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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, 2003

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, 2003
36,678,060

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Vesta Insurance Group, Inc.

Index

|Part I |  | Financial Information                                                                 |  | Page
|------ |  | ------------------------------------------------------------------------------------- |  | ----
|Item 1 |  | Financial Statements:                                                                 | 
|       |  | Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002                 |  | 1   
|       |  | Consolidated Statements of Operations and Comprehensive Income (Loss) for the         | 
|       |  | Three Months and Six Months Ended June 30, 2003 and 2002                              |  | 2   
|       |  | Consolidated Statements of Cash Flows for the Six Months ended June 30, 2003 and 2002 |  | 3   
|       |  | Notes to Consolidated Financial Statements                                            |  | 4   
|Item 2 |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 12  
|Item 3 |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 19  
|Item 4 |  | Controls and Procedures                                                               |  | 19  

|Part II |  | Other Information                                   |  |   
|------- |  | --------------------------------------------------- |  | --
|Item 1  |  | Legal Proceedings                                   |  | 20
|Item 2  |  | Changes in Securities                               |  | 22
|Item 3  |  | Defaults Upon Senior Securities                     |  | 22
|Item 4  |  | Submission of Matters to a Vote of Security Holders |  | 22
|Item 5  |  | Other Information                                   |  | 22
|Item 6  |  | Exhibits and Reports on Form 8-K                    |  | 23
|        |  | Signatures                                          |  | 24

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

|                                                                             | June 30, | December 31,
|---------------------------------------------------------------------------- | -------- | ------------
|
|
|Assets:                                                                      |          |             
|Fixed maturities available for sale - at fair value (cost:  2003 - $845,717; |          |             
|2002 - $829,982)                                                             |          |             
|Equity securities-at fair value: (cost: 2003- $28,829; 2002- $26,072)        |          |             
|Mortgage loans                                                               |          |             
|Policy loans                                                                 |          |             
|Short-term investments                                                       |          |             
|Other invested assets                                                        |          |             
|                                                                             |          |             
|Total investments                                                            |          |             
|Cash                                                                         |          |             
|Accrued investment income                                                    |          |             
|Premiums in course of collection (net of allowances for losses               |          |             
|of $897 in 2003 and 2002)                                                    |          |             
|Reinsurance balances receivable                                              |          |             
|Reinsurance recoverable on paid losses                                       |          |             
|Deferred policy acquisition costs                                            |          |             
|Property and equipment                                                       |          |             
|Deferred income taxes                                                        |          |             
|Assets held for sale                                                         |          |             
|Goodwill                                                                     |          |             
|Other intangible assets                                                      |          |             
|Other assets                                                                 |          |             
|                                                                             |          |             
|Total assets                                                                 |          |             
|                                                                             |          |             
|Liabilities:                                                                 |          |             
|Policy liabilities                                                           |          |             
|Losses and loss adjustment expenses                                          |          |             
|Unearned premiums                                                            |          |             
|Federal Home Loan Bank advances                                              |          |             
|Reinsurance balances payable                                                 |          |             
|Short term debt                                                              |          |             
|Long term debt                                                               |          |             
|Liabilities held for sale                                                    |          |             
|Other liabilities                                                            |          |             
|                                                                             |          |             
|Total liabilities                                                            |          |             
|Commitments and contingencies: See Note B                                    |          |             
|Deferrable Capital Securities                                                |          |             
|Stockholders' equity:                                                        |          |             
|Preferred stock, $.01 par value, 5,000,000 shares authorized, issued:        |          |             
|2003 - 0 and 2002 - 0                                                        |          |             
|Common stock, $.01 par value, 100,000,000 shares authorized,  issued:        |          |             
|2003 and 2002 - 38,143,037                                                   |          |             
|Additional paid-in capital                                                   |          |             
|Accumulated other comprehensive income, (net of  tax expense                 |          |             
|of $10,122 and $8,131 in 2003 and 2002, respectively)                        |          |             
|Retained earnings                                                            |          |             
|Treasury stock (2,464,977 shares at cost at June 30, 2003 and                |          |             
|December 31, 2002)                                                           |          |             
|Unearned stock                                                               |          |             
|                                                                             |          |             
|Total stockholders' equity                                                   |          |             
|                                                                             |          |             
|Total liabilities, deferrable capital securities                             |          |             
|and stockholders' equity                                                     |          |             
|                                                                             |          |             
|                                                                             |          |             

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
|---------------------------------------------------------------- | ------------------ | ----------------
|
|
|
|Revenues:                                                        |                    |                 
|Net premiums written                                             |                    |                 
|Change in unearned premiums                                      |                    |                 
|                                                                 |                    |                 
|Net premiums earned                                              |                    |                 
|Policy fees                                                      |                    |                 
|Agency fees and commissions                                      |                    |                 
|Net investment income                                            |                    |                 
|Realized gains (losses)                                          |                    |                 
|Other                                                            |                    |                 
|                                                                 |                    |                 
|Total revenues                                                   |                    |                 
|Expenses:                                                        |                    |                 
|Policyholder benefits                                            |                    |                 
|Losses and loss adjustment expenses incurred                     |                    |                 
|Policy acquisition expenses                                      |                    |                 
|Operating expenses                                               |                    |                 
|Interest on debt                                                 |                    |                 
|Gain on debt extinguishment                                      |                    |                 
|Other intangible amortization                                    |                    |                 
|                                                                 |                    |                 
|Total expenses                                                   |                    |                 
|(Loss) income from continuing operations before income taxes,    |                    |                 
|minority interest, and deferrable capital securities             |                    |                 
|Income tax (benefit) expense                                     |                    |                 
|Minority interest, net of tax                                    |                    |                 
|Deferrable capital security distributions, net of tax            |                    |                 
|                                                                 |                    |                 
|Net (loss) income from continuing operations                     |                    |                 
|Loss from discontinued operations, net of tax                    |                    |                 
|                                                                 |                    |                 
|Net loss                                                         |                    |                 
|Gain on redemption of preferred securities, net of tax           |                    |                 
|                                                                 |                    |                 
|Net loss available to common shareholders                        |                    |                 
|                                                                 |                    |                 
|Net (loss) income from continuing operations per share - Basic   |                    |                 
|                                                                 |                    |                 
|Net loss available to common shareholders per share - Basic      |                    |                 
|                                                                 |                    |                 
|Net (loss) income from continuing operations per share - Diluted |                    |                 
|                                                                 |                    |                 
|Net loss available to common shareholders per share - Diluted    |                    |                 
|                                                                 |                    |                 

|Statements of Comprehensive Income (Loss)                         
|------------------------------------------------------------------
|Net loss                                                          
|Other comprehensive income, net of tax:                           
|Unrealized holding (losses) gains on available-for-sale securities
|net of tax of $3,303, $2,875, $4,162 and $(67), respectively      
|Less realized (losses) gains on available-for-sale securities net 
|of tax of $739, $(206), $1,966 and $174, respectively             
|                                                                  
|                                                                  
|Gain on redemption of preferred securities, net of tax            
|of $0, $0, $0 and $113 respectively                               
|                                                                  
|Comprehensive loss                                                
|                                                                  
|                                                                  

See accompanying Notes to Consolidated Financial Statements

2

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##### Vesta Insurance Group, Inc.
Consolidated Statement of Cash Flows
(amounts in thousands)

|                                                                           | Six months ended June 30,
|-------------------------------------------------------------------------- | -------------------------
|
|
|Operating Activities:                                                      |                          
|Net income                                                                 |                          
|Adjustments to reconcile net loss to cash provided by (used in) operations |                          
|Changes in:                                                                |                          
|Loss and LAE reserves, and future policy liabilities                       |                          
|Unearned premium reserves                                                  |                          
|Reinsurance balances receivable                                            |                          
|Premiums in course of collection                                           |                          
|Reinsurance recoverable on paid losses                                     |                          
|Reinsurance balances payable                                               |                          
|Other assets and liabilities                                               |                          
|Policy acquisition costs deferred                                          |                          
|Policy acquisition costs amortized                                         |                          
|Realized gains                                                             |                          
|Amortization and depreciation                                              |                          
|Gain on extinguishment of debt                                             |                          
|                                                                           |                          
|Net cash provided by (used in) operations                                  |                          
|Investing Activities:                                                      |                          
|Investments sold:                                                          |                          
|Fixed maturities available for sale                                        |                          
|Equity securities                                                          |                          
|Investments acquired:                                                      |                          
|Fixed maturities available for sale                                        |                          
|Equity securities                                                          |                          
|Maturities, paydowns, calls and other                                      |                          
|Fixed maturities available for sale                                        |                          
|Net decrease in other invested assets                                      |                          
|Net cash received (paid) for acquisition                                   |                          
|Net increase in short-term investments                                     |                          
|Assets held for sale                                                       |                          
|Additions to property and equipment                                        |                          
|Disposal of property and equipment                                         |                          
|                                                                           |                          
|Net cash used in investing activities                                      |                          
|Financing Activities:                                                      |                          
|Net change in FHLB borrowings                                              |                          
|Change in long and short-term debt                                         |                          
|Repayment of acquisition contingent consideration                          |                          
|Net deposits and withdrawals from insurance liabilities                    |                          
|Acquisition of common stock                                                |                          
|Dividends paid                                                             |                          
|                                                                           |                          
|Net cash used in financing activities                                      |                          
|(Decrease) increase in cash                                                |                          
|Cash at beginning of period                                                |                          
|                                                                           |                          
|Cash at end of period                                                      |                          
|                                                                           |                          

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  consolidated  financial  statements of Vesta Insurance Group,  Inc. (the
"Company") have been prepared in conformity with accounting  principles  generally  accepted in the United States for interim financial
information  and with the  instructions of Form 10-Q and Article 10 of Regulation  S-X. These  financial  statements  should be read in
conjunction with the consolidated  financial  statements and the notes thereto included in the Company's Annual Report on Form 10-K for
the year ended  December 31,  2002.  Accordingly,  they do not include all of the  information  and  footnotes  required by  accounting
principles  generally accepted in the United States of America for complete  financial  statements.  In the opinion of management,  all
adjustments  (consisting of normal  recurring  accruals and other  adjustments,  such as impairments)  considered  necessary for a fair
presentation  have been included.  The results of operations and cash flows for any interim  period are not  necessarily  indicative of
results for the full year.

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

New Accounting  Standards: Effective July 1, 2002, Vesta adopted Statement of Financial  Accounting  Standards No. 145 (SFAS No.
145)  "Rescission of FASB Statement No. 4, 44 and 64,  Amendment of FASB Statement No. 13, and Technical  Corrections",  which had been
issued by the Financial  Accounting  Standards  Board "FASB" in April 2002.  SFAS No. 145 rescinds SFAS No. 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.  In  connection  with our  adoption  of SFAS No.  145,  we have  reclassified  gains on the  extinguishment  of debt  from
extraordinary gain on debt extinguishment to other expense.  These  reclassifications  decreased total expenses by $1.4 million for the
six months ended June 30, 2002.

In November 2002, the FASB issued FASB  Interpretation No. ("FIN") 45, "Guarantor's  Accounting and Disclosures  Requirements for
Guarantees,  Including  Indirect  Guarantees of Indebtedness of Others." FIN 45 clarifies the  requirements of SFAS No. 5,  "Accounting
for  Contingencies,"  related to a guarantors  accounting  for, and  disclosures  of, the issuance of certain types of guarantees.  The
disclosure  requirements are effective for financial  statements of interim and annual periods ending after December 15,  2002 and have
been included in the Notes to the consolidated  financial  statements included herein. The impact on the Company's financial statements
from the  application of the recognition  and  measurement  provisions of FIN No. 45 is dependent on the level of guarantees  issued or
modified in 2003 and thereafter.  No guaranties were issued or modified during the six months ended June 30, 2003,  which were impacted
by the provisions of FIN No. 45.

In January 2003,  the FASB issued FIN 46,  "Consolidation  of Variable  Interest  Entities"  which  clarifies the  application of
Accounting  Research  Bulletin  No.  51,   "Consolidated   Financial   Statements."  This  Interpretation   provides  guidance  on  the
identification and consolidation of variable interest entities  ("VIEs"),  whereby control is achieved through means other than through
voting rights.  The effective date of FIN 46 is for the first fiscal quarter  beginning after June 15,  2003.  Management  believes the
adoption of FIN 46 will not have a material impact on the Company's financial position, results of operations or cash flows.

In May 2002, the Derivatives  Implementation Group of the FASB exposed for comment issue No. B36, "Bifurcation of Embedded Credit
Derivatives"  ("DIG B36").  DIG B36 would require the bifurcation of potential  embedded  derivatives  within modified  coinsurance and
funds withheld  coinsurance  arrangements in which the terms require the future payment of a principal  amount plus a return based on a
specified  proportion of the ceding  company's  return on either its general account assets or a specified  block of those assets.  The
proposed  effective date of the  implementation  guidance in DIG B36 is for the first fiscal quarter  beginning after June 15, 2003 and
would be applied on a prospective basis.  The Company is currently evaluating the impact of this pronouncement.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial  Instruments with Characteristics of both Liabilities
and Equity" ("SFAS 150"). SFAS 150 establishes how an issuer classifies and measures certain free standing  financial  instruments with
characteristics  of both  liabilities  and equity and  requires  that such  instruments  be  classified  as  liabilities.  SFAS 150 was
effective for financial  instruments  entered into or modified  after May 31, 2003,  and otherwise is effective at the beginning of the
first interim period  beginning  after June 15, 2003 for those  existing  financial  instruments  subject to the provisions of SFAS No.
150.  The Company has not entered  into any  financial  instruments  within the scope of SFAS 150 since May 31,  2003.  Management  has
determined that the Company's  Deferrable Capital  Securities are subject to the provisions of SFAS No. 150. The transition  provisions
of SFAS No. 150 require that upon  adoption of SFAS No. 150 on July 1, 2003,  the  Company's  Deferrable  Capital  Securities  would be
reclassified  as a liability  from its current  mezzanine  debt  classification.  The dividends  paid to the holders of the  Deferrable
Capital Securities will be classified as interest expense on a prospective basis.

Restricted  Assets:  As part of a modified  coinsurance  agreement with Employers  Reinsurance  Corporation,  American Founders is
holding $167.5 million of assets for the benefit of Employers,  of which $165.7 million are included in fixed maturities  available for
sale herein.  Additionally, we have pledged investments having a market value of $169.5 million to the Federal Home Loan Bank.

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

4

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Reconciliation of net loss available to common shareholders and average shares outstanding for the three and six months ending June
30, 2003 and 2002 are as follows:

|                                            | Three months ended June 30,
|------------------------------------------- | ---------------------------
|
|Net loss available to common shareholders   |                            
|                                            |                            
|Weighted average shares outstanding-basic   |                            
|Stock options and restricted stock *        |                            
|                                            |                            
|Weighted average shares outstanding-diluted |                            
|                                            |                            

|                                            | Six months ended June 30,
|------------------------------------------- | -------------------------
|
|Net loss available to common shareholders   |                          
|                                            |                          
|Weighted average shares outstanding-basic   |                          
|Stock options and restricted stock *        |                          
|                                            |                          
|Weighted average shares outstanding-diluted |                          
|                                            |                          

| | * | 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 diluted
average shares  outstanding  calculation.  Potentially  dilutive  securities          for
the  three-month  and six-month  periods ending June 30, 2003 are 44 thousand and 47
thousand,  respectively.  Potentially          dilutive  securities  for the  three-month
 and  six-month  periods  ending June 30, 2002 are 446 thousand  and 526  thousand,
         respectively.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Earnings per share for discontinued operations for the three and six months ended June 30, 2003 and 2002 are as follows:

|                        | 2003 | 2002
|----------------------- | ---- | ----
|
|Basic loss per share:   |      |     
|Discontinued Operations |      |     
|Diluted loss per share: |      |     
|Discontinued Operations |      |     

Stock-Based  Compensation:  In December 2002, the FASB issued SFAS No. 148,  Accounting for  Stock-Based  Compensation - Transition and
Disclosure.  This statement is effective for 2003 and amends SFAS No. 123,  "Accounting  for  Stock-Based  Compensation,"  by providing
alternative  methods of  transition  for a voluntary  change to the fair value based  method of  accounting  for  stock-based  employee
compensation.  In  addition,  SFAS No.  148  requires  additional  disclosures  related to the effect of  stock-based  compensation  on
reported  results.  As allowed by SFAS No. 123,  the Company  has  elected to  continue  to apply the  intrinsic-value-based  method of
accounting  for  stock-based  compensation  and has adopted  only the  disclosure  requirements  of SFAS No. 123. The  following  table
illustrates  the effect on net loss if the  fair-value-based  method had been applied to all  outstanding  and unvested  awards in each
period.

|                                                              | 2003 | 2002
|------------------------------------------------------------- | ---- | ----
|
|Net loss as reported                                          |      |     
|Add: Stock-based employee compensation expense included       |      |     
|in net income, net of tax                                     |      |     
|Deduct: Total stock-based employee compensation               |      |     
|expense determined under fair-value-based                     |      |     
|method for all awards, net of tax                             |      |     
|                                                              |      |     
|Pro forma net loss                                            |      |     
|Net loss available to common shareholders per share - basic   |      |     
|As reported                                                   |      |     
|Pro forma                                                     |      |     
|Net loss available to common shareholders per share - diluted |      |     
|As reported                                                   |      |     
|Pro forma                                                     |      |     

5

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Note B-Commitments and Contingencies

Securities Litigation

In 2001,  Vesta  settled a securities  class action that had been pending since 1998. In  connection  with that  settlement,  the
issuer of our primary  directors'  and officers'  insurance  policy,  which was intended to cover the initial $25 million of settlement
costs and related  expenses,  denied  coverage and refused to fund its share of the settlement  costs.  We sued that insurer in Alabama
state court  alleging  that its action was taken in bad faith.  In February  2003,  we settled that claim and  collected $16 million in
cash, which was reflected in the 2002 consolidated financial statements.

Health insurance related lawsuits

Vesta and two  former  officers  of Vesta are  defendants  in a lawsuit  styled  James H.  Cashion,  Jr.  d/b/a  American  Health
Underwriters v. Vesta Insurance Group,  Inc., et al, Plaintiff,  a former general agent of our subsidiary States General Life Insurance
Company,  which we purchased in 2001,  alleges that the defendants  engaged in an actionable civil  conspiracy to tortiously  interfere
with his agency  contracts.  The civil conspiracy claim is premised,  in part, on certain payments made to these two former officers of
Vesta by another  agent who replaced Mr.  Cashion.  The  plaintiff is seeking  actual and  punitive  damages.  Vesta denies  tortiously
interfering with plaintiff's agency contract,  believes the claims asserted against it have no merit, and is vigorously  defending this
lawsuit.  In the opinion of management,  resolution of this lawsuit is not expected to have a material  adverse effect on our financial
position.

During the second quarter of 2003, we entered into a settlement and release agreement with Jimmy Walker, a former agent of
States General.  Pursuant to this settlement and release agreement, we voluntarily dismissed the arbitration and litigation that we
had earlier commenced against Mr. Walker and released him from his obligation to repay certain indebtedness owed to under a series of
promissory notes representing amounts Mr. Walker borrowed from us in connection with his agency activities.  Pursuant to this
settlement agreement, Mr. Walker unconditionally assigned to us certain commissions to which he would otherwise be entitled under his
former agent's agreement with States General and released us from any claims that he could assert against us arising from such
agent's agreement.  At June 30, 2003, the net realizable amount of the assigned commissions to the Company was $1.3 million and is recorded
as a component of other invested assets on the accompanying interim consolidated balance sheet.

Life insurance related lawsuits

Our subsidiary,  American Founders, is a defendant in a lawsuit brought by a judgment creditor of IFS Holdings, Inc. - the former
holder of American  Founders'  series A and C preferred  stock - alleging  that  American  Founders  redeemed its Series A and Series C
preferred stock from IFS Holdings,  Inc. for less than "reasonably equivalent value," and, therefore,  engaged in a voidable fraudulent
transfer.  American  Founders  believes (i) that the redemption  transaction  was for reasonably  equivalent  value;  and (ii) that the
allegations  brought  against it in this  lawsuit are  without  merit.  We have  vigorously  defended  this  action.  In the opinion of
management,  resolution  of the  lawsuit  is not  expected  to have a  material  adverse  effect on our  financial  position.  However,
depending upon the amount and timing,  an unfavorable  resolution of this matter could  materially  affect  American  Founders'  future
operations or cash flows in a particular period.

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 funding 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.

Reinsurance Arbitration/Litigation

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 $33.4
million at June 30, 2003.  Additionally,  we have previously  collected  approximately $48.5 million from the drawdown of collateral on
hand.  Such amount, net of related expenses, has been reflected in the 2002 financial statements.

NRMA Insurance Ltd. ("NRMA"), one of the participants in the 20 percent  whole account quota share treaty, filed a lawsuit in the
United States District Court for the Northern District of Alabama contesting our billings. NRMA sought rescission of the treaty and a
temporary restraining order preventing us from drawing down approximately $34.5 million of collateral.  We filed a demand for
arbitration as provided for in the treaty and also filed a motion to compel arbitration which was granted in the United States
District Court action.  Vesta reached an agreement with NRMA to collect the $34.5 million of collateral in exchange for posting a $25
million letter of credit in favor of NRMA to fund any amounts NRMA may recover as a result of the arbitration.  We 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 with Alfa was scheduled for May 2003.  However, on April 21, 2003, Alfa filed a lawsuit against Vesta Fire
in state court in Montgomery, Alabama seeking a declaration from the Court on certain procedural and organizational matters and
requesting that the Court stay the arbitration proceedings during the pendency of the litigation in state court in Alabama.  On April
24, 2003, the Court issued a temporary restraining order staying the proceedings in the ongoing arbitration in order to maintain the
status quo until the merits of Alfa's petition can be heard and determined, which is currently scheduled for September 24, 2003.  The
lawsuit filed by Alfa will delay indefinitely the Alfa arbitration proceedings but is not currently expected to delay proceedings in
the other two arbitrations.   On June 19, 2002, the panel in the NRMA arbitration 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.  On
September 6, 2002, the panel notified the parties that it would make such determination on this specific issue on the papers and
filings submitted by the parties without the necessity of a live hearing.  On November 6, 2002, the Company was notified by the panel
that it ruled that the treaty does not apply to loss occurrences prior to July 1, 1997.  As a result, Vesta recorded a $23.6 million
pre-tax charge as a revision of our estimated reinsurance recoverable in the third quarter of 2002.   This ruling does not set a
binding precedent regarding Vesta's other arbitrations and, accordingly, we have not recorded any change in our estimate of our
recoverable from the other treaty participants as a result of this ruling.  In February 2003, Vesta filed a petition to vacate the
NRMA panel ruling in the U.S. District Court for

6

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the Northern District of Alabama.  On April 8, 2003,  the Court ruled that since the  arbitration  proceedings  have not been fully  exhausted,  it was  dismissing
Vesta's petition without  prejudice of the parties to seek the Court's review of any final  arbitration  award. The hearing in the NRMA
arbitration is currently  scheduled to begin on October 20, 2003,  and is estimated to take  approximately  two weeks.  On December 16,
2002,  Dorinco filed a motion seeking an order that the treaty does not cover  developmental  losses.  On May 1, 2003, the panel in the
Dorinco  arbitration  ruled that Dorinco is not  responsible  for losses on any policy or any other  insurance or reinsurance  contract
terminated prior to July 1, 1997 and that the arbitration will continue with respect to losses whenever  occurring,  on policies or any
other  insurance or  reinsurance  contract in force at July 1, 1997. The hearing in the Dorinco  arbitration is currently  scheduled to
begin on  December  1, 2003,  and is  estimated  to take  approximately  two weeks.  Based on a current  estimate of the impact of this
ruling and the ruling  previously  received  from the NRMA panel,  we  currently  believe our  estimated  recoverable  is  appropriate.
However,  we are  continuing  to evaluate  the effects of complying  with these  rulings and our estimate may change in the future as a
result of this evaluation.

While management continues to believe its interpretation of the treaty's terms and computations based thereon are correct,  these
matters are being  contested in these  arbitration  proceedings  and their  ultimate  outcome  cannot be  determined  at this time.  If
rescission on all three treaties was awarded by three separate  arbitration  panels,  we would incur a pre-tax charge of  approximately
$57.0 million.

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.

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 claimed were due under the terms of the treaty.  At that time,
the treaty was  terminated on a cut-off  basis.  In the pending  arbitration  Vesta is seeking,  among other things,  recoupment of all
believed  improper  excessive  expense  allocations and charges from CIGNA. The arbitration was bifurcated into two phases with Phase I
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.  Phase II, which is ongoing,  relates to any  remaining  issues  between the parties,  including  those that exist
with regard to an audit of expenses  ceded to the  treaty.  The Phase I 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;  (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.  Vesta
is presently  conducting  its expense audit as permitted by the panel.  During the course of preparing for and  conducting  the expense
audit, the Company determined that it should revise its estimated  reinsurance  receivable and record during the second quarter of 2003
a pre-tax  valuation  allowance  of $9.4  million and recorded the  valuation  allowance  as a component  of  discontinued  operations.
Management  intends to continue to proceed with the presentation of our case to the arbitration  panel and believes that the resolution
of this arbitration will not have any adverse financial impact on the Company.  The Phase II hearing has not yet been scheduled.

Muhl vs. Vesta is a case pending in the supreme Court of the State of New York, County of New York,  brought by the Liquidator of
Midland Insurance Company  ("Midland"),  claiming  recoveries under two alleged  retrocession  agreements (Pool I and Pool III) between
Midland and Interstate Fire Insurance  Company,  Vesta's  predecessor in interest.  The Liquidator's  claims against Vesta under Pool I
and Pool III have been severed.

Third party auditors hired by Vesta have  identified  coverage  issues that cast doubt on the validity of a number of claims.  In
addition,  there is no actual  retrocessional  agreement that evidences the terms and conditions of Pool III which involves 71% or more
of the incurred  losses at issue.  Although  there are other  tangential  documents that the Liquidator may attempt to rely on to prove
liability  under Pool III, we believe  that the  Liquidator  will not be able to  establish  liability  for any portion of the Pool III
claims.  We also believe that a number of the losses allegedly  incurred in connection with Pool I may be avoided on specific  coverage
grounds.  We are defending this matter vigorously and are reasonably  optimistic  regarding the ultimate  outcome,  although an adverse
ruling in this case could have a material effect on our financial condition.

Nichols vs. Vesta Fire  Insurance  Corporation is a lawsuit  brought by the  Liquidator of Delta America Re Insurance  Company in
Kentucky state court to recover  losses alleged under  reinsurance  contracts  entered into in the 1970's.  Vesta removed the action to
federal  court and  successfully  moved to compel  arbitration.  Each  party has  selected  a party  arbitrator  but as yet there is no
neutral umpire.  There has been no discovery as yet and no organizational meeting of the panel.

Vesta vs. New Cap Re is an arbitration  against an Australian  reinsurer,  to collect  reinsurance  recoverables  pursuant to two
accident  year excess of loss ratio  reinsurance  agreements.  In the  arbitration,  New Cap Re  challenged  Vesta's  earlier draw on a
Letter  of  Credit  for $7.5  million  which was held in  connection  with one of the two  contracts.  Shortly  after  the  arbitration
commenced,  New Cap Re became the subject of insolvency  proceedings  in Australia and an ancillary  proceeding in the U.S.  Bankruptcy
Court in New York.  The  Bankruptcy  Court  stayed all pending  litigation  and  arbitration  against New Cap Re, and we appealed  that
ruling to the  Southern  District of New York,  and  ultimately  to the U.S.  Court of Appeals for the Second  Circuit  which  recently
affirmed the Bankruptcy  Court's stay of the  arbitration  against New Cap Re. Hence,  our efforts to recover losses as well as New Cap
Re's efforts to challenge the earlier draw on the $7.5 million Letter of Credit by us are stayed.

On September 5, 2002,  New Cap Re served us with an  Application  pursuant to Section 588FF of the  Australian  Corporations  Act
seeking  an order  directing  us to pay New Cap Re and its  liquidator  $1.0  million  that  Vesta  allegedly  received  as an  "unfair
preference"  and/or  arising out of an  "uncommercial  transaction,"  as those terms are  defined by the  Corporations  Act. We filed a
Notice of Appearance on October 31, 2002. While management  intends to vigorously defend this matter,  given the preliminary  nature of
these proceedings, it is too early to evaluate the likelihood of success.

Other

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.

7

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Credit Facilities

Effective  February 1, 2003, we entered into a new revolving  credit  arrangement  with First  Commercial to replace the previous
facility.  The new  facility  is a $30  million  line  secured  by a pledge of  358,375  shares of common  stock of  Instant  Insurance
Holdings,  Inc.  (Instant),  representing  approximately 70% of Instant's issued and outstanding shares of capital stock as of December
31, 2002.  The new  facility  bears  interest at First  Commercial's  prime rate and will mature no earlier  than June 30, 2005.  As of
June 30, 2003, we had drawn $29.8 million available under this Agreement.

This new credit agreement  contains  covenants which require us to maintain (i) consolidated GAAP net income (excluding  realized
gains and losses) of at least $15 million for any calendar  year,  beginning in 2003,  (ii)  Consolidated  debt to capital  ratio of no
more than 39%, (iii) an A.M. Best rating of "B" or better,  (iv) consolidated GAAP net worth of at least $208 million,  (v) an interest
coverage  ratio of not less than 1.5 to 1 and (vi)  risk-based  capital of not less than 150% of the NAIC's  authorized  control level.
As of June 30, 2003, we were in compliance  with all quarterly  covenants.  However,  based on our results through the first six months
of 2003,  we believe  that  uncertainty  exists  regarding  our  ability to meet  certain of the First  Commercial  credit  arrangement
covenants at December 31, 2003.  Furthermore,  current  dividend levels from Vesta Fire and J. Gordon Gaines would not be sufficient to
repay the anticipated  outstanding  balance of this credit  facility at the year-end  covenant  measurement  date without seeking prior
approval.  Although management believes the Company would be able to secure waivers on any covenant  violations,  the failure to obtain
such waivers of the  potential  covenant  violations or refinance  the credit  facility on similar terms could have a material  adverse
impact on our financial condition.

Note C-Segment Information

We report financial  results according to five business  segments,  which are distinguished by their product offerings or business
activities.  The  accounting  policies of the operating  segments are  described in Note A in the Company's  Annual Report on Form 10-K
for the year-ended  December 31, 2002.  Segment  pre-tax income (loss) is generally  income from  continuing  operations  before income
taxes,  minority  interest and  deferrable  capital  security  distributions.  Premiums,  policy fees,  other income,  loss and benefit
expenses,  operating  expenses and policy  acquisition  expenses are  attributed  directly to each  operating  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 segment

The standard  property-casualty  segment  consists of two  principal  lines of business:  (1)  underwriting  residential  property
insurance in capacity  constrained states; and (2) underwriting  residential  property and automobile  insurance in states where we can
profitably  offer  both  products  through   independent  agents.   Vesta's  insurance  products  are  distributed   primarily  through
approximately  2,475  independent  agencies in 16 states.  Our residential  property lines target families (1) with multiple  insurance
policies;  (2) who own more than one  automobile;  and (3) who live in a home  valued  between  $100,000  and  $250,000.  Our  standard
personal auto line targets drivers over age thirty-five with above average driving records.

Life insurance segment

We provide a variety of life insurance  products through American Founders Financial  Corporation,  a holding company for two life
insurance  companies  domiciled  in Texas.  In 2000,  we  purchased a 72%  interest in American  Founders.  On February  18,  2003,  we
purchased the remaining  shares held by minority holders and now own 100% of American  Founders.  At June 30, 2003,  American  Founders
had in force  approximately  $1.8  billion  (face value) of life and annuity  products.  American  Founders  markets  traditional  life
products,  universal life products,  fixed-rate  annuities,  pension contracts and related products through  independent agents located
throughout  the U.S.  In the fourth  quarter  of 2002,  we decided to exit the  health  insurance  business  line which was  previously
included in the life insurance  segment.  The results for the health insurance line have been  reclassified to discontinued  operations
for all periods presented in this report.  See Note F.

Non-standard underwriting segment

Our non-standard  underwriting  segment consists of two lines of business:  (1) underwriting  non-standard auto insurance products
sold by our affiliated agency operations and (2) underwriting  non-standard  auto insurance sold by unaffiliated  agencies.  In each of
these lines of business,  we utilize quota share  reinsurance to minimize our exposure to loss. The non-standard  underwriting  segment
includes our fronting operations and any underwriting risk retained from premiums written through our non-standard auto agencies.

With respect to fronting arrangements,  we write property-casualty insurance coverages and reinsure substantially all of the risks
to reinsurers  in exchange for fees.  This  business  takes  advantage of our  certificates  of authority  granting us license to write
insurance in many states.  Income from  fronting  arrangements  is primarily  generated  on a  fee-for-service  basis.  For the premium
written  through our  non-standard  auto  agencies,  we determine,  based upon market  conditions  and the  prospective  results of the
underlying  business,  whether to keep 100% of the underwriting risk or reinsure this risk to various  reinsurers.  Our decision on how
much  underwriting  risk to retain is  dependent  on the  current  rating  environment  and the  amount of  commissions  offered by the
reinsurers.

Non-standard agency segment

Our  non-standard  agency  segment does not engage in  underwriting  activities.  The primary  focus of our agency  segment is the
distribution of non-standard auto insurance  products for various retail and wholesale  insurance  carriers in exchange for commissions
and fees. Our non-standard  agencies  primarily  target (1) individuals  specifically  required by law to purchase auto insurance;  (2)
individuals  with accidents or violations on their driving  records;  (3) new drivers;  and (4) drivers of  high-performance  vehicles.
Typically,  non-standard auto insurance  customers are considered  higher-risk than standard  customers,  and premiums for non-standard
insurance are generally more expensive.

Corporate and other segment

Our corporate and other segment consists primarily of (1) net income earned on investments;  (2) interest expenses associated with
corporate debt; (3) financial  results for a small life insurance agency;  and (4) overhead  expenses not directly  associated with any
other business segment.

8

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A summary of segment results for the three months ended June 30, 2003 and 2002 is as follows:

|                                    | Standard |  |   |         |   |   |        
|----------------------------------- | -------- |  | - | ------- | - | - | -------
|
|
|
|Revenues:                           |          |  |   |         |   |   |        
|Premiums earned                     |          |  | $ | 79,348  |   | $ | 2,317  
|Agency fees and commissions         |          |  |   | --      |   |   | --     
|Net investment income               |          |  |   | --      |   |   | 7,078  
|Policy fees                         |          |  |   | 2,892   |   |   | 632    
|Realized gains (losses)             |          |  |   | --      |   |   | 242    
|Other                               |          |  |   | 164     |   |   | 719    
|                                    |          |  |   |         |   |   |        
|Total revenues                      |          |  |   | 82,404  |   |   | 10,988 
|Expenses:                           |          | 
|Loss, LAE and policyholder benefits |          |  |   | 64,997  |   |   | 5,214  
|Policy acquisition costs            |          |  |   | 17,785  |   |   | 41     
|Operating expenses                  |          |  |   | 11,264  |   |   | 2,407  
|Interest on debt                    |          |  |   | --      |   |   | 1,436  
|Intangible asset amortization       |          |  |   | --      |   |   | --     
|                                    |          |  |   |         |   |   |        
|Total expenses                      |          |  |   | 94,046  |   |   | 9,098  
|                                    |          |  |   |         |   |   |        
|Pre-tax income (loss)               |          |  | $ | (11,642 | ) | $ | 1,890  
|                                    |          |  |   |         |   |   |        
|Operating segment assets:           |          | 
|Investments and other assets        |          |  | $ | 439,319 |   | $ | 874,829
|Deferred acquisition costs          |          |  |   | 42,909  |   |   | 20,142 
|                                    |          |  |   |         |   |   |        
|                                    |          |  | $ | 482,228 |   | $ | 894,971
|                                    |          |  |   |         |   |   |        

|                                    | Standard |  |   |         |   |   |        
|----------------------------------- | -------- |  | - | ------- | - | - | -------
|
|
|
|Revenues:                           |          |  |   |         |   |   |        
|Premiums earned                     |          |  | $ | 79,142  |   | $ | 2,476  
|Agency fees and commissions         |          |  |   | --      |   |   | --     
|Net investment income               |          |  |   | --      |   |   | 9,230  
|Policy fees                         |          |  |   | 1,290   |   |   | 1,133  
|Realized gains (losses)             |          |  |   | --      |   |   | 2,322  
|Other                               |          |  |   | 225     |   |   | 320    
|                                    |          |  |   |         |   |   |        
|Total revenues                      |          |  |   | 80,657  |   |   | 15,481 
|Expenses:                           |          | 
|Loss, LAE and policyholder benefits |          |  |   | 59,336  |   |   | 6,923  
|Policy acquisition costs            |          |  |   | 16,405  |   |   | 463    
|Operating expenses                  |          |  |   | 9,735   |   |   | 2,646  
|Interest on debt                    |          |  |   | --      |   |   | 1,588  
|Intangible asset amortization       |          |  |   | --      |   |   | --     
|                                    |          |  |   |         |   |   |        
|Total expenses                      |          |  |   | 85,476  |   |   | 11,620 
|                                    |          |  |   |         |   |   |        
|Pre-tax income (loss)               |          |  | $ | (4,819  | ) | $ | 3,861  
|                                    |          |  |   |         |   |   |        
|Operating segment assets:           |          | 
|Investments and other assets        |          |  | $ | 359,554 |   | $ | 916,598
|Deferred acquisition costs          |          |  |   | 57,720  |   |   | 24,782 
|                                    |          |  |   |         |   |   |        
|                                    |          |  | $ | 417,274 |   | $ | 941,380
|                                    |          |  |   |         |   |   |        

9

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A summary of segment results for the six months ended June 30, 2003 and 2002 is as follows:

|                                    | Standard |  |   |         |   |   |       
|----------------------------------- | -------- |  | - | ------- | - | - | ------
|
|
|
|Revenues:                           |          |  |   |         |   |   |       
|Premiums earned                     |          |  | $ | 155,760 |   | $ | 4,727 
|Agency fees and commissions         |          |  |   | --      |   |   | --    
|Net investment income               |          |  |   | --      |   |   | 14,773
|Policy fees                         |          |  |   | 4,954   |   |   | 1,125 
|Realized gains (losses)             |          |  |   | --      |   |   | 232   
|Other                               |          |  |   | 406     |   |   | 1,361 
|                                    |          |  |   |         |   |   |       
|Total revenues                      |          |  |   | 161,120 |   |   | 22,218
|Expenses:                           |          | 
|Loss, LAE and policyholder benefits |          |  |   | 117,991 |   |   | 10,304
|Policy acquisition costs            |          |  |   | 36,413  |   |   | 409   
|Operating expenses                  |          |  |   | 22,269  |   |   | 4,859 
|Interest on debt                    |          |  |   | --      |   |   | 2,889 
|Gain on extinguishment of debt      |          |  |   | --      |   |   | --    
|Intangible asset amortization       |          |  |   | --      |   |   | --    
|                                    |          |  |   |         |   |   |       
|Total expenses                      |          |  |   | 176,673 |   |   | 18,461
|                                    |          |  |   |         |   |   |       
|Pre-tax income (loss)               |          |  | $ | (15,553 | ) | $ | 3,757 
|                                    |          |  |   |         |   |   |       

|                                    | Standard |  |   |         |   |   |       
|----------------------------------- | -------- |  | - | ------- | - | - | ------
|
|
|
|Revenues:                           |          |  |   |         |   |   |       
|Premiums earned                     |          |  | $ | 145,508 |   | $ | 5,533 
|Agency fees and commissions         |          |  |   | --      |   |   | --    
|Net investment income               |          |  |   | --      |   |   | 18,536
|Policy fees                         |          |  |   | 2,592   |   |   | 2,116 
|Realized gains (losses)             |          |  |   | --      |   |   | 3,263 
|Other                               |          |  |   | 225     |   |   | 657   
|                                    |          |  |   |         |   |   |       
|Total revenues                      |          |  |   | 148,325 |   |   | 30,105
|Expenses:                           |          | 
|Loss, LAE and policyholder benefits |          |  |   | 105,726 |   |   | 14,751
|Policy acquisition costs            |          |  |   | 31,469  |   |   | 800   
|Operating expenses                  |          |  |   | 18,621  |   |   | 5,104 
|Interest on debt                    |          |  |   | --      |   |   | 3,164 
|Gain on extinguishment of debt      |          |  |   | --      |   |   | --    
|Intangible asset amortization       |          |  |   | --      |   |   | --    
|                                    |          |  |   |         |   |   |       
|Total expenses                      |          |  |   | 155,816 |   |   | 23,819
|                                    |          |  |   |         |   |   |       
|Pre-tax income (loss)               |          |  | $ | (7,491  | ) | $ | 6,286 
|                                    |          |  |   |         |   |   |       

10

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Note D-Stock & Debt 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
a pre-tax gain on extinguishment  of debt of $1.4 million in other expense and an after tax gain on redemption of preferred  securities
of $.2 million.

Note E-Acquisitions and Dispositions

In February 2003, we completed the  acquisition of the  approximate  27% remaining  ownership from the minority owners of American
Founders  Financial  Corporation.  The purchase price for this  acquisition  was $12.9 million.  The transaction has been accounted for
as a purchase.  Summarized below is a preliminary  allocation of 100% of the assets and liabilities of American  Founders (in thousands
and unaudited):

|Assets acquired:                  |  |  |   |         | 
|--------------------------------- |  |  | - | ------- | 
|Invested assets                   |  |  | $ | 723,738 | 
|Deferred policy acquisition costs |  |  |   | 17,666  | 
|Other assets                      |  |  |   | 152,684 | 
|Goodwill                          |  |  |   | 10,760  | 
|                                  |  | 
|Total assets                      |  |  | $ | 904,848 | 
|                                  |  | 
|Liabilities acquired:             |  | 
|Future policy benefits            |  |  | $ | 661,432 | 
|Other liabilities                 |  |  |   | 185,719 | 
|                                  |  | 
|Total liabilities                 |  |  | $ | 847,151 | 
|                                  |  | 

During the second quarter of 2003, the Company acquired the 20% minority  interest in InsureOne  Independent  Insurance Agency,
LLC for $11.2 million.  The transaction has been accounted for as a purchase and resulted in an increase to goodwill of $9.1 million.

In June 2003, the Company executed a definitive stock purchase agreement for the sale of all common stock of Aegis Financial
Corporation (Aegis) and its subsidiary States General Life Insurance Company (States General).  The sales price is equal to the
statutory surplus of States General and Aegis, adjusted for any fair value adjustments on investment securities held by Aegis and
States General.  Consummation of the transaction, which is subject to regulatory approval, is expected to occur during the third
quarter.  The sales price is expected to be approximately $5.0 million.  The assets and liabilities of Aegis and States General are
reflected as held for sale on the accompanying June 30, 2003 balance sheet.

In the second quarter of 2003, the Company settled certain contingent consideration provisions related to prior period
standard property-casualty acquisitions.  The result of the settlement of the contingent consideration provisions was an increase of
goodwill of $3.5 million.

In January of 2002, the Company completed three acquisitions:  (1) the acquisition of certain assets of InsureOne Agency and the
renewal rights to a book of non-standard automobile business; (2) acquisition of the non-standard automobile related assets of Harbor
Insurance Group; and (3) purchase of the common stock of Old American Investments.  The combined purchase price for these
transactions was $35.1 million, with $16.6 million due at closing and $18.5 million due upon the occurrence of certain future
events.  In 2003, the Company paid $2.0 million in contingent consideration and settled the remaining $16.5 million through an
agreement by which the Company is required to make scheduled payments through August 2005.  The balance of the contingent
consideration liability at June 30, 2003 is $12.0 million and is reflected as a component of other liabilities on the accompanying
consolidated balance sheet.

Note F-Discontinued Operations

In the fourth quarter of 2002, we made the decision to exit the health  insurance and  consulting  business  lines.  Accordingly,
our health insurance and consulting lines results for 2002 have been  reclassified in our financial  statements as part of discontinued
operations  and are  classified  as operations  held for sale.  For the three and six months ended June 30, 2003, we recorded a pre-tax
loss for our health operations and our consulting business of $1.0 million and $2.5 million, respectively.

Previously, in 2000 and 1999, we exited the reinsurance assumed and commercial lines businesses,  respectively.  As a result, the
reporting  for these  business  lines is included in  discontinued  operations  in our  financial  statements.  At the time we made the
decision to exit each of these business  lines,  we estimated the reserves  required to fulfill our expected  future  obligations  with
respect to these discontinued  operations.  However,  we continue to monitor our recorded estimates with respect to ultimate settlement
on an ongoing basis.

Based upon available  information,  we believe the recorded  reserves for discontinued  operations at June 30, 2003 are adequate.
However,  we will continue to monitor these  reserves and their related  claims  activity and  experience.  Further  adjustments to our
estimates could be necessary as we continue to run off the remaining outstanding claims.

For the three and six months ended June 30, 2003, we recorded a pre-tax loss for reinsurance assumed and commercial lines
businesses of $10.7 million and $10.4 million, respectively.  These losses are primarily related to the recording, during the second
quarter of 2003,  of a pre-tax valuation allowance of $9.4 million on the CIGNA Property and Casualty Insurance Company arbitration
reinsurance assumed receivables.  See Note B to the interim consolidated financial statements.

The Company's 2002 results have been reclassified to reflect the losses from discontinued operations.

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 2002 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

Overview

Vesta conducts business in three areas of the personal  insurance  industry:  (1) standard property and casualty  insurance;  (2)
non-standard  automobile  insurance;  and (3) life  insurance.  Our  consolidated  revenue is  derived  principally  from  risk-bearing
premiums,  commissions and fees,  investment  income and investment gains and losses.  Our consolidated  expenses consist  primarily of
payments for claims and expenses associated with underwriting activities, agents' commissions and operations.

We report financial information according to five business segments: (1) standard  property-casualty  insurance; (2) non-standard
agency; (3) non-standard  underwriting;  (4) life insurance;  and (5) corporate and other. Since 1999, we have discontinued a number of
business lines.  We have segregated the reporting for these discontinued operations in our financial statements.

Since 2000,  we have pursued a strategy to diversify  into various  segments of the  personal  insurance  markets.  While we have
experienced  significant and profitable  growth in various personal lines  businesses since 2000, we have also experienced  significant
declines in our property and casualty  subsidiaries'  statutory  capital and surplus during the same period.  These declines in capital
and surplus are primarily  attributable  to lower than  expected  arbitration  awards and changes in estimates of disputed  reinsurance
recoverable  balances,  reserve  strengthening in our  discontinued  commercial and assumed  reinsurance  segments and increased policy
acquisitions  costs associated with significant  premium growth.  This decline in statutory surplus coupled with significant  growth in
premium  written is the primary  reason that A.M. Best Company  recently  adjusted the financial  strength  ratings of our property and
casualty  insurance  subsidiaries  from B+ (Very Good) to B (Fair).  Through the first half of 2003, our business has not experienced a
significant  negative  impact from this  adjustment.  However,  the  adjustment  could lead to  significant  deterioration  in selected
portions of our standard  property  and casualty  premium  volume and  adversely  impact the  financial  results of this segment  going
forward, the degree to which management is unable to quantify.

In an effort to strengthen our statutory capital position,  we have undertaken an evaluation of a possible sale or divestiture of
our life and health business as well as portions our property and casualty business.

Standard property-casualty and non-standard underwriting

The financial results of our property-casualty  underwriting activities (including our standard property-casualty segment and the
non-standard  underwriting  segment)  primarily  depend upon two variables:  (1) the amount of premiums we collect,  which is dependent
upon rates and volume; and (2) the costs we incur to adjust and pay claims submitted by individuals we have insured.

Subject to  competitive  and market  trends and  regulatory  approval,  premium rates are  generally  within our control,  and we
continuously  monitor and seek to adjust rates as  appropriate.  During the first six months of 2003, we  implemented 5 rate  increases
in our standard  automobile  business line in the states of North  Carolina,  Ohio, West Virginia and Tennessee,  which  represented an
average  premium  increase of  approximately  6.8%.  In the first six months of 2003,  we also  implemented  11 rate  increases  in our
standard  residential  property  line in the  states  of West  Virginia,  Ohio,  Pennsylvania,  Tennessee  and  South  Carolina,  which
represented  an  average  premium  increase  of  approximately  11.6%.  In our  non-standard  underwriting  segment,  we enacted 7 rate
increases in the states of Florida,  Illinois,  Indiana,  Missouri, New Mexico and South Carolina for an average increase of 2.2%. With
respect to volume, our ability to increase written premium in our property-casualty  underwriting  activities is largely dependent upon
our surplus leverage ratio,  which reflects our underwriting  operations' net written premiums relative to statutory surplus at the end
of a period.  As of December  31,  2002,  our surplus  leverage  ratio did not  indicate  capacity  for  significant  growth in our net
premiums  written,  and, in March of 2003, we commenced an evaluation  of a possible sale or  divestiture  of a portion of our property
and casualty business in an effort to maximize shareholder value and strengthen our statutory capital position.

The costs we incur to adjust and pay claims,  known as loss and loss  adjustment  expenses,  are  largely  beyond our control and
depend  primarily upon the frequency and/or severity of claims made by our  policyholders.  One measure of performance in the insurance
industry  is the  "loss  ratio,"  which is the  ratio of (i) the sum of loss and loss  adjustment  expenses;  to (ii) the sum of earned
premiums and policy fees.  Our loss ratio will  generally  increase or decrease  according to the frequency  and/or  severity of claims
made by our policyholders.

Another key  performance  measure for insurance  companies is the "combined  ratio." The combined  ratio  compares (i) the sum of
loss, loss adjustment expenses,  operating expenses and policy acquisition  expenses;  to (ii) total earned premiums and policy fees. A
combined ratio of less than 100% indicates  underwriting  profitability,  without regard to investment income earned from investing the
premium received.

Non-standard agency

The financial results of our agency activities primarily depend upon the amount of fees and commissions we can collect from the sale
of insurance products and the expenses we incur to conduct our day-to-day operations.  Although we expect the minimum commissions and
policy fees that we earn under a typical agency contract to be relatively stable, we expect to earn a substantial amount of
additional "profit sharing" commissions in excess of the contractual minimums.  These profit sharing commissions are dependent upon
whether the non-standard auto policies that we produce for other insurers result in a level of losses in relation to written premium
(i.e., loss ratios) below the levels stated in our agency contracts.  Accordingly, the frequency and severity of claims made on the
policies our agencies produce may impact our profit sharing commissions.

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Life insurance

The  financial  results of our life  insurance  operations  primarily  depend upon (1) the amount we collect as  premium;  (2) the
amount of  investment  income  earned on  invested  premium;  and (3) the  benefits  we pay to insureds  upon their  death.  Unlike the
standard  property-casualty  reporting  segments,  we include the investment  income earned on invested  premium in the results for our
life  insurance  segment.  The  greatest  variable in our  revenue in the life  segment is the amount of income we can earn on invested
assets,  which is dependent upon general  interest  rates and market  conditions.  The greatest  variable in our expense from period to
period is the mortality rate of our insureds,  as mortality rates in excess of our actuarially  predicted  levels will adversely impact
financial results in any given period.

Corporate and other

The  financial  results of our  corporate  and other  segment  reflect  other  revenue and expenses  that are not allocated to any
particular segment, including (i) investment income related to our property-casualty  underwriting operations;  (ii) corporate interest
expense;  (iii) general  corporate  operating  expenses;  and (iv) realized gains and losses and gains from repurchases of our own debt
securities at a discount.

In addition to the  above-mentioned  factors,  our financial results may also be impacted by such items as weather-related  events
including  hurricanes  and tornadoes and changes in  regulations  governing the insurance  industry.  Also,  our ability to effectively
compete in the insurance markets we serve is influenced by the financial strength ratings assigned to our companies by A.M. Best.

Comparison of Second Quarter 2003 to Second Quarter 2002

For the quarter ended June 30, 2003, we reported a net loss available to common  shareholders  of $11.6  million,  or $0.33 loss
per diluted share,  compared with a net loss available to shareholders of $11.5 million, or $0.34 loss per diluted share,  reported for
the previous year.

The primary factors that impacted our financial results in the second quarter of 2003 were as follows:

- Our combined ratio in the standard  property-casualty  segment was 114.1%.  The 114.1%  combined ratio was primarily  impacted
                by $20.0 million of catastrophe losses, including $17.3 million from the severe Texas hail storms in April.
- A decline in market interest rates and a higher level of prepayments on our mortgage-backed securities adversely impacted
                net investment income.  The weighted average yield (excluding realized and unrealized gains) decreased from 3.81% for
                the quarter ended June 30, 2002 to 2.48% for the quarter ended June 30, 2003.
- During the quarter ended June 20, 2003, the Company recorded a pre-tax valuation allowance of $9.4 million related to the
                CIGNA Property & Casualty Insurance Company arbitration reinsurance assumed receivable.

For a depiction of the various  components of revenue,  expense and financial results for each of our business segments for
the quarter ending June 30, 2003, refer to Note C included in this report.

Standard property-casualty segment

In our standard  property-casualty segment, we underwrite or sell personal automobile and residential property insurance through
approximately  2,475  independent  insurance  sales  agencies.  In the second quarter of 2003, the standard  property-casualty  segment
generated approximately $82.4 million in revenue, or approximately 50.5% of consolidated revenue.

For the quarter ended June 30, 2003, net premiums  written in our standard  property-casualty  lines  decreased by $22.0 million
(down 21.3%),  to $81.5 million from $103.5 million in the second  quarter of 2002.  Net premiums  earned during the three months ended
June 30, 2003 for standard  property-casualty  lines  increased by $.2 million,  or 0.3%,  to $79.3 million from $79.1 million in 2002.
The decrease in net premiums written is primarily  attributable to the Texas residential  property 50% quota share  reinsurance  treaty
entered  into in December of 2002,  as well as  decreased  writings in the Midwest  and  Mid-Atlantic  regions in  connection  with our
decision  to  terminate   agents  and  withdraw  from  certain   states.   The  increase  in  net  premiums  earned  for  the  standard
property-casualty  segment was  primarily  due to increases in premiums  written in prior  periods  being earned in the current  period
offset by $1.7 million of catastrophe reinstatement coverage premiums stemming from the April hail storms.

Although we expect our net written  premium to continue to decrease in 2003 on a net basis, we have  implemented  rate increases
to address  emerging  loss trends and to protect our net written  premium  relative to expenses,  or  underwriting  margin.  During the
first six months of 2003, we implemented 5 rate  increases in our standard  automobile  business line in the states of North  Carolina,
Ohio, West Virginia and Tennessee,  which  represented an average premium increase of  approximately  6.8%. We also implemented 11 rate
increases in our standard residential property line in the states of West Virginia, Ohio,  Pennsylvania,  Tennessee and South Carolina,
which represented an average increase of approximately 11.6%.

Loss and loss  adjustment  expenses (LAE) for standard  property  casualty lines for the period ended June 30, 2003 increased by
$5.7 million , or 9.6%,  to $65.0  million from $59.3  million in the prior year.  The  increase in loss and loss  adjustment  expenses
incurred was primarily  attributable  to a $13.8 million  increase in  catastrophe  losses in the current  quarter  offset by favorable
non-catastrophe  underwriting  results.  As a result,  the loss ratio for standard  property-casualty  segment was 79.0%  compared with
73.8% at June 30, 2002.

For the quarter ended June 30, 2003, policy acquisition  expenses increased by $1.4 million, or 8.5% to $17.8 million from $16.4
million for the same period of the prior year.  Policy  acquisition  costs as a percentage of total revenues for the quarter ended June
30,  2003 was 21.6% as compared to 20.3% for the same period in the prior year.  This  increase is  attributable  to a higher  level of
ceded premiums for reinsurance on which we do not receive a ceding commission.

Operating  expenses  increased  $1.6 million,  or 16.5%,  to $11.3 million during the three months ended June 30, 2003 from $9.7
million for the same period in the prior year.  This  increase is  attributable  to  increased  operating  expenses  stemming  from our
premium growth in 2002.  This increase has stabilized over the previous quarters.

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Non-standard agency segment

Our non-standard  agency segment does not retain any underwriting  risk.  Rather,  the primary focus of our agency segment is the
distribution of non-standard  auto insurance  products for various  insurance  carriers in exchange for commissions and fees. Since our
entry into the  non-standard  auto business in late 2000,  revenue for our agency  segment has increased  significantly.  In the second
quarter of 2003, our non-standard  agency segment generated  approximately $33.9 million of commission and fees-based revenue, or 18.8%
of aggregate revenue, before eliminations.

For the quarter ended June 30, 2003, fees and commissions in our agency segment  increased by $7.8 million due to increased sales
of non-standard  products.  Our agency segment pre-tax income  increased $0.4 million,  or 13.3%, to $3.4 million for the  three-months
ended June 30, 2003 compared to $3.0 million for 2002.

Non-standard underwriting segment

Our non-standard  underwriting segment can be separated into two lines of business: (1) underwriting  non-standard auto insurance
products sold by our affiliated agency operations and (2) underwriting  non-standard auto insurance sold by unaffiliated  agencies.  In
each of these  business  lines,  we utilize quota share  reinsurance  to minimize our exposure to loss.  Under a quota share  contract,
reinsurers share losses and certain allocated expenses in the same percentage as they share in premiums.

Since entering the  non-standard  auto business in late 2000, our revenue has increased  significantly.  In the second quarter of
2003, our non-standard  underwriting  segment generated  approximately  $41.8 million of revenue,  representing  approximately 29.5% of
consolidated revenue.

For the quarter ended June 30, 2003, net premiums  written for  non-standard  lines increased by $2.6 million,  or 6.0%, to $46.0
million from $43.4 million in 2002. For the same period,  net premiums  earned for  non-standard  lines  increased by $1.2 million,  or
3.0%, to $41.8 million from $40.6  million.  The increase in net premiums  written and net premiums  earned was primarily  attributable
to new business produced by our affiliated agency operations, which acquired several agencies in late 2001 and early 2002.

Of our total  non-standard  net written  premiums of $46.0 million during the second quarter of 2003, the net premiums written on
policies produced by our affiliated  agencies were  approximately  $38.9 million.  The largest component of our net premiums written on
policies sold by affiliated  agencies was  approximately  $16.9 million net premium written through  InsureOne,  our affiliated  agency
operation  based in Chicago,  Illinois.  Until December 1, 2002, we bore 100% of the  underwriting  risk on these  policies.  Effective
December  1, 2002,  we  entered  into a contract  to cede 40% of the  premiums  and losses on the  InsureOne  business  to third  party
reinsurers  pursuant to a quota share  reinsurance  contract.  Although the volume of policies sold by affiliated  agencies  other than
InsureOne  and  unaffiliated  agencies  have  continued to increase  during the first half of 2003, we expect the rate of growth of our
total  non-standard  underwriting  net written  premiums will decrease in second half of 2003 as a result of the InsureOne  quota share
reinsurance contract.

Of our total net non-standard  written premiums of $46.0 million during the second quarter of 2003, net written premiums produced
by unaffiliated  agencies was  approximately  $7.1 million,  with  approximately  $20.9 million of gross written premium ceded to third
party  reinsurers.  For the quarter ended June 30, 2003, we also collected  "issuing  carrier" or "fronting" fees of approximately  $.8
million,  down from $1.6 million in 2002. The decrease in fronting fees was primarily  attributable  to a decrease in the fronting fees
earned in relation to a program in  California  to $.6 million in the second  quarter of 2003,  compared  with $1.2 million in the same
period in 2002.

Although we expect our net  written  premium  will  decrease in the latter half of 2003 as compared to the prior year levels as a
result of the quota share  reinsurance  contract  placed on the Insure One  business,  we have  implemented  rate  increases to address
emerging loss trends and to protect our  underwriting  margin.  During the first six months of 2003, we implemented 7 rate increases in
our non-standard  underwriting segment in the states of Florida,  Illinois,  Indiana,  Missouri,  New Mexico and South Carolina,  which
represented an average premium increase of approximately 2.2%.

Loss and loss adjustment  expenses for the non-standard  underwriting  segment increased by $4.4 million, or 18.2%, in the second
quarter of 2003, to $28.6  million from $24.2 million in 2002.  The loss ratio for our  non-standard  underwriting  segment at June 30,
2003 was 60.4%,  compared  with 55.4% at June 30,  2002.  The  increase in the loss and loss  adjustment  expense  ratio was  primarily
attributable to a maturity of the book of business.

For the quarter  ended June 30, 2003 policy  acquisition  expenses  decreased $62 thousand to $12.1 million from $12.2 million in
2002.  Policy  acquisition  expenses as a percentage of earned  premiums and policy fees  decreased to 25.5% for the quarter ended June
30, 2003 from 27.8% in 2002, primarily  attributable to higher contingent  commissions earned during the current quarter as compared to
prior year.

Life insurance segment

We provide a variety of life insurance products through American Founders Financial  Corporation,  a holding company for two life
insurance  companies  domiciled in Texas.  American Founders' business is driven primarily by the acquisitions of closed blocks of life
insurance  policies and, to a lesser extent,  by marketing and distributing  its fixed annuity  products.  Our life insurance  products
are sold through marketing firms,  financial  institutions and 1,000 independent  agents located  throughout 37 states and the District
of Columbia.  At June 30, 2003,  American Founders had  approximately  $1.8 billion (face value) of life and annuity products in force,
and approximately $737.1 million in invested assets.

In the second quarter,  our life insurance segment generated  approximately  $11.0 million in revenue,  or approximately  6.7% of
consolidated revenue.

Life insurance fees decreased to $.6 million from $1.1 million in the prior year as a result of increased reinsurance.  Investment
income decreased $2.2 million from the prior year due to increased reinsurance, higher volumes of paydowns on our mortgage-backed
securities, an overall decline in market interest rates during 2002 and a reduction in invested assets from $851.4 million as of June
30, 2002 to $737.1 as of June 30, 2003.  The weighted average yield on invested assets for 2003 (excluding realized and unrealized
gains/losses) was 4.9% compared with 6.1% for the prior year period.

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Corporate and other segment

For the period ended June 30, 2003, net investment income related to our property-casualty  underwriting  operations decreased by
$2.1 million to $2.8 million from $4.9 million in 2002. The decrease in investment  income was primarily  attributable  to a decline in
overall  market  interest  rates and a higher level of prepayments on our  mortgage-backed  securities,  partially  offset by increased
average  invested  assets.  The weighted  average yield on invested assets for the quarter ended June 30, 2003 (excluding  realized and
unrealized gains/losses) was 3.72% compared with 6.1% for the prior year period.

Our overall  interest  expense  includes  interest  payable on our 8.75% senior  debentures  due in 2025 and  borrowings  and our
commercial  credit  borrowings.  Interest  expense  decreased by $.9 million  compared with 2002,  primarily due to debt repurchased in
2002.

In 2003,  operating expenses decreased by $1.0 million from the prior year primarily due to decreased  compensation costs and the
termination of an operating lease.

Discontinued operations

In the fourth quarter of 2002, we made the decision to exit the health  insurance and  consulting  business  lines.  Accordingly,
our health insurance and consulting lines results for 2002 have been  reclassified in our financial  statements as part of discontinued
operations  and are  classified  as operations  held for sale.  For the quarter ended June 30, 2003, we recorded a pre-tax loss of $1.0
million for our health operations and our consulting business.

Previously, in 2000 and 1999, we exited the reinsurance assumed and commercial lines businesses,  respectively.  As a result, the
reporting  for these  business  lines is included in  discontinued  operations  in our  financial  statements.  At the time we made the
decision to exit each of these business  lines,  we estimated the reserves  required to fulfill our expected  future  obligations  with
respect to these discontinued  operations.  However,  we continue to monitor our recorded estimates with respect to ultimate settlement
on an ongoing basis.

Based upon available  information,  we believe the recorded  reserves for  discontinued  operations at June 30, 2003 is adequate.
However,  we will continue to monitor these  reserves and their related  claims  activity and  experience.  Further  adjustments to our
estimates could be necessary as we continue to run off the remaining outstanding claims.

For the quarter ended June 30, 2003, we recorded a pre-tax loss of $10.7 million for  reinsurance  assumed and  commercial  lines
businesses  primarily related to the recording,  during the second quarter of 2003, of a pre-tax valuation allowance of $9.4 million on
the  CIGNA  Property  and  Casualty  Insurance  Company  arbitration  reinsurance  assumed  receivables.  See  Note  B to  the  interim
consolidated financial statements.

The Company's 2002 results have been reclassified to reflect the losses from discontinued operations.

Income taxes

For the period ended June 30, 2003,  we recorded an income tax benefit of $2.0  million,  compared  with an income tax benefit of
$.3 million  recorded in the prior year.  Our  effective  tax rate of 35% in 2003 was  consistent  with our  effective  tax rate in the
prior year.

Comparison of Six Months Ended June 30, 2003 with Six Months Ended June 30, 2002

For the six month period ended June 30, 2003, we reported net loss available to common  shareholders  of $7.9 million,  or $0.23
loss per diluted share,  compared with net loss available to  shareholders of $9.5 million,  or $0.29 loss per diluted share,  reported
for the previous year.

The primary factors that impacted our financial results in the six month period of 2003 were as follows:

- Our combined ratio in the standard  property-casualty  segment was 109.6%.  The combined ratio of 109.6% was primarily  driven
              by $23.3 million of losses, loss adjustment expenses and additional  catastrophe coverage premiums resulting from various
              catastrophes  occurring  during the first half of 2003,  including $17.3 million related to a series of April hail storms
              in Texas and the Southeastern United States.
- Net investment income have been adversely  impacted by higher levels of prepayments on our  mortgage-backed  securities and an
              overall decline in market rates.  The weighted  average yield  (excluding  realized and unrealized  gains) decreased from
              4.70% for the six months ended June 30, 2002 to 3.32% for the six months ended June 30, 2003.
- Operating results from our non-standard agency segment continue to improve as we expand our agency operations.  Pre-tax
              income from our non-standard agency was $8.4 million for the six months ended June 30, 2003.
- During the quarter ended June 30, 2003,  the Company  recorded a pre-tax  valuation  allowance of $9.4 million  related to the
              CIGNA Property & Casualty Insurance Company arbitration reinsurance assumed receivable.

Standard property-casualty segment

In the six months  ended June 30,  2003,  the standard  property-casualty  segment  generated  approximately  $161.1  million in
revenue, or approximately 49.4% of consolidated revenue.

For the six months  ended June 30,  2003,  net  premiums  written in our  standard  property-casualty  lines  decreased by $36.7
million,   or  18.4%,  to  $163.1  million  from  $199.8  million  in  the  prior  year  period.   Net  premiums  earned  for  standard
property-casualty  lines  increased by $10.3 million in 2003, up 7.0%, to $155.8  million from $145.5  million in 2002. The decrease in
net premiums written is primarily  attributable to the Texas residential  property 50% quota share  reinsurance  treaty entered into in
December of 2002 as well as decreased  writings in the Midwest and  Mid-Atlantic  regions in connection  with our decision to terminate
agents and  withdraw  from  certain  states.  The  increase  in net  premiums  earned for the  standard  property-casualty  segment was
primarily due to increases in premiums written in prior periods being earned in the current period.

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Although we expect our net written  premium will decrease in 2003 on a net basis as a result of the Texas  residential  property
50% quota share, we have  implemented  rate increases to address  emerging loss trends and to protect our net written premium  relative
to expenses,  or underwriting  margin.  During the first six months of 2003, we implemented 5 rate increases in our standard automobile
business line in the states of North Carolina,  Ohio,  West Virginia and Tennessee,  which  represented an average premium  increase of
approximately  6.8%. We also  implemented 11 rate increases in our standard  residential  property line in the states of West Virginia,
Ohio, Pennsylvania, Tennessee and South Carolina, which represented an average increase of approximately 11.6%.

Loss and loss  adjustment  expenses for standard  property  casualty lines for the period ended June 30, 2003 increased by $12.3
million,  or 11.6%,  to $118.0  million  from $105.7  million in the prior year.  The  increase  in loss and loss  adjustment  expenses
incurred was primarily  attributable  to a $15.4 million  increase in  catastrophe  losses in the first half of 2003 as compared to the
first  half  of  2002  off-set  by  favorable  non-catastrophe  underwriting  results.  As  a  result,  the  loss  ratio  for  standard
property-casualty segment was 73.2% for the first half of 2003 compared with 71.3% for the first half of 2002.

For the quarter ended June 30, 2003,  policy  acquisition  expenses  increased by $4.9 million,  or 15.7%, to $36.4 million from
$31.5 million for the same period of the prior year.  Policy  acquisition  costs as a percentage  of total  revenues for the six months
ended June 30,  2003 was 22.6% as compared to 21.2% for the same period in the prior  year.  This  increase is  attributable  to higher
level of ceded premiums for reinsurance on which we do not receive a ceding commission.

Operating  expenses  increased  $3.7 million,  or 19.9%,  to $22.3 million  during the six months ended June 30, 2003 from $18.6
million for the same period in the prior year.  This  increase is  attributable  to  increased  operating  expenses  stemming  from our
premium growth.

Non-standard agency segment

In the first six months of 2003,  our  non-standard  agency  segment  generated  approximately  $72.9 million of  commission  and
fees-based revenue, or approximately 20.2% of aggregate revenue, before eliminations.

For the six months ended June 30, 2003,  fees and  commissions in our agency segment  increased by $14.1 million,  reflecting the
continued  growth in this segment since our entry in late 2000.  Our agency segment  continued to improve its financial  performance in
the first half of 2003,  achieving pre-tax income of approximately  $8.4 million compared with $5.8 million during the first six months
of 2002.

Non-standard underwriting segment

Since entering the  non-standard  auto business in late 2000, our revenue has increased  significantly.  For the six months ended
June 30, 2003, our non-standard  underwriting  segment generated  approximately  $92.8 million of revenue,  representing  approximately
28.4% of consolidated revenue.

For the six months ended June 30, 2003, net premiums written for non-standard lines increased by $4.3 million,  or 4.9%, to $93.0
million from $88.7  million in 2002.  For the same period,  net premiums  earned for  non-standard  lines  increased by $4.1 million to
$80.5  million from $76.4  million.  The increase in net premiums  written and net premiums  earned was primarily  attributable  to new
business  produced  by our  affiliated  agency  operations,  which  acquired  several  agencies  in late 2001 and early 2002 which have
continued to experience premium growth.

Of our total  non-standard  net written  premiums of $93.0  million  during the six months ended June 30, 2003,  the net premiums
written on policies  produced by our affiliated  agencies was  approximately  $77.1 million.  The largest component of our net premiums
written on policies sold by affiliated agencies was approximately  $39.2 million net premium written through InsureOne,  our affiliated
agency  operation  based in  Chicago,  Illinois.  Until  December 1, 2002,  we bore 100% of the  underwriting  risk on these  policies.
Effective  December 1, 2002,  we entered  into a contract to cede 40% of the  premiums  and losses on the  InsureOne  business to third
party reinsurers  pursuant to a quota share  reinsurance  contract.  Although the volume of policies sold by affiliated  agencies other
than InsureOne  have continued to increase  during the first half of 2003, we expect our total  non-standard  underwriting  net written
premiums will decrease in the second half of 2003 as a result of the InsureOne quota share reinsurance contract.

Of our total  non-standard  net written  premiums of $93.0 million  during the six month period ended June 30, 2003,  net written
premiums produced by unaffiliated  agencies was approximately $15.9 million,  with approximately $44.7 million of gross written premium
ceded to third party  reinsurers.  For the quarter  ended June 30, 2003, we also  collected  "issuing  carrier" or  "fronting"  fees of
approximately  $1.7 million,  down from $3.2 million in 2002.  The decrease in fronting fees was primarily  attributable  to a decrease
in the fronting fees earned in relation to a program in California to $1.2 million  during the first six months of 2003,  compared with
$2.3 million in the prior year.

Although we expect our net written  premium will decrease in the latter half of 2003 as compared to the prior year as a result of
the quota share  reinsurance  contract placed on the Insure One business,  we have  implemented rate increases to address emerging loss
trends  and to  protect  our  underwriting  margin.  During  the first six  months of 2003,  we  implemented  7 rate  increases  in our
non-standard  underwriting  segment in the states of  Florida,  Illinois,  Indiana,  Missouri,  New  Mexico and South  Carolina,  which
represented an average premium increase of approximately 2.2%.

Loss and loss  adjustment  expenses during the first half of 2003 for the  non-standard  underwriting  segment  increased by $7.3
million,  or 15.3%,  in 2003, to $55.1 million from $47.8 million in 2002. The increase in loss and loss adjustment  expenses  incurred
was primarily  attributable  to the increase in earned premium  produced by affiliated  agencies  acquired in our agency segment during
2002.  The loss ratio for our  non-standard  underwriting  segment at June 30, 2003 was 60.5%,  compared  with 59.3% at June 30,  2002.
The increase in the loss and loss adjustment  expense ratio was primarily  attributable to unfavorable  loss ratios on premium produced
by affiliated agencies acquired in our non-standard agency segment during 2002.

Consistent with the  corresponding  increase in earned premium,  policy  acquisition  expenses for the period ended June 30, 2003
increased by $1.9 million from the same period of the prior year.

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Life insurance segment

In the first six months of 2003, our life insurance segment generated  approximately  $22.2 million in revenue,  or approximately
6.8% of consolidated revenue.

Life insurance  policy fees  decreased to $1.1 million from $2.1 million in the prior year as a result of increased  reinsurance.
Investment  income  decreased  $3.8  million  from the prior year due to  increased  reinsurance,  higher  volumes of  paydowns  on our
mortgage-backed  securities,  a decline in market  interest rates during 2003 and a reduction in invested assets from $851.4 million as
of June 30, 2002 to $737.1  million as of June 30, 2003.  The weighted  average yield on invested  assets for the six months ended June
30, 2003 (excluding realized and unrealized gains and losses) was 5.1% compared with 6.0% for the prior year period.

Corporate and other segment

For the six month period ended June 30, 2003, net  investment  income related to our  property-casualty  underwriting  operations
decreased by $2.6 million to $6.7 million from $9.3 million in 2002. The decrease in investment  income was primarily  attributable  to
a decline in overall market interest rates and a higher level of prepayments on our  mortgage-backed  securities,  partially  offset by
increased  average  invested  assets.  The weighted  average yield on invested assets for the six months ended June 30, 2003 (excluding
realized and unrealized gains and losses) was 4.05% compared with 6.4% for the prior year period.

Our overall  interest  expense includes  interest  payable on our 8.75% senior  debentures due in 2025 and our commercial  credit
borrowings.  Interest expense decreased by $1.6 million compared with 2002, primarily due to debt repurchased in 2002.

In 2003,  operating expenses decreased by $2.4 million from the prior year primarily due to decreased  compensation costs and the
termination of an operating lease.

Discontinued operations

In the fourth quarter of 2002, we made the decision to exit the health  insurance and  consulting  business  lines.  Accordingly,
our health insurance and consulting lines results for 2002 have been  reclassified in our financial  statements as part of discontinued
operations  and are  classified  as  operations  held for sale.  For the period ended June 30, 2003, we recorded a pre-tax loss of $2.5
million for our health operations and $.6 million from our consulting business.

Previously, in 2000 and 1999, we exited the reinsurance assumed and commercial lines businesses,  respectively.  As a result, the
reporting  for these  business  lines is included in  discontinued  operations  in our  financial  statements.  At the time we made the
decision to exit each of these business  lines,  we estimated the reserves  required to fulfill our expected  future  obligations  with
respect to these discontinued  operations.  However,  we continue to monitor our recorded estimates with respect to ultimate settlement
on an ongoing basis.

Based upon available  information,  we believe the recorded  reserves for  discontinued  operations at June 30, 2003 is adequate.
However,  we will continue to monitor these  reserves and their related  claims  activity and  experience.  Further  adjustments to our
estimates could be necessary as we continue to run off the remaining outstanding claims.

For the six months  ended June 30,  2003,  we recorded a pre-tax loss of $10.4  million.  This loss is  primarily  related to the
recording,  during the second quarter of 2003, of a valuation  allowance of $9.4 million on the CIGNA  Property and Casualty  Insurance
Company reinsurance receivables.  See Note B to the interim consolidated financial statements.

Income taxes

For the period ended June 30, 2003 and 2002,  we recorded an income tax expense of $.8 million.  Our effective tax rate of 35% in
2003 was consistent with our effective tax rate in the prior year.

Liquidity and Capital Resources

Liquidity and Capital Resources - Holding Company

Vesta is a holding company whose principal asset is its investment in the capital stock of the companies  constituting  the Vesta
Insurance  Group.  The  principal  uses of funds at the holding  company  level are to pay (1)  operating  expenses;  (2) principal and
interest on outstanding  indebtedness and deferrable capital securities;  and (3) dividends to stockholders as declared by the Board of
Directors.

Vesta's  principal  source of liquidity and capital  resources to meet its holding  company  obligations is dividends paid by our
subsidiaries.  Many of our  subsidiaries  are  insurance  companies  that  are  individually  supervised  by  various  state  insurance
regulators,  and other unregulated  companies that we own, such as Instant  Insurance  Holdings,  Inc., are owned indirectly  through a
regulated  insurance  company.  Given our  organizational  structure,  we rely on two  subsidiaries  to pay  dividends  to our  holding
company or  otherwise  fund the  obligations  of our  holding  company on its behalf - Vesta Fire  Insurance  Corporation,  an Illinois
domiciled insurer, and J. Gordon Gaines, Inc., a Delaware business corporation.

Dividends from Vesta Fire

Transactions  between  Vesta and its  insurance  subsidiaries,  including  the  payment  of  dividends,  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 unassigned  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.  The Illinois  Insurance  Department  has  indicated  that these  dividend  limitations  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 2002, and is
expected to continue to report negative  unassigned funds for the foreseeable  future.  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.  There can be no
assurance that Vesta Fire will be able to obtain the requisite regulatory approval for the payment of dividends.

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Dividends from J. Gordon Gaines

J. Gordon Gaines, Inc. provides  administrative services to all of our property - casualty insurance subsidiaries in exchange for
fees  pursuant  to an  administrative  services  agreement  and,  with  respect  to our  Texas  Select  Lloyds  Insurance  Company,  an
attorney-in-fact  agreement.  These management  agreements are subject to certain  regulatory  standards which generally  require their
terms and fees to be fair and  reasonable.  The Illinois or Texas  Departments  of Insurance may review these  agreements  from time to
time to insure the  reasonableness  of their 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  these  management  agreements  are not modified in a material  respect,  we
believe that J. Gordon Gaines,  Inc. will be able to pay dividends to our holding  company,  or otherwise  fund the  obligations of our
holding  company on its behalf,  sufficient to fund our  anticipated  needs  (including  scheduled  debt service) for at least the next
twelve months.

Credit Facilities

Effective  February 1, 2003, we entered into a new revolving  credit  arrangement  with First  Commercial to replace the previous
facility.  The new  facility  is a $30  million  line  secured  by a pledge of  358,375  shares of common  stock of  Instant  Insurance
Holdings,  Inc.  (Instant),  representing  approximately 70% of Instant's issued and outstanding shares of capital stock as of December
31, 2002.  The new  facility  bears  interest at First  Commercial's  prime rate and will mature no earlier  than June 30, 2005.  As of
June 30, 2003, we had drawn $29.8 million available under this Agreement.

This new credit agreement  contains  covenants which require us to maintain (i) consolidated GAAP net income (excluding  realized
gains and losses) of at least $15 million for any calendar  year,  beginning in 2003,  (ii)  Consolidated  debt to capital  ratio of no
more than 39%, (iii) an A.M. Best rating of "B" or better,  (iv) consolidated GAAP net worth of at least $208 million,  (v) an interest
coverage  ratio of not less than 1.5 to 1 and (vi)  risk-based  capital of not less than 150% of the NAIC's  authorized  control level.
As of June 30, 2003, we were in compliance  with all quarterly  covenants.  However,  based on our results through the first six months
of 2003,  we believe  that  uncertainty  exists  regarding  our  ability to meet  certain of the First  Commercial  credit  arrangement
covenants at December 31, 2003.  Furthermore,  current  dividend levels from Vesta Fire and J. Gordon Gaines would not be sufficient to
repay the anticipated  outstanding  balance of this credit  facility at the year-end  covenant  measurement  date without seeking prior
approval.  Although management believes the Company would be able to secure waivers on any covenant  violations,  the failure to obtain
such waivers of the  potential  covenant  violations or refinance  the credit  facility on similar terms could have a material  adverse
impact on our financial condition.

Liquidity and Capital Resources - Subsidiary Operations

The principal  sources of funds for our insurance  subsidiaries  are  premiums,  investment  income and proceeds from the sale or
maturity  of  invested  assets.  The  principal  uses of funds in our  subsidiary  operations  are the  payment  of  claims,  operating
expenses,  commissions and the purchase of investments.  Our  subsidiaries  also borrow funds from the Federal Home Loan Bank from time
to time and invest the proceeds at higher interest rates.

Contingent Obligations

Our subsidiary  operations are also involved in ongoing  reinsurance  recoverable  disputes that could result in an obligation to
repay certain amounts to reinsurers from whom we have collected  funds.  In connection  with these  disputes,  our principal  operating
subsidiary,  Vesta Fire, has obtained  letters of credit for the benefit of reinsurers  for which it is  contingently  liable.  At June
30, 2003, Vesta Fire was  contingently  liable for $33.7 million under the terms of letters of credit obtained in connection with these
reinsurance disputes.

Additionally,  we regularly  obtain letters of credit or otherwise  pledge  securities for the benefit of ceding  insurers in our
nonstandard  underwriting  segment pursuant to reinsurance  contracts.  As of June 30, 2003, we had pledged  approximately $7.9 million
in securities pursuant to these reinsurance contracts.

Inter-company obligations

In addition to the  contractual  obligations  of our holding  company to third  parties,  our holding  company  owes  contractual
obligations  to certain of our  subsidiaries  that are  eliminated in the  consolidation  of our financial  statements.  As of June 30,
2003,  our insurance  company  subsidiaries  held $13.2 million face amount of our 8.75% Senior  Debentures  due 2025 and $44.1 million
face  amount of our 12.5%  Senior  Notes due in December  of2005.  Our  holding  company  paid these  subsidiaries  approximately  $3.3
million in interest payments in 2003 which was eliminated in consolidation.

Cash Flows

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 are  included  in cash flow from  operations,  while the cash impact from our
investing  activities  is included in cash flow from  investing  activities.  In periods  such as 2001 and 2000,  when we were  exiting
certain lines of business such as commercial  lines and  reinsurance  assumed lines, we funded the payout of commercial and reinsurance
assumed claims through the liquidation of invested  assets,  consistent with the historical  insurance  business model.  However,  this
generates cash outflows from operations that can be misleading.

On a  consolidated  basis,  net cash provided by (used in)  operations  for the periods ended June 30, 2003 and 2002, was $(25.3)
million and $63.0 million,  respectively.  Cash flow from operations was negative for the current period primarily due to cash outflows
related to the payment of claims related to catastrophe  losses and the funding of the unearned  premium reserve on our 50% Texas quota
share reinsurance  contract.  Net cash used in investing  activities was $46.3 million and $41.5 million for the periods ended June 30,
2003 and 2002,  respectively  as we  invested  cash  generated  by our  operations  in prior  periods.  Net cash  used in
financing  activities  was $13.1  million and $8.6  million for the period  ending  June 30, 2003 and 2002,  respectively.  In 2003,
repayments of outstanding Federal Home Loan Bank borrowings drove our financing activities.

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New Accounting Pronouncements

Effective July 1, 2002,  Vesta adopted  Statement of Financial  Accounting  Standards No. 145 (SFAS No. 145)  "Rescission of FASB
Statement No. 4, 44 and 64,  Amendment of FASB  Statement No. 13, and  Technical  Corrections",  which had been issued by the Financial
Accounting  Standards  Board  "FASB" in April  2002.  SFAS No. 145  rescinds  SFAS No. 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. In
connection with our adoption of SFAS No. 145, we have  reclassified  gains on the  extinguishment  of debt from  extraordinary  gain on
debt extinguishment to other expense.  These  reclassifications  decreased total expenses by $1.4 million for the six months ended June
30, 2002.

In November 2002, the FASB issued FASB  Interpretation No. ("FIN") 45, "Guarantor's  Accounting and Disclosures  Requirements for
Guarantees,  Including  Indirect  Guarantees of Indebtedness of Others." FIN 45 clarifies the  requirements of SFAS No. 5,  "Accounting
for  Contingencies,"  related to a guarantors  accounting  for, and  disclosures  of, the issuance of certain types of guarantees.  The
disclosure  requirements are effective for financial  statements of interim and annual periods ending after December 15,  2002 and have
been included in the Notes to the consolidated  financial  statements included herein. The impact on the Company's financial statements
from the  application of the recognition  and  measurement  provisions of FIN No. 45 is dependent on the level of guarantees  issued or
modified in 2003 and thereafter.  No guaranties were issued or modified during the six months ended June 30, 2003,  which were impacted
by the provisions of FIN No. 45.

In January 2003,  the FASB issued FIN 46,  "Consolidation  of Variable  Interest  Entities"  which  clarifies the  application of
Accounting  Research  Bulletin  No.  51,   "Consolidated   Financial   Statements."  This  Interpretation   provides  guidance  on  the
identification and consolidation of variable interest entities  ("VIEs"),  whereby control is achieved through means other than through
voting rights.  The effective date of FIN 46 is for the first fiscal quarter  beginning after June 15,  2003.  Management  believes the
adoption of FIN 46 will not have a material impact on the Company's financial position, results of operations or cash flows.

In May 2002, the Derivatives  Implementation Group of the FASB exposed for comment issue No. B36, "Bifurcation of Embedded Credit
Derivatives"  ("DIG B36").  DIG B36 would require the bifurcation of potential  embedded  derivatives  within modified  coinsurance and
funds withheld  coinsurance  arrangements in which the terms require the future payment of a principal  amount plus a return based on a
specified  proportion of the ceding  company's  return on either its general account assets or a specified  block of those assets.  The
proposed  effective date of the  implementation  guidance in DIG B36 is for the first fiscal quarter  beginning after June 15, 2003 and
would be applied on a prospective basis.  The Company is currently evaluating the impact of this pronouncement.

In May 2003, the FASB issued SFAS No. 150,  "Accounting for Certain Financial  Instruments with Characteristics of both Liabilities and
Equity" ("SFAS 150").  SFAS 150 establishes how an issuer  classifies and measures  certain free standing  financial  instruments  with
characteristics  of both  liabilities  and equity and  requires  that such  instruments  be  classified  as  liabilities.  SFAS 150 was
effective for financial  instruments  entered into or modified  after May 31, 2003,  and otherwise is effective at the beginning of the
first interim period  beginning  after June 15, 2003 for those  existing  financial  instruments  subject to the provisions of SFAS No.
150.  The Company has not entered  into any  financial  instruments  within the scope of SFAS 150 since May 31,  2003.  Management  has
determined that the Company's  Deferrable Capital  Securities are subject to the provisions of SFAS No. 150. The transition  provisions
of SFAS No. 150 require that upon  adoption of SFAS No. 150 on July 1, 2003,  the  Company's  Deferrable  Capital  Securities  would be
reclassified  as a liability  from its current  mezzanine  debt  classification.  The dividends  paid to the holders of the  Deferrable
Capital Securities will be classified as interest expense on a prospective basis.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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, 2002.

Item 4.  Controls and Procedures

Within 90 days prior to the date of this report,  we carried out an evaluation,  under the supervision and with the participation
of our  principal  executive  officer  and  principal  financial  officer,  of the  effectiveness  of the design and  operation  of our
disclosure  controls and  procedures.  Based on this  evaluation,  including  the matters  noted in the next  paragraph,  our principal
executive  officer and principal  financial  officer  concluded  that our  disclosure  controls and  procedures are effective in timely
alerting them to material information  concerning Vesta and its consolidated  subsidiaries  required to be included in our periodic SEC
reports.

Management,  in consultation with the Company's independent  accountants,  identified  deficiencies in our consolidation  process,
which  constitute a "Reportable  Condition"  under standards  established by the American  Institute of Certified  Public  Accountants.
Management,  also in  consultation  with the  Company's  independent  accountants,  believes  that this matter has not had any material
impact  on our  consolidated  financial  statements.  At the end of the  second  quarter,  management  implemented  additional  control
procedures to address the identified  deficiencies in the consolidation  process.  We believe the effect of the implementation of these
additional control procedures will adequately address the previously identified deficiencies in design and operation.

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PART IIItem 1. Legal Proceedings

Securities Litigation

In 2001,  Vesta  settled a securities  class action that had been pending since 1998. In  connection  with that  settlement,  the
issuer of our primary  directors'  and officers'  insurance  policy,  which was intended to cover the initial $25 million of settlement
costs and related  expenses,  denied  coverage and refused to fund its share of the settlement  costs.  We sued that insurer in Alabama
state court  alleging  that its action was taken in bad faith.  In February  2003,  we settled that claim and  collected $16 million in
cash, which was reflected in the 2002 consolidated financial statements.

Health insurance related lawsuits

Vesta and two  former  officers  of Vesta are  defendants  in a lawsuit  styled  James H.  Cashion,  Jr.  d/b/a  American  Health
Underwriters v. Vesta Insurance Group,  Inc., et al, Plaintiff,  a former general agent of our subsidiary States General Life Insurance
Company,  which we purchased in 2001,  alleges that the defendants  engaged in an actionable civil  conspiracy to tortiously  interfere
with his agency  contracts.  The civil conspiracy claim is premised,  in part, on certain payments made to these two former officers of
Vesta by another  agent who replaced Mr.  Cashion.  The  plaintiff is seeking  actual and  punitive  damages.  Vesta denies  tortiously
interfering with plaintiff's agency contract,  believes the claims asserted against it have no merit, and is vigorously  defending this
lawsuit.  In the opinion of management,  resolution of this lawsuit is not expected to have a material  adverse effect on our financial
position.

During the second quarter of 2003, we entered into a settlement and release agreement with Jimmy Walker, a former agent of
States General.  Pursuant to this settlement and release agreement, we voluntarily dismissed the arbitration and litigation that we
had earlier commenced against Mr. Walker and released him from his obligation to repay certain indebtedness owed to under a series of
promissory notes representing amounts Mr. Walker borrowed from us in connection with his agency activities.  Pursuant to this
settlement agreement, Mr. Walker unconditionally assigned to us certain commissions to which he would otherwise be entitled under his
former agent's agreement with States General and released us from any claims that he could assert against us arising from such
agent's agreement.  At June 30, 2003, the net realizable amount of the assigned commissions to the Company was $1.3 million and is recorded
as a component of other invested assets on the accompanying interim consolidated balance sheet.

Life insurance related lawsuits

Our subsidiary,  American Founders, is a defendant in a lawsuit brought by a judgment creditor of IFS Holdings, Inc. - the former
holder of American  Founders'  series A and C preferred  stock - alleging  that  American  Founders  redeemed its Series A and Series C
preferred stock from IFS Holdings,  Inc. for less than "reasonably equivalent value," and, therefore,  engaged in a voidable fraudulent
transfer.  American  Founders  believes (i) that the redemption  transaction  was for reasonably  equivalent  value;  and (ii) that the
allegations  brought  against it in this  lawsuit are  without  merit.  We have  vigorously  defended  this  action.  In the opinion of
management,  resolution  of the  lawsuit  is not  expected  to have a  material  adverse  effect on our  financial  position.  However,
depending upon the amount and timing,  an unfavorable  resolution of this matter could  materially  affect  American  Founders'  future
operations or cash flows in a particular period.

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 funding 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.

Reinsurance Arbitration/Litigation

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 $33.4
million at June 30, 2003.  Additionally,  we have previously  collected  approximately $48.5 million from the drawdown of collateral on
hand.  Such amount, net of related expenses, has been reflected in the 2002 financial statements.

NRMA Insurance Ltd. ("NRMA"), one of the participants in the 20 percent  whole account quota share treaty, filed a lawsuit in the
United States District Court for the Northern District of Alabama contesting our billings. NRMA sought rescission of the treaty and a
temporary restraining order preventing us from drawing down approximately $34.5 million of collateral.  We filed a demand for
arbitration as provided for in the treaty and also filed a motion to compel arbitration which was granted in the United States
District Court action.  Vesta reached an agreement with NRMA to collect the $34.5 million of collateral in exchange for posting a $25
million letter of credit in favor of NRMA to fund any amounts NRMA may recover as a result of the arbitration.  We 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 with Alfa was scheduled for May 2003.  However, on April 21, 2003, Alfa filed a lawsuit against Vesta Fire
in state court in Montgomery, Alabama seeking a declaration from the Court on certain procedural and organizational matters and
requesting that the Court stay the arbitration proceedings during the pendency of the litigation in state court in Alabama.  On April
24, 2003, the Court issued a temporary restraining order staying the proceedings in the ongoing arbitration in order to maintain the
status quo until the merits of Alfa's petition can be heard and determined, which is currently scheduled for September 24, 2003.  The
lawsuit filed by Alfa will delay indefinitely the Alfa arbitration proceedings but is not currently expected to delay proceedings in
the other two arbitrations.   On June 19, 2002, the panel in the NRMA arbitration 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.  On
September 6, 2002, the panel notified the parties that it would make such determination on this specific issue on the papers and
filings submitted by the parties without the necessity of a live hearing.  On November 6, 2002, the Company was notified by the panel
that it ruled that the treaty does not apply to loss occurrences prior to July 1, 1997.  As a result, Vesta recorded a $23.6 million
pre-tax charge as a revision of our estimated reinsurance recoverable in the third quarter of 2002.   This ruling does not set a
binding precedent regarding Vesta's other arbitrations and, accordingly, we have not recorded any change in our estimate of our
recoverable from the other treaty participants as a result of this ruling.  In February 2003, Vesta filed a petition to vacate the
NRMA panel ruling in the U.S. District Court for

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the Northern  District of Alabama.  On April 8, 2003, the Court ruled that since the arbitration  proceedings have not been fully
exhausted,  it was dismissing  Vesta's  petition without  prejudice of the parties to seek the Court's review of any final  arbitration
award.  The  hearing  in the  NRMA  arbitration  is  currently  scheduled  to begin on  October  20,  2003,  and is  estimated  to take
approximately  two weeks.  On December 16, 2002,  Dorinco filed a motion seeking an order that the treaty does not cover  developmental
losses.  On May 1, 2003, the panel in the Dorinco  arbitration  ruled that Dorinco is not  responsible  for losses on any policy or any
other  insurance or  reinsurance  contract  terminated  prior to July 1, 1997 and that the  arbitration  will  continue with respect to
losses  whenever  occurring,  on policies or any other  insurance or reinsurance  contract in force at July 1, 1997. The hearing in the
Dorinco  arbitration is currently  scheduled to begin on December 1, 2003, and is estimated to take  approximately two weeks.  Based on
a current  estimate of the impact of this ruling and the ruling  previously  received  from the NRMA panel,  we  currently  believe our
estimated  recoverable  is  appropriate.  However,  we are  continuing to evaluate the effects of complying  with these rulings and our
estimate may change in the future as a result of this evaluation.

While management continues to believe its interpretation of the treaty's terms and computations based thereon are correct,  these
matters are being  contested in these  arbitration  proceedings  and their  ultimate  outcome  cannot be  determined  at this time.  If
rescission on all three treaties was awarded by three separate  arbitration  panels,  we would incur a pre-tax charge of  approximately
$57.0 million.

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.

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 claimed were due under the terms of the treaty.  At that time,
the treaty was  terminated on a cut-off  basis.  In the pending  arbitration  Vesta is seeking,  among other things,  recoupment of all
believed  improper  excessive  expense  allocations and charges from CIGNA. The arbitration was bifurcated into two phases with Phase I
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.  Phase II, which is ongoing,  relates to any  remaining  issues  between the parties,  including  those that exist
with regard to an audit of expenses  ceded to the  treaty.  The Phase I 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;  (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.  Vesta
is presently  conducting  its expense audit as permitted by the panel.  During the course of preparing for and  conducting  the expense
audit, the Company determined that it should revise its estimated  reinsurance  receivable and record during the second quarter of 2003
a pre-tax  valuation  allowance  of $9.4  million and recorded the  valuation  allowance  as a component  of  discontinued  operations.
Management  intends to continue to proceed with the presentation of our case to the arbitration  panel and believes that the resolution
of this arbitration will not have any adverse financial impact on the Company.  The Phase II hearing has not yet been scheduled.

Muhl vs. Vesta is a case pending in the supreme Court of the State of New York, County of New York,  brought by the Liquidator of
Midland Insurance Company  ("Midland"),  claiming  recoveries under two alleged  retrocession  agreements (Pool I and Pool III) between
Midland and Interstate Fire Insurance  Company,  Vesta's  predecessor in interest.  The Liquidator's  claims against Vesta under Pool I
and Pool III have been severed.

Third party auditors hired by Vesta have  identified  coverage  issues that cast doubt on the validity of a number of claims.  In
addition,  there is no actual  retrocessional  agreement that evidences the terms and conditions of Pool III which involves 71% or more
of the incurred  losses at issue.  Although  there are other  tangential  documents that the Liquidator may attempt to rely on to prove
liability  under Pool III, we believe  that the  Liquidator  will not be able to  establish  liability  for any portion of the Pool III
claims.  We also believe that a number of the losses allegedly  incurred in connection with Pool I may be avoided on specific  coverage
grounds.  We are defending this matter vigorously and are reasonably  optimistic  regarding the ultimate  outcome,  although an adverse
ruling in this case could have a material effect on our financial condition.

Nichols vs. Vesta Fire  Insurance  Corporation is a lawsuit  brought by the  Liquidator of Delta America Re Insurance  Company in
Kentucky state court to recover  losses alleged under  reinsurance  contracts  entered into in the 1970's.  Vesta removed the action to
federal  court and  successfully  moved to compel  arbitration.  Each  party has  selected  a party  arbitrator  but as yet there is no
neutral umpire.  There has been no discovery as yet and no organizational meeting of the panel.

Vesta vs. New Cap Reis an arbitration  against an Australian  reinsurer,  to collect  reinsurance  recoverables  pursuant to two
accident  year excess of loss ratio  reinsurance  agreements.  In the  arbitration,  New Cap Re  challenged  Vesta's  earlier draw on a
Letter  of  Credit  for $7.5  million  which was held in  connection  with one of the two  contracts.  Shortly  after  the  arbitration
commenced,  New Cap Re became the subject of insolvency  proceedings  in Australia and an ancillary  proceeding in the U.S.  Bankruptcy
Court in New York.  The  Bankruptcy  Court  stayed all pending  litigation  and  arbitration  against New Cap Re, and we appealed  that
ruling to the  Southern  District of New York,  and  ultimately  to the U.S.  Court of Appeals for the Second  Circuit  which  recently
affirmed the Bankruptcy  Court's stay of the  arbitration  against New Cap Re. Hence,  our efforts to recover losses as well as New Cap
Re's efforts to challenge the earlier draw on the $7.5 million Letter of Credit by us are stayed.

On September 5, 2002,  New Cap Re served us with an  Application  pursuant to Section 588FF of the  Australian  Corporations  Act
seeking  an order  directing  us to pay New Cap Re and its  liquidator  $1.0  million  that  Vesta  allegedly  received  as an  "unfair
preference"  and/or  arising out of an  "uncommercial  transaction,"  as those terms are  defined by the  Corporations  Act. We filed a
Notice of Appearance on October 31, 2002. While management  intends to vigorously defend this matter,  given the preliminary  nature of
these proceedings, it is too early to evaluate the likelihood of success.

Other

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

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Item 2. Changes in Securities

None.

Item 3. Defaults Upon Senior Securities

None.

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

At the annual  meeting of  stockholders  held May 27, 2003,  the following  matters were  submitted to a vote of  stockholders
(shares eligible to vote: 35,678,060).

1. Election of Directors

| | Messrs. | Walter
M. Beale, Jr. and Alan S. Farrior were elected to additional three year terms on the
Board of Directors.
| | ------- | ---------------------------------------------------------------------------------------------------------------

|        | For | Withheld
|------- | --- | --------
|Beale   |     |         
|Farrior |     |         

1. Ratification of Auditors

| | PricewaterhouseCoopers | LLP
was appointed as the principal  independent  auditor of the Company and its  subsidiaries
for the year ending December 31, 2003.
| | ---------------------- | ------------------------------------------------------------------------------------------------------------------------------------

|                           | For | Against | Abstain
|-------------------------- | --- | ------- | -------
|PricewaterhouseCoopers LLP |     |         |        

Item 5. Other information

None.

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Item 6. Exhibits and Reports on Form 8-K

a)           EXHIBITS

10.25         Employment agreement between the registrant and Hopson B. Nance dated as of February 24, 2003.
31.1           Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2           Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32              Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

b)           Reports on Form 8-K.

A current report was filed on Form 8-K on April 28, 2003 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, 2003

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