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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 September 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 November 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 September 30, 2003 and December 31, 2002                  |  | 1   
|       |  | Consolidated Statements of Operations and Comprehensive Income (Loss) for the               | 
|       |  | Three Months and Nine Months Ended September 30, 2003 and 2002                              |  | 2   
|       |  | Consolidated Statements of Cash Flows for the Nine Months ended September 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                                  |  | 20  
|Item 4 |  | Controls and Procedures                                                                     |  | 20  

|Part II |  | Other Information                                   |  |   
|------- |  | --------------------------------------------------- |  | --
|Item 1  |  | Legal Proceedings                                   |  | 21
|Item 2  |  | Changes in Securities                               |  | 23
|Item 3  |  | Defaults Upon Senior Securities                     |  | 23
|Item 4  |  | Submission of Matters to a Vote of Security Holders |  | 23
|Item 5  |  | Other Information                                   |  | 23
|Item 6  |  | Exhibits and Reports on Form 8-K                    |  | 24
|        |  | Signatures                                          |  | 25

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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)

|                                                                             | September 30, | December 31,
|---------------------------------------------------------------------------- | ------------- | ------------
|
|
|Assets:                                                                      |               |             
|Fixed maturities available for sale - at fair value (cost:  2003 - $842,927; |               |             
|2002 - $829,982)                                                             |               |             
|Equity securities-at fair value: (cost: 2003- $28,915; 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 $7,056 and $8,131 in 2003 and 2002, respectively)                         |               |             
|Retained earnings                                                            |               |             
|Treasury stock (2,464,977 shares at cost at September 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 (Loss)
Statements of Operations
(amounts in thousands, except per share data)

|                                                                       | Three months ended | Nine 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                                            |                    |                  
|Litigation settlement and arbitration award charge                     |                    |                  
|Operating expenses                                                     |                    |                  
|Interest on debt                                                       |                    |                  
|Deferrable capital distributions                                       |                    |                  
|Gain on debt extinguishment                                            |                    |                  
|                                                                       |                    |                  
|Total expenses                                                         |                    |                  
|                                                                       |                    |                  
|Income (loss) from continuing operations before income taxes and       |                    |                  
|minority interest                                                      |                    |                  
|Income tax expense (benefit)                                           |                    |                  
|Minority interest, net of tax                                          |                    |                  
|Deferrable capital security distributions, net of tax                  |                    |                  
|                                                                       |                    |                  
|Net income (loss) from continuing operations                           |                    |                  
|Loss from discontinued operations, net of tax                          |                    |                  
|                                                                       |                    |                  
|Net income (loss)                                                      |                    |                  
|Gain on redemption of preferred securities, net of tax                 |                    |                  
|                                                                       |                    |                  
|Net income (loss) available to common shareholders                     |                    |                  
|                                                                       |                    |                  
|Net income (loss) from continuing operations per share - Basic         |                    |                  
|                                                                       |                    |                  
|Net income (loss) available to common shareholders per share - Basic   |                    |                  
|                                                                       |                    |                  
|Net income (loss) from continuing operations per share - Diluted       |                    |                  
|                                                                       |                    |                  
|Net income (loss) available to common shareholders per share - Diluted |                    |                  
|                                                                       |                    |                  
|                                                                       |                    |                  

|Statements of Comprehensive Income (Loss)              
|-------------------------------------------------------
|Net income (loss)                                      
|Other comprehensive income, net of tax:                
|Unrealized holding (losses) gains on available-for-sale
|securities net of tax of $(2,789), $2,035, $1,374      
|and $1,970, respectively                               
|Less realized (losses) gains on available-for-sale     
|securities net of tax of $32, $(431), $1,998           
|and $(258), 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)

|                                                                           | Nine months ended September 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 cash received (paid) from sale of Aegis                                |                                
|Net increase in short-term investments                                     |                                
|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 withdrawals (deposits) 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 of America 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:  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 guarantees  were issued or modified  during the nine months ended
September 30, 2003, which were impacted by the provisions of FIN No. 45.

On January 15, 2003, FASB completed its redeliberations of the project related to the consolidation of variable interest entities
which culminated with the issuance of FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities (VIEs).  FIN
46 states that if a business enterprise has a controlling financial interest in a VIE, the assets, liabilities and results of the
activities of the VIE should be included in the consolidated financial statements of the business enterprise.  This Interpretation
explains how to identify VIEs and how an enterprise assesses its interests in a VIE to decide whether to consolidate that entity.
FIN 46 also requires existing unconsolidated VIEs to be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved.  VIEs that effectively disperse risks will not be consolidated unless a single
party holds an interest or combination of interests that effectively recombines risks that were previously dispersed.  This
Interpretation applies immediately to variable interest entities created after January 31, 2003, and to VIEs in which an enterprise
obtains an interest after that date.  On October 8, 2003, the FASB deferred the effective date for preexisting VIEs to the period
ending after December 15, 2003. As a result, the Company will adopt FIN 46 for pre-existing transactions in the fourth quarter of
this year.  The Company has not entered into any transactions subsequent to January 31, 2003 that would qualify as a VIE and is
continuing to evaluate the impact of this pronouncement on existing entities.

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
provisions of DIG B36 would be applied on a prospective  basis and will become  effective  during the fourth
quarter of 2003.  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 is 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.  The  Company's  Deferrable
Capital  Securities are subject to the  provisions of SFAS No. 150.  Accordingly,  the  outstanding  balance of the Company's  Deferrable
Capital  Securities  of $22.5  million as of September  30, 2003 has been  reclassified  to a component of total  liabilities  from the
previous  "mezzanine" debt  classification.  Furthermore,  Deferrable Capital Security  distributions of $0.5 million for the three and
nine months  ended  September  30, 2003 are  reflected  as a component  of income from  continuing  operations.  The  classification  of
Deferrable Capital Securities and Deferrable  Capital Security  distributions for all prior periods remains unchanged,  pursuant to the
provisions of SFAS No. 150.

Restricted  Assets:  As part of a modified  coinsurance  agreement with Employers  Reinsurance  Corporation ("Employers"),  American Founders is
holding $165.9 million of assets for the benefit of Employers,  of which $165.9 million are included in fixed maturities  available for
sale herein.  Additionally, we have pledged investments having a market value of $140.5 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 income (loss)  available to common  shareholders  and average  shares  outstanding  for the three and nine months  ending
September 30, 2003 and 2002 are as follows:

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

|                                                   | Nine months ended September 30,
|-------------------------------------------------- | -------------------------------
|
|Net income (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 nine-month periods ending September 30, 2002 are 450 thousand and 523
thousand, respectively.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Earnings per share for discontinued operations for the three and nine months ended September 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" ("SFAS No 148").  This statement is effective for 2003 and amends SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"), 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 income (loss) if the fair-value-based method had been applied to all
outstanding and unvested awards in each period.

|                                                                       | 2003 | 2002 |  
|---------------------------------------------------------------------- | ---- | ---- | -
|
|Net income (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 income (loss) available to common shareholders per share - basic   |      |     
|As reported                                                            |      |      | $
|Pro forma                                                              |      |      | $
|Net income (loss) available to common shareholders per share - diluted |      |     
|As reported                                                            |      |      | $
|Pro forma                                                              |      |      | $

5

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Note B-Commitments and Contingencies

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.

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 former  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.

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 September 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.  Pursuant to an order
of the NRMA  Arbitration  Panel,  Vesta posted an additional $4.8 million letter of credit in October of 2003 in favor of NRMA. We also
filed for arbitration  against Alfa Mutual  Insurance  Company  ("Alfa") and Dorinco  Reinsurance  Company  ("Dorinco"),  the other two
participants  on the treaty.  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 December 8, 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 panel  notified the Company that it ruled that the
treaty does not apply to loss  occurrences  prior to July 1, 1997.  Primarily,  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 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  began on October 20, 2003 and was  adjourned on October
31, 2003.  The hearing is currently  scheduled to resume and be  concluded in January of 2004.  On December 16, 2002,  Dorinco  filed a
motion seeking an order that the treaty does not cover  developmental  losses  relating to loss  occurrences  prior to July 1, 1997. 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  for the two weeks of March 8 through  March 12 and April 26 through  April 30,  2004.  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
$58.0 million.

6

---

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.  This case is  currently  scheduled  for  mediation  in
December of 2003.

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.  Subsequent  discussions  with the
Liquidator of Delta American Re have resulted in a negotiated settlement of $1.1 million, which was recorded in the third quarter of 2003.

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.

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  American  Agencies
Holdings, Inc. ("American Agencies"),  formally Instant Insurance Holdings, Inc., representing  approximately 70% of American Agencies'
issued and outstanding  shares of capital stock as of September 30, 2003. The new facility bears interest at First  Commercial's  prime
rate and will mature no earlier  than June 30,  2005.  As of  September  30,  2003,  we had drawn $30.0  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 September 30, 2003, we were in compliance  with all quarterly  covenants.  However,  based on our results through the nine months
ended  September 30, 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  Insurance  Corporation  ("Vesta
Fire") and J. Gordon Gaines Inc. 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.

7

---

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 and minority interest.  Premiums,  policy fees, agency fees and commissions,  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 September  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.  During the third quarter of 2003, we  consummated  the sale of Aegis  Financial
Corporation, the holding company for our health insurance subsidiaries.  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 a portion of the risks to
reinsurers  in exchange  for fees.  This  business  takes  advantage  of our  certificates  of  authority  granting us license to write
insurance in many states.  Income from  fronting  arrangements  is primarily  generated  on a  fee-for-service  basis.  For the premium
written  through our  non-standard  auto  agencies,  we determine,  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

---

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

|2003                                      |  |  |   |         |  |   |        
|----------------------------------------- |  |  | - | ------- |  | - | -------
|
|
|
|Revenues:                                 |  |  |   |         |  |   |        
|Premiums earned                           |  |  | $ | 81,909  |  | $ | 2,049  
|Agency fees and commissions               |  |  |   | --      |  |   | --     
|Net investment income                     |  |  |   | --      |  |   | 6,695  
|Policy fees                               |  |  |   | 3,520   |  |   | 565    
|Realized gains (losses)                   |  |  |   | --      |  |   | 824    
|Other                                     |  |  |   | 205     |  |   | 844    
|                                          |  |  |   |         |  |   |        
|Total revenues                            |  |  |   | 85,634  |  |   | 10,977 
|Expenses:                                 |  | 
|Loss, LAE and policyholder benefits       |  |  |   | 50,423  |  |   | 5,250  
|Policy acquisition costs                  |  |  |   | 18,170  |  |   | 246    
|Operating expenses                        |  |  |   | 10,996  |  |   | 2,548  
|Interest on debt                          |  |  |   | --      |  |   | 1,385  
|Deferrable Capital Security distributions |  |  |   | --      |  |   | --     
|                                          |  |  |   |         |  |   |        
|Total expenses                            |  |  |   | 79,589  |  |   | 9,429  
|                                          |  |  |   |         |  |   |        
|Pre-tax income (loss)                     |  |  | $ | 6,045   |  | $ | 1,548  
|                                          |  |  |   |         |  |   |        
|Operating segment assets:                 |  | 
|Investments and other assets              |  |  | $ | 439,319 |  | $ | 874,829
|Deferred acquisition costs                |  |  |   | 42,909  |  |   | 20,142 
|                                          |  |  |   |         |  |   |        
|                                          |  |  | $ | 482,228 |  | $ | 894,971
|                                          |  |  |   |         |  |   |        

|2002                                |  |  |   |         |   |   |        
|----------------------------------- |  |  | - | ------- | - | - | -------
|
|
|
|Revenues:                           |  |  |   |         |   |   |        
|Premiums earned                     |  |  | $ | 87,235  |   | $ | 2,651  
|Agency fees and commissions         |  |  |   | --      |   |   | --     
|Net investment income               |  |  |   | --      |   |   | 9,759  
|Policy fees                         |  |  |   | 1,345   |   |   | 798    
|Realized gains (losses)             |  |  |   | --      |   |   | (1,142 
|Other                               |  |  |   | 122     |   |   | 332    
|                                    |  |  |   |         |   |   |        
|Total revenues                      |  |  |   | 88,702  |   |   | 12,398 
|Expenses:                           |  | 
|Loss, LAE and policyholder benefits |  |  |   | 60,933  |   |   | 4,148  
|Policy acquisition costs            |  |  |   | 19,549  |   |   | 1,044  
|Arbitration charge (award)          |  |  |   | --      |   |   | --     
|Operating expenses                  |  |  |   | 10,267  |   |   | 2,741  
|Interest on debt                    |  |  |   | --      |   |   | 1,592  
|Gain on debt extinguishment         |  |  |   | --      |   |   | --     
|                                    |  |  |   |         |   |   |        
|Total expenses                      |  |  |   | 90,749  |   |   | 9,525  
|                                    |  |  |   |         |   |   |        
|Pre-tax income (loss)               |  |  | $ | (2,047  | ) | $ | 2,873  
|                                    |  |  |   |         |   |   |        
|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 nine months ended September 30, 2003 and 2002 is as follows:

|2003                                     |  |  |   |         |   |   |       
|---------------------------------------- |  |  | - | ------- | - | - | ------
|
|
|
|Revenues:                                |  |  |   |         |   |   |       
|Premiums earned                          |  |  | $ | 237,668 |   | $ | 6,776 
|Agency fees and commissions              |  |  |   | --      |   |   | --    
|Net investment income                    |  |  |   | --      |   |   | 21,468
|Policy fees                              |  |  |   | 8,474   |   |   | 1,690 
|Realized gains (losses)                  |  |  |   | --      |   |   | 1,099 
|Other                                    |  |  |   | 610     |   |   | 2,205 
|                                         |  |  |   |         |   |   |       
|Total revenues                           |  |  |   | 246,752 |   |   | 33,238
|Expenses:                                |  | 
|Loss, LAE and policyholder benefits      |  |  |   | 168,414 |   |   | 15,554
|Policy acquisition costs                 |  |  |   | 54,583  |   |   | 696   
|Operating expenses                       |  |  |   | 33,265  |   |   | 7,407 
|Interest on debt                         |  |  |   | --      |   |   | 4,274 
|Deferable Captial Security distributions |  |  |   | --      |   |   | --    
|                                         |  |  |   |         |   |   |       
|Total expenses                           |  |  |   | 256,262 |   |   | 27,931
|                                         |  |  |   |         |   |   |       
|Pre-tax income (loss)                    |  |  | $ | (9,510  | ) | $ | 5,307 
|                                         |  |  |   |         |   |   |       

|2002                                |  |  |   |         |   |   |       
|----------------------------------- |  |  | - | ------- | - | - | ------
|
|
|
|Revenues:                           |  |  |   |         |   |   |       
|Premiums earned                     |  |  | $ | 232,743 |   | $ | 8,184 
|Agency fees and commissions         |  |  |   | --      |   |   | --    
|Net investment income               |  |  |   | --      |   |   | 28,295
|Policy fees                         |  |  |   | 3,833   |   |   | 2,914 
|Realized gains (losses)             |  |  |   | --      |   |   | 1,480 
|Other                               |  |  |   | 451     |   |   | 989   
|                                    |  |  |   |         |   |   |       
|Total revenues                      |  |  |   | 237,027 |   |   | 41,862
|Expenses:                           |  | 
|Loss, LAE and policyholder benefits |  |  |   | 166,659 |   |   | 18,899
|Policy acquisition costs            |  |  |   | 51,018  |   |   | 1,204 
|Arbitration charge (award)          |  |  |   | --      |   |   | --    
|Operating expenses                  |  |  |   | 28,888  |   |   | 7,845 
|Interest on debt                    |  |  |   | --      |   |   | 4,756 
|Gain on extinguishment of debt      |  |  |   | --      |   |   | --    
|                                    |  |  |   |         |   |   |       
|Total expenses                      |  |  |   | 246,565 |   |   | 32,704
|                                    |  |  |   |         |   |   |       
|Pre-tax income (loss)               |  |  | $ | (9,538  | ) | $ | 9,158 
|                                    |  |  |   |         |   |   |       

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.

In the third  quarter of 2002, we redeemed  $8.0 million face amount of our 8.75% Senior Notes for  approximately  $5.0 million in
cash.  In connection with this transaction, we recorded a pre-tax gain on extinguishment of debt of $3.0 million.

10

---

Note E-Acquisitions and Dispositions

Effective September 30, 2003, we consummated a 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) for $4.6 million.  The sales price was
financed through a $5.0 million note issued by the buyer payable toVesta Fire.  The note bears interest at a fixed rate of 6%, with
interest payments due semi-annually and principal due in September 2006.  The note is secured by the common stock of Aegis.  The sale of Aegis resulted in the Company recording a
loss of $0.6 million, net of tax, which is reflected as a component of discontinued operations.

Effective July 1, 2003, the Company purchased 25% of the outstanding common stock of Harbor Insurance Group for $2.1 million.
The transaction is being accounted for using equity investment accounting.

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 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 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                   | 
|Deferred policy acquisition costs | 
|Other assets                      | 
|Goodwill                          | 
|                                  | 
|Total assets                      | 
|                                  | 
|Liabilities acquired:             | 
|Future policy benefits            | 
|Other liabilities                 | 
|                                  | 
|Total liabilities                 | 
|                                  | 

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 September 30, 2003 is $10.9 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 all periods  presented have been classified in our financial  statements as part
of  discontinued  operations  and are classified as operations  held for sale. For the three and nine months ended  September 30, 2003,
we recorded an after-tax loss for our health  operations and our  consulting  business of $1.1 million and $2.8 million,  respectively,
including the loss of $0.6 million,  net of tax, resulting from the consummation of our sale of Aegis Financial  Corporation during the
third quarter of 2003.

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 September  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 nine months ended September 30, 2003, we recorded an after-tax loss for reinsurance assumed and commercial lines
businesses of $0.9 million and $7.6 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 and the recording, during the third quarter of 2003, of a pre-tax charge of $1.1 million related to
the settlement of the Nichols lawsuit.  See Note B to the interim consolidated financial statements.

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

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Note G - Reinsurance Agreements

We entered into a 50% quota share agreement, effective September 30, 2003, on our residential property book of business in the
states of Alabama, Alaska, Arizona, California, Connecticut, Florida, Hawaii, Massachusetts, New Jersey, New York, Pennsylvania,
Rhode Island, South Carolina, Tennessee, and West Virginia.   The terms of the 50% quota share include a term of nine months and a
ceding commission due from the reinsurers of 37% on net written premiums.  The impact of entering into the 50% quota share to our
consolidated balance sheet as of September 30, 2003 was to increase reinsurance balances receivable by $42.7 million, reduce deferred
acquisition costs by $15.8 million and increase amount due to reinsurers by $26.9 million.  The statutory capital and surplus of
Vesta Fire was increased by $15.8 million as of September 30, 2003 as a result of entering into this agreement.  The Company's net
premiums earned for the three and nine months ended September 30, 2003 was not impacted by the provisions of the 50% quota share.
The $26.9 million due to reinsurers was funded in November of 2003.

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 realized  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.

During the first  quarter of 2003,  A.M.  Best  Company  adjusted  the  financial  strength  ratings of our property and casualty
insurance  subsidiaries  from B+ (Very Good) to B (Fair).  Through the nine months  ended  September  30,  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 capital position,  we began an evaluation of a possible sale or divestiture of our life and health
business as well as  portions  of our  property  and  casualty  business  in March of 2003.  One result  from this  evaluation  was the
determination  that we would divest ourselves of our health  insurance  operations.  The divesture of our health  insurance  operations
was completed in the third quarter of 2003 with the sale of Aegis  Financial  Corporation  (Aegis),  the holding company for our health
insurance line of business.  Another  initiative  resulting from our evaluation  relates to our non-standard  auto  operations.  During
the third quarter of 2003, we began the process of merging our non-standard auto underwriting  operations with our non-standard  agency
operations.  The merging of these operations will be effected  through various  intercompany  transactions  and reinsurance  contracts,
the results of which will effectively  place all of the economic risks and rewards of our  non-standard  auto  underwriting  operations
into American  Agencies  Holdings,  Inc.,  our  non-standard  agency  holding  company.  The purpose of merging the  non-standard  auto
underwriting and agency  operations is twofold.  First, the legal segregation of the non-standard  underwriting  operations will enable
management to seek separate  financial  strength ratings for our non-standard  auto operations and our standard  property-casualty  and
life  insurance  segments.  Secondly,  the legal  segregation  of our  non-standard  auto  operations  will  provide the  Company  with
additional  options in regards to capital  raising  opportunities.  Completing  the  merging of our  non-standard  auto  operations  is
contingent upon regulatory approval from various state regulatory agencies.

In regards to our evaluation of the standard property and casualty  business,  we intend to continue to evaluate our property and
casualty  business in the  future.  However,  as a near-term  strategy,  we  concluded  that an  enhanced  utilization  of  reinsurance
contracts,  as described below in the Comparison of Third Quarter 2003 to Third Quarter of 2002 - Standard  property-casualty  segment,
provides the Company with an  opportunity  to improve  statutory  capital,  which will enable us to more fully realize  premium  growth
opportunities  and better  capture the  positive  underwriting  results of our  property and  casualty  business.  Finally,  we plan to
continue to evaluate the possible divestiture of our life insurance 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.

Earned premium revenue levels for our standard property-casualty and non-standard underwriting activities are dependent upon two
significant factors:  premium rates and premium volumes.  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 nine
months of 2003, we implemented five rate increases in our standard automobile  business line in the states of North Carolina,  Ohio, West Virginia and  Pennsylvania,  which  represented a weighted
average  premium  increase of  approximately  5.5% on estimated  annualized net written  premiums of $46.8  million.  In the first nine
months of 2003, we also implemented 13 rate increases in our standard residential  property line in the states of West Virginia,  Ohio,
Pennsylvania,  Tennessee,  South Carolina,  Arizona and Florida which  represented a weighted average premium increase of approximately
19.4% on estimated  annualized net written premiums of $47.5 million. In regards to our non-standard  underwriting  segment, we enacted
nine rate increases and five rate decreases in the states of Florida,  Illinois,  Indiana,  Missouri,  and Texas. By year-end,  changes
the impact of these rate adjustments will be a reduction in total  non-standard  auto rates of approximately  1.0%, which is reflective
of our favorable loss ratio experience.

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The degree to which the Company is able to realize the positive  impact from these rate  increases is contingent  upon the degree
to  which  we can  sustain  current  net  written  premium  levels.  Decreased  written  premium  levels  due to  competition,  adverse
developments  from our financial  strength ratings or changes in the degree to which we utilize  reinsurance would reduce the impact of
these rate increases.  Furthermore,  the impact of these rate increases may be reduced through future rate reductions  enacted by state
regulatory agencies.

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.  Currently,  our surplus  leverage ratio does 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.  We  completed  our
evaluation  of our property  and casualty  business  during the third  quarter of 2003.  Although we intend to continue to evaluate our
property and casualty business in the future, we concluded that an enhanced  utilization of reinsurance  contracts,  as described below
in the  Comparison of Third Quarter 2003 to Third Quarter of 2002 - Standard  property-casualty  segment,  provides the Company with an
opportunity to improve statutory  capital,  which will enable us to more fully realize premium growth  opportunities and better capture
the positive underwriting results of our property and casualty business.

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.

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 investment 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 Third Quarter 2003 to Third Quarter 2002

For the quarter ended  September 30, 2003, we reported net income  available to common  shareholders  of $4.3 million,  or $0.12
income per diluted  share,  compared with a net loss  available to  shareholders  of $11.6  million,  or $0.34 loss per diluted  share,
reported for the previous year.

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

- Our combined ratio in the standard property-casualty segment was 92.9% as compared to 102.3% for the third quarter of 2002.  The
combined ratio for the current quarter reflects improved loss ratios for both our auto and homeowners businesses as a result of
improvements in the number and severity of claims.
- 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  annualized yield (excluding  realized and unrealized gains) decreased
                    from 5.8% for the quarter ended September 30, 2002 to 4.7% for the quarter ended September 30, 2003.
- Our corporate and other segment reported a pre-tax loss of $3.6 million for the quarter ended September 30, 2003 compared to
                a pre-tax loss of $22.6 million for the quarter ended September 30, 2002.  This improvement is reflective of a $23.6
                million arbitration charge recorded during the third quarter of 2002 partially offset by a gain on
                extinguishment of debt of $3.0 million and the inclusion of Deferrable Capital Security distributions accrued during
                the third quarter of 2003 as a component of pre-tax income (loss).

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

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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 third quarter of 2003,  the standard  property-casualty  segment
generated approximately $85.6 million in revenue, or approximately 51.7% of consolidated revenue.

We entered into a 50% quota share agreement effective September 30, 2003, on our residential property book of business in the states
of Alabama, Alaska, Arizona, California, Connecticut, Florida, Hawaii, Massachusetts, New Jersey, New York, Pennsylvania, Rhode
Island, South Carolina, Tennessee, and West Virginia ("continuing states"), excluding Texas. Under a quota share contract, reinsurers
share losses and certain allocated expenses in the same percentage as they share in premiums.  The terms of this 50% quota share
include a term of nine months and a ceding commission due from the reinsurers of 37% on net written premiums.  The impact of entering
into the 50% quota share on the consolidated balance sheet was to increase reinsurance balances receivable by $42.7 million, reduce
deferred acquisition costs by $15.8 million and increase amount due to reinsurers by $26.9 million.  The statutory capital and
surplus of Vesta Fire was increased by $15.8 million as of September 30, 2003 as a result of entering into this agreement.   Due to
the offsetting of the decrease in net written premiums and unearned premiums, the Company's net premiums earned for the three months
ended September 30, 2003 was not impacted by the provisions of the 50% quota share.

Net written premiums decreased $59.9 million, or 62.6%, to $35.8 million during the three months ended September 30, 2003
compared to net written premiums of $95.7 million for the three months ended September 30, 2002, reflecting the $42.7 million
reduction in net written premiums resulting from the abovementioned 50% quota share agreement as well as a $17.3 million reduction in
overall premium volumes primarily attributable to the Texas residential property 50% quota share agreement entered into in December
of 2002.  Net premiums earned during the three months ended September 30, 2003 decreased $5.3 million, or 6.1%, as compared to the
third quarter of 2002.  The decrease in net premiums earned 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.

Although we expect our net written  premium to continue to decrease in the  remainder  of 2003 and into 2004 on a net basis as a
result of the 50% quota share  agreement on our residential  property book of business in our continuing  states,  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 nine months of 2003, we  implemented  five rate  increases in our standard  automobile  business line in the states of
North  Carolina,  Ohio,  West Virginia and  Pennsylvania,  which  represented  an average  premium  increase of  approximately  5.5% on
estimated  annualized net written  premiums of $46.8 million.  In the first nine months of 2003, we also  implemented 13 rate increases
in our standard residential property line in the states of West Virginia, Ohio, Pennsylvania,  Tennessee,  South Carolina,  Arizona and
Florida which  represented an average premium  increase of  approximately  19.4% on estimated  annualized net written premiums of $47.5
million.

Policy fees,  which are fees earned by our insurance  companies based on gross written  premiums,  increased $2.2 million during
the three months ended  September  30, 2003 to $3.5 million from $1.3 million for the same period in the prior year.  This  increase is
primarily attributable to increased gross written premium volumes during 2003.

Loss and loss adjustment  expenses (LAE) for standard  property casualty lines for the period ended September 30, 2003 decreased
by $10.5  million,  or 17.2%,  to $50.4  million  from $60.9  million  in the prior  year.  The  decrease  in loss and loss  adjustment
expenses  incurred was primarily  attributable to the 50% quota share  agreement on our Texas  homeowners book of business and improved
underwriting  results in our  various  homeowners  business  including  improvements  in the  severity  of  claims.  The loss ratio for
standard  property-casualty  segment  decreased to 58.9% for the third quarter of 2003 from 68.7% for the three months ended  September
30, 2002 reflecting improvements in the number and severity of claims during the current period.

For the quarter ended September 30, 2003, policy acquisition  expenses decreased by $1.3 million,  or 6.7% to $18.2 million from
$19.5 million for the same period of the prior year.  Policy  acquisition  costs as a percentage of net premiums earned for the quarter
ended September 30, 2003 was 22.2% as compared to 22.4% for the same period in the prior year.

Operating expenses increased $0.7 million,  or 6.8%, to $11.0 million during the three months ended September 30, 2003 from $10.3
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 during 2003.

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 third quarter of 2003, our non-standard agency segment
generated approximately $35.0 million of commission and fees-based revenue, or 19.0 % of aggregate revenue, before eliminations.

For the quarter ended September 30, 2003,  fees and commissions in our agency segment  increased by $8.2 million due to increased
sales of  non-standard  products.  Our agency  segment  pre-tax income  increased $0.2 million,  or 5.7%, to $3.7 million for the three
months ended September 30, 2003 compared to $3.5 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.

Since  entering  the  non-standard  auto  business  in  late  2000,  our  non-standard   underwriting   revenues  have  increased
significantly.  In the third quarter of 2003, our non-standard  underwriting segment generated  approximately $49.8 million of revenue,
representing approximately 30.0% of consolidated revenue.

For the quarter ended September 30, 2003, net premiums  written for  non-standard  lines  increased by $1.3 million,  or 2.9%, to
$46.5 million from $45.2 million in 2002. For the same period,  net premiums earned for  non-standard  lines increased by $1.3 million,
or 3.1%,  to $43.3  million  from  $42.0  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.

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Of our total  non-standard  net written  premiums of $46.5 million during the third quarter of 2003, the net premiums  written on
policies produced by our affiliated  agencies were  approximately  $39.2 million.  The largest component of our net premiums written on
policies sold by affiliated  agencies was  approximately  $18.2 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  and  unaffiliated  agencies  have  continued to increase  during the first nine of 2003, we expect the rate of growth of our
total  non-standard  underwriting net written premiums will decrease as compared to the rate of growth experienced in 2002 as result of
the InsureOne quota share reinsurance contract.

Policy fees,  which are fees earned by our insurance  companies based on gross written  premiums,  increased $2.6 million during
the three months ended  September  30, 2003 to $5.7 million from $3.1 million for the same period in the prior year.  This  increase is
primarily attributable to increased gross written premium volumes during 2002 and 2003.

Non-standard net written premiums produced by unaffiliated  agencies was approximately  $7.3 million,  with  approximately  $16.1
million of gross  written  premium  ceded to third party  reinsurers.  For the quarter  ended  September  30, 2003,  we also  collected
"issuing carrier" or "fronting" fees of approximately  $0.7 million,  down from $1.4 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  that has been operating on a
renewal-only basis during 2003.

Loss and loss adjustment  expenses for the non-standard  underwriting  segment increased by $3.7 million, or 14.2 %, in the third
quarter of 2003, to $29.8 million from $26.1 million in 2002.  The loss ratio for our  non-standard  underwriting  segment at September
30, 2003 was 60.7%,  compared  with 57.8% at  September  30,  2002.  The  increase in the loss and loss  adjustment  expense  ratio was
primarily attributable to the maturity of this book of business.

For the quarter ended September 30, 2003 policy  acquisition  expenses decreased $0.6 million to $12.9 million from $13.5 million
in 2002.  Policy  acquisition  expenses as a percentage  of earned  premiums and policy fees  decreased to 26.2% for the quarter  ended
September 30, 2003 from 29.9% in 2002,  primarily  attributable  to higher  contingent  commissions  earned during the prior quarter as
compared to the current quarter.

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 September  2003,  American  Founders had  approximately  $1.8  billion  (face value) of life and annuity  products in
force, and approximately $726.4 million in invested assets.

In the third quarter,  our life insurance  segment generated  approximately  $11.0 million in revenue,  or approximately  6.6% of
consolidated  revenue.  Our life insurance  segment  pre-tax income  decreased  $1.3 million,  or 46.1%,  to $1.5 million for the three
months ended  September 30, 2003 compared to $2.9 million for 2002.  This decrease is attributed to several  factors,  including  lower
fee income, lower investment income, and unfavorable mortality developments.

Life  insurance  fees  decreased  to $0.2  million  from $0.8  million  in the prior year as a result of  increased  reinsurance.
Investment  income  decreased  $3.1 million from $9.8  million for the three  months  ended  September  30, 2002 to $6.7 million in the
current year due to increased  reinsurance,  higher volumes of paydowns on our  mortgage-backed  securities  and an overall  decline in
market interest rates during.  The weighted  average  annualized  yield on invested assets for 2003 (excluding  realized and unrealized
gains/losses)  was 5.0% compared with 6.3% for the prior year period.  Policyholder  benefits  increased $1.1 million,  or 26.2%,  from
$4.1 million to $5.2 million due to increased mortality rates for our existing book of business.

Corporate and other segment

For the period ended  September  30,  2003,  net  investment  income  related to our  property-casualty  underwriting  operations
decreased by $1.5 million to $3.4 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,  which was the primary
cause in the reduction of average  invested  assets.  The weighted  average  annualized  yield on invested assets for the quarter ended
September 30, 2003 (excluding realized and unrealized gains/losses) was 4.2% compared with 5.1% for the prior year period.

Our 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 approximately  $0.3 million compared with 2002,  primarily due to debt repurchased in
the second and third quarters of 2002.

The Company's adoption of the provisions of SFAS No. 150,  "Accounting for Certain Financial  Instruments with Characteristics of
both  Liabilities  and Equity"  ("SFAS 150")  resulted in the  Deferrable  Capital  Security  distributions  for the three months ended
September  30, 2003 being  included  as a  component  of pre-tax  income  (loss).  Pursuant  to the  provisions  of SFAS No.  150,  the
classification  of Deferrable  Capital Security  distributions for prior periods was not changed.  As a result,  $0.5 million increased
the pre-tax loss for the corporate and other segment.

In 2003,  operating expenses decreased by $0.9 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 all periods presented have been reclassified in our financial statements as
part of discontinued operations and are classified as operations held for sale.   We consummated the sale of Aegis Financial
Corporation (Aegis) and its subsidiary States General Life Insurance Company (States General) effective September 30, 2003 for $4.6
million.  The sales price was financed through a $5.0 million note issued by the buyer payable toVesta Fire.  The note bears interest at a fixed rate of 6%, with interest payments due semi-annually and principle due in September 2006.    The sale of Aegis resulted in
the Company recording a loss of $0.6 million, net of tax, which is reflected as a component of discontinued operations.    For the
quarter ended September 30, 2003, we recorded a loss of $1.1 million, net of tax, for our health operations and our consulting
business, including the aforementioned loss on the sale of Aegis.

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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  September  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 September 30, 2003, we recorded a loss of $0.9 million,  net of tax, for reinsurance assumed and commercial
lines primarily related to the settlement of the Nichols lawsuit.  See Note B to the interim  consolidated  financial  statements for a
further discussion of the Nichols lawsuit.

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

Income taxes

For the three months ended  September 30, 2003,  we recorded an income tax expense of $3.5  million,  compared with an income tax
benefit of $5.5 million  recorded in the prior year.  Our  effective  tax rate of  approximately  35% in 2003 was  consistent  with our
effective tax rate in the prior year.

Comparison of Nine Months Ended September 30, 2003 with Nine Months Ended September 30, 2002

For the nine month period ended September 30, 2003, we reported net loss available to common  shareholders  of $3.6 million,  or
$0.10 loss per diluted share,  compared with net loss  available to  shareholders  of $21.1  million,  or $0.63 loss per diluted share,
reported for the previous year.

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

- Our combined ratio in the standard property-casualty segment was 103.9% for the current quarter as compared to 104.0% in the prior
year.  The combined ratio of 103.9% was primarily driven by $27.9 million of losses, loss adjustment expenses and additional
catastrophe coverage premiums resulting from various catastrophes occurring during the first nine months of 2003, including $18.3
million related to a series of April, 2003 hail storms in Texas and the Southeastern United States.
- Net investment  income has been adversely  impacted by higher levels of prepayments on our  mortgage-backed  securities and an
              overall  decline in market rates.  The weighted  average  annualized  yield  (excluding  realized and  unrealized  gains)
              decreased from 5.8% for the nine months ended September 30, 2002 to 5.0% for the nine months ended September 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 $12.1 million for the nine months ended September 30, 2003 compared to $9.3 million in the prior year.
- Our  corporate  and other  segment  reported a pre-tax  loss of $3.4  million for the nine  months  ended  September  30, 2003
              compared  to a pre-tax  loss of $30.5  million  for the nine  months  ended  September  30,  2002.  This  improvement  is
              reflective of a $23.6 million arbitration charge recorded during the third quarter of 2002 partially offset by
              a $4.4 million gain on the extinguishment of debt and the inclusion of Deferrable Capital Security  distributions accrued
              during the third quarter of 2003 as a component of pre-tax income (loss) in the current year period.

Standard property-casualty segment

In the nine months ended September 30, 2003, the standard  property-casualty  segment generated  approximately $246.8 million in
revenue, or approximately 50.1% of consolidated revenue.

Effective  September  30, 2003,  we entered  into a 50% quota share  agreement on our  residential  property  book of business in
continuing states,  excluding Texas.  Under a quota share contract,  reinsurers share losses and certain allocated expenses in the same
percentage  as they share in premiums.  The terms of this 50% quota share include a term of nine months and a ceding  commission  due from
the  reinsurers  of 37% on net  written  premiums.  The impact of  entering  into the 50% quota  share on the consolidated balance sheet was to increase reinsurance balances receivable by $42.7  million,  reduce  deferred  acquisition  costs by $15.8  million and  increase  amount due to
reinsurers by $26.9  million.  The statutory  capital and surplus of Vesta Fire was increased by $15.8 million as of September 30, 2003
as a result of entering  into this  agreement.  Due to the  offsetting of the decrease in net written  premiums and unearned  premiums,
the Company's net premiums earned for nine months ended September 30, 2003 was not impacted by the provisions of the 50% quota share.

Net written premiums decreased $96.7 million, or 32.7%, to $198.8 million during the nine months ended September 30, 2003
compared to net written premiums of $295.5 million for the nine months ended September 30, 2002, reflecting the $42.7 million
reduction in net written premiums resulting from the abovementioned 50% quota share agreement as well as a $53.9 million reduction in
overall premium volumes primarily attributable to the Texas residential property 50% quota share reinsurance treaty entered into in
December of 2002.  Net premiums earned during the nine months ended September 30, 2003 increased $4.9 million, or 2.1%, as compared
to the prior year period.  The increase in net premiums earned was primarily due to increases in premiums written in prior periods
being earned in the current period.

Although we expect our net written premium to continue to decrease in the remainder of 2003 and into 2004 on a net basis with the
entering into of the 50% quota share agreement on our residential property book of business in continuing states, excluding Texas, 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 nine months of 2003, we implemented five rate increases in our standard automobile business
line in the states of North Carolina, Ohio, West Virginia and Pennsylvania, which represented an average premium increase of
approximately 5.5% on estimated annualized net written premiums of $46.8 million.   In the first nine months of 2003, we also
implemented 13 rate increases in our  standard residential property line in the states of West Virginia,  Ohio,  Pennsylvania,  Tennessee,  South Carolina,  Arizona and Florida which
represented an average premium increase of approximately 19.4% on estimated annualized net written premiums of $47.5 million.

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Policy fees,  which are fees earned by our insurance  companies based on gross written  premiums,  increased $4.7 million during
the nine months ended  September  30, 2003 to $8.5 million  from $3.8 million for the same period in the prior year.  This  increase is
primarily attributable to increased gross written premium volumes during 2002 and 2003.

Loss and loss adjustment  expenses for standard  property  casualty lines for the nine months ended September 30, 2003 increased
by $1.7  million,  or 1.0%,  to $168.4  million  from  $166.7  million in the prior  year.  The  increase  in loss and loss  adjustment
expenses  incurred was primarily  attributable  to a $17.4 million  increase in catastrophe  losses in the first nine months of 2003 as
compared to the prior year period  off-set by the effects of the 50% quota share  agreement  on our Texas  homeowners  book of business
and favorable  non-catastrophe  underwriting  results.  The increase in  catastrophe  losses is primarily  related to a series of April
2003 hail storms in Texas and  Southeastern  United States.  The loss ratio for standard  property-casualty  segment was 68.3% for nine
months ended 2003  compared  with 70.3% for the nine months  ended  September  30, 2002.  The decrease in the loss ratio in the current
year  reflects  improved  underwriting  performance,  including  improvements  in  claim  severity  for both  our  homeowners  and auto
businesses.

For the nine months ended  September  30, 2003 policy  acquisition  expenses  increased  $3.6 million to $54.6 million from $51.0
million in 2002.  Policy  acquisition  expenses as a  percentage  of earned  premiums  and policy fees  increased to 22.2% for the nine
months ended September 30, 2003 from 21.6% in 2002, primarily  attributable to higher contingent  commissions earned during the current
year as compared to prior year.

Non-standard agency segment

For the nine months ended  September  30, 2003,  our  non-standard  agency  segment  generated  approximately  $107.8  million of
commission and fees-based revenue, or approximately 19.8% of aggregate revenue, before eliminations.

For the nine months ended September 30, 2003, fees and commissions in our agency segment  increased by $22.4 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 nine months of 2003,  achieving pre-tax income of approximately  $12.1 million compared with $9.3 million during the first
nine months of 2002.

Non-standard underwriting segment

Since entering the non-standard  auto business in late 2000, our revenue has increased  significantly.  For the nine months ended
September  30,  2003,  our  non-standard  underwriting  segment  generated  approximately  $142.5  million  of  revenue,   representing
approximately 28.9% of consolidated revenue.

For the nine months ended September 30, 2003, net premiums written for non-standard lines increased by $5.6 million,  or 4.2%, to
$139.5  million  from $133.9  million in 2002.  For the same period,  net  premiums  earned for  non-standard  lines  increased by $5.4
million to $123.8  million  from  $118.4  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 $139.5  million  during the nine months ended  September  30, 2003,  the net
premiums written on policies  produced by our affiliated  agencies was approximately  $116.4 million.  The largest component of our net
premiums written on policies sold by affiliated  agencies was approximately  $57.4 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 2003, we expect the rate of growth of our total  non-standard  underwriting  net
written  premiums  will  decrease  as  compared  to the rate of  growth  experienced  in 2002 as result of the  InsureOne  quota  share
reinsurance contract.

Policy fees,  which are fees earned by our insurance  companies based on gross written  premiums,  increased $9.1 million during
the nine months ended  September  30, 2003 to $16.4  million from $7.3 million for the same period in the prior year.  This increase is
primarily attributable to increased gross written premium volumes during 2002 and 2003.

Of our total  non-standard  net written  premiums of $139.5  million  during the nine month period ended  September 30, 2003, net
written premiums produced by unaffiliated  agencies was approximately $23.1 million,  with approximately $56.3 million of gross written
premium  ceded to third party  reinsurers.  For the nine months  ended  September  30, 2003,  we also  collected  "issuing  carrier" or
"fronting"  fees of  approximately  $2.3  million,  down from $4.6  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  that has been  operating  on a
renewal-only basis during 2003.

Loss and loss adjustment expenses during the nine months ended September 30, 2003 for the non-standard underwriting segment increased
by $11.0 million, or 14.9%, to $84.9 million from $73.9 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  September  30,  2003 was 60.6%,  compared  with 58.7% at  September  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.

For the nine month period ended  September  30, 2003 policy  acquisition  expenses  increased  $3.3 million to $36.6 million from
$33.3  million in 2002.  Policy  acquisition  expenses as a percentage  of earned  premiums and policy fees  increased to 29.6% for the
nine months ended September 30, 2003 from 28.1% in 2002,  primarily  attributable to an increase in the volume of premiums generated by
unaffiliated  agencies for which we pay higher commissions.

Life insurance segment

For the nine months ended September 30, 2003, our life insurance segment  generated  approximately  $33.4 million in revenue,  or
approximately  6.8% of  consolidated  revenue.  Our life insurance  segment  pre-tax income  decreased $3.9 million,  or 42.4%, to $5.3
million for the nine months  ended  September  30, 2003  compared to $9.2  million for 2002.  This  decrease is  attributed  to several
factors, including lower fee income, lower investment income, and unfavorable mortality developments.

Life insurance  policy fees  decreased to $1.7 million from $2.9 million in the prior year as a result of increased  reinsurance.
Investment  income  decreased  $6.8  million  from the prior year due to  increased  reinsurance,  higher  volumes of  paydowns  on our
mortgage-backed  securities  and a decline in market  interest  rates during 2003. The weighted  average  annualized  yield on invested
assets for the nine months ended  September 30, 2003 (excluding  realized and

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unrealized  gains and losses) was 5.3% compared with 6.1%
for the prior  year  period.  Policyholder  benefits  increased  $1.1  million,  or 26.2%,  from $4.1  million to $5.2  million  due to
increased mortality rates for the existing book of business.

Corporate and other segment

For the nine-month period ended September 30, 2003, net investment income related to our property-casualty underwriting operations
decreased by $4.1 million to $10.1 million from $14.2 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, which was the
primary cause in the reduction of average invested assets. The weighted average annualized yield on invested assets for the nine
months ended September 30, 2003 (excluding realized and unrealized gains and losses) was 4.4% compared with 5.2% for the prior year
period.

Our 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 approximately  $1.7 million compared with 2002,  primarily due to debt repurchased in
the second and third quarters of 2002.

The Company's adoption of the provisions of SFAS No. 150 resulted in the Deferrable Capital Security  distributions for the three
months ended  September 30, 2003 being included as a component of pre-tax  income  (loss).  Pursuant to the provisions of SFAS No. 150,
the  classification  of  Deferrable  Capital  Security  distributions  for prior  periods was not  changed.  As a result,  $0.5 million
increased the pre-tax loss for the corporate and other segment.

In 2003,  operating expenses decreased by $3.5 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 all periods presented have been reclassified in our financial statements as
part of discontinued operations and are classified as operations held for sale.   We consummated the sale of Aegis Financial
Corporation (Aegis) and its subsidiary States General Life Insurance Company (States General) effective September 30, 2003 for $4.6
million.  The sales price was financed through a $5.0 million note issued by the buyer payable to Vesta Fire.  The note bears
interest at a fixed rate of 6%, with interest payments due semi-annually and principle due in September 2006.    The sale of Aegis
resulted in the Company recording a loss of $0.6 million, net of tax, which is reflected as a component of discontinued
operations.    For the nine months ended September 30, 2003, we recorded a loss of $2.8 million, net of tax, for our health
operations and our consulting business, including the aforementioned $0.6 million loss from the sale of Aegis.

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  September  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 nine months ended  September 30, 2003, we recorded a pre-tax loss of $7.6 million,  net of tax, 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 and the
recording,  during the third quarter of 2003, a pre-tax charge of $1.1 million  related to the settlement of the Nichols  lawsuit.  See
Note B to the interim consolidated financial statements for a further discussion of the CIGNA arbitration and the Nichols lawsuit.

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

Income taxes

For the period ended  September  30, 2003 and 2002, we recorded an income tax expense of $4.3 million and an income tax benefit of
$4.7 million,  respectively.  Our effective tax rate of  approximately  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  Insurance  Group,  Inc.  (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.  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

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"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.  Vesta Fire has not
paid any dividends during 2003.

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 Vesta,  or otherwise fund the  obligations of our holding company
on its behalf, sufficient to fund our anticipated operating cash flows and 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  American  Agencies
Holdings,  Inc.  (American  Agencies),  formally  operating under the name Instant Insurance  Holdings,  Inc.  (Instant),  representing
approximately  70% of American  Agencies'  issued and  outstanding  shares of capital stock as of September 30, 2003.  The new facility
bears  interest at First  Commercial's  prime rate and will mature no earlier than June 30,  2005.  As of  September  30, 2003,  we had
drawn $30.0 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 September 30, 2003, we were in compliance  with all quarterly  covenants.  However,  based on our results  through the first nine
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
September 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.  In October of 2003, Vesta Fire secured an additional letter of credit in the amount of $4.8 million
related to the NRMA 20 percent whole account quota share dispute.

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 September 30, 2003, we had pledged  approximately  $13.4
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 September
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  of 2005.  Our holding  company  paid these  subsidiaries  approximately  $5.0
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 nine months ended  September 30, 2003 and 2002, was
$(1.7) million and $73.6 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 $82.6 million and $48.4 million for the nine months
ended  September 30, 2003 and 2002,  respectively  as we invested cash generated by our  operations in prior periods.  Net cash used in
financing  activities  was $16.6 million and $16.1 million for the period ending  September 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

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 guarantees  were issued or modified  during the nine months ended  September 30, 2003,  which were
impacted by the provisions of FIN No. 45.

On January 15, 2003, FASB completed its redeliberations of the project related to the consolidation of variable interest entities
which culminated with the issuance of FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities (VIEs).  FIN
46 states that if a business enterprise has a controlling financial interest in a VIE, the assets, liabilities and results of the
activities of the VIE should be included in the consolidated financial statements of the business enterprise.  This Interpretation
explains how to identify VIEs and how an enterprise assesses its interests in a VIE to decide whether to consolidate that entity.
FIN 46 also requires existing unconsolidated VIEs to be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved.  VIEs that effectively disperse risks will not be consolidated unless a single
party holds an interest or combination of interests that effectively recombines risks that were previously dispersed.  This
Interpretation applies immediately to variable interest entities created after January 31, 2003, and to VIEs in which an enterprise
obtains an interest after that date.  On October 8, 2003, the FASB deferred the effective date for preexisting VIEs to the period
ending after December 15, 2003. As a result, the Company will adopt FIN 46 for pre-existing transactions in the fourth quarter of
this year.  The Company has not entered into any transactions subsequent to January 31, 2003 that would qualify as a VIE and is
continuing to evaluate the impact of this pronouncement on existing entities.

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
provisions of DIG B36 would be applied on a prospective  basis and will become  effective  during the fourth
quarter of 2003.  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 is 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.  The  Company's  Deferrable
Capital  Securities are subject to the  provisions of SFAS No. 150.  Accordingly,  the  outstanding  balance of the Company's  Deferrable
Capital  Securities  of $22.5  million as of September  30, 2003 has been  reclassified  to a component of total  liabilities  from the
previous  mezzanine debt  classification.  Furthermore,  Deferrable  Capital  Security  distributions of $0.5 million for the three and
nine months  ended  September  30, 2003 are  reflected  as a component  of income from  continuing  operations.  The  classification  of
Deferrable Capital Securities and Deferrable  Capital Security  distributions for all prior periods remains unchanged,  pursuant to the
provisions of SFAS No. 150.

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

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 as of September 30, 2003.  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 adequately addresses the previously identified deficiencies in design and operation.

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PART IIItem 1. Legal Proceedings

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.

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 former  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.

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 September 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.  Pursuant to an order
of the NRMA  Arbitration  Panel,  Vesta posted an additional $4.8 million letter of credit in October of 2003 in favor of NRMA. We also
filed for arbitration  against Alfa Mutual  Insurance  Company  ("Alfa") and Dorinco  Reinsurance  Company  ("Dorinco"),  the other two
participants  on the treaty.  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 December 8, 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 panel  notified the Company that it ruled that the
treaty does not apply to loss  occurrences  prior to July 1, 1997.  Primarily,  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 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  began on October 20, 2003 and was  adjourned on October
31, 2003.  The hearing is currently  scheduled to resume and be  concluded in January of 2004.  On December 16, 2002,  Dorinco  filed a
motion seeking an order that the treaty does not cover  developmental  losses  relating to loss  occurrences  prior to July 1, 1997. 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  for the two weeks of March 8 through  March 12 and April 26 through  April 30,  2004.  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
$58.0 million.

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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.  This case is  currently  scheduled  for  mediation  in
December of 2003.

Nichols vs. Vesta Fire  Insurance  Corporationis 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.  Subsequent  discussions  with the
Liquidator of Delta American Re have resulted in a negotiated settlement of $1.1 million, which was recorded in the third quarter of 2003.

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.

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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

None.

Item 5.  Other Information

Recently, our Chief Executive Officer, Norman Gayle experienced a brief seizure and was diagnosed to have a mass in his brain.
Neither Mr. Gayle nor his physicians believe this condition or the current course of treatment is currently impeding his ability to
perform the duties of his office.  Mr. Gayle plans to follow the recommendation of his physician to pursue check-ups every two months
to observe his condition.   This condition or alternative courses of treatment could, however, in the future, cause Mr. Gayle to
become unable to perform the duties of his office for an undetermined period of time.

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Item 6. Exhibits and Reports on Form 8-K

a)           EXHIBITS

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.

a)           Reports on Form 8-K.

A current report was filed on Form 8-K on August 6, 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:  November 12, 2003

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