UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q


           (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended        September 30, 1998
                               ------------------------------------------------

                                       OR

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

For the transition period from _________________ to ___________________

Commission file number                                             001-14067

                        LINCOLN HERITAGE CORPORATION
             (Exact name of registrant as specified in its charter)

                 Texas                                 36-3427454
     (State or other jurisdiction         (I.R.S. Employer Identification No.)
          of incorporation or
             organization)

                   1250 Capital of TX Hwy, Bldg. 3, Suite 100
                                Austin, TX 78746
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (512) 328-0075
              (Registrant's telephone number, including area code)

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 |_| Yes |X| No


            Title of class of                        Number of shares
              common stock                  outstanding as of November 30, 1998
      Common stock, $0.01 par value                      4,520,000



<PAGE>


LINCOLN HERITAGE CORPORATION
FORM 10-Q

                                      INDEX

PART I.           FINANCIAL INFORMATION

Item 1.           Financial Statements (unaudited).............................3

                  Consolidated Balance Sheets --September 30, 1998 (Unaudited)
                  and  December 31,1997........................................3

                  Consolidated Statements of Operations (Unaudited) --Three
                  Months and Nine Months Ended September 30, 1998 and 1997.....5

                  Consolidated Statement of Shareholders'Equity and
                  Comprehensive Income (Unaudited) --Nine Months Ended
                  September 30, 1998 and 1997..................................6

                  Consolidated Statements of Cash Flows (Unaudited) --Nine
                  Months Ended September 30, 1998 and 1997.....................7

                  Notes to Financial Statements................................8

Item 2.           Management's Discussion and Analysis of Financial Condition
                  and Results of Operation....................................12

                  Overview....................................................12

                  Results of Operations, Liquidity and Capital Resources......13

                  Factors Affecting the Company's Business and Prospects......15

PART II.          OTHER INFORMATION

Item 1.           Legal Proceedings...........................................18

Item 2.           Changes in Securities and Use of Proceeds...................18

Item 3.           Defaults Upon Senior Securities.............................18

Item 4.           Submission of Matters to a Vote of Security Holders.........18

Item 5.           Other Information...........................................18

Item 6.           Exhibits and Reports on Form 8-K............................18

SIGNATURES....................................................................19

EXHIBIT INDEX.................................................................20


<PAGE>
<TABLE>

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

                          LINCOLN HERITAGE CORPORATION

                           CONSOLIDATED BALANCE SHEETS

<CAPTION>

                                                           (Unaudited)
                                                 September 30,     December 31,
                                                     1998              1997
                                                ---------------  ---------------

                                     ASSETS
<S>                                             <C>               <C>
Fixed maturities available for sale
     at fair value(amortized cost $72,168,752
     and $44,085,520)                           $   70,244,177    $   45,120,485
Equity securities at fair value (amortized
     cost $6,362,928 and $1,013,365)                 5,000,777           794,870
Policyholder loans to related party                 16,518,201        11,457,962
Reverse repurchase agreements                       10,734,511        29,512,372
Deposits to support hedging transactions               533,607                 -
Short-term investments                              27,430,893        31,530,513
                                                --------------    --------------
       Total investments                           130,462,166       118,416,202

Cash                                                 1,645,711         1,624,822
Accrued investment income                              733,191           609,847
Receivable from related party                        1,750,884           478,362
Federal income tax receivable                          407,569                 -
Funds withheld by ceding company                       498,512           498,512
Deferred policy acquisition costs, net              14,761,824        12,554,870
Fixed assets, net                                    1,138,881           649,546
Cost of policies purchased, net                      4,832,078         3,249,365
Goodwill, net                                        1,424,811           773,436
Deferred tax assets, net                             3,185,744         2,394,970
Other assets, net                                    1,298,156           353,078
                                                --------------    --------------
       Total assets                             $  162,139,527    $  141,603,010
                                                ==============    ==============











<CAPTION>
                   The accompanying notes are an integral part
                   of these consolidated financial statements.


<PAGE>



                          LINCOLN HERITAGE CORPORATION

                           CONSOLIDATED BALANCE SHEETS
                                   (CONTINUED)


                                                 (Unaudited)
                                                 September 30,     December 31,
                                                     1998              1997
                                                --------------  ----------------

                      LIABILITIES AND SHAREHOLDERS' EQUITY
<S>                                             <C>            <C>
Policy liabilities:
    Future policy benefits                      $  106,063,986  $   87,843,239
    Policyholder deposits                           48,580,820      41,613,697
    Unpaid claims                                      389,000         689,000
    Premiums received in advance                       336,588         304,471
                                                --------------  --------------
       Total policy liabilities                    155,370,394     130,450,407

Income tax liabilities                                       -       1,975,165
Accounts payable and accrued liabilities               318,799         334,776
Accounts payable to related party                      179,417          17,090
Other liabilities                                    1,820,291       1,942,861
                                                --------------  --------------
       Total liabilities                           157,688,901     134,720,299

Shareholders' equity:

Preferred stock($.01 par value; 1,000,000
     shares authorized, no shares issued
     and outstanding)                                        -               -
Common stock($.01 par value; 10,000,000
     shares authorized, 4,000,000 and
     1,000,000 shares issued and outstanding,
     respectively)                                      40,000          10,000
Additional paid-in capital                           2,159,136       2,075,576
Retained earnings                                    3,756,335       4,258,265
Accumulated other comprehensive income (loss)       (1,504,845)        538,870
                                                 --------------  --------------
       Total shareholders' equity                   4,450,626        6,882,711
                                                 -------------   --------------

     Total liabilities and shareholders'equity   $ 162,139,527   $  141,603,010
                                                 ==============  ==============

                   The accompanying notes are an integral part
                   of these consolidated financial statements.

</TABLE>
<PAGE>
<TABLE>


                          LINCOLN HERITAGE CORPORATION

                CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<CAPTION>
                               Three Months Ended           Nine Months Ended
                                  September 30,               September 30,
                              1998             1997       1998            1997

<S>                         <C>          <C>           <C>          <C>
REVENUES

Life insurance premiums
     from related party     $10,897,591  $10,691,489   $31,630,543  $28,027,773
Net investment income         2,840,302    1,884,569     7,673,251    4,397,166
Realized investment gains       442,905      562,781     1,511,108      669,872
Other revenue                    65,065         --         212,931          --
                            -----------  -----------   -----------   ----------
Total revenues               14,245,863   13,138,839    41,027,833   33,094,811

BENEFITS AND EXPENSES

Death benefits paid to
     related party            4,045,996    3,846,871    12,335,933   11,348,831
Surrender benefits paid to
     related party            1,088,746       23,321     1,567,331       77,600
Increase in future policy
     benefits                 3,974,317    4,386,113    12,382,365   11,188,699
Interest paid on
     policyholder deposits      685,143      249,876     1,467,826      299,671
Commissions paid to
     related party            4,875,589    2,294,581    11,811,695    7,499,890
General expenses              1,814,236    1,205,296     5,158,001    3,400,615
General expenses reimbursed
     by related party          (751,854)    (544,761)   (2,066,886)  (1,891,531)
Taxes, licenses and fees        243,620      307,512       661,468      689,560
Amortization of cost of
     policies purchased          49,430       65,000       623,003       65,000
Change in deferred
     acquisition costs, net  (1,057,320)     (76,152)   (2,206,954)    (480,484)
                            -----------  -----------   -----------  ------------
Total benefits and expenses  14,967,903   11,757,657    41,733,782   32,197,851

Income (loss) before
     federal income taxes      (722,040)   1,381,182      (705,949)     896,960

Provision for income taxes
Current                        (407,569)   1,075,118      (407,569)     414,880
Deferred                        198,826     (678,000)      203,550     (149,000)
                            -----------  -----------   -----------  -----------
Total income taxes             (208,743)     397,118      (204,019)     265,880

Net income (loss)              (513,297)     984,064      (501,930)     631,080
                            ============ ===========   ============ ===========

Basic earnings (loss)
     per share              $     (0.13) $      0.25   $     (0.13) $      0.16
                            ===========  ===========   ===========  ===========

Diluted earnings (loss)
     per share              $    (0.13)  $      0.25   $     (0.13) $      0.16
                            ===========  ===========   ===========  ===========

Weighted average shares
     outstanding:

Basic                         4,000,000    4,000,000      4,000,000   4,000,000
Diluted                       4,000,000    4,000,000      4,000,000   4,000,000

                   The accompanying notes are an integral part
                   of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
                          LINCOLN HERITAGE CORPORATION

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                            AND COMPREHENSIVE INCOME
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
                                   (UNAUDITED)
<CAPTION>
                                                         Net
                                          Additional   Unrealized
                                 Common     Paid-In    Investment      Retained
                      Total      Stock      Capital    Gains(Losses)   Earnings
<S>                   <C>         <C>      <C>         <C>           <C>
Balance,
 December 31, 1997    $6,882,711  $10,000  $2,075,576  $   538,870   $4,258,265

 Transfer to Common
 Stock in connection
 with stock split
 and stock dividend           -    30,000    (30,000)            -            -

 Effect of stock
 option issued in
 1998, net of
 applicable income
 tax effect of
 $58,500                 113,560        -     113,560            -            -

Comprehensive income
 (loss), net of tax:

Net loss               (501,930)        -           -            -     (501,930)

 Change in unrealized
 losses on available
 for sale and equity
 securities, net of
 applicable income
 tax benefit of
 $1,052,823            (2,043,715)       -           -   (2,043,715)          -
                       ----------
 Total comprehensive
 loss                  (2,545,645)       -           -            -           -
                     ----------- -------  ----------  ------------   ----------
Balance,
 September 30, 1998   4,450,626  $40,000  $2,159,136  $(1,504,845)   $3,756,335
                      ========== =======  ==========  ============   ==========
Balance
 December 31, 1996   $1,856,355  $ 1,000  $       40  $  (756,524)   $2,611,839

 Retroactive premium
 increase treated as
 paid-in-capital, net
 of applicable income
 tax effect of
 $314,884             1,259,536        -   1,259,536            -            -

 Benefit of reduction
 of future commissions
 treated as additional
 paid-in-capital, net
 of applicable tax
 effect of $249,000     612,000        -      612,000           -             -

Comprehensive income,
 net of tax:

 Net income             631,080        -           -            -       631,080

 Change in unrealized
 gains on available
 for sale and equity
 securities, net of
 applicable income tax
 expense of $252,270   489,689         -           -      489,689            -
                      ---------
 Total comprehensive
  income             1,120,769        -           -            -             -
                     ---------  --------  ----------  -----------    ----------
Balance,
 September 30, 1997 $4,848,660  $  1,000  $1,871,576  $  (266,835)   $3,242,919
                    ==========  ========  ==========  ============   ==========

                   The accompanying notes are an integral part
                   of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>


                          LINCOLN HERITAGE CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
                                   (UNAUDITED)


<CAPTION>
                                                        1998           1997
                                                  -------------   --------------
<S>                                               <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES

 Net income (loss)                                     (501,930)   $    631,080
 Adjustments to reconcile net income to net cash
 provided by operating activities:
   Future policy benefits and policyholder deposits   3,333,775       9,734,821
   Deferred policy acquisition costs                 (2,206,954)       (480,484)
   Accounts receivable and payable to related party  (1,110,195)     (2,361,085)
   Depreciation and amortization                        809,440         142,061
   Accrued investment income                            (74,344)       (465,091)
   Unpaid claims                                       (300,000)       (156,000)
   Premiums received in advance                          32,117          60,731
   Accrued expenses                                     (16,223)       (137,158)
   Other liabilities                                   (122,570)      1,083,595
   Accretion of discount on investments              (1,170,911)       (255,366)
   Federal income tax liabilities                    (2,079,761)       (197,849)
   Other assets                                        (810,946)       (542,644)
   Realized investments gains                        (1,511,108)       (669,872)
                                                   -------------   -------------
   Net cash provided (used) by operating activities  (5,729,610)      6,386,739
                                                   -------------   -------------

CASH FLOWS FROM INVESTING ACTIVITIES

   Sales, maturities and redemptions of investments 223,824,091      35,203,318
   Purchases of investments                        (230,933,520)     (6,707,210)
   Policyholder loans, net                           (3,559,578)     (5,349,789)
   Acquisition of World Service Life Insurance
     Company                                         (5,066,809)              -
   Short-term investments, net                       22,125,348     (23,173,380)
   Other, net                                          (752,593)       (344,853)
                                                   -------------   -------------
   Net cash provided (used) by investing activities   5,636,939        (371,914)
                                                   -------------   -------------

CASH FLOWS FROM FINANCING ACTIVITIES

   Capital contributions received                        113,560      1,871,536
                                                   -------------    ------------
   Net cash provided by investing activities             113,560      1,871,536
                                                   -------------    ------------

NET INCREASE IN CASH                                      20,889      7,886,361

CASH, BEGINNING OF PERIOD                              1,624,822      1,837,703
                                                    ------------    -----------

CASH, END OF PERIOD                                 $  1,645,711  $   9,724,064
                                                    ============  =============

CASH PAID FOR FEDERAL INCOME TAXES                  $  1,975,165  $     283,173
                                                    ============  =============

                   The accompanying notes are an integral part
                   of these consolidated financial statements.
</TABLE>
<PAGE>
                          LINCOLN HERITAGE CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- BASIS OF PRESENTATION

The  accompanying  consolidated  financial  statements  include the  accounts of
Lincoln Heritage  Corporation ("the Company") and its direct and indirect wholly
owned  subsidiaries,  Memorial Service Life Insurance Company,  Lincoln Memorial
Life Insurance  Company,  and World Service Life  Insurance  Company of America.
These  consolidated  financial  statements have been prepared in accordance with
generally accepted accounting principles.  All significant intercompany balances
and transactions have been eliminated in consolidation.

The accompanying  consolidated financial statements as of September 30, 1998 and
the three and nine months ended September 30, 1998 and 1997, are unaudited.  The
unaudited interim  consolidated  financial  statements have been prepared on the
same basis as the annual consolidated  financial  statements and, in the opinion
of  management,  reflect all  adjustments,  which include only normal  recurring
adjustments,  necessary  to present  fairly the  Company's  financial  position,
results of operations  and cash flows as of September 30, 1998 and for the three
and nine months ended September 30, 1998 and 1997. These consolidated  financial
statements  and notes thereto are  unaudited  and should be read in  conjunction
with the Company's audited financial  statements  included in the Company's Rule
424(b)(1)  Prospectus  filed with the  Securities  and  Exchange  Commission  on
October 28, 1998. The results for the three and nine months ended  September 30,
1998 are not necessarily  indicative of the expected results for the year ending
December 31, 1998.  Certain  prior period  balances  have been  reclassified  to
conform to the current period presentation.

NOTE 2 -- STOCK SPLITS AND EARNINGS PER SHARE

On September 19, 1997, the Company  effected a 100,000-for-1  stock split in the
form of a stock dividend. Upon consummation of such stock split, the Company had
1,000,000 shares of its Common Stock issued and  outstanding.  On April 6, 1998,
the Company  effected a 3.2-for-1  stock split, in the form of a stock dividend,
and on August 18, 1998, the Company declared and paid a 25% stock dividend.  The
4,000,000  shares  outstanding  at August 18, 1998 have been used to compute the
basic earnings per share of the Company for all periods  presented.  The diluted
earnings  per share is computed  using the  treasury  stock  method,  unless the
effect is anti-dilutive.

NOTE 3 -- INITIAL PUBLIC OFFERING

In October 1998, the Company  completed its initial  public  offering and issued
520,000  shares  of its  Common  Stock at a price of $7.50  per  share.  The net
proceeds of the offering were  approximately  $2.7 million,  after  underwriting
discounts,  commissions and other offering costs.  The net proceeds were used to
make a  capital  contribution  on  December  1,  1998  to  one of the  Company's
subsidiaries.

NOTE 4 -- RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial  Accounting  Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging  Activities" which establishes  accounting and reporting
standards  for  derivative  instruments  and  hedging  activities.  SFAS No. 133
requires  that  an  entity   recognize  all  derivatives  as  either  assets  or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning  after June 15,  1999.  The Company is  assessing  the impact that the
adoption of SFAS No. 133 will have on its consolidated financial statements, but
does not expect such  implementation  to have a material  adverse  effect on its
financial position or results of operations.

NOTE 5 -- CO-INSURANCE OF LIFE INSURANCE AND ANNUITY POLICIES

On  September 1, 1997,  the Company  co-insured  a block of life  insurance  and
annuity policies from Woodmen  Accident and Life Company (the "Woodmen  Block").
The block of  business  consisted  primarily  of deferred  annuities,  which are
accounted for as investment  contracts  using  deposit  accounting.  The Company
assumed approximately  $51,311,000 of insurance and annuity reserves in exchange
for receiving $48,018,000 in cash. The net liabilities assumed, $3,293,000, plus
other costs  related to the  co-insurance  of the Woodmen Block in the amount of
$218,000 have been shown as additions from  acquisitions as the cost of policies
purchased.

Effective  April 1, 1998,  the Company  co-insured a block of life insurance and
annuity policies from World Insurance Company (the "World Block").  The reserves
on the block of business consisted of approximately one-third deferred annuities
and one-third of interest  sensitive life  insurance  which are accounted for as
investment  contracts using deposit  accounting and one-third  traditional whole
life insurance.  The Company assumed approximately  $21,909,000 of insurance and
annuity  reserves in  exchange  for  receiving  $19,941,000  in assets.  The net
liabilities assumed, $2,005,716, plus other costs related to the co-insurance of
the World  Block in the  amount of  approximately  $200,000  have been  shown as
additions from acquisitions as the cost of policies purchased.

NOTE 6 -- ACQUISITIONS AND PENDING ACQUISITIONS

On March 9, 1998, the Company executed a definitive stock purchase  agreement to
acquire all of the outstanding  stock of World Service Life Insurance Company of
America ("World Service") for a total consideration of $5,470,000. World Service
currently has no active policies in force; however, World Service is licensed to
conduct  business in 42 states and the District of Columbia.  The acquisition of
World Service was consummated on May 15, 1998.

The following is a condensed balance sheet of World Service as of May 15, 1998:

<TABLE>
<CAPTION>
                                                  Net assets acquired
                                                  and net liabilities
                                                            assumed
<S>                                                      <C>
Cash and invested assets .............................   $4,650,686
Goodwill acquired ....................................      557,451
Other assets .........................................      262,504
                                                         ----------
       Total assets acquired .........................    5,470,641
Liabilities assumed ..................................         (246)
       Net purchase price ............................   $5,470,395
                                                         ==========
</TABLE>

On January 28, 1998, the Company executed a definitive stock purchase  agreement
to  acquire  all  of the  outstanding  stock  of  Harbourton  Reassurance,  Inc.
("Harbourton").  Harbourton's insurance operations consist of the reinsurance of
life,  annuity and disability income products from various other U.S.  insurance
companies. The acquisition is subject to final regulatory approval and there can
be no assurance that such regulatory approval will be obtained.  The transaction
is  expected  to be  completed  by  the  end of  1998  for  an  estimated  total
consideration  of approximately  $12,500,000.  Each party to the transaction has
deposited $250,000 into an escrow account  established for the performance under
the stock purchase  agreement.  Each party's deposit is subject to forfeiture if
such party  defaults  under the stock  purchase  agreement by not completing the
transaction  by December 31, 1998. The  acquisition  will be accounted for under
the purchase method of accounting.

NOTE 7 -- RELATED PARTY TRANSACTIONS

Essentially  all of the  Company's  life  insurance  policies are issued to fund
prearranged  funeral contracts that are sold by National  Prearranged  Services,
Inc. ("NPS") and National Prearranged Services Agency, Inc. ("NPS Agency").  NPS
and  NPS  Agency  are  affiliated   companies  that  collect  all  payments  for
prearranged funeral contracts and remit such amounts to the Company.

The  Company's  insurance  subsidiaries  have in force an agents'  contract (the
"Contract") with NPS and NPS Agency that obligates the Company to pay first-year
and renewal commissions on policies written by NPS and NPS Agency.

In order to better  match the  commissions  paid with the  profitability  of the
underlying  policies,  effective  January 1, 1997,  the  Company and NPS and NPS
Agency  agreed  to amend  the  Contract  to  provide  for  increased  first-year
commissions  of up to 31.5% of the face amount on single  premium  policies  and
terminate  payments  of  renewal  commissions  on  policies  issued on or before
December 31, 1995.  The effect of the amended  agreement  was a reduction in the
increase  in future  policy  benefits  of  $861,000  for the nine  months  ended
September 30, 1997 on policies  issued in 1997 and this effect,  net of $249,000
of tax expense  was  reflected  as an  increase in paid-in  capital for the nine
months ended September 30, 1997.

The net effect on  operations  of the  amendment to the Contract  over the short
term (the next three  years)  will depend on the amount of  single-pay  business
written by NPS when compared to the amount of renewal commissions  terminated on
business issued prior to December 31, 1995.  Commissions on single-pay  policies
are increased  over what would have been paid under the original  Contract,  but
future renewal  commission on policies sold prior to December 31, 1995, will not
be paid.  After three years,  the amount of renewal  commissions  terminated  on
business issued prior to December 31, 1995 will be zero, so the effect on future
operations of the change in the Contract will decrease earnings by the amount of
the increase in commissions from 23% to 31.5% paid on single-pay business.

NOTE 8 -- STOCK-BASED COMPENSATION
The Company  accounts for  stock-based  employee  compensation  arrangements  in
accordance  with provisions of Accounting  Principles  Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB
No. 25, compensation expense is based on the difference,  if any, on the date of
the grant, between the fair value of the Company's stock and the exercise price.
The Company  accounts for stock issued to  non-employees  in accordance with the
provisions of SFAS No. 123 and EITF 96-18.

Effective  April 6, 1998, the Company adopted the Lincoln  Heritage  Corporation
1998 Long-Term Incentive Plan (the "Plan").  The Plan allows for the issuance of
(i) stock options,  (ii) stock appreciation  rights,  (iii) restricted shares of
common stock and (iv) performance  awards. A total of 1,200,000 shares of common
stock have been reserved for issuance under the Plan. During the period April 6,
1998 to  September  30, 1998,  the Company  granted  options to acquire  399,000
shares of common stock at an exercise price of $3.75 per share.

Estimated  compensation  of  approximately  $1.6 million in connection  with the
option grants is being amortized over the four-year vesting period. Amortization
expense  recognized  during the nine months  ended  September  30, 1998  totaled
approximately  $170,000.  In  accordance  with APB  Opinion  No. 25, the Company
computed the estimated  compensation  value of the stock  options  issued to its
executives  and employees as the  difference  between the exercise  price of the
options  ($3.75) and the market price of the stock at the date of grant ($7.50).
In accordance with SFAS No. 123, "Accounting for Stock-Based  Compensation," the
fair market value of the options granted to  non-employees  was estimated on the
date of grant using the minimum value approach. The expected life of the options
was 7.5  years,  the  risk-free  interest  rate  used was 6% and  there  were no
assumptions as to volatility or dividend yield.


<PAGE>

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

Overview

         Lincoln  Heritage  Corporation  is a  life  insurance  holding  company
engaged in the ownership and operation of life  insurance  companies and related
services.  The Company also acquires  existing life insurance  policies,  either
through direct purchase or the acquisition of insurance companies. The Company's
life insurance  operations are conducted through its wholly owned life insurance
subsidiaries.

         The  Company was  incorporated  in Texas in 1980.  The  Company  formed
Memorial  Service Life Insurance  Company in 1986 and acquired  Lincoln Memorial
Life Insurance Company in 1992 and World Service Life Insurance Company in 1998.
In 1997 and 1998,  the Company  acquired  blocks of life  insurance  and annuity
policies  from Woodmen  Accident and Life Company and World  Insurance  Company,
respectively. The acquisition of the Woodmen Block was the first instance of the
Company's strategy of acquiring life and annuity policies.

         The  Company's  intended  strategy  is to  use  the  increased  capital
received from its initial  public  offering and other capital  resources to grow
its business by acquiring blocks of in force life insurance and annuity business
and  companies  that have  blocks of such  business.  Management  of the Company
believes  that the  Company is well  positioned  to  significantly  enhance  the
profitability of the business acquired. Profitability of an acquired company can
usually be enhanced in several ways,  including,  but not limited to, savings by
elimination  of management  and  reduction in staff,  and savings as a result of
economies of scale through the integration of systems and  administration  of an
acquired  company into the  Company.  The Company  expects that its  acquisition
targets will be predominantly similar life insurance companies and closed blocks
of  business,  all of which  utilize  the same type of  systems,  personnel  and
management skills as the Company.

         A substantial  majority of the Company's  life  insurance  premiums has
been derived from the issuance of insurance policies to fund prearranged funeral
contracts sold by NPS, an affiliate of the Company.  NPS, which was incorporated
in 1979, is engaged in the business of marketing  prearranged  funeral contracts
for funeral homes in Missouri,  Texas and six other  states,  and is licensed to
expand into an additional 22 states. There is no affiliation between NPS and any
funeral home for which NPS markets prearranged funeral contracts.  A prearranged
funeral  contract  allows  customers to purchase at current prices services that
may not be  needed  for  many  years.  Under a  prearrangement,  family  members
generally are removed from the planning that would otherwise have been completed
at  the  difficult  time  of  death.   However,  by  paying  for  the  costs  of
pre-planning,  the  client  loses  use of any cash  paid  that  could  have been
invested elsewhere.

         The following discussion presents specific comments on material changes
to the  Company's  consolidated  results of  operations,  capital  resources and
liquidity for the periods  reflected in the interim  financial  statements filed
with this report.  Many of the changes in 1998 and 1997 affecting the results of
operations  were caused by the  acquisition of the Woodmen Block as described in
the  notes to the  consolidated  financial  statements  and in the  notes to the
consolidated  financial  statements  included in the  Company's  Rule  424(b)(1)
Prospectus  filed with the  Securities  and Exchange  Commission  on October 28,
1998.  This  discussion  should be read in conjunction  with those  consolidated
financial statements and related notes.

<PAGE>
Results of Operations

         Comparison  of the Three and Nine Months Ended  September  30, 1998 and
1997.

         Premium income increased approximately $206,000 and $3.6 million, or 2%
and 13%, in the  three-month  and nine-month  periods ended  September 30, 1998,
respectively,   over  the  comparable   periods  of  1997.  The  increases  were
attributable   to  higher  sales   volumes.   New  policies   issued   increased
significantly  for  both  limited  pay and  single  pay  policies  with  greater
increases in limited pay policies for the nine-month  period ended September 30,
1998 compared to the nine-month period ended September 30, 1997.

         Net  investment  income  increased   approximately  $956,000  and  $3.0
million,  or 51% and  68%,  in the  three-month  and  nine-month  periods  ended
September 30, 1998,  respectively,  over the  comparable  periods of 1997.  This
increase  can be  attributed  to a higher  level of invested  assets  (primarily
resulting  from  the  Woodmen  Block)  and a more  actively  managed  investment
portfolio.

         Net realized  gains  decreased  approximately  $120,000  and  increased
approximately  $841,000,  or 21% and 126%,  in the  three-month  and  nine-month
periods ended September 30, 1998, respectively, versus the comparable periods of
1997.  Gains were  recognized in the  three-month  and nine-month  periods ended
September 30, 1998 due to the higher levels of invested assets  discussed above.
However,  these  gains  were  offset  by losses of  approximately  $450,000  and
$1,050,000, for the three-month and nine-month periods ended September 30, 1998,
respectively,  for  significant  declines  in the fair  market  value of certain
investments.  The declines in fair market values of certain of these investments
followed public  announcements of operating problems of the entities  associated
with these  investments.  As of November 30, 1998,  these  investments have been
sold and  accordingly,  no  additional  losses  from these  investments  will be
recorded in the fourth quarter.

         Benefits increased  approximately $1.3 million and $4.8 million, or 15%
and 21%, in the  three-month  and nine-month  periods ended  September 30, 1998,
respectively,  over the comparable  periods of 1997. These increases were due to
increases in death  benefits in proportion to the increases in overall  policies
in force,  surrender  benefits  associated  with the Woodmen Block and the World
Block,  increases in future policy  benefits due to higher levels of policies in
force and an  increase  in reserve per unit on renewal  business,  and  interest
credited to policyholder accounts for the Woodmen Block and the World Block.

         Commissions  increased  approximately $2.6 million and $4.3 million, or
113% and 57%, in the  three-month  and  nine-month  periods ended  September 30,
1998,  respectively,  over the comparable  periods of 1997. These increases were
attributable  to higher sales  volumes and changes in the mix of policies  sold.
The face amount of new policies issued increased 64% and 56% for the three-month
and nine-month periods ended September 30, 1998,  respectively,  compared to the
comparable periods in 1997.

         General expenses, net of expenses reimbursed,  increased  approximately
$402,000 and $1.6 million,  or 61% and 105%, in the  three-month  and nine-month
periods ended September 30, 1998,  respectively,  over the comparable periods of
1997.  These  increases  were  attributable  to  higher  policy  administration,
administrative,  and accounting expenses as a result of increased sales volumes,
the  acquisition  of the Woodmen  Block and World Block,  support for  increased
levels of  acquisition  activities and regulatory  reporting  requirements,  and
deferred  compensation costs associated with the Company's  Long-Term  Incentive
Plan established in August 1998.

         Amortization  of  the  cost  of  policies  purchased  of  approximately
$623,000  for the  nine-month  period  ended  September  30, 1998 was  primarily
attributable to the purchase of the Woodmen Block.

         The  decreases  in  the  change  in  deferred   acquisition   costs  of
approximately  $1.0 million and $1.7 million for the  three-month and nine-month
periods  ended  September  30,  1998,  respectively,  compared to  approximately
$76,000 and $480,000 for the three-month and nine-month  periods ended September
30, 1997, respectively, were due to the capitalization of the costs of acquiring
new  business  at a higher  rate than the  amortization  of such  costs due to a
higher volume of new policies issued, particularly limited pay policies.

Liquidity and Capital Resources

         The Company's insurance subsidiaries generally generate sufficient cash
receipts from premium collections and investment income to satisfy the Company's
obligations. The Company believes that the diversity of the investment portfolio
of  its  insurance  subsidiaries  provides  sufficient  liquidity  to  meet  its
operating cash requirements.

         On May 15,  1998,  the Company  acquired all the  outstanding  stock of
World  Service  for  approximately  $5.5  million  in cash (the  "World  Service
Acquisition").  Effective April 1, 1998, the Company acquired a block of annuity
and life business through  co-insurance  from World Insurance  Company.  The net
liabilities assumed,  approximately $2.0 million, plus other costs in the amount
of $200,000,  have been recorded as additions from  acquisitions  in the cost of
policies purchased account.

         The Company's cash  requirements for fiscal 1998 and in the future will
depend upon mortality  experience,  acquisitions,  timing of expansion plans and
capital  expenditures.  The  Company  believes  that the net  proceeds  from its
initial public offering in October 1998, interest earned on the net proceeds and
anticipated revenue from operations should be adequate for the Company's working
capital  requirements  of its existing  business over the next twelve months and
the planned  acquisition  of  Harbourton.  In the event the  Company's  plans or
assumptions  change,  or if its  requirements to meet  unanticipated  changes in
business  conditions or the proceeds of its initial public  offering prove to be
insufficient  to  fund  operations,  the  Company  could  be  required  to  seek
additional financing prior to that time.

         Changes in the Company's  consolidated  balance sheet between  December
31, 1997 and September 30, 1998 reflect  growth through  operations,  changes in
the fair value of actively managed fixed maturity and equity securities, changes
in the  investment  portfolio  mix,  the  purchase of the Woodmen  Block and the
purchase of the World Block.

         Total  investments  increased  approximately  $12.1 million from $118.4
million at  December  31,  1997 to $130.5  million  at  September  30,  1998 due
primarily to the receipt of assets in connection  with the purchase of the World
Block  netted  against  cancellations  of policies  associated  with the Woodmen
Block.  Changes in the separate  components of investment assets were due to the
portfolio mix of the Company's  investment  assets and changes in the fair value
of balances in actively managed fixed maturity and equity securities.

         Receivables from related parties increased  approximately  $1.3 million
from  $478,000 at December 31, 1997 to $1.8  million at  September  30, 1998 due
primarily to receivables due under the Company's cost sharing arrangement.

         Deferred policy acquisition costs increased  approximately $2.2 million
from $12.6  million at December 31, 1997 to $14.8 million at September 30, 1998,
due to increases in policies in force.

         Fixed assets,  net, increased  approximately  $489,000 from $650,000 at
December 31, 1997 to $1.1 million at September 30, 1998 due to expenditures  for
furniture and equipment due to expansion of the Company's operations and ongoing
development and modifications to the Company's software systems.

         Cost of policies purchased,  net, increased  approximately $1.6 million
from $3.2 million at December 31, 1997 to $4.8 million at September 30, 1998 due
to the acquisition of the World Block offset by the amortization of costs.

     Goodwill  increased  approximately  $651,000  from $773,000 at December 31,
1997 to $1.4 million at September 30, 1998 due to the World Service Acquisition.

         Other assets increased approximately $945,000 from $353,000 at December
31,  1997 to $1.3  million at  September  30,  1998 due  primarily  to  expenses
associated with the Company's initial public offering in October 1998 which will
be netted against the gross proceeds received in the additional  paid-in capital
account. See Part II, Item 2, Changes in Securities and Use of Proceeds.

         Future policy benefits increased approximately $18.2 million from $87.8
million at December  31, 1997 to $106.0  million at  September  30,  1998.  This
increase  was due to an  increase in the amount of new  policies  issued and the
acquisition of the World Block.

         Policyholder  deposits increased  approximately $7.4 million from $41.6
million  at  December  31,  1997  to  $49.0   million  at  September  30,  1998.
Policyholder  deposits are  comprised  primarily of annuities  acquired with the
Woodmen Block and the World Block.  The increase was due to the  acquisition  of
the World Block on April 1, 1998  offset by  cancellations  of policies  and the
absence of the issuance of new annuity policies.

         Income tax  liabilities of  approximately  $2.0 million at December 31,
1997 was due to operating  income for the year ended  December 31, 1997 compared
to operating losses for the nine-month period ended September 30, 1998.

         The decrease in shareholders'  equity for the first nine months of 1998
reflects the  decrease in net  unrealized  appreciation  on  securities  of $2.0
million.

Factors Affecting the Company's Business and Prospects

Seasonality

         Historically,  the Company's revenues and operating results have varied
from quarter to quarter and are expected to continue to fluctuate in the future.
These  fluctuations  have been due to a number of  factors,  including  a higher
mortality rate of the Company's insureds during the winter months.

Year 2000 Issues
         Many current installed computer systems and software products are coded
to accept  only  two-digit  entries in the date code  field and cannot  reliably
distinguish  dates  beginning  on January  1, 2000 from dates  prior to the year
2000. Many companies'  software and computer  systems may need to be upgraded or
replaced in order to correctly process dates beginning in 2000.
<PAGE>


         Company Readiness

          The Company's  information  technology personnel recently assessed the
Company's  readiness to manage Year 2000 issues.  This  included a review of all
current  computer  systems in use, as well as  communications  with  significant
vendors and other third  parties to determine  the extent to which the Company's
operations are  vulnerable to third  parties'  failure to correct their own Year
2000  issues.  Based  on the  overall  assessment  performed,  the  Company  has
determined that it will not need to  significantly  modify or replace any of its
current  systems in order to comply with Year 2000 issues.  In  addition,  based
upon  communications  with  significant  vendors  and other third  parties,  the
Company is not aware of any  material  impact on their  systems  relating to the
transition to the Year 2000. However,  the Company has no means of ensuring that
these  entities  will be Year 2000  ready.  The  inability  of third  parties to
complete their Year 2000 programs in a timely manner could materially impact the
Company. The effect of non-compliant third parties is not determinable.

         Year 2000 Costs

         The  Company's  total  costs of Year 2000  efforts  to date and  future
anticipated  costs  have not and are not  expected  to have a  material  adverse
effect on the Company's financial position or results of operations.

         Risks Associated with the Company's Year 2000 Issues

         The Company expects its internal  systems to be Year 2000 compliant and
believes that the worst case  scenario  would result from vendors or other third
parties failing to achieve Year 2000 compliance.  Due to the general uncertainty
inherent  in the Year 2000  problem,  the  Company  cannot  predict  whether the
consequence  of Year 2000  failures will have a material  adverse  effect on the
Company's business, financial condition or results of operations. However, based
on  the  Company's  assessment  of its  internal  systems,  communications  with
significant  vendors and other third  parties,  the Company does not expect Year
2000 problems to result in a material adverse effect on the Company's  financial
position or results of operations

Forward-Looking Statements

         This report contains  forward-looking  statements within the meaning of
the "safe harbor" provisions of the Private Securities  Litigation Reform Act of
1995. Such forward-looking  statements are based on the beliefs of the Company's
management as well as on assumptions made by and information currently available
to the Company at the time such  statements  were made.  The Company can give no
assurance that the  expectations  indicated by such  forward-looking  statements
will be realized. If any of management's  assumptions should prove incorrect, or
if any of the  risks  and  uncertainties  underlying  such  expectations  should
materialize,  the  Company's  actual  results may differ  materially  from those
indicated by the forward-looking statements.

         The  following  factors that are not within the  Company's  control and
that may have a direct bearing on operating results include, but are not limited
to: (i) general  economic  conditions  and other factors,  including  prevailing
interest rate levels and stock market performance,  which may affect the ability
of the  Company  to  sell  its  products,  the  market  value  of the  Company's
investments and the lapse rate and profitability of the Company's policies; (ii)
the Company's ability to achieve anticipated levels of operational  efficiencies
at  recently   acquired   companies,   as  well  as  through  other  cost-saving
initiatives; (iii) mortality,  morbidity, and other factors which may affect the
profitability of the Company's insurance  products;  (iv) changes in the federal
income tax laws and  regulations  which may affect the cost of or demand for the
Company's  products;  (v)  increasing  competition  in the sale of the Company's
products;  (vi)  regulatory  changes or  actions,  including  those  relating to
regulation of financial  services  affecting (among other things) bank sales and
underwriting of insurance  products,  regulation of the sale,  underwriting  and
pricing  of  insurance  products;  (vii)  the  availability  and terms of future
acquisitions;  and  (viii)  the risk  factors  or  uncertainties  listed  in the
Company's other filings with the Securities and Exchange Commission.

         Additionally,  the  Company  may  not  be  successful  in  identifying,
acquiring,   and  integrating   additional   start-up   locations  and  possible
acquisitions,   implementing  improved  management  and  accounting  information
systems and controls and may be dependent upon additional  capital and equipment
purchases for future  growth.  There may be other risks and  uncertainties  that
management is not able to predict.

         When  used  in  this  report,   the  words   "anticipate,"   "believe,"
"estimate," "expect," "intends," and similar expressions,  as they relate to the
Company are intended to identify forward-looking statements,  although there may
be certain forward-looking statements not accompanied by such expressions.



<PAGE>



                                                      - 18 -
PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

         Not applicable.

Item 2.  Changes in Securities and Use of Proceeds

         (d) The effective date of the registration  statement for the Company's
initial public offering ("IPO") of its Common Stock, filed on Form S-1 under the
Securities Act of 1933 (No. 333-50525), was October 22, 1998. A total of 520,000
shares of Company's Common Stock were sold through an underwriting  syndicate at
a price of $7.50 per share. The managing underwriter was Tejas Securities Group,
Inc. The offering  commenced and was completed on November 2, 1998, and resulted
in  gross  proceeds  of  $3.9  million.   The  Company   incurred   expenses  of
approximately  $1.26  million  of  which  approximately   $360,000   represented
underwriting  discounts and commissions,  and approximately $900,000 represented
other  expenses  related to the IPO. The net IPO  proceeds to the Company  after
total expenses were  approximately  $2.7 million.  The net proceeds were used to
make a capital  contribution to one of the Company's  insurance  subsidiaries on
December 1, 1998.

Item 3.  Defaults Upon Senior Securities

         Not applicable.

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

         Not applicable.

Item 5.  Other Information

         Not applicable.

Item 6.  Exhibits and Reports on Form 8-K

         (a)      Exhibits:
                  See Exhibit Index attached hereto.

         (b)      Reports on Form 8-K:
                  None.


<PAGE>


                                                    SIGNATURES

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



                           LINCOLN HERITAGE CORPORATION
                                             (Registrant)


December 7, 1998           By:    /s/ Nick Powling
                                   President and Chief Executive Officer


December 7, 1998           By:    /s/ Clifton Mitchell
                                  Executive Vice  President-  Actuarial and
                                  Principal Financial and Accounting Officer


<PAGE>

<TABLE>

                                  EXHIBIT INDEX
<CAPTION>

Ex. No.                    Description
<S>        <C>
   27.1    Financial Data Schedule for the nine months ended September 30, 1998.
   27.2    Financial Data Schedule for the nine months ended September 30, 1997.

</TABLE>