SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K


(Mark One)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 (FEE REQUIRED)

         For the fiscal year ended December 31, 2000

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

         For the transition period from              to

Commission File
Number 0-4690

                        FINANCIAL INDUSTRIES CORPORATION
             (Exact name of registrant as specified in its charter)

      TEXAS                                        74-2126975
State of Incorporation                (I.R.S. Employer Identification number)

6500 River Place Boulevard, Building One, Austin, Texas              78730
  (Address of Principal Executive Offices)                        (Zip Code)

                 (512) 404-5050              (Registrant's Telephone Number)

Securities Registered pursuant to Section 12(b) of the Act:  None

Securities Registered pursuant to Section 12(g) of the Act:

                   Common Stock, $.20 par value
                        (Title of Class)



                                       -1-





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 and (2) has been subject to such filing requirements for
the past 90 days. YES X NO

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant  on March 6, 2001,  based on the  closing  sales  price in The Nasdaq
Small-Cap  Market  ($9.75  per  share),  was  44,406,968.

The number of shares  outstanding of Registrant's  common stock on March 6, 2001
was 5,054,661.

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

DOCUMENTS INCORPORATED BY REFERENCE:

     A. Reports on Form 10-K of InterContinental Life Corporation for the fiscal
     years ended  December 31, 2000,  1999 and 1998 are hereby  incorporated  by
     reference.

Forward-Looking Statements

Except for  historical  factual  information  set forth in this Form  10-K,  the
statements, analyses, and other information contained in this report relating to
trends in the Company's  operations and financial  results,  the markets for the
Company's products,  the future development of the Company's  business,  and the
contingencies and uncertainties to which the Company may be subject,  as well as
other  statements  including  words  such as  "anticipate,"  "believe,"  "path,"
"estimate,"   "expect,"  "intend"  and  other  similar  expressions   constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. Such statements are made based upon management's  current expectations and
beliefs concerning the financial results, economic conditions and are subject to
known and unknown risks,  uncertainties  and other factors  contemplated  by the
forward-looking  statements.  Such  factors  include,  among other  things:  (1)
general economic  conditions and other factors,  including  prevailing  interest
rate levels and stock market performance, which may effect the ability of FIC to
sell its products,  the market value of FIC's investments and the lapse rate and
profitability of policies;  (2) FIC's ability to achieve  anticipated  levels of
operational efficiencies and cost-saving  initiatives;  (3) customer response to
new products,  distribution channels and marketing  initiatives;  (4) mortality,
morbidity  and  other  factors  which  may  affect  the  profitability  of FIC's
insurance  products;  (5) changes in the Federal income tax laws and regulations
which may affect the  relative tax  advantages  of some of FIC's  products;  (6)
increasing  competition in the sale of insurance and  annuities;  (7) regulatory
changes or actions, including those relating to regulation of insurance products
and insurance companies; (8) ratings assigned to FIC's insurance subsidiaries by
independent rating  organizations such as A.M. Best Company,  which FIC believes
are  particularly  important  to the  sale of  annuity  and  other  accumulation
products; and (9) unanticipated litigation. There can be no assurance that other
factors not currently  anticipated  by management  will not also  materially and
adversely affect FIC.

                                       -2-



                                     PART I

Item 1. Business

General

Financial Industries Corporation ("FIC", the "Company" or the "Registrant") is a
holding company  primarily  engaged in the life insurance  business  through its
indirect  ownership of 100% of Family Life Insurance Company ("Family Life") and
its approximately 48.3% interest in InterContinental  Life Corporation ("ILCO"),
also a holding company primarily engaged in the life insurance business.

The  Registrant   was  organized  as  an  Ohio   corporation  in  1968  and  was
reincorporated in Texas in 1980. Its executive offices are located at 6500 River
Place  Boulevard,  Building  One,  Austin,  Texas  78730.  Through  1984,  FIC's
principal  business was the sale and underwriting of life and health  insurance,
mainly in the midwestern and southwestern United States.  During the period from
1985 to 1987,  FIC  acquired  its equity  interest in ILCO,  which is  currently
approximately 48.3%.

FIC,  ILCO  and  their  insurance  subsidiaries  have  substantially   identical
managements.  Officers  allocate  their time between FIC and ILCO in  accordance
with the comparative requirements of both companies and their subsidiaries.  The
Roy F. and Joann Cole Mitte Foundation (the  "Foundation"),  a charitable entity
exempt from federal income tax under section 501(a) of the Internal Revenue Code
(the "Code") as an organization described in section 501(c)(3) of the Code, owns
30.71% of the outstanding  shares of FIC's common stock. The sole members of the
Foundation are Roy F. Mitte, Chairman,  President and Chief Executive Officer of
FIC,  the Company and their  insurance  subsidiaries,  and his wife,  Joann Cole
Mitte.  FIC  owns  Family  Life  Insurance  Company,   a  Washington   domiciled
underwriter of mortgage protection life insurance.

Acquisitions  Strategy.  The Company's  strategy has been and continues to be to
grow internally and through acquisitions,  while maintaining an emphasis on cost
controls. Management believes that, under appropriate circumstances,  it is more
advantageous to acquire  companies with books of in-force life insurance than to
produce new  business,  because  initial  underwriting  costs have  already been
incurred  and mature  business is  generally  less likely to  terminate,  making
possible more predictable profit analysis. However, Family Life does continue to
market those products that are  profitable,  as well as develop new products and
streamline   distribution  channels.   See  "Agency  Operations".   It  is  also
management's  belief that the  continuing  consolidation  in the life  insurance
industry  presents  attractive  opportunities  for the  Company to acquire  life
insurance  companies  that  complement  or fit  within  the  Company's  existing
marketing structure and product lines. The Company's objective is to improve the
profitability  of acquired  businesses by  consolidating  and  streamlining  the
administrative functions of these businesses,  eliminating unprofitable products
and  distribution  channels,  applying its  marketing  expertise to the acquired
company's  markets and agents and  benefitting  from  economies of scale.  FIC's
ability  to make  future  acquisitions  will be  dependent  on its being able to
obtain the necessary financing. In addition, since ILCO has the same acquisition
strategy as FIC, a conflict of  interest  could arise in the future  between FIC
and ILCO with respect to acquisition opportunities.


                                        -3-




Acquisition  of ILCO.  In January,  1985,  FIC acquired  26.53% of ILCO's common
stock. FIC and Family Life  subsequently  acquired  additional  shares of ILCO's
common stock and as of March 6, 2001, FIC owned, directly and indirectly through
Family Life,  approximately  48.3% of the  outstanding  shares of ILCO's  common
stock.  Prior to September 30, 1998, FIC held options to acquire up to 1,702,155
additional  shares of ILCO's common stock.  The  consideration  for the options,
which were granted in 1986,  was FIC's  granting to ILCO a loan in the principal
amount of $1.2 million,  FIC's agreement to guarantee future loan obligations of
ILCO  and  FIC's  agreement  to  guarantee   ILCO's  lease   obligation  on  its
headquarters  building  upon demand.  As  described  under the heading "The ILCO
Senior  Loan",  the Senior Loan of ILCO was fully repaid on September  30, 1998.
Accordingly,  FIC's rights under the 1986 option agreement  expired on September
30, 1998.

Acquisition  of  Family  Life.  FIC  acquired  Family  Life from  Merrill  Lynch
Insurance Group,  Inc. on June 12, 1991. The  consideration for the purchase was
$114  million  consisting  of a cash  payment of $70  million and $44 million of
subordinated  promissory  notes issued by  subsidiaries of FIC to the seller and
its affiliates.  Family Life's primary  business is the underwriting and sale of
mortgage  protection life insurance to customers who are mortgage borrowers from
financial  institutions  where Family Life has marketing  relationships.  Family
Life  distributes  its insurance  products  primarily  through a national career
agency sales force. See "Business of Family Life Insurance Company".

ILCO's Acquisitions

a. Standard  Life. In November,  1986,  ILCO  acquired  Standard Life  Insurance
Company ("Standard Life"),  headquartered in Jackson,  Mississippi,  for a gross
purchase price of $54.5 million.

b.  Investors-NA and  Investors-CA.  In December,  1988, ILCO,  through Standard
Life, purchased Investors Life Insurance Company of California  ("Investors-CA")
and Investors-NA from CIGNA Corporation for a purchase price of $140 million.

c. Investors-Indiana.  In February, 1995, ILCO, through Investors-NA,  purchased
from Meridian  Mutual  Insurance  Company the stock of Meridian  Life  Insurance
Company, an Indianapolis-based  life insurer, for a cash purchase price of $17.1
million. After the acquisition, Meridian Life changed its name to Investors Life
Insurance Company of Indiana ("Investors-Indiana").

d. State Auto Life. In July,  1997,  ILCO and  Investors-Indiana  acquired State
Auto  Life  Insurance  Company,  an Ohio  domiciled  life  insurer,  from  State
Automobile  Mutual  Insurance  Company,  for an adjusted cash purchase  price of
$11.8 million.  Under the terms of the  transaction,  State Auto Life was merged
into Investors-Indiana.

                                       -4-



e.  Grinnell  Life.  On June 30,  1998,  ILCO,  through a  subsidiary,  acquired
Grinnell Life Insurance Company ("Grinnell Life") for an adjusted purchase price
of $16.6 million.  A portion of the purchase price ($12.37  million) was paid by
way of a  dividend  to the  seller  immediately  prior  to  the  closing  of the
transaction; the balance of the purchase price was paid by ILCO's subsidiary. As
part of the transaction, Grinnell Life was immediately merged with and into that
subsidiary, with that subsidiary being the surviving entity.

Merger of ILIC and Investors-Indiana.  In December, 1997,  InterContinental Life
Insurance Company ("ILIC"), a subsidiary of ILCO,  transferred its domicile from
New Jersey to Indiana. Following completion of the redomestication,  ILIC merged
with Investors-Indiana, with ILIC as the surviving entity in the merger process.
Immediately after the merger,  ILIC changed its name to Investors Life Insurance
Company of Indiana. As used hereinafter, the phrase "Investors-IN" shall be used
to refer to the merged entities.

Business of Family Life Insurance Company

Family Life, which was organized in the State of Washington in 1949, specializes
in providing mortgage protection life and accidental death insurance and annuity
products  to  mortgage  borrowers  of  financial  institutions.  Family Life has
policies in force with customers of approximately 82 financial institutions,  of
which  approximately  49 actively  provide Family Life with regular  updating of
their lists of borrowers.

Family Life's mortgage  protection  business consists of term and universal life
insurance sold to borrowers of mortgage debt, designed to repay the mortgages of
policyholders in the event of their death. This business is sold to customers of
client financial  institutions,  usually through a list of borrowers provided by
the  financial  institution.  These  policies  often list the lending  financial
institution  as  the  primary  beneficiary  of the  life  insurance  policy.  An
important  feature of the Family Life product is the ability to bill and collect
premiums through the policyholder's monthly mortgage payments.

Family  Life has  annuity  products  and a variety of life  insurance  products,
including  decreasing  term life insurance,  universal life insurance,  ten-year
level term products and a whole life insurance product.

Family Life is licensed to sell  mortgage life  insurance  products in 49 states
and the District of Columbia.  In 2000,  premium  income from these products was
derived  from all states in which  Family  Life is  licensed,  with  significant
amounts  derived from Texas ( 26%),  California ( 25%) and Florida ( 5%). Family
Life's primary  distribution  channel is its agency force of  approximately  340
career agents (at December 31, 2000), who are organized into 28 regions. Most of
the career agents sell mortgage life insurance  products  exclusively for Family
Life.  The mortgage  life  insurance  business is very  fragmented.  Family Life
believes  that it is among  the  larger  writers  of agent  sold  mortgage  life
insurance  in the  United  States  and  the  only  nation-wide  agent-sold  life
insurance company operating through leads from financial  institutions.  Many of
Family Life's competitors are life insurance  companies with more resources than
Family Life and whose mortgage life insurance  business  represents only a small
portion of their total business.


                                       -5-



During 2000, Family Life continued the expansion of its distribution  system, to
recruit  agents whose  product  portfolio  includes a broader  range of life and
annuity  products,  in  addition to the  traditional  mortgage  protection  life
insurance products offered by Family Life. While Family Life's traditional sales
force consists of agents who are contracted exclusively with the company, agents
who   participate  in  the  expanded   distribution   system  may  have  selling
relationships  with other  insurers  in addition to Family  Life.  During  2000,
Family Life  recruited  410 agents for this  marketing  effort.

At December 31, 2000, the number of employees  within FIC and its  subsidiaries,
together with the employees of ILCO's insurance subsidiaries,  was approximately
286 and the number of regional vice  presidents  employed by the life  insurance
subsidiaries of the Company and ILCO was 40.

Business of InterContinental Life Corporation

ILCO was incorporated in 1969 under the laws of New Jersey.  In June, 1997, ILCO
transferred its domicile to the State of Texas.  Its executive office is located
at 6500 River Place Boulevard, Building One, Austin, Texas 78730.

Operations.  ILCO  has  developed  management  techniques  to  reduce  operating
expenses by centralizing,  standardizing  and more  efficiently  performing many
functions  common to most life insurance  companies,  such as  underwriting  and
policy administration, accounting and financial reporting, marketing, regulatory
compliance,  actuarial  services  and  asset  management.  ILCO has  selectively
recruited personnel in sales, marketing and various administrative departments.

Principal  Products.  ILCO's  insurance  subsidiaries  are engaged  primarily in
administering  existing portfolios of individual life insurance and accident and
health insurance policies and annuity products.  Approximately 79 % of the total
collected  premiums for 2000 were  derived  from  renewal  premiums on insurance
policies and annuity  products sold by ILCO's  insurance  subsidiaries  prior to
their acquisition by ILCO.

ILCO's  insurance  subsidiaries  are also engaged in marketing and  underwriting
individual life insurance and annuity  products in 49 states and the District of
Columbia. These products are marketed through independent, non-exclusive general
agents.

The products  currently being  distributed by ILCO's life  subsidiaries  include
several  versions of universal  life  insurance,  which provide  permanent  life
insurance which credit  company-declared  current  interest rates. The universal
life insurance portfolio of ILCO's insurance  subsidiaries  consists of flexible
premium universal life insurance policies.  Under the flexible premium policies,
policyholders  may vary the  amounts of their  coverage  (subject to minimum and
maximum limits) as well as the date of payment and frequency of payments.


                                      -6-




Direct  statutory  premiums  received from all types of universal  life products
were $36.3  million in 2000,  as  compared  to $ 35.6  million in 1999 and $38.9
million in 1998.  Investors-NA received reinsurance premiums from Family Life of
$3.5 million in 2000,  pursuant to the reinsurance  agreement for universal life
products written by Family Life. In 2000, premium income from all life insurance
products was derived from all states in which ILCO's insurance  subsidiaries are
licensed,  with significant amounts derived from Pennsylvania (14%),  California
(8%), Ohio (8%) and New Jersey (7%).

ILCO's  insurance  subsidiaries  receive  premium  income from health  insurance
policies.  In 2000,  premium income from all health insurance  policies was $0.7
million,  as  compared  to $0.8  million in 1999 and $1.0  million in 1998.  The
health insurance business of ILCO's  subsidiaries is 100% reinsured with a third
party reinsurer.  In December,  1997, ILCO's life insurance subsidiaries entered
into a reinsurance  treaty under which most of the  contractual  obligations and
risks under accident and health and disability  income  insurance  policies were
assumed by a third party  reinsurer.  The transfer  was  effective as of July 1,
1997.  The  decision  to  dispose of this book of  business  was based on ILCO's
analysis that the business was not  generating  targeted  profit  objectives and
that the products were not part of the core business of ILCO's subsidiaries. The
sale permits the companies to focus on its primary business - life insurance and
annuity  sales.  In  connection  with the  transaction,  the total amount of net
reserves transferred by the ILCO subsidiaries was $6,327,504.

Investors-NA  sponsors a variable annuity separate account,  which offers single
premium and flexible  premium  policies.  The policies  provide for the contract
owner to allocate  premium  payments among four  different  portfolios of Putnam
Variable  Trust (the  "Putnam  Fund"),  a series fund which is managed by Putnam
Investment  Management,  Inc. As of December  31,  2000,  the assets held in the
separate account were $42.3 million. During 2000, the premium income realized in
connection with these variable annuity policies was $85,402,  which was received
from existing contract owners.

Investors-NA  also maintains a closed variable  annuity separate  account,  with
approximately  $16.6  million of assets as of December  31,  2000.  The separate
account was closed to new  purchases  in 1981 as a result of an IRS ruling which
adversely affected the status of variable annuity separate accounts which invest
in  publicly-available  mutual funds.  The ruling did not  adversely  affect the
status of in-force contracts.

For the past several  years,  ILCO's life company  subsidiaries  expanded  their
marketing efforts in the fixed annuity market.  Direct deposits from the sale of
fixed  annuity  products were $10.6 million in 2000, as compared to $7.6 million
in 1999 and  $6.1  million  in  1998.  Investors-NA  also  received  reinsurance
premiums  from Family Life of $1.2  million in 2000,  pursuant to a  reinsurance
agreement for annuity  products  between  Investors-NA and Family Life Insurance
Company.

                                       -7-



During  the fourth  quarter  of 1998,  Investors-NA  developed  a group  deposit
administration  product,  designed  for use in  connection  with the  funding of
deferred compensation plans maintained by government employers under section 457
of  the  Internal   Revenue  Code.  The  company  has  established  a  marketing
relationship with a third-party administrator based in San Antonio, Texas, which
has  established  relationships  with school  districts in Texas and  Louisiana.
Enrollments  under the program  commenced  during 1999,  which  contributed $0.9
million of the annuity  premiums  for that year.  Annuity  premiums for the year
2000 totaled $1.5 million.

During  1999,  a marketing  subsidiary  of the Company  entered into a marketing
agreement with a third- party life insurance  company.  The marketing  agreement
makes   available,   to  appointed   agents  of  the  Company's  life  insurance
subsidiaries,  a portfolio of term life insurance  products not currently  being
offered by the  subsidiaries.  The underwriting  risk on the products sold under
this arrangement is assumed by the third-party  insurer. The Company's appointed
agents  receive  commissions  on the sales of these  products and the  Company's
marketing  subsidiary  receives  an override  commission.  This  initiative  was
expanded  during the year 2000 to include a  substantially  similar  arrangement
with another third-party life insurance company.

Merger of Insurance Subsidiaries.  Investors-NA redomesticated from Pennsylvania
to  Washington in December of 1992.  Investors-CA  merged into  Investors-NA  on
December 31, 1992.  Standard Life merged into Investors-NA on June 29, 1993. The
mergers have achieved cost savings,  such as reduced auditing  expenses involved
in auditing one  combined  company;  the savings of expenses and time  resulting
from the  combined  company  being  examined by one state  insurance  department
(Washington), rather than three (California,  Pennsylvania and Mississippi); the
reduction  in the number of tax  returns  and other  annual  filings  with state
insurance  departments;  and  smaller  annual  fees to do  business  and reduced
retaliatory premium taxes in most states.

In December,  1997,  ILIC  transferred  its domicile from New Jersey to Indiana.
Following completion of the redomestication, ILIC merged with Investors-Indiana,
with ILIC as the surviving entity in the merger process.  Immediately  after the
merger, ILIC changed its name to Investors Life Insurance Company of Indiana. As
used hereinafter, the phrase "Investors-IN" shall be used to refer to the merged
entities.  As a result of the merger,  Investors-IN is licensed in 47 states and
the  District of  Columbia.  As of December  31,  2000,  it had assets of $170.0
million and capital and surplus of $26.3 million.

ILCO's  management  believes that these  acquisitions  and  consolidations  have
caused a  reduction  in expense  and have  further  strengthened  the  financial
condition of the combined companies.

Investment of Assets

The assets  held by Family  Life and ILCO's  life  insurance  subsidiaries  must
comply with applicable  state insurance laws and regulations  pertaining to life
insurance  companies.  The investment  portfolios of Family Life and ILCO's life
insurance  subsidiaries are tailored by their  managements to reflect the nature
of the insurance obligations,  business needs,  regulatory  requirements and tax
considerations  relating to the  underlying  insurance  business with respect to
such assets.  This is particularly  the case with respect to  interest-sensitive
life insurance  products,  where the investment emphasis is to obtain a targeted
margin of profit over the rate of  interest  credited  to  policyholders,  while
endeavoring to minimize the portfolio's  exposure to changing interest rates. To
reduce the exposure to such rate changes,  portfolio investments are selected so
that  diversity,  maturity and  liquidity  factors  approximate  the duration of
associated policyholder liabilities.

                                       -8-



The  investment  objective  of Family  Life and  ILCO's  insurance  subsidiaries
emphasizes  the  selection  of short to medium term,  high quality  fixed income
securities,  rated  Baa-3  (investment  grade) or better  by  Moody's  Investors
Service,  Inc. At  December  31,  2000,  only 4.4% of ILCO's  total  assets were
invested  in  mortgage  loans  or real  estate.  Non-affiliated  corporate  debt
securities  that were  non-investment  grade  represented  0.3% of ILCO's  total
assets  at  December  31,  2000.  ILCO had  investments  in debt  securities  of
affiliated companies aggregating  approximately $35.3 million as of December 31,
2000.  Family Life does not have  investments  in mortgage  loans,  real estate,
non-investment grade debt securities or affiliates' debt securities.

The   investments  of  Family  Life  and  ILCO's   insurance   subsidiaries   in
mortgage-backed securities included collateralized mortgage obligations ("CMOs")
of  $22.4  million  and  $175.7  million,   respectively,   and  mortgage-backed
pass-through  securities  of $8.6 million and $42.9  million,  respectively,  at
December 31, 2000. Mortgage-backed pass-through securities, sequential CMO's and
support bonds, which comprised  approximately  43.25% of the book value of FIC's
mortgage-backed securities and 45.7% of the book value of ILCO's mortgage-backed
securities  at December 31, 2000,  are  sensitive to  prepayment  and  extension
risks.  ILCO  and FIC  have  reduced  the  risk of  prepayment  associated  with
mortgage-backed  securities by investing in planned  amortization class ("PAC"),
target  amortization  class ("TAC")  instruments,  accretion  directed bonds and
scheduled  bonds.  These  investments  are designed to amortize in a predictable
manner by shifting the risk of prepayment of the underlying  collateral to other
investors  in other  tranches  ("support  classes")  of the CMO. At December 31,
2000,  PAC and TAC  instruments  and  accretion  directed  and  scheduled  bonds
represented  approximately  56.75%  of the book  value of FIC's  mortgage-backed
securities and approximately  45.7% of the book value of ILCO's  mortgage-backed
securities.  Sequential and support classes  represented  approximately 15.4% of
the book value of FIC's  mortgage-backed  securities and approximately  34.7% of
the book value of ILCO's  mortgage-backed  securities  at December 31, 2000.  In
addition,  FIC and ILCO  limit the risk of  prepayment  of CMOs by not  paying a
premium for any CMOs. ILCO and FIC do not invest in  mortgage-backed  securities
with increased  prepayment  risk, such as  interest-only  stripped  pass-through
securities  and inverse  floater  bonds.  Neither FIC nor ILCO had any z-accrual
bonds as of December 31, 2000. The prepayment risk that certain  mortgage-backed
securities are subject to is prevalent in periods of declining  interest  rates,
when  mortgages  may be  repaid  more  rapidly  than  scheduled  as  individuals
refinance higher rate mortgages to take advantage of the lower current rates. As
a result, holders of mortgage-backed securities may receive large prepayments on
their  investments  which cannot be reinvested at an interest rate comparable to
the rate on the prepaying mortgages.

                                      -9-



FIC and ILCO do not invest in non-agency mortgage-backed securities,  which have
a greater credit risk than that of agency mortgage-backed securities.

ILCO  and  FIC  do  not  make  new  mortgage  loans  on  commercial  properties.
Substantially  all of ILCO's mortgage loans were made by its subsidiaries  prior
to their  acquisition by ILCO. At December 31, 2000,  none of the mortgage loans
held by ILCO had  defaulted  as to  principal or interest for more than 90 days,
and none of the ILCO's mortgage loans were in foreclosure.

Another  key element of FIC's and ILCO's  investment  strategy is to avoid large
exposure in other investment  categories which management  believes carry higher
credit or liquidity risks,  including private placements,  partnerships and bank
participations.  These  categories  accounted for  approximately  0.2% of ILCO's
invested assets and none of FIC's invested assets at December 31, 2000.

ILCO's  subsidiaries  also  make  investments  in  real  property,   subject  to
regulatory  limitations.  In October,  1998,  Investors-NA purchased River Place
Pointe,  two adjoining  tracts of land located in Austin,  Texas totaling 47.995
acres.  The  aggregate  purchase  price  for  these  tracts  was  $8.1  million.
Investors-NA has obtained approval of a site plan development proposal for these
tracts.  Prior to the closing of the transaction,  Investors-NA  obtained a Site
Development  Permit for the tracts from the City of Austin. The Site Development
Permit allows for the  construction of seven office  buildings  totaling 600,000
square  feet,  with  associated  parking,   drives  and  related   improvements.
Construction  on the first phase of the  Project,  which  consists of two office
buildings,   an  associated  parking  garage,  and  related  infrastructure  was
completed during 2000. The second phase of construction, which includes two more
office  buildings,  is in progress and Investors-NA  expects  completion of this
phase by the end of the second quarter of 2001.

FIC and ILCO have  established  and  staffed  an  investment  department,  which
manages portfolio investments and investment accounting functions for their life
insurance subsidiaries.

Agency Operations

The products of FIC's and ILCO's  insurance  subsidiaries  are marketed and sold
through two divisions:

A.       Investors Life Distribution System

ILCO's  insurance  subsidiaries  collectively  market  through  the  "Investors"
distribution  system.  Independent  non-exclusive  agents,  general  agents  and
brokers are recruited nation-wide to sell the products.  Such agents and brokers
also sell insurance  products for companies in competition with ILCO's insurance
subsidiaries.  In order to attract  agents and enhance the sale of its products,
the  Company's  insurance  subsidiaries  pay  competitive  commission  rates and
provide other sales  inducements.  The Investors  sales  distribution  system is
presently concentrating its efforts on the promotion and sale of universal life,
term life and fixed annuity products.

                                      -10-



Marketing and sales for all of the Company's insurance subsidiaries are directed
by the  Executive  Vice  President  of  Marketing  and Sales.  The  Senior  Vice
President  for  Investors  Sales  directs   Regional  Vice  Presidents  who  are
responsible  for the  recruitment  and  maintenance  of the  general  agents and
managing general agents for individual insurance sales. During 1999, the Company
implemented a plan to restructure  the  compensation  arrangements  for Regional
Vice Presidents, so as to emphasize the role of personal production by the RVPs.
The  effect  of this plan  during  the year  2000 was to lower  fixed  costs for
distribution of the Company's products.

B.       Family Life Distribution System

This nationwide  system sells Family Life's products  through an exclusive agent
force.  This agent force sells  mortgage  protection  life insurance and annuity
products.  The products are sold primarily to middle-income  customers of client
financial  institutions,  usually  through a list of  borrowers  provided by the
financial institution. Family Life works closely with the financial institutions
to maintain and insure that Family Life lead systems,  which had been built from
the loan  portfolios of each active  financial  institution,  operate at a level
that favors both parties. Family Life agents make courtesy calls to borrowers of
the  financial  institutions  which are active on the Family Life lead system to
offer the borrower the  opportunity to purchase  mortgage  protection  insurance
(term or universal life insurance products).

In  advance of the  passage of the  Financial  Services  Modernization  Act (the
"Act") in 1999 (for a discussion of the provisions of this new law, refer to the
section entitled "Regulation"),  Family Life established a task force to develop
new lead  sources for its agents.  Since  Family Life uses leads from  financial
institutions,  restrictions  under  the Act on the type of  information  which a
financial  institution  may provide to Family Life may have an adverse impact on
its  traditional  sales methods.  Although Family Life continues to focus on its
traditional  sales approach,  it has  established a supplemental  leads program,
whereby third parties  supply leads  obtained from public  records (e.g.  county
loan records). Family Life has also developed a strategy to work with lenders as
"setup only",  whereby the mortgage institution does not furnish leads, but will
collect  and  remit  premiums.  Finally,  Family  Life is  developing  new sales
methods,  including direct mailings and direct telephone leads. The Act provides
that various Federal agencies are to adopt regulations implementing the purposes
of the  Act.  The  adopted  regulations  are not  going  to take  effect  on the
insurance industry until July 1, 2001.

Beginning in 1998,  Family Life  expanded its  distribution  system,  to recruit
agents  whose  product  portfolio  includes a broader  range of life and annuity
products,  in addition to the  traditional  mortgage  protection  life insurance
products  offered by Family Life.  While  Family  Life's  exclusive  sales force
consists of agents who are contracted  exclusively with the company,  agents who
participate in the expanded  distribution system may have selling  relationships
with other  insurers  in  addition  to Family  Life.  During  2000,  Family Life
recruited 438 agents for this marketing effort.

In October,  1999,  a marketing  subsidiary  of  Investors  Life  entered into a
marketing  agreement with a third- party life insurance  company.  The marketing
agreement makes  available to appointed  agents of the Investors Life and Family
Life a portfolio of term life insurance  products not currently being offered by
those  companies.  The  underwriting  risk  on  the  products  sold  under  this
arrangement  is assumed by the  third-party  insurer.  The  Company's  appointed
agents  receives  commissions  on the sale of these  products and the  marketing
subsidiary receives an override commission.

                                      -11-





Sales and Marketing for Family Life is directed by the Executive  Vice President
of Marketing and Sales.  Reporting to the Executive Vice  President,  the Senior
Vice President of Marketing heads the Family Life marketing  organization  which
is focused on the development and maintenance of contractual agreements with the
financial  institutions which provide referrals to, and collect monthly premiums
from, their borrowers for Family Life insurance plans. The Senior Vice President
for Family Life Sales directs 28 Regional Vice Presidents. Currently, the Family
Life distribution  system consists of 159 District Sales Managers and 179 active
career agents.

Data Processing

Since December,  1994, the data  processing  needs of ILCO's and FIC's insurance
subsidiaries  have been provided to ILCO's and FIC's Austin,  Texas and Seattle,
Washington  facilities by FIC Computer Services,  Inc., a subsidiary of FIC. See
Item 13 - Certain Relationships and Related Transactions with Management.

As the  provider of data  processing  for the Company and its  subsidiaries  and
affiliates,  FIC Computer Services,  Inc. utilizes a centralized computer system
to process  policyholder  records and financial  information.  In addition,  the
Company  uses   non-centralized   computer  terminals  in  connection  with  its
operations.

 In response to the  potential  operations  and policy  administration
problems  caused  by the  computer  calendar  change on  January  1,  2000,  the
management of the Company instructed FIC Computer Services,  Inc. to analyze its
system  capabilities  and the  operational  requirements  of the Company and its
respective  subsidiaries  and  affiliates  with respect to the Y2K problem.  The
Company  developed  a Year 2000 Plan and began the major  work under the Plan in
1997.  The work,  including  extensive  testing of the  converted  systems,  was
completed  during the fourth quarter of 1999. The Company did not experience any
material  disruptions  in the processing of its business as a result of the Year
2000 date change.

Under  the  Year  2000  Plan,  FIC  Computer  Services,  Inc.  utilized  its own
personnel, acquired Y2K compliant operating software, and engaged the assistance
of outside  consultants to facilitate the systems conversions and modifications.
For the twelve  month period ended  December 31, 1999,  the Company  incurred an
after tax cost of approximately  $195,000 in connection with the Year 2000 Plan,
as compared to an after tax expense of approximately $158,000 for the year ended
December 31, 1998. In the year December 31, 2000, the Company  incurred  $90,000
in expenses  related to the Year 2000 Plan,  in connection  with bonus  payments
made to management employees for Year 2000 Plan-related work.

                                    -12-



Competition

There are many life and health insurance companies in the United States.  Agents
placing  insurance  business with Family Life and ILCO's insurance  subsidiaries
are  compensated  on a commission  basis.  However,  some  companies  pay higher
commissions  and  charge  lower  premium  rates  and many  companies  have  more
substantial  resources than Family Life and ILCO's  insurance  subsidiaries.  In
addition,  consolidations  of  insurance  and  banking  institutions,  which  is
permitted under recently-enacted  federal legislation,  may adversely affect the
ability  of Family  Life to expand  its  customer  referral  relationships  with
mortgage lending and servicing institutions.

The  principal  cost and  competitive  factors that affect the ability of Family
Life and ILCO's  insurance  subsidiaries to sell their  insurance  products on a
profitable  basis are:  (1) the general  level of premium  rates for  comparable
products;  (2) the  extent of  individual  policyholders  services  required  to
service each product category; (3) general interest rate levels; (4) competitive
commission  rates and related  marketing  costs;  (5) legislative and regulatory
requirements and restrictions;  (6) the impact of competing  insurance and other
financial  products;  and  (7)  the  condition  of  the  regional  and  national
economies.

Reinsurance and Reserves

In accordance with general practices in the insurance industry,  Family Life and
ILCO's insurance  subsidiaries  limit the maximum net losses that may arise from
large risks by reinsuring with other carriers.  Such reinsurance  provides for a
portion  of the  mortality  risk to be  retained  by  Family  Life  and the ILCO
subsidiaries  with the excess  being ceded to a reinsurer at a premium set forth
in a schedule  based upon the age and risk  classification  of the insured.  The
reinsurance  treaties  provide for  allowances  that help Family Life and ILCO's
insurance  subsidiaries offset the expense of writing new business.  Family Life
generally  retains the first $200,000 of risk on the life of any one individual.
Investors-IN  generally  retains  the first  $100,000 of risk on the life of any
individual,  depending  on the  type of  coverage  being  written.  Investors-NA
generally  retains  the first  $100,000  to  $250,000 of risk on the life of any
individual.

Family Life maintains a bulk reinsurance treaty, under which it reinsured all of
its risks under accidental death benefit policies.  The treaty was most recently
renegotiated with the current reinsurer in January, 1997.


                                      -13-



As discussed  above (see  "Principal  Products"),  in December,  1997,  FLIC and
ILCO's life insurance subsidiaries entered into a reinsurance treaty under which
all of the  contractual  obligations  and risks  under  accident  and health and
disability income policies were assumed by a third party reinsurer.

In  1995,  Family  Life  (as the  ceding  company)  entered  into a  reinsurance
agreement with Investors-NA (as the reinsuring  company) pertaining to universal
life  insurance  written  by Family  Life.  The  reinsurance  agreement  is on a
co-insurance  basis and applies to all covered  business with effective dates on
and after  January 1, 1995.  The  agreement  applies to only that portion of the
face amount of the policy which is less than $200,000;  face amounts of $200,000
or more are  reinsured  by Family  Life with a third party  reinsurer.  In 1996,
Family Life (as the ceding  company)  entered into a reinsurance  agreement with
Investors-NA  (as the  reinsuring  company),  pertaining  to  annuity  contracts
written by Family Life. The agreement  applies to contracts  written on or after
January 1, 1996. These  reinsurance  arrangements  reflect  management's plan to
develop  universal life and annuity business at  Investors-NA,  with Family Life
concentrating on the writing of term life insurance products.

Although  reinsurance  does not  eliminate  the  exposure  of FIC's  and  ILCO's
insurance  subsidiaries to losses from risks insured,  the net liability of such
subsidiaries will be limited to the portion of the risk retained,  provided that
the reinsurers meet their contractual obligations.

ILCO's  insurance  subsidiaries and Family Life carry reserves on their books to
meet  future  obligations  under  their  outstanding  insurance  policies.  Such
reserves are believed to be sufficient to meet policy obligations as they mature
and are  calculated  using  assumptions  for interest,  mortality,  expenses and
withdrawals in effect at the time the policies were issued.

Acquisition of Family Life

In June,  1991,  FIC purchased  Family Life, a Washington  based life  insurance
corporation,  from Merrill Lynch Insurance Group, Inc.  ("Merrill  Lynch").  The
business of Family Life, as reconstituted for sale, consists  principally of the
underwriting  and sale of life insurance to mortgage  borrowers  through lending
institutions.

The consideration for the purchase was $114 million consisting of a cash payment
of $70  million  and $44  million of  subordinated  promissory  notes  issued by
subsidiaries of FIC to the seller and its affiliates.

To effectuate the transaction,  FIC organized two downstream  holding companies:
Family  Life  Corporation   ("FLC"),   and  Family  Life  Insurance   Investment
Corporation ("FLIIC").  FLIIC was organized as a wholly- owned subsidiary of FIC
and, in turn,  was issued all of the  outstanding  shares of FLC. FLC  purchased
250,000 shares of common stock,  being all of the outstanding  shares, of Family
Life from Merrill Lynch for an $84 million cash payment  (including  $14 million
that had been  borrowed by FLIIC from an affiliate  of Merrill  Lynch) and a $30
million  senior  subordinated  note.  Following  the purchase of the Family Life
shares by FLC,  Family Life issued  250,000  previously  unissued  shares of its
common stock to FLC for a $2.5 million cash payment and  immediately  thereafter
redeemed from FLC 250,000  shares of its common stock that had been purchased by
FLC from Merrill Lynch.  The  consideration  paid to FLC by Family Life for said
redeemed shares consisted of $2.5 million cash, a newly issued surplus debenture
(an  instrument  having  certain  restrictions  on payment for the protection of
policyholders)  in the  principal  amount  of  $97.5  million  and  $14  million
principal value of newly issued preferred shares.


                                      -14-

As part of the financing  arrangement,  FLC entered into a Senior Loan agreement
under  which $50  million was  provided  by a group of banks (the  "Family  Life
Senior  Loan").  The  balance  of  the  financing  consisted  of a  $30  million
subordinated  note issued by FLC to Merrill  Lynch and $14  million  borrowed by
FLIIC from an affiliate of Merrill Lynch and evidenced by a subordinated note in
the  principal  amount of $12 million and a  subordinated  note in the principal
amount of $2 million (collectively,  the "Merrill Lynch Subordinated Loans") and
$25 million lent by two insurance  company  subsidiaries of ILCO (the "Investors
Life Subordinated  Loans"). The latter amount was represented by a $22.5 million
loan from  Investors-NA to FLC and a $2.5 million loan provided  directly to FIC
by Investors-CA.  In addition to the interest  provided under the Investors Life
Subordinated   Loans,   Investors-NA  and  Investors-CA   were  granted  by  FIC
non-transferable   options  to  purchase,  in  amounts  proportionate  to  their
respective  loans, up to a total of 9.9 percent of shares of FIC common stock at
a price of $10.50  per  share,  equivalent  to the then  current  market  price,
subject to  adjustment  to prevent  dilution.  The  initial  terms of the option
provided for their expiration on June 12, 1998, if not previously exercised.  In
connection  with the 1996  amendments  to the $34.5 million  subordinated  loans
obtained from  Investors-NA,  the expiration date of the options was extended to
September  12, 2006.

Of the total  $119  million  of cash  borrowed  and notes  issued by FIC and its
subsidiaries  for  purposes of the  transaction,  $114 million  constituted  the
purchase price for Family Life and $5 million was used to pay transaction costs,
for working  capital and for other  related  purposes.  In  connection  with the
several  loans  effected  for  purposes of the  transaction,  various  creditors
priorities and normal borrower  requirements and  restrictions  were established
and FIC issued its direct guaranty of the respective  loans,  subject to certain
priorities, to the various lending banks, Merrill Lynch and its affiliates,  and
Investors-NA and Investors-CA.  The outstanding shares of common stock of Family
Life were also pledged as collateral to the bank lenders and, upon  repayment of
the bank loan, to Merrill Lynch.  The  transaction  was structured to conform to
the requirements of Section 338(h)(10) of the Internal Revenue Code.

On July 30, 1993, the Merrill Lynch Subordinated Loans were prepaid. $38 million
plus accrued interest was paid to retire the indebtedness, which had a principal
balance of approximately $50 million on July 30, 1993. The primary source of the
funds used to prepay the Merrill Lynch  Subordinated  Loans was new subordinated
loans  totaling  $34.5 million that were obtained  from  Investors-NA.  See "The
Family Life Refinancing."

                                      -15-


Family Life Senior and ILCO Subordinated Loans

Senior Loan.  The Senior Loan  obligations  of FLC were  completely  paid off on
April 17, 1996.  During the period that the Senior Loan was in effect,  it was a
secured and guaranteed  five year term loan in the initial  principal  amount of
$50 million.

Upon  the  retirement  of  the  Senior  Loan,  certain  of its  provisions  were
automatically  incorporated into the Investors Life Subordinated Loans which are
described in the following section. Those provisions include specified events of
default,  including,  but not limited to,  failure to pay  principal,  interest,
commitment fees or other amounts payable when due,  failure to maintain  certain
financial covenants, violation of covenants (including covenants with respect to
the maintenance of a minimum net worth), material  misrepresentations,  defaults
under other indebtedness,  the loss of any license of an insurance subsidiary of
FLC which would have a material  adverse  effect on FLC,  defaults under the FIC
guaranty  agreement,  a fine in an amount in excess of $100,000 imposed upon any
insurance subsidiary of FLC by any state insurance regulatory agency, changes in
ownership or control of FIC by its controlling  person, Roy F. Mitte, or in ILCO
by FIC and the  occurrence of certain  events of  bankruptcy.  In addition,  the
security  interests  furnished  to  the  lenders  under  the  Senior  Loan  were
transferred to Investors-NA.  The security  interests  include all of the issued
and  outstanding  shares of  preferred  stock and common stock of FLC and Family
Life and the $97.5 million surplus debenture of Family Life.

Investors Life Subordinated  Loans. The $22.5 million  subordinated  senior note
issued by FLC to  Investors-NA  was  originally  scheduled to mature on June 12,
1998, with principal payments in four equal semi-annual  principal  installments
of $5,625,000  each on December 12, 1996,  June 12, 1997,  December 12, 1997 and
June 12, 1998. Interest is payable semi-annually,  at the rate of 11% per annum.
Effective  as of June 12,  1996,  the note was  amended  to  provide  for twenty
quarterly principal  payments,  in the amount of $1,125,000 each, to commence on
December 12, 1996. The final quarterly principal payment is due on September 12,
2001. The interest rate on the note remained at 11%.

The $2.5  million  subordinated  note  issued by FIC to  Investors-CA  initially
provided for interest, payable semi-annually,  at the rate of 12% per annum, and
its principal was due and payable in full at maturity on June 12, 1998 (the "FIC
Note").  As a result of the merger of Investors-CA  into  Investors-NA,  the FIC
Note is now owned by Investors-NA.  Prior to June 12, 1996,  accrued interest on
the FIC  Note was paid by  delivery  of  additional  notes of FIC  having  terms
identical to such  original  note,  including  the payment of interest (the "PIK
Notes").  Interest  payable on and after June 12, 1996 on all of the FIC Note is
to be paid in cash.  Effective as of June 12, 1996,  the FIC Note was amended to
provide  that the  principal  balance  of the  note is to be  repaid  in  twenty
quarterly  installments of $125,000 each,  commencing December 12, 1996 with the
final  payment due on  September  12, 2001.  With respect to the PIK Notes,  the
amendment provided that the principal balance of the notes ($1,977,119) is to be
paid in twenty quarterly principal  payments,  in the amount of $98,855.95 each,
commencing  December 12, 1996 with the final  payment due on September 12, 2001.
The interest rate on both the FIC Note and the PIK Notes remained at 12%.


                                      -16-


The obligors are allowed to prepay the Investors  Life  Subordinated  Loans,  in
whole or in part,  without  premium or penalty.  During the time that the Senior
Loan was outstanding, the Investors Life Subordinated Loans were subordinated to
the Senior Loan and constitute a second lien on the pledged  collateral  subject
to the first lien of the Senior Loan.  Repayment of FLC's $22.5  million note is
also guaranteed by FIC.

The  Investors  Life  Subordinated  Loan  documents  specify  events of default,
including,  but not  limited  to,  failure to pay  principal,  interest or other
amounts payable with respect to the Investors Life  Subordinated  Loan documents
when due,  violation  of  covenants  in the  Investors  Life  Subordinated  Loan
documents  (including covenants with respect to the maintenance of a minimum net
worth), material misrepresentations,  defaults under other indebtedness, and the
occurrence of certain events of bankruptcy.

The Investors Life  Subordinated  Loan documents also contain various  specified
negative,  affirmative  and  financial  covenants to be performed or observed by
FLC,  FIC and  their  subsidiaries.  During  the  period  the  Senior  Loan  was
outstanding,  the covenants in effect under the Investors Life Subordinated Loan
documents  were  less  restrictive  than the  covenants  under the  Senior  Loan
documents but become generally  equivalent to the Senior Loan  restrictions upon
the termination of the Senior Loan.

On July 30, 1993, Investors-NA loaned $34.5 million to FLC and FLIIC in the form
of  subordinated  notes in connection  with the  prepayment of the Merrill Lynch
Subordinated Loans. See "The Family Life Refinancing."

As of December 31, 2000, the outstanding principal balance of the Investors Life
Subordinated  Loans,  including the loans made by Investors-NA in 1993 was $35.3
million.

Options.  In  addition  to  the  interest  provided  under  the  Investors  Life
Subordinated   Loans,   Investors-NA  and  Investors-CA   were  granted  by  FIC
non-transferable   options  to  purchase,  in  amounts  proportionate  to  their
respective  loans, up to a total of 9.9 percent of shares of FIC common stock at
a price of $2.10 per share (as adjusted to reflect the five-for-one  stock split
in November,  1996),  equivalent to the then current  market  price,  subject to
adjustment to prevent  dilution.  The initial  terms of the option  provided for
their  expiration on June 12, 1998, if not previously  exercised.  In connection
with the 1996 amendments to the $34.5 million  subordinated  loans obtained from
Investors-NA,  the expiration  date of the options was extended to September 12,
2006.

The Family Life Refinancing. In July, 1993, the Merrill Lynch Subordinated Loans
were  prepaid.  $38  million  plus  accrued  interest  was  paid to  retire  the
indebtedness, which had a principal balance of approximately $50 million on July
30, 1993.

The primary  source of the funds used to prepay the Merrill  Lynch  Subordinated
Loans was new subordinated  loans totaling $34.5 million that were obtained from
Investors-NA. Prior to the 1996 amendments described below, the principal amount
of the new  subordinated  debt was payable in four equal annual  installments in
2000,  2001, 2002 and 2003. The interest rate is 9%. The other terms of the 1993
notes are substantially the same as those of the $22.5 million subordinated loan
that   Investors-NA  had  previously  made  to  FLC  and  that  continue  to  be
outstanding.

                                      -17-


The $34.5 million of new subordinated loans consist of a $30 million loan to FLC
and a $4.5  million  loan to FLIIC.  The debt  restructuring  reduced  the total
indebtedness  of FLC and FLIIC by  approximately  $15 million.  The  transaction
resulted in a pre-tax gain of  approximately  $12 million for the Company in the
third quarter of 1993, and the Company  estimates that the restructuring of this
subordinated debt will result in aggregate  interest savings to FLC and FLIIC of
approximately  $40  million  over the next ten  years.  In  recognition  of this
reduced  interest  requirement,  the interest  rate on the surplus  debenture of
Family Life held by FLC was reduced from 12.5% to 9%.

As of June 12, 1996, the provisions of the notes from  Investors-NA  to FIC, FLC
and FLIIC were  modified as follows:  (a) the $22.5  million note was amended to
provide for twenty  quarterly  principal  payments,  in the amount of $1,125,000
each, to commence on December 12, 1996; the final quarterly principal payment is
due on September 12, 2001; the interest rate on the note remains at 11%, (b) the
$30 million note was amended to provide for forty quarterly  principal payments,
in the amount of $163,540 each for the period December 12, 1996 to September 12,
2001;  beginning with the principal payment due on December 12, 2001, the amount
of the principal payment increases to $1,336,458;  the final quarterly principal
payment is due on September  12, 2006;  the interest rate on the note remains at
9%,  (c) the $4.5  million  note was  amended  to  provide  for forty  quarterly
principal  payments,  in the amount of $24,531 each for the period  December 12,
1996 to September 12, 2001; beginning with the principal payment due on December
12, 2001, the amount of the principal payment  increases to $200,469;  the final
quarterly  principal  payment is due on September 12, 2006; the interest rate on
the note  remains at 9%, (d) the $2.5  million  note was amended to provide that
the  principal  balance  of  the  note  is  to be  repaid  in  twenty  quarterly
installments  of  $125,000  each,  commencing  December  12, 1996 with the final
payment due on September 12, 2001;  the rate of interest  remains at 12% and (e)
the Master PIK note,  which was  issued to  provide  for the  payment in kind of
interest  due under the terms of the $2.5  million  note prior to June 12, 1996,
was amended to provide that the principal  balance of the note, in the amount of
$1,977,119,  is to be paid in twenty quarterly principal payments, in the amount
of $98,855.95 each, to commence  December 12, 1996 with the final payment due on
September 12, 2001; the interest rate on the note remains at 12%.

In December, 1998, FLIIC was dissolved. In connection with the dissolution,  all
of the assets and  liabilities  of FLIIC became the  obligations of FLIIC's sole
shareholder (FIC). Accordingly, the obligations under the provisions of the $4.5
million note described above are now the obligations of FIC.

                                      -18-


ILCO's Senior Loan

ILCO's Senior Loan was fully repaid as of September 30, 1998. The Senior Loan of
ILCO  was  originally  arranged  in  connection  with the  1988  acquisition  of
Investors-NA  and  Investors-CA.  In January,  1993,  ILCO refinanced its Senior
Loan.  That  transaction  was  done in  connection  with the  prepayment  of the
subordinated  indebtedness and the purchase of warrants which had been issued as
part of the  financing  of the 1988  acquisitions.  The terms of the amended and
restated credit facility were substantially the same as the terms and provisions
of the 1988 Senior Loan.  The maturity  date,  which had been December 31, 1996,
was extended to July 1, 1998 for the Senior Loan. The average interest rate paid
by ILCO on its Senior Loan was approximately 7.63% during 1998.

In February, 1995, ILCO borrowed an additional $15 million under the Senior Loan
to help finance the  acquisition  of Meridian Life  Insurance  Company,  and the
maturity  date of the Senior  Loan was  further  extended  to July 1,  1999.  In
connection with ILCO's acquisition of State Auto Life Insurance Company in July,
1997,  ILCO's Senior Loan  agreement was modified to extend the maturity date to
October 1, 1998.

As of December 31, 1997, the outstanding principal balance of ILCO's senior loan
obligations was $11.0 million,  which reflected the prepayment by the Company of
the payment originally  scheduled for January 1, 1998. A regular payment, in the
amount of $3.7  million,  was made on April 1, 1998 and a prepayment of the July
1, 1998 installment,  in the amount of $3.7 million,  was made on June 30, 1998.
The  outstanding  principal  balance of ILCO's senior loan  obligations was $3.6
million at June 30, 1998. The final  installment  on the senior loan  obligation
scheduled  for October 1, 1998,  was prepaid on September 30, 1998. As a result,
the senior loan obligation of ILCO was fully discharged  effective September 30,
1998.


Regulation

General.  The Company and its insurance  subsidiaries  are subject to regulation
and supervision at both the state and Federal level,  including regulation under
federal and state securities laws and regulation by the states in which they are
licensed to do business. The state insurance regulation is designed primarily to
protect policy owners.  Although the extent of regulation  varies by state,  the
respective state insurance departments have broad administrative powers relating
to the granting and  revocation of licenses to transact  business,  licensing of
agents,  the regulation of trade  practices and premium  rates,  the approval of
form  and  content  of  financial  statements  and the  type  and  character  of
investments.

These laws and  regulations  require the  Company's  insurance  subsidiaries  to
maintain  certain minimum surplus levels and to file detailed  periodic  reports
with the  supervisory  agencies  in each of the states in which they do business
and their  business and accounts are subject to  examination by such agencies at
any time. The insurance laws and  regulations of the  domiciliary  states of the
Company's insurance  subsidiaries  require that such subsidiaries be examined at
specified intervals.

Investors-NA  and  Investors-IN  are domiciled in the states of  Washington  and
Indiana,  respectively.  In December,  1992,  Investors-NA  redomesticated  from
Pennsylvania to Washington, and Investors-CA merged into Investors-NA.  In June,
1993,  Standard  Life  merged  into  Investors-NA.   Prior  to  December,  1997,
Investors-IN  was  domiciled  in the State of New  Jersey.  In  December,  1997,
Investors-IN transferred its domicile to the State of Indiana.


                                      -19-



A number of states regulate the manner and extent to which  insurance  companies
may test for acquired immune deficiency syndrome (AIDS) antibodies in connection
with the  underwriting of life insurance  policies.  To the extent  permitted by
law,  the  Company's  insurance   subsidiaries   consider  AIDS  information  in
underwriting  coverage and  establishing  premium  rates.  An  evaluation of the
financial  impact of future AIDS claims is extremely  difficult,  due in part to
insufficient  and conflicting data regarding the incidence of the disease in the
general  population  and the  prognosis  for the probable  future  course of the
disease.

Risk  Based  Capital   Requirements.   The  National  Association  of  Insurance
Commissioners  ("NAIC") has imposed Risk-Based  Capital ("RBC")  requirements to
evaluate the adequacy of statutory capital and surplus in relation to investment
and insurance  risks  associated  with;  (i) asset  quality;  (ii) mortality and
morbidity;  (iii) asset and liability matching; and (iv) other business factors.
The RBC  formula is  intended  to be used by  insurance  regulators  as an early
warning tool to discover potential weakly capitalized  companies for the purpose
of initiating  regulatory  action. The RBC requirements are not intended to be a
basis for ranking the relative  financial strength of insurance  companies.  The
formula also defines a new minimum  capital  standard which will  supplement the
prevailing  system of low fixed minimum  capital and surplus  requirements  on a
state-by-state basis.

The RBC requirements  provide for four different levels of regulatory  attention
in those states that adopt the NAIC  regulations,  depending on the ratio of the
company's  Total  Adjusted  Capital  (which  generally  consist of its statutory
capital,  surplus and asset valuation  reserve) to its Authorized  Control Level
RBC. A "Company  Action Level Event" is triggered if a company's  Total Adjusted
Capital is less than 200% but  greater  than or equal to 150% of its  Authorized
Control  Level  RBC,  or if a negative  trend has  occurred  (as  defined by the
regulations)  and Total Adjusted Capital is less than 250% but more than 200% of
its Authorized  Control Level RBC. When a Company Action Level Event occurs, the
company  must submit a  comprehensive  plan to the  regulatory  authority  which
discusses  proposed  corrective  actions  to improve  its  capital  position.  A
"Regulatory  Action  Level Event" is  triggered  if a company's  Total  Adjusted
Capital is less than 150% but  greater  than or equal to 100% of its  Authorized
Control Level RBC. When a Regulatory  Action Level Event occurs,  the regulatory
authority  will perform a special  examination of the company and issue an order
specifying  corrective  actions that must be followed.  An  "Authorized  Control
Level  Event" is triggered if a company's  Total  Adjusted  Capital is less than
100% but greater than or equal to 70% of its  Authorized  Control Level RBC, and
the  regulatory  authority  may take any  action it deems  necessary,  including
placing the company under regulatory  control. A "Mandatory Control Level Event"
is  triggered  if a  company's  total  adjusted  capital is less than 70% of its
Authorized Control Level RBC, and the regulatory  authority is mandated to place
the company under its control.

Calculations  using the NAIC formula and the statutory  financial  statements of
the Company's  insurance  subsidiaries as of December 31, 2000 indicate that the
Total Adjusted Capital of each of the Company's insurance  subsidiaries is above
560% of its respective Authorized Control Level RBC.

                                      -20-


Solvency Laws Assessments. The solvency or guaranty laws of most states in which
an insurance  company does business may require that company to pay  assessments
(up to certain prescribed limits) to fund policyholder  losses or liabilities of
insurance  companies that become  insolvent.  Recent  insolvencies  of insurance
companies increase the possibility that such assessments may be required.  These
assessments  may be deferred or forgiven  under most guaranty laws if they would
threaten an  insurer's  financial  strength  and, in certain  instances,  may be
offset against future premium taxes. The insurance  companies record the expense
for  guaranty  fund  assessments  in the  period  assessed.  For the year  ended
December  31,  2000,  Family  Life and ILCO's  insurance  subsidiaries  received
credits on their guaranty fund assessment  returns, in the amount of $54,344 and
$24,136,  respectively.  Those amounts are net of the amounts that can be offset
against future premium taxes and, in the case of Family Life, the amount is also
net of the amount that can be recovered from Merrill Lynch pursuant to the Stock
Purchase  Agreement  between FIC and Merrill Lynch.  See  "Acquisition of Family
Life." The  likelihood  and  amount of any other  future  assessments  cannot be
estimated and are beyond the control of FIC and ILCO.

Surplus Debentures and Dividends.  The principal sources of cash for FLC to make
payments of  principal  and interest on the Family Life Senior Loan are payments
under   the   surplus   debenture   of  Family   Life   Insurance   Company   (a
Washington-domiciled  insurer) and dividends paid by Family Life.  Under current
Washington  law,  any  proposed  payment of a dividend  or  distribution  which,
together  with  dividends  or  distributions  paid during the  preceding  twelve
months,  exceeds the greater of (i) 10% of statutory surplus as of the preceding
December  31 or (ii)  statutory  net  gain  from  operations  for the  preceding
calendar year is an "extraordinary dividend" and may not be paid until either it
has been approved,  or a 60-day waiting period shall have passed during which it
has not been disapproved,  by the Washington  Insurance  Commissioner.  In 1993,
Washington amended its insurance code to retain the above-described "greater of"
standard for dividends,  but enacted  requirements that prior  notification of a
proposed  dividend be given to the Washington  Insurance  Commissioner  and that
cash  dividends  may be paid  only from  earned  surplus.  Family  Life does not
presently  have  earned  surplus as defined  by the  regulations  adopted by the
Washington Insurance Commissioner and, therefore,  is not presently permitted to
pay cash dividends.  However,  since this law applies only to dividend payments,
the ability of Family Life to make  principal  and interest  payments  under the
surplus debenture is not affected.

Principal  and  interest   payments  on  the  surplus  debenture  have  provided
sufficient  funds to meet debt service  obligations of FLC. Under the provisions
of the surplus  debenture  and current  law,  Family Life can pay  interest  and
principal on the surplus  debenture  without having to obtain the prior approval
of the Washington Insurance Commissioner;  provided that, after giving effect to
the payment of interest or principal  on the surplus  debenture,  the  statutory
capital  and surplus of Family  Life  exceeds 6% of its assets.  Pursuant to the
surplus  debenture,  Family Life paid  principal and interest in 1998,  1999 and
2000 totaling $11,564,978,  $10,754,978 and $8,982,244 respectively. Family Life
does give five-days prior notification to the Washington Insurance Department of
each proposed  payment on the surplus  debenture in accordance with an agreement
between Family Life and the  Department.  The Company does not anticipate  that,
for the  foreseeable  future,  Family  Life will have any  difficulty  in making
payments to Family Life Corporation in amounts  sufficient to enable Family Life
Corporation  to service its  indebtedness,  either by payments of principal  and
interest by Family  Life on the  Surplus  Debenture  or partial  redemptions  by
Family Life of its redeemable preferred stock.

                                      -21-


Valuation Reserves.  Life insurance companies are required to establish an Asset
Valuation  Reserve  ("AVR")  consisting  of  two  components:   (i)  a  "default
component,"  which provides for future  credit-related  losses on fixed maturity
investments,  and (ii) an "equity  component,"  which provides for losses on all
types of  equity  investments,  including  equity  securities  and real  estate.
Insurers are also required to establish an Interest Maintenance Reserve ("IMR"),
designed to defer realized capital gains and losses due to interest rate changes
on fixed income  investments  and to amortize those gains and losses into future
income.  The IMR is required to be amortized into statutory  earnings on a basis
reflecting  the remaining  period to maturity of the fixed  maturity  securities
sold. These reserves are required by state insurance  regulatory  authorities to
be  established  as  a  liability  on  a  life  insurer's   statutory  financial
statements,  but do not affect the financial  statements  prepared in accordance
with GAAP.  Management  believes  that the  combination  of the AVR and IMR will
affect statutory capital and surplus and may reduce the ability of the Company's
insurance subsidiaries to pay dividends to ILCO.

Insurance Holding Company Regulation. Family Life is subject to regulation under
the  insurance  and  insurance  holding  company  statutes  of  Washington.  The
insurance  holding  company  laws and  regulations  vary  from  jurisdiction  to
jurisdiction,  but generally require  insurance and reinsurance  subsidiaries of
insurance  holding  companies to register with the applicable  state  regulatory
authorities and to file with those authorities certain reports describing, among
other information,  their capital  structure,  ownership,  financial  condition,
certain intercompany transactions and general business operations. The insurance
holding company  statutes also require prior  regulatory  agency approval or, in
certain  circumstances,  prior notice of certain material intercompany transfers
of assets as well as certain  transactions  between insurance  companies,  their
parent companies and affiliates.

Under the Washington  Insurance  Code,  unless (i) certain filings are made with
the  Washington  Department of  Insurance,  (ii) certain  requirements  are met,
including a public  hearing and (iii)  approval or  exemption  is granted by the
insurance  commissioner,  no person may acquire any voting  security or security
convertible into a voting security of an insurance holding company,  such as the
Company,  which controls a Washington  insurance  company,  or merge with such a
holding company,  if as a result of such transaction such person would "control"
the  insurance  holding  company.  "Control"  is  presumed  to exist if a person
directly or indirectly owns or controls 10% or more or the voting  securities of
another person.

                                      -22-


Privacy Legislation. On November 12, 1999, President Clinton signed into law the
Financial  Services  Modernization  Act  (referred  to in this  paragraph as the
"Act")  of 1999,  implementing  fundamental  changes  in the  regulation  of the
financial  services industry in the United States. In general,  the Act provides
that  financial  institutions  have  certain  obligations  with  respect  to the
maintenance of the privacy of customer information, so as to insure the security
and confidentiality of customer records and information,  to protect against any
anticipated threats or hazards to the security or integrity of these records and
to protect  against  unauthorized  access or use of these records or information
which could result in  substantial  harm or  inconvenience  to any customer.  In
addition,  the Act places new  restrictions on disclosure of nonpublic  personal
information to third party  institutions  seeking to utilize such information in
connection  with the sale of products or services.  A financial  institution may
disseminate certain types of customer information to nonaffiliated third parties
if  the   institution   provides  clear  and   conspicuous   disclosure  of  the
institution's  privacy policy and the customer authorizes the release of certain
information  to third  parties.  Where the  customer  permits the release of the
information,  the Act restricts  disclosure of information that is non-public in
nature but does not  prohibit the release of  information  which can be obtained
from public sources.  The passage of the Act and regulations  pertaining thereto
may adversely affect FIC's insurance  subsidiaries  from utilizing certain sales
methods;  however,  at this time,  FIC is unable to determine to what extent the
final   regulations   will  impact  the  sales   practices  of  FIC's  insurance
subsidiaries.

Potential Federal Regulation. Although the federal government generally does not
directly  regulate the insurance  industry,  federal  initiatives  often have an
impact on the business.  Congress and certain federal agencies are investigating
the current  condition of the  insurance  industry  (encompassing  both life and
health and  property and casualty  insurance)  in the United  States in order to
decide  whether  some  form of  federal  role  in the  regulation  of  insurance
companies  would be appropriate.  Congress is currently  conducting a variety of
hearings relating in general to the solvency of insurers.  It is not possible to
predict the outcome of any such congressional activity nor the potential effects
thereof on Family Life.

Federal  Income  Taxation.  The Revenue  Reconciliation  Act of 1990 amended the
Internal  Revenue Code of 1986 to require a portion of the expenses  incurred in
selling insurance  products to be deducted over a period of years, as opposed to
an immediate deduction in the year incurred.  Since this change only affects the
timing  of the  deductions,  it does  not  affect  tax  expense  as shown on the
Company's financial  statements  prepared in accordance with GAAP. However,  the
change will increase the tax for statutory  accounting purposes in the first few
years,  which will reduce statutory surplus and,  accordingly,  may decrease the
amount of cash  dividends that Family Life can pay. For the years ended December
31, 1998,  1999 and 2000,  the  decreases in Family  Life's  current  income tax
provisions, utilizing the effective tax rates, due to this change were $89,034 ,
$78,759  and  $177,038  respectively.  The change has a negative  tax effect for
statutory  accounting purposes when Family Life's premium income increases,  but
has a positive tax effect when its premium income decreases.

The Company and Family Life filed a consolidated  federal income tax returns for
the years 2000 and 1999.


                               Segment Information

The  principal  operations  of the  Company's  insurance  subsidiaries  are  the
underwriting of life insurance and annuities.  Accordingly,  no separate segment
information  is required to be provided  by the  Registrant  for the  three-year
period ending December 31, 2000.

                                      -23-




Item 2.  Properties

ILCO's  home office is located at River Place  Pointe,  6500 River Place  Blvd.,
Building One, Austin, Texas. River Place Pointe was purchased by Investors-NA on
October 29, 1998. It consists of two adjoining tracts of land located in Austin,
Texas totaling 47.995 acres.  The aggregate  purchase price for these tracts was
$8.1 million.  Prior to the closing of the transaction,  Investors-NA obtained a
Site  Development  Permit  for the  tracts  from  the City of  Austin.  The Site
Development  Permit  allows  for the  construction  of  seven  office  buildings
totaling  600,000  square  feet,  with  associated  parking,  drives and related
improvements.  Construction on the first phase of the Project, which consists of
two office buildings,  an associated parking garage, and related  infrastructure
was completed during 2000. The second phase of construction,  which includes two
more office  buildings,  is in progress and Investors-NA  expects  completion of
this  phase by the end of the  second  quarter  of  2001.  ILCO,  FIC and  their
insurance  subsidiaries  occupy  almost the entire  Building  One of River Place
Pointe, consisting of approximately 74,021 square feet of space.

Family Life leases its home offices at the Sedgwick James Building,  2101 Fourth
Avenue, in Seattle,  Washington.  The lease currently covers approximately 7,776
rentable  square feet of office  space for a term  expiring on October 31, 2001.
Family  Life is in the  process of  renewing  this  lease for a two year  period
commencing on November 1, 2001 and expiring on October 31, 2003. The base rental
for the renewal paid will be  approximately  $16,362 per month,  which  includes
Family  Life's   proportionate  share  of  the  building's  operating  expenses,
including  utilities,  property  taxes,  insurance,  maintenance and management.
Actual increases from those initial operating expenses during the lease term are
passed on to Family Life on a proportionate basis.

The Company  believes that its  properties and leased space are adequate to meet
its foreseeable requirements.


                                      -24-



Item 3.  Legal Proceedings

The Company and its subsidiaries are defendants in certain legal actions related
to the normal business  operations of the Company.  Management believes that the
resolution  of such  legal  actions  will  not  have a  material  impact  on the
financial statements.

ILCO and  Investors-NA  are  defendants in a lawsuit which was filed in October,
1996, in Travis County, Texas. CIGNA Corporation,  an unrelated company, is also
a named  defendant in the lawsuit.  The named  plaintiffs in the suit (a husband
and wife), allege that the universal life insurance policies sold to them by INA
Life Insurance  Company (a company which was merged into  Investors-NA  in 1992)
utilized unfair sales  practices.  The named  plaintiffs seek reformation of the
life  insurance  contracts  and an  unspecified  amount  of  damages.  The named
plaintiffs  also seek a class action as to similarly  situated  individuals.  No
certification  of a class has been granted as of the date hereof.  ILCO believes
that the suit is without merit and intends to vigorously defend this matter.

Additionally,   ILCO's  insurance   subsidiaries   are  regularly   involved  in
litigation,  both as a defendant and as  plaintiff.  The  litigation  naming the
insurance  subsidiaries  as defendant  ordinarily  involves our  activities as a
provider  of  insurance  protection  products.  We  do  not  believe  that  such
litigation,  either  individually  or in the  aggregate,  will  have a  material
adverse  effect on the  Company's  business,  financial  condition or results of
operations.


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

No matter  was  submitted  during the  fourth  quarter of the fiscal  year ended
December 31, 2000, to a vote of security holders.



                                      -25-



                                     PART II


Item 5. Market for the  Registrant's  Common Stock and Related
 Security  Holder Matters

A.  Market Information

FIC's  common stock is traded in the Nasdaq  Small-Cap  Market  (NASDAQ  symbol:
FNIN).  The following  table sets forth the quarterly  high and low sales prices
for FIC common stock for 2000 and 1999. Quotations are furnished by the National
Association of Securities Dealers Automated Quotation System (NASDAQ).

                                              Common Stock
                                                 Prices
                                         High               Low
2000
         First Quarter                 $10.50              $7.25
         Second Quarter                 10.50               8.00
         Third Quarter                   9.50               7.875
         Fourth Quarter                 10.00               8.500


1999
         First Quarter                 $17.375            $12.00
         Second Quarter                 14.00               7.625
         Third Quarter                  15.50               8.00
         Fourth Quarter                 10.75               9.25



B.  Holders

As of March 6, 2001 there were approximately 14,736 record holders of FIC common
stock.

                                      -26-


C.  Dividends

In the year  2000,  FIC paid a cash  dividend  in the  amount of $.18 per share,
which was payable on April 12, 2000, to shareholders of record on April 5, 2000.

The ability of an insurance  holding  company,  such as FIC, to pay dividends to
its shareholders may be limited by the company's  ability to obtain revenue,  in
the  form  of  dividends  and  other  payments,  from  its  operating  insurance
subsidiary  or  subsidiaries.  The  right of  Family  Life to pay  dividends  is
restricted by the insurance laws of its domiciliary  state. See Item 1. Business
- - Regulation - Surplus Debentures and Dividends.  However, FIC does not directly
own Family  Life's  stock but,  instead,  indirectly  owns that stock  through a
downstream holding company,  Family Life Corporation  ("FLC").  FLC, which holds
all of the stock of Family  Life,  is  restricted  from paying  dividends on its
common  stock by the  provisions  of the notes  from  Investors-NA.  FIC (as the
successor to the  obligations  of FLIIC under the provisions of the $4.5 million
subordinated note held by Investors-NA),  is prohibited from paying dividends on
its stock by the provisions of the $4.5 million  subordinated  note. In order to
provide for the payment of the $.18 per share annual  dividend  payable on April
12,  2000,  FIC  requested a waiver  from  Investors-NA  of the  above-described
restrictions of the loan agreements.  Investors-NA granted the requested waiver,
thereby permitting FIC to make the dividend payment to its shareholders.

The ability of ILCO to pay dividends to FIC and the other  shareholders  of ILCO
is affected by the receipt of dividends  and other  payments  from its insurance
subsidiaries.

Item 6.  Selected Financial Data: (Registrant and its Consolidated Subsidiaries)

                                                                                 
                                                  (In thousands, except per share data)

                                        2000          1999         1998            1997          1996

Operating Revenues                  $ 44,418      $ 46,244     $ 52,293         $ 63,343      $ 59,928
Income before federal
 income tax, equity in net
 earnings of affiliates                6,482         7,013        8,973           13,411         9,791
Income before equity in
 net earnings of affiliates            5,198         5,839        6,605            9,870         7,145
Equity in net earnings of
 affiliate, net of tax                 3,581         3,310        2,613            6,458         9,012
Net Income                          $  8,779      $  9,149     $  9,218         $ 16,328      $ 16,157
Common Stock and
 Common Stock                          5,163         5,200        5,557            5,589         5,568
 Equivalents
Net income per share
Basic                              $   1.74      $   1.81     $   1.71         $   3.01      $   2.98
Diluted                            $   1.70      $   1.76     $   1.66         $   2.92      $   2.90

Total Assets                       $300,766      $294,054     $301,738         $304,324      $287,730

Long Term Obligations              $ 35,349      $ 41,497     $ 47,645         $ 53,792      $ 59,940







                                      -27-



Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

Following is a discussion  and analysis of the  financial  statements  and other
statistical  data that  management  believes will enhance the  understanding  of
FIC's financial condition and results of operations.

                           Forward-Looking Statements


Except  for  historical  factual  information  set  forth  in this  Management's
Discussion  and  Analysis,  the  statements,  analyses,  and  other  information
contained  in this report  relating to trends in the  Company's  operations  and
financial  results,   the  markets  for  the  Company's  products,   the  future
development of the Company's  business,  and the contingencies and uncertainties
to which the Company may be subject, as well as other statements including words
such as "anticipate,"  "believe,"  "path,"  "estimate,"  "expect,"  "intend" and
other  similar  expressions  constitute  forward-looking  statements  under  the
Private Securities Litigation Reform Act of 1995. Such statements are made based
upon  management's  current  expectations  and beliefs  concerning the financial
results,  economic  conditions  and are  subject  to known  and  unknown  risks,
uncertainties and other factors contemplated by the forward-looking  statements.
Such factors include,  among other things:  (1) general economic  conditions and
other  factors,  including  prevailing  interest  rate  levels and stock  market
performance,  which may effect  the  ability  of FIC to sell its  products,  the
market  value of FIC's  investments  and the  lapse  rate and  profitability  of
policies;  (2) FIC's  ability  to  achieve  anticipated  levels  of  operational
efficiencies and cost-saving initiatives; (3) customer response to new products,
distribution channels and marketing  initiatives;  (4) mortality,  morbidity and
other factors which may affect the  profitability  of FIC's insurance  products;
(5) changes in the Federal income tax laws and regulations  which may affect the
relative tax advantages of some of FIC's products; (6) increasing competition in
the  sale of  insurance  and  annuities;  (7)  regulatory  changes  or  actions,
including  those  relating to  regulation  of insurance  products and  insurance
companies;  (8) ratings assigned to FIC's insurance  subsidiaries by independent
rating  organizations  such  as  A.M.  Best  Company,  which  FIC  believes  are
particularly  important to the sale of annuity and other accumulation  products;
and (9) unanticipated  litigation.  There can be no assurance that other factors
not currently  anticipated by management  will not also materially and adversely
affect FIC.
                                      -28-



Results of Operations - Three Years Ended December 31, 2000, 1999 and 1998

For the year ended  December 31, 2000,  FIC's net income was  $8,779,000  (basic
earnings  of $1.74 per  common  share or  diluted  earnings  of $1.70 per common
share) which was a decrease as compared to $9,149,000  (basic  earnings of $1.81
per common  share or diluted  earnings  of $1.76 per common  share) for the year
ended December 31, 1999 and $9,218,000 (basic earnings of $1.71 per common share
or diluted  earnings of $1.66 per common share) for the year ended  December 31,
1998.  Earnings  per share are stated in  accordance  with the  requirements  of
Financial  Accounting  Standard (FAS) No. 128, which establishes two measures of
earnings per share:  basic  earnings  per share and diluted  earnings per share.
Basic  earnings  per share are computed by dividing  income  available to common
shareholders by the weighted average number of common shares  outstanding during
the period. Diluted earnings per share reflect the potential dilution that would
occur if securities or other  contracts to issue common stock were  converted or
exercised.  Net  income  for the year  1999 was  affected  by the  inclusion  of
$629,000 of gain from the sale of real estate located in Jackson, Mississippi.

Premiums for the year 2000, net of  reinsurance  ceded,  were $33.1 million,  as
compared  to $33.96  million  for the year 1999 and $38.4  million  for the year
1998.  This  source of  revenue is related  to Family  Life's  traditional  life
insurance book of business,  especially  Family Life's decreasing term products.
The first year premiums for 2000 were  relatively  level with 1999. The decrease
in first year  premiums  from 1998 to 1999 of $0.7 million was related to higher
level of new sales in 1998. The level of, renewal premiums for the year 2000 was
$0.6 million  lower than for the year 1999,  and the level for the year 1999 was
$3.7 million  lower that for the year 1998.  The decrease in renewal  premium is
attributable to the decrease in the traditional life insurance book of business.

The net investment income was  approximately  level from 1999 to 2000 mainly due
to the long term portfolio  remaining  level while short term  investments  were
decreasing and the short term rates were increasing.  The net investment  income
for 1999 was $6.9  million as  compared  to $7.8  million  in 1998.  There was a
decrease of approximately $0.9 million from 1998 to 1999.

                                      -29-



Earned insurance charges for 2000 were $4.3 million, as compared to $4.8 million
in 1999 and $6.0  million  in 1998.  This  source of  revenue  is related to the
universal life insurance and annuity book of business of Family Life. The amount
is consistently  decreasing  because Family Life Insurance Company reinsures all
of its  universal  life and annuity  business  with  Investors-NA.  As a result,
earned insurance charges are affected by a decreasing block of business.

Policyholder  benefits and expenses were $13.5 million in 2000, as compared to $
12.9  million  in 1999 and $14.9  million  in 1998.  The  $600,000  increase  in
policyholder  benefits and  expenses  from 1999 to 2000 is due to an increase in
policyholder  expenses.  The $2.0 million decrease in policyholder  benefits and
expenses  from  1998  to  1999  is due to a  decrease  in the  reserves  of $2.8
million.,  which is related to a lower  level of  premiums,  and an  increase in
death claims of $1.1 million.

Interest  expense on contract  holders deposit funds was $2.2 million in each of
the years 2000 and 1999,  as compared to $2.4  million in 1998.  This expense is
related to the  universal  life book of business,  which was a relatively  level
amount during the three-year period.

In 2000,  the  amortization  of  present  value of future  profits  of  acquired
business  was $3.7  million as compared to $5.2 million in 1999 and $6.1 million
in 1998. The  amortization of present value of future profits  decreased by $1.5
million  in 1999 to 2000 and  $958,000  from 1998 to 1999.  These  decreases  in
amortization  were  expected and should  continue to decrease as the  underlying
asset, present value of future profits decreases.

                                      -30-




The amortization of deferred policy  acquisition costs was $5.3 million in 2000,
as compared to $5.2  million in 1999 and $5.2  million in 1998.  The increase in
amortization   of  $171,000   from  1999  to  2000  can  be  attributed  to  the
capitalization  of  expenses  incurred  in  connection  with the  writing of new
business.

The operating  expenses for 2000 were $11.4  million,  as compared to
$11.7  million on 1999 and $11.8  million in 1998.  The  decrease  in  operating
expenses  of  $365,000  from  1999  to  2000 is due to a  reduction  of  overall
operating expenses in 2000 and the reduction of Y2K conversion expenses incurred
in 2000 as compared to 1999's  expenses.  The  experience of level expenses from
1998 to 1999 was due to a reduction of overall operating expenses in 1999 offset
by the additional costs relating to the Y2K conversion.

Interest expense for 2000 was $1.9 million,  as compared to $2.4 million in 1999
and $2.9 million in 1998. The continued  decrease of interest expenses from 1999
to 2000 is consistent with the scheduled pay down of FIC's debt to Investors-NA.

The provision for federal  income taxes was $1.28 million in 2000 as compared to
$1.17million in 1999 and $2.37 million in 1998. The provision for federal income
taxes for the years 2000 and 1999 is  substantially  lower that for 1998, due to
the  utilization in 1999 and 2000 of the small company  deduction by Family Life
Insurance  Company.  That deduction was not available to Family Life in the year
1998 under the applicable  federal  income tax rules.  The  availability  of the
deduction reduced federal income taxes by $600,000 in 1999 and $400,000 in 2000.


          Results of Operations - Three Months Ended December 31, 2000
             as compared to the Three Months Ended December 31, 1999

For the three-month  period ended December 31, 2000, FIC's net income was $2.193
million  (basic and diluted  earnings of $0.85 per common  share) on revenues of
$10.649  million as compared to the net income of $2.604 million (basic earnings
and  diluted  earnings of $1.02 per common  share) on total  revenues of $11.169
million  in the last  three  months of 1999.  Earnings  per share are  stated in
accordance with the requirements of Financial Accounting Standard (FAS) No. 128,
which  establishes two measures of earnings per share:  basic earnings per share
and diluted earnings per share. Basic earnings per share is computed by dividing
income available to common shareholders by the weighted average number of common
shares  outstanding  during the period.  Diluted  earnings per share reflect the
potential  dilution that would occur if  securities or other  contracts to issue
common stock were converted or exercised.



                                      -31-



            Equity in Net Income of InterContinental Life Corporation


General

Prior  to the  acquisition  of  Family  Life  in  June of  1991,  FIC's  primary
involvement  in the life insurance  business was through its equity  interest in
ILCO. For the year 2000,  the Company's  equity in the net earnings of ILCO, net
of federal  income  tax,  was  $3,581,000  ,which was an increase as compared to
$3,310,000  for the year 1999 and  $2,613,000 for the year 1998. The increase in
equity  income from ILCO of $271,000  from 1999 to 2000 is due to an increase in
the percentage  ownership FIC has in ILCO and is partially  offset by a decrease
in ILCO's net income.  The equity income from ILCO of $697,000 from 1998 to 1999
can be  attributed to an increase in ILCO's net income of $1.6 million from 1998
to 1999.

FIC currently owns 3,590,592 shares of ILCO's common stock. In addition,  Family
Life  currently  owns  343,400  shares of ILCO common  stock.  As a result,  FIC
currently owns,  directly and indirectly  through Family Life,  3,932,692 shares
(approximately 48.3%) of ILCO's common stock.

FIC  carries  its  investment  in ILCO on the equity  method of  accounting.  At
December 31, 2000,  FIC's  investment in affiliate was valued at $79.1  million.
The book value of ILCO's common stock at December 31, 2000 was $19.70 per share,
which is substantially  above the market value ($9.50) of ILCO's common stock on
that same date.  The  applicable  accounting  standards  permit FIC to carry its
investment in ILCO on the equity method of accounting, without any adjustment to
reflect  the  difference  between  book value and market  value.  Under  certain
circumstances,  Accounting  Principles  Board  Opinion  18 ("APB  18") and Staff
Accounting  Bulletin  Topic 5.M ("SAB 5.M")  require an  adjustment  to earnings
where the value of an investment is deemed to have  decreased on an other than a
temporary basis.  Application of the "other than temporary" provisions of APB 18
and SAB 5.M to FIC's investment in ILCO would potentially  result in a charge to
earnings  in some  future  period.  The  amount  of such  charge  would be based
primarily upon the market price of ILCO's common stock, which ranged from $9.313
per share to $14.56 per share  during the first  quarter of 2001.  Based on that
range of market  prices,  the range of possible  impairment  charges which might
result would be from $20.22 million to $39.36 million, net of tax.

However,  management believes that an adjustment to earnings is neither required
nor  appropriate  under  the  provisions  of APB 18 and SAB  5.M.  In  addition,
management  notes that FIC and ILCO are  currently  parties to an Agreement  and
Plan of Merger whereby ILCO would become a wholly- owned  subsidiary of FIC. FIC
believes  that it is  probable  that the merger will be  consummated.  After the
merger,  FIC will include ILCO in its  consolidated  financial  statements.  FIC
expects to recover the cost of its  investment in ILCO from the  realization  of
ILCO's net assets through consolidation.

Further,  in the event that the merger transaction were not completed,  ILCO has
the ability to resume its stock repurchase plan. If ILCO were to make additional
purchases  under that plan, the additional  purchases would reduce the number of
ILCO's outstanding shares,  thereby increasing the percentage of FIC's ownership
interest in ILCO.  Alternatively,  FIC could purchase  shares of FIC in the open
market or in negotiated transactions to increase the percentage of its ownership
in ILCO. In the event that the ownership percentage were to be increased to more
than 50%, FIC would include ILCO in its consolidated financial statements, which
would produce the results described in the preceding paragraph.

                                      -32-



In the event that none of the  above-described  events were to occur and FIC was
required  to  recognize  an  earnings  charge  for  an  "other  than  temporary"
impairment,  the ability of FIC to record on an equity basis its interest in the
net earnings of ILCO may be limited by the future  market value of ILCO's common
stock.  Since the amount of any such  adjustments  would be  dependent  upon the
future  market value of ILCO's  common  stock,  FIC's  management is not able to
estimate the potential range of charges which might occur in future periods.

The decrease in long-term  interest rates during the last part of the year 2000,
which was related to general economic conditions, had a positive effect upon the
market  value of the  fixed  maturities  available  for sale  segment  of ILCO's
investment  portfolio.  As of December 31,  2000,  the market value of the fixed
maturities  available  for sale  segment  was $440.7  million as  compared to an
amortized cost of $437.0 million,  or an unrealized gain of $3.7 million.  Since
FIC owns approximately 48.3% of the common stock of ILCO, such unrealized gains,
net of tax, are reflected in FIC's investment in affiliate and accumulated other
comprehensive  income,  and had the effect of increasing  the reported  value of
such equity interest by approximately $1.2 million.

ILCO's results for 1998 include,  for the period beginning on June 30, 1998, the
operations of Grinnell  Life  Insurance  Company.  Grinnell Life was acquired on
June 30, 1998,  through a subsidiary of ILCO, for an adjusted  purchase price of
$16.6 million.  A portion of the purchase price ($12.37 million) was paid by way
of a dividend to the seller immediately prior to the closing of the transaction;
the balance of the purchase price was paid by ILCO's subsidiary.  As part of the
transaction, Grinnell Life was immediately merged with and into that subsidiary,
with that subsidiary being the surviving entity.


Liquidity and Capital Resources of ILCO

Liquidity  describes the ability of a company to generate  sufficient cash flows
to  meet  the  cash  requirements  of  business  operations.  Historically,  our
principal  cash flow sources have been from  periodic  payment of principal  and
interest by Investors-NA,  pursuant to the terms of the Surplus  Debentures.  In
addition to the need for cash flow to meet  operating  expenses,  our  liquidity
requirements  relate principally to the liabilities  associated with our various
life insurance and annuity products. Our product liabilities include the payment
of benefits under life insurance and annuity products, as well as the payment of
policy surrenders, withdrawals and policy loans.

                                      -33-




ILCO is an insurance  holding  company.  The principal assets of ILCO consist of
the outstanding capital stock of Investors-NA and its subsidiary,  Investors-IN.
Prior to June 30, 2000,  ILCO's principal  source of liquidity  consisted of the
periodic  payment of  principal  and interest by  Investors-NA,  pursuant to the
terms of the Surplus  Debentures.  The Surplus Debentures were originally issued
by Standard Life Insurance  Company and their terms were previously  approved by
the Mississippi  Insurance  Commissioner.  In connection with the 1993 merger of
Standard Life into Investors-NA,  the obligations of the Surplus Debentures were
assumed by Investors-NA.  As of June 30, 2000, the outstanding principal balance
of the Surplus  Debentures  was completely  paid off. For periods  subsequent to
June 30, 2000, ILCO's available source of liquidity is dividends paid to it from
its subsidiaries. Applicable state insurance laws generally restrict the ability
of insurance companies to pay cash dividends in excess of prescribed limitations
without prior approval. The ability of Investors-NA to pay shareholder dividends
is and will  continue to be subject to  restrictions  set forth in the insurance
laws and  regulations  of  Washington,  its  domiciliary  state.  The Washington
insurance law limits how and when Investors-NA can pay shareholder  dividends by
including  the "greater  of" standard for payment of dividends to  shareholders,
and requiring  that prior  notification  of a proposed  dividend be given to the
Washington Insurance  Commissioner and that cash dividends may be paid only from
earned surplus.  Under the "greater of" standard,  an insurer may pay a dividend
in an amount equal to the greater of (i) 10% of the policyholder surplus or (ii)
the insurer's net gain from operations for the previous year. As of December 31,
2000, Investors-NA had earned surplus of $69.1 million.

Investors-IN is domiciled in the State of Indiana.  Under the Indiana  insurance
code, a domestic insurer may make dividend  distributions  upon proper notice to
the  Department  of  Insurance,  as long as the  distribution  is  reasonable in
relation to adequate  levels of  policyholder  surplus and quality of  earnings.
Under Indiana law the dividend must be paid from earned  surplus.  Extraordinary
dividend  approval would be required where a dividend exceeds the greater of 10%
of  surplus  or the  net  gain  from  operations  for  the  prior  fiscal  year.
Investors-IN had earned surplus of $ 23.8 million at December 31, 2000.

The Form 10-Ks of ILCO for the years ended December 31, 2000, 1999 and 1998, set
forth  the  business  operations  and  financial  results  of ILCO  and its life
insurance  subsidiaries.  Such 10-K reports of ILCO, including the discussion by
ILCO's  management  under the caption  "Management's  Discussion and Analysis of
Financial  Conditions  and Results of  Operations"  are  incorporated  herein by
reference.


                         Liquidity and Capital Resources

FIC is a holding company whose  principal  assets consist of the common stock of
Family Life and its equity  ownership in ILCO.  FIC's primary sources of capital
consists of cash flow from operations of its  subsidiaries and the proceeds from
bank and institutional borrowings.

                                      -34-



The  principal  source of  liquidity  for  FIC's  subsidiaries  consists  of the
periodic  payment of principal and interest by Family Life pursuant to the terms
of a Surplus  Debenture.  The terms of the  Surplus  Debenture  were  previously
approved by the Washington Insurance  Commissioner.  Under the provisions of the
Surplus Debenture and current law, no prior approval of the Washington Insurance
Department  is required  for Family Life to pay  interest  or  principal  on the
Surplus  Debenture;  provided that,  after giving effect to such  payments,  the
statutory  surplus  of Family  Life is in excess of 6% of assets  (the  "surplus
floor").  However,  Family  Life has  voluntarily  agreed  with  the  Washington
Insurance Commissioner that it will provide at least five days advance notice of
payments  which it will make under the surplus  debenture.  As of  December  31,
2000,  the statutory  capital and surplus of Family Life was $23.8  million,  an
amount  substantially in excess of the surplus floor.  During 2000,  Family Life
made principal payments of $8.0 million and interest payments of $1.0 million to
Family Life Corporation  under the Surplus  Debenture.  As of December 31, 2000,
the  principal  balance of the Surplus  Debenture  was $5.9  million.  The funds
required by Family Life to meet its  obligations  under the terms of the Surplus
Debenture  are generated  primarily  from premium  payments from  policyholders,
investment income and the proceeds from the sale
and redemption of portfolio investments.

Washington's insurance code includes the "greater of" standard for dividends but
has requirements that prior  notification of a proposed dividend be given to the
Washington Insurance  Commissioner and that cash dividends may be paid only from
earned surplus. Family Life does not presently have earned surplus as defined by
the regulations adopted by the Washington Insurance Commissioner and, therefore,
is not permitted to pay cash dividends.  However, since the new law applies only
to dividend payments,  the ability of Family Life to make principal and interest
payments  under the Surplus  Debenture  is not  affected.  The Company  does not
anticipate  that,  for  the  foreseeable  future,  Family  Life  will  have  any
difficulty in making payments to Family Life  Corporation in amounts  sufficient
to enable  Family  Life  Corporation  to  service  its  indebtedness,  either by
payments of principal  and  interest by Family Life on the Surplus  Debenture or
partial redemptions by Family Life of its redeemable preferred stock.

The  sources  of  funds  for  Family  Life  consist  of  premium  payments  from
policyholders,  investment  income and the proceeds from the sale and redemption
of portfolio  investments.  These funds are applied primarily to provide for the
payment of claims under  insurance  and annuity  policies,  operating  expenses,
taxes,  investments in portfolio securities,  shareholder dividends and payments
under the provisions of the Surplus Debenture.

FIC's net cash flow  provided by  operating  activities  was $7,000 for the year
2000,  as compared to $2.6  million for the year 1999 and $6.0  million in 1998.
The decrease from 1999 to 2000 can be  attributed to an increase in  receivables
of $3.3  million in 2000 as compared to a $1.5  million  increase in 1999.  This
change is attributable to the reinsurance receivable from the universal life and
annuity business  reinsured by Family Life with Investors-NA.  In addition,  the
change in cash  flow  provided  by  operating  activities  for the year 2000 was
adversely  affected by a decrease in the  amortization  of the present  value of
future profits and the amortization of deferred policy acquisition costs.


                                      -35-




Net cash flow used in  financing  activities  was  ($7.05)  million in 2000,  as
compared to ($6.15)  million in 1999 and ($13.10)  million in 1998. The increase
for the  year  2000 in cash  used in  financing  activities  is due to the  cash
dividend paid to the FIC stockholders.

The guaranty  commitments of FIC under the loans incurred in connection with the
acquisition  of Family Life (after  taking into account the  repayments  and new
loans which occurred in July, 1993) relate to: (i) the $22.5 million note issued
by Family Life Corporation to Investors Life Insurance  Company of North America
and (ii) the $34.5 million loaned by Investors-NA to two subsidiaries of FIC.

Management  believes that its cash, cash  equivalents and short term investments
of FIC and its subsidiaries are sufficient to meet the needs of its business and
to satisfy debt service.


                                   Investments

As of December 31, 2000, the Company's  investment assets totaled $99.1 million,
as compared to $105.95 million in 1999.

The level of short-term  investments  at the end of 2000 was $15.6  million,  as
compared  to $24.8  million  as of  December  31,  1999.  The  fixed  maturities
available for sale portion  represents $79.8 million of investment  assets as of
December  31,  2000,  as  compared  to $77.5  million  at the end of  1999.  The
amortized  cost of fixed  maturities  available for sale as of December 31, 2000
was $78.2 million  representing  a net  unrealized  gain of $1.6  million.  This
unrealized gain principally  reflects changes in interest rates from the date of
purchase of the related investments.

The decrease in long-term  interest rates during the last part of the year 2000,
which was related to general economic conditions, had a positive effect upon the
market value of the fixed maturities available for sale segment of the Company's
portfolio.  As of December  31, 2000,  the market value of the fixed  maturities
available for sale segment was $79.8  million as compared to an amortized  value
of $78.2 million, or a realized gain of $1.6 million.

The assets held by Family Life must comply with applicable  state insurance laws
and  regulations.  In  selecting  investments  for the  portfolios  of its  life
insurance  subsidiaries,  the Company's  emphasis is to obtain  targeted  profit
margins,  while  minimizing  the  exposure  to  changing  interest  rates.  This
objective  is  implemented  by  selecting   primarily   short-  to  medium-term,
investment grade fixed income securities.  In making such portfolio  selections,
the  Company  generally  does not  select  new  investments  which are  commonly
referred to as "high yield" or "non-investment grade".

The fixed  maturities  portfolio  of  Family  Life,  as of  December  31,  2000,
consisted solely of fixed maturities investments which, in the annual statements
of the companies,  as filed with state  insurance  departments,  were designated
under the National Association of Insurance Commissioners ("NAIC") rating system
as a "1" (highest quality).

                                      -36-






Prior to December,  1999,  FIC owned several  parcels of real estate in Jackson,
Mississippi, adjacent to an office building known as the Standard Life Building,
which  building was owned by  Investors-NA.  On December 29, 1999,  Investors-NA
donated  the  Standard  Life  Building to the  Jackson  Redevelopment  Authority
("JRA").  Contemporaneously  with the  donation of the Standard  Life  Building,
Investors-NA  and FIC sold all of the adjacent parcels they owned to the JRA for
a total sale price of $2,500,000.00,  which has been allocated  according to the
respective  ownership interests of Investors-NA  (approximately  59.28%) and FIC
(approximately  40.72%). The donation and sale was made pursuant to the terms of
the  Donation,  Purchase and Sale  Agreement  dated July 17, 1998.  Investors-NA
claimed an income tax  deduction  on its 2000 tax return for the donation of the
Standard Life Building of $864,231, The donation and sale transaction referenced
above  resulted in a net of tax gain (GAAP basis) of $0.992 million for ILCO and
$0.409 million for FIC (or a combined total of $1.401 million) in 1999.

Management  believes that the absence of "high-yield" or "non-investment  grade"
investments  (as  defined  above)  in  the  portfolios  of  its  life  insurance
subsidiary  enhances  the ability of the  Company to service  its debt,  provide
security  to its  policyholders  and to credit  relatively  consistent  rates of
return to its policyholders.



                          New Accounting Pronouncements


In  June,  1998,  the  FASB  issued  FAS No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities," which establishes  accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts,  (collectively  referred to as derivatives) and for
hedging  activities.  FAS No. 133, as amended by FAS No.  138,  "Accounting  for
Certain Derivative  Instruments and Certain Hedging Activities - An Amendment of
FASB  Statement No. 133", is applicable to financial  statements  for all fiscal
quarters of fiscal years  beginning  after June 15, 2000,  as amended by FAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the  Effective  Date of FAS No. 133".  As the Company does not have  significant
investments in derivative financial instruments, the adoption of FAS 133 did not
have a material  impact on the  Company's  results of  operations,  liquidity or
financial position.

                                      -37-




                                Subsequent Events

Agreement and Plan of Merger.

On January 17,  2001,  FIC  entered  into an  Agreement  and Plan of Merger (the
"Agreement")  with ILCO and ILCO  Acquisition  Company ("ILCO  Acquisition"),  a
Texas corporation and wholly-owned  subsidiary of FIC. In general, the Agreement
provides that,  following the approval of the Agreement by the  shareholders  of
ILCO and the  approval  of the  issuance  of  shares  of FIC  common  stock  and
amendment to FIC's articles of  incorporation by the shareholders of FIC and the
satisfaction  or  waiver  of the  other  conditions  to  the  merger:  (1)  ILCO
Acquisition  will merge with and into ILCO; and (2) ILCO  Acquisition will cease
to  exist  and  ILCO  will  continue  as  the  surviving  corporation  and  as a
wholly-owned subsidiary of FIC following the merger.

Upon the consummation of the merger:  (1) each share of ILCO common stock issued
and  outstanding  immediately  prior to the  merger,  other than  shares of ILCO
common  stock  held as  treasury  shares by ILCO (but  excluding  shares of ILCO
common  stock  held by any of ILCO's  subsidiaries,  whether  or not  treated as
treasury  shares  of ILCO  on a  consolidated  basis  under  generally  accepted
accounting  principles)  or shares of ILCO  common  stock  held by FIC,  will be
converted into the right to receive 1.1 shares of FIC common stock.  However, in
the event of any change in FIC common  stock  and/or ILCO common  stock prior to
the   merger,   such   as  a   stock   split,   stock   dividend,   subdivision,
reclassification, recapitalization, combination, exchange of shares or the like,
the number and class of shares of FIC common stock to be issued and delivered in
the merger in exchange for each  outstanding  share of ILCO common stock will be
adjusted so as to maintain the relative  proportionate  interests of the holders
of ILCO common stock and FIC common stock;  (2) each share of ILCO common stock,
series A  preferred  stock and series B  preferred  stock of ILCO,  in each case
which is held as treasury shares by ILCO prior to the merger  (excluding  shares
of ILCO common stock held by any of ILCO's subsidiaries,  whether or not treated
as treasury  shares of ILCO on a  consolidated  basis under  generally  accepted
accounting principles), and each share of ILCO common stock which is held by FIC
(excluding  any shares of ILCO common stock owned by any of FIC's  subsidiaries)
prior to the merger,  will be cancelled  and  retired;  (3) each share of common
stock of ILCO Acquisition issued and outstanding immediately prior to the merger
will be  converted  into one share of common  stock of ILCO and such shares will
represent all of the issued and outstanding  capital stock of ILCO following the
merger; and (4) shares of FIC common stock outstanding  immediately prior to the
merger  (including  shares of FIC common stock held by any  subsidiary of FIC or
ILCO)  will  remain  outstanding  and  will  be  unaffected  by the  merger.  No
fractional  shares of FIC common stock will be issued in the merger. A holder of
ILCO common stock who would otherwise be entitled to receive  fractional  shares
of FIC  common  stock  as a  result  of the  merger  will  receive,  in  lieu of
fractional  shares,  cash in an amount  equal to the average  closing  price per
share of FIC  common  stock for the 30  trading  days  immediately  prior to the
merger  multiplied  by the  fraction  to which the  holder  would  otherwise  be
entitled.  FIC will make  available to First Union  National  Bank,  as exchange
agent,  from  time to time  sufficient  cash  amounts  to  satisfy  payment  for
fractional  shares  and First  Union  will  distribute  such  proceeds,  without
interest, to the holders of the fractional interests.

The consummation of the merger remains subject to regulatory  approval,  as well
as to the various conditions precedent set forth in the Agreement, including the
approval  of certain  matters by the  shareholders  of FIC and ILCO.  For a more
detailed  description of the Agreement,  see the complete copy of the Agreement,
attached as an annex to the S-4 filed by FIC with the  Securities  and  Exchange
Commission on February 1, 2001, as amended by the S-4/A filed on March 13, 2001.

                                      -38-


Litigation Relating to the Merger

On the day that ILCO publicly  announced the formation of a special committee to
evaluate a  potential  merger with FIC,  two class  action  lawsuits  were filed
against  ILCO,  FIC and the officers and directors of ILCO.  The actions  allege
that a cash  consideration  in the proposed merger is unfair to the shareholders
of ILCO,  that it would prevent the ILCO  shareholders  from  realizing the true
value of ILCO,  and that FIC and the named  officers and  directors had material
conflicts of interest in approving the transaction.

In their initial pleadings,  the plaintiffs sought certification of the cases as
class actions and the named plaintiffs as class representatives, and among other
relief, requested that the merger be enjoined (or, if consummated, rescinded and
set  aside)  and that the  defendants  account  to the class  members  for their
damages.

As of March 16,  2001,  the  plaintiffs  have not taken any further  action with
respect to the litigation.  The defendants believe that the lawsuits are without
merit and intend to  vigorously  contest the  lawsuits.  Management is unable to
determine  the impact,  if any,  that the  lawsuits  will have on the results of
operations of ILCO.


NASDAQ Application

On January 24,  2001,  FIC  submitted  an  application  to have its common stock
traded on the NASDAQ  National  Market under the symbol  FNIN.  FIC has provided
Nasdaq Listing  Qualifications  with  appropriate  documentation  to support its
application and management  expects the  application  process to be completed at
the beginning of April, 2001.

Unsolicited Verbal Inquiries Concerning Possible Purchase of Post-Merger Company

On  March  8,  2001,  FIC  announced  that it has  received  unsolicited  verbal
indications of interest from a few companies that may be interested in acquiring
FIC after  completion  of the merger with ILCO.  The press release did not state
any price ranges or other material terms. In conjunction  with such  indications
of interest,  FIC has retained Philo Smith Capital  Corporation as its financial
advisor to  explore  the  possibility  of a  post-merger  sale of FIC with these
companies and to further  solicit  indications of interest from other  companies
that may have similar  interests.  No formal  indications  of interest have been
received  by FIC to date  and FIC has not  determined  to sell  the  post-merger
company.


                                      -39-





Dividend

In March,  2001, FIC announced that its board of directors  approved the payment
of an annual  cash  dividend in the amount of $0.41 per share.  The  dividend is
payable on April 12,  2001,  to record  holders as of the close of  business  on
March 19, 2001.


Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

General. FIC's principal assets are financial instruments,  which are subject to
market  risks.  Market risk is the risk of loss arising from adverse  changes in
market  rates,  principally  interest  rates on fixed  rate  investments.  For a
discussion of the  Company's  investment  portfolio  and the  management of that
portfolio to reflect the nature of the underlying  insurance  obligations of the
Company's  insurance  subsidiaries,   please  refer  to  the  sections  entitled
"Acquisition  of ILCO" and  "Investment  of Assets" in Item 1 of this report and
the  information set forth in Item 7,  "Management's  Discussion and Analysis of
Financial Condition and Operations - Investments".

The  following is a discussion of the Company's  primary  market risk  sensitive
instruments.  It should be noted that this  discussion has been developed  using
estimates  and  assumptions.  Actual  results may differ  materially  from those
described below.  Further,  the following  discussion does not take into account
actions which could be taken by management in response to the assumed changes in
market rates. In addition, the discussion does not take into account other types
of risks which may be involved in the business  operations of the Company,  such
as the reinsurance recoveries on reinsurance treaties with third party insurers.

The primary market risk to the Company's  investment  portfolio is interest rate
risk. Since the Company own approximately 48.3% of the common stock of ILCO, the
interest  rate risk of ILCO's fixed income  portfolio has an effect on the value
of  FIC's  "investment  in  affiliate".  The  Company  does  not use  derivative
financial instruments.

         Interest Rate Risk

         a.    FIC's Fixed Income Investments:

               The Company manages the interest rate risk inherent in our assets
               relative to the interest rate risk  inherent in our  liabilities.
               Generally,  we manage interest rate risk based on the application
               of a  commonly  used  model.  The model  projects  the  impact of
               interest rate changes on a range of factors,  including  duration
               and  potential  prepayment.  For  example,  assuming an immediate
               increase  of  100  basis  points  in  interest  rates,   the  net
               hypothetical  loss in fair market value  related to the financial
               instruments  segment of the Company's  balance sheet is estimated
               to be $3.1  million  at  December  31,  2000 and $9.7  million at
               December 31, 1999.  For purposes of the foregoing  estimate,  the
               following  categories of the Company's  fixed income  investments
               were taken into account:  (i) fixed  maturities,  including fixed
               maturities  available for sale, (ii)  short-term  investments and
               (iii) notes receivable from affiliates.  The market value of such
               assets was $95.4 million at December 31, 2000 and $102.4  million
               at December 31, 1999.

                                      -40-






               The fixed  income  investments  of the  Company  include  certain
               mortgage-backed  securities.  The market value of such securities
               was $31.6  million  at  December  31,  2000 and $27.3  million at
               December  31, 1999.  Assuming an immediate  increase of 100 basis
               points in interest rates, the net  hypothetical  loss in the fair
               market  value  related  to  such  mortgage-backed  securities  is
               estimated  to be $1.4  million  at  December  31,  2000  and $1.9
               million at December 31, 1999.

               Separate  account assets have not been included,  since gains and
               losses on those assets generally accrue to the policyholders.

               The Company  does not use  derivative  financial  instruments  to
               manager our exposure to fluctuations in interest rates.

         b.    FIC's Investment in Affiliate:

               The value of FIC's  investment  in  affiliate  is affected by the
               amount  of  unrealized  gains  and  losses,  net of  tax,  in the
               investment   portfolio  of  its  affiliate,   ILCO.  Assuming  an
               immediate increase of 100 basis points in interest rates, the net
               hypothetical  loss in value, net of tax, related to the Company's
               investment  in  affiliate  is  estimated  to be $ 6.2  million at
               December 31, 2000 and $6.3 million at December 31, 1999.

The  hypothetical  effect of the interest rate risk on fair values was estimated
by applying a commonly  used model.  The model  projects  the impact of interest
rate changes on a range of factors, including duration and potential prepayment.

Item 8.  Financial Statements and Supplementary Data

The following Financial  Statements of the Registrant have been filed as part of
this report:

1. Report of PricewaterhouseCoopers LLP, Independent Accountants, dated April 2,
2001.

2. Consolidated Balance Sheets, as of December 31, 2000 and December 31, 1999.

3. Consolidated Statements of Income for the years ended December 31, 2000, 1999
and 1998.

4.  Consolidated  Statements  of Changes in  Shareholders'  Equity for the years
ended December 31, 2000, 1999 and 1998.

5. Consolidated  Statements of Cash Flows for the years ended December 31, 2000,
1999 and 1998.

6. Notes to Consolidated Financial Statements.

7. Consolidated Financial Statement Schedules.

                                      -41-



Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

No independent  accountant who audited the Registrant's financial statements has
resigned or been dismissed during the two most recent fiscal years.


                                    Part III

Item 10.  Directors and Executive Officers of the Registrant

(a)  Directors of the Registrant

The names and ages of the current  directors of the Registrant,  their principal
occupations  or employment  during the past five years and other data  regarding
them are set forth below.  All of the  directors,  other than  Messrs.  M. Scott
Mitte and  Steven P.  Schmitt,  were  elected  at the 2000  annual  shareholders
meeting. Messrs. Mitte and Schmitt appointed as a directors in October, 2000, to
fill a vacancies  created by  resignations  of two directors.  The data supplied
below is based on information  provided by the  directors,  except to the extent
that such data is known to the Registrant.


                                      -42-



                                                   


Name              Age            Since             Director and Other Information

John D.           58             1991              Director of FIC since 1991.  Vice President, Investment
Barnett                                            Professionals, Inc. from 1996 to present. Vice President,
                                                   Investments of Prudential Securities from 1983 to 1996.

Joseph F.         62             1992              Director of FIC since February 29, 1992. Vice President
Crowe                                              of FIC from February 29, 1992 to January 3, 1997. Vice
                                                   President of ILCO from May 1991 to January, 1997.
                                                   Director of ILCO from May, 1991 until September, 1997.
                                                   Director and Executive Vice President of Investors-NA
                                                   and Investors-IN from June, 1991 to January, 1997.
                                                   Director and Executive Vice President of FLIC from June,
                                                   1991 to January, 1997.

Jeffrey H.        48             1995              Director of FIC since May, 1995.  Vice President of FIC
Demgen                                             since August, 1996.  Vice President and Director of ILCO
                                                   since August, 1996.  Director of FLIC since October,
                                                   1992.  Executive Vice President of FLIC since August,
                                                   1996.  Senior Vice President of FLIC from October,
                                                   1992 to August, 1996.  Executive Vice President and
                                                   Director of Investors - NA since August, 1996.  Senior
                                                   Vice President and Director of Investors - NA from
                                                   October, 1992 to June, 1995.  Executive Vice President
                                                   and Director of Investors-IN since August, 1996.  Senior
                                                   Vice President of Investors-IN from October, 1992 to
                                                   June, 1995.


                                      -43-





Name                     Age         Since         Director and Other Information

Theodore A.              61          1996          Vice President and Director of FIC since August, 1996.
Fleron                                             Vice President and Director of ILCO since May, 1991.
                                                   Assistant Secretary of ILCO since June, 1990.  Senior
                                                   Vice President, General Counsel, Assistant Secretary and
                                                   Director of Investors - NA and Investors-IN since July,
                                                   1992.  Senior Vice President, General Counsel, Director
                                                   and Assistant Secretary of FLIC since August, 1996.


James M.                 57          1976          Vice President,  Treasurer and Director of FIC since
Grace                                              1976.  Vice President and Treasurer of ILCO since
                                                   January, 1985.  Executive Vice President, Treasurer and
                                                   Director of Investors-IN since 1989.  Executive Vice
                                                   President and Treasurer of Investors-NA since 1989.
                                                   Director, Executive Vice President and Treasurer of FLIC
                                                   since 1991.

M. Scott Mitte           44          2000          Director of FIC since October, 2000.  Director of ILCO
                                                   since October, 2000.  Executive Director and Vice-
                                                   President of the Roy F. and Joann Cole Mitte Foundation
                                                   since 1999.

Roy F. Mitte             68          1976          Chairman of the Board, President and Chief Executive
                                                   Office of FIC since 1976.  Chairman of the Board,
                                                   President and Chief Executive Officer of ILCO and
                                                   Investors-IN  since 1985.  Chairman of the Board,
                                                   President and Chief Executive Officer of Investors-NA
                                                   since December, 1988.  Chairman of ILG Securities
                                                   Corporation since December 1988.  Chairman of the
                                                   Board, President and Chief Executive Officer of FLIC
                                                   since June, 1991.

Frank Parker             71          1994          Private investor.  Prior to June, 1997, President of
                                                   Gateway Tugs, Inc. and Par-Tex Marine, Inc., both of
                                                   which are located in Brownsville, Texas and were engaged
                                                   in operating and chartering harbor and intracoastal tug
                                                   boats.  Director of FIC since May, 1994.

Thomas C.                59          1996          Director of FIC since August, 1996. Director of ILCO
Richmond                                           from March, 1994 to August, 1996.  Senior Vice
                                                   President since January 1993 of Investors -NA  and
                                                   Investors-IN.


                                      -44-





Name                     Age         Since         Director and Other Information

Steven P.                54          2000          Director of FIC since October, 2000.  Director of ILCO
Schmitt                                            since 1994.  Vice President of FIC and ILCO since
                                                   October, 2000.  Executive Vice President of Family Life
                                                   Insurance Company since October, 2000.  Executive Vice
                                                   President of Investors-NA and Investors-IN since
                                                   October, 2000.  Senior Vice President of Investors-NA
                                                   and Investors-IN from April, 1992 through October, 2000
                                                   and Director and Assistant Secretary of Investors-NA and
                                                   Investors-IN since August, 1989.   Senior Vice President
                                                   of Family Life Insurance Company from April, 1992
                                                   through October, 2000 and Director of FLIC since June,
                                                   1999.

Jerome H.                64          1998          President and Professor of Chemistry, Southwest Texas
Supple                                             State University since April, 1989.  Director of FIC since
                                                   1998.






(b) Executive Officers of the Registrant

The  following  table sets forth the names and ages of the persons who served as
the Registrant's  Executive Officers during 2000 together with all positions and
offices held by them with the  Registrant.  Officers are elected to serve at the
will of the Board of Directors or until their  successors  have been elected and
qualified.

Name                       Age              Positions and Offices

Roy F. Mitte               69               Chairman of the Board,
                                            President and Chief
                                            Executive Officer

James M. Grace             57               Vice President and Treasurer

Steven P. Schmitt          54               Vice President and Secretary

Jeffrey H. Demgen          48               Vice President


                                      -45-


In May,  1991, Roy F. Mitte  suffered a stroke,  resulting in partial  paralysis
affecting  his speech and  mobility.  Mr. Mitte  continues to make the requisite
decisions in his capacity as Chief  Executive  Officer,  although his ability to
communicate and his mobility are impaired.

Steven P. Schmitt was appointed  Vice  President and Secretary of the Company in
October, 2000.

(c)  Identification of certain significant employees

Not applicable.

(d)  Family relationships

M. Scott Mitte is Roy F. Mitte's son.

(e)  Business experience

All of the  executive  officers  of the  Company  are  members  of the  Board of
Directors, and their business experience has been outlined in Item 10 (a).

(f) Involvement in Certain Legal Proceedings

None.

(g) Beneficial Ownership Reporting Compliance

Section  16(a) of the  Securities  Exchange Act of 1934  requires the  Company's
officers  and  directors,  and  persons  who own  more  than  ten  percent  of a
registered  class  of the  Company's  equity  securities,  to  file  reports  of
beneficial  ownership on Form 3 and changes in  beneficial  ownership on Forms 4
and 5 with the  Securities  and Exchange  Commission.  Officers,  directors  and
greater than ten-percent  shareholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file.

Based solely on review of the copies of such forms furnished to the Company,  or
written representations that no Form 5s were required, the Company believes that
during the period from  January 1, 2000 through  December 31, 2000,  all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten-percent beneficial owners were complied with, other than with respect to (i)
Mr.  Michael  Scott Mitte,  who filed a Form 5 in February,  2001, to report his
election as a director  on October 13,  2000;  and (ii) Steven P.  Schmitt,  who
filed a Form 5 in  February,  2001,  to report his  election  as a  director  on
October 13, 2000.




                                      -46-



Item 11.  Executive Compensation

Composition of Board and Committees

The business of FIC is managed  under the  direction of its board of  directors.
The board of directors currently consists of eleven directors,  four of whom are
independent directors.

Compensation Committee

The  compensation  committee  of FIC is chosen by the  Board of  Directors.  The
Compensation  Committee  makes  recommendations  to the Board of Directors  with
respect  to the Chief  Executive  Officer's  compensation.  The  members  of the
Compensation  Committee are John D. Barnett,  Frank Parker and Jerome H. Supple.
The Compensation Committee met once in 2000.

Compensation Committee Interlocks and Insider Participation

Roy F. Mitte  determines  the  compensation  of all  executive  officers  of the
Company,  other than the Chief Executive  Officer.  Mr. Mitte is the Chairman of
the Board,  President and Chief Executive Officer of FIC. He also determines the
compensation  of all executive  officers of FIC, other than the Chief  Executive
Officer.

Summary Compensation Table

The following table sets forth  information  concerning the  compensation of the
Company's  Chief  Executive  Officer and each of the four other persons who were
serving as  executive  officers of the  Company at the end of 2000 and  received
cash compensation exceeding $100,000 during 2000:


                                                Annual Compensation

                                                                                                          
                                                                                                        Long Term
                                                                                                         Compens-
Name and                                                                                                ation Awards/     All Other
Principal                                                                                               Stock Options     Compensa-
Position                  Year               Salary(1)         Bonus(3)               Other(2)           (Shares)           tion

Roy F. Mitte,
Chairman,                 2000             $ 503,500         $2,500,000                 -0-                  -0-             -0-
President and             1999               503,500          2,500,000                 -0-                  -0-             -0-
Chief Executive           1998               503,500          2,500,000                 -0-                  -0-             -0-
Officer

James M.                  2000               195,000             25,000                 -0-                  -0-             -0-
Grace, Vice               1999               195,000             20,000                 -0-                  -0-             -0-
President and             1998               195,000             25,000                 -0-                  -0-             -0-
Treasurer

Steven P.                 2000(4)            108,846             16,000                 -0-                  -0-             -0-
Schmitt, Vice
President and
Secretary

Jeffrey H.                2000               160,000             20,000                 -0-                  -0-             -0-
Demgen, Vice              1999               150,000             20,000                 -0-                  -0-             -0-
President                 1998               145,384             15,000                 -0-                  -0-             -0-




                                      -47-



(1) The  salaries  and bonuses set forth in the table were paid by ILCO,  except
that FIC and/or  Family  Life  authorized  payment  of a portion of Mr.  Mitte's
salary in each of 1998,  1999 and 2000. The executive  officers of FIC have also
been  executive  officers of Family Life,  the insurance  subsidiary of FIC, and
ILCO and its insurance subsidiaries. FIC and/or Family Life reimbursed ILCO (or,
in the case of Mr. Mitte,  authorized payment of) the following amounts as FIC's
or Family Life's share of the executive  officers' cash  compensation  and bonus
for 1998,1999 and 2000 (i) Mr. Mitte:  $1,111,821,  $1,111,821  and  $1,111,821,
respectively; (ii) Mr. Grace: $64,152, $62,694 and $64,152, respectively;  (iii)
Mr. Schmitt:  $39,888,  respectively;  and (iv) Mr. Demgen: $72,173, $76,500 and
$81,000, respectively.

Mr.  Mitte and FIC are parties to an  employment  agreement,  providing  for the
employment of Mr. Mitte as Chairman,  President and Chief  Executive  Officer of
the Company.  The agreement,  which was initially  effective  February 25, 1982,
provides for five-year  terms and for automatic  renewals for  successive  five-
year periods,  unless  otherwise  terminated in accordance with the terms of the
agreement.  The agreement  provides that the level of compensation will be fixed
each year by agreement,  but not less than  $120,000 per year. In addition,  the
agreement  provides that Mr. Mitte is entitled to  reimbursement  for reasonable
business   expenses  and  to   participate  in  all  fringe  benefit  plans  and
arrangements  available  generally to employees of the Company.  In March, 2001,
the Company approved an amendment to the employment  agreement,  effective as of
the date of the  closing of the  proposed  merger  between  the Company and FIC.
Under the provisions of the  amendment,  the minimum level of  compensation  was
increased to $503,500.  In addition,  the amendment provides that Mr. Mitte will
be  entitled  to receive an annual  bonus in an amount to be  determined  by the
Compensation  Committee  of the Board of  Directors.  Upon the  occurrence  of a
change in control (as defined in the amendment), the amendment provides that the
amount of the  bonus is to be fixed at the rate of $2.5  million  per year.  The
amendment  further  provides  that, in the event of the death of Mr. Mitte,  the
rate of  compensation  which was being paid to him at that time will continue to
be paid for a period of twelve months following the date of death.

(2) Does not  include  the  value of  perquisites  and other  personal  benefits
because the aggregate amount of any such compensation does not exceed the lesser
of $50,000 or 10 percent of the total amount of annual  salary and bonus for any
named individual.

(3) The data in this column represents the amount of annual bonus awarded.

(4) Steven P. Schmitt was  appointed  as an executive  officer in the year 2000,
thus only his compensation for the year 2000 is disclosed.

                                      -48-



Compensation of Directors

Directors  who are not  officers or  employees  of the Company are paid a $5,000
annual fee, and are  compensated  $1,000 for each regular or special  meeting of
the Board of Directors  which they attend in person.  In the case of  telephonic
meetings of the Board, non-employee directors who participate in such telephonic
meetings are  compensated  $500 for such meeting.  Directors who participate via
telephone in a regular or special meeting which is held by other than conference
telephone are not entitled to a fee for such a meeting.

Non-employee directors serving on committees of the Board are compensated in the
amount of $500 for each committee meeting they attend whether such participation
is in person or by telephone,  provided that the committee  meeting is held on a
day other than that on which the Board meets.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

The following  table presents  information as of March 6, 2001 as to all persons
who, to the  knowledge of the  Registrant,  were the  beneficial  owners of five
percent (5%) or more of the common stock of the Registrant.


                                                                          
                                            Amount and Nature
Name and Address of                         of Beneficial                       Percent
Beneficial Owner                            Ownership                           of Class

Roy F. and Joann Cole Mitte
Foundation
6500 River Place Blvd.
Austin, Texas  78730                        1,552,206 (1)                        30.71 %

Roy F. Mitte
6500 River Place Blvd.
Austin, Texas  78730                        1,552,206 (1)                        30.71 %

Family Life Insurance Company
6500 River Place Blvd.
Austin, Texas 78730                           272,000                             5.1 %

InterContinental Life
Corporation
6500 Rive Place Blvd.
Austin, Texas  78730                          690,161(2)                         12.01 %(3)

Investors Life Insurance
Company of North America
6500 River Place Blvd.
Austin, Texas  78730                          690,161(2)                         12.01 %(3)

Heartland Advisors, Inc.
790 North Milwaukee St.
Milwaukee, WI 53202                           471,400                             9.33 %(4)

Fidelity Management &
Research Company
82 Devonshire Street
Boston, MA 02109                              340,000                             6.73 %(5)




                                      -49-




(1)  The  Roy  F.   and   Joann   Cole   Mitte   Foundation   is  a   non-profit
     corporation/membership  organization  and its two  members are Roy F. Mitte
     and Joann Cole Mitte.  The Internal Revenue Service has determined that the
     Foundation is exempt from federal  income tax under  section  501(a) of the
     Internal Revenue Code (the "Code') as an organization  described in section
     501(c)(3) of the Code. Roy F. Mitte is also  Chairman,  President and Chief
     Executive  Officer of both FIC and ILCO.  For  purposes of this table,  Mr.
     Mitte is deemed to have  beneficial  ownership  of the shares  owned by the
     Foundation.

(2)  Of such shares, 145,500 shares are owned by Investors-NA, 44,250 shares are
     owned by Investors-IN,  and 500,411 shares are issuable upon exercise of an
     option held by Investors-NA.  Investors-NA is a direct  subsidiary of ILCO.
     Investors-IN is a direct subsidiary of Investors-NA.

(3)  Assumes that outstanding  stock options or warrants held by  non-affiliated
     persons have not been exercised and that outstanding  stock options held by
     Investors-NA have been exercised.

(4)  As reported to the Company on a amended  Schedule 13(G) filed on January 8,
     2001 by Heartland Advisors, Inc.  ("Heartland").  According to the Schedule
     13(G), the shares are held for various investment advisory accounts and the
     interest of one such account (Heartland Value Fund, a registered investment
     company) is more than 5% of the common stock of FIC.


                                      -50-


(5)  As reported to the Company on a Schedule  13(G) filed on February 14, 2000,
     by FMR  Corporation,  the parent company of Fidelity  Management & Research
     Company  ("Fidelity") and Fidelity  Management  Trust Company.  The Company
     also notes that  Fidelity  filed a Schedule  13G/A on  February  13,  2001,
     reporting  that its beneficial  ownership had increased to 340,000  shares.
     According to the  Schedule  13(G)  filings,  as amended,  Fidelity  acts as
     investment  advisor to the  Fidelity  Low-Priced  Stock Fund,  a registered
     investment company,  and the Fund is the beneficial owner of 340,000 shares
     of FIC common stock.


The following  table  contains  information as of March 6, 2001 as to the common
stock of FIC  beneficially  owned by each director and executive  officer and by
all  executive  officers  and  directors  of FIC  as a  group.  The  information
contained in the table has been obtained by FIC from each director and executive
officer,  except for the  information  known to FIC.  Except as indicated in the
notes to the  table,  each  beneficial  owner  has sole  voting  power  and sole
investment power as to the shares listed opposite his name.


                               Amount and Nature of                Percent of
Name                          Beneficial Ownership(2)                Class

John Barnett                        2,000                              *
Joseph F. Crowe                     1,500                              *
Jeffrey H. Demgen                      -0-
Theodore A. Fleron                     -0-
James M. Grace                      7,600                              *
Roy F. Mitte                    1,552,206(1)                       30.71%
Michael Scott Mitte                    -0-
Frank Parker                       12,000                              *
Thomas C. Richmond                     -0-
Steven P. Schmitt                      -0-
Jerome H. Supple                      200                              *

All Executive Officers,
and Directors as
a group (11 persons)            1,575,506                          31.16%

 *       Less than 1%.

(1)  The  Roy  F.   and   Joann   Cole   Mitte   Foundation   is  a   non-profit
     corporation/membership  organization  and its two  members are Roy F. Mitte
     and Joann Cole Mitte.  The Internal Revenue Service has determined that the
     Foundation is exempt from federal  income tax under  section  501(a) of the
     Internal Revenue Code (the 'Code") as an organization  described in section
     501(c)(3) of the Code. Roy F. Mitte is also  Chairman,  President and Chief
     Executive  Officer of both FIC and ILCO.  For  purposes of this table,  Mr.
     Mitte is assumed to have  beneficial  ownership  of the shares owned by the
     Foundation.

(2)  No  executive  officer or director  holds any options to acquire FIC common
     stock.  Messrs. Roy Mitte, Grace, Demgen and Schmitt are executive officers
     and/or directors of ILCO.

                                      -51-


Item 13.  Certain Relationships and Related Transactions

For the period January 1, 2000 to December 31, 2000, the Registrant  reports the
following  information in accordance  with the provisions of section  229.404 of
the  Regulations  of the U.S.  Securities  and exchange  Commission.  Management
believes that the  transactions  described herein were in the ordinary course of
business and on terms as favorable to the Registrant and its  subsidiaries as if
the transactions had involved unaffiliated persons or organizations.

(a)  Roy F. Mitte serves as Chairman,  President and Chief Executive  Officer of
     both FIC and ILCO.  James M. Grace serves as Vice President,  Treasurer and
     Director of both companies; Mr. Schmitt serves as Vice President, Secretary
     and  Director of both  companies;  Messrs.  Demgen and Fleron serve as Vice
     Presidents and Directors of both companies.  Mr. Roy Mitte holds beneficial
     ownership of 30.71% of the outstanding shares of the Company (see "Security
     Ownership of Certain Beneficial Owners").

(b)  As part of the financing  arrangement  for the  acquisition  of Family Life
     Insurance  Company,  Family Life Corporation  ("FLC"), a subsidiary of FIC,
     entered into a Senior Loan  agreement  under which $50 million was provided
     by a group of  banks.  The  balance  of the  financing  consisted  of a $30
     million  subordinated  note issued by FLC to Merrill Lynch Insurance Group,
     Ins.  ("Merrill  Lynch") and $14 million borrowed by another  subsidiary of
     FIC  from  an  affiliate  of  Merrill  Lynch  and  evidenced  by  a  senior
     subordinated  note in the  principal  amount  of $12  million  and a junior
     subordinated  note in the  principal  amount of $2 million  and $25 million
     lent by two insurance  company  subsidiaries of ILCO. The latter amount was
     represented  by a $22.5  million loan from  Investors-NA  to FLC and a $2.5
     million loan provided  directly to FIC by Investors-CA.  In addition to the
     interest  provided under those loans,  Investors-NA and  Investors-CA  were
     granted  by FIC  non-transferable  options  to  purchase,  in  the  amounts
     proportionate  to their  respective  loans, up to a total of 9.9 percent of
     shares of FIC's  common  stock at a price of $10.50  per share  ($2.10  per
     share as adjusted  for the  five-for-one  stock split in  November,  1996),
     equivalent  to the then current  market  price,  subject to  adjustment  to
     prevent dilution. The original provisions of the options provided for their
     expiration on June 12, 1998 if not previously exercised. In connection with
     the 1996  amendments to the  subordinated  notes, as described  below,  the
     expiration date of the options were extended to September 12, 2006.

                                      -52-


     On July 30, 1993, the subordinated  indebtedness  owed to Merrill Lynch and
     its  affiliate  was  prepaid.  The Company  paid $38 million  plus  accrued
     interest  to retire  the  indebtedness,  which had a  principal  balance of
     approximately $50 million on July 30, 1993. The primary source of the funds
     used to prepay the subordinated  debt was new  subordinated  loans totaling
     $34.5  million  that  FLC  and  another  subsidiary  of FIC  obtained  from
     Investors-NA.  The principal amount of the new subordinated debt is payable
     in four equal annual  installments  in 2000,  2001, 2002 and 2003 and bears
     interest  at an  annual  rate of 9%.  The  other  terms of the new debt are
     substantially  the same as those of the $22.5  million  subordinated  loans
     that  Investors-NA  had  previously  made to FLC and  that  continue  to be
     outstanding.

     In June, 1996, the provisions of the notes from Investors-NA to FIC, Family
     Life  Corporation  ('FLC") and Family  Life  Insurance  Investment  Company
     ('FLIIC") were modified as follows:  (a) the $22.5 million note was amended
     to  provide  for  twenty  quarterly  principal  payments,  in the amount of
     $1,125,000  each,  to commence on December  12, 1996;  the final  quarterly
     principal  payment is due on September  12, 2001;  the interest rate on the
     note  remains at 11%,  (b) the $30 million  note was amended to provide for
     forty quarterly principal payments,  in the amount of $163,540 each for the
     period  December  12,  1996 to  September  12,  2001;  beginning  with  the
     principal  payment due on December  12, 2001,  the amount of the  principal
     payment increases to $1,336,458;  the final quarterly  principal payment is
     due on September 12, 2006; the interest rate on the note remains at 9%, (c)
     the $4.5 million note was amended to provide for forty quarterly  principal
     payments, in the amount of $24,531 each for the period December 12, 1996 to
     September 12, 2001;  beginning  with the principal  payment due on December
     12, 2001, the amount of the principal  payment  increases to $200,469;  the
     final  quarterly  principal  payment  is due on  September  12,  2006;  the
     interest  rate on the note  remains  at 9%, (d) the $2.5  million  note was
     amended to provide that the  principal  balance of the note is to be repaid
     in twenty quarterly  installments of $125,000 each, commencing December 12,
     1996 with the final payment due on September 12, 2001; the rate of interest
     remains at 12% and (e) the Master PIK note, which was issued to provide for
     the  payment in kind of  interest  due under the terms of the $2.5  million
     note prior to June 12,  1996,  was  amended to provide  that the  principal
     balance  of  the  note  ($1,977,119)  is to be  paid  in  twenty  quarterly
     principal payments,  in the amount of $98,855.95 each, to commence December
     12, 1996 with the final  payment due on September  12,  2001;  the interest
     rate on the note remains at 12%.

     In December, 1998, FLIIC was dissolved. In connection with the dissolution,
     all of the assets  and  liabilities  of FLIIC  became  the  obligations  of
     FLIIC's sole  shareholder  (FIC).  Accordingly,  the obligations  under the
     provisions of the $4.5 million note described above are now the obligations
     of FIC.


                                      -53-


(c)  The data processing  needs of ILCO's and FIC's insurance  subsidiaries  are
     provided  to  ILCO's  and  FIC's  insurance  subsidiaries  by FIC  Computer
     Services, Inc. ("FIC Computer"),  a subsidiary of FIC. Under the provisions
     of the data  processing  agreement FIC Computer  provides  data  processing
     services  to  each   subsidiary   for  fees  equal  to  such   subsidiary's
     proportionate  share of FIC  Computer's  actual  costs of  providing  those
     services to all of the subsidiaries. Family Life paid $1,758,000 and ILCO's
     insurance  subsidiaries paid $2,427,000 to FIC Computer for data processing
     services  provided  during  2000.

(d)  In 1995, Family Life entered into a reinsurance agreement with Investors-NA
     pertaining  to  universal  life  insurance  written  by  Family  Life.  The
     reinsurance agreement is on a co-insurance basis and applies to all covered
     business with  effective  dates on and after January 1, 1995. The agreement
     applies to only that portion of the face amount of the policy which is less
     than  $200,000;  face  amounts of $200,000 or more are  reinsured by Family
     Life with a third party reinsurer.

(e)  In  1996,   Family  Life  entered  into  a   reinsurance   agreement   with
     Investors-NA,  pertaining to annuity  contracts written by Family Life. The
     agreement applies to contracts written on or after January 1, 1996.

(f)  On January 8, 2001, the Compensation  Committee of the Company  recommended
     that the  Company  make a donation of $375,000 to the Roy F. and Joann Cole
     Mitte Foundation (the "Foundation"). At the Company's board meeting held on
     January 17,  2001,  the Board of  Directors  approved  the  donation to the
     Foundation.  The  Foundation  is a  charitable  entity  exempt from federal
     income tax under section 501(a) of the Code as an organization described in
     section 501(c)(3) of the Code, and owns 30.71% of the outstanding shares of
     FIC's common stock.  The sole members of the  Foundation  are Roy F. Mitte,
     Chairman,  President  and Chief  Executive  Officer of FIC,  ILCO and their
     insurance subsidiaries, and his wife, Joann Cole Mitte.

                                      -54-


                                     Part IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)  The following documents have been filed as part of this report:

        1.  Financial  Statements  (See Item 8)

               ILCO Form 10-K as of  December  31,  1998,  1999 and 2000 and the
               Financial Statements contained therein are hereby incorporated by
               reference.

               The  following  consolidated  financial  statements  of Financial
               Industries Corporation and Subsidiaries are included in Item 8:

                    Report of Independent Accountants

                    Consolidated Balance Sheets, September 31, 2000 and 1999

                    Consolidated  Statements of Income, for years ended December
                    31, 2000, 1999 and 1998

                    Consolidated  Statements of Changes in Shareholders' Equity,
                    for the years ended December 31, 2000, 1999 and 1998

                    Consolidated  Statement  of Cash Flows,  for the years ended
                    December 31, 2000, 1999 and 1998

                    Notes to Consolidated Financial Statements

     2. The following  consolidated  financial  statement schedules of Financial
     Industries Corporation and Subsidiaries are included:

          Schedule  I-Summary of Investments  Other Than  Investments in Related
          Parties

          Schedule II - Condensed Financial Statements of Registrant

          Schedule IV - Reinsurance


All other  schedules for which  provision is made in the  applicable  accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not applicable, and therefore, have been omitted.

     3. Exhibits filed with this report or incorporated  herein by reference are
     as listed in the Index to Exhibits on Page Ex-1.

(b) Reports on Form 8-K

No  reports on Form 8-K were filed  during the last  quarter of the fiscal  year
ended December 31, 2000.

                                      -55-



                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) 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.

                        Financial Industries Corporation
                                  (Registrant)

By:/s/ Roy F. Mitte                                By:/s/ James M. Grace
Roy F. Mitte, Chairman of                          James M. Grace, Treasurer,
   the Board, President and                        Principal Accounting and
   Chief Executive Officer                         and Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities indicated on March 29, 2001.

/s/ Roy F. Mitte                                   /s/ James M. Grace
Roy F. Mitte, Director                             James M. Grace, Director

/s/ Jeffrey H. Demgen, Director                    /s/ Steven P. Schmitt
Jeffrey H. Demgen, Director                        Steven P. Schmitt, Directo

/s/ Joseph F. Crowe                                /s/ Thomas C. Richmond
Joseph F. Crowe, Director                          Thomas C. Richmond, Director

/s/ Theodore A. Fleron                             /s/ M. Scott Mitte
Theodore A. Fleron, Director                       M. Scott Mitte, Director

/s/ John D. Barnett
John D. Barnett, Director

/s/ Jerome H. Supple
Jerome H. Supple, Director

/s/ Frank Parker
Frank Parker, Director








                                      -56-



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                       FORM 10-K--ITEM 14 (a) (1) and (2)
                          LIST OF FINANCIAL STATEMENTS
                                TABLE OF CONTENTS


(1) The following  consolidated  financial  statements  of Financial  Industries
Corporation and Subsidiaries are included in Item 8:

         Report of Independent Accountants...............................F-2

         Consolidated Balance Sheets,
            December 31, 2000 and 1999...................................F-3

         Consolidated Statements of Income, for the
            years ended December 31, 2000, 1999 and 1998.................F-5

         Consolidated Statements of Changes in
            Shareholders' Equity for the years ended
            December 31, 2000, 1999 and 1998.............................F-7

         Consolidated Statements of Cash Flows, for
            the years ended December 2000, 1999 and 1998.................F-10

         Notes to Consolidated Financial Statements......................F-12

(2) The following  consolidated  financial  statements  of Financial  Industries
Corporation and Subsidiaries are included:

         Schedule I - Summary of Investments Other
            Than Investments in Related Parties..........................F-41

            Schedule II - Condensed Financial Statements of
         Registrant  ....................................................F-42

         Schedule IV - Reinsurance.......................................F-45


All other  schedules for which  provision is made in the  applicable  accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not applicable, and therefore, have been omitted.


                                       F-1






                        REPORT OF INDEPENDENT ACCOUNTANTS




To The Board of Directors and Shareholders of
Financial Industries Corporation:

In our opinion, the accompanying consolidated financial statements listed in the
index appearing under Item 14(a) (1) and (2) on page F-1 present fairly,  in all
material respects,  the financial position of Financial  Industries  Corporation
and its  subsidiaries  (the  "Company") at December 31, 2000 and 1999,  and the
results of their  operations and their cash flows for each of the three years in
the period ended  December 31, 2000, in conformity  with  accounting  principles
generally accepted in the United States of America. In addition, in our opinion,
the financial  statement  schedules  listed in the index appearing under Item 14
(a) (1) on page F-1 present fairly,  in all material  respects,  the information
set  forth  therein  when  read in  conjunction  with the  related  consolidated
financial  statements.   These  financial  statements  and  financial  statement
schedules are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial  statements and financial  statement
schedules  based on our audits.  We conducted our audits of these  statements in
accordance with auditing  standards  generally  accepted in the United States of
America,  which require that we plan and perform the audit to obtain  reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.




PricewaterhouseCoopers LLP
Dallas, Texas
April 2, 2001


                                       F-2



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                                         December 31,
                                                    2000               1999
                                                        (in thousands)

ASSETS
Investments other than
 investments in affiliate:

Fixed maturities available for sale at
 market value (amortized cost of $78,249
 and $78,252 at December 31, 2000 and 1999)       $ 79,786           $ 77,515

Equity securities at market (cost
 approximates $11 at December 31, 2000
 and 1999)                                               4                  4

Policy loans                                         3,699              3,595

Short-term investments                              15,624             24,839

  Total investments                                 99,113            105,953

Cash and cash equivalents                            2,733                692

Investment in affiliate                             79,105             70,013

Accrued investment income                            1,172              1,180

Agency advances and other
 receivables                                         7,604              6,885

Reinsurance receivables                             17,466             14,848

Due and deferred premiums                           12,537             12,392

Property and equipment, net                          1,318              1,355

Deferred policy acquisition costs                   56,161             52,490

Present value of future profits of
 acquired businesses                                19,440             23,109

Other assets                                         4,117              4,758

Separate account assets                                 -0-               379

  Total Assets                                    $300,766           $294,054




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

                                       F-3



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                                          December 31,
                                                    2000               1999
                                                        (in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:

Policy liabilities and contract
 holder deposit funds:

Future policy benefits                           $ 62,462           $ 59,783

Contract holder deposit funds                      43,301             44,681

Unearned premiums                                      -0-                14

Other policy claims and benefits
 payable                                            2,931              4,282
                                                  108,694            108,760

Subordinated notes payable to
 affiliate                                         35,349             41,497

Deferred federal income taxes                      24,437             23,222

Other liabilities                                   3,734              4,079

Separate account liabilities                           -0-               379

Total Liabilities                                 172,214            177,937

Commitments and Contingencies
 (See Notes 6, 8, 12, 14 and 18)

Shareholders' equity:

Common stock, $.20 par value, 10,000,000
 shares authorized; 5,845,300 shares
 issued, 5,054,661 outstanding in
 2000 and 1999                                      1,169              1,169

Additional paid-in capital                          7,225              7,225

Accumulated other comprehensive
 income (loss)                                      2,107             (2,454)

Retained earnings                                 125,426            117,552
                                                  135,927            123,492
Common treasury stock, at cost,
 790,639 shares at 2000 and 1999                   (7,375)            (7,375)

Total Shareholders' Equity                         128,552           116,117

Total Liabilities and Shareholders' Equity       $ 300,766          $294,054




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

                                       F-4



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                                                                                      


                                                                 Year Ended December 31,
                                                      2000                 1999                1998
                                                                     (in thousands)

Revenues:

Premiums                                         $   33,149           $   33,958          $   38,358

Net investment income                                 6,940                6,928               7,808

Net realized gain on
 sale of real estate                                     -0-                 629                  -0-

Earned insurance charges                              4,323                4,752               5,971

Other                                                     6                  (23)                156
                                                     44,418               46,244              52,293
Benefits and expenses:

Policyholder benefits
 and expenses                                        13,453               12,585              14,944

Interest expense on contract
 holders deposit funds                                2,211                2,189               2,374

Amortization of present
 value of future profits
 of acquired businesses                               3,669                5,185               6,143

Amortization of deferred
 policy acquisition costs                             5,329                5,158               5,174

Operating expenses                                   11,375               11,740              11,822

Interest expense                                      1,899                2,374               2,863
                                                     37,936               39,231              43,320
Income before federal income
 tax and equity in net
 earnings of affiliates                               6,482                7,013               8,973

Provision for federal income taxes:

Current                                               1,521                  335                 119

Deferred                                               (237)                 839               2,249

Income before equity in net
 earning of affiliates                                5,198                5,839               6,605

Equity in net earnings of
 affiliate, net of tax                                3,581                3,310               2,613

Net Income                                       $    8,779           $    9,149          $    9,218




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

                                       F-5





                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                      (in thousands except per share data)

                                                Years Ended December 31,
                                           2000            1999          1998
                                                     (in thousands)
Net Income Per Share (Note 15)

Basic:

Average weighted shares outstanding       5,055           5,055         5,383

Basic earnings per share                $  1.74         $  1.81       $  1.71

Diluted:

Common stock and common stock
 equivalents                              5,163           5,200         5,557

Diluted earnings per share              $  1.70         $  1.76       $  1.66




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



                                       F-6



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                 (in thousands)
                                                                                

                                               Common Stock                           Additional
                                                                                       Paid-in
                                                 Shares             Amount             Capital

Balance at December 31, 1997                      5,845          $   1,169          $   7,225
Comprehensive Income:

Net Income

Other Comprehensive Income:

Change in net unrealized gain on
 investments in fixed maturities
 available for sale, net of tax

Change in net unrealized appreciation
 of equity securities, net of tax

Total Comprehensive Income

Balance at December 31, 1998                      5,845              1,169              7,225
Comprehensive Income:

Net Income

Other Comprehensive Income:

Change in net unrealized gain on
 investments in fixed maturities
 available for sale, net of tax

Change in net unrealized depreciation
 of equity securities, net of tax

Total Comprehensive Income

Balance at December 31, 1999                      5,845              1,169              7,225
Comprehensive Income:

Net Income

Other Comprehensive Income:

Change in net unrealized loss on
 investments in fixed maturities
 available for sale, net of tax

Change in net unrealized appreciation
 of equity securities, net of tax

Total Comprehensive Income

Cash Dividends to Stockholders
 ($0.18 per share)

Balance at December 31, 2000                      5,845          $   1,169          $   7,225










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

                                       F-7



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                 (in thousands)



                                          Accumulated Other Comprehensive Income (Loss)
                                                                            


                                                          Net Unrealized
                                                          Gain (Loss) on
                                     Net Unrealized       Investments in          Total
                                      Appreciation        Fixed  Maturities      Accumulated
                                      (Depreciation)       Available for           Other
                                       of Equity             Sale              Comprehensive
                                       Securities                                  Income (Loss)

Balance at December 31, 1997             $   32           $  6,660            $    6,692
Comprehensive Income:

Net Income

Other Comprehensive Income:

Change in net unrealized
 gain on investments in
 fixed maturities available
 for sale, net of tax                                         (760)                 (760)

Change in net unrealized
 appreciation of equity
 securities, net of tax                     (34)                                     (34)

Total Comprehensive Income                  (34)              (760)                 (794)

Balance at December 31, 1998                 (2)             5,900                 5,898
Comprehensive Income:

Net Income

Other Comprehensive Income:

Change in net unrealized
 gain on investments in
 fixed maturities available
 for sale, net of tax                                       (8,354)               (8,354)

Change in net unrealized
 depreciation of equity
 securities, net of tax                       2                                        2

Total Comprehensive Income                    2             (8,354)               (8,352)

Balance at December 31, 1999                  0             (2,454)               (2,454)
Comprehensive Income:

Net Income

Other Comprehensive Income:

Change in net unrealized loss on
 investments in fixed maturities
 available for sale, net of tax                              4,561                 4,561

Change in net unrealized
 appreciation of equity securities,
 net of tax                                   0                                        0

Total Comprehensive Income                    0              4,561                 4,561

Cash Dividends to Stockholders ($0.18
    per share)

Balance at December 31, 2000             $    0           $  2,107            $    2,107


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

                                       F-8





                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                 (in thousands)

                                                                                             
                                                                                                     Total
                                                                       Retained      Treasury     Shareholders'
                                                                       Earnings        Stock         Equity

Balance at December 31, 1997                                       $     99,185    $    (422)      $ 113,849

Comprehensive Income:

Net Income                                                                9,218                        9,218

Other Comprehensive Income:

Change in net unrealized gain on
 investments in fixed maturities
 available for sale, net of tax                                                                         (760)

Change in net unrealized appreciation
 of equity securities, net of tax                                                                        (34)

Total Comprehensive Income                                                9,218           -0-          8,424

Purchase of treasury stock                                                            (6,953)         (6,953)

Balance at December 31, 1998                                            108,403       (7,375)        115,320
Comprehensive Income:

Net Income                                                                9,149                        9,149

Other Comprehensive Income:

Change in net unrealized gain on
 investments in fixed maturities
 available for sale, net of tax                                                                       (8,354)

Change in net unrealized depreciation
 of equity securities, net of tax                                                                          2

Total Comprehensive Income                                               9,149            -0-            797

Balance at December 31, 1999                                           117,552        (7,375)        116,117

Comprehensive Income:

Net Income                                                               8,779                         8,779

Other Comprehensive Income:

Change in net unrealized loss on
 investments in fixed maturities
 available for sale, net of tax                                                                        4,561

Change in net unrealized appreciation
 of equity securities, net of tax                                                                          0

Total Comprehensive Income                                               8,779            -0-         13,340

Cash Dividends to Stockholders ($0.18 per share)                          (905)                         (905)

Balance at December 31, 2000                                       $   125,426     $  (7,375)     $  128,552





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

                                       F-9




                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                       
                                                        Year Ended December 31,
                                               2000             1999            1998
                                                            (in thousands)
CASH FLOWS FROM OPERATING
ACTIVITIES

Net Income                                  $   8,779       $  9,149         $  9,218

Adjustments to reconcile net
 income to net cash provided
 by operating activities:

Amortization of present value of
 future profits of acquired business            3,669          5,185            6,143

Amortization of deferred policy
 acquisition costs                              5,329          5,158            5,174

Equity in undistributed earnings
 of  affiliate
                                              (5,760)         (5,654)          (4,965)
Changes in assets and liabilities:

Decrease (increase) in accrued
 investment income                                 8              29              (25)

Increase in agency advances and
 other receivables                            (3,337)         (1,548)          (2,577)

Increase in due premiums                        (145)           (211)          (1,095)

Increase in deferred policy
 acquisition costs                            (9,000)         (9,138)          (8,562)

Decrease in other assets                         641             634              954

(Decrease) increase in policy
 liabilities and                                 (66)         (1,047)             111

Decrease in other liabilities                   (345)           (395)            (406)

Increase (decrease) in deferred
 federal income taxes                          1,215            (762)           2,353

Other, net                                      (981)          1,172             (373)

Net cash provided by
 operating activities                       $      7        $  2,572         $  5,950






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

                                      F-10


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued

                                                                       
                                                     Year Ended December 31,
                                               2000             1999            1998
                                                         (in thousands)
CASH FLOWS FROM INVESTING
ACTIVITIES

Fixed maturities purchased                   (11,725)        (19,557)         (14,082)

Proceeds from sales and
 maturities of fixed maturities               11,664          18,511           16,880

Net decrease in short-term
 investments                                   9,215           2,750            6,886

Net increase in policy loans                    (104)           (440)            (407)

Purchase and retirement of
 property and equipment                           37             403              (34)

Net cash provided by investing
 activities                                    9,087           1,667            9,243

CASH FLOW FROM FINANCING
 ACTIVITIES

Repayment of subordinated notes
 payable                                      (6,148)         (6,148)          (6,147)

Cash dividends to stockholders                  (905)             -0-              -0-

Purchase of treasury stock.                       -0-             -0-          (6,953)

Net cash used in financing
 activities                                   (7,053)         (6,148)         (13,100)

Net increase (decrease) in cash                2,041          (1,909)           2,093

Cash and cash equivalents,
 beginning of year                               692           2,601              508

Cash and cash equivalents,
 end of year                              $    2,733        $    692         $  2,601

Supplemental Cash Flow Disclosures:


Income taxes paid                         $    1,200        $    485         $  1,184

Interest paid                             $    2,073        $  2,621         $  2,935





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

                                      F-11


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Organization

Financial Industries  Corporation (FIC or the "Company") is principally engaged,
through its subsidiaries,  in acquiring and administering existing portfolios of
individual  and annuity  products.  The Company's  insurance  subsidiary is also
engaged in the business of marketing and underwriting individual life insurance,
disability  insurance  and  annuity  products  in 49 states and the  District of
Columbia. Such products are marketed through an exclusive career agency system.

Principles of Consolidation

The  consolidated  financial  statements  include  the  accounts  of FIC and its
wholly-owned   subsidiaries   at  December  31,  2000.   The  more   significant
subsidiaries are: Family Life Corporation  (FLC),  Family Life Insurance Company
(Family  Life),  FIC  Realty  Services,  Inc.  (FIC  Realty)  and  FIC  Property
Management,  Inc.  (FIC-Property).  The Company's  approximate 48% investment in
InterContinental Life Corporation (ILCO) is presented using the equity method of
accounting.

Basis of Presentation

The  accompanying  consolidated  financial  statements  have  been  prepared  in
conformity with accounting principles generally accepted in the United States of
America which differ from statutory accounting principles required by regulatory
authorities for the Company's insurance  subsidiary.  All material  intercompany
balances  and  transactions  have  been  eliminated.  The  following  accounting
policies  describe the  accounting  principles  used in the  preparation  of the
consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results will differ from those estimates.

Investments

The Company's general investment philosophy is to hold fixed maturity securities
until maturity.  However,  fixed  maturities may be sold prior to their maturity
dates in response  to  changing  market  conditions,  duration  of  liabilities,
liquidity  factors,  interest  rate  movements  and  other  investment  factors.
Accordingly, fixed maturity investments are classified as available for sale and
are carried at market value. Unrealized gains and losses on securities available
for sale are not recognized in earnings but are reported as a separate component
of equity in other  accumulated  comprehensive  income,  net of  related  income
taxes.



                                      F-12


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

While  collateralized  mortgage  obligations (CMOs) are carried at market value,
premiums and discounts on CMOs are amortized  over stated  maturity of the CMOs,
with  consideration  given to estimates of  prepayments in the  amortization  of
those premiums and discounts.  The Company endeavors to minimize the portfolio's
exposure to interest  rate changes  inherent in  interest-sensitive  products by
selecting  and selling  investments  so that  diversity,  maturity and liquidity
factors approximate the duration of related policyholder liabilities.

Equity  securities are carried at market value.  Unrealized  gains and losses on
equity  securities,  net of deferred income taxes, if applicable,  are reflected
directly in shareholders'  equity as a component of other comprehensive  income.
Policy loans  represent  unpaid  balances  and do not exceed the cash  surrender
value of the related policies.

Short-term investments are carried at cost, which approximates market value, and
generally   consist  of  those  fixed  maturities  and  other  investments  with
maturities less than one year from the date of purchase.  Securities  pledged as
collateral  for  repurchase  agreements  are  held by the  Company's  investment
custodian  until  maturity  of  the  repurchase  agreement.  Provisions  of  the
agreement and procedures  adopted by the Company ensure that the market value of
the collateral,  including accrued interest thereon,  is sufficient in the event
of default by the counterparty.

The cost of investments sold is determined on the specific identification basis,
except for stocks, for which the first-in, first-out method is employed. When an
impairment of the value of an investment is considered other than temporary, the
decrease in value is reported in net income as a realized  investment loss and a
new cost basis is established.

Cash and Cash Equivalents

Generally,  cash  includes cash on hand and on deposit in  non-interest  bearing
accounts.  Short term investments with maturities of three months or less at the
time of purchase are reported as cash equivalents.

Sale of Real Estate

Prior to December,  1999,  FIC owned several  parcels of real estate in Jackson,
Mississippi,  adjacent  to an  office  building  which  formerly  served  as the
headquarters of Standard Life Insurance  Company (the "Standard Life Building").
The Standard Life Building was owned by Investors-NA.  This building is 68 years
old and contains  approximately  85,000 square feet (65,000 net rentable  square
feet) of office space. On December 29, 1999,  Investors-NA  donated the Standard
Life Building to the Jackson Redevelopment Authority ("JRA").  Contemporaneously
with the donation of the Standard  Life  Building,  Investors-NA  and  Financial
Industries  Corporation  ("FIC") sold all of the adjacent  parcels they owned to
the JRA for a total sale price of $2,500,000, which has been allocated according
to the respective ownership interests of Investors-NA (approximately 59.28%) and
FIC (approximately 40.72%). The donation and sale was made pursuant to the terms
of the Donation,  Purchase and Sale Agreement dated July 17, 1998.  During 2000,
Investors-NA  claimed an income tax  deduction  for the donation of the Standard
Life  Building,   which  has  an  appraised   value  at  December  15,  1999  of
approximately  $3,050,000.  The donation and sale  transaction  referenced above
resulted in a net gain (GAAP  basis) of $992,494  for ILCO and  $408,664 for FIC
(or a combined total of $1,401,158).



                                      F-13


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


Property and Equipment

Property  and  equipment  is  stated  at  cost  less  accumulated  depreciation.
Depreciation  is provided  using  straight-line  and  accelerated  methods  over
estimated useful lives of 5 to 33 years.  Maintenance and repairs are charged to
expense when incurred.

Deferred Policy Acquisition Costs

The cost of acquiring  new  business,  principally  first year  commissions  and
certain expenses of the policy issuance and underwriting departments, which vary
with and are primarily  related to the  production  of new  business,  have been
deferred to the extent  recoverable.  Acquisition costs related to mortgage term
life  insurance  business are deferred and amortized to expense using  actuarial
methods  that  include  the same  assumptions  used to  estimate  future  policy
benefits.  Acquisition costs related to universal life products are deferred and
amortized in proportion to the ratio of estimated  annual gross profits to total
estimated gross profits over the expected lives of the contracts.

Present Value of Future Profits on Acquired Businesses

The  present  value of future  profits of  acquired  businesses  (See Note 5) is
amortized over the premium  paying period of the related  policies in proportion
to the ratio of the annual premium revenue to total anticipated  premium revenue
applicable to such policies. Interest on the unamortized present value of future
profits is accreted at  approximately  8.5% per annum. The fair value of the net
assets  acquired  exceeded the purchase price and negative  goodwill  associated
with the purchase has been netted against the calculated amount of present value
of future profits.

Separate Accounts

Separate  account assets,  carried at market value,  and  liabilities  represent
policyholder funds maintained in accounts having specific investment objectives.
The net investment income,  gains and losses of these accounts,  less applicable
contract  charges,  accrue directly to the  policyholders.  The separate account
business  was fully  reinsured  to Merrill  Lynch at the date of sale through an
assumption  reinsurance  agreement which was pending regulatory approval.  As of
December 31, 2000 the remaining states have approved the assumption  reinsurance
agreement.

                                      F-14






                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


Solvency Laws Assessments

The solvency or guaranty  laws of most states in which the  Company's  insurance
subsidiary  do business may require the  Company's  insurance  subsidiary to pay
assessments (up to certain  prescribed  limits) to fund  policyholder  losses or
liabilities of insurance companies that become insolvent.  These assessments may
be deferred  or  forgiven  under most  guaranty  laws if they would  threaten an
insurer's  financial strength,  and in certain instances,  may be offset against
future premium taxes. The Company's  insurance  subsidiary  expense for guaranty
fund assessment,  from states,  which do not allow premium tax offsets,  was not
material.

Policy Liabilities and Contractholder Deposit Funds

Liabilities for future policy benefits  related to traditional life products are
accrued as premium revenue is recognized. The liabilities are computed using the
net level premium method, or an equivalent actuarial method, based upon industry
and  Company  experience  of  investment  yields,   mortality  and  withdrawals,
including  provisions for possible adverse  deviation.  The liability for future
policy benefits for traditional  life policies is graded to reserves  stipulated
by regulatory authorities over a 30-year period or the end of the premium paying
period, if less.

Contract  holder  deposit funds are  liabilities  for universal life and annuity
products.  These  liabilities  consist of deposits  received from  customers and
accumulated  at actual  credited  interest  rates on their  fund  balances  less
charges for expenses and mortality.

Other Policy Claims and Benefits Payable

The  liability  for  other  policy  claims  and  benefits   payable   represents
management's   estimate   of  ultimate   unpaid   losses  on  claims  and  other
miscellaneous  liabilities to  policyholders.  Estimated unpaid losses on claims
are  comprised of losses on claims that have been  reported but not yet paid and
claims that have been incurred but not reported.

The  liability  for other policy  claims and benefits  payable is subject to the
impact of changes in claim severity, frequency and other factors. Although there
is considerable variability inherent in such estimates, management believes that
the liability recorded is adequate.

Federal Income Taxes

The  Financial   Accounting   Standards  Board  issued  Statement  of  Financial
Accounting  Standards No. 109,  "Accounting  for Income Taxes" (FAS 109),  which
mandates the asset and  liability  method for computing  deferred  income taxes.
Under this method,  balance sheet amounts for deferred income taxes are computed
based on the tax effect of the differences  between the financial  reporting and
federal income tax basis of assets and liabilities using the tax rates which are
expected be in effect when these differences are anticipated to reverse.



                                      F-15


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


Revenue Recognition

Premiums on mortgage life products are recognized as revenue when due.  Proceeds
from  universal  life and annuity  products  are  recorded as  liabilities  when
received.  Revenues consist of net investment income and contract charges,  such
as mortality,  administration  and surrender  charges  assessed against the fund
values.

Net Income Per Share

Net income per share is  calculated  based on two  methods,  basic  earnings per
share and diluted  earnings per share.  Basic  earnings per share is computed by
dividing income available to common  shareholders by the weighted average number
of common  shares  outstanding  during the period.  Diluted  earnings  per share
reflects  the  potential  dilution  that  could  occur  if  securities  or other
contracts to issue common stock were  converted or  exercised.  Both methods are
presented on the face of the income statement.

New Accounting Pronouncements

In June 1997, the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income,"
which  establishes  standards  for the  reporting  and display of  comprehensive
income  and its  components.  Comprehensive  income  is  defined  as net  income
adjusted for changes in  stockholders'  equity  resulting from events other than
net income or  transactions  related to an  entity's  capital  instruments.  The
Company has adopted SFAS 130 for the year ended December 31, 1998.

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise and Related  Information," which establishes  standards for reporting
information  about  operating  segments.   Generally,  SFAS  131  requires  that
financial  information  be  reported  on the basis that is used  internally  for
evaluating performance. The Company adopted SFAS 131 for the year ended December
31, 1998. As described in Note 1, the Company is  principally  engaged,  through
its  subsidiaries,  in  administering  existing  portfolios of  individual  life
insurance and annuity products.  The Company's  insurance  subsidiaries are also
engaged in the business of marketing and underwriting  individual life insurance
and annuity  products in 49 states and the District of Columbia.  Such  products
are marketed through an exclusive career agency system. Management considers the
Company's  insurance  operations to constitute one reportable  segment.  Premium
revenues for  traditional  insurance  products and earned  insurance  charges on
universal  life  and  annuity   products  are  presented  in  the   accompanying
consolidated statements of income. No single customer accounts for 10 percent or
more of the Company's revenue. The Company has no foreign operations.

In February 1998,  the FASB issued SFAS No. 132,  "Employers  Disclosures  about
Pensions and Other  Postretirement  Benefits," which revises current  disclosure
requirements for employers'  pension and other retiree  benefits.  SFAS 132 does
not change the  measurement or  recognition  of pension or other  postretirement
benefit  plans.  The Company  adopted  SFAS 132 for the year ended  December 31,
1998.

                                      F-16


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

In December 1997, the Accounting  Standards Executive Committee issued Statement
of Position  ("SOP") 97-3,  "Accounting by Insurance and Other  Enterprises  for
Insurance-Related  Assessments,"  which  provides  guidance  on  accounting  for
insurance-related assessments. The Company adopted SOP 97-3 effective January 1,
1999.  Previously issued financial  statements should not be restated unless the
SOP is adopted prior to the  effective  date and during an interim  period.  The
adoption of this SOP did not have a material  impact on the Company's  financial
statements.

In  June,  1998,  the  FASB  issued  FAS No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities",  which establishes accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts,  (collectively  referred to as derivatives) and for
hedging  activities.  FAS No. 133, as amended by FAS No.  138,  "Accounting  for
Certain Derivative  Instruments and Certain Hedging Activities - An Amendment of
FASB  Statement No. 133", is applicable to financial  statements  for all fiscal
quarters of fiscal years  beginning after June 15, 2000 as amended by FAS No 137
"Accounting for Derivative  Instruments and Hedging Activities - Deferral of the
Effective  Date  of FAS No  133".  As the  Company  does  not  have  significant
investments in derivative financial instruments, the adoption of FAS 133 did not
have a material  impact on the  Company's  results of  operations,  liquidity or
financial position.

Reclassification

Certain  prior years'  amounts have been  reclassified  to conform with the 2000
presentation.




                                      F-17



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

2.       Investments

Fixed Maturities

Investments  in fixed  maturities  by category  at  December  31, 2000 and 1999,
respectively, were as follows (in thousands):
                                                                                                      


                                                                          Gross               Gross
December 31, 2000                                   Amortized            Unrealized         Unrealized           Market
                                                       Cost               Gains               Losses              Value
U.S. Treasury securities and
 obligations of U.S. government
 agencies and corporations                         $   6,378          $     576            $      21           $   6,933

States, municipalities and
 political subdivisions                                4,928                122                    0               5,050

Corporate securities                                  35,905                491                  189              36,207

Mortgage-backed securities                            31,038                584                   26              31,596

Total fixed maturities available for
 sale                                             $   78,249         $    1,773            $     236          $   79,786



                                                                          Gross               Gross
December 31, 1999                                   Amortized            Unrealized         Unrealized           Market
                                                       Cost               Gains               Losses              Value
U.S. Treasury securities and
 obligations of U.S. government
 agencies and corporations                        $   8,938          $      326            $       0          $    9,264

States, municipalities and political
 subdivisions                                         4,972                 109                    0               5,081

Corporate securities                                 36,795                  25                  944              35,876

Mortgage-backed securities                           27,547                 137                  390              27,294

Total fixed maturities available
 for sale                                        $   78,252         $       597           $    1,334         $    77,515




                                      F-18


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

The amounts of  unrealized  gains and losses  reflected in the balance  sheet in
accumulated other  comprehensive  income have been reduced by estimated deferred
tax expense  (benefit) in the amount of $538,000 and $(258,000)in 2000 and 1999,
respectively.  The  adjustment  is made to recognize  deferred  taxes on the net
unrealized gain (loss). Additional deferred tax expense (benefit) of $84,000 and
$(149,000)  in 2000 and 1999,  respectively,  have been provided with respect to
the Company's  portion of ILCO's  unrealized  appreciation  or  depreciation  in
marketable securities.

The  amortized  value and market value of fixed  maturities at December 31, 2000
are shown  below by  contractual  maturity.  Actual  maturities  may differ from
contractual  maturities  because  borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.

                                                Amortized             Market
                                                  Value               Value
                                                        (in thousands)

Due in one year                                $     6,000         $     5,977
Due after one year through five years               10,559              10,544
Due after five years through ten years              15,216              15,923
Due after ten years                                 15,436              15,746
Mortgage-backed securities                          31,038              31,596
Total fixed maturities available for sale
                                               $    78,249         $    79,786

To reduce  the  exposure  to market  rate  changes,  portfolio  investments  are
selected so that  diversity,  maturity,  and liquidity  factors  approximate the
duration of associated policyholder liabilities.

Proceeds from  maturities of investments in fixed  maturities  during 2000, 1999
and 1998 were $11,664,000, $18,511,000 and $16,880,000, respectively. There were
gains of $6,599 and losses of $0 in 2000 and gains of $4,739 and losses of $0 in
1999 and gains of $5,916 and losses of $16,437 in 1998.

The net change in  unrealized  investment  gains  (losses)  represents  the only
component of other  comprehensive  income for the years ended December 31, 2000,
1999 and 1998. The following is a summary of the change in unrealized investment
gains  (losses)  net of related  deferred  income  taxes which are  reflected in
accumulated other comprehensive income for the periods presented:

The unrealized gains and losses include the Company's  portion of its percentage
ownership  of ILCO.  The amounts  included  in the total  below are  $4,743,000,
$(9,440,000) and $(1,044,000) for 2000, 1999 and 1998, respectively.


                                      F-19


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                                                                           
Change in Unrealized Gains (Losses) on Investments      2000          1999          1998
                                                                 (in thousands)

Fixed maturities                                     $  7,017     $ (12,852)     $ (1,170)
Equity securities                                          -0-            2          (52)
                                                        7,017       (12,850)      (1,222)
Deferred federal income taxes                           2,456        (4,498)        (428)
Net change in unrealized gains
 (losses) on investments                            $   4,561     $  (8,352)     $  (794)

The following table sets forth the reclassification adjustments required for the
years ended December 31, 2000, 1999 and 1998:

Reclassification Adjustments                            2000          1999          1998
                                                                 (in thousands)

Unrealized holding gains (losses)
 on investments arising
 during the period                                  $   4,554     $  (8,357)     $  (790)

Reclassification adjustments for
 gains included in net income                               7             5           (4)

Unrealized gains (losses) on
 investments, net of reclassification
 adjustment                                         $   4,561     $  (8,352)     $ (794)

Net Investment Income

The components of net investment income are summarized as follows:

                                                                  Year ended December 31,
                                                        2000          1999          1998
                                                                  (in thousands)

Fixed maturities                                    $   5,493    $    5,221      $5,792

Other, including short-term
 investments and policy loans                           1,490         1,756       2,080
                                                        6,983         6,977       7,872
Investment expenses                                       (43)          (49)        (64)

Net investment income                               $   6,940    $    6,928      $7,808




There were no impairments  in the value of  investments  in 2000,  1999 or 1998,
which were considered other than temporary.


                                      F-20


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

3. Disclosure about Fair Value of Financial Instruments

The estimated fair values of the Company's financial instruments at December 31,
2000 are as follows:

                                           Carrying              Fair
                                            Amount              Value
                                                  (in thousands)

Financial assets:
 Fixed maturities                          $79,786              $79,786
 Policy loans                                3,699                3,699
 Short-term investments                     15,624               15,624
 Cash and cash equivalents                   2,733                2,733

Financial liabilities:
 Subordinated notes payable to
  affiliate                                 35,349               35,349

The following  methods and  assumptions  were used to estimate the fair value of
each class of financial instruments:

Fixed Maturities

Fair values are based on quoted market prices or dealer quotes.

Policy Loans

Policy loans are, generally, issued with coupon rates below market rates and are
considered  early payment of the life benefit.  As such, the carrying  amount of
these financial instruments is a reasonable estimate of their fair value.

Cash and Short-term Investments

The carrying amount of these instruments approximates market value.

Subordinated Notes Payable to Affiliate

The fair value is based on the Company's estimate of current market conditions.

                                      F-21




                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

4. Investment in InterContinental Life Corporation

FIC  carries  its  investment  in ILCO on the equity  method of  accounting.  At
December 31, 2000,  FIC's  investment in affiliate was valued at $79.1  million.
The book value of ILCO's common stock at December 31, 2000 was $19.70 per share,
which is substantially  above the market value ($9.50) of ILCO's common stock on
that same date.  The  applicable  accounting  standards  permit FIC to carry its
investment in ILCO on the equity method of accounting, without any adjustment to
reflect  the  difference  between  book value and market  value.  Under  certain
circumstances,  Accounting  Principles  Board  Opinion  18 ("APB  18") and Staff
Accounting  Bulletin  Topic 5.M ("SAB 5.M")  require an  adjustment  to earnings
where the value of an investment is deemed to have  decreased on an other than a
temporary basis.  Application of the "other than temporary" provisions of APB 18
and SAB 5.M to FIC's investment in ILCO would potentially  result in a charge to
earnings  in some  future  period.  The  amount  of such  charge  would be based
primarily upon the market price of ILCO's common stock, which ranged from $9.313
per share to $14.56 per share  during the first  quarter of 2001.  Based on that
range of market  prices,  the range of possible  impairment  charges which might
result would be from $20.22 million to $39.36 million,  net of tax. However, the
accounting standards set forth in APB 18 and SAB 5.M provide for several factors
as set forth  below that  indicate  that an  adjustment  to  earnings is neither
required nor appropriate:

     (i) FIC has the ability to recover the carrying amount of its investment in
     ILCO.  Currently,  FIC and ILCO are  parties  to an  Agreement  and Plan of
     Merger  whereby ILCO would  become a  wholly-owned  subsidiary  of FIC. FIC
     believes that it is probable that the merger will be consummated. After the
     merger, FIC will include ILCO in its consolidated financial statements. FIC
     expects to recover the cost of its investment in ILCO from the  realization
     of ILCO's net assets through consolidation.  FIC believes that there are no
     impairment  issues  related to ILCO's assets and that its  liabilities  are
     fairly stated

     (ii) FIC has the ability and intent to continue to hold its  investment  in
     ILCO, as evidenced by the length of time of its holding  (approximately  18
     years);

     (iii) ILCO has a long,  unbroken  record of  profitability  and there is an
     absence of factors which would indicate a change in that pattern,

     (iv) FIC believes  that the market has tended to  undervalue  ILCO's common
     stock, due in part to the complex ownership structure of ILCO and the large
     block of stock owned by FIC,

     (vi) the  average  initial  cost of FIC's  investment  in ILCO is $2.54 per
     share,  as compared to a market value of $9.50 per share as of December 31,
     2000 and $12.00 per share as of March 30, 2001.  During the period that FIC
     has held its investment in ILCO, there has not been a significant  decrease
     in either the market value of ILCO's common stock or ILCO's  earnings.  The
     carrying  value of FIC's  investment  in ILCO has increased as FIC recorded
     its equity interest in the earnings of ILCO; and

     (vii)  ILCO  has  not  incurred  either  a  technological   change  or  the
     discontinuance  of a business segment which could impair the  profitability
     of its operations.



                                      F-22

 

                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued




     At December 31, 2000 excess of cost over net assets acquired of $1,686,000,
     net of accumulated amortization of $1,686,000, is included in investment in
     affiliate.  At  December  31,  1999,  these  amounts  were  $1,686,000  and
     $1,644,000,  respectively.  Amortization  of this  excess is  reflected  in
     equity in net earnings of affiliate.  ILCO is primarily engaged in the sale
     and  administration  of  life  insurance  products  through  its  insurance
     subsidiaries,   Investors   Life   Insurance   Company  of  North   America
     (Investors-NA)   and   Investors   Life   Insurance   Company   of  Indiana
     (Investors-IN).  Summarized  financial  information  for ILCO is set  forth
     below:

                   Balance sheet information:       2000                1999
                                                         (in thousands)

Investments                                  $    659,982         $   678,814
Deferred policy acquisition
 costs and present value of
 future profits                                    75,419              75,429

Other assets                                      572,214             566,956
   Total Assets                              $  1,307,615         $ 1,321,199

Policy liabilities and contract
 holder deposit funds                        $    663,064         $   675,831

Other liabilities                                 480,375             493,677

Total liabilities                               1,143,439           1,169,508

Common stock, additional paid-in
 capital and retained earnings                    160,811             155,403

Accumulated other comprehensive
 income                                             3,365              (3,712)

Shareholders' equity                              164,176             151,691

Total liabilities and shareholders'
 equity                                      $  1,307,615         $ 1,321,199



                                      F-23


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                Results of Operations:        2000         1999           1998
                                                      (in thousands)

Premium income                             $ 10,873      $ 11,132      $ 10,890
Net investment income                        50,893        49,913        54,619
Gain on sale of real estate                      -0-          112            -0-
Earned insurance charges                     38,500        40,447        41,067
Benefits and expenses                        84,669        85,466        91,876
Net income                                   12,066        12,765        11,119
Basic earnings per share                   $   1.45      $   1.45      $   1.27
Diluted earnings per share                 $   1.45      $   1.45      $   1.25

Total  market  value  basis of the  Company's  investment  in ILCO  approximated
$37,360,574  and  $36,377,401 at December 31, 2000 and 1999,  respectively.  FIC
directly or indirectly owns 3,932,692 shares of ILCO's  outstanding common stock
at December 31, 2000, 1999 and 1998,  (approximately 48% at December 31, 2000) .

In January 1985, FIC acquired 26.53% of ILCO's common stock. FIC and Family Life
subsequently  acquired  additional  shares  of  ILCO's  common  stock  and as of
December  31, 2000,  FIC owned,  directly and  indirectly  through  Family Life,
approximately  48% of the  outstanding  shares of ILCO's common stock.  Prior to
October 1, 1998, FIC held options to acquire up to 1,702,155  additional  shares
of ILCO Common Stock.  As a result of the final  repayment on ILCO's Senior Loan
on September 30, 1998,  FIC's  options to acquire  shares of ILCO's Common Stock
expired.

The amount of net realized  gains  (losses)  included in net earnings of ILCO is
$(3,000), $297,000 and $642,000, for the years ended December 31, 2000, 1999 and
1998, respectively.



                                      F-24



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

5.  Acquisition of Business

In 1991, the Company acquired Family Life, a Washington domiciled life insurance
company,  from Merrill  Lynch  Insurance  Group,  Inc.  Present  value of future
profits of $87,726,000 was recorded as a result of the purchase.

An analysis of the present value of future profits follows:

                                                    2000                1999
                                                        (in thousands)

Balance at beginning of year                   $   23,109          $   28,294

Accretion of interest                               1,820               2,154

Amortization during the period                     (5,489)             (7,339)

Present value of future profits at
December 31                                     $  19,440          $   23,109

Anticipated  amortization of the present value of future profits net of interest
accretion for each of the next five years is as follows:

                                                       (in thousands)

                                                    2001        $     3,758
                                                    2002        $     3,023
                                                    2003        $     2,431
                                                    2004        $     1,955
                                                    2005        $     1,573

At purchase, the present value of future profits was calculated using a discount
rate of approximately 15%. Interest is accredited on the unamortized  portion at
approximately 8.5%.


                                      F-25



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

6.  Subordinated Notes Payable

Following is a summary of outstanding debt at December 31:
                                                    2000                 1999
                                                           (in thousands)

Subordinated senior notes payable
 to Investors-NA beginning with a
 $1,125,000 payment on December 12,
 1996 and each subsequentquarter
 through September 12, 2001.
 Interest is payable on a quarterly
 basis at 11%                                   $   3,375           $    7,875

Subordinated notes payable to
 Investors-NA beginning with a $223,856
 payment on December 12, 1996 and each
 subsequent quarter through September
 12, 2001.  Interest is payable on a
 quarterly basis at 12%                               672                1,567

Subordinated notes payable to
 Investors -NA beginning with a
 $188,071 payment on December 12,
 1996 and each subsequent quarter
 through September 12, 2001, a
 payment of $1,536,927 on December
 12, 2001 and each subsequent
 quarter through June 12,2006 with
 a final payment of $1,536,967 on
 September 12, 2006. Interest is
 payable on a quarterly basis at 9%
                                                   31,302               32,055
Total subordinated notes payable              $    35,349            $  41,497

The obligors are allowed to prepay the Investors-NA Subordinated Loans, in whole
or in part, without premium or penalty. The Investors-NA Subordinated Loans were
subordinated  to the  Senior  Loan  and now  constitute  a lien  on the  Pledged
Collateral.  Repayment of the Investors-NA Subordinated Loans is also guaranteed
by the Company.

Aggregate maturities of the Subordinated Notes Payable are as follows:

                                                  (in thousands)

                                                    2001             $   6,148
                                                    2002                 6,148
                                                    2003                 6,148
                                                    2004                 6,148
                                                    2005                 6,148
                                              Thereafter                 4,609
                                                    Total             $ 35,349



                                      F-26



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

7.  Income Taxes

The  Company  files  a   consolidated   federal   income  tax  return  with  its
subsidiaries.  Beginning for the tax year ended  December 31, 1999 the Company's
life  insurance  subsidiary  joined in the  federal  consolidated  return of the
Company.

The U.S. federal income tax provision (benefit) charged to continuing operations
was as follows:
                                             2000         1999           1998
                                                      (in thousands)

Current                                  $  1,521      $   335        $   119
Deferred                                     (237)         839          2,249
Total provision for income tax           $  1,284      $ 1,174        $ 2,368

The provision for income taxes is less than the amount of income tax  determined
by applying  the U.S.  statutory  income tax rate of 35% to pre-tax  income from
continuing operations as a result of the following differences:

                                               2000         1999         1998

                                                       (in thousands)

Income taxes at the statutory rate         $  2,269      $ 2,454      $ 3,141

Increase (decrease) in taxes resulting
 from:

 Small life insurance company
  deduction                                    (382)        (608)        (238)

 Dividends received deduction                  (477)        (526)        (586)

 Tax rate differential                          (65)         (70)         (90)

 Non-deductible compensation                     16           17           38

 Other items, net                               (77)         (93)         103

Total provision for income taxes           $  1,284      $ 1,174      $ 2,368

Provision has not been made for state and foreign  income tax expense since this
expense is  minimal.  Premium  taxes are paid to various  states  where  premium
revenue is earned.  Premium  taxes are  included in the  statement  of income as
operating expenses.






                                      F-27



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

Deferred  taxes are recorded for  temporary  differences  between the  financial
reporting  bases and the federal  income tax bases of the  Company's  assets and
liabilities.  The sources of these  differences  and the estimated tax effect of
each are as follows:

           Deferred tax liability                   2000                1999
                                                          (in thousands)

Equity in net earnings of affiliate            $   5,225            $   4,815

Excess pension benefit                               436                  436

Deferred policy acquisition costs                 15,941               14,582

Present value of future profits                    6,576                7,798

Guaranty fund assessments                             77                  219

Deferred and uncollected premium                   4,263                4,213

Unrealized (depreciation) appreciation
 on marketable securities                            622                 (406)

Other taxable temporary differences                6,198                4,927

    Total deferred tax liability                  39,338               36,584

Deferred tax asset:

Policy reserves                                   13,017               11,397

Net operating loss carry forward                   1,826                1,785

Alternative minimum tax credit                        -0-                 122

Accrued liabilities                                   58                   58
    Total deferred tax assets, net                14,901               13,362
    Net deferred tax liability                 $  24,437            $  23,222

An additional  deferred  federal  income  (asset)  liability of  $1,028,000  and
$(1,656,000)  for  2000  and  1999,  respectively,  have  been  provided  on the
unrealized appreciation  (depreciation) of marketable securities and included in
the balance of the deferred tax liability. This increase or decrease in deferred
tax  liability  has  been  recorded  as  reduction  or  increase  to the  equity
adjustment due to the net change in unrealized  appreciation or depreciation and
has not been  reflected  in the  deferred  income tax  expense,  included in net
income from operations.


                                      F-28



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

Family Life is eligible for a special  deduction allowed to small life insurance
companies  equal to 60 percent  of  tentative  life  insurance  company  taxable
income, subject to certain limitations.

Provision  for  U.S.  income  taxes  has  not  been  made  on a  portion  of the
undistributed  earnings of ILCO from the date of the Company's  investment since
the Company  expects such earnings to be remitted in the form of dividends.  The
Company has  provided for the tax on the  undistributed  earnings of ILCO net of
the dividends  received deduction expected to be allowed when such dividends are
paid,  including  $423,000 of deferred  tax  expense in the  current  year.  The
Company  expects  that  additional  deferred  taxes  would  be  payable  on  the
undistributed earnings of ILCO if the Company should sell its investment.

8.  Reinsurance

Family Life reinsures portions of certain policies it writes,  thereby providing
greater  diversification of risk and minimizing exposure on larger policies. The
Company's retention on any one individual ranges from $-0- to $200,000 depending
on the risk.

Policy  liabilities  and  contract  holder  deposit  funds are  reported  in the
consolidated  financial  statements before considering the effect of reinsurance
ceded.  The insurance  subsidiary  remains liable to the extent the  reinsurance
companies are unable to meet their obligation under the reinsurance agreements.

Under the provisions of the purchase  agreement  between the Company and Merrill
Lynch,  certain life insurance companies affiliated with Merrill Lynch agreed to
assume (on an assumption  reinsurance  basis)  certain single premium whole life
and annuity  products  written by Merrill Lynch's  insurance  division on Family
Life's paper. The transfer of these reserves, in accordance with the reinsurance
agreement, is subject to certain regulatory approvals.

The amount  remaining  under this  agreement  that had not yet been approved for
transfer to Merrill  Lynch was  $214,875  and  $116,070 at December 31, 2000 and
1999, respectively.

The amounts in the consolidated  financial  statements for reinsurance ceded are
as follows:
                                                      December 31,
                                         2000             1999         1998
                                                    (in thousands)

Future policy benefits                $ 17,170         $ 14,512       $  11,950
Unearned premiums                           51               46              28
Other policy claims and benefits
 payable                                   245              290             448
                                      $ 17,466         $ 14,848        $ 12,426


                                      F-29


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                               For the years ended
                                         2000             1999         1998
                                                  (in thousands)

Premiums                            $     839          $ 1,091        $ 1,419
Policyholder benefits
 and expenses                       $   1,515          $ 1,306        $ 1,503

Estimated  amounts  recoverable  from  reinsurers on paid claims were $7,399 and
$32,243 in 2000 and 1999,  respectively.  These  amounts were  included in other
receivables in the  consolidated  financial  statements at December 31, 2000 and
1999.

9.  Shareholders' Equity

The Company's ability to pay dividends to its shareholders is affected, in part,
by receipt of dividends from Family Life and ILCO.

Family Life is domiciled in the state of  Washington.  Under current  Washington
law  any  proposed  payment  of  dividends  or  distribution  by  the  insurance
subsidiary  which,  together  with  dividends or  distributions  paid during the
preceding twelve months,  exceeds the greater of (i) 10% of statutory surplus as
of the  preceding  December 31 or (ii)  statutory net gain from  operations,  is
called an "extraordinary  dividend" and may not be paid until either it has been
approved,  or a waiting  period  shall have passed  during which it has not been
disapproved, by the insurance commissioner.

Effective  July 25, 1993  Washington  amended its  insurance  code to retain the
"greater of"  standard but enacted  requirements  that prior  notification  of a
proposed  dividend be given to the Washington  Insurance  Commissioner  and that
dividends may be paid only from earned  surplus.  Family Life does not presently
have  earned  surplus as defined by the  regulations  adopted by the  Washington
Insurance  Commissioner and,  therefore,  is not presently permitted to pay cash
dividends.

However,  the Company  does not  directly  own its life  insurance  subsidiary's
stock,  but instead  indirectly  owns that stock  through a  downstream  holding
company,  FLC,  whose ability to pay  dividends to the Company is  significantly
limited by some of the subordinated notes referred to in Note 6 during the terms
of  those  loans.  Consolidated  net  assets  of  FLC  aggregated  approximately
$67,188,000 and $64,235,000 at December 31, 2000 and 1999, respectively.

The ability of ILCO to pay  dividends to the Company and the other  shareholders
of ILCO is affected by receipt of  dividends  from its  insurance  subsidiaries,
which are  generally  limited by law to the  greater of their net income for the
prior year or 10% of capital and surplus.

Capital and surplus of Family Life as reported to  insurance  regulators  and as
determined in  accordance  with  statutory  accounting  practices  prescribed or
permitted by the state of Washington  aggregates  approximately  $23,788,279 and
$26,874,275 at December 31, 2000 and 1999, respectively.

                                      F-30


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

Statutory  net  income  aggregated  approximately  $5,024,926,   $6,703,705  and
$10,473,492 for the years ended December 31, 2000, 1999 and 1998, respectively.

The  Company  employed  no  permitted   statutory   accounting   practices  that
individually  or in the  aggregate  materially  affected  statutory  surplus  or
risk-based capital at December 31, 2000 or 1999.

In 1998, the NAIC adopted the  Codification of Statutory  Accounting  Principles
guidance,  which will replace the current  Accounting  Practices and  Procedures
manual as the NAIC's primary guidance on statutory  accounting.  The NAIC is now
considering amendments to the Codification guidance that would also be effective
upon  implementation.   The  Codification  provides  guidance  for  areas  where
statutory accounting has been silent and changes current statutory accounting in
some areas,  e.g.  deferred income taxes are recorded.  While management has not
yet determined the impact of  Codification,  it is possible that certain changes
in statutory  accounting  principles arising from Codification would be material
to the Company's insurance subsidiary.

10. Options

In connection with the subordinated  senior notes and subordinated notes payable
to Investors-NA, Investors-NA was granted non-transferrable options to purchase,
in amounts proportionate to their respective loans, up to a total of 9.9 percent
of the common  shares of FIC. The option  price is $2.10 per share  (adjusted to
reflect the  five-for-one  stock split in 1996),  equivalent to the then current
market  price,  subject to  adjustment  to prevent the effect of  dilution.  The
options expired at the time of final  repayment of each of the respective  loans
in 1998.

11. Retirement Plans and Employee Stock Plans

Retirement Plan

Family Life has a  non-contributory  defined  benefit  pension plan which covers
employees  who have  completed  one year or more of  service.  Under  the  plan,
benefits  are payable  upon  retirement  based on earnings and years of credited
service.

     a. The Normal  Retirement  Date for all  employees  is the first day of the
     month  coinciding  with or next following the later of attainment of age 65
     or the completion of five years of service, but not later than age 70.

     b. The Normal  Retirement  Benefit is the  actuarial  equivalent  of a life
     annuity,  payable monthly,  with the first payment commencing on the Normal
     Retirement Date. The life annuity is equal to the sum of (1) plus (2):

          (1) Annual Past Service Benefit: 1.17% of the first $10,000 of Average
          Final  Earnings  plus 1 1/2% of the excess of Average  Final  Earnings
          over  $10,000,  all  multiplied  by the  participant's  Credited  Past
          Service. For these purposes,  "credited past service" is service prior
          to April 1, 1967, with respect to employees who were plan participants
          on December 31, 1975.

                                      F-31


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


          (2) Annual  Future  Service  Benefit:  1.5578% of the first $10,000 of
          Average Final Earnings plus 2% of the excess of Average Final Earnings
          over $10,000,  all  multiplied by the  participant's  Credited  Future
          Service.

     c.  Effective  April 1, 1997,  the Family Life  pension plan was amended to
     provide that the accrual rate for future  service is 1.57% of Final Average
     Earnings  multiplied by Credited Service after March 31, 1997, less .65% of
     Final Average Earnings up to Covered Compensation.  With respect to service
     prior to April 1, 1997, the accrual rate described in paragraph (b), above,
     is  applicable,   with  Average  Final  Earnings   taking  into  account  a
     participant's  earnings subsequent to April 1, 1997. Average Final Earnings
     are the highest average  Considered  Earnings  during any five  consecutive
     years  while an  active  participant.  Total  Credited  Past  Service  plus
     Credited Future Service is limited to 40 years.

The pension costs for the plan includes the following components:

                                             2000              1999       1998
                                                         (in thousands)

Service cost for benefits
 earned during the year                   $    61         $     52      $  59

Interest cost on projected
 benefit obligation                           472              500        452

Expected return on plan assets               (401)            (535)      (633)

Pension benefit                          $    132        $      17      $(122)


                                      F-32



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

The following summarizes the  status of the plan at December 31:

                                                        2000             1999
                                                            (in thousands)

Change in benefit obligation:

 Benefit obligation at beginning
  of year                                        $     6,679       $    7,690

  Service cost                                            61               52

 Interest cost                                           472              500

 Benefits paid                                          (341)          (1,581)

 (Gain)/Loss due to change
  in assumptions                                           0                0

 (Gain)/Loss due to experience                           (30)              18

 Benefit obligation at end of year               $     6,841       $    6,679

Change in plan assets:
Fair value of plan assets at
 beginning of year                               $     6,352       $    7,721

Actual return on plan assets                             383              212

Benefits paid                                          (341)           (1,581)

Fair value of plan assets at
 end of year                                     $     6,394       $    6,352

Funded Status:
Funded status at end of year                     $      (447)      $     (327)

Unrecognized actuarial net (gain) loss                 2,131            2,143

Prepaid pension expense at end of year           $     1,684       $    1,816


The significant assumptions for the plans are as follows:

The discount  rate for  projected  benefit  obligations  was 7.25% for the years
ended  December  31,  2000,  1999  and  1998.

The assumed  long-term  rate of  compensation  increases  was 5.0% for the years
ended December 31, 2000, 1999 and 1998.

The assumed long-term rate of return on plan assets was 8.0% for the years ended
December 31, 2000, 1999 and 1998.




                                      F-33

                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


During 1995,  the ILCO Employee  Stock  Ownership  Plan and the ILCO Savings and
Investment  Plan were  amended  to allow for the  addition  of Family  Life as a
participating  employer,  thus allowing  Family Life employees to participate in
the plans.

In 1997,  the ILCO  Savings  and  Investment  Plan was  amended to provide for a
matching  contribution by participating  companies.  The match,  which is in the
form  of  shares  of  ILCO  common  stock,  is  equal  to  100%  of an  eligible
participant's  elective deferral  contributions,  as defined in the Plan, not to
exceed a maximum percentage of the participant's  plan compensation.  Initially,
the maximum  percentage was 1%. Effective  January 1, 2000, the plan was amended
to increase the maximum  percentage to 2%.  Allocations  are made on a quarterly
basis to the account of  participants  who have at least 250 hours of service in
that quarter.

Effective May 1, 1998,  the 401(k) Plan was amended to provide for the merger of
the ESOP into the 401(k) Plan. In connection with the merger,  certain  features
under  the  ESOP  were  preserved  for  the  benefit  of  employees   previously
participating  in the ESOP with regard to all  benefits  accrued  under the ESOP
through the date of merger.

Stock Option Plans

In 1984, the Company's  shareholders  adopted a qualified  stock option plan for
officers and key employees.  The aggregate  amount of the common shares on which
options may be granted is limited to 200,000  shares.  The option price will not
be less than 100% of the fair market  price of the  optioned  shares on the date
the option is granted.  As of December  31,  2000,  no options had been  granted
under this plan.

12. Leases

Family Life occupies  office  facilities  under lease  agreements with unrelated
third parties which expire over the next year.  Certain  office space leases may
be renewed at the option of the Company.

Rent  expense  in  2000,  1999 and 1998 was  $687,840,  $591,947,  and  $628,979
respectively. Minimum annual rentals are as follows:

                                            (in thousands)
                                            2001     $   750
                                            2002         692
                                            2003         681
                                            2004         662
                                            2005         662
                                       Thereafter      2,980
                                           Total      $6,427




                                      F-34


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

13. Related Party Transactions

The  obligations of ILCO under the ILCO Senior Loan were  guaranteed by FIC. FIC
presently owns 3,932,692  shares of ILCO Common Stock,  constituting 48% of such
shares  outstanding.  The  current  Senior  Loan of ILCO  was  fully  repaid  on
September  30, 1998.  Accordingly  FIC's rights under the 1986 option  agreement
expired on September 30, 1998.

As part of the financing arrangement for the acquisition of Family Life, a $22.5
million loan was made by  Investors-NA  to FLC, a subsidiary  of FIC, and a $2.5
million  loan  was  made by  Investors  Life  Insurance  Company  of  California
(Investors-CA),  which was merged into Investors-NA in 1992, to FIC. In addition
to the interest  provided under those loans,  Investors-NA and Investors-CA were
granted  by  FIC  non-  transferable   options  to  purchase,   in  the  amounts
proportionate to their respective  loans, up to a total of 9.9 percent of shares
of FIC's  common  stock at a price of $10.50 per share,  equivalent  to the then
current market price, subject to adjustment to prevent dilution.  As a result of
the FIC's  five-for-one  stock split, which was effective November 12, 1996, the
option price is currently $2.10 per share. The options originally were to expire
on June  12,  1998 if not  previously  exercised.  In  connection  with the 1996
amendments to the subordinated notes, as described below, the expiration date of
the options were extended to September 12, 2006.

On July 30, 1993, the  subordinated  indebtedness  owed to Merrill Lynch and its
affiliate  was prepaid.  The Company  paid $38 million plus accrued  interest to
retire the  indebtedness,  which had a principal  balance of  approximately  $50
million on July 30,  1993.  The  primary  source of the funds used to prepay the
subordinated debt was new subordinated loans totaling $34.5 million that FLC and
Family Life Insurance  Investment Company ("FLIIC"),  another subsidiary of FIC,
obtained from Investors-NA. The principal amount of the new subordinated debt is
payable in four equal annual installments in 2000, 2001, 2002 and 2003 and bears
interest  at an  annual  rate  of 9%.  The  other  terms  of the  new  debt  are
substantially  the same as those of the $22.5  million  subordinated  loans that
Investors-NA had previously made to FLC and that continue to be outstanding.

As of June 12, 1996, the provisions of the notes from  Investors-NA  to FIC, FLC
and FLIIC were  modified as follows:  (a) the $22.5  million note was amended to
provide for twenty  quarterly  principal  payments,  in the amount of $1,125,000
each, to commence on December 12, 1996; the final quarterly principal payment is
due on September 12, 2001; the interest rate on the note remains at 11%, (b) the
$30 million note was amended to provide for forty quarterly  principal payments,
in the amount of $163,540 each for the period December 12, 1996 to September 12,
2001;  beginning with the principal payment due on December 12, 2001, the amount
of the principal payment increases to $1,336,458;  the final quarterly principal
payment is due on September  12, 2006;  the interest rate on the note remains at
9%,  (c) the $4.5  million  note was  amended  to  provide  for forty  quarterly
principal  payments,  in the amount of $24,531 each for the period  December 12,
1996 to September 12, 2001; beginning with the principal payment due on December
12, 2001, the amount of the principal payment  increases to $200,469;  the final
quarterly  principal  payment is due on September 12, 2006; the interest rate on
the note  remains at 9%, (d) the $2.5  million  note was amended to provide that
the  principal  balance  of  the  note  is  to be  repaid  in  twenty  quarterly
installments  of  $125,000  each,  commencing  December  12, 1996 with the final
payment due on September 12, 2001; the rate of interest  remains at 12%, (e) the
Master PIK note, which was issued to provide for the payment in kind of interest
due under the terms of the $2.5 million note prior to June 12, 1996, was amended
to provide that the  principal  balance of the note  $1,977,119 is to be paid in
twenty  quarterly  principal  payments,  in the amount of  $98,855.95  each,  to
commence December 12, 1996 with the final payment due on September 12, 2001; the
interest rate on the note remains at 12%.

                                      F-35


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

In December, 1998 FLIIC was dissolved.  In connection with the dissolution,  all
of the assets and  liabilities  of FLIIC became the  obligations of FLIIC's sole
shareholder,  FIC. Accordingly, the obligations under the provisions of the $4.5
million note described above are now the obligations of FIC.

Data  processing  services  are provided to ILCO's and FIC's  Austin,  Texas and
Seattle,  Washington facilities by FIC Computer Services, Inc. ("FIC Computer"),
a subsidiary of FIC. Each of FIC's and ILCO's insurance subsidiaries has entered
into a data processing agreement with FIC Computer whereby FIC Computer provides
data processing  services to each subsidiary for fees equal to such subsidiary's
proportionate  share of FIC Computer's  actual costs of providing those services
to all  of  the  subsidiaries.  Family  Life  paid  $1,757,904,  $1,916,350  and
$1,610,397 and ILCO's insurance  subsidiaries  paid  $2,426,793,  $2,730,189 and
$2,818,095 to FIC Computer for data  processing  services  provided during 2000,
1999 and 1998, respectively.

In 1995,  Family Life entered into a  reinsurance  agreement  with  Investors-NA
pertaining to universal life insurance  written by Family Life. The  reinsurance
agreement is on a  co-insurance  basis and applies to all covered  business with
effective dates on and after January 1, 1995. The agreement applies to only that
portion  of the face  amount of the  policy  which is less than  $200,000;  face
amounts of  $200,000  or more are  reinsured  by Family  Life with a third party
reinsurer.

In 1996,  Family Life entered into a reinsurance  agreement  with  Investors-NA,
pertaining to annuity contracts written by Family Life. The agreement applies to
contracts written on or after January 1, 1996.

Pursuant  to a Service  Agreement  between  Family  Life and  Investors  NA, the
Company  reimbursed  Investors  NA for certain  operating  expenses  incurred on
behalf of FLIC totaling  approximately $12 million, $13 million, and $11 million
in 2000, 1999 and 1998, respectively.

In November,  1998, FIC purchased  101,304 shares of FIC's common stock from the
Roy F. and Joann Cole Mitte  Foundation (the  "Foundation"),  a Texas non-profit
corporation which is controlled by Mr. Mitte and his wife, at a price of $18.625
per share (or a total purchase price of  $1,886,787).  At the same time,  Family
Life  purchased  272,000  shares of FIC's common stock from the  Foundation at a
price of $18.625 per share (or a total purchase price of $5,066,000).  Mr. Mitte
and his wife had previously donated the shares to the Foundation. The shares are
included in common treasury stock in the Company's financial statements at cost.




                                      F-36



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

14. Commitments and Contingencies

The Company and its subsidiaries are defendants in certain legal actions related
to the normal business  operations of the Company.  Management believes that the
resolution  of such  matters  will not have a material  impact on the  financial
statements.

15. Net Income Per Share
    (in thousands except per share data)

The following table reflects the  calculation of basic and diluted  earnings per
share:

                                                   December 31,
                                           2000          1999          1998
                                              (Amounts in thousands,
                                                except per share amounts)

Basic:

 Net income available to common
  shareholders                          $   8,779     $  9,149      $  9,218

 Average weighted common stock
  outstanding                               5,055        5,055         5,383

 Basic earnings per share               $    1.74     $   1.81      $   1.71

Diluted:

 Net income available to common
  shareholders                          $   8,779     $  9,149      $  9,218

 Average weighted common stock
  outstanding                               5,055        5,055         5,383

Common stock options                          258          277           293

 Effect of shares ILCO owns of FIC            (91)         (85)          (85)

 Repurchase of treasury stock                 (59)         (47)          (34)

 Common stock and common stock
 equivalents                                5,163        5,200         5,557

Diluted earnings per share              $    1.70     $   1.76      $   1.66






                                      F-37




                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

16. Business Concentration

The Company's  insurance  subsidiary,  Family Life provides mortgage  protection
life,  disability  and  accidental  death  insurance  to mortgage  borrowers  of
financial  institutions.  For marketing  purposes a significant  number of these
financial institutions provide Family Life with customer lists. In 2000, premium
income  from  these   products   was  derived   from   forty-nine   states  with
concentrations   of   approximately   25%  and  26%  in  California  and  Texas,
respectively. In 1999, these amounts were 25% and 25%, respectively.

17. Quarterly Financial Data (unaudited)
      (in thousands, except per share data)
                                           Three Months         Three Months
                                              Ended                Ended
                                             March 31,             June 30,
                                      2000          1999        2000       1999

Total revenues                    $ 11,288      $ 12,115     $ 11,371   $ 12,308
Net income                        $  2,214      $  2,268     $  2,205   $  1,801
Basic earnings per share          $   0.44      $   0.45     $   0.44   $   0.36
Diluted earnings per share        $   0.43      $   0.44     $   0.43   $   0.35



                                            Three Months        Three Months
                                              Ended               Ended
                                            September 30,        December 31,
                                      2000          1999        2000       1999

Total revenues                    $ 11,110      $ 11,721     $ 10,649   $ 11,169
Net income                        $  2,167      $  2,476     $  2,193   $  2,604
Basic earnings per share          $   0.43      $   0.49     $   0.43   $   0.52
Diluted earnings per share        $   0.42      $   0.48     $   0.42   $   0.50

18.  Subsequent Events

Agreement and Plan of Merger.

On January 17,  2001,  FIC  entered  into an  Agreement  and Plan of Merger (the
"Agreement")  with ILCO and ILCO  Acquisition  Company ("ILCO  Acquisition"),  a
Texas corporation and wholly-owned  subsidiary of FIC. In general, the Agreement
provides that,  following the approval of the Agreement by the  shareholders  of
ILCO and the  approval  of the  issuance  of  shares  of FIC  common  stock  and
amendment to FIC's articles of  incorporation by the shareholders of FIC and the
satisfaction  or  waiver  of the  other  conditions  to  the  merger:  (1)  ILCO
Acquisition  will merge with and into ILCO; and (2) ILCO  Acquisition will cease
to  exist  and  ILCO  will  continue  as  the  surviving  corporation  and  as a
wholly-owned subsidiary of FIC following the merger.

                                      F-38


Upon the consummation of the merger:  (1) each share of ILCO common stock issued
and  outstanding  immediately  prior to the  merger,  other than  shares of ILCO
common  stock  held as  treasury  shares by ILCO (but  excluding  shares of ILCO
common  stock  held by any of ILCO's  subsidiaries,  whether  or not  treated as
treasury  shares  of ILCO  on a  consolidated  basis  under  generally  accepted
accounting  principles)  or shares of ILCO  common  stock  held by FIC,  will be
converted into the right to receive 1.1 shares of FIC common stock.  However, in
the event of any change in FIC common  stock  and/or ILCO common  stock prior to
the   merger,   such   as  a   stock   split,   stock   dividend,   subdivision,
reclassification, recapitalization, combination, exchange of shares or the like,
the number and class of shares of FIC common stock to be issued and delivered in
the merger in exchange for each  outstanding  share of ILCO common stock will be
adjusted so as to maintain the relative  proportionate  interests of the holders
of ILCO common stock and FIC common stock;  (2) each share of ILCO common stock,
series A  preferred  stock and series B  preferred  stock of ILCO,  in each case
which is held as treasury shares by ILCO prior to the merger  (excluding  shares
of ILCO common stock held by any of ILCO's subsidiaries,  whether or not treated
as treasury  shares of ILCO on a  consolidated  basis under  generally  accepted
accounting principles), and each share of ILCO common stock which is held by FIC
(excluding  any shares of ILCO common stock owned by any of FIC's  subsidiaries)
prior to the merger,  will be cancelled  and  retired;  (3) each share of common
stock of ILCO Acquisition issued and outstanding immediately prior to the merger
will be  converted  into one share of common  stock of ILCO and such shares will
represent all of the issued and outstanding  capital stock of ILCO following the
merger; and (4) shares of FIC common stock outstanding  immediately prior to the
merger  (including  shares of FIC common stock held by any  subsidiary of FIC or
ILCO)  will  remain  outstanding  and  will  be  unaffected  by the  merger.  No
fractional  shares of FIC common stock will be issued in the merger. A holder of
ILCO common stock who would otherwise be entitled to receive  fractional  shares
of FIC  common  stock  as a  result  of the  merger  will  receive,  in  lieu of
fractional  shares,  cash in an amount  equal to the average  closing  price per
share of FIC  common  stock for the 30  trading  days  immediately  prior to the
merger  multiplied  by the  fraction  to which the  holder  would  otherwise  be
entitled.  FIC will make  available to First Union  National  Bank,  as exchange
agent,  from  time to time  sufficient  cash  amounts  to  satisfy  payment  for
fractional  shares  and First  Union  will  distribute  such  proceeds,  without
interest, to the holders of the fractional interests.

The consummation of the merger remains subject to regulatory  approval,  as well
as to the various conditions precedent set forth in the Agreement, including the
approval  of certain  matters by the  shareholders  of FIC and ILCO.  For a more
detailed  description of the Agreement,  see the complete copy of the Agreement,
attached as an annex to the S-4 filed by FIC with the  Securities  and  Exchange
Commission on February 1, 2001, as amended by the S-4/A filed on March 13, 2001.



                                      F-39


Litigation Relating to the Merger

On the day that ILCO publicly  announced the formation of a special committee to
evaluate a  potential  merger with FIC,  two class  action  lawsuits  were filed
against  ILCO,  FIC and the officers and directors of ILCO.  The actions  allege
that a cash  consideration  in the proposed merger is unfair to the shareholders
of ILCO,  that it would prevent the ILCO  shareholders  from  realizing the true
value of ILCO,  and that FIC and the named  officers and  directors had material
conflicts of interest in approving the transaction.

In their initial pleadings,  the plaintiffs sought certification of the cases as
class actions and the named plaintiffs as class representatives, and among other
relief, requested that the merger be enjoined (or, if consummated, rescinded and
set  aside)  and that the  defendants  account  to the class  members  for their
damages.

As of March 16,  2001,  the  plaintiffs  have not taken any further  action with
respect to the litigation.  The defendants believe that the lawsuits are without
merit and intend to  vigorously  contest the  lawsuits.  Management is unable to
determine  the impact,  if any,  that the  lawsuits  will have on the results of
operations of FIC.

NASDAQ Application

On January 24,  2001,  FIC  submitted  an  application  to have its common stock
traded on the NASDAQ  National  Market under the symbol  FNIN.  FIC has provided
Nasdaq Listing  Qualifications  with  appropriate  documentation  to support its
application and management  expects the  application  process to be completed at
the beginning of April, 2001.

Unsolicited Verbal Inquiries Concerning Possible Purchase of Post-Merger Company

On  March  8,  2001,  FIC  announced  that it has  received  unsolicited  verbal
indications of interest from a few companies that may be interested in acquiring
FIC after  completion  of the merger with ILCO.  The press release did not state
any price ranges or other material terms. In conjunction  with such  indications
of interest,  FIC has retained Philo Smith Capital  Corporation as its financial
advisor to  explore  the  possibility  of a  post-merger  sale of FIC with these
companies and to further  solicit  indications of interest from other  companies
that may have similar  interests.  No formal  indications  of interest have been
received  by FIC to date  and FIC has not  determined  to sell  the  post-merger
company.

Dividend

In March,  2001, the Company announced that its board of directors  approved the
payment  of an annual  cash  dividend  in the  amount of $0.41  per  share.  The
dividend  is  payable  on April 12,  2001 to record  holders  as of the close of
business on March 20, 2001.




                                      F-40


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                 SCHEDULE I - SUMMARY OF INVESTMENTS OTHER THAN
                         INVESTMENTS IN RELATED PARTIES
                                                                                       


                                                     December 31, 2000
                                                       (in thousands)

Column A                                          Column B              Column C             Column D
                                                                                           Amount Shown
                                                                                          on the Balance
Type of Investment                              Amortized Cost         Fair Value             Sheet

Fixed Maturities Available for Sale:

Bonds:

United States Government and
 government agencies and authorities          $     6,378           $   6,933          $     6,933

States, municipalities and political
 subdivisions                                       4,928               5,050                5,050

Corporate securities                               35,905              36,207               36,207

Mortgage-backed securities                         31,038              31,596               31,596

 Total fixed maturities                            78,249              79,786               79,786

Equity securities:

Common Stocks

Industrial and miscellaneous other                     11                   4                    4

 Total equity securities

Policy loans                                        3,699               3,699                3,699

Short -term investments                            15,624              15,624               15,624

 Total investments                             $   97,583           $  99,113          $    99,113




                                      F-41


                FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
           SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
                                 BALANCE SHEETS

                                                           December 31,
                                                    2000                1999
ASSETS                                                   (in thousands)

Cash and cash equivalents                         $     223      $         70

Short-term investments                                  150             1,037

Long-term bonds                                          16                16

Investments in subsidiaries*                        143,011           130,399

Property, plant and equipment, net                       69               105

Other assets                                            999               965

Accounts receivable                                     582               100

  Total assets                                   $  145,050         $ 132,692

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:

Subordinated notes payable                       $   4,755          $  5,748

Other liabilities and intercompany payables          6,677             5,761

 Total liabilities                                  11,432            11,509

Shareholders' equity

Common stock, $.20 par value, 10,000,000
 shares authorized;  5,845,300 shares
 issued, 5,054,661 shares outstanding
 in 2000 and 1999
                                                     1,169             1,169
Additional paid-in capital                           7,225             7,225

Accumulated other comprehensive income               2,107            (2,454)

Retained earnings (including $124,930 and
 $115,363 of undistributed earnings of
 subsidiaries at December 31, 2000 and 1999)        125,426           117,552
                                                    135,927           123,492
Common treasury stock, at cost, 518,639
 shares in 2000 and 1999 respectively                (2,309)           (2,309)

Total shareholders' equity                          133,618           121,183

Total liabilities and shareholders' equity       $  145,050         $ 132,692

*  $72,309  and  $65,354  are  eliminated  in  consolidation  in 2000 and  1999,
respectively.





                                      F-42



                FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
           SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT,
                              STATEMENTS OF INCOME
                               FOR THE YEARS ENDED

                                              December 31,
                                             (in thousands)
                                        2000          1999            1998

Income                            $      26     $       629      $      89

Expenses:

Operating expenses                      147             193            436

Interest expense*                       515             613            769
                                        662             806          1,205
Loss from operations                   (636)           (177)        (1,116)

Equity in undistributed
 earnings from subsidiaries           9,415           9,326         10,334

Net income                        $   8,779      $    9,149       $  9,218


*In  consolidation,  $250 is reported  as a  reduction  in equity in earnings of
unconsolidated subsidiary.

                                      F-43


                FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
           SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
                            STATEMENTS OF CASH FLOWS

                                                       FOR THE YEARS ENDED
                                                            December 31,
                                                          (in thousands)
                                              2000         1999           1998
CASH FLOWS FROM OPERATING ACTIVITIES

Net income                               $   8,779     $  9,149       $  9,218

Adjustments to reconcile net
 income to net cash used in
 operating activities:

Decrease (increase) in
 accounts receivables                        (482)           26            (49)

Increase in investment in
 subsidiaries*                             (12,612)      (7,418)       (14,837)

(Increase) decrease in
 other assets                                 (34)            3             50

Increase (decrease) in other
 liabilities and intercompany
 payables                                     916          (175)         3,111

Other                                       4,597           404            (35)

Net cash provided by (used in)
 operating activities                       1,164         1,989         (2,542)

CASH FLOWS FROM FINANCING
ACTIVITIES

Net change in short-term
 investments                                  887         (980)          1,046

Change in subordinated notes
 payable to Investors-NA                     (993)        (994)          3,384

Cash dividend to stockholders                (905)          -0-            -0-

Purchase of treasury stock                     -0-          -0-         (1,887)

 Net cash provided by (used in)
  financing activities                     (1,011)      (1,974)          2,543

 Increase in cash                             153           15               1

 Cash and cash equivalents,
  beginning of year                            70           55              54

 Cash and cash equivalents,
  end of year                            $    223     $     70       $      55

*Eliminated in consolidation


                                      F-44



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                             SCHEDULE IV-REINSURANCE
              FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 and 1998
                                 (in thousands)

                                                                                                  

                                                        Ceded to           Assumed                           Percentage
                                       Direct            Other           From Other         Net Amount        of Amount
                                       Amount          Companies          Companies                            Assumed
2000
Life Insurance
 in-force                           $  7,006,301       $  552,467        $   5,067         $  6,458,901           0.08%

Premium:

Life insurance                      $     33,499       $      448        $      51         $     33,102           0.15%

Accident-health
 insurance                                   438              391              -0-                   47           0.00%

Total                               $     33,937       $      839        $      51         $     33,149           0.15%

1999
Life Insurance in-
 force                              $  7,406,486       $  520,319        $   5,787         $  6,891,954           0.08%

Premium:

Life insurance                      $     34,378       $      573        $      48         $     33,853           0.14%

Accident-health
 insurance                                   623              518              -0-                  105           0.00%

Total                               $     35,001       $    1,091        $      48         $     33,958           0.14%

1998

Life insurance in-
 force                              $  7,755,545       $  440,270        $   6,159         $  7,321,434           0.08%

Premium:

Life insurance                      $     38,908       $      769        $      60          $    38,199           0.16%

Accident-health
 insurance                                   809              650              -0-                  159           0.00%

Total                               $     39,717       $    1,419        $      60         $     38,358           0.16%




                                      F-45





                                  EXHIBIT INDEX


 Exhibit
   No.                         Description of Exhibit

   2.1             Agreement and Plan of Merger dated as of January 17,
                    2001, by and among FIC, ILCO and Merger Sub.(1)
   3.1             Articles of Incorporation of FIC.(2)
   3.2             Certificate of Amendment to the Articles of
                    Incorporation of FIC, dated November 12, 1996.(3)
   3.3             Bylaws of FIC.(2)
   3.4             Amendment to Bylaws of FIC dated February 29, 1992.(10)
   3.5             Amendment to Bylaws of FIC dated June 16, 1992.(10)
  10.1             Stock Purchase Agreement, dated as of March 19, 1991,
                    as amended, by and among Merrill Lynch Insurance Group,
                    Inc., Family Life Insurance Company, Family Life
                    Corporation, Family Life Insurance Investment Company and
                    FIC.(4)
  10.2             Note, dated June 12, 1991, in the original principal
                    amount of $2.5 million made by FIC in favor of Investors
                    Life Insurance Company of California (Investors-CA) and
                    transferred to Investors Life Insurance Company of North
                    America (Investors-NA) in connection with the merger as of
                    December 31, 1992 of Investors-CA into Investors-NA.(4)
  10.3             Credit Agreement, dated as of June 12, 1991, among
                    Family Life Corporation, the Lenders named therein and the
                    Agent named therein.(4)
  10.4             Note, dated June 12, 1991, in the original principal
                    amount of $22.5 million made by Family Life Corporation in
                    favor of Investors Life Insurance Company of North
                    America.(4)
  10.5             Note, dated June 12, 1991, in the original principal
                    amount of $2.5 million made by FIC in favor of Investors
                    Life Insurance Company of California.(5)
  10.6             Option Agreement, dated as of June 12, 1991, among FIC,
                    Investors Life Insurance Company of North America and
                    Investors Life Insurance Company of California.(4)
  10.7             Surplus Debenture, dated as of June 12, 1991, in the
                    original principal amount of $97.5 million made by Family
                    Life Insurance Company in favor of Family Life
                    Corporation.(5)


                                      Ex-1





  10.8              Note, dated July 30, 1993, in the original principal
                     amount of $30 million made by Family Life Corporation in
                     favor of Investors Life Insurance Company of North
                     America.(5)
  10.9              Note, dated July 30, 1993, in the original principal
                     amount of $4.5 million made by Family Life Insurance
                     Investment Company in favor of Investors Life Insurance
                     Company of North America.(5)
  10.10             Amendment No. 1 to Note, dated July 30, 1993, between
                     Family Life Corporation and Investors Life Insurance
                     Company of North America.(5)
  10.11             Amendment No. 1 to Note, dated July 30, 1993, between
                     Family Life Insurance Company and Family Life
                     Corporation.(5)
  10.12             Guaranty Agreement, dated July 30, 1993, between FIC
                     and Investors Life Insurance Company of North America.(5)
  10.13             Guaranty Agreement, dated July 30, 1993, between FIC
                     and Investors Life Insurance Company of North America.(5)
  10.14             Data Processing Agreement, dated as of November 30,
                     1994, between ILCO and FIC Computer Services, Inc.(6)
  10.15             Data Processing Agreement, dated as of November 30,
                     1994, between Investors Life Insurance Company of North
                     America and FIC Computer Services, Inc.(6)
  10.16             Data Processing Agreement, dated as of November 30,
                     1994, between Family Life Insurance Company and FIC
                     Computer Services, Inc.(6)
  10.17             Amendment No. 2, dated December 12, 1996, effective
                     June 12, 1996 to the note dated June 12, 1991 in the
                     original principal amount of $22.5 million made by Family
                     Life Corporation in favor of Investors Life Insurance
                     Company of North America.(7)
  10.18             Amendment No. 1, dated December 12, 1996, effective
                     June 12, 1996 to the note dated June 12, 1991 in the
                     original principal amount of $2.5 million made by FIC in
                     favor of Investors Life Insurance Company of California.(7)


                                      Ex-2






 10.19              Amendment No. 1, dated December 12, 1996, effective
                     June 12, 1996 to the note dated June 12, 1991 in the
                     original principal amount of $2.5 million made by FIC in
                     favor of Investors Life Insurance Company of North
                     America.(7)
 10.20              Amendment No. 1, dated December 12, 1996, effective
                     June 12, 1996 to the note dated July 30, 1993 in the
                     original principal amount of $30 million made by FIC in
                     favor of Investors Life Insurance Company of North
                     America.(7)
 10.21              Amendment No. 1, dated December 12, 1996, effective
                     June 12, 1996 to the note dated July 30, 1993 in the
                     original principal amount of $4.5 million made by Family
                     Life Insurance Investment Company in favor of Investors
                     Life Insurance Company of North America.(7)
 10.22              Company of North America and Investors Life Insurance
                     Company of California.(7)
 10.23              Assignment Agreement, dated December 23, 1998, between
                    Family Life Insurance Investment Company and FIC.(8)
 21.1     EX-5      Subsidiaries of Registrant.*


















                                      Ex-3



  *  Filed herewith.


(1)  Incorporated  be reference to the Exhibits  filed with FIC's Current Report
     on Form 8-k dated January 23, 2001.
(2)  Incorporated by reference to the Exhibits filed with FIC's Annual Report on
     Form 10-K for 1985.
(3)  Incorporated by reference to the Exhibits filed with FIC's Quarterly Report
     on Form 10-Q for the quarter ended September 30, 1996.
(4)  Incorporated  by reference to the Exhibits  filed with FIC's Current Report
     on Form 8-k dated June 25, 1991.
(5)  Incorporated by reference to the Exhibits filed with FIC's Annual Report on
     Form 10-K for 1993.
(6)  Incorporated by reference to the Exhibits filed with FIC's Annual Report on
     Form 10-K for 1994.
(7)  Incorporated by reference to the Exhibits filed with FIC's Annual Report on
     Form 10-K for 1996.
(8)  Incorporated by reference to the Exhibits filed with FIC's Annual Report on
     Form 10-K for 1998.
(9)  Incorporated by reference to the Exhibits filed with FIC's Annual Report on
     Form 10-K for 1999.
(10)  Incorporated  by reference  to the Exhibits  filed with FIC's S-4 filed on
February 1, 2001.


                                      Ex-4





                                   EXHIBIT 21

                           Subsidiaries of Registrant



Family Life Corporation

Family Life Insurance Company

Financial Industries Service Corporation

Financial Industries Securities Corporation

Financial Industries Service Corporation
     of Mississippi, Inc.

Financial Industries Sales Corporation
     of Southern California, Inc.

FIC Realty Services, Inc.

FIC Property Management, Inc.

FIC Computer Services, Inc.

ILCO Acquisition Company



                                      Ex-5