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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, 2002

OR

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

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

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

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

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

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

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

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

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

---

Vesta Insurance Group, Inc.

Index

|Part I  | Financial Information                                                                   | Page
|------- | --------------------------------------------------------------------------------------- | ----
|Item 1. | Financial Statements:                                                                   |     
|        | Consolidated Balance Sheets at September 30, 2002 and December 31, 2001                 | 1   
|        | Consolidated Statements of Income and Comprehensive Income for the                      |     
|        | Three Months and Nine Months ended September 30, 2002 and 2001                          | 2   
|        | Consolidated Statements of Cash Flows for Nine Months ended September 30, 2002 and 2001 | 3   
|        | Notes to Consolidated Financial Statements                                              | 4   
|Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations   | 12  
|Item 3. | Quantitative and Qualitative Disclosures About Market Risk                              | 16  
|Item 4. | Controls and Procedures                                                                 | 16  
|        |                                                                                         |     
|
|Item 1. | Legal Proceedings                                                                       | 17  
|Item 2. | Changes in Securities                                                                   | 19  
|Item 3. | Defaults Upon Senior Securities                                                         | 19  
|Item 4. | Submission of Matters to a Vote of Security Holders                                     | 19  
|Item 5. | Other Information                                                                       | 19  
|Item 6. | Exhibits and Reports on Form 8-K                                                        | 20  
|        | Certifications                                                                          | 22  

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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,
                                                                                  2002             2001
                                                                             ---------------  ---------------
                                                                              (unaudited)
Assets:

    Fixed maturities available for sale - at fair value (cost:  2002 - $861,576;
         2001 - $785,049)                                                         $ 875,581        $ 807,197
    Equity securities-at fair value: (cost: 2002- $29,228; 2001- $32,298)            27,141           31,431
    Mortgage and collateral loans                                                    38,735           43,978
    Policy loans                                                                     61,491           63,949
    Short-term investments                                                           71,338           41,198
    Other invested assets                                                            27,751           47,996
                                                                             ---------------  ---------------
                       Total investments                                          1,102,037        1,035,749
    Cash                                                                             32,745           23,579
    Accrued investment income                                                        13,420           23,090
    Premiums in course of collection (net of allowances for losses
         of $2,389 in 2002 and $2,684 in 2001)                                      167,238           47,589
    Reinsurance balances receivable                                                 347,198          357,827
    Reinsurance recoverable on paid losses                                           40,127           76,757
    Deferred policy acquisition costs                                                98,210           58,832
    Property and equipment                                                           18,527           18,368
    Deferred income taxes                                                            42,839           38,591
    Goodwill and other intangible assets                                            138,186          109,260
    Other assets                                                                     28,601           41,240
                                                                             ---------------  ---------------
                       Total assets                                             $ 2,029,128      $ 1,830,882
                                                                             ===============  ===============

Liabilities:
    Policy liabilities                                                            $ 680,446        $ 695,170
    Losses and loss adjustment expenses                                             342,210          280,997
    Unearned premiums                                                               301,245          179,879
    Federal Home Loan Bank advances                                                 167,300          168,614
    Short term debt                                                                  30,184           29,964
    Long term debt                                                                   66,798           79,432
    Reinsurance balances payable                                                     76,445           14,184
    Other liabilities                                                                96,804          100,085
                                                                             ---------------  ---------------
                     Total liabilities                                            1,761,432        1,548,325

Commitments and contingencies: See Note B

Deferrable Capital Securities                                                        22,445           23,250

Stockholders' equity:
    Preferred stock, $.01 par value, 5,000,000 shares authorized, issued:
         2002 - 0 and 2001 - 0                                                           --               --
    Common stock, $.01 par value, 100,000,000 shares authorized,  issued:
         2002 - 37,528,111 and 2001 - 36,994,464                                        375              370
    Additional paid-in capital                                                      248,313          244,640
    Accumulated other comprehensive income, net of  tax expense
         of $6,417 and $4,191 in 2002 and 2001, respectively                         11,918            7,784
    Retained earnings                                                                 8,787           32,611
    Treasury stock (1,084,817 shares and 923,972 shares at cost
         at September 30, 2002 and December 31, 2001, respectively)                  (7,540)          (6,591)
    Unearned stock                                                                  (16,602)         (19,507)
                                                                             ---------------  ---------------
                 Total stockholders' equity                                         245,251          259,307
                                                                             ---------------  ---------------
                 Total liabilities, deferrable capital securities
                     and stockholderes' equity                                  $ 2,029,128      $ 1,830,882
                                                                             ===============  ===============`

See accompanying Notes to Consolidated Financial Statements

1

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


                                                                          Three months ended           Nine months ended
                                                                            September 30,                 September 30,
                                                                          2002          2001           2002         2001
                                                                      -------------- ------------  -------------- -----------
                                                                         (unaudited)                 (unaudited)
Revenues:
    Net premiums written                                                  $ 149,913     $ 80,152      $ 456,863    $ 215,619
    Change in unearned premiums                                             (11,697)      (6,455)       (78,215)      (2,336)
                                                                      -------------- ------------  -------------- -----------
            Net premiums earned                                             138,216       73,697        378,648      213,283
    Policy fees                                                               5,272        2,230         14,195        5,211
    Agency fees and commissions                                              21,268          299         60,379        1,097
    Net investment income                                                    14,397       15,450         41,877       48,163
    Realized gains (losses)                                                  (1,233)         757           (737)       4,985
    Other                                                                     2,990        2,884         10,163        6,828
                                                                      -------------- ------------  -------------- -----------

        Total revenues                                                      180,910       95,317        504,525      279,567
Expenses:
    Policyholder benefits                                                     8,082        8,436         29,831       25,431
    Losses and loss adjustment expenses incurred                             87,524       43,896        242,454      121,668
    Policy acquisition expenses                                              27,725       17,506         73,737       48,883
    Litigation settlement and arbitration award charge                       23,600       30,000         23,600       30,000
    Operating expenses                                                       49,215       17,575        141,489       47,464
    Interest on debt                                                          3,576        4,054         11,422       13,199
    Gain on debt extinguishment                                              (2,998)      (1,400)        (4,398)      (1,400)
    Goodwill and other intangible amortization                                   84          935            252        2,430
                                                                      -------------- ------------  -------------- -----------
        Total expenses                                                      196,808      121,002        518,387      287,675
Income loss from continuing operations before taxes, minority interest,
     and deferrable capital securities                                      (15,898)     (25,685)       (13,862)      (8,108)
Income tax benefit                                                           (5,565)      (9,020)        (4,806)      (2,834)
Minority interest, net of tax                                                   300          200          1,321          981
Deferrable capital security distributions, net of tax                           322          387            773        1,153
                                                                      -------------- ------------  -------------- -----------
Net loss from continuing operations                                         (10,955)     (17,252)       (11,150)      (7,408)
Loss from discontinued operations, net of tax                                  (655)     (19,800)       (10,183)     (19,958)
                                                                      -------------- ------------  -------------- -----------
        Net loss                                                            (11,610)     (37,052)       (21,333)     (27,366)
Preferred stock dividend                                                         --           --             --         (163)
Gain on redemption of preferred securities, net of tax                           --        5,099            210        5,099
                                                                      -------------- ------------  -------------- -----------
Net loss  available to common shareholders                                $ (11,610)    $(31,953)     $ (21,123)   $ (22,430)
                                                                      ============== ============  ============== ===========
Net loss   from continuing operations per share - Basic                     $ (0.32)     $ (0.57)       $ (0.33)     $ (0.33)
                                                                      ============== ============  ============== ===========
Net loss  available to common shareholders per share - Basic                $ (0.34)     $ (1.00)       $ (0.63)     $ (0.90)
                                                                      ============== ============  ============== ===========
Net loss  from continuing operations per share - Diluted                    $ (0.32)     $ (0.57)       $ (0.33)     $ (0.33)
                                                                      ============== ============  ============== ===========
Net loss  available to common shareholders per share - Diluted              $ (0.34)     $ (1.00)       $ (0.63)     $ (0.90)
                                                                      ============== ============  ============== ===========

                 Statements of Comprehensive Income
Net income (loss)                                                         $ (11,610)    $(37,052)     $ (21,333)   $ (27,366)
Other comprehensive income, net of tax:
        Unrealized holding (losses) gains on available-for-sale securities
           net of tax of $2,035, $4,224, $1,970, and $8,270, respectively     3,780        7,845          3,658       15,359
        Less realized (losses) gains on available-for-sale securities net of tax
            of $432, $265, $258, and $1,745, respectively                      (801)         492           (479)       3,240
                                                                      -------------- ------------  -------------- -----------
                                                                              4,581        7,353          4,137       12,119
Gain on redemption of preferred securities, net of tax of $2,746,
    $113 and $2,746 respectively                                                 --        5,099            210        5,099

                                                                      -------------- ------------  -------------- -----------
Comprehensive (loss) income                                                $ (7,029)    $(24,600)     $ (16,986)   $ (10,148)
                                                                      ============== ============  ============== ===========`

See accompanying Notes to Consolidated Financial Statements

2

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


                                                                              Nine months ended September 30,
                                                                                  2002              2001
                                                                             ---------------   ---------------
                                                                                (unaudited)
Operating Activities:
    Net loss                                                                      $ (21,333)        $ (27,366)
    Adjustments to reconcile net loss to cash provided by (used in) operations
       Changes in:
       Loss and LAE reserves, and future policy liabilities                          44,949            (3,935)
       Unearned premium reserves                                                     85,635             4,689
       Reinsurance balances receivable                                               (2,931)           12,671
       Premiums in course of collection                                            (117,469)           (7,539)
       Reinsurance recoverable on paid losses                                        (2,292)          (10,259)
       Reinsurance balances payable                                                  59,981                --
       Other assets and liabilities                                                  58,487            (5,136)
    Policy acquisition costs deferred                                              (103,646)          (15,166)
    Policy acquisition costs amortized                                               73,737            16,506
    Realized gains                                                                     (737)           (4,985)
    Amortization and depreciation                                                     3,648             6,921
    Gain on extinguishment of debt                                                   (4,398)             (910)
                                                                             ---------------   ---------------
             Net cash provided by (used in) operations                               73,631           (34,509)

Investing Activities:
    Investments sold, matured, and called:
       Fixed maturities available for sale                                          283,813           282,566
       Equity securities                                                              6,697                --
    Investments acquired:
       Fixed maturities available for sale                                         (335,983)         (227,224)
       Equity securities                                                             (6,001)          (11,244)
    Net decrease in other invested assets                                            27,946             4,513
    Net cash received (paid) for acquisition                                          7,020           (46,674)
    Net (increase) decrease in short-term investments                               (30,140)            5,374
    Additions to property and equipment                                              (1,712)           (4,701)
                                                                             ---------------   ---------------
             Net cash (used in) provided from investing activities                  (48,360)            2,610

Financing Activities:
    Net change in FHLB borrowings                                                    (1,314)            8,636
    Change in long and short-term debt                                               (4,779)            4,973
    Net deposits and withdrawals from insurance liabilities                          (6,315)           (3,877)
    Issuance of common stock                                                             --            96,381
    Acquisition of common stock                                                        (949)          (52,322)
    Dividends paid                                                                   (2,748)           (1,891)
                                                                             ---------------   ---------------
             Net cash provided by (used in) financing activities                    (16,105)           51,900
Increase in cash                                                                      9,166            20,001
Cash at beginning of period                                                          23,579            13,374
                                                                             ---------------   ---------------
Cash at end of period                                                              $ 32,745          $ 33,375
                                                                             ===============   ===============`

See accompanying Notes to Consolidated Financial Statements

3

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

Note A-Significant Accounting Policies

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

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

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

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

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

In April 2002, the FASB issued SFAS 145,  "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical  Corrections."  SFAS 145 rescinds SFAS 4, which required all gains and losses from  extinguishments  of debt to be aggregated
and, if material,  classified as an  extraordinary  item,  net of related  income tax effect.  As a result,  the criteria in Accounting
Principals  Board Opinion 30, will now be used to classify those gains and losses.  SFAS 64 amended SFAS 4, and is no longer  necessary
because SFAS 4 has been  rescinded.  SFAS 44 and the amended  sections of SFAS 13 are not  applicable  to Vesta and  therefore  have no
effect on Vesta's  financial  statements.  SFAS 145 is effective for fiscal years beginning  after May 15, 2002 with early  application
encouraged.  Vesta adopted SFAS 145 on July 1, 2002. In connection  with this adoption,  we reclassed  gains on the  extinguishment  of
debt from  extraordinary  gain on debt  extinguishment  to other expense.  These reclasses  decreased other expense by $3.0 million and
$4.4  million for the three and nine month  periods  ending  September  30, 2002 and $1.4 for the three and nine month  periods  ending
September 30, 2001.

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

Restricted  Assets:  As part of a modified  coinsurance  agreement with Employers  Reinsurance  Corporation,  American Founders is
holding $113.4 million of assets for the benefit of Employers,  of which $112.7 million are included in fixed maturities  available for
sale herein.

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

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

`Three months ended September 30,
                                                                      2002           2001
                                                                ---------------- -------------
Net loss available to common shareholders                         $ (11,610)     $  (31,953)
Preferred stock dividends on convertible preferred stock                 --              --
                                                                ---------------- -------------
Adjusted net income available to common shareholders              $ (11,610)     $  (31,953)
                                                                ================ =============

Weighted average shares outstanding-basic (1)                        33,870          31,837
Stock options and restricted stock (2)                                   --              --
                                                                ---------------- -------------
Weighted average shares outstanding-diluted (1)                      33,870          31,837
                                                                ================ =============`

4

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`Nine months ended September 30,
                                                                      2002           2001
                                                                ---------------- -------------
Net loss available to common shareholders                         $ (21,123)     $ (22,430)
Preferred stock dividends on convertible preferred stock                 --            163
                                                                ---------------- -------------
Adjusted net income (loss) available to common shareholders       $ (21,123)     $ (22,267)
                                                                ================ =============

Weighted average shares outstanding-basic (1)                        33,659         24,848
Stock options and restricted stock (2)                                   --             --
                                                                ---------------- -------------
Weighted average shares outstanding-diluted (1)                      33,659         24,848
                                                                ================ =============`

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

(2) Under the provisions of SFAS No. 128, Earnings per Share, contingently issuable shares that would have the effect of being
          anti-dilutive are excluded for the average shares outstanding calculation.  Potentially dilutive securities for the three months 
          ended September 30, 2002 and 2001 are .5 million shares and for the nine months ending September 30, 2002 and 2001 are .5 million shares.

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

`2002                         2001
                                     3 month       9 month        3 month      9 month
                                   ------------  ------------   ------------ -------------
Basic Earnings per share:
    Discontinued Operations            $ (0.02)      $ (0.30)       $ (0.62)      $ (0.80)
Diluted Earnings per share:
    Discontinued Operations            $ (0.02)      $ (0.30)       $ (0.62)      $ (0.80)`

Note B-Commitments and Contingencies

Securities Litigation

On October 26, 2001,  Vesta executed a definitive  agreement to settle the securities  litigation that had been pending since June
1998 against Vesta and certain  current and former officers and directors.  On December 10, 2001, the Court approved  settlement of the
consolidated  class action  securities  litigation in U.S.  District  Court in Alabama as to Vesta and its officers and directors for a
total of $61  million in cash.  A related  derivative  action  lawsuit in the  Circuit  Court of  Jefferson  County,  Alabama  was also
dismissed  with  prejudice.  Vesta  funded $21.0  million  towards the  settlement  and the  Company's  excess  directors  and officers
liability  carriers  funded the remaining  $40.0  million.  Vesta used its line of credit to finance its portion of the  settlement and
recorded a pre-tax  one-time charge of approximately  $30 million against earnings to cover Vesta's  contribution to the settlement and
other  expenses  incurred.  However,  in the  fourth  quarter  of 2001,  the  company  reduced  the charge by $5 million as a result of
recording  amounts due the  company  from  various  insurance  carriers  under its D&O  coverage.  This amount was paid to Vesta in the
third quarter of 2002.

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

Indemnification Agreements and Liability Insurance

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

Arbitration

As discussed in previous SEC filings, in 1998 we corrected our accounting for assumed reinsurance business through restatement of our
previously issued financial statements. Similar corrections were made on a statutory accounting basis through recording cumulative
adjustments in Vesta Fire's 1997 statutory financial statements. The impact of this correction has been reflected in amounts ceded
under our 20 percent whole account quota share treaty which was terminated on June 30, 1998 on a run-off basis. We believe such
treatment is appropriate under the terms of this treaty and have calculated the quarterly reinsurance billings presented to the three
treaty participants accordingly. The aggregate amount included herein as recoverable from such reinsurers totaled $33.9 million at
September 30, 2002. Additionally, we have previously collected approximately $48.5 million from the drawdown of collateral on hand.

5

---

NRMA Insurance Ltd. ("NRMA"),  one of the participants in the 20% whole account quota share treaty,  filed a lawsuit in the United
States  District  Court for the Northern  District of Alabama  contesting  our  billings.  NRMA sought  rescission  of the treaty and a
temporary  restraining order preventing us from drawing down  approximately  $34.5 of collateral.  We filed a demand for arbitration as
provided  for in the treaty and also filed a motion to compel  arbitration  which was  granted  in the  United  States  District  Court
action.  Vesta reached an agreement  with NRMA to collect the $34.5 million of collateral in exchange for posting a $25 million  letter
of credit  in favor of NRMA to fund any  amounts  NRMA may  recover  as a result  of the  arbitration.  We also  filed for  arbitration
against  Alfa  Mutual  Insurance  Company  and  Dorinco  Reinsurance  Company,  the other two  participants  on the  treaty.  All those
arbitrations are in the discovery stages.  Additionally,  Alfa filed a Motion for Declaratory  Judgment asking the arbitration panel to
order that there is no  enforceable  agreement  between Alfa and Vesta or  alternatively,  that there is no coverage for  developmental
losses under the treaty.  After a hearing in June,  2002,  the  arbitration  panel denied Alfa's  motion.  The hearing on the merits of
the  arbitration  is scheduled for May,  2003.  The panel in the NRMA  arbitration  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.  The Company was recently  notified by the panel that it has
ruled  that the  treaty  does not  apply to loss  occurrences  prior  to July 1,  1997.  As a  result,  Vesta  recorded  a $23.6 million pre-tax non-operating charge as a revision of our estimated reinsurance recoverable in the third quarter.  This ruling does not set a binding  precedent  regarding the Company'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.  The hearing on the remaining  issues in the NRMA  arbitration  will be conducted in 2003.  The hearing in the
Dorinco  arbitration  is presently  scheduled for December,  2003.  While  management  continues to believe its  interpretation  of the
treaty's  terms and  computations  based thereon are correct,  these matters are in arbitration  and their  ultimate  outcome cannot be
determined at this time.

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

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

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

Other Litigation

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

Vesta Fire owns  approximately  72% of the voting  securities  of American  Founders,  and Ken  Phillips  and Wayne  Schreck  (the
"Minority  Shareholders")  collectively own approximately 28% of voting securities of American  Founders.  Vesta Fire, on the one hand,
and the Minority Shareholders,  on the other hand, are parties to an Investor Rights Agreement (the "IRA") which provides,  among other
things,  that the Minority  Shareholders may deliver an "offer notice" offering to sell their securities in American  Founders to Vesta
Fire and, if Vesta Fire declines to accept the offer, the Minority  Shareholders may then sell the offered  securities to a third party
or, in the  alternative,  purchase  Vesta  Fire's  securities  on  "substantially  equivalent  terms." The Minority  Shareholders  have
delivered an offer notice to Vesta Fire which fails to provide one fixed price for American  Founders  securities that is applicable to
both Vesta Fire and the  Minority  Shareholders,  and  further  purports to require  significant  extraneous  payments to the  Minority
Shareholders under their employment  contracts  to which they are not otherwise entitled and which are unrelated to the value of their
American Founders  securities.  On September 4, 2002, Vesta Fire filed a Petition and Application for Temporary  Injunction in District
Court for Collin County,  Texas against the Minority  Shareholders  seeking to void or, in the alternative,  reform the offensive terms
of their "Offer  Notice." On October 15, 2002,  the court  granted a temporary  injunction  enjoining  the Minority  Shareholders  from
selling their securities to a third party or demanding the purchase of Vesta Fire's securities in American  Founders,  and set the
matter for trial on February 17, 2003.

The Minority Shareholders filed an answer, cross-claim against American Founders and counterclaim against Vesta Fire on November 4,
2002.  The cross-claim against American Founders alleges breach of the Minority Shareholders' employment contracts.  The counter
claim against Vesta Fire alleges negligent misrepresentation and fraud in connection with Vesta Fire's initial investment of $25
million in American Founders on June 30, 2000.  The Minority Shareholders seek unspecified damages and rescission of Vesta's
investment in American Founders.  In the opinion of management, the Minority Shareholders' claims against both American Founders and
Vesta Fire are without merit and will not have any material adverse effect on either American Founders or Vesta Fire.

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.

6

---

Non-Performing Loans

Our life insurance subsidiary, American Founders, invested in approximately $42 million in loans to certain borrowers in 1998 and
1999.  These loans were generally structured to pay scheduled principal and interest payments on a quarterly basis over a seven year
term and were secured by the stock of privately held companies.  Management of American Founders wrote off approximately $8.0 million
of these loans in the fourth quarter of 2001 and $1.25 million in the third quarter of 2002 following the bankruptcy of an affiliate
of one of these privately held companies, which reduced American Founders' aggregate carrying value of these loans at September 30,
2002  to $26.0 million.

The $26.0 million balance of the loans owed are collateralized by pledges of stock in privately held companies which own real
estate located in Mexico.   These loans have not performed since September 30, 2001.  Although management believes that the
collateral underlying these loans is adequate and currently believes that American Founders will ultimately collect all amounts owed
under these loans, it is possible that management's view of these loans' collectibility could change as they proceed to enforce
American Founders' rights under the loan documents, including taking control of the pledged stock of these privately held companies
and exercising that control in order to realize cash proceeds from the Mexican real estate held by them.

Note C-Segment Information

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

A brief description of each segment is as follows:

Standard Property-Casualty

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

Life and Health Insurance

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

Specialty Underwriting

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

Agency

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

Corporate and Other

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

7

---

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

`Standard     Life and
                                           Property-     Health        Specialty                Corporate
                                           Casualty     Insurance    Underwriting   Agency      and Other    Eliminations    Total
2002                                      ------------ ------------ -------------- -----------  ----------- -------------- ----------
Revenues:                                                                (in thousands)
    Premiums earned                          $ 88,694      $ 7,537        $ 41,985                                            $ 138,216
    Agency fees and commissions                    --           --              --    $ 26,745                    $ (5,477)      21,268
    Net investment income                          --        9,827              --          --       $ 4,857          (287)      14,397
    Policy fees                                 1,345          798           3,129          --            --            --        5,272
    Realized gains (losses)                        --       (1,092)             --          --          (141)           --       (1,233)
    Other                                         122          367           1,369          --         1,132            --        2,990
                                          ------------ ------------ --------------- -----------  ------------ -------------  -----------
                 Total revenues                90,161       17,437          46,483      26,745         5,848        (5,764)   $ 180,910
Expenses:
    Loss, LAE and policyholder benefits        61,446        8,082          26,078          --            --            --       95,606
    Policy acquisition costs                   19,881        1,534          11,787          --            --        (5,477)      27,725
    Loss due to arbitration award                  --           --              --          --        23,600            --       23,600
    Operating expenses                         10,551        3,470           6,064      22,922         6,208            --       49,215
    Interest on debt                               --        1,592              --         287         1,984          (287)       3,576
    Gain on extinguishment of debt                 --           --              --          --        (2,998)           --       (2,998)
    Intangible asset amortization                  --           --              --          --            84            --           84
                                          ------------ ------------ --------------- -----------  ------------ -------------  -----------
                 Total expenses                91,878       14,678          43,929      23,209        28,878        (5,764)     196,808

Pre-tax income (loss) from continuing
        operations                           $ (1,717)     $ 2,759         $ 2,554     $ 3,536     $ (23,030)           --    $ (15,898)
                                          ============ ============ =============== ===========  ============ =============  ===========


Operating segment assets:
    Investments and other assets            $ 363,522    $ 890,477       $ 168,999    $ 60,981     $ 361,621
    Deferred acquisition costs                 59,352       25,730          13,128          --            --
                                          ------------ ------------ --------------- -----------  ------------
                                            $ 422,874    $ 916,207       $ 182,127    $ 60,981     $ 361,621
                                          ============ ============ =============== ===========  ============`

`Standard     Life and
                                           Property-     Health        Specialty                Corporate
                                           Casualty     Insurance    Underwriting   Agency      and Other    Eliminations    Total
2001                                      ------------ ------------ -------------- -----------  ----------- -------------- ----------
Revenues:                                                                (in thousands)
    Premiums earned                          $ 63,890      $ 7,365        $ 2,442                                              $ 73,697
    Agency fees and commissions                    --           --             --        $ 299                          --          299
    Net investment income                          --       10,348             --           49       $ 5,053            --       15,450
    Policy fees                                 1,254          976             --           --            --            --        2,230
    Realized gains (losses)                        --          860             --           --          (103)           --          757
    Other                                         166          314           1346           --         1,058            --        2,884
                                          ------------ ------------ --------------------------- ------------- -------------  -----------
                 Total revenues                65,310       19,863          3,788          348         6,008            --     $ 95,317
Expenses:                                                                                                               --
    Loss, LAE and policyholder benefits        41,896        8,436          2,000           --            --            --       52,332
    Policy acquisition costs                   14,519        2,401            586           --            --            --       17,506
    Litigate settlement charge                     --           --             --           --        30,000            --       30,000
    Operating expenses                          7,738        3,248             54        1,573         4,962            --       17,575
    Interest on debt                               --        2,067             --           --         1,987            --        4,054
    Gain on extinguishment of debt                              --             --           --        (1,400)           --       (1,400)
    Goodwill and other intangible amortization     --           --             --           --           935            --          935
                                          ------------ ------------ -------------- ------------ ------------- -------------  -----------
                 Total expenses                64,153       16,152          2,640        1,573        36,484            --      121,002
                                                                                                                        --
Pre-tax income (loss) from continuing
   operations                                 $ 1,157      $ 3,711        $ 1,148     $ (1,225)    $ (30,476)           --    $ (25,685)
                                          ============ ============ ============== ============ ============= =============  ===========

Operating segment assets:
    Investments and other assets            $ 323,819    $ 940,395       $ 35,876     $ 21,320     $ 266,735
    Deferred acquisition costs                 30,485       20,955            434           --            --
                                          ------------ ------------ -------------- ------------ -------------
                                            $ 354,304    $ 961,350       $ 36,310     $ 21,320     $ 266,735
                                          ============ ============ ============== ============ =============`

8

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

`Standard     Life and
                                           Property-     Health        Specialty                Corporate
                                           Casualty     Insurance    Underwriting   Agency      and Other    Eliminations    Total
2002                                      ------------ ------------ -------------- -----------  ----------- -------------- ----------
Revenues:                                                              (in thousands)
    Premiums earned                         $ 237,050     $ 23,173      $ 118,425                                           $ 378,648
    Agency fees and commissions                    --           --             --    $ 76,505                   $ (16,126)     60,379
    Net investment income                          --       28,584             --          --     $ 14,154           (861)     41,877
    Policy fees                                 3,937        2,914          7,344          --           --             --      14,195
    Realized gains (losses)                        --        2,173             --          --       (2,910)            --        (737)
    Other                                         347        1,024          4,605          --        4,187             --      10,163
                                          ------------ ------------ -------------- -----------  ----------- -------------- -----------
                 Total revenues               241,334       57,868        130,374      76,505       15,431        (16,987)    504,525

Expenses:
    Loss, LAE and policyholder benefits       168,571       29,831         73,883          --           --             --     272,285
    Policy acquisition costs                   52,013        4,592         33,258          --           --        (16,126)     73,737
    Loss due to arbitration award                  --           --             --          --       23,600             --      23,600
    Operating expenses                         29,815       10,307         15,117      66,329       19,921             --     141,489
    Interest on debt                               --        4,756             --         861        6,666           (861)     11,422
    Gain on debt extinguishment                    --           --             --          --       (4,398)            --      (4,398)
    Intangible asset amortization                  --           --             --          --          252             --         252
                                          ------------ ------------ -------------- -----------  ----------- -------------- -----------
                 Total expenses               250,399       49,486        122,258      67,190       46,041        (16,987)    518,387

Pre-tax income (loss) from continuing
    operations                               $ (9,065)     $ 8,382        $ 8,116     $ 9,315    $ (30,610)            --   $ (13,862)
                                          ============ ============ ============== ===========  =========== ============== ===========`

`Standard     Life and
                                           Property-     Health        Specialty                Corporate
                                           Casualty     Insurance    Underwriting   Agency      and Other    Eliminations    Total
2001                                      ------------ ------------ -------------- -----------  ----------- -------------- ----------
Revenues:                                                             (in thousands)
    Premiums earned                         $ 185,443     $ 22,312         $ 5,528                                             $ 213,283
    Agency fees and commissions                    --           --              --     $ 1,097                           --        1,097
    Net investment income                          --       32,138              --         309       $ 15,716            --       48,163
    Policy fees                                 2,285        2,926              --          --             --            --        5,211
    Realized gains                                 --        2,258              --          --          2,727            --        4,985
    Other                                         586          549           3,150                      2,543            --        6,828
                                          ------------ ------------ --------------- -----------  ------------- -------------  -----------
                 Total revenues               188,314       60,183           8,678       1,406         20,986            --    $ 279,567
Expenses:
    Loss, LAE and policyholder benefits       117,371       25,431           4,297          --             --            --      147,099
    Policy acquisition costs                   41,096        6,558           1,229          --             --            --       48,883
    Litigation settlement charge                   --           --              --          --         30,000            --       30,000
    Operating expenses                         22,143        9,815             211       4,400         10,895            --       47,464
    Interest on debt                               --        6,695              --          --          6,504            --       13,199
    Interest on debt                               --        6,695              --          --          6,504            --       13,199
    Gain on debt extinguishment                    --           --              --          --         (1,400)           --       (1,400)
    Goodwill and other intangible amortization     --           --              --          --          2,430            --        2,430
                                          ------------ ------------ --------------- -----------  ------------- -------------  -----------
                 Total expenses               180,610       48,499           5,737       4,400         48,429            --      287,675

Pre-tax income (loss) from continuing
    operations                                $ 7,704     $ 11,684         $ 2,941    $ (2,994)     $ (27,443)           --     $ (8,108)
                                          ============ ============ =============== ===========  ============= =============  ===========`

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 cash.  In
connection with this transaction, we recorded a pre-tax gain on extinguishment of debt of $3.0 million in other expense.

9

---

Note E-Acquisitions

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

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

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

On August 1, 2002, our  subsidiary  Instant  Insurance  Holdings,  Inc.  ("Instant")  acquired a 100% interest in Driver's  Choice
Insurance  Services,  LLC. The transaction has been accounted for as a purchase.  Summarized  below is an initial  allocation of assets
and liabilities acquired (in thousands except per share amounts and unaudited):

`Assets acquired:
     Cash                                $ (59)
     Other assets                        1,088
     Goodwill and other intangibles      1,800
                                  -------------
          Total assets                 $ 2,829
                                  =============

Liabilities acquired:
     Payables and other liabilites       1,898
                                  -------------
          Total liabilities            $ 1,898
                                  =============`

Note F-Goodwill and Other Intangible Assets

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

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

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

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

10

---

During  the nine  months  ended  September  30,  2001,  we  recorded  $1.6  million in  amortization  of  goodwill.  The impact of
amortization  of goodwill on net income for the nine months ended  September  30, 2001 was as follows (in  thousands,  except per share
data):

`Nine months ended
                                                               September 30, 2001
                                                               ----------------------

Reported net loss                                                    $ (27,366)
Add back:
     Goodwill amortization, net of income taxes                          1,580
                                                               ----------------------

Net loss excluding goodwill amortization, net of income taxes        $ (25,786)
                                                               ======================

Basic net income per common share

Reported net loss                                                     $ (1.10)
Add back:
    Goodwill amortization, net of income taxes                           0.06
                                                               ----------------------

Net loss excluding goodwill amortization, net of income taxes         $ (1.04)
                                                               ======================

Weighted average number of common shares outstanding (basic)           24,848

Diluted net income per common share

Reported loss income                                                  $ (1.10)
Add back:
     Goodwill amortization, net of income taxes                          0.06
                                                               ----------------------

Net loss excluding goodwill amortization, net of income taxes         $ (1.04)
                                                               ======================

Weighted average number of common shares outstanding (diluted)         24,848`

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

`Balance as of January 1, 2001                    $ 17,797
Goodwill and other intangible assets  acquired     94,857
Amortization                                       (3,394)
                                           ---------------

Balance as of December 31, 2001                   109,260
Goodwill and other intangible assets acquired      29,178
Amortization                                         (252)
Transitional impairment charge                         --
                                           ---------------

Balance as of September 30, 2002                $ 138,186
                                           ===============`

The $138.2 million balance at September 30, 2002 consists of $131.5 million of goodwill and $6.7 million of intangible assets.
Other intangible assets include brand name, trademark and the value of certain policy renewal rights.

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

`For the year ended December 31,

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

Note G-Subsequent Events

In October 2002, we redeemed $8.0 face amount of our 8.75% Senior Notes for approximately $4.1 million cash.  In connection
with this transaction, we will record in the fourth quarter, a pre-tax gain on extinguishments of debt of approximately $3.9 million.

Subsequent to September 30, 2002, we were informed by A.M. Best that the financial strength ratings of American Founders
Life Insurance Company and States General Life Insurance Company, our principal life and health insurance subsidiaries have been
changed to B (Fair) and B-, respectively.  Management expects the rating actions to cause minimal impact to the financial results of
our life and health operations for the remainder of 2002 and 2003.

11

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

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

Results of Operations

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

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

Comparison of Third Quarter 2002 to Third Quarter 2001

Income available to common  shareholders  increased by $20.4 million, to a $11.6 million loss for the quarter ended September 30,
2002,  from a $32.0  million  loss for the  quarter  ended  September  30,  2001.  This  increase  is the result of higher  income from
operations in the current quarter,  a $30.0 million charge in the prior quarter related to settlement of securities  litigation and a $30.0
million pretax charge for  discontinued  operations in the prior year quarter.  On a diluted per share basis,  net income  available to
common  shareholders  for the third  quarter  of 2002 was net loss of $0.34 per share  versus net loss of $1.00 per share for the third
quarter of 2001.  In the third  quarter of 2002,  we  recorded a $23.6  million  pre-tax non-operating  charge as a revision  of our  estimated
reinsurance  recoverable under a whole account quota share  reinsurance  treaty.  This treaty is the subject of an arbitration  between
our principal  property-casualty  operating company, Vesta Fire, and the treaty participants.  See Note B to the consolidated financial
statements for further discussion of this arbitration.

Standard Property-Casualty

Net premiums written for standard  property-casualty  lines increased by $27.2 million, or 38.8%, to $97.2 million for the quarter
ended  September  30,  2002,  from $70.0  million  for the  quarter  ended  September  30,  2001.  Net  premiums  earned  for  standard
property-casualty  lines  increased  $24.8  million,  or 38.8% to $88.7  million for the quarter ended  September 30, 2002,  from $63.9
million for the quarter  ended  September  30,  2001.  The  increase in net  premiums  written  and net  premiums  earned is  primarily
attributable to increased writings in Texas, partially offset by decreases in other lines of business.

Loss and loss adjustment  expenses  ("LAE") for standard  property-casualty  lines increased by $19.5 million,  or 46.5%, to $61.4
million for the quarter ended  September  30, 2001,  from $41.9  million for the quarter  ended  September  30, 2001.  The loss and LAE
ratio for  property-casualty  lines for the quarter  ended  September  30, 2002 was 68.2% as compared to 64.3% at  September  30, 2001.
The  increase  in the loss and LAE  incurred  is due to the  increase  in earned  premium.  The  increase  in the loss and LAE ratio is
primarily  attributable to deteriorating  underwriting  results in the current period in certain components of our homeowners business,
partially  offset by improving  results in our Texas  operations.  The  deterioration  in our  underwriting  results is being primarily
driven by increases in severity of claims in certain states.

Policy acquisition expenses increased $5.4 million for the quarter-to-quarter  comparison,  consistent with the increase in earned
premium.  Operating  expenses  increased by $2.9 million,  to $10.6  million for the quarter  ended  September 30, 2002, as we incurred
increased expenses from our growth in the Texas operations.

Life and Health Insurance

American Founders and Aegis have  approximately  $2.5 billion (face value) of life and annuity products in force and $22.6 million
of health  insurance  premiums in force at  September  30,  2002.  Life  insurance  premiums  and policy fees were $2.7 million for the
quarter ended  September 30, 2002 compared to $2.4 million for the  comparable  prior period in 2001. The increase is  attributable  to
the  acquisition of Washington  Life in August 2001.  Health  insurance  premiums  totaled $5.6 million for the quarter ended September
30, 2002 versus $5.0  million for the  comparable  prior  period.  Health  insurance  benefits  incurred  totaled  $3.0 million for the
quarter and health insurance  commission  expense was $1.2 million.  Pre-tax  operating  income increased by $.7 million  primarily due
to improved mortality in our acquired blocks, and better morbidity in our health insurance operations.

Subsequent to September 30, 2002, we were informed by A.M. Best that the financial strength ratings of American Founders
Life Insurance Company and States General Life Insurance Company, our principal life and health insurance subsidiaries have been
changed to B (Fair) and B-, respectively.  Management expects the rating actions to cause minimal impact to the financial results of
our life and health operations for the remainder of 2002 and 2003.

Specialty Underwriting

Net premiums  written for specialty  underwriting  increased by $42.4 million to $45.2 million for the quarter ended September 30,
2002,  from $2.8 million for the quarter ended September 30, 2002. Net premiums  earned for specialty  underwriting  increased to $42.0
million for the quarter ended  September  30, 2002,  from $2.4 million for the quarter  ended  September 30, 2001.  The increase in net
premiums  written  and net  premiums  earned is  primarily  attributable  to the  acquisition  of certain  assets of Insure One and the
related book of business  from its  affiliated  insurance  companies  and  increased  retained  amounts from other  fronting  programs.
Fronting fees were consistent with the prior year period as ceded earned premium was consistent with the prior year.

Loss and loss adjustment expenses ("LAE") for specialty  underwriting  increased by $24.1 million to $26.1 million for the quarter
ended  September  30, 2002,  from $2.0 million for the quarter ended  September 30, 2001.  The loss and LAE ratio for the quarter ended
September  30,  2002 was  57.8% as  compared  to 81.9% at  September  30,  2001.  The  increase  in the loss and LAE  incurred  and the
decrease in the loss and LAE ratio is primarily  attributable to the inclusion of underwriting  results of the business produced by our
affiliated agency, Insure One, which are better than the underwriting results from our traditional fronting programs.

Policy  acquisition  expenses  increased  $11.2 million for the  quarter-to-quarter  comparison,  consistent  with the increase in
earned  premium.  Operating  expenses  increased by $6.0  million,  to $6.1 million for the quarter  ended  September  30, 2002,  as we
incurred increased expenses from our increased operations.

12

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Agency

Our Agency  operations  increased  its revenues by $26.4  million to $26.7  million as a result of  acquisitions  completed in the
fourth  quarter  of 2001 and the  first  quarter  of 2002.  Operating  expenses  increased  by $21.3  million  to $22.9  million  as we
integrated the acquired operations with our existing operations.

Net Investment Income

Net investment  income  decreased by $1.1 million,  or 6.8%, to $14.4 million for the quarter ended September 30, 2002, from $15.5
million for the quarter ended  September 30, 2001. The weighted  average yield on invested  assets  (excluding  realized and unrealized
gains) was 5.19% for the quarter ended  September 30, 2002,  compared with 6.2% for the quarter ended  September 30, 2001. The decrease
in  investment  income is primarily  attributable  to a decrease in the weighted  average  yield as yields have  generally  declined in
recent  months,  the  investment of funds in our investment  portfolio in new operating  entities and a reduction in investment  income
from our non-performing collateral loan portfolio.

Federal Income Taxes

Federal income taxes  increased by $3.5 million to a $5.6 million  benefit for the quarter ended September 30, 2002 as a result of
a loss in the current period compared to the prior period loss.

Discontinued Operations

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

Comparison of Nine Months Ended September 30, 2002 with Nine Months Ended September 30, 2001

Income available to common  shareholders  increased by $1.3 million,  to a $21.1 million loss for the nine months ended September
30, 2002,  from a $22.4 million loss for the nine months ended September 30, 2001. On a diluted per share basis,  net income  available
to common  shareholders  for the first nine months of 2002 was a net loss of $0.63 per share versus net loss of $0.90 per share for the
corresponding  period of 2001.  In the third quarter of 2002,  we recorded a $23.6  million  pre-tax non-operating  charge as a revision of our
estimated  reinsurance  recoverable under a whole account quota share reinsurance  treaty. This treaty is the subject of an arbitration
between our principal  property-casualty  operating company,  Vesta Fire, and the treaty  participants.  See Note B to the consolidated
financial statements for further discussion of this arbitration.

Standard Property-Casualty

Net premiums  written for standard  property-casualty  lines increased by $112.8  million,  or 60%, to $299.8 million for the nine
months ended  September 30, 2002,  from $187.0 million for the nine months ended  September 30, 2001. Net premiums  earned for standard
property-casualty  lines increased $51.7 million,  or 27.8% to $237.1 million for the nine months ended September 30, 2002, from $185.4
million for the nine months ended  September  30,  2001.  The  increase in net  premiums  written and net premiums  earned is primarily
attributable  to the  acquisition of Florida Select in April 2001, and increased  writings in Texas,  partially  offset by decreases in
other lines of business.

Loss and loss adjustment  expenses ("LAE") for standard  property-casualty  lines increased by $51.2 million,  or 43.6%, to $168.6
million for the nine months ended  September 30, 2002,  from $117.4 million for the nine months ended  September 30, 2001. The loss and
LAE ratio for  property-casualty  lines for the nine months ended  September  30, 2002 was 69.9% as compared to 62.5% at September  30,
2001.  The  increase  in the  loss  and  LAE  incurred  and  the  loss  and  LAE  ratio  is  primarily  attributable  to  deteriorating
underwriting  results in the current period in our automobile  lines,  storm losses in Texas,  and an increase in earned  premium.  The
deterioration  in our  underwriting  results is being  primarily  driven by increases  in  frequency  and severity of claims in certain
states.

Policy  acquisition  expenses  increased  $10.9 million for the nine months ended  September 30,  consistent  with the increase in
earned  premium.  Operating  expenses  increased by $7.7 million,  to $29.8 million for the nine months ended September 30, 2002, as we
incurred increased expenses from our growth in the Texas operations.

Life and Health Insurance

American Founders and Aegis have  approximately  $2.5 billion (face value) of life and annuity products in force and $22.6 million
of health  insurance  premiums in force at September  30, 2002.  Life  insurance  premiums and policy fees were  consistent  with prior
period as  acquisitions  have offset  normal  declines.  Health  insurance  premiums  totaled  $17.2  million for the nine months ended
September 30, 2002 versus $15.3 million for the comparable prior period.  Health insurance  benefits  incurred totaled $9.6 million for
the nine months and health  insurance  commission  expense  was $3.5  million.  Pre-tax  operating  income  decreased  by $3.1  million
primarily due to higher  mortality in certain  acquired  blocks,  lower than expected  investment  income and adverse  morbidity in our
health insurance operations as compared to the prior year.

Subsequent to September 30, 2002, we were informed by A.M. Best that the financial strength ratings of American Founders
Life Insurance Company and States General Life Insurance Company, our principal life and health insurance subsidiaries have been
changed to B (Fair) and B-, respectively.  Management expects the rating actions to cause minimal impact to the financial results of
our life and health operations for the remainder of 2002 and 2003.

Specialty Underwriting

Net  premiums  written for  specialty  underwriting  increased  by $127.6  million to $133.9  million  for the nine  months  ended
September 30, 2002,  from $6.3 million for the nine months ended  September 30, 2001.  Net premiums  earned for specialty  underwriting
increased to $118.4  million for the nine months ended  September 30, 2002,  from $5.5 million for the nine months ended  September 30,
2001. The increase in net premiums  written and net premiums  earned is primarily  attributable to the acquisition of certain assets of
Insure One and the related  book of business  from its  affiliated  insurance  companies  and  increased  retained  amounts  from other
fronting programs.  Fronting fees increased $1.5 million to $4.6 million on higher ceded earned premium.

Loss and loss  adjustment  expenses  ("LAE") for specialty  underwriting  increased by $69.6 million to $73.9 million for the nine
months ended  September 30, 2002,  from $4.3 million for the nine months ended  September 30, 2001. The loss and LAE ratio for the nine
months  ended  September  30, 2002 was 58.7% as compared to 77.7% at  September  30,  2001.  The  increase in the loss and LAE incurred
and the  decrease  in the loss and LAE ratio is  primarily  attributable  to the  inclusion  of  underwriting  results of the  business
produced by our affiliated agency, Insure One, which are better than the underwriting results from our traditional fronting programs.

Policy acquisition expenses increased $32.1 million for the nine month period comparison, consistent with the increase in
earned premium.  Operating expenses increased by $14.9 million, to $15.1 million for the quarter ended September 30, 2002, as we
incurred increased expenses from our increased operations.

13

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Agency

Our Agency  operations  increased  its revenues by $75.1  million to $76.5  million as a result of  acquisitions  completed in the
fourth  quarter  of 2001 and the  first  quarter  of 2002.  Operating  expenses  increased  by $61.9  million  to $66.3  million  as we
integrated the acquired operations with our existing operations.

Net Investment Income

Net investment  income  decreased by $6.3 million,  or 13.0%,  to $41.9 million for the nine months ended September 30, 2002, from
$48.2 million for the nine months ended  September 30, 2001.  The weighted  average yield on invested  assets  (excluding  realized and
unrealized  gains) was 5.82% for the nine months ended  September 30, 2002,  compared with 6.3% for the nine months ended September 30,
2001.  The  decrease in  investment  income is  primarily  attributable  to a decrease  in the  weighted  average  yield as yields have
generally declined in recent months,  the investment of funds in our investment  portfolio in new operating entities and a reduction in
investment income from our collateral loan portfolio.

Federal Income Taxes

Federal income taxes decreased by $2.0 million to $4.8 million benefit for the nine months ended September 30, 2002 as a result
of more income in the current period compared to the prior period.

Discontinued Operations

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

Liquidity and Capital Resources

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

Dividends and Management Fees

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

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

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

We rely  primarily  on fees earned  under several  management  agreements  with our  insurance  company  subsidiaries  to meet our cash
requirements  (including debt service) and to pay dividends to our stockholders.  Management  agreements are subject to certain  regulatory  standards which generally require its terms and fees to
be fair and  reasonable.  These management agreements may be reviewed 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 these management  agreements will provide us with funds
sufficient to meet our anticipated needs (including debt service) for at least the next twelve months.

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Credit Facilities

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

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

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

Each of these credit facilities mature on April 30, 2003.  As of September 30, 2002, the principal amount outstanding under
these credit facilities was approximately $30.0 million.   Effective as of March 30, 2002, each of these credit agreements were
amended to restructure the financial covenants contained therein.  The amended covenants require us to maintain certain minimum (i)
consolidated net income, (ii) consolidated debt to capital ratios, (iii) credit ratings, (iv) GAAP net worth, (v) interest coverage
ratio and (vi) risk based capital.   As of September 30, 2002, we were in compliance with all of these covenants.

Contingent Obligations

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

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

Cash Flows

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

On a consolidated  basis,  net cash provided by (used in) operations for the quarter ended  September 30, 2002 and 2001, was $73.6
million and $(34.5)  million,  respectively  as our increased  written premium  generated a significant  amount of operating cash flow.
Net cash (used in) provided by investing  activities  was $(48.3)  million and $2.6 million for the quarter  ended  September  30, 2002
and 2001,  respectively  as we  invested  excess  cash  generated  from  operations  in our  investment  portfolio.  Net cash (used in)
provided by financing activities was $(16.1) million and $51.9 million for the quarter ending September 30, 2002 and 2001.

New Accounting Pronouncements

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

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

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

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

In April 2002, the FASB issued SFAS 145,  "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical  Corrections."  SFAS 145 rescinds SFAS 4, which required all gains and losses from  extinguishments  of debt to be aggregated
and, if material,  classified as an  extraordinary  item,  net of related  income tax effect.  As a result,  the criteria in Accounting
Principals  Board Opinion 30, will now be used to classify those gains and losses.  SFAS 64 amended SFAS 4, and is no longer  necessary
because SFAS 4 has been  rescinded.  SFAS 44 and the amended  sections of SFAS 13 are not  applicable  to Vesta and  therefore  have no
effect on Vesta's  financial  statements.  SFAS 145 is effective for fiscal years beginning  after May 15, 2002 with early  application
encouraged.  Vesta adopted SFAS 145 on July 1, 2002. In connection  with this adoption,  we reclassed  gains on the  extinguishment  of
debt from  extraordinary  gain on debt  extinguishment  to other expense.  These reclasses  decreased other expense by $3.0 million and
$4.4 million for the three and nine month periods ending September 30, 2002.

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

15

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Market Risk of Financial Instruments

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

Special Note Regarding Forward-Looking Statements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

None.

Item 4.  Controls and Procedures

Within 90 days prior to the date of this report,  we carried out an evaluation,  under the  supervision and with the  participation  of
our principal  executive officer and principal  financial  officer,  of the effectiveness of the design and operation of our disclosure
controls and procedures.  Based on this evaluation,  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.

In addition, there have been no significant changes in our internal controls or in other factors that could significantly affect
those controls subsequent to the date of their last evaluation.

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PART II

Item 1. Legal Proceedings

Securities Litigation

On October 26, 2001,  Vesta executed a definitive  agreement to settle the securities  litigation that had been pending since June
1998 against Vesta and certain  current and former officers and directors.  On December 10, 2001, the Court approved  settlement of the
consolidated  class action  securities  litigation in U.S.  District  Court in Alabama as to Vesta and its officers and directors for a
total of $61  million in cash.  A related  derivative  action  lawsuit in the  Circuit  Court of  Jefferson  County,  Alabama  was also
dismissed  with  prejudice.  Vesta  funded $21.0  million  towards the  settlement  and the  Company's  excess  directors  and officers
liability  carriers  funded the remaining  $40.0  million.  Vesta used its line of credit to finance its portion of the  settlement and
recorded a pre-tax  one-time charge of approximately  $30 million against earnings to cover Vesta's  contribution to the settlement and
other  expenses  incurred.  However,  in the  fourth  quarter  of 2001,  the  company  reduced  the charge by $5 million as a result of
recording  amounts due the  company  from  various  insurance  carriers  under its D&O  coverage.  This amount was paid to Vesta in the
third quarter of 2002.

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

Indemnification Agreements and Liability Insurance

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

Arbitration

As discussed in previous SEC filings,  in 1998 we corrected our accounting for assumed  reinsurance  business through  restatement
of our previously  issued  financial  statements.  Similar  corrections  were made on a statutory  accounting  basis through  recording
cumulative  adjustments  in Vesta Fire's 1997  statutory  financial  statements.  The impact of this  correction  has been reflected in
amounts  ceded under our 20 percent  whole account  quota share treaty which was  terminated  on June 30, 1998 on a run-off  basis.  We
believe such treatment is appropriate under the terms of this treaty and have calculated the quarterly  reinsurance  billings presented
to the three treaty  participants  accordingly.  The aggregate amount included herein as recoverable from such reinsurers totaled $33.9
million at September 30, 2002.  Additionally,  we have previously collected approximately $48.5 million from the drawdown of collateral
on hand.

NRMA Insurance Ltd. ("NRMA"),  one of the participants in the 20% whole account quota share treaty,  filed a lawsuit in the United
States  District  Court for the Northern  District of Alabama  contesting  our  billings.  NRMA sought  rescission  of the treaty and a
temporary  restraining order preventing us from drawing down  approximately  $34.5 of collateral.  We filed a demand for arbitration as
provided  for in the treaty and also filed a motion to compel  arbitration  which was  granted  in the  United  States  District  Court
action.  Vesta reached an agreement  with NRMA to collect the $34.5 million of collateral in exchange for posting a $25 million  letter
of credit  in favor of NRMA to fund any  amounts  NRMA may  recover  as a result  of the  arbitration.  We also  filed for  arbitration
against  Alfa  Mutual  Insurance  Company  and  Dorinco  Reinsurance  Company,  the other two  participants  on the  treaty.  All those
arbitrations are in the discovery stages.  Additionally,  Alfa filed a Motion for Declaratory  Judgment asking the arbitration panel to
order that there is no  enforceable  agreement  between Alfa and Vesta or  alternatively,  that there is no coverage for  developmental
losses under the treaty.  After a hearing in June,  2002,  the  arbitration  panel denied Alfa's  motion.  The hearing on the merits of
the  arbitration  is scheduled for May,  2003.  The panel in the NRMA  arbitration  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.  The Company was recently  notified by the panel that it has
ruled  that the  treaty  does not  apply to loss  occurrences  prior  to July 1,  1997.  As a  result,  Vesta  recorded  a $23.6 million pre-tax non-operating charge as a revision of our estimated reinsurance recoverable in the third quarter.  This ruling does not set a binding  precedent  regarding the Company'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.  The hearing on the remaining  issues in the NRMA  arbitration  will be conducted in 2003.  The hearing in the
Dorinco  arbitration  is presently  scheduled for December,  2003.  While  management  continues to believe its  interpretation  of the
treaty's  terms and  computations  based thereon are correct,  these matters are in arbitration  and their  ultimate  outcome cannot be
determined at this time.

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

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

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

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Other Litigation

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

Vesta Fire owns  approximately  72% of the voting  securities  of American  Founders,  and Ken  Phillips  and Wayne  Schreck  (the
"Minority  Shareholders")  collectively own approximately 28% of voting securities of American  Founders.  Vesta Fire, on the one hand,
and the Minority Shareholders,  on the other hand, are parties to an Investor Rights Agreement (the "IRA") which provides,  among other
things,  that the Minority  Shareholders may deliver an "offer notice" offering to sell their securities in American  Founders to Vesta
Fire and, if Vesta Fire declines to accept the offer, the Minority  Shareholders may then sell the offered  securities to a third party
or, in the  alternative,  purchase  Vesta  Fire's  securities  on  "substantially  equivalent  terms." The Minority  Shareholders  have
delivered an offer notice to Vesta Fire which fails to provide one fixed price for American  Founders  securities that is applicable to
both Vesta Fire and the  Minority  Shareholders,  and  further  purports to require  significant  extraneous  payments to the  Minority
Shareholders under their employment  contracts  to which they are not otherwise entitled and which are unrelated to the value of their
American Founders  securities.  On September 4, 2002, Vesta Fire filed a Petition and Application for Temporary  Injunction in District
Court for Collin County,  Texas against the Minority  Shareholders  seeking to void or, in the alternative,  reform the offensive terms
of their "Offer  Notice." On October 15, 2002,  the court  granted a temporary  injunction  enjoining  the Minority  Shareholders  from
selling their securities to a third party or demanding  the purchase of Vesta Fire's securities in American  Founders,  and set the
matter for trial on February 17, 2003.

The Minority  Shareholders filed an answer,  cross-claim against American Founders and counterclaim against Vesta Fire on November
4, 2002. The cross-claim  against American  Founders alleges breach of the Minority  Shareholders'  employment  contracts.  The counter
claim against  Vesta Fire alleges  negligent  misrepresentation  and fraud in connection  with Vesta Fire's  initial  investment of $25
million in American  Founders  on June 30,  2000.  The  Minority  Shareholders  seek  unspecified  damages  and  rescission  of Vesta's
investment in American Founders.  In the opinion of management,  the Minority  Shareholders'  claims against both American Founders and
Vesta Fire are without merit and will not have any material adverse effect on either American Founders or Vesta Fire.

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.

18

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Item 2. Changes in SecuritiesNone.

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

Item 5. Other information

None.

19

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Item 6. Exhibits and Reports on Form 8-K

a)   EXHIBITS

99.1   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

b)   Reports on Form 8-K.

Current reports were filed on Form 8-K on July 19, 2002 and August 9, 2002 in connection with press releases.

A current report was filed on Form 8-K on August 14, 2002 in connection with the CEO and CFO second quarter financial
certifications.

20

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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 14, 2002

21

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CERTIFICATIONS

I, Norman W. Gayle, III, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Vesta Insurance Group, Inc.;

2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly report;

3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;

4.   The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)         designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this quarterly report is being prepared;

b)   evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date"); and

c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

5.    The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)         all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any
material weaknesses in internal controls; and

b)        any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls; and

6.    The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  November 14, 2002

22

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I, Hopson B. Nance, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Vesta Insurance Group, Inc.;

2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly report;

3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;

4.   The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)         designed such disclosure controls and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this quarterly report is being prepared;

b)   evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date"); and

c)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;

5.    The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)         all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any
material weaknesses in internal controls; and

b)        any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal controls; and

6.    The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  November 14, 2002