10-K

                       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, 1999

[ ]      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)

701 Brazos, Suite 1400, Austin, Texas                    78701
  (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 15,  2000,  based on the closing  sales price in The Nasdaq
Small-Cap Market ($9.50 per share), was $31,230,348.

The number of shares outstanding of Registrant's  common stock on March 15, 2000
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,  1999,  1998 and  1997 are  hereby
          incorporated by reference.

                                      -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
ownership  of 100% of Family  Life  Insurance  Company  ("Family  Life") and its
approximately 44.5% interest in InterContinental Life Corporation ("ILCO").

The  Registrant   was  organized  as  an  Ohio   corporation  in  1968  and  was
reincorporated  in Texas in 1980.  Its  executive  offices  are  located  at 701
Brazos,  Suite 1400, Austin, Texas 78701. Through 1984, FIC's principal business
was the sale  and  underwriting  of life and  health  insurance,  mainly  in the
midwestern  and  southwestern  United States.  In 1985, FIC acquired  control of
ILCO.

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.  Roy
F. Mitte, Chairman, President and Chief Executive Officer of FIC, ILCO and their
insurance   subsidiaries,   is  the  owner,   directly  and   beneficially,   of
approximately 30.71% of the outstanding shares of FIC's common stock.

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 15,  2000,  FIC  owned,  directly  and  indirectly
through Family Life,  approximately  44.5% 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  Life  Insurance  Company of North America  ("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.

e.  Investors-IN.  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

                                       -4-



Company of Indiana. As used hereinafter, the phrase "Investors-IN" shall be used
to refer to the merged entities.

f.  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.

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 227 financial institutions, of
which  approximately  54 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 1999,  premium  income from these products was
derived  from all states in which  Family  Life is  licensed,  with  significant
amounts derived from Texas (25.4%), California (24.8%) and Florida (4.9%).

Family Life's primary  distribution channel is its agency force of approximately
607 career  agents (at December 31, 1999),  who are  organized  into 22 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 1999, 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  1999,
Family Life recruited 438 agents for this marketing effort.

At December 31, 1999, the number of employees  within FIC and its  subsidiaries,
together with the employees of ILCO's insurance subsidiaries,  was approximately
312.

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 701 Brazos, Suite 1400, Austin, Texas 78701.

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.

During 1999, the general  insurance  expenses of ILCO's  insurance  subsidiaries
were  $15,910,308,  as compared to $15,172,682 in 1998 and  $15,574,265 in 1997.
The level of expenses at the ILCO life  companies for the year 1999 was affected
by the expenses  incurred in connection with Year 2000 compliance.  For the year
1998,  the level of expenses  at the ILCO life  companies  was also  affected by
expenses  incurred  in  connection  with  Year 2000  compliance,  as well as the
expenses  incurred in  connection  with  ILCO's  acquisition  of  Grinnell  Life
Insurance Company. Expenses for the year 1997 were affected primarily from costs
incurred in connection with ILCO's  acquisition of State Auto Life in July, 1997
and as well as expenses related to the  modification of data processing  systems
for Year 2000  compliance.  Management is committed to  maintaining  the general
insurance  expenses  of ILCO's  insurance  subsidiaries  at a level  which  will
generate an acceptable level of profitability  while maintaining the competitive
pricing of their insurance products.

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 1999 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.


                                       -6-



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.

Direct  statutory  premiums  received from all types of universal  life products
were  $34.3  million in 1999,  as  compared  to $38.9  million in 1998 and $40.6
million in 1997.  Investors-NA received reinsurance premiums from Family Life of
$3.2 million in 1999,  pursuant to the reinsurance  agreement for universal life
products written by Family Life. In 1999, 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 (9%) and New Jersey (8%).

ILCO's  insurance  subsidiaries  receive  premium  income from health  insurance
policies.  In 1999,  premium income from all health insurance  policies was $0.8
million,  as  compared  to $1.0  million in 1998 and $0.9  million  in 1997.  As
described below, 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.  In addition to the transfer of reserves,
ILCO's life  companies  paid the reinsurer  $1,037,150  in  connection  with the
transaction,  which  amount was  accounted  for as an expense for the year ended
December 31, 1997. In 1997, the  transferred  business  generated  approximately
$791,000 in annualized premiums for ILCO's life subsidiaries.

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,  1999,  the assets held in the
separate account were $48.4 million. During 1999, the premium income realized in
connection with these variable annuity policies was $117,666, which was received
from existing contract owners.

Investors-NA  also maintains a closed variable  annuity separate  account,  with
approximately  $19.8  million of assets as of December  31,  1999.  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.

                                       -7-


Beginning in 1997,  ILCO's life company  subsidiaries  expanded their  marketing
efforts in the fixed  annuity  market.  Direct  deposits  from the sale of fixed
annuity  products were $7.6 million in 1999, as compared to $6.1 million in 1998
and $3.5 million in 1997.  Investors-NA also received  reinsurance premiums from
Family Life of $1.8 million in 1999,  pursuant to a  reinsurance  agreement  for
annuity products between Investors-NA and Family 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,  1999,  it had assets of $ 176.4
million and capital and surplus of $23 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.

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,  1999,  only 2.2% of ILCO's  total  assets were
invested  in  mortgage  loans  or real  estate.  Non-affiliated  corporate  debt
securities  that were  non-investment  grade  represented  0.1% of ILCO's  total
assets at December 31, 1999. ILCO had

                                       -8-



investments in debt securities of affiliated companies aggregating approximately
$41.5 million as of December 31, 1999.  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  $22.1  million  and  $178.9  million,   respectively,   and  mortgage-backed
pass-through  securities  of $5.4 million and $29.1  million,  respectively,  at
December 31, 1999. Mortgage-backed pass-through securities, sequential CMO's and
support bonds,  which comprised  approximately  43.9% of the book value of FIC's
mortgage-   backed   securities   and   52.0%  of  the  book   value  of  ILCO's
mortgage-backed securities at December 31, 1999, 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,
1999,  PAC and TAC  instruments  and  accretion  directed  and  scheduled  bonds
represented  approximately  56.1%  of the book  value  of FIC's  mortgage-backed
securities and approximately  48.0% of the book value of ILCO's  mortgage-backed
securities.  Sequential and support classes  represented  approximately 24.1% of
the book value of FIC's  mortgage-backed  securities and approximately  38.0% of
the book value of ILCO's  mortgage-backed  securities  at December 31, 1999.  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, 1999. 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.  Neither  FIC nor ILCO  made  additional
investments in CMOs during 1999. For the year 2000, the investment objectives of
FIC and ILCO include the making of selected investments in CMOs.

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, 1999,  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.  During 1999,  ILCO
wrote off the value of  approximately  $81,000  of  principal  and  interest  on
mortgage loans which had defaulted as to principal and interest payment for more
than 90 days.

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

                                       -9-



private  placements,  partnerships  and bank  participations.  These  categories
accounted for  approximately  0.3% of ILCO's  invested  assets and none of FIC's
invested assets at December 31, 1999.

A subsidiary of ILCO,  Investors-NA,  was the owner and developer of Bridgepoint
Square  Offices.  Following  the  completion  of the  construction,  the project
consisted of four office buildings, with a total rentable space of approximately
364,000 square feet, and two parking garages. Investors-NA purchased the 20 acre
tract of land for this  complex  in  January,  1995.  At that  time,  the  tract
included one  completed and fully leased office  building,  an adjacent  parking
garage,  and sites for three more office  buildings and another  parking garage.
Investors-NA  completed construction of the three remaining office buildings and
parking garage in 1997. See Item 2. Properties.

In May,  1996,  Family Life  purchased a 7.1 acre tract adjacent to the original
Bridgepoint  Square tract. This second tract contained one building site and one
garage site. In January,  1997,  Family Life began  construction on a four-story
office building,  with rentable space of  approximately  76,793 square feet, and
the parking garage,  with 350 parking spaces.  In May, 1997, the entire rentable
space in the building was leased to a major tenant in the  technology  business.
Construction  of the parking  garage and the  building  shell was  completed  in
October, 1997.

In November,  1997,  Investors-NA  and Family Life entered into a sale agreement
with an independent  third party for the sale of their  respective  interests in
Bridgepoint  Square Offices.  The transaction,  which closed on December 5,1997,
was for an aggregate  price of $78 million.  The sale  resulted in a net pre-tax
profit to Investors-NA of approximately $14.0 million,  and a net pre-tax profit
to Family Life of approximately $4.5 million. See Item 2. Properties.

In October,  1998,  Investors-NA purchased 47.995 acres of land in Austin, Texas
for the  development of its River Place Pointe  project.  The purchase price for
the land 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.  Development of the initial phase of the project  commenced during
the first quarter of 1999. When  completed,  the first phase will consist of two
office  buildings,  a  parking  garage  and the  infrastructure  for the  entire
project.  FIC and ILCO plan to move their  corporate  offices  to  approximately
70,182 square feet of office space in one of the two buildings  currently  under
construction.  The move is  planned to take  place  during the third  quarter of
2000. Investors-NA plans to commence development of the additional stages of the
project following completion and leasing of the first phase.

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




                                      -10-


                               Agency Operations

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

A.       Investors Life Distribution System

The Investors Life Distribution  System sells a wide range of life insurance and
annuity  products  through an  independent,  non-exclusive  general  agent sales
distribution  system.  The products sold are issued by  subsidiary  companies of
ILCO.

All  marketing  and sales for the Company 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 of
general agents and managing general agents for individual insurance sales in the
Investors Life Distribution System.

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. Since such regulations  have not been finalized,  Family Life is not
in a position to determine  whether the final regulations will have an impact on
the  ability  of  financial   institutions  to  supply  Family  Life  with  lead
information.

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

                                      -11-



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  1999,  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 offer 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.

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 22 Regional Vice Presidents. Currently, the Family
Life distribution  system consists of 110 District Sales Managers and 497 active
career agents.

Data Processing

The data  processing  needs of  FIC's  and  ILCO's  insurance  subsidiaries  are
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 advance of the millennium  date change,  the Company  recognized
that the  software  programs  used in  connection  with these  systems  could be
affected by what has been referred to as the "Y2K date problem".  This refers to
the limitations of the programming code in certain existing software programs to
recognize date sensitive information on and after January 1, 2000.

Beginning in 1997, the Company began an evaluation of its  centralized  computer
systems and developed a plan to reach Y2K compliance (the "Y2K Plan"). A central
feature of the Y2K Plan was to convert certain of the  centralized  systems to a
common system which was already in compliance with Y2K requirements. The Company
completed  this system  conversion  during  1999.  The  converted  systems  were
extensively  tested  during the  fourth  quarter of 1999.  The  Company  did not
experience any material disruptions in its data processing as a result of either
the  January  1,  2000  date  change  or the  occurrence  of a leap year date in
February, 2000.

The Y2K Plan called for an upgrade of the Family Life's  administrative  systems
by  changing  individual  lines of  computer  code in order  to  modify  current
operating  software  such that it became Y2K  compliant.  This process  included
approximately 29 sub-systems which provide data input to

                                      -12-



the main  systems.  The  administrative  systems  which were not  modified  were
converted onto the Company's CK/4 System,  a system designed to be Y2K compliant
according to the representations of the vendor.

The systems which  administer a substantial  number of Family Life policies were
modified   rather  than   converted.   The   modification   of  the  PMS  system
(administering  approximately 100,880 policies for Family Life) was completed in
March, 1998. The conversion of the Cypros AP system (administering approximately
22,210  active  policies  for Family  Life) was  completed in October of 1999. A
small number of Family Life  policies  are  administered  by systems  which also
administer  policies for ILCO and its subsidiaries.  With regard to ILCO and its
subsidiaries,   the  ALIS  system  (administering  approximately  42,000  active
policies for  Investors-NA  at the time of conversion)  was converted to CK/4 in
January  of  1998.  The   conversion  of  the  Life  70  system   (administering
approximately  15,300 active policies for  Investors-IN) was completed in May of
1999. The  modification  of the Lifecomm-B  system which is responsible  for the
administration  of  approximately  16,900 active  policies  assumed after ILCO's
acquisition  of State  Auto  Life  was also  completed.  The  conversion  of the
Lifecomm-A system,  which administers  approximately  57,140 active policies for
Investors-NA  and 2,000  active  policies  for Family  Life,  was  completed  in
November, 1999.

The cost of  implementing  and  completing the Y2K Plan resulted in an after-tax
expense of  approximately  $825,000 for the three-year  (1997 - 1999) conversion
period.

The Company  also faced the risk that one or more of its  external  suppliers of
goods or  services  ("third  party  providers")  would not be in a  position  to
properly  interact  with the  Company due to the  inability  of such third party
provider to resolve its own Y2K issues.  The Company  completed  an inventory of
its third party provider relationships.  In order to assess the Y2K readiness of
such third party  providers,  the  Company  developed  and  forwarded a detailed
questionnaire to such providers.  The Company received  responses and assurances
of Y2K readiness from all of its mission critical external suppliers, as well as
many of its non-mission critical suppliers.

With respect to non-centralized  systems (i.e., desktop computers),  the Company
obtained updated software releases and new hardware designed to be Y2K compliant
according to the representations of the vendors.  The Company's effort needed to
correct for Y2K problems on such systems was less time intensive than the effort
needed to achieve  compliance for its centralized  systems.  The installation of
such new PC hardware and software was commenced in early 1999 and was completed
in mid-November, 1999.

As part of its Y2K Plan the Company  developed a  contingency  plan in the event
that a major  administrative  system  failed to  operate  properly  due to a Y2K
problem.  Under the contingency  plan, FIC Computer  Services  assigned  certain
personnel to be members of an emergency  response team to resolve Y2K operations
problems.   Additionally,  the  plan  provided  for  insurance  policies  to  be
administered  manually if the necessary  systems  conversions were not completed
prior to January 1, 2000, or subsequent Y2K operations  problems should persist.
Since the  implementation  of the Y2K Plan was  successful,  the Company did not
need to invoke these contingency plans.


                                      -13-



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 $60,000 to $100,000 of risk on the life
of any individual, depending on the type of coverage being written. Investors-NA
generally retains the first $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.

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
connection with the transaction, the total amount of net reserves transferred by
the FLIC was  $852,688.  In addition to the transfer of reserves,  FLIC paid the
reinsurer  $100,000  in  connection  with  the  transaction,  which  amount  was
accounted for as an expense for the year ended December 31, 1997.

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

                                      -14-



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.


                                      -15-



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."


Family Life Senior and 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

                                      -16-



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 remains 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%.

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

                                      -17-



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, 1999 the outstanding  principal balance of the Investors Life
Subordinated Loans,  including the loans made by Investors-NA in 1993 was $41.50
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.

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%.

                                      -18-



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, 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.

ILCO's Senior Loan

ILCO's Senior Loan was fully repaid as of September 30, 1998.  During the period
that the ILCO Senior Loan was outstanding,  FIC guaranteed obligations under the
loan  documents.  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  7.68%
during 1997 and 7.63% during 1998.

                                      -19-



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.  As of
December 31,  1995,  the  outstanding  principal  balance of ILCO's  Senior Loan
obligations was $59.4 million.  In January,  1996, ILCO made a scheduled payment
of $4.5 million under its Senior Loan. In March,  1996,  ILCO made the scheduled
payments  for April 1st and July 1st,  totaling $9  million.  At that same time,
ILCO made a payment of $941,000,  an  additional  payment under the terms of the
loan applied to the principal  balance.  On April 1, 1996, an optional principal
payment in the amount of $15 million was made,  which  resulted in advancing the
scheduled  payoff date of the Senior Loan to April 1, 1998. In July,  1996, ILCO
made the  principal  payment for October  1st ($4.5  million),  plus an optional
principal  payment of $0.5 million.  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. ILCO's insurance subsidiaries and Family Life are subject to regulation
and  supervision  by the states in which they are licensed to do business.  Such
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 Family Life and ILCO'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 FIC's
and ILCO's insurance  subsidiaries require that such subsidiaries be examined at
specified  intervals.  Family  Life is  domiciled  in the  State of  Washington.
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.

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, Family Life and ILCO's insurance  subsidiaries consider AIDS information in
underwriting  coverages 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.

                                      -20-



Privacy Legislation.  In November 12, 1999, the Financial Services Modernization
Act (the  "Act") was  signed  into law,  to take  effect on March 12,  2000.  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 such  records and to protect  against  unauthorized  access to or use of such
records or information  which could result in substantial  harm or inconvenience
to any customer. In addition,  the Act introduces 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.  The
restrictions include a notice requirement,  an opt out provision and limitations
on the  permissible  recipients of nonpublic  information and account numbers of
customers.  The notice requirements call for financial  institutions to maintain
the  confidentiality  all nonpublic  personal customer  information.  However, a
financial institution may disseminate certain types of information pertaining to
a customer 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 information, the Act restricts the disclosure of
information that is non-public in nature.  The Act does not preclude the release
of information which can be obtained from public sources, such as the internet.

Risk-Based  Capital  Requirements.  Effective  for the 1993 calendar  year,  the
National Association of Insurance  Commissioners ("NAIC") has adopted 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 states  will use the RBC formula 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.  In
addition,  the  formula  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  consists 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.

                                      -21-




Calculations  using the NAIC formula and the statutory  financial  statements of
Family Life and ILCO's  insurance  subsidiaries as of December 31, 1999 indicate
that  the  Total  Adjusted  Capital  of  each  of  FIC's  and  ILCO's  insurance
subsidiaries is above 630% of its respective Authorized Control Level RBC.

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,  1999,  Family  Life and ILCO's  insurance  subsidiaries  received
credits on their guaranty fund assessment  returns, in the amount of $45,603 and
$13,478,  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.

                                      -22-



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 1997,  1998 and
1999 totaling  $11,903,287,  $11,564,978 and $10,754,978,  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 Family Life will have any  difficulty  in making  principal and
interest  payments on the surplus  debenture in the amounts  necessary to enable
FLC to service its indebtedness for the foreseeable future.

Valuation  Reserves.  Commencing  in 1992,  the Mandatory  Securities  Valuation
Reserve ("MSVR") required by the NAIC for life insurance  companies was replaced
by a  mandatory  Asset  Valuation  Reserve  ("AVR")  which is  expanded to cover
mortgage loans, real estate and other investments.  During 1997, a change in the
NAIC's AVR  procedures  resulted  in a one-time  reduction  in the amount of the
reserves  held by Family Life,  with a  corresponding  one-time  increase in the
amount  of  surplus,  in  the  amount  of  $320,000.  A new  mandatory  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,  is also  effective for 1992.  Previously,
realized  capital gains  attributable  to interest rate changes were credited to
the  MSVR  and  had  the  effect  of  reducing   Family  Life's   required  MSVR
contributions.  Beginning  in the year 1992,  such  realized  capital  gains are
credited to the IMR. The  combination  of the AVR and IMR will affect  statutory
capital and  surplus and may reduce the ability of Family Life to pay  dividends
and make payments on the surplus debenture.

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.

                                      -23-



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.

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.

Congressional initiatives directed at repeal of the McCarran-Ferguson Act (which
exempts the  "business of  insurance"  from most  federal  laws,  including  the
antitrust  laws, to the extent it is subject to state  regulation)  and judicial
decisions   narrowing   the   definition   of   "business  of   insurance"   for
McCarran-Ferguson  Act purposes may limit the ability of insurance  companies in
general to share  information  with respect to  rate-setting,  underwriting  and
claims  management  practices.  Current and proposed  federal measures which may
also  significantly  affect the  insurance  industry  include  minimum  solvency
requirements  and  removal of  barriers  preventing  banks from  engaging in the
insurance business.

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, 1997,  1998 and 1999,
the  decreases in Family Life's  current  income tax  provisions,  utilizing the
effective  tax rates,  due to this change were  $136,000,  $89,034 and  $78,759,
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 are eligible to file a  consolidated  federal income
tax return.  The Company is considering the tax advantages to be obtained by the
filing of a consolidated return and is currently  considering the filing of such
consolidated return for the year 1999.



                                      -24-




Item 2.  Properties

The  Registrant's  headquarters  are  currently  located at Austin  Centre,  701
Brazos, Suite 1400, Austin, Texas. A subsidiary of ILCO, Investors-NA, purchased
Austin Centre, an office-hotel  property in downtown Austin in August 1991 for a
purchase  price of  $31,275,000  from an  unrelated  seller that had  previously
acquired the property  through  foreclosure.  Austin  Centre  covers a full city
block and is a sixteen story mixed use development  consisting of 343,664 square
feet of office/retail space  (predominately  office space), a 314 room hotel and
61 luxury  apartments,  all united by a 200 foot high glass atrium.  The project
was completed in October, 1986.

In September,  1995,  Investors-NA entered into a contract to sell Austin Centre
to an Austin-based  real estate  investment firm for a purchase price of $62.675
million,  less $1  million  to be  paid to a  capital  reserve  account  for the
purchaser.  The sale was  consummated  on March 29,  1996. A portion of the sale
proceeds equal to the amount that Investors-NA  presently had invested in Austin
Centre were  retained and  reinvested  by  Investors-NA.  The balance of the net
proceeds  of  the  sale  were  used  to  reduce  ILCO's  bank   indebtedness  by
approximately $15 million.

Following  the  sale of the  Austin  Centre,  the  Company  and  its  affiliates
continued to occupy three floors of the office space, under a lease arrangement.
The current  lease,  which was entered into in May, 1997, is for a five (5) year
term ending in October,  2002,  with options to renew for three  successive five
(5) year terms thereafter.

Investors-NA  is currently in the process of developing  an office  complex at a
site in Austin,  Texas.  The site consists of 47.995 acres. The Site Development
Permit  obtained by  Investors-NA  allows for the  construction  of seven office
buildings  totaling  600,000 square feet,  with associated  parking,  drives and
related improvements. The initial phase of the project ("Phase One") consists of
two office buildings,  associated  parking and the infrastructure for the entire
project,  which is  known  as River  Place  Pointe.  Construction  on Phase  One
commenced  during the first quarter of 1999.  Upon  completion of Phase One, the
Company  plans  to  move  its  corporate  headquarters  to  space  in one of the
buildings.  The move is currently  scheduled for July,  2000. In connection with
the move,  Investors-NA  (the tenant under the lease of the Austin Centre space)
intends to sub-lease said space.

In January,  1995,  ILCO,  through  Investors-NA,  purchased,  as an  investment
property,  an office  building  project  known as  Bridgepoint  Office Square in
Austin,  Texas for a cash purchase price of $9.75 million. The property consists
of 20 acres of land with four office  building  sites and two parking  structure
sites.  The first phase of development of the property was completed in 1986 and
consists of a five-story  office  building  with 83,474  square feet of rentable
space and a 550-car parking garage.

In the fourth quarter of 1995, construction began on the second office building,
containing  approximately  109,000  rentable  square feet, and the other parking
garage  containing  approximately  871  spaces.  That phase of the  project  was
completed in September,  1996.  In March,  1996,  construction  commenced on the
third office building,  with approximately 79,000 rentable square feet of office
space and was  completed in  December,  1996.  Construction  began on the fourth
building in July,  1996 and was completed in July,  1997.  The fourth  building
contains approximately 92,459 rentable square feet.

                                      -25-



On May 3, 1996,  Family Life purchased a tract of land adjoining the Bridgepoint
Office  Square tract for a cash  purchase  price of $1.3  million.  The property
consists  of 7.1 acres of land with one  office  building  site and one  parking
structure site.  Family Life began  construction of the fifth building (known as
"Bridgepoint  Five") on the new site in January,  1997. In May, 1997, the entire
rentable space  (approximately  76,793  rentable  square feet)  contained in the
building was leased to a major tenant in the technology  business.  Construction
of the parking garage and the building shell was completed in October, 1997.

On November 24, 1997,  Investors-NA and Family Life entered into a contract with
Health and Retirement  Properties Trust, a Maryland real estate investment trust
(the "Purchaser") to sell their respective  interests in the Bridgepoint  Square
Office complex.  The aggregate  purchase price for the project was  $78,000,000.
The  transaction  closed on December 5, 1997.  The purchase  price was allocated
approximately  78.5% to  Investors-NA  and  21.5% to  Family  Life.  The sale of
Bridgepoint   Office  Square  resulted  in  a  net  profit  to  Investors-NA  of
approximately  $14.0 million ($9.1 million after tax) that is included in ILCO's
fourth quarter earnings for the year 1997. For Family Life, the sale resulted in
a net profit of  approximately  $4.5 million  ($3.2  million  after tax) that is
included in FIC's fourth quarter earnings for the year 1997.

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 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 intends to claim an income
tax  deduction on its upcoming tax return for the donation of the Standard  Life
Building,  which has an appraised  value at December  15, 1999 of  approximately
$3,050,000.00.  The donation and sale transaction referenced above resulted in a
net gain (GAAP basis) of $0.992  million for ILCO and $0.409 million for FIC (or
a combined total of $1.401 million).

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 in October,  2001. The
base rental is  approximately  $11,200 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.


                                      -26-



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


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.

In August,  1997,  another  individual  filed a similar action in Travis County,
Texas against the corporate entities  identified above. The lawsuit involves the
same type of policy and includes  allegations which are substantially  identical
to the  allegations  in the first action.  The named  plaintiff also seeks class
certification.  ILCO believes that the court would consider class  certification
with respect to only one of these  actions.  ILCO also believes that this action
is without merit and intends to vigorously defend this matter.

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, 1999 to a vote of security holders.




                                      -27-



                                     PART II

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

A.  Market Information

The following  table sets forth the quarterly  high and low sales prices for FIC
common stock in The Nasdaq  Small-Cap  Market for 1999 and 1998.  The quotations
set forth in the table  have been  adjusted  to give  retroactive  effect to the
five-for-one  stock split which was  effective  November 12, 1996.  FIC's NASDAQ
trading symbol is FNIN.

                                                    Common Stock
                                                       Prices
                                               High               Low
1999
         First Quarter                     $ 17.375            $ 12.00
         Second Quarter                      14.00                7.625
         Third Quarter                       15.50                8.00
         Fourth Quarter                      10.750               9.250


1998
         First Quarter                      $ 21.25            $ 16.375
         Second Quarter                       20.50              17.75
         Third Quarter                        20.25              12.50
         Fourth Quarter                       19.50              13.625


B.  Holders

As of March 15, 2000  there were  approximately  14,998  record  holders of FIC
common stock.

C.  Dividends

FIC did not pay a dividend  during the years 1976 to 1999.  On January 18, 2000,
FIC announced  that it will pay a cash dividend in the amount of $.18 per share,
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 Debenture 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)  the  immediate  parent of FLC and the
directly-owned  subsidiary  of FIC, 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.


                                      -28-




Item 6.  Selected Financial Data: (Registrant and its Consolidated Subsidiaries)
                                           (In thousands, except per share data)
                                                                                 


                                     1999          1998            1997           1996         1995
Operating Revenues                $ 47,313      $ 53,607        $ 63,343       $ 59,928     $ 61,541
Income before federal
income tax, equity in net
earnings of affiliates               7,013         8,973          13,411          9,791       10,394
Income before equity in net
earnings of affiliates               5,839         6,605           9,870          7,145        7,966
Equity in net earnings of
affiliate, net of tax                3,310         2,613           6,458          9,012        2,051

Net Income                        $  9,149      $  9,218        $ 16,328       $ 16,157     $ 10,017

Common Stock and
Common Stock Equivalents             5,200         5,557           5,589          5,568        5,540
Net income per share
Basic                             $   1.81      $   1.71        $   3.01       $   2.98    $    1.85
Diluted                           $   1.76      $   1.66        $   2.92       $   2.90    $    1.81
Total Assets                      $294,054      $301,738        $304,324       $287,730    $ 287,678

Long Term Obligations             $ 41,497      $ 47,645        $ 53,792       $ 59,940    $  67,989






                                                       -29-



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

For the year ended  December 31, 1999,  FIC's net income was  $9,149,000  (basic
earnings  of $1.81 per  common  share or  diluted  earnings  of $1.76 per common
share) as compared to  $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
and $16,328,000 (basic earnings of $3.01 per common share or diluted earnings of
$2.92 per common share) for the year ended December 31, 1997. 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.

                              Results of Operations

Net income from continuing  operations (excluding the gain resulting from Family
Life's sale of its interest in  Bridgepoint  Square  Offices in 1997, and ILCO's
sale of its interest in Bridgepoint  Square Offices in 1997, as described below)
was $9,149,000  (basic earnings of $1.81 per common share or diluted earnings of
$1.76 per common share) in 1999, as compared to  $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 and $9,300,000  (basic earnings of $1.71 per common
share or diluted earnings of $1.66 per common share) for the year ended December
31, 1997.

Net income for the year ended December 31, 1997 includes $3.2 million ($0.57 per
common share)  resulting  from Family Life's sale of its interest in Bridgepoint
Square Offices.  Family Life purchased  undeveloped land at the Bridgepoint site
in May, 1996, for a cash purchase price of $1.3 million.  The property  consists
of 7.1 acres of land with one office  building  site and one  parking  structure
site.  Family Life began  construction  of the building  (known as  "Bridgepoint
Five") in January,  1997. In May, 1997, the entire rentable space (approximately
76,793  rentable  square  feet)  contained in the building was leased to a major
tenant in the technology  business.  Construction  of the parking garage and the
building shell was completed in October,  1997. In November,  1997,  Family Life
entered into a contract to sell its interest in the  Bridgepoint  Square  Office
complex.  The sale also  included  the adjacent  properties  developed by ILCO's
subsidiary,  Investors-NA.  The aggregate purchase price for the project was $78
million.  The  transaction  closed on December 5, 1997.  The purchase  price was
allocated approximately 78.5% to Investors-NA and 21.5% to Family Life. The sale
resulted  in a net profit to Family Life of  approximately  $4.5  million  ($3.2
million after tax) that is included in FIC's earnings for the year 1997.

FIC's net income is affected by its equity  interest  in  InterContinental  Life
Corporation ("ILCO") and ILCO's insurance subsidiaries.  Net income for the year
ended  December  31, 1997  includes  $3.8  million  ($0.68 per common share on a
diluted basis) resulting from ILCO's sale of its interest in Bridgepoint  Square
Offices.

                                      -30-



The  statutory  earnings of Family Life as required to be reported to  insurance
regulatory  authorities  before interest expense,  capital gains and losses, and
federal  income  taxes were  $8,829,000  at December  31,  1999,  as compared to
$12,930,000  at December 31, 1998 and  $13,625,000  at December 31, 1997.  These
statutory  earnings  are  the  source  to  provide  for  the  repayment  of  the
indebtedness incurred in connection with the acquisition of Family Life.

The increase in  long-term  interest  rates  during  1999,  which was related to
general economic conditions,  had a negative effect upon the market value of the
fixed maturities  available for sale segment of the Company's  portfolio.  As of
December 31, 1999, the market value of the fixed  maturities  available for sale
segment was $77.5 million as compared to an amortized value of $78.3 million, or
an unrealized loss $0.8 million.  The net of tax effect of this decease has been
recorded as a decrease in shareholders' equity.

For the year ended  December 31,  1999,  FIC's  income from  operations,  before
federal  income tax and equity in net earnings of affiliate,  was $7,013,000 (on
revenues of  $47,313,000) as compared to $8,973,000 (on revenues of $53,607,000)
for the year 1998 and $13,411,000 (on revenues of $63,343,000) in the year 1997.

Premiums for the year 1999, net of reinsurance  ceded,  were $33.96 million,  as
compared  to  $38.4  million  for the  year  1998  and  $40.2  million  in 1997.
Policyholder  benefits and expenses  were $13.9  million in 1999, as compared to
$16.3 million in 1998 and $19.9 million in 1997.


            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 1999,  the Company's  equity in the net earnings of ILCO, net
of federal  income tax, was  $3,310,000,  as compared to $2,613,000 for the year
1998 and $6,458,000 for the year 1997.

FIC currently owns 3,590,292 shares of ILCO's common stock. In addition,  Family
Life  currently  owns  342,400  shares of ILCO common  stock.  As a result,  FIC
currently owns,  directly and indirectly  through Family Life,  3,932,692 shares
(approximately 44.5%) of ILCO's common stock.

The increase in  long-term  interest  rates  during  1999,  which was related to
general economic conditions,  had a negative effect upon the market value of the
fixed maturities available for sale segment of ILCO's investment  portfolio.  As
of December 31, 1999,  the market value of the fixed  maturities  available  for
sale  segment  was $404.2  million as compared  to an  amortized  cost of $411.5
million,  or an unrealized  loss of $7.3 million.  Since FIC owns  approximately
44.5% of the common  stock of ILCO,  such  unrealized  losses,  net of tax,  are
reflected in FIC's equity interest in ILCO, and had the effect of decreasing the
reported value of such equity interest by approximately $2.0 million.


                                      -31-



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

ILCO is a holding company whose principal  assets consist of the common stock of
Investors-NA  and its subsidiary,  Investors-IN.  ILCO's primary source of funds
consists of payments under the surplus debentures from Investors-NA.

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.

ILCO receives  periodic  payments of principal  and interest from  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.  Upon the merger
of Standard Life into  Investors-NA,  the obligations of the Surplus  Debentures
were assumed by Investors-NA. As of December 31, 1999, the outstanding principal
balance  of the  Surplus  Debentures  was  $0.956  million  and  $4.94  million,
respectively.  The terms of the latter  debenture  provided for final payment of
the remaining principal on September 30, 1999. In September,  1999, Investors-NA
and ILCO  amended the payment  schedule to provide for payment of the  remaining
balance in four installments, with the final installment being due July 1, 2000.
Since  Investors-NA  is domiciled in the State of Washington,  the provisions of
Washington  insurance law apply to the Surplus Debentures.  Under the provisions
of the Surplus  Debentures  and current law, no prior approval of the Washington
Insurance Commissioner is required for Investors-NA to pay interest or principal
on the Surplus Debentures;  provided that, after giving effect to such payments,
the statutory  surplus of Investors-NA is in excess of $10 million (the "surplus
floor").  However,  Investors-NA  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,
1999,  the  statutory  surplus  of  Investors-NA  was $72.6  million,  an amount
substantially in excess of the surplus floor. The funds required by Investors-NA
to meet its obligations to the Company under the terms of the Surplus Debentures
are derived from  operating  income  generated  from  insurance  and  investment
operations.


                                      -32-



In addition to the payments under the terms of the Surplus Debentures,  ILCO has
received dividends from its life insurance subsidiaries.  Washington's insurance
code   includes   the   "greater  of"  standard  for  payment  of  dividends  to
shareholders,  but has a  requirement  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.  As of  December  31,  1999,
Investors-NA had earned surplus of $51.6 million.  Since the law applies only to
dividend  payments,  the ability of  Investors-NA to make principal and interest
payments under the Surplus Debentures is not affected.  ILCO does not anticipate
that  Investors-NA  will have any  difficulty  in making  principal and interest
payments on the Surplus Debentures for the foreseeable future.

Investors-IN is domiciled in the State of Indiana. The transfer of domicile from
New Jersey to  Indiana  was  effective  December  15,  1997.  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 $18.1 million at December 31, 1999.

The Form 10-Ks of ILCO for the years ended December 31, 1999, 1998 and 1997, 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.

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,
1999,  the statutory  capital and surplus of Family Life was $26.9  million,  an
amount  substantially in excess of the surplus floor.  During 1999,  Family Life
made principal payments of $9.0 million and interest

                                      -33-



payments of $1.8 million to Family Life Corporation under the Surplus Debenture.
As of December 31, 1999,  the  principal  balance of the Surplus  Debenture  was
$13.9 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 Family Life will have any  difficulty  in making  principal and
interest  payments on the Surplus  Debenture in the amounts  necessary to enable
Family Life Corporation to service its indebtedness for the foreseeable future.

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 $2.6 million for the
year 1999,  as compared to $6.0  million in 1998 and $4.2  million in 1997.  Net
cash flow used in financing activities was $6.15 million in 1999, as compared to
$13.10 million in 1998 and $6.15 million in 1997.

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
are sufficient to meet the needs of its business and to satisfy debt service.


                                   Investments

As of December  31,  1999,  the  Company's  investment  assets  totaled  $105.95
million, as compared to $110.15 million as of December 31, 1998.

The level of short-term  investments  at the end of 1999 was $24.8  million,  as
compared  to $27.6  million  as of  December  31,  1998.  The  fixed  maturities
available for sale portion  represents $77.5 million of investment  assets as of
December 31, 1999, as compared to $79.4 million at the end of 1998.

                                      -34-



The  amortized  cost of fixed  maturities  available for sale as of December 31,
1999 was $78.3 million representing a net unrealized loss of $0.8 million.  This
unrealized loss principally reflects changes in interest rates from the date the
respective  investments were purchased.  To reduce the exposure to interest rate
changes,  portfolio  investments  are selected so that  diversity,  maturity and
liquidity   factors   approximate   the  duration  of  associated   policyholder
liabilities.

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,  1999,
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).

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. 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 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  intends  to claim an income tax
deduction  on its  upcoming  tax return for the  donation of the  Standard  Life
Building,  which has an appraised  value at December  15, 1999 of  approximately
$3,050,000.00.  The donation and sale transaction referenced above resulted in a
net gain (GAAP basis) of $0.992  million for ILCO and $0.409 million for FIC (or
a combined total of $1.401 million).

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.

                                      -35-




                              Year 2000 Compliance

The  Company  and its  subsidiaries  utilize 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 calendar change on January 1, 2000, the Company evaluated its centralized
computer  systems and developed a plan to reach Y2K  compliance  (the "Year 2000
Plan").  A central feature of the plan was to convert certain of the centralized
systems to a common system which is already in compliance with Y2K requirements.

The Year 2000 Plan  called for an upgrade  of the Family  Life's  administrative
systems by changing individual lines of computer code in order to modify current
operating  software  such  that it would  become  Y2K  compliant.  This  process
included  approximately  29  sub-systems  which  provide  data input to the main
systems. The administrative  systems which were not modified were converted onto
the Company's CK/4 System,  a system  designed to be Y2K compliant  according to
the representations of the vendor.

The Company  completed  this systems  conversion and testing prior to January 1,
2000. For the year ended  December 31, 1999,  the Company  incurred an after-tax
expense of  approximately  $283,000 in  connection  with the Year 2000 Plan,  as
compared to an after-tax expense of approximately $289,000 for the year 1998 and
$253,000 for the year 1997.

With respect to non-centralized  systems (i.e., desktop computers),  the Company
obtained updated software releases and new hardware designed to be Y2K compliant
according to the representations of the vendors. The installation of such new PC
hardware and software was commenced in early 1999 and was  completed  during the
fourth quarter of 1999.

The Company  also faced the risk that one or more of its  external  suppliers of
goods or  services  ("third  party  providers")  would not be in a  position  to
properly  interact  with the  Company due to the  inability  of such third party
provider to resolve its own Y2K issues.  During 1999,  the Company  completed an
inventory of its third party provider relationships.  In order to assess the Y2K
readiness of such third party providers,  the Company  developed and forwarded a
detailed questionnaire to such providers. As the responses to the questionnaires
were  received,  the Company  evaluated  the overall Y2K  readiness of its third
party  provider  relationships.  The Company  did not  experience  any  material
problems with its  third-party  vendors which were related to the Year 2000 date
change.

   Cautionary Statements for Purposes of the "Safe Harbor" Provisions of the
                Private Securities Litigation Reform Act of 1995

Except  for  historical  factual  information  set  forth  in this  Management's
Discussion  and  Analysis,  certain  statements  made in this report are forward
looking and contain information about financial results, economic conditions and
other risks and known uncertainties. The Company cautions the reader that actual
results could differ materially from those anticipated by the Company, depending
upon  the  eventual  outcome  of  certain  factors,  including:  (1)  heightened
competition for new business,  (2) significant changes in interest rates and (3)
adverse regulatory changes affecting the business of insurance.


                                      -36-



                             Accounting Developments

In February,  1997,  the  Financial  Accounting  Standards  Board (FASB)  issued
Financial Accounting Standard (FAS) No. 128, "Earnings Per Share," which revises
the  standards  for  computing  earnings  per  share  previously  prescribed  by
Accounting  Principles Board Opinion No. 15, "Earnings Per Share." The Statement
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 reflects the
potential  dilution that could occur if  securities or other  contracts to issue
common  stock  were  converted  or  exercised.   The  Statement   requires  dual
presentation  of basic and diluted  earnings per share on the face of the income
statement for all entities with potential dilutive securities  outstanding.  The
Statement also requires a reconciliation of the numerator and denominator of the
basic  earnings per share  computation  to the numerator and  denominator of the
diluted earnings per share  computation.  The Statement is effective for interim
and annual periods ending after  December 15, 1997.  Earlier  application is not
permitted.  However, a company may disclose pro forma earnings per share amounts
that would have resulted if it had applied the  Statement in an earlier  period.
The Company  adopted  FAS 128 in its annual  financial  statements  for the year
ended December 31, 1997.

In June, 1997, the FASB issued FAS No. 130,  "Reporting  Comprehensive  Income",
which  establishes  standards for reporting and display of comprehensive  income
and its components in a financial  statement  with the same  prominence as other
financial statements. 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 adopted FAS
130 effective January 1, 1998, with reclassification of financial statements for
earlier years.

In June,  1997,  the FASB issued FAS No. 131,  "Disclosure  About Segments of an
Enterprise and Related  Information",  which establishes standards for reporting
information  about  operating  segments.  Generally,  FAS No. 131 requires  that
financial  information  be reported on the basis that it is used  internally for
evaluating  performance.  The Company  adopted FAS No. 131 effective  January 1,
1998 and  comparative  information  for earlier  years has been  restated.  This
statement  does not need to be applied to interim  financial  statements  in the
initial year of application. The adoption of FAS No. 131 did not impact upon the
Company's reporting of financial information.

In February,  1998, the FASB issued FAS No. 132,  "Employers'  Disclosures About
Pensions and Other  Postretirement  Benefits",  which revises current disclosure
requirements for employers' pension and other retiree benefits. FAS No. 132 does
not change the  measurement or  recognition  of pension or other  postretirement
benefit plans.  The Company adopted FAS No. 132 effective  January 1, 1998, with
the effect of such  adoption to be reflected in year-end  financial  statements.
The  adoption  of FAS No.  132 did not have a material  impact on the  Company's
results of operations, liquidity or financial position.


                                      -37-




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 were required to be restated.
The adoption of SOP 97-3 did not have a material impact on the Company's results
of operations, liquidity or financial position.

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 is applicable to financial  statements for all
fiscal  quarters of fiscal years  beginning  after June 15, 1999. As the Company
does not have significant  investments in derivative financial instruments,  the
adoption of FAS 133 is not expected to have a material  impact on the  Company's
results of operations, liquidity or financial position.

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 44.5% 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.


                                      -38-



Interest Rate Risk

a.   FIC's Fixed Income Investments

     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 $9.7
     million at December 31, 1999 and $2.5  million at December  31,  1998.  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  and  (ii)
     short-term investments.  The market value of such assets was $102.4 million
     at December 31, 1999 and $107.0 million at December 31, 1998.


     The fixed income investments of the Company include certain mortgage-backed
     securities.  The  market  value of such  securities  was $27.3  million  at
     December  31, 1999 and $33.9  million at  December  31,  1998.  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 $1.9 million at December 31, 1999 and $1.2
     million at December 31, 1998.

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 $6.3 million at
     December 31, 1999 and $4.6 million at December 31, 1998.


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.

                                      -39-




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 March
     27, 2000.

2.   Consolidated Balance Sheets, as of December 31, 1999 and December 31, 1998.

3.   Consolidated  Statements  of Income for the years ended  December 31, 1999,
     1998 and 1997.

4.   Consolidated  Statements of Changes in  Shareholders'  Equity for the years
     ended December 31, 1999, 1998 and 1997.

5.   Consolidated  Statements  of Cash Flows for the years  ended  December  31,
     1999, 1998 and 1997.

6.   Notes to Consolidated Financial Statements.

7.   Consolidated Financial Statement Schedules.


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.


                                      -40-



                                    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 Mr.  Chacosky,  were
elected at the 1999 annual shareholders meeting.  Mr.Chacosky was appointed as a
director  in  January,  2000,  to fill a vacancy  created by an  increase in the
number of  directors  which was  approved by the Board of  Directors in January,
2000. The data supplied below is based on information provided by the directors,
except to the extent that such data is known to the Registrant.

Name           Age        Since      Director and Other Information

John D.        57         1991       Director of FIC since 1991. Vice President,
Barnett                              Investment Professionals, Inc. from 1996 to
                                     present. Vice President, Investments of
                                     Prudential Securities from 1983 to 1996.

Charles K.     42         2000       Director and Vice President of FIC and ILCO
Chacosky                             since January, 2000.  Executive Vice
                                     President of FLIC since January, 2000.
                                     Executive Vice President of Investors-NA
                                     and Investors-IN since January, 2000.
                                     Senior Manager of PricewaterhouseCoopers,
                                     LLP from February, 1997 to December, 1999.
                                     Vice President of Germantown Life Insurance
                                     from February, 1995 to January, 1997.

Joseph F.      61         1992       Director of FIC since February 29, 1992.
Crowe                                Vice President 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.


                                      -41-



Name           Age        Since      Director and Other Information

Jeffrey H.      47        1995       Director of FIC since May, 1995.  Vice
Demgen                               President of FIC 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.

Theodore A.     60        1996       Vice President and Director of FIC since
Fleron                               August, 1996. 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.         56       1976       Vice President, Secretary, Treasurer and
Grace                                Director of FIC since 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.

Dale E. Mitte    65       1994       Director of FIC since 1994. Senior Vice
                                     President, Chief Underwriter and Director
                                     from January, 1993 to March 5, 1999 of
                                     Investors-NA and Investors-IN. Vice
                                     President and Chief Underwriter from
                                     June, 1991 to March 5, 1999 of FLIC.


                                      -42-



Name           Age        Since      Director and Other Information

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    70        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.

Eugene E.       57        1992       Vice President and Director of FIC since
Payne                                1992.  Vice President of ILCO since
                                     December, 1988 and Director since May,
                                     1989.  Executive Vice President, Secretary
                                     and Director of Investors-NA since
                                     December, 1988. Executive Vice President
                                     since December, 1988 and Director since
                                     May, 1989 of Investors-IN.  Director,
                                     Executive Vice President and Secretary of
                                     FLIC since June, 1991.

Thomas C.       58        1996       Director of FIC since August, 1996.
Richmond                             Director of ILCO from March, 1994 to
                                     August, 1996.  Senior Vice President since
                                     January 1993 of Investors -NA  and
                                     Investors-IN.

Jerome H.       63        1998       President and Professor of Chemistry,
Supple                               Southwest Texas State University since
                                     April, 1989. Director of FIC since 1998.


The  incumbent  directors,  other  than  Dr.  Payne,  have  been  nominated  for
submission  to  vote of the  shareholders  for  reelection  at the  2000  annual
shareholders' meeting.



                                      -43-



(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 1999 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               68               Chairman of the Board,
                                            President and Chief
                                            Executive Officer

James M. Grace             56               Vice President and Treasurer

Eugene E. Payne            57               Vice President and Secretary

Jeffrey H. Demgen          47               Vice President

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.


                                      -44-



(c)  Identification of certain significant employees

Not applicable.

(d)  Family relationships

Dale E. Mitte is Roy F. Mitte's brother.

(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)  Compliance with Section 16(a) of the Securities Exchange Act of 1934

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 Form 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, 1999 through  December 31, 1999,  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 Mr.
Parker,  who filed a Form 5 in February,  2000, to report the transfer to him in
February,  1998  of  2,000  shares  of  the  Company's  common  stock  upon  the
dissolution of his employer (Par-Tex Marine).

                                      -45-


Item 11.  Executive Compensation

Summary Compensation Table

The following table sets forth  information  concerning the  compensation of the
Company's Chief  Executive  Officer and each of the three other persons who were
serving as  executive  officers of the  Company at the end of 1999 and  received
cash compensation exceeding $100,000 during 1999:

                               Annual Compensation
                                                                                                    

                                                                                              Long Term
       Name and                                                                           Compensation Awards      All Other
       Principal                                                                             Stock Options         Compensa-
       Position            Year             Salary(1)           Bonus(3)      Other(2)            (Shares)              tion
Roy F. Mitte,
Chairman,                  1999            $ 503,500         $2,500,000         -0-                -0-                -0-
President and              1998              503,500          2,500,000         -0-                -0-                -0-
Chief Executive            1997              503,500          1,500,000         -0-                -0-                -0-
Officer
James M.                   1999              195,000             20,000         -0-                -0-                -0-
Grace, Vice                1998              195,000             25,000         -0-                -0-                -0-
President and              1997              195,000             40,000         -0-                -0-                -0-
Treasurer
Eugene E.                  1999              195,000             20,000         -0-                -0-                -0-
Payne, Vice                1998              195,000             20,000         -0-                -0-                -0-
President and              1997              195,000             40,000         -0-                -0-                -0-
Secretary
Jeffrey H.                 1999              150,000             20,000         -0-                -0-                -0-
Demgen, Vice               1998              145,384             15,000         -0-                -0-                -0-
President                  1997              117,884             30,000         -0-                -0-                -0-




(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 1997,  1998 and 1999. 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 1997,  1998 and 1999 (i) Mr. Mitte:  $999,746,  $1,111,821  and  $1,111,821,
respectively; (ii) Mr. Grace: $68,150, $64,152 and $62,694, respectively;  (iii)
Dr. Payne:  $68,150 , $61,447 and $61,447,  respectively;  and (iv) Mr.  Demgen:
$66,548, $72,173 and $76,500, 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.

(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.  The
bonuses for Mr.  Grace,  Dr.  Payne and Mr.  Demgen for the year 1997  represent
amounts paid in 1997, but include the bonuses  awarded with respect to the years
1996 and 1997.  Dr. Payne elected to defer the amounts shown for 1997,  1998 and
1999 into the Company's  Non-Qualified  Deferred Compensation Plan. The Plan was
established  in 1997 to permit  Mr.  Grace and Dr.  Payne to defer a portion  of
their compensation. Under the provisions of the Plan, contributions are invested
on a money  purchase  basis  and plan  benefits  are  based on the  value of the
account at retirement or other  distribution.  In accordance with applicable tax
law  requirements,  amounts  allocated  to the Plan are subject to the claims of
general creditors of the Company.


                                      -46-




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.

Members of Compensation Committee

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.


Compensation Committee Interlocks and Insider Participation

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

Item 12.  Security Ownership of Certain Beneficial Owners and Management

The following table presents  information as of March 15, 2000 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. Mitte,
Chairman of the Board,
President and Chief
Executive Officer,
701 Brazos
Suite 1400
Austin, Texas  78701                     1,552,206                 30.71 %

Family Life Insurance Company
701 Brazos Street
Suite 1400
Austin, Texas 78701                        272,000                  5.38 %

InterContinental Life
  Corporation
701 Brazos
Suite 1400
Austin, Texas  78701                       690,161 (1,3)           12.42 % (2)

Investors Life Insurance
  Company of North America
701 Brazos
Suite 1400
Austin, Texas  78701                       690,161 (1,3)           12.42 % (2)

Heartland Advisors, Inc.
790 North Milwaukee St.
Milwaukee, WI 53202                        500,100                  9.89 % (4)


                                      -47-



Fidelity Management &
Research Company
82 Devonshire Street
Boston, MA 02109                           272,700                   5.39% (5)


(1)  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.

(2)  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.

(3)  See Item 1.  Business-Acquisition  of Family Life for a description  of the
     options granted to Investors-NA.

(4)  As reported to the Company on a Schedule 13(G) filed 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. A Schedule  13(G) was filed on January
     27, 1998,  reporting  beneficial  ownership of 320,400  shares.  A Schedule
     13(G)/A was filed on January 21, 1999, reporting beneficial ownership of an
     additional  118,100 shares and a Schedule  13(G)/A was filed on January 12,
     2000, reporting beneficial ownership of an additional 61,600 shares.

(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.  According to
     the Schedule  13(G)  filing,  Fidelity  acts as  investment  advisor to the
     Fidelity Low-Priced Stock Fund, a registered  investment  company,  and the
     Fund is the  beneficial  owner of 268,700  shares of FIC common stock.  The
     Schedule  13(G) also states that Fidelity  Management  Trust Company is the
     beneficial  owner of 4,000 shares of FIC common  stock,  as a result of its
     serving as investment manager of certain institutional accounts.

The following  table contains  information as of March 15, 2000 as to the common
stock  of the  Registrant  beneficially  owned  by each  director,  nominee  and
executive officer and by all executive  officers and directors of the Registrant
as a group.  The  information  contained  in the table has been  obtained by the
Registrant from each director and executive officer,  except for the information
known to the  Registrant.  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.






                                      -48-



                           Amount and Nature of            Percent of
Name                       Beneficial Ownership             Class

John Barnett                       2,000                      *
Joseph F. Crowe                    1,500 (2)                  *
Charles K. Chacosky                  -0- (2)
Jeffrey H. Demgen                    -0- (2)
Theodore A. Fleron                   -0-
James M. Grace                     7,600 (2)                  *
Dale E. Mitte                      2,000                      *
Roy F. Mitte                   1,552,206 (1,2)              30.71%
Frank Parker                      12,000                      *
Eugene E. Payne                      -0-
Thomas C. Richmond                   -0-
 Jerome H. Supple                    200                      *

All Executive Officers,
and Directors as
a group (11 persons)           1,577,506 (1,2)              31.21%

 *       Less than 1%.

(1)  As of March  15,  2000,  Mr.  Mitte,  jointly  with his  wife  Joann,  owns
     1,552,206 common shares of Financial  Industries  Corporation  ("FIC"). The
     holdings  of Mr.  Mitte of FIC's  common  stock  constitutes  30.71% of the
     outstanding common stock of the Company.  In addition,  Mr. Mitte holds the
     position of Chairman, President and Chief Executive Officer of ILCO.

(2)  No  executive  officer or director  holds any options to acquire FIC common
     stock.  Messrs. Roy Mitte,  Grace, Payne, Demgen and Chacosky are executive
     officers and/or directors of ILCO and beneficially owned approximately 46.9
     % of the  outstanding  shares of ILCO  common  stock as of March 15,  2000.
     Since FIC beneficially owns approximately 44.5% of ILCO's common stock, Mr.
     Roy  Mitte's  personal   holdings  are  combined  with  FIC's  holdings  in
     determining the percentage of ILCO common stock  beneficially  owned by Mr.
     Mitte. ILCO  beneficially  owned 690,161 shares of FIC common stock (12.42%
     of outstanding  shares,  assuming the exercise of outstanding stock options
     held by an ILCO subsidiary) as of March 15, 2000.

Item 13.  Certain Relationships and Related Transactions

For the period January 1, 1999 to December 31, 1999, 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.

                                      -49-





(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;  Dr. Payne 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% 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.

     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

                                      -50-



     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.

(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 $1,916,350 and ILCO's
     insurance  subsidiaries paid $2,730,189 to FIC Computer for data processing
     services provided during 1999.

(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)  Mr. Crowe retired from active service with the Company in January, 1997 and
     served on the ILCO Board until October,  1997; he continues to serve on the
     Board of Directors of FIC.  Following Mr. Crowe's  retirement,  the Company
     entered  into a  consulting  agreement  with  him.  Under  the terms of the
     agreement,  Mr.  Crowe is to be  available  for  periodic  consultation  on
     actuarial   matters  related  to  the  operations  of  the  life  insurance
     companies.  The  agreement  provide of a payment of $25,000  per year for a
     period of five-years.

                                      -51-



                                     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,  1997,  1998 and  1999  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, 1999 and 1998

Consolidated  Statements of Income,  for
years ended December 31, 1999, 1998 and 1997

Consolidated  Statements of Changes in
Shareholders' Equity, for the years ended
December 31, 1999, 1998 and 1997

Consolidated Statement of Cash Flows, for the
years ended December 31, 1999, 1998 and 1997

                                      -52-




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, 1999.


                                      -53-





                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, 1999 and 1998..............................................F-3

     Consolidated Statements of Income, for the
     years ended December 31, 1999, 1998 and 1997............................F-5

     Consolidated Statements of Changes in Shareholders'
     Equity for the years ended December 31, 1999, 1998 and 1997.............F-7

     Consolidated Statements of Cash Flows, for
     the years ended December 1999, 1998 and 1997...........................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-40

     Schedule II - Condensed Financial Statements of
     Registrant.............................................................F-41

     Schedule IV - Reinsurance..............................................F-44


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  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, 1999 and 1998,  and the
results of their  operations and their cash flows for each of the three years in
the period ended  December 31, 1999, in conformity  with  accounting  principles
generally  accepted in the United  States.  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,  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 the opinion expressed above.



PricewaterhouseCoopers LLP
Dallas, Texas
March 27, 2000


                                       F-2


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                                            December 31,
                                                        1999              1998
                                                            (in thousands)

ASSETS
Investments other than investments in affiliate:
Fixed maturities available for sale at
 market value (amortized cost of $78,252 and $76,727
 at December  31, 1999 and 1998)                      $  77,515     $  79,402
Equity securities at market (cost approximates $11
 at December 31, 1999 and 1998)                               4             4
Policy loans                                              3,595         3,155
Short-term investments                                   24,839        27,589
     Total investments                                  105,953       110,150
Cash and cash equivalents                                   692         2,601
Investment in affiliate                                  70,013        70,950
Accrued investment income                                 1,180         1,209
Agency advances and other receivables                     6,885         7,759
Reinsurance receivables                                  14,848        12,426
Due and deferred premiums                                12,392        12,181
Property and equipment, net                               1,355         1,758
Deferred policy acquisition costs                        52,490        48,510
Present value of future profits of
 acquired businesses                                     23,109        28,294
Other assets                                              4,758         5,392
Separate account assets                                     379           508
     Total Assets                                     $ 294,054     $ 301,738




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

                                       F-3



                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                                          December 31,
                                                   1999                1998
                                                        (in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
Policy liabilities and contract
 holder deposit funds:
Future policy benefits                        $  59,783           $  60,069
Contract holder deposit funds                    44,681              45,128
Unearned premiums                                    14                  28
Other policy claims and benefits
 payable                                          4,282               4,582
                                                108,760             109,807
Subordinated notes payable to
 affiliate                                       41,497              47,645
Deferred federal income taxes                    23,222              23,984
Other liabilities                                 4,079               4,474
Separate account liabilities                        379                 508

Total Liabilities                               177,937             186,418
Commitments and Contingencies
 (See Notes 6, 8, 12, 14)
Shareholders' equity:

Common stock, $.20 par value,
 10,000,000 shares authorized;
 5,845,300 shares issued,
 5,054,661 outstanding in 1999 and 1998           1,169                1,169

Additional paid-in capital                        7,225                7,225
Accumulated other comprehensive
 income (loss)                                   (2,454)               5,898
Retained earnings                               117,552              108,403
                                                123,492              122,695
Common treasury stock, at cost,
 790,639 shares in 1999 and 1998                 (7,375)              (7,375)

Total Shareholders' Equity                      116,117              115,320

Total Liabilities and Shareholders' Equity    $ 294,054           $  301,738



              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,
                                                                            

                                                    1999             1998           1997
                                                               (in thousands)

Revenues:
 Premiums                                       $  33,958        $  38,358        $  40,249
 Net investment income                              6,928            7,808            8,106
 Net realized gain on sale of real estate             629              -0-            4,548
 Earned insurance charges                           4,752            5,971            6,989
 Other                                              1,046            1,470            3,451
                                                   47,313           53,607           63,343
Benefits and expenses:
 Policyholder benefits and expenses                13,940           16,258           19,905
 Interest expense on contract holders
 deposit funds                                      1,903            2,374            2,596
 Amortization of present value of future
 profits of acquired businesses                     5,185            6,143            6,167
 Amortization of deferred policy
  acquisition costs                                 5,158            5,174            4,826
 Operating expenses                                11,740           11,822           12,755
 Interest expense                                   2,374            2,863            3,683
                                                   40,300           44,634           49,932
Income before federal income tax and
 equity in net earnings of affiliates               7,013            8,973           13,411
Provision for federal income taxes:
   Current                                            335              119            1,348
   Deferred                                           839            2,249            2,193

Income before equity in net earnings
 of affiliates                                      5,839            6,605            9,870
Equity in net earnings of affiliate,
 net of tax                                         3,310            2,613            6,458
Net Income                                      $   9,149        $   9,218        $  16,328


              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,
                                           1999            1998           1997
                                                       (in thousands)
Net Income Per Share (Note 15)
Basic:
Average weighted shares outstanding       5,055           5,383          5,428
Basic earnings per share              $    1.81       $    1.71      $    3.01
Diluted:
Common stock and common stock
 equivalents                              5,200           5,557          5,589
Diluted earnings per share            $    1.76       $    1.66      $    2.92





              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, 1996                  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, 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
    depreciation 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 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
Balance at December 31, 1999                  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                     Accumulated
                                                  (Depreciation)         Maturities                Other
                                                  of Equity              Available for             Comprehensive
                                                  Securities             Sale                      Income (Loss)
                                                                                               


Balance at December 31, 1996                       $   25                 $   1,220                  $  1,245
Comprehensive Income:
  Net Income
Other Comprehensive Income:
  Change in net unrealized gain on
    investments in fixed maturities
    available for sale, net of tax                                            5,440                     5,440
  Change in net unrealized
    appreciation of equity securities,
    net of tax                                          7                                                   7

 Total Comprehensive Income                             7                     5,440                     5,447

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


              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, 1996                                  $     82,857         $   (422)            $   92,074
Comprehensive Income:
  Net Income                                                        16,328                                  16,328
Other Comprehensive Income:
  Change in net unrealized gain on
  investments in fixed maturities
  available for sale, net of tax                                                                             5,440
  Change in net unrealized appreciation
     of equity securities, net of tax                                                                            7
 Total Comprehensive Income                                         16,328               -0-                21,775

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 depreciation of equity
    securities, net of tax                                                                                     (34)

 Total Comprehensive Income                                          9,218               -0-                 8,424
   Purchase of treasury stock                                          -0-            (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 loss
   on investments in fixed
   maturities available for
   sale, net of tax                                                                                        (8,354)
  Change in net
unrealized
   appreciation 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




              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,
                                                     1999              1998            1997
                                                                   (in thousands)
                                                                              

CASH FLOWS FROM OPERATING
ACTIVITIES

Net Income                                      $   9,149           $   9,218         $  16,328
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of present value of future
profits of acquired business                         5,185              6,143             6,167
Amortization of deferred policy
acquisition costs                                    5,158              5,174             4,826
Equity in undistributed earnings of
affiliate                                           (5,654)            (4,965)           (9,323)
Changes in assets and liabilities:
Decrease (Increase) in accrued
investment income                                       29                (25)               49
Increase in agency advances and
other  receivables                                  (1,548)            (2,577)           (3,624)
Increase in due premiums                              (211)            (1,095)             (435)
Increase in deferred policy acquisition
costs                                               (9,138)            (8,562)           (8,615)
Decrease (increase) in other assets                    634                954              (640)
(Decrease) increase in policy liabilities and
accruals                                            (1,047)               111             3,629
Decrease in other liabilities                         (395)              (406)           (6,368)
(Decrease) increase in deferred federal
income taxes                                          (762)             2,353             3,679
Other, net                                           1,172               (373)           (1,482)
Net cash provided by operating activities       $    2,572          $   5,950        $    4,191

              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,
                                                         1999                1998                  1997
                                                                          (in thousands)
                                                                                           

CASH FLOWS FROM INVESTING
ACTIVITIES

Fixed maturities purchased                         $  (19,557)         $   (14,082)           $   (4,056)
Proceeds from sales and maturities of
 fixed maturities                                      18,071               16,473                 7,998
Net decrease (increase) in short-term                   2,750                6,886                (8,860)
investments
Purchase & retirement of property
 and equipment                                            403                  (34)                7,075
Net cash provided by investing activities               1,667                9,243                 2,157

CASH FLOW FROM FINANCING
 ACTIVITIES
Repayment of subordinated notes payable                (6,148)              (6,147)               (6,148)

Purchase of treasury stock.                               -0-               (6,953)
Net cash used in financing activities                  (6,148)             (13,100)               (6,148)
Net increase (decrease) in cash                        (1,909)               2,093                   200
Cash and cash equivalents, beginning of                 2,601                  508                   308
year
Cash and cash equivalents, end of year             $      692          $     2,601            $      508
Supplemental Cash Flow Disclosures:
Income taxes paid                                  $      485          $     1,184            $      150
Interest paid                                      $    2,621          $     2,935            $    3,677




              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,  1999.   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 45% 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  generally  accepted  accounting  principles  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 generally  accepted
accounting principles 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.




                                      F-12


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

Premiums  and  discounts  on  collateralized  mortgage  obligations  (CMOs)  are
amortized  over  the  estimated  redemption  period  as  opposed  to the  stated
maturity. An adjustment to the investment and investment income is recorded on a
retrospective  basis to reflect the amounts  that would have existed had the new
effective  yield been applied  since the  acquisition  of the CMOs.  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.


                                      F-13

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


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.  Investors-NA
intends  to claim an income tax  deduction  of its  upcoming  tax return 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).

Net income for 1997 includes $4.5 million  (before federal income tax) resulting
from the sale during the fourth quarter of 1997 of the Bridgepoint Square office
complex.  The  aggregate  selling  price was $78  million  which  was  allocated
approximately 21.5% to Family Life and 78.5% to Investors Life Insurance Company
of North America (Investors-NA),  a subsidiary of ILCO, in accordance with their
respective  ownership  interests in the Bridgepoint  Square office complex.  The
sale closed on December 5, 1997.

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  over the premium  paying
period of the related  policies.  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.

                                      F-14


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



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 is pending regulatory approval.

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 for mortgage life and annuity  insurance
products  are  computed  using the net level  premium  method or an  actuarially
equivalent  method.  The  assumption  for  future  investment  yield  is  8.5 %.
Assumptions  for mortality and withdrawal are based on company  experience  with
provision for possible adverse deviation.

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.



                                      F-15


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

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,
including estimates of additional  development of initial claims estimates,  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

In February,  1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109).
The Company adopted FAS 109 on a prospective  basis  effective  January 1, 1993.
FAS 109 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.

Revenue Recognition

Premiums on mortgage life and health products are recognized as revenue over the
premium  paying  period.  Benefits  and  expenses  are  associated  with  earned
premiums,  so as to  result  in  recognition  of  profits  over  the life of the
contracts.

Revenues for universal  life and annuity  products  consist of contract  charges
(earned  insurance  charges) assessed against the fund values and net investment
income.  Related benefit  expenses  primarily  consist of net investment  income
credited to the fund values after  deductions  for  investment and risk charges.
Revenues  for  universal  life and annuity  products  consist of net  investment
income and mortality,  administration and surrender charges assessed against the
fund values.  Related benefit expenses include  universal life benefit claims in
excess of fund values and net investment  income  credited to universal life and
annuity 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.

                                      F-16


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

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 February, 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No.  128,  "Earnings  Per Share,"  which  revises the  standards  for  computing
earnings per share previously  prescribed by Accounting Principles Board ("APB")
Opinion No. 15, "Earnings Per Share." The Statement  establishes two measures of
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.  The Statement  requires dual presentation of basic
and  diluted  earnings  per share on the face of the  income  statement  for all
entities with potential dilutive securities outstanding.

The Statement also requires a reconciliation of the numerator and denominator of
the basic earnings per share computation to the numerator and denominator of the
diluted earnings per share  computation.  The Statement is effective for interim
and annual periods ending after December 15, 1997. The Company  adopted SFAS No.
128 for the year ended December 31, 1997.

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 and has
restated  financial  statement   presentation  for  1997  as  required  by  this
pronouncement.

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% or more
of the Company's revenue. The Company has no foreign operations.

                                      F-17


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


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, and restated disclosures for 1997 as required by this pronouncement.

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 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 is not
anticipated  to 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 1999
presentation.


                                      F-18


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

2.       Investments

Fixed Maturities

Investments  in fixed  maturities  by category  at  December  31, 1999 and 1998,
respectively, were as follows (in thousands):



                                                                      Gross              Gross
                                                 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






                                                                      Gross               Gross
                                                 Amortized          Unrealized         Unrealized           Market
                                                   Cost               Gains              Losses             Value
                                                                                                 

U.S. Treasury securities and
obligations of U.S. government
agencies and corporations                     $     16,125       $     1,014       $          0       $     17,139
States, municipalities and
political subdivisions                               2,990               107                  0              3,097
Corporate securities                                24,499               783                  4             25,278
Mortgage-backed securities                          33,113               778                  3             33,888
Total fixed maturities available
for sale                                      $     76,727       $     2,682       $          7       $     79,402


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 $(258,000) and $937,000 in 1999 and 1998,
respectively.  The  adjustment  is made to recognize  deferred  taxes on the net
unrealized gain (loss).  Additional deferred tax expense (benefit) of $(149,000)
and $313,000 in 1999 and 1998, 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, 1999
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                                  $    9,664        $     9,655
Due after one year through five years                16,065             15,696
Due after five years through ten years                8,579              8,448
Due after ten years                                  16,397             16,422
Mortgage-backed securities                           27,547             27,294
Total fixed maturities available for
sale                                             $   78,252        $    77,515

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 1999, 1998
and 1997 were $18,071,000,  $16,473,000 and $7,998,000, respectively. There were
gains of $4,739  and  losses of $0 in 1999 and  gains of  $5,916  and  losses of
$16,437 in 1998 and gains of $23,000 and losses of $0 in 1997.



                                      F-19


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


The net change in  unrealized  investment  gains  (losses)  represents  the only
component of other  comprehensive  income for the years ended December 31, 1999,
1998 and 1997. 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 is  $(9,440,000),
$(1,044,000) and $6,433,000 for 1999, 1998 and 1997, respectively.

Change in Unrealized Gains
 (Losses) on Investments                  1999            1998           1997
                                                     (in thousands)

Fixed maturities                    $  (12,852)      $  (1,170)     $    8,369
Equity securities                            2             (52)             11
                                       (12,850)         (1,222)          8,380
Deferred federal income taxes           (4,498)           (428)          2,933
Net change in unrealized gains
 (losses) on investments            $   (8,352)      $    (794)     $    5,447

The following table sets forth the reclassification adjustments required for the
years ended December 31, 1999, 1998 and 1997:

Reclassification Adjustments              1999            1998            1997
                                                     (in thousands)

Unrealized holding gains (losses)
 on investments arising
 during the period                   $  (8,357)      $    (790)     $    5,432
Reclassification adjustments
 for gains included in
 net income                                  5              (4)             15
Unrealized gains (losses) on
 investments, net of
 reclassification adjustment         $  (8,352)      $     (794)    $    5,447




                                      F-20



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

Net Investment Income

The components of net investment income are summarized as follows:
                                                    Year ended December 31,
                                          1999            1998            1997
                                                       (in thousands)

Fixed maturities                     $   5,221      $     5,792     $     5,853
Other, including short-term
  investments and policy loans           1,756            2,080           2,336
                                         6,977            7,872           8,189
Investment expenses                        (49)             (64)            (83)
Net investment income                $   6,928      $     7,808     $     8,106

There were no impairments  in the value of  investments  in 1999,  1998 or 1997,
which were considered other than temporary.

3.        Disclosure about Fair Value of Financial Instruments

The estimated fair values of the Company's financial instruments at December 31,
1999 are as follows:
                                                  Carrying           Fair
                                                   Amount            Value
                                                       (in thousands)

Financial assets:
     Fixed maturities                             $ 77,515         $ 77,515
     Policy loans                                    3,595            3,595
     Short-term investments                         24,839           24,839
     Cash and cash equivalents                         692              692
Financial liabilities:
      Subordinated notes payable to
       affiliate                                    41,497           41,497




                                      F-21



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

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-22



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

4. Investment in InterContinental Life Corporation

The Company  carries its  investment in ILCO on the equity method of accounting.
At December 31, 1999 excess of cost over net assets acquired of $1,686,000,  net
of  accumulated  amortization  of  $1,644,000,  is  included  in  investment  in
affiliate.  At December 31, 1998,  these amounts were $1,686,000 and $1,544,000,
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:                  1999                 1998
                                                            (in thousands)

Investments                                     $    678,814        $    702,086
Deferred policy acquisition costs and
 present value of future profits                      75,429              75,619
Other assets                                         566,956             572,543
     Total Assets                               $  1,321,199        $  1,350,248
Policy liabilities and contract holder
 deposit funds                                  $    675,831        $    694,351
Other liabilities                                    493,677             501,662
Total liabilities                                  1,169,508           1,196,013
Common stock, additional paid-in
  capital and retained earnings                      155,403             142,664

Accumulated other comprehensive
income                                               (3,712)              11,571

Shareholders' equity                                 151,691             154,235

Total liabilities and shareholders' equity      $  1,321,199        $  1,350,248



                                      F-23


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

  Results of Operations:               1999             1998             1997
                                                   (in thousands)

Premium income                    $    11,132        $  10,890         $  11,031
Net investment income                  49,913           54,619            57,740
Gain on sale of real estate               112              -0-            14,630
Earned insurance charges               40,447           41,067            40,853
Benefits and expenses                  85,466           91,876            96,081
Net income                             12,765           11,119            20,540
Basic earnings per share           $     1.45        $    1.27         $    2.37
Diluted earnings per share         $     1.45        $    1.25         $    2.35

Total  market  value  basis of the  Company's  investment  in ILCO  approximated
$36,377,401  and  $39,326,920 at December 31, 1999 and 1998,  respectively.  FIC
directly or  indirectly  owns  3,932,692  shares  (approximately  45%) of ILCO's
outstanding common stock at December 31, 1999, 1998 and 1997.

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
16, 1998, FIC owned, directly and indirectly through Family Life,  approximately
45% 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 included in net earnings of ILCO is $1,289,000,
$642,000 and  $9,623,000,  for the years ended December 31, 1999, 1998 and 1997,
respectively.

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.


                                      F-24


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

An analysis of the present value of future profits follows:

                                                    1999              1998
                                                       (in thousands)

Balance at beginning of year                  $   28,294          $   34,437
Accretion of interest                              2,154               2,667
Amortization during the period                    (7,339)             (8,810)
Present value of future profits at
December 31                                   $   23,109          $   28,294

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):

                                  2000 $ 5,784
                                  2001 $ 4,426
                                  2002 $ 3,158
                                  2003 $ 2,459
                                  2004 $ 1,915

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:

                                                   1999                 1998
                                                        (in thousands)

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

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%                                              1,567               2,463

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%              32,055              32,807

Total subordinated notes payable                 $ 41,497            $ 47,645

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)

                                    2000              $6,148
                                    2001               6,148
                                    2002               6,148
                                    2003               6,148
                                    2004               6,148
                           Thereafter                 10,757
                                                     $41,497


                                      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 non-life
subsidiaries.  The Company's life insurance  subsidiary files a separate federal
income tax return.

The U.S. federal income tax provision (benefit) charged to continuing operations
was as follows:
                                        1999           1998          1997
                                                   (in thousands)

Current                              $   335        $   119       $ 1,348
Deferred                                 839          2,249         2,193
Total provision for
 income tax                          $ 1,174        $ 2,368       $ 3,541

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:  1999 1998 1997
(in thousands)

Income taxes at the statutory rate   $  2,454       $ 3,141       $ 4,694
Increase (decrease) in taxes
 resulting from:
  Small life insurance company
   deduction                             (608)         (238)         (499)
  Dividends received deduction           (526)         (586)         (649)
   Tax rate differential                  (70)          (90)         (135)
   Non-deductible compensation             17            38           -0-
   Other items, net                       (93)          103           130
Total provision for income taxes    $   1,174       $ 2,368       $ 3,541

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:                         1999                1998
                                                       (in thousands)

Equity in net earnings of affiliate            $   4,815          $   4,414
Excess pension benefit                               436                436
Deferred policy acquisition costs                 14,582             13,072
Present value of future profits                    7,798              8,221
Guaranty fund assessments                            219                388
Deferred and uncollected premium                   4,213              4,141
Unrealized (depreciation) appreciation
on marketable securities                            (406)             1,250

Other taxable temporary differences                4,927              5,314

       Total deferred tax liability               36,584             37,236

Deferred tax asset:
Policy reserves                                   11,397             12,123
Net operating loss carry forward                   1,785                957
Alternative minimum tax credit                       122                114
Accrued liabilities                                   58                 58

      Total deferred tax assets, net              13,362             13,252

      Net deferred tax liability                $ 23,222           $ 23,984

An additional  deferred  federal income (asset)  liability of  $(1,656,000)  and
$(97,000) for 1999 and 1998, 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. 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  $116,070  and  $115,524 at December 31, 1999 and
1998, respectively.




                                      F-29


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

The amounts in the consolidated  financial  statements for reinsurance ceded are
as follows:

                                                        December 31,
                                         1999             1998         1997
                                                     (in thousands)

Future policy benefits                $ 14,512         $ 11,950       $   9,765
Unearned premiums                           46               28              90
Other policy claims and benefits
payable                                    290              448           1,279
                                      $ 14,848         $ 12,426       $  11,134

                                                   For the years ended
                                         1999            1998           1997
                                                     (in thousands)

Premiums                              $  1,091         $  1,419        $  1,112
Policyholder benefits and expenses    $  2,260         $  2,479        $  1,697

Estimated  amounts  recoverable  from reinsurers on paid claims were $32,243 and
$4,603 in 1999 and 1998,  respectively.  These  amounts  were  included in other
receivables in the  consolidated  financial  statements at December 31, 1999 and
1998.

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

                                      F-30


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

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 FLC aggregated approximately $64,235,000
and $54,514,000 at December 31, 1999 and 1998, 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  $26,874,275 and
$30,294,446  at December 31, 1999 and 1998,  respectively.  Statutory net income
aggregated approximately  $6,703,705,  $10,473,492 and $13,302,000 for the years
ended December 31, 1999, 1998 and 1997, 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, 1999 or 1998.

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.  The  Company has not
estimated the  potential  effect of the  Codification  guidance on statutory net
income and statutory capital and surplus. However, the actual effect of adoption
could  differ as changes  are made to the  Codification  guidance,  prior to its
recommended effective date of January 1, 2001.

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% 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
expire at the time of final repayment of each of the respective loans.


                                      F-31


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

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.

     (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.




                                      F-32



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

The pension costs for the plan includes the following components:
                                                1999         1998         1997
                                                         (in thousands)

Service cost for benefits earned
 during the year                           $     52       $    59      $   88

Interest cost on projected benefit
 obligation                                     500           452         509

Expected return on plan assets                 (535)         (633)       (719)

Pension benefit                            $     17       $  (122)     $ (122)

The following summarizes the  status of the plan at December 31:
                                                     1999           1998
                                                       (in thousands)

Change in benefit obligation:
  Benefit obligation at beginning of year         $   7,690       $   6,683
   Service cost                                          52              59
   Interest cost                                        500             452
   Benefits paid                                     (1,581)           (897)
   (Gain)/Loss due to change in assumptions               0             525
   (Gain)/Loss due to experience                         18             868
 Benefit obligation at end of year                $   6,679       $   7,690

Change in plan assets:
Fair value of plan assets at beginning of year    $   7,721       $   8,361
 Actual return on plan assets                           212             495
 Benefits paid                                       (1,581)           (898)

Fair value of plan assets at end of year          $   6,352       $   7,958

Funded Status:
 Funded status at end of year                     $    (327)      $     268
 Unrecognized actuarial net (gain) loss               2,143           1,564
Prepaid pension expense at end of year            $   1,816       $   1,832



                                      F-33


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

The significant assumptions for the plans are as follows:

The discount rate for projected benefit  obligations was 7.25%,  7.25% and 7.75%
for the years ended December 31, 1999, 1998 and 1997, respectively.

The assumed long-term rate of compensation increases was 5.0%, 5.0% and 6.0% for
the years ended December 31, 1999, 1998 and 1997, respectively.

The assumed long-term rate of return on plan assets was 8.0% for the years ended
December 31, 1999, 1998 and 1997.

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 1% of the  participant's  plan  compensation.  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,  1999,  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.


                                      F-34


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


Rent  expense  in  1999,  1998  and 1997 was  $591,947,  $628,979  and  $781,104
respectively. Minimum annual rentals are as follows:

                               (in thousands)
                               2000     $   478
                               2001         471
                               2002         320
                               2003          19
                               2004         -0-
                           Thereafte       - 0-
                           Total        $ 1,288

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 44.5% 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.

FIC Property,  a subsidiary of FIC,  conducted  the leasing  activities  for the
Bridgepoint  Square properties  previously owned by Investors-NA.  In connection
with the December,  1997 sale of Bridgepoint  Square Offices by Investors-NA and
Family Life Insurance Company, FIC Realty received a commission in the amount of
$156,000, of which $122,538 was paid by Investors-NA and $33,462 by Family Life.

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% 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.

                                      F-35


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


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% 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.


                                      F-36



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

FIC was  reimbursed by ILCO for rental  expense and certain other  miscellaneous
expenses   incurred   during  1997  on  behalf  of  ILCO.  The  amount  of  such
reimbursement was approximately $822,000.

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 $1,916,350, $1,610,397 and $824,425
and ILCO's insurance subsidiaries paid $2,730,189,  $2,818,095 and $3,010,110 to
FIC Computer for data processing  services  provided during 1999, 1998 and 1997,
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 $13 million, $11 million, and $14 million
in 1999, 1998 and 1997, 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.

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.

                                      F-37


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

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,
                                                      1999               1998            1997
                                                                                 
                                           (Amounts in  thousands,  except per share amounts)

Basic:
  Net income available to common
  shareholders                                   $    9,149        $    9,218        $   16,328
  Average weighted common stock
   outstanding                                        5,055             5,383             5,428
  Basic earnings per share                       $     1.81        $     1.71        $     3.01
Diluted:
  Net income available to common
shareholders                                     $    9,149        $     9,218       $   16,328
  Average weighted common stock
outstanding                                           5,055              5,383            5,428
  Common stock options                                  277                293              293
  Effect of shares of ILCO owns of FIC                  (85)               (85)             (86)
  Repurchase of treasury stock                          (47)               (34)             (46)
Common stock and common stock
equivalents                                           5,200              5,557            5,589
  Diluted earnings per share                     $     1.76        $      1.66       $    2.92


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 1999, premium
income  from  these   products   was  derived   from   forty-nine   states  with
concentrations   of   approximately   25%  and  25%  in  California  and  Texas,
respectively. In 1998, these amounts were 24% and 25%, respectively.


                                      F-38



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



17.       Quarterly Financial Data (unaudited)(in thousands, except per share
          data)


                                                             Three Months                     Three Months
                                                                 Ended                            Ended
                                                               March 31,                         June 30,
                                                                                                  

                                                           1999              1998              1999            1998
Total revenues                                          $ 12,115          $ 13,476         $  12,308         $ 14,028
Net income                                              $  2,268          $  2,333         $   1,801         $  2,493
Basic earnings per share                                $   0.45          $   0.43         $    0.36         $   0.46
Diluted earnings per share                              $   0.44          $   0.42         $    0.35         $   0.44



                                                            Three Months                    Three Months
                                                                 Ended                          Ended
                                                            September 30,                  December 31,
                                                           1999              1998              1999             1998
                                                                                                     

Total revenues                                          $  11,721         $  13,461        $   11,169        $ 12,642
Net income                                              $   2,476         $   2,153        $    2,604        $  2,240
Basic earnings per share                                $    0.49         $    0.40        $     0.52        $   0.43
Diluted earnings per share                              $    0.48         $    0.38        $     0.50        $   0.41



18.  Subsequent Events

On January  18,  2000,  FIC  announced  that it will pay a cash  dividend in the
amount of $.18 per share, payable on April 12, 2000 to shareholders of record on
April 5, 2000.





                                      F-39



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



                                                      December 31, 1999
                                                         (in thousands)

Column A                                          Column B              Column C            Column D

                                                                                         Amount Shown on
Type of Investment                              Amortized Cost        Fair Value        the Balance Sheet
                                                                                       

Fixed Maturities Available for Sale:
  Bonds:
  United States Government and
    government agencies and authorities       $     8,938         $     9,264          $     9,264
  States, municipalities and political
    subdivisions                                    4,972               5,081                5,081
Corporate securities                               36,795              35,876               35,876
Mortgage-backed securities                         27,547              27,294               27,294
     Total fixed maturities                        78,252              77,515               77,515
Equity securities:
  Common Stocks
  Industrial and miscellaneous other                   11                   4                    4
     Total equity securities
Policy loans                                        3,595               3,595                3,595
Short -term investments                            24,839              24,839               24,839
     Total investments                           $106,697            $105,953             $105,953



                                      F-40


                FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
           SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
                                 BALANCE SHEETS
                                                            December 31,
                                                       1999               1998
         ASSETS                                            (in thousands)

Cash and cash equivalents                       $        70        $       55
Short-term investments                                1,037                57
Long-term bonds                                          16                16
Investments in subsidiaries*                        130,399           131,333
Property and equipment, net                             105               509
Other assets                                            965               968
Accounts receivable                                     100               126

  Total assets                                  $   132,692        $  133,064

         LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
  Subordinated notes payable                    $     5,748        $    6,742
  Other liabilities and intercompany payables         5,761             5,936

   Total liabilities                                 11,509            12,678

Shareholders' equity
  Common stock, $.20 par value,
  10,000,000 shares authorized;
  5,845,300 shares issued, 5,054,661
  shares outstanding in 1999 and 1998
                                                      1,169              1,169
Additional paid-in capital                            7,225              7,225

Accumulated other comprehensive income               (2,454)             5,898
Retained earnings (including $115,363
 and $106,037 of undistributed earnings
 of subsidiaries at December 31, 1999
 and 1998)                                          117,552            108,403
                                                    123,492            122,695
Common treasury stock, at cost, 518,639
 shares in 1999 and
 1998 respectively                                   (2,309)            (2,309)

Total shareholders' equity                          121,183            120,386

Total liabilities and shareholders' equity      $   132,692         $  133,064

*  $62,144  and  $60,383  are  eliminated  in  consolidation  in 1999 and  1998,
respectively.



                                      F-41



                FINANCIAL INDUSTRIES CORPORATION (PARENT COMPANY)
           SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT,
                              STATEMENTS OF INCOME
                               FOR THE YEARS ENDED
                                                       December 31,
                                                     (in thousands)
                                        1999           1998           1997

Income                             $    629    $         89      $   1,375

Expenses:
Operating expenses                      193             436          1,136
Interest expense*                       613             769            869
                                        806           1,205          2,005
Loss from operations                   (177)         (1,116)          (630)
Equity in undistributed
 earnings from subsidiaries           9,326          10,334         16,958
Net income                         $  9,149      $    9,218       $ 16,328


*In  consolidation,  $282 is reported  as a  reduction  in equity in earnings of
unconsolidated subsidiary.


                                      F-42


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



                                                                      FOR THE YEARS ENDED
                                                                          December 31,
                                                                        (in thousands)
                                                           1999             1998            1997
                                                                                       

  CASH FLOWS FROM OPERATING ACTIVITIES

Net income                                               $ 9,149       $   9,218        $  16,328
Adjustments to reconcile net income to net
 cash used in operating activities:
  Decrease (increase) in accounts receivables                 26             (49)             (20)
  Increase in investment in subsidiaries*                 (7,418)        (14,837)         (21,024)
  Decrease in other assets                                     3              50               68
  (Decrease) increase in other liabilities and
    intercompany payables                                   (175)          3,111             (980)
  Other                                                      404             (35)           5,702
  Net cash provided by (used in) operating
    activities                                             1,989          (2,542)              74
CASH FLOWS FROM FINANCING
ACTIVITIES
Net change in short-term investments                        (980)          1,046              823
Change in subordinated notes payable
   to Investors-NA                                          (994)          3,384             (895)

Purchase of treasury stock                                   -0-          (1,887)               0
 Net cash provided by (used in) financing
   activities                                            (1,974)           2,543              (72)
 Increase in cash                                            15                1                2
Cash and cash equivalents, beginning of year                 55               54               52
Cash and cash equivalents, end of year                   $   70        $      55        $      54


*Eliminated in consolidation


                                      F-43


                FINANCIAL INDUSTRIES CORPORATION AND SUBSIDIARIES
                             SCHEDULE IV-REINSURANCE
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
                                 (in thousands)




                                                           Ceded to            Assumed                           Percentage
                                         Direct              Other           From Other            Net            of Amount
                                         Amount            Companies          Companies           Amount           Assumed
                                                                                                       

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%
1997
Life insurance in-
 force                              $  7,809,531        $   403,600          $    6,663      $  7,412,594            0.09%
Premium:
Life insurance                      $     40,333        $       704          $       94      $     39,723            0.24%
Accident-health
 insurance                                   934                408                 -0-               526            0.00%
Total                               $     41,267       $      1,112          $       94      $     40,249            0.23%



                                      F-44


                                   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, 2000.

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

/s/ Eugene E. Payne                                /s/ Jeffrey H. Demgen
Eugene E. Payne, Director                          Jeffrey H. Demgen, Director

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

/s/ Theodore A. Fleron                             /s/ Charles K. Chacosky
Theodore A. Fleron, Director                       Charles K. Chacosky, Director

/s/ Dale E. Mitte
Dale E. Mitte, Director

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

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

/s/ Frank Parker
Frank Parker, Director






                                      -54-








                                  EXHIBIT INDEX


Exhibit    Page         Description
No.        Nos.


3                       The current Articles of Incorporation and Bylaws of
                        Registrant.  Exhibit 3 to Registrant's Report on Form
                        10-K filed for the year 1985 is hereby incorporated by
                        reference.

3(a)                    Certificate of Amendment to the Articles of
                        Incorporation of Registrant, dated November 12, 1996,
                        filed as an exhibit with Registrant's 10-Q for the
                        quarter ended September 30, 1996 and incorporated herein
                        by reference.

10(ah)                  Guaranty Agreement dated as of December 28, 1988 from
                        Registrant to a group of banks on Senior Loan to ILCO,
                        filed as an exhibit with Registrant's Form 10-K for the
                        year ended December 31, 1989 and incorporated herein by
                        reference.

10(ai)                  Guaranty Agreement, dated as of December 1, 1988, on
                        loan to ILCO on the Note Purchase Agreement between
                        ILCO and a Connecticut based insurance/financial
                        services company; a guaranty agreement in substantially
                        identical form was provided by FIC to each of the seven
                        other entities participating in said loan, filed as an
                        exhibit with Registrant's Form 10-K for the year ended
                        December 31, 1989 and incorporated herein by reference.

10(aj)                  Guaranty Agreement, dated as of July 30, 1990, issued by
                        the Registrant to a holder of ILCO's 1999 Series
                        Subordinated Notes; a guaranty agreement in
                        substantially identical form was provided by the
                        Registrant to each of the holders of said notes.

*10(ak)                 Stock Purchase Agreement by and among Merrill Lynch
                        Insurance Group, Inc., Family Life Insurance Company,
                        Family Life Corporation, Family Life Insurance
                        Investment Company and Financial Industries Corporation
                        dated as of March 19, 1991, as amended.

*10(al)                 Note dated June 12, 1991 in the amount of $30 million
                        made by a subsidiary of the Registrant in favor of
                        Merrill Lynch Insurance Group, Inc.


                                      Ex-1


*10(am)                 Note dated June 12, 1991 in the amount of $12 million
                        made by a subsidiary of the Registrant to Merrill Lynch
                        & Co., Inc.

*10(an)                 Note dated June 12, 1991 in the amount of $2 million
                        made by a subsidiary of the Registrant in favor of the
                        Seller under the Stock Purchase Agreement dated as of
                        March 19, 1991.

*10(ao)                 Performance and Payment Guaranty Agreement dated June
                        12, 1991 by Registrant in favor of the Seller under the
                        Stock Purchase Agreement dated as of March 19, 1991.

*10(ap)                 Payment Guaranty Agreement dated June 12, 1991 by
                        Registrant in favor of the Seller under the Stock
                        Purchase Agreement dated as of March 19, 1991.

*10(aq)                 InterCreditor Agreement dated June 12, 1991 among
                        Investors Life Insurance Company of North America,
                        Investors Life Insurance Company of California, Merrill
                        Lynch Insurance Group, Inc., and Merrill Lynch & Co.,
                        Inc.

*10(ar)                 Credit Agreement dated as of June 12, 1991 among Family
                        Life Corporation (a subsidiary of the Registrant), the
                        Lenders named therein and the Agent.

*10(as)                 Guaranty Agreement by Registrant of the $50 million loan
                        to Family Life Corporation in favor of the bank lenders
                        under the Credit Agreement dated as of June 12, 1991.

*10(at)                 Guaranty Agreement by a subsidiary of the Registrant on
                        the $50 million loan to Family Life Corporation in favor
                        of the bank lenders under the Credit Agreement dated as
                        of June 12, 1991.


*10(au)                 Pledge Agreement by Family Life Corporation (a
                        subsidiary of the Registrant) in favor of the bank
                        lenders under the Credit Agreement dated as of
                        June 12, 1991.

*10(aw)                 Pledge Agreement by Family Life Insurance Investment
                        Company (a subsidiary of the Registrant) in favor of the
                        bank lenders under the Credit Agreement dated as of June
                        12, 1991.


                                      Ex-2


*10(ax)                 Note dated June 12, 1991 in the amount of $22.5 million
                        made by a subsidiary of the Registrant in favor of
                        Investors Life Insurance Company of North America.

*10(ay)                 Note dated June 12, 1991 in the amount of $2.5 million
                        made by the Registrant in favor of Investors Life
                        Insurance Company of California.

*10(az)                 InterCreditor Agreement among Investors Life Insurance
                        Company of North America, Investors Life Insurance
                        Company of California, and the Agent under the Credit
                        Agreement dated as of June 12, 1991.

*10(aaa)                Option Agreement by the Registrant in favor of Investors
                        life Insurance Company of North America and Investors
                        Life Insurance Company of California.

10(aab)                 Hotel Lease Agreement dated as of August 22, 1991
                        between Investors Life Insurance Company of North
                        America and FIC Realty Services, Inc. filed as exhibit
                        10(aab) by Registrant on Form 10-K for the year ended
                        December 31, 1991 is hereby incorporated by reference.

10(aac)                 Management Agreement dated as of September 4, 1991
                        between Investors Life Insurance Company of North
                        America and FIC Property Management, Inc. filed as
                        exhibit 10(aac) by Registrant on Form 10-K for the year
                        ended December 31, 1991 is hereby incorporated by
                        reference.

10(aad)                 Stock Option Agreement dated March 8, 1986 between
                        ILCO and Registrant filed as exhibit 10(aad) by
                        Registrant on Form 10-K for the year ended December 31,
                        1992 is hereby incorporated by reference.

10(aae)                 Amended and Restated Guaranty of Registrant dated
                        January 29, 1993 filed as exhibit 10(aae) by Registrant
                        on Form 10-K for the year ended December 31, 1992 is
                        hereby incorporation by reference.

10(aaf)                 Surplus Debenture dated as of June 12, 1991 in the
                        amount of $97.5 million made by Family Life Insurance
                        Company in favor of Family Life Corporation filed as
                        exhibit 10(aaf) by Registrant on Form 10-K for the year
                        ended December 31, 1993 is hereby incorporated by
                        reference.


                                      Ex-3



10(aag)                 Note dated July 30, 1993 in the amount of $30 million
                        made by Family Life Corporation in favor of Investors
                        Life Insurance Company of North America filed as exhibit
                        10(aag) by Registrant on Form 10-K for the year ended
                        December 31, 1993 is hereby incorporated by reference.

10(aah)                 Note dated July 30, 1993 in the amount of $4.5 million
                        made by Family Life Insurance Investment Company in
                        favor of Investors Life Insurance Company of North
                        America filed as exhibit 10(aah) by Registrant on Form
                        10-K for the year ended December 31, 1993 is hereby
                        incorporated by reference.

10(aai)                 Amendment No. 1 dated July 30, 1993 between Family
                        Life Corporation and Investors Life Insurance Company of
                        North America amending $22.5 million note filed as
                        exhibit 10(aai) by Registrant on Form 10-K for the year
                        ended December 31, 1993 is hereby incorporated by
                        reference.

10(aaj)                 Amendment No. 1 dated July 30, 1993 between Family
                        Life Insurance Company and Family Life Corporation
                        amending $97.5 million Surplus Debenture filed as
                        exhibit 10(aaj) by Registrant on Form 10-K for the year
                        ended December 31, 1993 is hereby incorporated by
                        reference.

10(aak)                 Guaranty Agreement dated July 30, 1993 by Registrant of
                        the $30 million loan to Family Life Corporation in favor
                        of Investors Life Insurance Company of North America
                        filed as exhibit 10(aak) by Registrant on Form 10-K for
                        the year ended December 31, 1993 is hereby incorporated
                        by reference.

10(aal)                 Guaranty Agreement dated July 30, 1993 by Registrant of
                        the $4.5 million loan to Family Life Insurance
                        Investment Company in favor of Investors Life Insurance
                        Company of North America filed as exhibit  10(aal) by
                        Registrant on Form 10-K for the year ended December 31,
                        1993 is hereby incorporated by reference.

10(aam)                 Letter agreement dated May 26, 1993 among Family Life
                        Corporation, Family Life Insurance Investment Company,
                        Merrill Lynch & Co., Inc. and Merrill Lynch Group, Inc.
                        filed as exhibit 10(aam) by Registrant on Form 10-K for
                        the year ended December 31, 1993 is hereby incorporated
                        by reference.

                                      Ex-4


10(aan)                 Waiver and Amendment Agreement dated as of July 23,
                        1993 among Family Life Corporation, the Lenders named
                        therein and the Agent filed as exhibit 10(aan) by
                        Registrant on Form 10-K for the year ended December 31,
                        1994 is hereby incorporate by reference.

10(aao)                 Waiver and Amendment Agreement dated as of December
                        14, 1993 among Family Life Corporation, the Lenders
                        named therein and the Agent filed as exhibit 10(aao) by
                        Registrant on Form 10-K for the year ended December 31,
                        1994 is hereby incorporated by reference.

10(aap)                 Data Processing Agreement dated as of November 30,
                        1994 between InterContinental Life Insurance Company
                        and FIC Computer Services, Inc filed as exhibit 10(aap)
                        by Registrant on Form 10-K for the year ended December
                        31, 1994 is hereby incorporated by reference.

10(aaq)                 Data Processing Agreement dated as of November 30,
                        1994 between Investors Life Insurance Company of North
                        America and FIC Computer Services, Inc filed as exhibit
                        10(aaq) by Registrant on Form 10-K for the year ended
                        December 31, 1994 is hereby incorporated by Reference.

10(aar)                 Data Processing Agreement dated as of November 30,
                        1994 between Family Life Insurance Company and FIC
                        Computer Services, Inc filed as exhibit 10(aar) by
                        Registrant on Form 10-K for the year ended December 31,
                        1994 is hereby incorporated by reference.

10(aas)                 Lease Agreement dated as of September 30, 1994 between
                        FIC Realty Services, Inc. and Atrium Beverage
                        Corporation filed as exhibit 10(aas) by Registrant on
                        Form 10-K for the year ended December 31, 1994 is hereby
                        incorporated by reference.

10(aat)                 Management Agreement dated as of September 30, 1994
                        between HCD Austin Corporation as agent for FIC Realty
                        Services, Inc. and Atrium Beverage Corporation filed as
                        exhibit 10(aat) by Registrant on Form 10-K for the year
                        ended December 31, 1994 is hereby incorporated by
                        reference.

10(aau)                 Amendment Agreement dated as of July 31, 1995 among
                        Family Life Corporation, the Lenders named therein and
                        the Agent filed as exhibit 10(aau) by Registrant on Form

                                      Ex-5



                        10-K for the year ended December 31, 1995 is hereby
                        incorporated by reference.


10(aav)                 Amendment No. 2 dated December 12, 1996, effective
                        June 12, 1996 to the note dated June 12, 1991 in the
                        amount of $22.5 million made by Family Life Corporation
                        in favor of Investors Life Insurance Company of North
                        America filed as exhibit 10(aav) by Registrant on Form
                        10-K for the year ended December 31, 1996 is hereby
                        incorporated by reference.

10(aaw)                 (i) Amendment No. 1 dated December 12, 1996,
                        effective June 12, 1996 to the note dated June 12,
                        1991 in the amount of $2.5 million made by
                        Financial Industries Corporation in favor of
                        Investors Life Insurance Company of California
                        filed as exhibit 10(aaw)(i) by Registrant on Form
                        10-K for the year ended December 31, 1996 is
                        hereby incorporated by reference.

                        (ii) Amendment No. 1 dated December 12, 1996,
                        effective June 12, 1996 to the "payment in kind"
                        provisions of the note dated June 12, 1991 in the
                        amount of $2.5 million made by Financial
                        Industries Corporation in favor of Investors Life
                        Insurance Company of North America filed as
                        exhibit 10(aaw)(ii) by Registrant on Form 10-K
                        for the year ended December 31, 1996 is hereby
                        incorporated by reference.

10(aax)                 Amendment No. 1 dated December 12, 1996, effective
                        June 12, 1996 to the note dated July 30, 1993 in the
                        amount of $30 million made by Family Life Corporation
                        in favor of Investors Life Insurance Company of North
                        America filed as exhibit 10(aax) by Registrant on Form
                        10-K for the year ended December 31, 1996 is hereby
                        incorporated by reference.

10(aay)                 Amendment No. 1 dated December 12, 1996, effective
                        June 12, 1996 to the note dated July 30, 1993 in the
                        amount of $4.5 million made by Family Life Insurance
                        Investment Company in favor of Investors Life Insurance
                        Company of North America filed as exhibit 10(aay) by
                        Registrant on Form 10-K for the year ended December 31,
                        1996 is hereby incorporated by reference.

                                      Ex-6



10(aaz)                 Amendment Agreement dated December 12, 1996
                        amending the Option Agreement by Financial Industries
                        Corporation in favor of Investors Life Insurance
                        Company of North America and Investors Life Insurance
                        Company of California filed as exhibit 10(aaz)
                        Registrant on Form 10-K for the year ended December 31,
                        1996 is hereby incorporated by reference.

10(aaaa) **             Assignment Agreement  dated December 23, 1998, from
                        Family Life Insurance Investment Company to Financial
                        Industries Corporation, assigning the 9% Senior
                        Subordinated Note dated July 30, 1993 in the amount of
                        $4.5 million made by Family Life Insurance Investment
                        Company in favor of Investors Life Insurance Company of
                        North America.

21            Ex-8      Subsidiaries of Registrant.

28                      Report on Form 10-K filed by ILCO for the year ended
                        December 31, 1999 is hereby incorporated by reference in
                        its entirety.

*                       Filed as an Exhibit with Registrant's Current Report on
                        Form 8-K dated June 25, 1991, and incorporated herein by
                        reference.

**                      Filed as an Exhibit with Registrant's Current Report on
                        Form 10-K for the year ended December 31, 1998 and
                        incorporated herein by reference.



                                      Ex-7


                                   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.

                                      Ex-8

EX-27

 


<ARTICLE>                                           7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR
THE YEAR ENDED  DECEMBER  31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.

<MULTIPLIER>                                    1,000

                             
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                              Dec-31-1999
<PERIOD-END>                                 Dec-31-1999
<DEBT-HELD-FOR-SALE>                             77,515
<DEBT-CARRYING-VALUE>                                 0
<DEBT-MARKET-VALUE>                                   0
<EQUITIES>                                            4
<MORTGAGE>                                            0
<REAL-ESTATE>                                         0
<TOTAL-INVEST>                                  105,953
<CASH>                                              692
<RECOVER-REINSURE>                               14,848
<DEFERRED-ACQUISITION>                           52,490
<TOTAL-ASSETS>                                  294,054
<POLICY-LOSSES>                                  59,783
<UNEARNED-PREMIUMS>                                  14
<POLICY-OTHER>                                   44,681
<POLICY-HOLDER-FUNDS>                             4,282
<NOTES-PAYABLE>                                  41,497
<PREFERRED-MANDATORY>                                 0
<PREFERRED>                                           0
<COMMON>                                          1,169
<OTHER-SE>                                      114,948
<TOTAL-LIABILITY-AND-EQUITY>                    294,054
<PREMIUMS>                                       33,958
<INVESTMENT-INCOME>                               6,928
<INVESTMENT-GAINS>                                  629
<OTHER-INCOME>                                    1,046
<BENEFITS>                                       13,940
<UNDERWRITING-AMORTIZATION>                       5,158
<UNDERWRITING-OTHER>                             11,740
<INCOME-PRETAX>                                  10,323
<INCOME-TAX>                                      1,174
<INCOME-CONTINUING>                               9,149
<DISCONTINUED>                                        0
<EXTRAORDINARY>                                       0
<CHANGES>                                             0
<NET-INCOME>                                      9,149
<EPS-BASIC>                                        1.81
<EPS-DILUTED>                                      1.76
<RESERVE-OPEN>                                        0
<PROVISION-CURRENT>                                   0
<PROVISION-PRIOR>                                     0
<PAYMENTS-CURRENT>                                    0
<PAYMENTS-PRIOR>                                      0
<RESERVE-CLOSE>                                       0
<CUMULATIVE-DEFICIENCY>                               0