<PAGE>
 
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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                   FORM 10-Q
 
(MARK ONE)
  [X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
 
                                      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 IDENTIFICATION NO.)
    INCORPORATION OR ORGANIZATION)
 
   3760 RIVER RUN DRIVE BIRMINGHAM,                     35243
                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 June 30, 1998
                                  18,435,705
 
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<PAGE>
 
                          VESTA INSURANCE GROUP, INC.
 
 
                                     INDEX
 
<TABLE>
 <C>     <S>                                                                 <C>
 PART I  FINANCIAL INFORMATION
 Item 1. Financial Statements:
         Consolidated Balance Sheets at June 30, 1998 and
         December 31, 1997................................................     1
         Consolidated Statements of Operations and Comprehensive Income
         for the Three Months and Six Months Ended June 30, 1998 and 1997.     2
         Consolidated Statements of Cash Flows for the Six
         Months Ended June 30, 1998 and 1997..............................     3
         Notes to Consolidated Financial Statements.......................     4
 Item 2. Management's Discussion and Analysis of Financial
         Condition and Results of Operations..............................     6
 PART II OTHER INFORMATION
 Item 1. Legal Proceedings................................................    11
 Item 2. Changes in Securities............................................    11
 Item 3. Defaults Upon Senior Securities..................................    11
 Item 4. Submission of Matters to a Vote of Security Holders..............    11
 Item 5. Other Information................................................    12
 Item 6. Exhibits and Reports on Form 8-K.................................    12
</TABLE>
<PAGE>
 
                                     PART I
 
                          ITEM 1. FINANCIAL STATEMENTS
 
                          VESTA INSURANCE GROUP, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                  (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                        JUNE 30,    DECEMBER 31,
                                                          1998          1997
                                                       -----------  ------------
                                                       (UNAUDITED)   (RESTATED)
<S>                                                    <C>          <C>
Assets:
 Investments:
  Fixed maturities available for sale--at fair value
   (cost: 1998--$468,959;
   1997--$488,923).................................... $  476,532    $  495,566
  Equity securities--at fair value: (cost: 1998--
   $13,913; 1997--$10,921)............................     24,245        20,424
  Short-term investments..............................    159,731       119,025
                                                       ----------    ----------
   Total investments..................................    660,508       635,015
 Cash.................................................      5,570        21,801
 Accrued investment income ...........................      7,812        15,799
 Premiums in course of collection.....................    257,831       252,193
 Reinsurance balances receivable......................    337,597       368,949
 Reinsurance recoverable on paid losses...............    139,991        83,225
 Deferred policy acquisition costs....................    104,726       102,124
 Property and equipment...............................     17,968        18,093
 Income tax receivable................................        --          5,609
 Other assets.........................................     40,320        39,358
 Goodwill.............................................     92,474        96,141
                                                       ----------    ----------
   Total assets....................................... $1,664,797    $1,638,307
                                                       ==========    ==========
Liabilities:
 Reserves for:
  Losses and loss adjustment expenses................. $  599,846    $  596,797
  Unearned premiums...................................    378,081       365,052
                                                       ----------    ----------
                                                          977,927       961,849
 Accrued income taxes.................................      5,678           --
 Reinsurance balances payable.........................     85,210        56,897
 Other liabilities....................................     34,360        67,610
 Short term debt......................................     70,000        45,000
 Long term debt.......................................     98,349        98,602
                                                       ----------    ----------
   Total liabilities..................................  1,271,524     1,229,958
Commitments and contingencies
 Deferrable Capital Securities........................    100,000       100,000
Stockholders' equity
 Preferred stock, 5,000,000 shares authorized, none
  issued..............................................        --            --
 Common stock, $.01 par value, 32,000,000 shares
  authorized,
  issued: 1998--18,964,322 shares; 1997--18,970,695...        190           190
 Additional paid-in capital...........................    162,076       162,550
 Unrealized investment gains, net of applicable taxes.      9,920         9,829
 Retained earnings....................................    148,622       165,087
 Receivable from issuance of restricted stock.........     (2,193)       (3,891)
 Treasury stock.......................................    (25,342)      (25,416)
                                                       ----------    ----------
   Total stockholders' equity.........................    293,273       308,349
                                                       ----------    ----------
   Total liabilities and stockholders' equity......... $1,664,797    $1,638,307
                                                       ==========    ==========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       1
<PAGE>
 
                          VESTA INSURANCE GROUP, INC.
 
         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                  (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
 
STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                         THREE MONTHS       SIX MONTHS ENDED
                                         ENDED JUNE 30           JUNE 30
                                       ------------------  --------------------
                                         1998      1997      1998       1997
                                       --------  --------  --------  ----------
                                                                     (RESTATED)
                                                    (UNAUDITED)
<S>                                    <C>       <C>       <C>       <C>
Revenues:
 Net premiums written................. $169,291  $137,186  $301,175   $235,858
 (Increase) decrease in unearned pre-
  miums...............................   (5,215)   (3,469)    2,193     (9,165)
                                       --------  --------  --------   --------
 Net premiums earned..................  164,076   133,717   303,368    226,693
 Net investment income................    8,800     7,178    18,100     13,325
 Other, including realized gains and
  losses..............................    1,843       (78)    3,093        236
                                       --------  --------  --------   --------
   Total revenues.....................  174,719   140,817   324,561    240,254
Expenses:
 Losses incurred......................   87,876    57,682   175,504    114,194
 Loss adjustment expenses incurred....   21,024     7,058    28,739     10,708
 Policy acquisition expenses..........   60,120    39,937    89,026     57,370
 Operating expenses...................   17,330     6,975    34,586     14,574
 Premium taxes and fees...............    3,560     1,021     6,695      3,267
 Interest on debt.....................    3,345     2,249     6,453      4,608
 Goodwill.............................    1,612       362     3,281        667
                                       --------  --------  --------   --------
   Total expenses.....................  194,867   115,284   344,284    205,388
Income (loss) before income taxes and
 deferrable capital securities........  (20,148)   25,533   (19,723)    34,866
Income taxes..........................   (7,571)    9,059    (7,362)    11,116
Deferrable capital securities inter-
 est, net of income tax...............    1,362     1,386     2,724      2,309
                                       --------  --------  --------   --------
   Net income (loss).................. $(13,939) $ 15,088  $(15,085)  $ 21,441
                                       ========  ========  ========   ========
 Basic net income (loss) per common
  share............................... $   (.76) $    .81  $   (.82)  $   1.15
                                       ========  ========  ========   ========
 Diluted net income (loss) per common
  share............................... $   (.76) $    .80  $   (.82)  $   1.14
                                       ========  ========  ========   ========
 
STATEMENTS OF COMPREHENSIVE INCOME
 
Net income (loss)..................... $(13,939) $ 15,088  $(15,085)  $ 21,441
Other comprehensive income, net of
 tax:
 Unrealized holding gains (losses) on
  available-for-sale securities.......      (48)    2,280       226        602
 Less realized gains on available-for-
  sale securities.....................      --        282       135        107
                                       --------  --------  --------   --------
                                            (48)    1,998        91        495
                                       --------  --------  --------   --------
Comprehensive income (loss)........... $(13,987) $ 17,086  $(14,994)  $ 21,936
                                       ========  ========  ========   ========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements
 
                                       2

<PAGE>
 
                          VESTA INSURANCE GROUP, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                   SIX MONTHS ENDED JUNE 30
                                                   ------------------------
                                                      1998           1997
                                                   ------------  ---------------
                                                                  (RESTATED)
                                                          (UNAUDITED)
<S>                                                <C>           <C>
Operating Activities:
 Net income (loss)................................ $    (15,085)  $     21,441
 Adjustments to reconcile net income to cash from
  operating activities:
  Change in:
   Loss and LAE reserves..........................        3,049          8,938
   Unearned premium reserve.......................       13,029         15,519
   Reinsurance balances payable...................       28,313         44,365
   Accrued income taxes...........................       11,521           (167)
   Other liabilities..............................      (33,249)         6,895
   Premiums in course of collection...............       (5,639)        (8,746)
   Reinsurance balances receivable................       31,351        (39,586)
   Reinsurance recoverable on paid losses.........      (56,766)       (24,887)
   Other assets...................................        2,402        (11,639)
  Policy acquisition costs deferred...............      (66,867)       (30,577)
  Policy acquisition costs amortized..............       64,264         34,987
  Amortization and depreciation...................       10,946          1,600
  Investment gains................................         (135)          (107)
  (Gain) Loss on disposition of property, plant
   and equipment..................................          173           (118)
                                                   ------------   ------------
   Net cash provided from (used in) operating
    activities....................................      (12,693)        17,918
Investing Activities:
 Investments sold or matured:
 Fixed maturities available for sale-matured,
  called..........................................       78,386         48,614
 Equity securities................................          --           2,291
Investments acquired:
 Fixed maturities available for sale..............      (59,820)           --
 Equity securities................................       (4,119)        (5,669)
Net increase in short-term investments............      (40,706)      (141,679)
Additions to property, plant and equipment........       (2,237)          (884)
Dispositions of property, plant and equipment.....          292            208
                                                   ------------   ------------
  Net cash used in investing activities...........      (28,204)       (97,119)
Financing Activities:
 Issuance of deferrable capital securities........          --         100,000
 Issuance (repayment) of long and short term debt.       24,747        (21,977)
 Dividends paid...................................       (1,379)        (1,394)
 Capital contributions from exercising options....        1,298          1,553
                                                   ------------   ------------
  Net cash provided from financing activities.....       24,666         78,182
Decrease in cash..................................      (16,231)        (1,019)
Cash at beginning of year.........................       21,801          4,637
                                                   ------------   ------------
Cash at end of period............................. $      5,570   $      3,618
                                                   ============   ============
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements
 
                                       3
<PAGE>
 
                          VESTA INSURANCE GROUP, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         (DOLLAR AMOUNTS IN THOUSANDS)
 
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
 
  Basis of Presentation: The accompanying unaudited financial statements have
been prepared in conformity with generally accepted accounting principles and,
in the opinion of management, reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of results for such
periods. The results of operations and cash flows for any interim period are
not necessarily indicative of results for the full year. These financial
statements should be read in conjunction with the restated financial
statements and related notes which have been issued by the Company and filed
with the Securities and Exchange Commission (see Note B below). Amounts in the
prior financial statements presented have been adjusted in order to conform to
the restatement. There were no adjustments to the Company's Statement of
Operations for the three months ended June 30, 1997.
 
  Certain amounts in the financial statements presented have been reclassified
from amounts previously reported in order to be comparable between years.
These reclassifications have no effect on previously reported stockholders'
equity or net income during the period involved.
 
  Income per share: Basic weighted average common shares outstanding for the
six month period ended June 30, 1998 and 1997 was 18,454,982 and 18,590,852,
respectively. Basic weighted average common shares outstanding for the three
month period ended June 30, 1998 and 1997 was 18,453,010 and 18,599,900,
respectively. Basic EPS is computed by dividing income available to common
stockholders by the weighted average common shares outstanding for the period.
Diluted EPS is calculated by adding to shares outstanding the additional net
effect of potentially dilutive securities or contracts which could be
exercised or converted into common shares except when the additional shares
would reduce net loss per share. Diluted weighted average shares outstanding
for the six month period ended June 30, 1998 and 1997 was 18,454,982 and
18,453,010, respectively. Diluted weighted average shares outstanding for the
three month period ended June 30, 1998 and 1997 was 18,453,010 and 18,921,221,
respectively.
 
  Recently Issued Accounting Standards: In June 1997, the FASB issued
Financial Accounting Statement No. 130, Reporting Comprehensive Income.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances arising from non-owner sources. The Company adopted FAS130 on
January 1, 1998.
 
NOTE B--RESTATEMENT OF FINANCIAL STATEMENTS
 
  Subsequent to the filing of its quarterly report on Form 10-Q for the period
ended March 31, 1998 with the Securities and Exchange Commission, the Company
became aware of certain inappropriate reductions of reserves and over
statements of premium income in the Company's reinsurance business that had
been recorded in the fourth quarter of 1997 and the first quarter of 1998. The
Company promptly commenced an internal investigation to determine the exact
scope and amount of such reductions and estimations. Based on the information
discovered in that investigation, the Company has restated its previously
issued financial statements to make the necessary corrections.
 
  During its internal investigation the Company and its independent auditors
also re-evaluated the accounting methodology being utilized to recognize
earned premium income in its reinsurance business. The Company had
historically reported certain assumed reinsurance premiums as earned in the
year in which the related reinsurance contracts were entered even though the
terms of those contracts frequently bridged two years.
 
                                       4
<PAGE>
 
  The Company has now determined that reinsurance premiums should be
recognized as earned over the contract period. Therefore, the Company has
corrected the error in its accounting methodology which includes a revision of
the actuarial methodology on which anticipated reinsurance premiums and losses
were calculated.
 
  The Company has now issued restated financial statements for each of the
three years in the period ended December 31, 1997 which have been audited by
the Company's independent auditors and unaudited restated financial statements
for the three months ended March 31, 1998, which were filed with the
Securities and Exchange Commission as exhibits to a current report on Form 8-K
dated August 19, 1998.
 
  As a result of the restatement described above, the Company made the
following adjustments to the Company's consolidated statements of operations
and comprehensive income for the six months ended June 30, 1997 and cumulative
adjustments to the December 31, 1997 Balance Sheet.
 
<TABLE>
<CAPTION>
                                               SIX MONTHS ENDED JUNE 30, 1997
                                             -----------------------------------
                                             AS PREVIOUSLY                 AS
                                               REPORTED    RESTATEMENTS RESTATED
                                             ------------- ------------ --------
<S>                                          <C>           <C>          <C>
Revenue....................................    $272,898      $(32,644)  $240,254
Losses.....................................     128,227       (14,003)   114,194
Loss adjustment expenses incurred..........      10,708           --      10,708
Policy acquisition expenses................      64,747        (7,377)    57,370
Operating Expenses.........................      14,574           --      14,574
Premium taxes and fees.....................       3,267           --       3,267
Interest on debt...........................       4,608           --       4,608
Goodwill amortization......................         667           --         667
Income taxes...............................      16,145        (5,029)    11,116
Deferrable capital securities interest, net
 of income tax.............................       2,309           --       2,309
                                               --------      --------   --------
  Net income...............................    $ 27,646      $ (6,205)  $ 21,441
                                               ========      ========   ========
  Basic net income per common share........    $   1.49                 $   1.15
                                               ========                 ========
  Diluted net income per common share......    $   1.46                 $   1.14
                                               ========                 ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                                 CUMULATIVE
                                                            RESTATEMENTS THROUGH
                                                             DECEMBER 31, 1997
                                                            --------------------
<S>                                                         <C>
Premiums in course of collection...........................      $(78,962)
Reinsurance balances receivable............................         53,415
Reinsurance recoverable on paid losses.....................            951
Deferred acquisition costs.................................            825
Other assets...............................................          9,484
Reserves for losses and lae................................         74,991
Reinsurance balances payable...............................        (17,569)
Other liabilities..........................................         15,290
                                                                 ---------
  Total pretax.............................................        (86,999)
Tax effect on above items..................................         29,845
                                                                 ---------
                                                                 $ (57,154)
                                                                 =========
</TABLE>
 
NOTE C--CONTINGENCIES
 
  Litigation: Commencing in June 1998, the Company and several of its current
and former officers and directors were named in several purported class action
law suits in the United States District Court for the Northern District of
Alabama and in one purported class action law suit in the Circuit Court of
Jefferson County, Alabama. The complaints allege various violations of the
federal and state securities laws and seek unspecified but potentially
significant damages. The Company is presently evaluating these complaints and
is unable, at this time, to determine the potential financial impact of the
litigation.
 
                                       5
<PAGE>
 
  The Company, through its subsidiaries, is routinely a party to pending or
threatened legal proceedings and arbitrations. These proceedings involve
alleged breaches of contract, torts, including bad faith and fraud claims and
miscellaneous other specified relief. Based upon information presently
available, and in light of legal and other defenses available to the Company
and its subsidiaries, management does not consider liability from any
threatened or pending litigation to be material.
 
  Regulatory: The Company's insurance subsidiaries are subject to regulation
by the insurance departments of states in which they are licensed and
undergoes examinations by those departments. Vesta Fire is currently
undergoing an examination by the Alabama Department. This examination could
result in adjustments to Vesta Fire's statutory statements, including
policyholder surplus. Management does not believe that such adjustments, if
any, would have a material impact on the Company's financial position or
results of operations.
 
 
                                       6
<PAGE>
 
    ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS
 
RESULTS OF OPERATIONS
 
  Vesta Insurance Group, Inc. (the "Company" or "Vesta") is a holding company
for a group of property and casualty insurance companies (the "Vesta Group")
that offer treaty reinsurance and primary insurance on personal and commercial
risks. In both its reinsurance and primary insurance operations, the Company
focuses principally on property coverages and private passenger automobile, for
which ultimate losses generally can be more promptly determined than on general
casualty risks. The Company's revenues from operations are derived primarily
from net premiums earned on risks written and reinsured by the Company,
investment income and investment gains or losses, while expenses consist
primarily of payments for claims losses and underwriting expenses, including
agents' commissions and operating expenses.
 
Comparison of Second Quarter 1998 to Second Quarter 1997
 
  Net loss for the quarter ended June 30, 1998 was $13.9 million versus $15.1
million of net income for the quarter ended June 30, 1997. On a diluted per
share basis, net loss for the second quarter of 1998 was $(.76) per share
versus net income of $.80 per share for the second quarter of 1997.
 
  Premiums, Loss and LAE--Primary Insurance
 
  Gross premiums written for primary insurance increased by $67.7 million or
115.6% to $126.3 million for the quarter ended June 30, 1998, from $58.6
million for the quarter ended June 30, 1997. Included in the $67.7 million
increase in gross premiums written for primary insurance was $69.7 million of
gross premiums written by the Shelby Insurance Companies ("Shelby"). The
remaining decrease of $2.0 million was primarily due to declining volume in the
commercial lines.
 
  Net premiums written for primary insurance increased by $44.7 million or
123.8% to $80.8 million for the quarter ended June 30, 1998, from $36.1 million
for the quarter ended June 30, 1997. Included in the $44.7 million increase in
net premiums written was $43.1 million of net premiums written by Shelby. The
remaining increase of $1.6 million was primarily due to increases in personal
lines. Net premiums earned for primary insurance increased $46.4 million or
177.8% to $72.5 million for the quarter ended June 30, 1998, from $26.1 million
for the quarter ended June 30, 1997.
 
  Loss and loss adjustment expenses ("LAE") for primary insurance increased by
$38.8 million, or 298.5%, to $51.8 million for the quarter ended June 30, 1998,
from $13.0 million for the quarter ended June 30, 1997. Included in the $38.8
million increase in loss and loss adjustment expenses was $30.8 million in
losses and LAE incurred by Shelby. The loss and LAE ratio for primary insurance
for the quarter ended June 30, 1998 was 71.4% as compared to 49.7% for the
quarter ended June 30, 1997. The increase in the loss ratio is primarily
attributable to the Company's increased writings of personal automobile lines
as a result of the acquisition of Shelby, which experienced a 73% loss and LAE
ratio, and an increase of $1.2 million in catastrophe losses.
 
  Premiums, Loss and LAE--Reinsurance
 
  Gross premiums written for reinsurance decreased by $17.4 million, or 12.0%,
to $127.1 million for the quarter ended June 30, 1998, from $144.5 million for
the quarter ended June 30, 1997. The decrease in gross premiums written is
primarily attributable to pricing pressure in the reinsurance market due to
increased competition and market capacity, the Company's unwillingness to
support underpriced business, and cedants retaining more business. Net premiums
written for reinsurance decreased by $12.5 million, or 12.4%, to $88.5 million
for the quarter ended June 30, 1998, from
 
                                       7
<PAGE>
 
$101.0 million for the quarter ended June 30, 1997. Net premiums earned
decreased $16.0 million, or 14.9% to $91.6 million for the quarter ended June
30, 1998, from $107.6 million for the quarter ended June 30, 1997.
 
  Loss and loss adjustment expenses ("LAE") for reinsurance increased by $5.4
million, or 10.4%, to $57.1 million for the quarter end June 30, 1998, from
$51.7 for the quarter end June 30, 1997. The loss and LAE ratio for reinsurance
for the quarter ended June 30, 1998 was 62.4% as compared to 48.1% for the
quarter ended June 30, 1997. The increase in the loss ratio is primarily a
result of decreases in earned premiums due to pricing pressures, market
competition and an increase of $2.0 million in catastrophe losses.
 
  Net Investment Income. Net investment income increased by $1.6 million, or
22.5%, to $8.8 million for the quarter ended June 30, 1998, from $7.2 million
for the quarter ended June 30, 1997. The weighted average yield on invested
assets (excluding realized and unrealized gains) was 6.2% for the quarter ended
June 30, 1998, compared with 5.5% for the quarter ended June 30, 1997. The
increase in net investment income is primarily attributable to the increase in
average invested assets due to invested assets acquired in the Shelby
acquisition.
 
  Policy Acquisition Expenses and Other Expenses. Policy acquisition expenses
increased by $20.2 million, or 50.6%, to $60.1 million for the quarter ended
June 30, 1998, from $39.9 million for the quarter ended June 30, 1997. The
increase in policy acquisition expenses is primarily attributable to the
increase in net written premiums. Other expenses include operating expenses not
directly related to the generation of premium revenue, premium taxes and fees,
interest on debt and goodwill amortization. Operating expenses increased by
$10.4 million. The increase is primarily attributable to the increase in
information systems expenses related to the assimilation and administration of
the Shelby operations following its acquisition on June 30, 1997 and the
Company's year 2000 compliance efforts. The $2.5 million increase in premium
taxes is primarily attributable to the increase in primary gross written
premiums. These factors caused the underwriting expense ratio to increase from
35.8% in the second quarter of 1997 to 49.4% in the second quarter of 1998. The
increase in goodwill amortization is primarily attributable to the $83 million
of goodwill acquired on June 30, 1997 in connection with the Shelby
acquisition.
 
  Federal Income Taxes. Federal income tax expense decreased by $16.6 million
to $(7.6) million for the quarter ended June 30, 1998. This decrease was due
primarily to the decrease in operating income.
 
Comparison of Six Months Ended June 30, 1998 with Six Months Ended June 30,
1997.
 
  The first six months of 1998 resulted in a net loss of $15.1 million, a
decrease of $36.5 million from the $21.4 million in income reported for the
same period in 1997.
 
  Premiums, Loss and LAE - Primary Insurance
 
  Gross premiums written for primary insurance increased by $147.9 million, or
145.3%, to $249.7 million for the six months ended June 30, 1998 from $101.8
million for the six month period ended June 30, 1997. Included in the $147.9
million increase in gross premiums written was $139.0 million of gross premiums
written by Shelby. The remaining increase of $8.9 million was primarily
attributable to the transfer of business from assumed reinsurance to personal
lines following the acquisition of Vesta County Mutual. Net premiums written
for primary insurance increased by $95.4 million, or 150.9%, to $158.7 million
for the six month period ended June 30, 1998 from $63.2 million for the six
month period ended June 30, 1997. Included in the $95.4 million increase was
$84.3 million of net premiums written by Shelby. Net earned premiums increased
$102.6 million, or 202.0%, to $153.5 million for the six month period ended
June 30, 1998, from $50.8 million for the six month period ended June 30, 1997.
 
                                       8
<PAGE>
 
  Loss and loss adjustment expense ("LAE") for primary insurance increased by
$78.8 million, or 301.9%, to $104.9 million for the six months ended June 30,
1998, from $26.1 million for the six months ended June 30, 1997. Included in
the $78.8 million increase in loss and LAE was $59.6 million of loss and LAE
incurred by Shelby. The loss and LAE ratio for primary insurance for the six
months ended June 30, 1998 was 68.3% as compared to 51.3% for the six months
ended June 30, 1997. The increase in the loss and LAE ratio is primarily
attributable to the Company's increased writings of personal automobile lines
(53.8% of total premiums in 1998 as compared to 28.5% of total premiums in
1997) due to the acquisition of Shelby and an increase of $4.2 million in
catastrophe losses.
 
  Premiums, Loss and LAE - Reinsurance
 
  Gross premiums written for reinsurance decreased by $35.6 million, or 13.1%,
to $236.8 million for the six months ended June 30, 1998, from $272.4 million
for the six months ended June 30, 1997. The decrease in gross premiums written
is primarily attributable to pricing pressures and competition in the
reinsurance market as well as the transfer of business from assumed reinsurance
to personal lines following the acquisition of Vesta County Mutual. Net
premiums written for reinsurance decreased $30.1 million, or 17.4%, to $142.5
million for the six months ended June 30, 1998, from $172.6 million for the six
months ended June 30, 1997. Net premiums earned decreased $26.0 million, or
14.8% to $149.9 million for the six months ended June 30, 1998, from $175.9
million for the six months ended June 30, 1997.
 
  Loss and loss adjustment expenses ("LAE") for reinsurance increased $.5
million, or .5%, to $99.3 million for the six months ended June 30, 1998, from
$98.8 million for the six months ended June 30, 1997. The loss and LAE ratio
for reinsurance for the six months ended June 30, 1998 was 66.3% as compared to
56.2% for the six months ended June 30, 1997. The increase in the loss ratio is
primarily a result of decreases in earned premiums due to pricing pressures,
market competition and an increase of $2.2 million in catastrophe losses.
 
  Policy Acquisition Expenses and Other Expenses. Policy acquisition expenses
increased $31.7 million, or 55.2%, to $89.0 million for the six month period
ended June 30, 1998, from $57.4 million for the six month period ended June 30,
1997. The increase in policy acquisition expense is primarily attributable to
the increase in net written premiums. Operating expenses increased by $20.0
million due to increase in information systems and other expenses related to
the assimilation and administration of the Shelby operations following its
acquisition on June 30, 1997 and the Company's year 2000 compliance efforts.
The $3.4 million increase in premium taxes and fees is primarily attributable
to the increase in primary gross written premiums. The increase in goodwill
amortization is primarily attributable to the $83.0 million of goodwill
acquired on June 30, 1997 in connection with the Shelby acquisition.
 
 
  Net Investment Income. Net investment income increased by $4.8 million, or
36.1%, to $18.1 million for the first six months of 1998, from $13.3 million
for the first six months of 1997. The weighted average pre-tax yield on
invested assets (excluding realized and unrealized gains) was 6.1% for the six
month period ended June 30, 1998, compared with 5.6% for the six month period
ended June 30, 1997. The increase in net investment income is primarily
attributable to the increase in average invested assets relating to the
increase in invested assets from the Shelby acquisition.
 
  Federal Income Taxes. Federal income taxes decreased by $18.5 million to
$(7.4) million for the six month period ended June 30, 1998. This decrease was
primarily due to the decrease in operating income.
 
 
                                       9
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company is a holding company whose principal asset is its investment in
the capital stock of the companies constituting the Vesta Group, a group of
wholly-owned property and casualty insurance companies including Vesta Fire.
The several insurance company subsidiaries comprising Vesta Group are
individually regulated by state insurance regulators. Vesta Fire is the
principal operating subsidiary of the Company.
 
  As a holding company with no other business operations, the Company relies
primarily upon dividend payments from Vesta Fire to meet its cash requirements
(including its debt service) and to pay dividends to its stockholders.
Transactions between Vesta Fire and the Company, including the payment of
dividends by Vesta Fire, are subject to certain limitations under the insurance
laws of Alabama. Specifically, Alabama law permits the payment of dividends in
any year which, together with other dividends or distributions made within the
preceding 12 months, do not exceed the greater of 10% of statutory surplus as
of the end of the preceding year or the net income for the preceding year, with
larger dividends payable only after receipt of prior regulatory approval. Based
upon restrictions presently in effect, the maximum amount available for payment
of dividends to the Company by its insurance subsidiaries in 1998 without prior
approval of regulatory authorities is estimated to be approximately $31.8
million.
 
  The principal uses of funds at the holding company level are to pay operating
expenses, interest on outstanding indebtedness and dividends to stockholders.
During the last three years, the insurance subsidiaries of the Company have
produced operating results sufficient to fund the needs of the Company. There
can be no assurance as to the ability of the Company's insurance subsidiaries
to continue to pay dividends at current levels. However, the Company is not
aware of any demands or commitments of the insurance subsidiaries that would
prevent the payment of dividends to the Company sufficient to meet the
anticipated needs (including debt service) of the Company over the next twelve
months.
 
  During the first six month period of 1998, the Company paid approximately
$1.4 million in dividends on its common stock, and it is expected that the
Company will pay approximately $2.8 million for all of 1998. The Company is
also required to make semi-annual interest payments of $4.4 million on its $100
million of 8.75% Senior Debentures due 2025 and $4.25 million on the $100
million of 8.525% Capital Securities due 2027 issued by Vesta Capital Trust I.
 
  The principal sources of funds for the Company's insurance subsidiaries are
premiums, investment income and proceeds from the sale or maturity of invested
assets. Such funds are used principally for the payment of claims, operating
expenses, commissions and the purchase of investments. In order to provide
further liquidity, the Company increased its $100 million line of credit to
$200 million effective April 8, 1997. As of the Balance Sheet date, the Company
has borrowed $70 million under this line of credit for general corporate
purposes and for a capital contribution of $25 million to the Company's
principal insurance subsidiary, Vesta Fire Insurance Corporation. The Credit
Agreement relating to this line of credit contains certain covenants that
require, among other things, the Company to maintain a certain consolidated net
worth, maintain a certain amount of earnings before interest and taxes
available for the payment of interest and dividend expense (the "Fixed Charge
Ratio"), cause each insurance subsidiary to maintain a certain total adjusted
capital and that limits the amount of indebtedness of the Company. Subsequent
to the period ended June 30, 1998, the Company's banks agreed to amend the
Fixed Charge Ratio as of the last day of the fiscal quarter ended June 30, 1998
and waive any Event of Default arising from noncompliance with such covenant as
of June 30, 1998. As an inducement to the Company's banks to enter into such
amendment and waiver, the Company has agreed not to request any additional
borrowings under this Credit Agreement until such time as the Company has
delivered financial statements to the banks in form and substance satisfactory
to the banks.
 
                                       10
<PAGE>
 
  On a consolidated basis, net cash provided from (used in) operations for the
six month period ended June 30, 1998 and 1997 was $(12.7) million and $17.9
million, respectively.
 
  Total assets of the Company increased by 1.6% to $1,664.8 million in 1998,
from $1638.3 million in 1997. Cash and invested assets were $666.1 million at
June 30, 1998, increasing 1.4% from December 31, 1997.
 
  As of June 30, 1998, the Company's investment portfolio consisted of cash and
short-term investments (24.8%), U.S. Government securities (15.1%), asset-
backed securities (11.5%), corporate bonds (23.7%), foreign government
securities (0.7%), municipal bonds (20.6%) and equity securities (3.6%).
According to Moody's rating, 96% of the Company's portfolio is rated A or
better. The Company expects current cash flow to be sufficient to meet
operating needs, although, a certain amount of invested assets has been
categorized as available for sale in the event short-term cash needs exceed
available resources. The Company adjusts its holdings of cash, short-term
investments and invested assets available for sale according to its seasonal
cash flow needs. Beginning in June of each year, the Company begins to increase
its holdings of cash and short-term investments. This practice facilitates the
Company's ability to meet its higher short-term cash needs during the hurricane
season.
 
  The Company is heavily dependent upon computer systems for all phases of its
operations. The year 2000 issue--common to most corporations--concerns the
inability of certain software and databases to properly recognize date
sensitive information beginning January 1, 2000. This problem could result in a
material disruption to the Company's operations, if not corrected. The Company
has assessed and developed a detailed strategy to prevent or at least minimize
problems related to the year 2000 issue. In 1997 resources were committed and
implementation began to modify the affected information systems. Total costs
related to the project are estimated to be approximately $5.7 million, of which
$1.1 million was spent in 1997. Substantially all remaining costs will be
expended in 1998 of which $2.9 million was spent in the first six months of
1998. Implementation is currently on schedule. The Company is in the beginning
stages of contacting vendors who provide products and/or services requesting
verification that they either are or will be 2000 compliant. The year 2000
issue is also a concern from an underwriting standpoint as well as regarding
the extent of liability for coverage under various general liability, property
and package insurance policies. The Company's operating subsidiaries are
adopting the ISO Exclusionary Endorsement in the states where that endorsement
is filed and approved. The degree of success of this project cannot be
determined at this time. However, management believes that the final outcome
will not have a material adverse effect on the operations of the Company.
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
  Any statement contained in this report which is not a historical fact, or
which might otherwise be considered an opinion or projection concerning the
Company or its business, whether express or implied, is meant as and should be
considered a forward-looking statement as that term is defined in the Private
Securities Litigation Reform Act of 1996. Forward-looking statements are based
on assumptions and opinions concerning a variety of known and unknown risks,
including but not necessarily limited to changes in market conditions, natural
disasters and other catastrophic events, increased competition, changes in
availability and cost of reinsurance, changes in governmental regulations, and
general economic conditions, as well as other risks more completely described
in the Company's filings with the Securities and Exchange Commission, including
its most recent Annual Report on Form 10-K. If any of these assumptions or
opinion 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.
 
                                       11
<PAGE>
 
                                    PART II
 
                           ITEM 1. LEGAL PROCEEDINGS
 
  Commencing in June 1998, the Company and several of its current and former
officers and directors were named in several purported class action law suits
in the United States District Court for the Northern District of Alabama and in
one purported class action law suit in the Circuit Court of Jefferson County,
Alabama. The complaints allege various violations of the federal and state
securities laws and seek unspecified but potentially significant damages. The
Company is presently evaluating these complaints and is unable, at this time,
to determine the potential financial impact of the litigation.
 
  The Company, through its subsidiaries, is routinely a party to pending or
threatened legal proceedings and arbitrations. These proceedings involve
alleged breaches of contract, torts, including bad faith and fraud claims and
miscellaneous other specified relief. Based upon information presently
available, and in light of legal and other defenses available to the Company
and its subsidiaries, management does not consider liability from any
threatened or pending litigation to be material.
 
                         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 19, 1998, the following
matters were submitted to a vote of stockholders. (Shares Eligible to Vote
18,452,279; Shares Voted 17,050,177)
 
  1. Election of Directors
 
  Messrs. Ehney A. Camp III, Jr., Clifford F. Palmer, and Norman L. Rosenthal
were elected to additional three year terms on the Board of Directors.
 
<TABLE>
<CAPTION>
                                                               FOR     WLTHHELD
                                                            ---------- ---------
   <S>                                                      <C>        <C>
   Camp.................................................... 16,101,667   948,510
   Palmer.................................................. 16,008,562 1,041,615
   Rosenthal............................................... 16,101,017   949,160
</TABLE>
 
  Messrs. Walter M. Beale, Jr., Robert A. Hershberger, C.B. Hudson, Jarvis W.
Palmer and R. K. Richey continue to serve on the Board of Directors. On July
27, 1998, Messrs. Norman W. Gayle, III and James E. Tait were elected by the
Board of Directors to fill a vacancy and a newly created directorship on the
Board of Directors.
 
                                       12
<PAGE>
 
  2. Amendment to Restated Certificate of Incorporation to increase the number
of authorized shares of the Company's Common Stock
 
  The proposal to increase the authorized shares of the Company's common stock,
par value $.01 per share, (the "Common Stock") from 32,000,000 shares to
100,000,000 shares was approved. The additional authorized shares of Common
Stock will be available for issuance by the Company's Board of Directors from
time to time, without further action or authorization by the stockholders
(except as required by law or by a national stock exchange). The Board of
Directors could make a determination to issue such shares in connection with,
among other things, (i) possible future acquisitions, (ii) the declaration of a
stock split or stock dividend, (iii) the raising of additional capital funds
through offerings of shares of Common Stock or of equity or debt securities
convertible into or exchangeable for Common Stock and (iv) the Company's
various employee benefit plans, incentive compensation plans and dividend
reinvestment plan.
 
<TABLE>
<CAPTION>
                                                                          NON
                                                FOR      AGAINST  ABSTAIN VOTE
                                             ---------- --------- ------- ----
   <S>                                       <C>        <C>       <C>     <C>
   Amendment to restated Certificate of
    Incorporation to increase the number of
    authorized shares of the Company's
    Common Stock............................ 12,080,189 4,957,549 12,439    0
</TABLE>
 
 
 
  3. Election of Auditors
 
  KPMG Peat Marwick was appointed as the principal independent auditor of the
Company and its subsidiaries for the year ending December 31, 1998.
 
<TABLE>
<CAPTION>
                                                         FOR     AGAINST ABSTAIN
                                                      ---------- ------- -------
   <S>                                                <C>        <C>     <C>
   KPMG Peat Marwick................................. 17,023,570  3,558  23,049
</TABLE>
 
                           ITEM 5. OTHER INFORMATLON
 
  None.
 
                                 EXHIBITS INDEX
 
<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
 3.1     Restated Certificate of Incorporation of the Company, dated September
         1, 1993, as amended (as of June 16, 1998).
 3.2     By-Laws of the Company (Amended and Restated as of October 1, 1993)
         (filed as an exhibit to Amendment No. 1 to the Registration Statement
         on Form S-1 (Registration No. 33-68114) of Vesta Insurance Group,
         Inc., filed on October 18, 1993 and incorporated herein by reference
         (File No. 1-12338)).
 4.1     Indenture between the Company and Southtrust Bank of Alabama, National
         Association, dated as of July 19, 1995 fled as an exhibit to the
         Company's Form 10-K for the year ended December 31, 1995, filed on
         March 28, 1996 and incorporated herein by reference (File No. 1-
         12338)).
</TABLE>
 
                                       13
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
 4.2     Supplemental Indebenture between the Company and Southtrust Bank of
         Alabama, National Association, dated July 19, 1995 (filed as an
         exhibit to the Company~'s Form 10-K for the year ended December 31,
         1995, filed on March 28, 1996 and incorporated herein by reference
         (File No. 1-12338)).
 4.3     Indenture dated as of January 31, 1997, between the Company and First
         Union National Bank of North Carolina, as trustee (filed as an exhibit
         to the Company's Form 10-Q for the quarter ended March 31, 1997, filed
         on May 13, 1997 and incorporated herein by reference (File No. 1-
         12338)).
 4.4     Amended and Restated Declaration of Trust, dated as of January 31,
         1997, of Vesta Capital Trust I (filed as an exhibit to the Company's
         Form 10-Q for the quarter ended March 31, 1997, filed on May 13, 1997
         and incorporated herein by reference (File No. 1-12338)).
 4.5     Capital Securities Guarantee Agreement, dated as of January 31, 1997,
         between the Company and First Union National Bank of North Carolina,
         as trustee (filed as an exhibit to the Company's Form 10-Q for the
         quarter ended March 31, 1997, filed on May 13, 1997 and incorporated
         herein by reference (File No. 1-12338)).
 10.1    Separation and Public Offering Agreement between Torchmark Corporation
         and the Company dated September 13, 1993 (filed as an exhibit to the
         Company's Form 10-K for the year ended December 31, 1993, filed on
         March 28, 1994 and incorporated herein by reference (File No. 1-
         2338)).
 10.2    Marketing and Administrative Services Agreement between Liberty
         National Fire Insurance Company, Liberty National Insurance
         Corporation and Liberty National Life Insurance Company dated
         September 13, 1993 (filed as an exhibit to the Company~'s Form 10-K
         for the year ended December 31, 1993, filed on March 28, 1994 and
         incorporated herein by reference (File No. 1-2338)).
 10.3    Investment Services Agreement between Waddell & Reed Asset Management
         Company and the Company (filed as an exhibit to Amendment No. 1 to the
         Registration Statement on Form S-1 (Registration No. 33-68114) of
         Vesta Insurance Group, Inc., filed on October 18, 1993 and
         incorporated herein by reference (File No. 1-12338)) dated September
         13, 1993.
 10.5    Management Agreement between J. Gordon Gaines, Inc., Liberty National
         Fire Insurance Company, Sheffield Insurance Corporation, Liberty
         National Insurance Corporation and Vesta Insurance Corporation dated
         November 15, 1994 (filed as an exhibit to the Company's Form 10-K for
         the year ended December 31, 1993, filed on March 28, 1994 and
         incorporated herein by reference (File No. 1-2338)).
 10.6    Form of Restricted Stock Agreement (filed as an exhibit to the
         Registration Statement on Form S-1 (Registration No. 33-68114) of
         Vesta Insurance Group, Inc., filed on August 31, 1993 and incorporated
         herein by reference (File No. 1-12338)).
 10.7*   The Company's Long Term Incentive Plan as amended effective as of May
         16, 1995 (filed as an exhibit to the Company's Form 10Q for the
         quarter ended June 30, 1995, filed on August 14, 1995 and incorporated
         herein by reference (File No. 1-12338)).
 10.8*   Form of Non-Qualified Stock Option Agreement entered into by and
         between the Company and certain of its executive officers and
         directors (filed as an exhibit to the Company's Form 10-K for the year
         ended December 31, 1995, filed on March 28, 1996 and incorporated
         herein by reference (File No. 1-12338)).
 10.9*   Cash Bonus Plan of the Company (filed as an exhibit to the Company's
         Form 10-K for the year ended December 31, 1993, filed on March 28,
         1994 and incorporated herein by reference (File No. 1-2338)).
</TABLE>
 
                                       14
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
 10.10*  J. Gordon Gaines, Inc. Post Retirement Benefits Plan (filed as an
         exhibit to the Company's Form 10-K for the year ended December 31,
         1994, filed on March 29, 1995 and incorporated herein by reference
         (File No. 1-12338)).
 
 10.11*  J. Gordon Gaines, Inc. Retirement Savings Plan (filed as an exhibit to
         the Company's Form 10-K for the year ended December 31, 1994, filed on
         March 29, 1995 and incorporated herein by reference (File No. 1-
         12338)).
 10.12*  The Company's Non-Employee Director Stock Plan (filed as an exhibit to
         the Company's 10-Q for the quarter ended June 30, 1995, filed on
         August 14, 1995 and incorporated herein by reference (File No. 1-
         12338)).
 10.13   Office Lease between the Company and Torchmark Development
         Corporation, dated as of April 20, 1992 (filed as an exhibit to the
         Company's Form 10-K for the year ended December 31, 1993, filed on
         March 28, 1994 and incorporated herein by reference (File No. 1-
         12338)).
 10.14   Agency Agreement between Liberty National Fire Insurance Company,
         Vesta Insurance Corporation, Sheffield Insurance Corporation, and
         Overby-Seawell Company (filed as an exhibit to Amendment No. 1 to the
         Registration Statement on Form S-1 (Registration No. 33-68114) of
         Vesta Insurance Group, Inc., filed on October 18, 1993 and
         incorporated herein by reference (File No. 1-12338)).
 10.15   Commercial/Personal Property Risk Excess Reinsurance Contracts, dated
         July 1, 1993, constituting the Company~s Direct Per Risk Treaty
         Program, between Vesta Fire Insurance Corporation, Sheffield Insurance
         Corporation, Vesta Insurance Corporation, Vesta Lloyds Insurance
         Company and various reinsurers (filed as an exhibit to Amendment No. 1
         to the Registration Statement on Form S-1 (Registration No. 33-68114)
         of Vesta Insurance Group, Inc., filed on October 18, 1993 and
         incorporated herein by reference (File No. 1-12338)) Renewed July 1,
         1997.
 10.17   Specific Regional Catastrophe Excess Contracts, dated January 1, 1996,
         constituting the Company's Regional Property Catastrophe Program,
         between Vesta Fire Insurance Corporation and various reinsurers (filed
         as an exhibit to the Company's Form 10-K for the year ended December
         31, 1995, filed on March 28, 1996 and incorporated herein by reference
         (File No. 1-12338)). Renewed January 1, 1998.
 10.18   Casualty Excess of Loss Reinsurance Agreements, dated January 1, 1998,
         constituting the Company's Casualty Excess of Loss Reinsurance
         Program, between Vesta Fire Insurance Corporation, Vesta Insurance
         Corporation, Sheffield Insurance Corporation, Vesta Lloyds Insurance
         Company and Employers Reinsurance Corporation, (filed as an exhibit to
         the Company's Form 10-Q for the quarter ended March 31, 1998, filed on
         May 13 and incorporated herein by reference (File No. 1-12338)).
 10.19   Amendment to Catastrophe Reinsurance Contracts, dated July 1, 1995,
         constituting the Company's Direct Property Catastrophe Program,
         between Vesta Fire Insurance Corporation, Vesta Insurance Corporation,
         Sheffield Insurance Corporation, Vesta Lloyds Insurance Company,
         Hawaiian Insurance & Guaranty Company, Limited and various reinsurers.
         (Filed as an exhibit to the Company's Form 10-Q for the quarter ended
         September 30, 1995, filed on November 14, 1995 and incorporated herein
         by reference (File No. 1-12338)). Renewed July 1, 1997.
</TABLE>
 
                                       15
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
 10.20   Amendment to Catastrophe Reinsurance Contracts, dated January 1, 1996,
         constituting the Company's Direct Property Catastrophe Program,
         between Vesta Fire Insurance Corporation, Vesta Insurance Corporation,
         Sheffield Insurance Corporation, Vesta Lloyds Insurance Company,
         Hawaiian Insurance & Guaranty Company, Limited and various reinsurers
         (filed as an exhibit to the Company's Form 10-K for the year ended
         December 31, 1995, filed on March 28, 1996 and incorporated herein by
         reference (File No. 1-12338)). Renewed January 1, 1998.
 10.21   Amended and Restated Credit Agreement between Vesta Insurance Group,
         Inc. and Southtrust Bank of Alabama, N.A., ABN Amro Bank B.V., Bank of
         Tokyo-Mitsubishi Trust Company, The First National Bank of Chicago,
         Wachovia Bank of Georgia, N.A. and First Union National Bank of North
         Carolina (as agent), dated April 8, 1997 (filed as an exhibit to the
         Company's Form 10-Q for the quarter ended March 31, 1997, filed on May
         13, 1997, and incorporated herein by reference (File No. 1-12338)).
 10.22   Quota Share Reinsurance Contract, effective July 1, 1996, covering all
         lines of business written by Vesta Fire Insurance Corporation and its
         subsidiary and affiliated companies and various reinsurers (filed as
         an exhibit to the Company's Form 10-Q for the quarter ended September
         30, 1996, filed on November 14, 1996 and incorporated herein by
         reference (File No. 1-12338)). Renewed July 1, 1997.
 10.23   Stock Purchase Agreement between Anthem Casualty Insurance Group,
         Inc., and Vesta Insurance Group, Inc., dated April 23, 1997 (filed as
         an exhibit to the Company's Form 10-Q for the year ended December 31,
         1997, filed on May 13, 1997 and incorporated herein by reference (File
         No. 1-12338)).
 10.24   Business Transfer and Management Agreement between Vesta Fire
         Insurance Corporation and its affiliated companies and CIGNA Property
         and Casualty Insurance Company and its affiliated companies, dated
         January 28, 1998 (filed as an exhibit to the Company's Form 10-K for
         the year ended December 31, 1997, filed on March 27, 1998 (File No. 1-
         12338)).
 10.25   Agreement for Data Processing Services between Shelby Insurance
         Company and Policy Management Systems Corporation, dated January 1,
         1998.
</TABLE>
--------
*These are the Company's compensatory plans.
 
B)REPORTS ON FORM 8-K.
 
  The Company reported that it was conducting an internal investigation into
  accounting irregularities that affected previously reported earnings for
  the first quarter of 1998 and the fourth quarter of 1997 on Form 8-K filed
  with the Securities and Exchange Commission on June 4, 1998.
 
  The Company reported that it concluded its internal investigation into the
  accounting irregularities and that the Company will correct the method of
  accounting by which it recognizes earned premium income in its reinsurance
  business, including a revision of the actuarial information on which
  anticipated reinsurance premiums and losses were calculated on Form 8-K
  filed with the Securities and Exchange Commission on July 1, 1998.
 
                                       16
<PAGE>
 
                                   SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED
"HEREUNTO DULY AUTHORIZED.
 
                                          VESTA INSURANCE GROUP, INC.
 
Date: August 19, 1998                               /s/ James E. Tait
                                          _____________________________________
                                                      James E. Tait
                                               Principal Financial Officer
 
                                                  /s/ Mary Beth Heibein
                                          _____________________________________
                                                    Mary Beth Heibein
                                                Controller and Principal
                                                   Accounting Officer
 
 
                                       17