awarded  Vesta  $15 million,  plus
interest of $1.44 million.  Accordingly,  the Company has recorded a pre-tax charge of  approximately  $13.6 million in the 2nd quarter
of 2002 as  discontinued  operations.  The charge related to this award was recorded to in our Assumed  Reinsurance  segment,  which is
reflected  herein as a  discontinued  operation,  consistent  with the manner in which  premiums and losses under these  contracts were
originally recorded.

Other Litigation

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

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

Non-Performing Loans

Our life insurance subsidiary, American Founders, invested in approximately $42 million in loans to certain borrowers in 1998 and
1999.  These loans were generally structured to pay scheduled principal and interest payments on a quarterly basis over a seven year
term and were secured by the stock of privately held companies.  Management of American Founders wrote off approximately $8.0 million
of these loans in the fourth quarter of 2001 following the bankruptcy of an affiliate of one of these privately held companies, which
reduced American Founders' aggregate carrying value of these loans at June 30, 2002 and December 31, 2001 to $27.1 million.

The $27.1 million balance of the loans are collateralized by pledges of stock in privately held companies which
own real estate located in Mexico.   These loans have not performed since September 30, 2001.  Although management of American
Founders believes that the collateral underlying these loans is adequate and currently believes that American Founders will ultimately collect all amounts owed under these loans, it is possible that management's view of these loans' collectibility could
change as they proceed to enforce American Founders' rights under the loan documents, including taking control of the pledged stock
of these privately held companies and exercising that control in order to realize cash proceeds from the Mexican real estate held by
them.

6

---

Note C-Segment Information

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

A brief description of each segment is as follows:

Standard Property-Casualty

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

Life and Health Insurance

On June 30, 2000, we entered the life and annuity business through an investment in American  Founders  Financial  Corporation,  a
holding  company  for two life  insurance  companies  domiciled  in Texas and we entered  the health  insurance  business  through  the
acquisition  of Aegis  Financial  Corporation  in December  2000.  American  Founders and Aegis have  approximately  $2.5 billion (face
value) of life and annuity products in force and  approximately  $22.6 million of health insurance  premiums in force at June 30, 2002.
American  Founders markets  traditional life products,  universal life products,  fixed-rate  annuities,  pension contracts and related
products through  independent  agents throughout the majority of the United States.  Aegis Financial markets health insurance  products
through captive agents throughout the United States.

Specialty Underwriting

Specialty  underwriting  includes our fronting  operations and any  underwriting  risk retained from premiums  written through our
non-standard  auto  agencies.  In  fronting  arrangements,  we  write  targeted  property-casualty  insurance  coverages  and  reinsure
substantial  portion of the risks to reinsurers in exchange for fees.  This business takes  advantage of our  certificates of authority
granting us license to write insurance in many states.  Income from fronting  arrangements is primarily  generated on a fee-for-service
basis. For the premium written through our non-standard auto agencies,  we determine the amount of underwriting  risk to retain,  based
on market  conditions,  and the prospective  results of the underlying  business.  Our decision on how much underwriting risk to retain
is dependent on the current rating environment and the reinsurance terms offered by reinsurers.

Agency

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

Corporate and Other

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

7

---

A summary of segment results for the three months ended June 30, 2002 and 2001 is as follows:

`Standard     Life and
                                           Property-     Health        Specialty                Corporate
                                           Casualty     Insurance    Underwriting   Agency      and Other    Eliminations    Total
2002                                      ------------ ------------ -------------- -----------  ----------- -------------- ----------
Revenues:                                                                (in thousands)
    Premiums earned                          $ 80,513      $ 7,562        $ 40,566                                            $ 128,641
    Agency fees and commissions                    --           --              --    $ 26,172                    $ (5,441)      20,731
    Net investment income                          --        9,338              --          --       $ 4,915          (454)      13,799
    Policy fees                                 1,290        1,133           3,082          --            --            --        5,505
    Realized gains (losses)                        --        2,322              --          --        (2,911)           --         (589)
    Other                                         225          320           1,628                     1,626            --        3,799
                                          ------------ ------------ --------------- -----------  ------------ -------------  -----------
                 Total revenues                82,028       20,675          45,276      26,172         3,630        (5,895)   $ 171,886
Expenses:
    Loss, LAE and policyholder benefits        60,046       11,104          24,190          --            --            --       95,340
    Policy acquisition costs                   16,717        1,309          12,153          --            --        (5,441)      24,738
    Operating expenses                         10,092        3,551           5,757      22,671         7,450            --       49,521
    Interest on debt                               --        1,588              --         454         2,307          (454)       3,895
    Goodwill and other intangible amortization     --           --              --          --            84            --           84
                                          ------------ ------------ --------------- -----------  ------------ -------------  -----------
                 Total expenses                86,855       17,552          42,100      23,125         9,841        (5,895)     173,578

Pre-tax income (loss) from
      continuing operations                   $(4,827)     $ 3,123         $ 3,176     $ 3,047      $ (6,211)          $ -     $ (1,692)
                                          ============ ============ =============== ===========  ============ =============  ===========

Operating segment assets:
    Investments and other assets            $ 359,554    $ 916,598       $ 149,657    $ 66,192     $ 353,141
    Deferred acquisition costs                 57,720       24,782           1,517      10,669            --
                                          ------------ ------------ --------------- -----------  ------------
                                            $ 417,274    $ 941,380       $ 151,174    $ 76,861     $ 353,141
                                          ============ ============ =============== ===========  ============`

`Standard     Life and
                                           Property-     Health        Specialty                Corporate
                                           Casualty     Insurance    Underwriting   Agency      and Other    Eliminations    Total
2001                                      ------------ ------------ -------------- -----------  ----------- -------------- ----------
Revenues:                                                               (in thousands)
    Premiums earned                          $ 64,706      $ 7,482        $ 2,003                                              $ 74,191
    Agency fees and commissions                    --           --             --        $ 356                          --          356
    Net investment income                          --       11,010             --          103       $ 5,997            --       17,110
    Policy fees                                   676        1,052             --           --            --            --        1,728
    Realized gains                                 --          797             --           --         1,725            --        2,522
    Other                                         420          183            961           --           676            --        2,240
                                          ------------ ------------ --------------------------- ------------- -------------  -----------
                 Total revenues                65,802       20,524          2,964          459         8,398            --     $ 98,147
Expenses:                                                                                                               --
    Loss, LAE and policyholder benefits        37,573        8,938          1,498           --            --            --       48,009
    Policy acquisition costs                   14,519        2,035            421           --            --            --       16,975
    Operating expenses                          8,043        2,806             96        1,438         2,853            --       15,236
    Interest on debt                               --        2,198             --           --         2,289            --        4,487
    Goodwill and other intangible amortization     --           --             --           --           969            --          969
                                          ------------ ------------ -------------- ------------ ------------- -------------  -----------
                 Total expenses                60,135       15,977          2,015        1,438         6,111            --       85,676
                                                                                                                        --
Pre-tax income (loss) from
      continuing operations                   $ 5,667      $ 4,547          $ 949       $ (979)      $ 2,287            --     $ 12,471
                                          ============ ============ ============== ============ ============= =============  ===========

Operating segment assets:
    Investments and other assets            $ 333,458    $ 925,653       $ 11,493     $ 24,135     $ 353,719
    Deferred acquisition costs                 32,140        1,573            253           --            --
                                          ------------ ------------ -------------- ------------ -------------
                                            $ 365,598    $ 927,226       $ 11,746     $ 24,135     $ 353,719
                                          ============ ============ ============== ============ =============`

8

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A summary of segment results for the six months ended June 30, 2002 and 2001 is as follows:

`Standard     Life and
                                           Property-     Health        Specialty                Corporate
                                           Casualty     Insurance    Underwriting   Agency      and Other    Eliminations    Total
2002                                      ------------ ------------ -------------- -----------  ----------- -------------- ----------
Revenues:                                                              (in thousands)
    Premiums earned                         $ 148,356     $ 15,636       $ 76,440                                           $ 240,432
    Agency fees and commissions                    --           --             --    $ 49,760                   $ (10,649)     39,111
    Net investment income                          --       18,757             --          --      $ 9,297           (574)     27,480
    Policy fees                                 2,592        2,116          4,215          --           --             --       8,923
    Realized gains (losses)                        --        3,263             --          --       (2,767)            --         496
    Other                                         225          657          3,236                    3,055             --       7,173
                                          ------------ ------------ -------------- -----------  ----------- -------------- -----------
                 Total revenues               151,173       40,429         83,891      49,760        9,585        (11,223)  $ 323,615
Expenses:
    Loss, LAE and policyholder benefits       107,125       21,749         47,805          --           --             --     176,679
    Policy acquisition costs                   32,132        3,058         21,471          --           --        (10,649)     46,012
    Operating expenses                         19,264        6,837          9,053      43,407       13,713             --      92,274
    Interest on debt                               --        3,164             --         574        4,682           (574)      7,846
    Goodwill and other intangible amortization     --           --             --          --          168             --         168
                                          ------------ ------------ -------------- -----------  ----------- -------------- -----------
                 Total expenses               158,521       34,808         78,329      43,981       18,563        (11,223)    322,979

Pre-tax income (loss) from
        continuing operations                $ (7,348)     $ 5,621        $ 5,562     $ 5,779     $ (8,978)           $ -       $ 636
                                          ============ ============ ============== ===========  =========== ============== ===========`

`Standard     Life and
                                           Property-     Health        Specialty                Corporate
                                           Casualty     Insurance    Underwriting   Agency      and Other    Eliminations    Total
2001                                      ------------ ------------ -------------- -----------  ----------- -------------- ----------
Revenues:                                                             (in thousands)
    Premiums earned                         $ 121,553     $ 14,947         $ 3,086                                             $ 139,586
    Agency fees and commissions                    --           --              --       $ 798                           --          798
    Net investment income                          --       21,790              --         260       $ 10,663            --       32,713
    Policy fees                                 1,031        1,950              --          --             --            --        2,981
    Realized gains                                 --        1,398              --          --          2,830            --        4,228
    Other                                         420          235           1,804                      1,485            --        3,944
                                          ------------ ------------ --------------- -----------  ------------- -------------  -----------
                 Total revenues               123,004       40,320           4,890       1,058         14,978            --    $ 184,250
Expenses:
    Loss, LAE and policyholder benefits        75,475       16,995           2,297          --             --            --       94,767
    Policy acquisition costs                   26,577        4,157             643          --             --            --       31,377
    Operating expenses                         14,405        6,567             157       2,827          5,933            --       29,889
    Interest on debt                               --        4,628              --          --          4,517            --        9,145
    Goodwill and other intangible amortization     --           --              --          --          1,495            --        1,495
                                          ------------ ------------ --------------- -----------  ------------- -------------  -----------
                 Total expenses               116,457       32,347           3,097       2,827         11,945            --      166,673

Pre-tax income (loss) from
          continuing operations               $ 6,547      $ 7,973         $ 1,793    $ (1,769)       $ 3,033            --     $ 17,577
                                          ============ ============ =============== ===========  ============= =============  ===========`

Note D-Stock Transactions

In the first  quarter of 2002,  we issued  533,647  shares of common  stock in exchange  for $4.6 million face amount of our 8.75%
Senior Notes and $.8 million face amount of our 8.5% Deferrable  Capital  Securities.  In connection with this  transaction we recorded
an after tax extraordinary  gain on  extinguishment of debt of $.9 million and an after tax gain on redemption of preferred  securities
of $.2 million.

9

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Note E-Acquisitions

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

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

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

Note F-Goodwill and Other Intangible Assets

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

We adopted the new rules on accounting for goodwill and other  intangible  assets  effective  January 1, 2002.  Application of the
non-amortization  provisions of SFAS No. 142 is expected to result in an increase in net income of  approximately  $2.6 million  during
2002.

In connection with the transitional goodwill impairment evaluation, SFAS 142 required the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of adoption.  To accomplish this the Company identified its
reporting units and determined the carrying value of each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of the date of adoption.  The Company then had up to six months
from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount.
To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may
be impaired and the Company must perform the second step of the transitional impairment test.  In the second step of the analysis,
the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair
value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in
accordance with SFAS 141, to its carrying amount, both of which would be measured as of the date of adoption.

The Company has completed the first step of the analysis and  there is no indication of a goodwill impairment.

10

---

During the six months ended June 30, 2001, we recorded $1.0 million in  amortization  of goodwill.  The impact of  amortization of
goodwill on net income for the six months ended June 30, 2001 was as follows (in thousands, except per share data):

`Six months ended
                                                                June 30, 2001
                                                               -------------------

Reported net income                                                  $ 9,687
Add back:
     Goodwill amortization, net of income taxes                          972
                                                               -------------------

Net income excluding goodwill amortization, net of income taxes     $ 10,659
                                                               ===================

Basic net income per common share

Reported net income                                                   $ 0.45
Add back:
     Goodwill amortization, net of income taxes                         0.05
                                                               -------------------

Net income excluding goodwill amortization, net of income taxes       $ 0.50
                                                               ===================

Weighted average number of common shares outstanding (basic)          21,334

Diluted net income per common share

Reported net income                                                   $ 0.44
Add back:
     Goodwill amortization, net of income taxes                         0.04
                                                               -------------------

Net income excluding goodwill amortization, net of income taxes       $ 0.48
                                                               ===================

Weighted average number of common shares outstanding (diluted)        22,731`

The changes in the carrying amount of goodwill and other intangible assets for the year ended December 31, 2001 and for the six
months ended June 30, 2002 are as follows (in thousands):

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

Balance as of December 31, 2001                         109,260
Goodwill and other intangible assets acquired            25,646
Amortization                                               (168)
Transitional impairment charge                               --
                                                    --------------

Balance as of June 30, 2002                           $ 134,738
                                                    ==============`

The $134.7 million balance at June 30, 2002 consists of $128.0 million of goodwill and $6.7 million of intangible assets.  Other
intangible assets include brand name, trademark and the value of certain policy renewal rights.

Amortization expense recorded on the intangible assets for each of the three-month periods ended June 30, 2002 and 2001 was $.1
million and $0, respectively.  The estimated amortization expense for each of the five succeeding fiscal years is as follows (in
thousands):

`For the year ended December 31,

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

11

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

The following  discussion should be read in conjunction with management's  discussion and analysis of the financial  condition and
results of operations and all of the other information,  including the discussion of Vesta's critical  accounting  policies,  appearing
in Vesta's 2001 Annual Report as filed with the  Securities  and Exchange  Commission  on Form 10-K and with the financial  statements
included therein and the notes thereto.

Results of Operations

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

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

Comparison of Second Quarter 2002 to Second Quarter 2001

Income  available to common  shareholders  decreased by $18.6  million,  to an $11.5  million loss for the quarter ended June 30,
2002,  from $7.1 million of income for the quarter ended June 30, 2001.  This  decrease is the result of lower income from  operations,
increased  catastrophe  losses,  and a $9.5 million  after-tax charge for  discontinued  operations  primarily  related to our award in
arbitration  with F&G Re. On a diluted per share basis,  net income  available to common  shareholders  for the second quarter of 2002
was a net loss of $0.34 per share versus net income of $0.29 per share for the second quarter of 2001.

Standard Property-Casualty

Net  premiums  written for standard  property-casualty  lines  increased by $40.1  million,  or 61.9%,  to $104.9  million for the
quarter  ended  June  30,  2002,  from  $64.8  million  for the  quarter  ended  June  30,  2001.  Net  premiums  earned  for  standard
property-casualty  lines  increased  $15.8 million,  or 24.4% to $80.5 million for the quarter ended June 30, 2002,  from $64.7 million
for the quarter  ended June 30, 2001.  The  increase in net premiums  written and net  premiums  earned is  primarily  attributable  to
increased writings in Texas, partially offset by decreases in other lines of business.

Loss and loss adjustment  expenses  ("LAE") for standard  property-casualty  lines increased by $22.4 million,  or 59.6%, to $60.0
million for the quarter  ended June 30,  2002,  from $37.6  million for the  quarter  ended June 30,  2001.  The loss and LAE ratio for
property-casualty  lines for the  quarter  ended June 30, 2002 was 74.1% as compared  to 57.5% at June 30,  2001.  The  increase in the
loss and LAE  incurred  and the loss and LAE ratio is  primarily  attributable  to  deteriorating  underwriting  results in the current
period in our automobile lines versus our results in the prior year period,  catastrophe  losses in the current quarter of $6.2 million
versus $.3 million in the prior year  period,  and our overall  increase  in earned  premium.  The  deterioration  in our  underwriting
results is being primarily driven by increases in severity of claims in certain states.

Policy acquisition expenses increased $2.2 million for the quarter-to-quarter  comparison,  consistent with the increase in earned
premium.  Operating  expenses  increased  by $2.0  million,  to $10.1  million  for the  quarter  ended June 30,  2002,  as we incurred
increased expenses from our  growth in the Texas operations.

Life and Health Insurance

American Founders and Aegis have  approximately  $2.5 billion (face value) of life and annuity products in force and $22.6 million
of health  insurance  premiums in force at June 30,  2002.  Life  insurance  premiums and policy fees were $5.1 million for the quarter
ended June 30, 2002 compared to $3.5 million for the comparable  prior period in 2001. The increase is  attributable to the acquisition
of  Washington  Life in August 2001.  Health  insurance  premiums  totaled $3.6 million for the quarter ended June 30, 2002 versus $3.5
million  for the  comparable  prior  period.  Health  insurance  benefits  incurred  totaled  $4.2  million  for the quarter and health
insurance  commission  expense was $1.0 million.  Pre-tax  income  decreased by $.7 million  primarily  due to higher  mortality in two
older acquired blocks,  lower than expected  investment  income,  and adverse morbidity in our health insurance  operations,  partially
offset by increased realized investment gains.

Specialty Underwriting

Net premiums written for specialty  underwriting  increased by $41.4 million to $43.4 million for the quarter ended June 30, 2002,
from $2.0 million for the quarter ended June 30, 2002. Net premiums  earned for specialty  underwriting  increased to $40.6 million for
the quarter ended June 30, 2002,  from $2.0 million for the quarter ended June 30, 2001.  The increase in net premiums  written and net
premiums  earned is primarily  attributable  to the  acquisition  of certain assets of Insure One and the related book of business from
its affiliated  insurance  companies and increased retained amounts from other fronting  programs.  Fronting fees increased $.7 million
to $1.6 million on higher ceded earned premium.

Loss and loss adjustment expenses ("LAE") for specialty  underwriting  increased by $22.7 million to $24.2 million for the quarter
ended June 30, 2002,  from $1.5  million for the quarter  ended June 30,  2001.  The loss and LAE ratio for the quarter  ended June 30,
2002 was 55.4% as compared  to 74.8% at June 30,  2001.  The  increase in the loss and LAE  incurred  and the  decrease in the loss and
LAE ratio is primarily  attributable  to the  inclusion of  underwriting  results of the business  produced by our  affiliated  agency,
Insure One, which are better than the underwriting results from our traditional fronting programs.

Policy  acquisition  expenses  increased  $11.7 million for the  quarter-to-quarter  comparison,  consistent  with the increase in
earned  premium.  Operating  expenses  increased by $5.7  million,  to $5.8 million for the quarter ended June 30, 2002, as we incurred
increased expenses from our increased operations.

12

---

Agency

Our Agency  operations  increased  its revenues by $25.8  million to $26.2  million as a result of  acquisitions  completed in the
fourth  quarter  of 2001 and the  first  quarter  of 2002.  Operating  expenses  increased  by $21.3  million  to $22.7  million  as we
integrated the acquired operations with our existing operations.

Net Investment Income

Net  investment  income  decreased by $3.3 million,  or 19.3%,  to $13.8  million for the quarter ended June 30, 2002,  from $17.1
million for the quarter ended June 30, 2001. The weighted average yield on invested assets  (excluding  realized and unrealized  gains)
was 6.1% for the quarter  ended June 30,  2002,  compared  with 6.7% for the quarter  ended June 30, 2001.  The decrease in  investment
income is primarily  attributable to a decrease in the weighted average yield as yields have generally  declined in recent months,  the
investment of funds in our  investment  portfolio in new operating  entities and a reduction in investment  income from our  non-performing collateral
loan portfolio.

Federal Income Taxes

Federal  income  taxes  decreased by $4.9  million to a $.6 million  benefit for the quarter  ended June 30, 2002 as a result of a
loss in the current period compared to the prior period income.

Discontinued Operations

In the second  quarter of 2002,  we  received  an award in our  arbitration  with F&G Re over two loss  ratio  contracts  covering
accident  years  1996 and  1997.  The  award was for  $16.44  million.  Accordingly,  the  Company  has  recorded  a pre-tax  charge of
approximately  $13.6 million in the 2nd quarter of 2002 as discontinued  operations.  The charge related to this award was recorded
in our Assumed  Reinsurance  segment,  which is  reflected  herein as a  discontinued  operation,  consistent  with the manner in which
premiums and losses under these contracts were originally recorded.

Comparison of Six Months Ended June 30, 2002 with Six Months Ended June 30, 2001

Income  available to common  shareholders  decreased by $19.6  million,  to a $9.5 million loss for the six months ended June 30,
2002,  from $10.1  million of income for the six months ended June 30,  2001.  On a diluted per share  basis,  net income  available to
common  shareholders  for the first six  months of 2002 was a net loss of $0.29 per share  versus net income of $0.45 per share for the
corresponding period of 2001.

Standard Property-Casualty

Net premiums  written for standard  property-casualty  lines  increased by $85.6 million,  or 73.2%, to $202.6 million for the six
months  ended June 30,  2002,  from  $117.0  million  for the six  months  ended  June 30,  2001.  Net  premiums  earned  for  standard
property-casualty  lines  increased  $26.8  million,  or 22.0% to $148.4  million for the six months ended June 30,  2002,  from $121.6
million  for the six  months  ended  June 30,  2001.  The  increase  in net  premiums  written  and net  premiums  earned is  primarily
attributable  to the  acquisition of Florida Select in April 2001, and increased  writings in Texas,  partially  offset by decreases in
other lines of business.

Loss and loss adjustment  expenses ("LAE") for standard  property-casualty  lines increased by $31.6 million,  or 41.8%, to $107.1
million for the six months ended June 30,  2002,  from $75.5  million for the six months  ended June 30,  2001.  The loss and LAE ratio
for  property-casualty  lines for the six months  ended June 30,  2002 was 71.0% as compared to 61.6% at June 30,  2001.  The  increase
in the loss and LAE  incurred  and the loss and LAE ratio is  primarily  attributable  to  deteriorating  underwriting  results  in the
current  period  in our  automobile  lines,  storm  losses in Texas,  and an  increase  in earned  premium.  The  deterioration  in our
underwriting results is being primarily driven by increases in frequency and severity of claims in certain states.

Policy  acquisition  expenses  increased  $5.5  million for the six months ended June 30,  consistent  with the increase in earned
premium.  Operating  expenses  increased by $4.9  million,  to $19.3  million for the six months  ended June 30,  2002,  as we incurred
increased expenses from our growth in the Texas operations.

Life and Health Insurance

American Founders and Aegis have  approximately  $2.5 billion (face value) of life and annuity products in force and $22.6 million
of health  insurance  premiums in force at June 30, 2002. Life insurance  premiums and policy fees were $7.7 million for the six months
ended June 30, 2002 compared to $6.6 million for the comparable  prior period in 2001. The increase is  attributable to the acquisition
of  Washington  Life in August 2001.  Health  insurance  premiums  totaled  $10.1 million for the six months ended June 30, 2002 versus
$10.3 million for the comparable prior period.  Health insurance  benefits  incurred totaled $7.0 million for the six months and health
insurance  commission  expense was $1.3 million.  Pre-tax  income  decreased by $2.5 million  primarily due to higher  mortality in two
older acquired blocks and lower than expected investment income.

Specialty Underwriting

Net premiums  written for  specialty  underwriting  increased by $85.2  million to $88.7 million for the six months ended June 30,
2002,  from $3.5 million for the six months ended June 30, 2002.  Net premiums  earned for  specialty  underwriting  increased to $76.4
million  for the six months  ended June 30,  2002,  from $3.1  million  for the six months  ended June 30,  2001.  The  increase in net
premiums  written and net premiums earned is primarily  attributable to the acquisition of certain assets of Insure One and the related
book of business from its affiliated  insurance  companies and increased retained amounts from other fronting  programs.  Fronting fees
increased $1.4 million to $3.2 million on higher ceded earned premium.

Loss and loss  adjustment  expenses  ("LAE") for  specialty  underwriting  increased by $45.5 million to $47.8 million for the six
months  ended June 30,  2002,  from $2.3  million  for the six months  ended June 30,  2001.  The loss and LAE ratio for the six months
ended June 30,  2002 was 59.3% as compared to 74.4% at June 30,  2001.  The  increase  in the loss and LAE  incurred  and the  decrease
in the loss and LAE ratio is  primarily  attributable  to the  inclusion  of  underwriting  results  of the  business  produced  by our
affiliated agency, Insure One, which are better than the underwriting results from our traditional fronting programs.

Policy acquisition  expenses  increased $20.8 million for the six month period comparison,  consistent with the increase in earned
premium.  Operating expenses  increased by $8.9 million,  to $9.1 million for the quarter ended June 30, 2002, as we incurred increased
expenses from our increased operations.

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Agency

Our Agency  operations  increased  its revenues by $49.0  million to $49.8  million as a result of  acquisitions  completed in the
fourth  quarter  of 2001 and the  first  quarter  of 2002.  Operating  expenses  increased  by $40.6  million  to $43.4  million  as we
integrated the acquired operations with our existing operations.

Net Investment Income

Net investment  income  decreased by $5.2 million,  or 15.9%,  to $27.5 million for the six months ended June 30, 2002, from $32.7
million for the six months ended June 30, 2001.  The weighted  average  yield on invested  assets  (excluding  realized and  unrealized
gains) was 6.4% for the six months ended June 30,  2002,  compared  with 6.5% for the six months  ended June 30, 2001.  The decrease in
investment  income is primarily  attributable to a decrease in the weighted  average yield as yields have generally  declined in recent
months,  the investment of funds in our investment  portfolio in new operating  entities and a reduction in investment  income from our
collateral loan portfolio.

Federal Income Taxes

Federal income taxes decreased by $3.6 million to $.3 million for the six months ended June 30, 2002 as a result of less income
in the current period compared to the prior period.

Discontinued Operations

In the second  quarter of 2002,  we  received  an award in our  arbitration  with F&G Re over two loss  ratio  contracts  covering
accident  years  1996 and  1997.  The  award was for  $16.44  million.  Accordingly,  the  Company  has  recorded  a pre-tax  charge of
approximately  $13.6 million in the 2nd quarter of 2002 as discontinued  operations.  The charge related to this award was recorded
in our Assumed  Reinsurance  segment,  which is  reflected  herein as a  discontinued  operation,  consistent  with the manner in which
premiums and losses under these contracts were originally recorded.

Liquidity and Capital Resources

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

Dividends and Management Fees

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

Transactions  between Vesta and its insurance  subsidiaries,  including the payment of dividends and  management  fees to Vesta by
such  subsidiaries,  are subject to certain  limitations  under the  insurance  laws of those  subsidiaries'  domiciliary  states.  The
insurance  laws of the state of Illinois,  where Vesta Fire is domiciled,  permit the payment of dividends out of earned surplus in any
year which,  together with other dividends or  distributions  made within the preceding 12 months,  do not exceed the greater of 10% of
statutory  surplus as of the end of the preceding year or the net income for the preceding  year,  with larger  dividends  payable only
after receipt of prior  regulatory  approval.  On October 29, 2001,  the Illinois  Insurance  Department  published a Company  Bulletin
that  indicates  that the  Department  interprets  these  dividend  limitations to prohibit the payment of dividends if the insurer has
negative or zero "unassigned  funds" at the end of the prior year, as reported on its statutorily  required annual statement.  Our lead
insurance  subsidiary,  Vesta Fire, reported negative "unassigned funds" on its annual statement for 2001.  Accordingly,  we may not be
able to declare and pay a dividend from our lead insurance company subsidiary for the foreseeable future without prior approval.

We believe that the Illinois Insurance Department's  willingness to approve the payment of a dividend by Vesta Fire to our holding
company  will depend on a variety of factors,  such as the impact to the holding  company if the dividend is not paid and the impact to
Vesta Fire if the dividend is paid. For example,  the payment of a dividend may cause  non-compliance  with the Illinois  Department of
Insurance's  "reserve  reconciliation  test," which requires Vesta Fire to maintain a minimum amount of liquid, high quality assets. At
June 30, 2002, Vesta Fire's  qualifying assets exceeded its minimum by approximately  $8.8 million.  If the payment of a dividend would
jeopardize  Vesta Fire's ability to comply with this reserve  reconciliation  test,  then the Illinois  Department of Insurance may not
approve it.  Accordingly,  there can be no assurance that Vesta Fire will be able to obtain the requisite  regulatory  approval for the
payment of dividends.  In the second quarter of 2002, we applied for and received approval for a dividend of $10.0 million.

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

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Credit Facilities

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

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

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

Each of these credit facilities mature on April 30, 2003.  As of June 30, 2002, the principal amount outstanding under these credit
facilities was approximately $28.9 million.   Effective as of March 30, 2002, each of these credit agreements have been amended to
restructure the financial covenants contained therein.  The amended covenants require us to maintain certain minimum (i) consolidated
net income, (ii) consolidated debt to capital ratios, (iii) credit ratings, (iv) GAAP net worth, (v) interest coverage ratio and (vi)
risk based capital.   As of June 30, 2002, we were in compliance with all of these covenants.

Contingent Obligations

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

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

Cash Flows

The  principal  sources of funds for our insurance  subsidiaries  are  premiums,  investment  income and proceeds from the sale or
maturity of invested  assets.  Such funds are used  principally  for the payment of claims,  operating  expenses,  commissions  and the
purchase of investments.  As is typical in the insurance  industry,  we collect cash in the form of premiums and invest that cash until
claims are paid.  Cash  collected  from  premiums  and cash paid for claims is  included in cash flow from  operations,  while the cash
impact from our investing activities is included in cash flow from investing activities.

On a  consolidated  basis,  net cash  provided by (used in)  operations  for the quarter  ended June 30, 2002 and 2001,  was $63.1
million and $(20.7)  million,  respectively  as our increased  written premium  generated a significant  amount of operating cash flow.
Net cash (used in) provided by  investing  activities  was $(41.5)  million and $25.5  million for the quarter  ended June 30, 2002 and
2001,  respectively  as we invested  excess cash generated from  operations in our  investment  portfolio.  Net cash (used in) provided
by financing activities was $(8.6) million and $58.2 million for the quarter ending June 30, 2002 and 2001.

New Accounting Pronouncements

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

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

Vesta adopted the provisions of SFAS No. 142 effective January 1, 2002.   Additionally, SFAS No. 142 requires that goodwill be
tested annually for impairment and the initial goodwill impairment test is required to be completed within six months of adoption.
Application of the non-amortization provisions of SAFS No. 142 is expected to result in increase in net income of approximately $2.6
million in fiscal year 2002.

In October of 2001, the FASB issued SFAS No. 144,  "Accounting for the Impairment or Disposal of Long-Lived  Assets." SFAS No. 144
is  effective  for fiscal  years  beginning  after  December 15,  2001 and was  written to provide a single  model for the  disposal of
long-lived assets.  SFAS No. 144  supersedes SFAS No. 121  "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" and the accounting and reporting  provisions of Accounting  Principles Board Opinion No. 30,  "Reporting the results of
Operations-Reporting  the Effects of Disposal of a Segment of a Business, and Extraordinary,  Unusual and Infrequently Occurring Events
and  Transactions."  Vesta adopted SFAS No. 144  effective  January 1, 2002.  Such adoption  resulted in no material  impact on Vesta's
financial position, results of operations or cash flows.

In April 2002, the FASB issued SFAS 145,  "Rescission of FASB Statement No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and
Technical  Corrections."  SFAS 145 rescinds SFAS 4, which required all gains and losses from  extinguishments  of debt to be aggregated and,
if  material,  classified  as an  extraordinary  item,  net of related  income tax effect.  As a result,  the  criteria  in  Accounting
Principals  Board Opinion 30, will now be used to classify those gains and losses.  SFAS 64 amended SFAS 4, and is no longer  necessary
because SFAS 4 has been  rescinded.  SFAS 44 and the amended  sections of SFAS 13 are not  applicable  to Vesta and  therefore  have no
effect on Vesta's  financial  statements.  SFAS 145 is effective for fiscal years beginning  after May 15, 2002 with early  application
encouraged.  The  adoption  of SFAS  145  will  require Vesta to reclass any previous gains and losses on the extinguishments of debt as these items will no longer be considered extraordinary as defined by APB 30.

On July 31, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."  This
Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and requires that a
liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred.  The provisions of
this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption
encouraged.  The adoption of this statement is not expected to have a material impact on Vesta's consolidated financial position or
consolidated results of operations.

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Market Risk of Financial Instruments

Vesta's  principal  assets are  financial  instruments,  which are subject to the market  risk of  potential  losses from  adverse
changes in market rates and prices.  Our primary risk  exposures are interest rate risk on fixed  maturity  investments,  mortgages and
collateral  loans and annuity  liabilities  and equity  price risk for stocks.  Vesta  manages its exposure to market risk by selecting
investment assets with characteristics such as duration,  yield and liquidity to reflect the underlying  characteristics of the related
insurance.  There have been no material  changes to the  information  about our market risk set forth in our Annual Report on Form 10-K
for  the year ended December 31, 2001.

Special Note Regarding Forward-Looking Statements

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

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PART II

Item 1. Legal Proceedings

Securities Litigation

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

Vesta  determined to participate in the funding of the settlement and to take the related  one-time  charge against  earnings as a
result of the Cincinnati  Insurance  Company's  attempted  rescission of their $25 million directors and officers  liability policy and
denial of  coverage.  Vesta has sued  Cincinnati  in Alabama  state  court  alleging  that its  actions  were taken in bad faith and is
vigorously pursuing that claim.  The Cincinnati case was recently rescheduled for trial in February, 2003.

Indemnification Agreements and Liability Insurance

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

Arbitration

As discussed in previous SEC filings,  in 1998 we corrected our accounting for assumed  reinsurance  business through  restatement
of our previously  issued  financial  statements.  Similar  corrections  were made on a statutory  accounting  basis through  recording
cumulative  adjustments  in Vesta Fire's 1997  statutory  financial  statements.  The impact of this  correction  has been reflected in
amounts  ceded under our 20 percent  whole account  quota share treaty which was  terminated  on June 30, 1998 on a run-off  basis.  We
believe such treatment is appropriate under the terms of this treaty and have calculated the quarterly  reinsurance  billings presented
to the three treaty  participants  accordingly.  The aggregate amount included herein as recoverable from such reinsurers totaled $55.2
million at June 30, 2002.  Additionally,  we have previously  collected  approximately $48.5 million from the drawdown of collateral on
hand.

NRMA Insurance Ltd. ("NRMA),  one of the participants in the 20% whole account quota share treaty,  filed a lawsuit in the United
States  District  Court for the Northern  District of Alabama  contesting  our  billings.  NRMA sought  rescission  of the treaty and a
temporary  restraining order preventing us from drawing down  approximately  $34.5 of collateral.  We filed a demand for arbitration as
provided  for in the treaty and also filed a motion to compel  arbitration  which was  granted  in the  United  States  District  Court
action.  Vesta reached an agreement  with NRMA to collect the $34.5 million of collateral in exchange for posting a $25 million  letter
of credit  in favor of NRMA to fund any  amounts  NRMA may  recover  as a result  of the  arbitration.  We also  filed for  arbitration
against  Alfa  Mutual  Insurance  Company  and  Dorinco  Reinsurance  Company,  the other two  participants  on the  treaty.  All those
arbitrations are in the discovery stages.  Additionally,  Alfa filed a Motion for Declaratory  Judgment asking the arbitration panel to
order that there is no  enforceable  agreement  between Alfa and Vesta or  alternatively,  that there is no coverage for  developmental
losses under the treaty.  After a hearing in June,  2002,  the  arbitration  panel denied Alfa's  motion.  The hearing on the merits of
the arbitration is scheduled for May, 2003. The panel in the NRMA  arbitration  recently issued an order to bifurcate the  arbitration,
and scheduled a hearing for the week of  October 28,  2002 to decide the issue of coverage for  developmental  losses under the treaty.
The hearing on any issues  remaining  after the  October 28,  2002  hearing  will be  conducted  in October,  2003.  The hearing in the
Dorinco  arbitration is presently  scheduled for December,  2003. While management  believes its  interpretation  of the treaty's terms
and  computations  based thereon are correct,  these matters are in arbitration and their ultimate outcome cannot be determined at this
time.

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

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

During 1999, F&G Re (on behalf of USF&G), filed for arbitration under two aggregate stop loss reinsurance treaties whereby F&G  Re
assumed certain risk from Vesta.  F&G Re sought to cancel the treaties and avoid its obligation.  Vesta had recorded a reinsurance
recoverable of $30.0 million at March 31, 2002 related to these two treaties.  The hearing in this arbitration began on February 11,
2002.  The hearing was adjourned on February 15, 2002 and resumed on June 11, 2002, and the panel awarded Vesta $15 million, plus
interest of $1.44 million.  Accordingly, the Company has recorded a pre-tax charge of approximately $13.6 million in the 2nd quarter
of 2002 as discontinued operations.

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Other Litigation

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

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

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Item 2. Changes in SecuritiesNone.

Item 3. Defaults Upon Senior SecuritiesNone.Item 4. Submission of Matters to a Vote of Security Holders

At the annual meeting of stockholders held May 7, 2001, the following  matters were submitted to a vote of stockholders.
(Shares Eligible to Vote 36,473,394)

`1.       Election of Directors

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

                                                                                        For             Withheld
                                                                                        ---             --------
Gayle...........................................................................    30,155,658          1,712,507
Tait............................................................................    30,072,529          1,795,636


2.      Election of Auditors

     PricewaterhouseCoopers  was  appointed  as the  principal  independent  auditor of the Company and its  subsidiaries  for the
year ending December 31, 2002.

                                                                                For        Against     Abstain
                                                                                ---        -------     -------
PricewaterhouseCoopers LLP.................................................. 30,914,389    920,970     32,806`

Item 5. Other information

None.

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Item 6. Exhibits and Reports on Form 8-K

a)   EXHIBITS

b)   Reports on Form 8-K.

A current report was filed on Form 8-K on May 6, 2002 in connection with a press release.

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Signatures

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

Vesta Insurance Group, Inc.

Date:  August 13, 2002

Date: August 13, 2002

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