UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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, ~~2004~~2006

Commission File Number 0-4690

Financial Industries Corporation

(Exact name of registrant as specified in its charter)

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

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

6500 River Place Boulevard, Building I, Austin, Texas 78730

(Address including Zip Code of Principal Executive Offices)

(512) 404-5000

(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)

Indicate by check mark if the ~~registrant~~Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO x

Indicate by check mark if the ~~registrant~~Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ~~YESo~~ YES o NO x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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. ~~YES o NO~~ x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO x

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant on June 30, ~~2004~~2006, based on the closing sales price on the ~~Nasdaq~~National Quotation Bureau’s Pink Sheet Quotation Service ($98.2875), was $8782,~~286~~650,~~242~~264.

The number of shares outstanding of Registrant’s common stock on ~~September~~March 3031, ~~2006~~2007, was 9 10,~~869~~210,~~504~~385.

Forward-Looking Statements

Except for historical factual information set forth in this Form 10-K, the statements, analyses, and other information contained herein, including but not limited to, statements found in Item 1 - Description of the Business, Item 3 - Legal Proceedings, and Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, relating to trends in our operations and financial results, the markets for our products, future results, the future development of our business, and the contingencies and uncertainties to which we may be subject, as well as other statements including words such as “anticipate,” “believe,” “plan,” “budget,” “could,” “designed,” “estimate,” “expect,” “intend,” “forecast,” “predict,” “project,” “may,” “might,” “should” and other similar expressions constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Such statements are made based upon management’s current expectations and beliefs concerning financial results and economic conditions and are subject to known and unknown risks, uncertainties and other factors contemplated by the forward-looking statements. These factors include, among other things: (1) general economic conditions and other factors, including prevailing interest rate levels and stock market performance, which may affect the ability of Financial Industries Corporation (“FIC,” “the Company,” or the “Registrant”) to sell its products, the market value of FIC’s investments and the lapse rate and profitability of policies; (2) FIC’s ability to achieve anticipated levels of operational efficiencies and cost-saving initiatives; (3) customer response to new products, distribution channels and marketing initiatives; (4) mortality, morbidity and other factors that may affect the profitability of FIC’s insurance products; (5) FIC’s ability to develop and maintain effective risk management policies and procedures and to maintain adequate reserves for future policy benefits and claims; (6) changes in the federal income tax laws and regulations that may affect the relative tax advantages of some of FIC’s products; (7) ~~increasing~~ competition in the sale of insurance ~~and annuities~~ products; (8) the effect of regulation and regulatory changes or actions, including those relating to regulation of insurance products and insurance companies; (9) ratings assigned to FIC’s insurance ~~subsidiaries~~subsidiary by independent rating organizations such as A.M. Best Company, which FIC believes are particularly important to the sale of ~~annuity and other~~ accumulation-type products; (10) the performance of our investment portfolios; (11) the effect of changes in standards of accounting; (12) the effects and results of litigation; (13) business risks and factors described elsewhere in this report, including, but not limited to, Item 1 - Description of the Business, Item 3 - Legal Proceedings, and Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, and (14) other factors discussed in the Company’s other filings with the SEC, which are available free of charge on the SEC’s website at www.sec.gov. You should read carefully the above factors and all of the other information contained in this report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated. All subsequent written and oral forward-looking statements attributable to the Company or to persons acting on our behalf are expressly qualified in their entirety by reference to these risks and uncertainties. There can be no ~~assurance~~ assurance that other factors not currently anticipated by management will not also materially and adversely affect our results of operations. Each forward-looking statement speaks only as of the date of the particular statement and the Company undertakes no obligation to update or revise any forward-looking statement, except as required by federal securities laws.

SPECIAL NOTE ABOUT THIS REPORT

This report is our first annual report covering periods after December 31, 2003. Readers should be aware of several aspects of this annual report. First, this report is for the annual reporting period ended December 31, 2004. Second, because of the gap in our public reporting and the significant changes we have made to our business in the interim, we have included certain information relating to our business, current directors, current officers, and related matters which have occurred subsequent to December 31, 2004. In this Form 10-K, we have restated the consolidated financial statements for the fiscal years 2003, 2002, 2001 and 2000 that were previously reported in Financial Industries Corporation’s Annual Report on Form 10-K (see Note 2 to the consolidated financial statements) for the fiscal year ended December 31, 2003, as filed with the Securities and Exchange Commission (“SEC”).

PART I

ITEM 1. DESCRIPTION OF THE BUSINESS

Please refer to “Forward-Looking Statements” on page 2 of this Form 10-K .

General Development of the Business

Financial Industries Corporation (“FIC,” the “Company,” or the “Registrant”) is a holding company engaged primarily in the life insurance business through its ownership of ~~Family Life Insurance Company (“Family Life”) and~~ Investors Life Insurance Company of North America (“Investors Life”). ~~Organized as an Ohio corporation in 1968,~~ FIC ~~reincorporated in Texas in 1980. FIC~~ and its insurance ~~subsidiaries~~subsidiary have substantially identical management; officers allocate their time among FIC and its ~~subsidiaries~~subsidiary in accordance with the needs of the Company’s business. FIC’s executive offices are located at 6500 River Place Boulevard, Building I, Austin, Texas 78730.

~~Through 1984~~During 2006, FIC’s ~~principal~~engaged ~~business~~in ~~was~~ the ~~sale and underwriting of~~ life ~~and health~~ insurance, ~~mainly~~business inthrough ~~the~~Investors ~~midwestern~~Life and another ~~southwestern~~insurance ~~United States. From 1985 to 1987~~subsidiary, ~~FIC~~Family ~~acquired a 48.1% equity interest in InterContinental~~ Life ~~Corporation~~Insurance Company (“~~ILCO~~Family Life”). AtAs part ~~that~~of ~~time, ILCO was~~ a ~~publicly~~strategic ~~traded~~initiative ~~New~~to ~~Jersey~~enhance ~~corporation~~shareholder ~~engaged~~value begun in ~~the sale and underwriting of life insurance and annuities through various subsidiaries. In 1991~~June 2006, FIC ~~purchased~~sold Family Life, ato ~~Washington-based~~The ~~life~~Manhattan ~~insurance~~Life ~~company, from Merrill Lynch~~ Insurance ~~Group,~~Company ~~Inc.~~(“Manhattan InLife”) at ~~2001, FIC acquired~~ the ~~remaining~~end ~~shares~~ of ~~ILCO~~2006 ~~through~~(see ~~a merger of a subsidiary of FIC with and into ILCO. See~~ “~~Acquisitions,~~Recent ~~Acquisition~~Developments—Sale ~~Financing, and Divestitures-Acquisition~~ of ~~Investors~~Family Life. Insurance Company”).

~~Until~~Throughout 2006 ~~September~~and ~~2002,~~ the ~~business~~beginning ~~and~~of ~~affairs~~2007, ofFIC ~~the~~has ~~Company~~continued ~~were~~efforts ~~led~~to bybecome current in its ~~former~~public ~~Chairman,~~filings ~~CEO,~~with ~~and~~the ~~President, Roy Mitte~~SEC. ~~After~~The ~~Mr.~~Company ~~Mitte’s~~filed ~~termination~~its as2004 anForm ~~executive~~10-K ~~officer,~~and Forms 10-Q ~~the~~on ~~Company~~October in30, ~~2003~~2006 ~~entered into several initiatives (see “Purchase~~ and ~~Sale~~filed ofits ~~‘New~~2005 ~~Era’~~Form ~~Companies”~~10-K and ~~“Investment~~Forms of10-Q ~~Assets”~~on ~~below)~~January 12, 2007. InWith ~~2003,~~the afiling ~~proxy~~of ~~contest~~this ~~relating~~Annual toReport ~~the~~on ~~election~~Form of10-K, ~~directors~~FIC ~~resulted~~has become current in ~~the~~its ~~election~~Annual inReport ~~August~~filings ~~2003~~on ofForm a10-K, ~~majority~~and ofwith the ~~board~~anticipated filing of ~~directors~~the ~~from~~2007 ~~among~~first ~~the~~quarter ~~dissident~~Form ~~candidates.~~10-Q ~~Since~~by ~~August~~June ~~2003~~30, ~~this~~2007, ~~newly~~FIC ~~constituted~~expects to become ~~Board~~current ~~(the “new Board”) has taken substantial steps (described elsewhere~~ in ~~this~~its ~~document)~~public ~~intended~~filings tounder ~~stabilize~~ the ~~business~~Securities ~~and~~Exchange ~~refocus~~Act ~~FIC’s growth strategy~~of 1934.

~~Changes in Management~~Recent Developments

Since August 2003, the new Board has brought in new management to run the Company. The CEO and President (Eugene Payne), Chief Financial Officer (George Wise), Chief Marketing Officer (William P. Tedrow), Vice President for Operations (John Welliver), Vice President for Information Technology (Tom Richmond), Corporate Communications Officer (Robert Cox), and Corporate Affairs Officer (Bob Bender) have all left the Company. They were replaced by a new non-employee Chairman of the Board (R. Keith Long), CEO and President (J. Bruce Boisture), Senior Vice President – Operations (Michael P. Hydanus), and CFO (Vincent L. Kasch). Also during this period Charles B. Cooper served as Chief Operating Officer from February through December 2004. In November 2005, J. Bruce Boisture resigned as CEO and President. Following the resignation of J. Bruce Boisture, Michael P.Exploration ~~Hydanus was named as Interim CEO. In December 2005, Theodore A. Fleron, who had served as Vice President, General Counsel and Secretary~~ of ~~FIC,~~Strategic ~~retired. He continues to be available as a consultant to the Company.~~Alternatives

3In the Company’s Form 8-K filed on June 9, 2006, the Board announced that it has retained Keefe, Bruyette & Woods, Inc. as its financial advisor to explore strategic alternatives of the Company to enhance shareholder value, including, but not limited to, the potential sale of the Company or its insurance subsidiaries. As part of this strategic initiative, the Company completed the sale of its wholly owned subsidiary, Family Life, on December 29, 2006 (see “Sale of Family Life Insurance Company”) and continues to explore further strategic alternatives. There can be no assurance that a transaction will result and the Company does not currently intend to disclose developments regarding its exploration unless and until the Board has approved a specific transaction.

~~In addition, FIC had changes to its board~~ Sale of ~~directors~~Family ~~during~~Life ~~this~~Insurance period as both Messrs. Payne and Boisture resigned their board positions and Robert Nikels joined the Board in November 2005, filling the position left vacant by the resignation of Salvador Diaz-Verson in July 2005.Company

~~Exploration~~As part of the strategic initiative described above, FIC entered into a definitive agreement on December 8, 2006 for the sale of ~~Strategic~~its ~~Alternatives~~wholly owned subsidiary, Family Life, to Manhattan Life for $28.0 million in cash. A copy of the sale agreement with Manhattan Life was filed as an exhibit to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2005. The sale of Family Life was completed on December 29, 2006.

InProceeds from the ~~Company’s~~sale ~~Form~~were ~~8-K~~used ~~filed~~to onimprove ~~June~~FIC’s 9,capital ~~2006,~~structure ~~the~~by ~~Board~~retiring approximately ~~announced~~$15.4 ~~that~~million itof ~~has~~intercompany ~~retained~~debt ~~Keefe,~~and ~~Bruyette~~for &general ~~Woods, Inc~~corporate purposes. asIn ~~its~~addition, ~~financial~~FIC ~~advisor~~agreed to ~~explore~~retain ~~strategic alternatives of~~ the ~~Company~~liabilities toassociated ~~enhance~~with Family ~~shareholder~~Life’s ~~value,~~defined ~~including,~~benefit ~~but~~pension ~~not~~plan ~~limited~~totaling to$3.3 million, ~~the~~in ~~potential~~exchange for ~~sale~~which ofit ~~the~~received ~~Company~~a orcorresponding ~~its~~transfer ~~insurance~~of ~~subsidiaries. There~~assets ~~can~~from beFamily noLife. FIC also ~~assurance~~purchased ~~that~~324,320 ashares ~~transaction~~of ~~will result and~~ the ~~Company~~FIC ~~does~~common ~~not~~stock ~~currently~~owned ~~intend~~by toFamily ~~disclose~~Life at ~~developments~~a price ~~regarding~~of ~~its~~$6.80 ~~exploration~~per ~~unless and until the Board has approved a specific transaction~~share.

~~Change~~Furthermore, in connection with the sale of Family Life, FIC agreed to a reinsurance arrangement that allows Manhattan Life to participate in ~~Domiciliary~~certain ~~State~~of the new business written by Investors Life. This coinsurance arrangement was precipitated by the decision to move new business production from Family Life to Investors Life as of July 1, 2006. Accordingly, concurrently with the closing of the sale transaction, Investors Life entered into a coinsurance agreement pursuant to which Investors Life will cede to Family Life (now a wholly-owned subsidiary of Manhattan Life) 35% of the face amount of all mortgage protection term policies written in the new division during the five-year period beginning April 1, 2007 and ending March 31, 2012. Such business will be administered by Investors Life, and Investors Life will receive allowances for its expenses on the portion of the business that is ceded. The coinsurance agreement does not cover products written by other portions of the FIC distribution force. A copy of the coinsurance agreement was filed as an exhibit to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2005.

Prior to March 2004, FIC’s insurance company subsidiaries were chartered and regulated by the State of Washington and maintained insurance-related operations in Seattle, Washington, pursuant to an agreement with the Washington Department of Insurance. In 2003, FIC’s insurance company subsidiaries applied to the Insurance Departments in Washington and Texas for permission to redomesticate to Texas. The applications were approved in March 2004. The transfer of the Company’s insurance charters to Texas (in connection with consolidating its insurance operations in Texas) has helped it to achieve regulatory and operating efficiencies. 3

~~Creation~~Manhattan Life offiled ~~New~~suit ~~Insurance~~against ~~Service~~the Company on April 17, 2007, claiming that the Company has breached the non-compete provision contained in the sale agreement (see “Item 3 - Legal Proceedings).

InAppointment of ~~June~~Chief ~~2004,~~Executive ~~with~~Officer; ~~the~~Retention ~~approval~~ of ~~the~~Consulting Texas Department of Insurance, FIC established a new insurance services subsidiary, FIC Insurance Services, L.P. This new entity provides management, operating and administrative services to both Family Life and Investors Life, on a fee basis. This structure enables FIC to improve cash flow at the holding company level.Firm

~~Acquisitions~~On February 1, 2007, FIC engaged William Prouty to serve as the Chief Executive Officer of FIC. Michael P. Hydanus, who had acted as the Interim President and Chief ~~Divestitures~~Executive Officer since November 5, 2005, assumed the responsibilities of Executive Vice President and Chief Operations Officer upon Mr. Prouty’s appointment. The terms of Mr. Prouty’s engagement are described in Item 10-Executive Officers of the Registrant. In addition, concurrently with the appointment of Mr. Prouty, the Company engaged DLB Capital Fund FNIN, LLC (“DLB”) to provide consulting services to the Company (see Item 13 - Certain Relationships and Related Transactions). Mr. Prouty is a partner in DLB.

~~For~~Annual Meeting ~~much~~ of ~~its history, FIC has pursued a growth-by-acquisition strategy. A series of acquisitions, divestitures, and related financing has substantially shaped the current Company.~~Shareholders

~~Acquisition~~The Company ofwas ~~Family~~required ~~Life.~~to Inhold ~~1991,~~an ~~FIC~~annual ~~acquired~~meeting ~~Family~~of ~~Life~~shareholders on December 6, 2006 apursuant ~~Washington-based~~to ~~life~~an ~~insurance~~agreed ~~company,~~court ~~from~~order ~~Merrill~~entered ~~Lynch~~in ~~Insurance~~connection ~~Group,~~with ~~Inc~~the T. David Porter ~~Family~~shareholder ~~Life’s~~litigation ~~primary~~(see ~~business~~Item is3—Legal ~~the~~Proceedings—T. ~~underwriting~~David ~~and~~Porter ~~sale~~v. Financial ofIndustries ~~mortgage~~Corporation). ~~protection~~The ~~life~~Company ~~insurance~~made arrangements for, and was prepared to ~~customers~~hold, ~~who~~an ~~are~~annual ~~mortgage~~meeting ~~borrowers~~on ~~from~~such ~~financial~~date ~~institutions~~in compliance with ~~which~~the ~~Family~~agreed order, ~~Life~~but ~~has~~it ~~marketing~~was ~~relationships.~~unable ~~Family~~to ~~Life~~conduct ~~distributes~~the ~~its~~meeting ~~insurance~~because ~~products~~there ~~primarily~~were ~~through~~not enough shares present in person or by proxy to constitute a ~~national~~quorum, ~~career~~which ~~agency~~consists of at ~~sales~~least ~~force.~~a ~~See~~majority ~~“Insurance~~of ~~Subsidiaries~~shares -outstanding ~~Family~~and ~~Life”~~entitled to vote on October 24, 2006, the record date established for the meeting.

~~Acquisition~~Shortly after ofthe ~~Investors~~meeting, ~~Life~~Mr. ~~From~~Porter ~~1985~~applied for a temporary restraining order and temporary injunction requiring the Company to ~~1987,~~convene ~~FIC~~one ~~acquired~~or anmore ~~equity~~additional meetings ~~interest~~of ~~(approximately~~shareholders, ~~48%)~~contending that in ~~InterContinental~~the ~~Life~~absence ~~Corporation~~of ~~(“ILCO”)~~a quorum on December 6, Texas law and the Company’s bylaws entitled a ~~public~~majority ~~company~~of ~~that~~the ~~owned~~shareholders ~~several~~in attendance ~~life~~to ~~insurance~~choose ~~companies~~a date to which the meeting would be adjourned. InThe District Court held a hearing on Porter’s application, and on December ~~1988~~22, ~~ILCO~~2006 entered ~~acquired~~an ~~Investors~~order ~~Life.~~requiring ~~During~~FIC ~~the~~to ~~1990s,~~hold ~~ILCO~~an ~~acquired~~annual ~~several~~shareholders ~~other~~meeting ~~insurance~~for the election ~~companies~~of ~~and~~directors ~~merged~~on ~~its~~January ~~insurance~~16, ~~subsidiaries~~2007, ~~into~~but ~~Investors~~stating ~~Life.~~that Inif ~~May~~a ~~2001~~quorum was not present on that date, FIC ~~acquired~~would ~~the~~not ~~remaining~~be ~~51.9%~~required to hold another annual meeting of ~~ILCO~~shareholders at any time before July 17, ~~making~~2007. ~~Investors~~FIC ~~Life~~made arrangements for, and was prepared to hold, an ~~indirect~~annual meeting on such date, ~~wholly-owned~~but ~~subsidiary~~it ofwas again unable ~~FIC.~~to ~~See~~hold ~~“Insurance~~a ~~Subsidiaries~~meeting –because ~~Investors~~a ~~Life~~quorum was not present.”

Purchase and Sale of “New Era” Companies. In June 2003, the Company acquired several small companies collectively known as the “New Era” companies. These companies (Paragon Benefits, Inc., The Paragon Group, Inc., and Paragon National, Inc. (collectively referred to as “Paragon”), Total Consulting Group, Inc., and JNT Group, Inc. (“JNT”)) were in several related businesses: consulting in the design of planned benefit programs for secondary school systems, investment advisory services for such plans and for other clients, insurance brokerage to participants in such plans, and third-party administrative services to such plans. The acquisition, made through a non-insurance subsidiary, cost approximately $4.9 million, of which $646,000 was paid in the form of FIC common stock. Also in connection with theDescription ~~acquisition, six principals/employees~~ of the New Era companies obtained long-term (three-year to five-year) employment contracts, in connection with which they were to receive FIC stock, allocated as part of the Stock Purchase Agreements, with a market value of approximately $2.4 million as of the date of the Stock Purchase Agreements in June 2003. Business

The Company ~~performance~~markets ofand ~~the~~sells ~~New~~life ~~Era~~insurance ~~companies~~products ~~after~~through ~~the~~agents ~~acquisition~~of ~~was~~its insurance ~~substantially~~subsidiary, ~~below~~Investors ~~plan~~Life. ByUntil ~~the~~December ~~fourth~~29, ~~quarter of 2003~~2006, the Company also marketed ~~had~~and ~~advanced~~sold ~~approximately~~life $1insurance ~~million~~products inthrough ~~working~~another ~~capital~~insurance tosubsidiary, Family ~~the~~Life, ~~New~~which ~~Era~~was ~~companies.~~sold ~~JNT,~~at the ~~third-party~~end ~~administration~~of ~~company,~~2006 ~~required~~(see ~~extensive~~Recent ~~reworking~~Developments—Sale of Family ~~its~~Life ~~recordkeeping~~Insurance ~~systems~~Company). ~~during this period as well, along with a~~

4During 2006, Investors Life was engaged primarily in administering its existing portfolio of individual life insurance and annuity policies. Investors Life is licensed to sell individual life insurance and annuity products in 49 states (not licensed in New York), the District of Columbia, and the U.S. Virgin Islands as of December 31, 2006. These products were marketed through independent, non-exclusive general agents. In 2006, Investors Life derived premium income from all states in which it was licensed, with the largest amounts, 12%, 8%, 8%, and 7%, derived from Pennsylvania, California, New Jersey, and Ohio, respectively.

~~$200,000~~Investors Life ~~infusion~~has ~~from~~a ~~FIC~~series ~~into~~of ~~the~~level-term ~~fiduciary~~life ~~accounts~~products ~~maintained~~aimed byat ~~JNT for its customers. One of~~ the ~~New~~mortgage-protection market ~~Era~~that ~~principals~~feature ~~resigned~~competitive ~~during~~rates ~~this~~and ~~period,~~a ~~alleging~~guaranteed ~~“good~~return ~~reason” under the provisions~~ of ~~his~~premium option. In ~~employment~~2005, ~~agreement;~~Investors ~~see~~Life ~~Item~~introduced ~~3-Legal~~a ~~Proceedings-Litigation~~new ~~with~~whole ~~Former~~life ~~Employee.~~product ~~On December 3, 2003,~~ (the ~~remaining~~“Final ~~five~~Expense Product”) ~~New~~designed ~~Era~~to ~~principals/employees~~compete ~~notified~~in the ~~Company~~50 ~~that~~to ~~they~~85 ~~were~~year-old ~~resigning~~population ~~their~~market. ~~employment,~~This product ~~effective~~is asa ofsimplified ~~December~~issue ~~16,~~product ~~2003,~~which ~~alleging~~has ~~that~~allowed ~~such~~Investors ~~resignations~~Life ~~were~~to improve ~~for~~its ~~“good~~agent ~~reason”~~and ~~under~~customer ~~the provisions of their employment agreements~~support. The ~~Company~~Final ~~notified~~Expense ~~the~~Product ~~individuals~~has ~~that~~allowed Investors itLife ~~disputed~~to ~~the~~enter ~~“good~~into ~~reason”~~the ~~claim,~~new ~~and~~niche ~~that~~market ~~their~~of ~~resignations~~the ~~would~~50 beto ~~viewed~~85 ~~as a breach of their employment agreements~~year-old population.

~~After~~In addition, ~~reviewing~~products ~~the~~currently ~~long-term~~underwritten ~~prospects~~by ~~for~~Investors ~~the~~Life ~~New~~include ~~Era~~a ~~companies,~~universal life insurance plan that the Company ~~decided~~believes inranks ~~December~~favorably ~~2003~~ to ~~sell~~similar products ~~them.~~offered Inby ~~light~~its ofcompetitors ~~the~~with ~~significant~~regard ~~operating~~to ~~loss~~guaranteed ~~that~~and ~~had~~current assumption ~~been~~cash ~~generated~~values. byUniversal ~~these~~life ~~companies~~insurance ~~since~~provides ~~the~~death ~~June~~benefit protection ~~2003~~with ~~acquisition,~~flexible ~~their~~premium ~~significant~~and ~~use~~coverage offeatures, ~~working~~and ~~capital~~the ~~during~~crediting of interest ~~the~~on ~~same~~cash ~~period~~values, ~~and~~at ~~the~~company-declared ~~perceived~~current ~~poor~~interest ~~future~~rates. ~~prospects for~~ Under the flexible ~~businesses~~premium policies, ~~the~~policyholders ~~New~~may ~~Era~~vary ~~companies~~the ~~were~~amounts ~~resold~~of totheir ~~five~~coverage (subject ofto ~~the~~minimum ~~New~~and ~~Era~~maximum ~~principals~~limits) ~~for~~as ~~one~~well ~~dollar.~~as ~~The~~the ~~sale~~dates ~~closed~~of onpayments and frequency ~~December~~of ~~31, 2003~~payments.

In connection with the sale, the employment contracts of the five principals/employees were cancelled and FIC stock, with a market value of approximately $2.1 million as of December 31, 2003, that would otherwise have been payable to the five principals/employees, reverted to the Company. In consideration for the cancellation of the five principals’/employees’ employment contracts, the principals received a payment of $10,000 each from the Company. See, also, “Item 3-Legal Proceedings-Litigation with Former Employee of Subsidiary.”4

~~Acquisition~~Direct statutory premiums received from all types of life insurance policies sold by Investors Life were $33.0 million in 2006, as compared to $33.2 million in 2005 and $35.4 million in 2004. First-~~Related~~year ~~Financing~~premiums received were $1.5 million in 2006, as compared to $178,000 in 2005 and $251,000 in 2004. Direct deposits from the sale (first-year and single premiums) of fixed annuity products were $1,500 in 2006, compared to $20,000 in 2005 and $5.2 million in 2004. Effective April 1, 2004, the distribution of fixed annuity products was temporarily discontinued. The Company may resume the marketing of fixed annuity products in the future, depending upon market conditions and the development of new products that are more competitive; however, no definite date has been set for resumption of such sales.

~~Financing for Family~~ Investors Life ~~Acquisition.~~also ~~The~~sponsors ~~acquisition~~a ofvariable ~~Family~~annuity ~~Life~~separate inaccount, ~~1991 was financed in part~~ through ~~loans~~which ~~obtained~~it has offered ~~from~~single ~~various~~premium ~~third-party financing sources. By 1996, these loans had been replaced entirely by subordinated loans from Investors Life to FIC~~ and ~~Family~~flexible ~~Life~~premium ~~Corporation~~contracts. The ~~outstanding~~contracts balance on these loans at December 31, 2004, and June 30, 2006, was $15.4 million. With the approval of the Texas Department of Insurance, these loans were restructured as of March 18, 2004. As amended, the loans provide for ~~a reduction in~~ the ~~interest~~contract ~~rate~~owner ~~from~~to 9%allocate topremium 5%payments ~~for~~among ~~the~~four ~~balance~~different portfolios of ~~the~~Putnam ~~term~~Variable ofTrust (the ~~loans~~“Putnam Fund”), noa ~~required~~series ~~principal~~fund ~~payments~~which ~~for~~is ~~the~~managed ~~period~~by Putnam ~~from~~Investment ~~June 12~~Management, ~~2004,~~Inc. toAt December 1231, ~~2005, a resumption of principal payments on March 12,~~ 2006, and ~~ten~~2005, ~~equal~~the ~~quarterly~~assets held ~~principal~~in ~~payments until~~ the ~~maturity~~separate ~~date~~account oftotaled ~~June~~$25.9 ~~12,~~million ~~2008~~and $25.6 ~~Again with~~million, ~~the~~ respectively. ~~approval~~During of2006 ~~the~~and ~~Texas Department of Insurance~~2005, the ~~loans~~premium ~~were~~received ~~restructured~~in asconnection ~~of March~~with 9, these ~~2006. As~~variable ~~amended,~~annuity ~~the~~policies ~~loans~~was ~~provide for a moratorium on principal payments for the period from March 12~~$40,000 ~~2006~~and ~~to December 12~~$38, ~~2006~~000, ~~with principal payments to resume on March 12~~respectively, ~~2007,~~which was received ~~with~~from ~~ten~~existing ~~equal~~contract ~~quarterly~~owners. ~~principal~~Investors ~~payments~~Life ~~until~~no ~~the~~longer ~~maturity~~actively markets ~~date~~these ~~of June 12, 2009~~products.

~~Because~~The separate account business of Investors Life isalso aincludes ~~wholly~~approximately ~~owned~~$325.1 million ~~subsidiary~~and $316.1 million of ~~FIC~~deposits under investment, ~~these~~or ~~loans~~“wraparound”, annuity dopolicies ~~not~~at ~~appear~~December on31, 2006 and 2005, respectively. These policies were written during the 1970s, prior to FIC’s ~~consolidated~~purchase ~~balance~~of ~~sheets~~Investors Life. Investors ~~The~~Life ~~debt~~(which ~~service~~was ~~associated~~known ~~with~~as First Investment Annuity Company at that time) discontinued the ~~loans~~sale of this type of policy following the issuance of a ruling by the IRS in 1977 that revoked prior rulings pertaining to the tax deferral of the inside build-up under the policies. However, ~~however~~the tax deferred treatment of policies issued prior to the 1977 ruling was grandfathered. Following the ruling, ~~does~~Investors ~~affect~~Life ~~FIC’s~~reinsured ~~cash~~90% ~~flow~~of ~~requirements~~the risk under this business with an independent life insurer, aswhich ~~well~~also asassumed responsibility for the ~~ability~~administration of ~~FIC’s~~the ~~insurance~~policies. ~~subsidiaries~~In June 2006, Investors Life recaptured the business, pursuant to ~~generate~~the ~~dividends~~terms orof ~~other~~the ~~cash~~reinsurance ~~flow~~agreement, toand ~~FIC~~assumed responsibility for the administration of this block of business. This ~~debt~~recaptured business ~~service~~increased ~~obligation~~other ~~also~~revenues ~~affects~~in ~~FIC’s~~2006 ~~ability~~by toapproximately ~~pay~~$1.3 ~~dividends~~million toas compared ~~its~~with ~~shareholders~~2005. However, since the level of deposits under the policies has been declining over time, as annuitants die and policies are surrendered, the Company is not able to estimate the amount of fees that it will receive from this business in future years.

~~FIC~~Investors Life ~~Borrowing~~also inmaintains ~~2003. In~~a ~~May~~closed ~~2003,~~variable ~~FIC~~annuity ~~borrowed~~separate account, with approximately $159.08 million byand ~~issuing subordinated notes~~$10.1 Itmillion ~~used the proceeds in part for the acquisition~~ of ~~the~~assets ~~New~~at ~~Era~~December ~~companies~~31, ~~(see “Purchase~~ 2006 and ~~Sale of ‘New Era’ Companies~~ 2005,” ~~below) and in part for general corporate purposes~~respectively. The ~~notes~~separate ~~bear~~account ~~interest~~was atclosed ~~LIBOR~~to ~~plus~~new ~~4.2%,~~purchases ~~require~~in ~~the~~1981 as a ~~payment~~result ~~only~~ of ~~interest~~an ~~through~~IRS ~~May~~ruling ~~22,~~that ~~2033,~~adversely ~~and~~affected ~~require~~the ~~repayment~~status of ~~the~~variable annuity separate ~~entire~~accounts ~~$15.0~~that ~~million~~invest ofin ~~principal~~publicly-available onmutual ~~May 22, 2033~~funds. ~~For~~The aruling did not ~~more~~adversely ~~extensive~~affect ~~description of~~ the ~~notes,~~status ~~see~~of ~~Note~~in-force ~~7 to the consolidated financial statements~~contracts.

~~Financial~~Through its ~~Information~~affiliate, ~~About~~ILG ~~Segments~~Sales Corporation, Investors Life operates a distribution system for the products of third-party life insurance companies. The marketing arrangement makes available, to appointed agents of Investors Life, types of life insurance and annuity products not currently being offered by Investors Life. The underwriting risk on the products sold under this arrangement is assumed by the third-party insurer. The Company’s appointed agents receive commissions on the sales of these products and the Company’s marketing subsidiary, ILG Sales Corporation, receives an override commission. During 2006, 2005 and 2004, ILG Sales Corporation received override revenues of $141,000, $244,000 and $569,000, respectively, through this distribution system.

~~The~~As the Company ~~principal~~phases ~~operations~~out of the ~~Company’s~~sale ~~insurance~~of ~~subsidiaries~~third-party ~~are~~products, ~~the~~it ~~underwriting~~is building a distribution of ~~life~~general ~~insurance~~agents ~~and~~to ~~annuity~~sell products underwritten by Investors Life. At ~~Accordingly~~December 31, no2006 ~~separate~~and ~~segment~~2005, ~~information~~there iswere ~~required~~981 and 534 agents, respectively, appointed to besell ~~provided~~products underwritten by Investors Life. At December 31, 2006, 345 of these agents were contracted directly by the Company ~~for~~and managed under a personal producing general agents (“PPGA”) program, 135 were affiliated with the Company’s ~~three-year~~new ~~period~~division ~~ended~~(as previously described) and 501 were contracted through an independent marketing organization. At December 31, ~~2004~~2005, 339 were contracted directly by the Company and 195 were contracted through an independent marketing organization. The new division began selling on July 1, 2006 and initially was comprised of agents that were moved from Family Life. See also “Agency Operations”.

~~Description of the Business~~5

~~Insurance~~Financial Information ~~Subsidiaries~~About Segments

The principal ~~Company~~operations ~~markets~~of ~~and~~the ~~sells~~Company’s ~~life~~ insurance ~~products~~subsidiary ~~through~~are ~~agents~~the underwriting of ~~its~~life insurance ~~subsidiaries, Family Life and Investors Life~~products. ~~Effective April 1~~Accordingly, ~~2004,~~no ~~the~~separate ~~distribution~~segment ofinformation is required ~~fixed~~to ~~annuity~~be ~~products~~provided ~~was~~by ~~temporarily discontinued. During 2004 and 2003,~~ the Company ~~received~~for ~~$5.8 million and $23.1 million, respectively, of deposits under annuity contracts. The Company may resume~~ the ~~marketing~~three-year ofperiod ~~fixed~~ended ~~annuity products in the future~~December 31, ~~depending upon market conditions and the development of new products that are more competitive; however, no definite date has been set for resumption of such sales~~2006.

5Agency Operations

Through ~~Family Life. Family Life, which was organized in the State of Washington in 1949 and redomesticated to the State of Texas in~~ 2004, ~~specializes~~Investors ~~in providing mortgage protection life insurance to mortgage loan borrowers. Family~~ Life ~~believes~~contracted ~~that~~with itindependent, ~~is the only nation~~non-~~wide~~exclusive ~~captive-agent life insurance company operating primarily through leads from financial institutions. As of June 30~~agents, ~~2006,~~general agents ~~Family~~and ~~Life~~brokers ~~has~~nationwide ~~contractual~~to ~~relationships~~sell ~~with~~its ~~approximately 80 mortgage-service organizations across the country~~products. ~~This~~Such ~~includes~~agents ~~both mortgage-service companies actively marketing Family Life’s programs on an on-going basis~~ and ~~mortgage-service companies that do not market with Family Life but do allow insureds the convenience of including their premium payment with the~~brokers ~~monthly~~ also sold mortgage payment. Family Life has strong contractual relationships with many of the A-paper mortgage servicers and the top subprime lenders in the U.S. In recent years, certain mortgage-service companies have developed their own distribution systems for insurance products ~~that~~for ~~are~~companies in competition with ~~Family~~Investors Life. To attract ~~products,~~agents ~~which~~and ~~has~~enhance ~~resulted~~the insale ~~a decrease in revenues from some~~ of ~~the~~its ~~organizations~~products, ~~with~~Investors ~~whom Family~~ Life ~~retains~~has ~~relationships.~~sought to ~~Family~~pay ~~Life~~competitive iscommission ~~currently~~rates ~~evaluating~~and ~~alternatives~~provide toother ~~deal~~sales ~~with this development~~inducements.

~~Family~~ Investors Life’s ~~mortgage~~has ~~protection~~reorganized ~~business~~its ~~consists~~distribution ofsystem ~~term~~to ~~and~~enhance ~~universal~~its ~~life~~ability ~~insurance sold~~ to distribute ~~homeowners.~~its ~~Generally,~~life ~~the Family Life~~ insurance ~~policies~~products. ~~are~~In ~~designed~~connection towith ~~repay~~this orreorganization, Investors ~~reduce~~Life ~~the~~has ~~mortgage~~eliminated ~~balances~~several oflayers ~~policyholders in the event~~ of ~~their~~salaried ~~death.~~sales ~~These~~managers ~~policies~~and substituted ~~are sold primarily to customers of independent financial institutions, often facilitated by~~ a ~~current~~system ~~list~~ of ~~borrowers~~PPGAs ~~provided~~managed bydirectly ~~the~~from ~~financial institution. These policies may list~~ the ~~lending~~home ~~financial institution as the primary beneficiary of the life insurance policy~~office. AThe Company believes ~~key~~that ~~feature~~this ofPPGA ~~the Family Life~~ system isbetter suits the ~~ability~~current tosales ~~bill~~level and ~~collect premiums through the policyholder’s monthly mortgage payments. This system~~ enables Investors ~~Family~~ Life to provide aan ~~convenient~~attractive ~~solution~~level toof ~~the~~commissions ~~financial~~to ~~security~~agents. ~~needs~~At December of31, ~~the~~2006 ~~under-served~~ and ~~under-protected~~2005 ~~low-to-moderate~~the ~~income~~Company ~~homeowner~~had ~~market,~~345 ~~which~~and is339 ~~currently~~of ~~its~~these ~~primary market~~agents, respectively.

~~Direct~~In 2005, Investors ~~access~~Life toentered ~~mortgage~~into ~~customers~~a ~~and~~relationship ~~the~~with ~~convenience~~Ultra, ofInc. ~~the~~(“Ultra”), ~~insured~~an independent ~~making~~marketing ~~payments~~organization ~~through~~(“IMO”) ~~their~~based ~~mortgage bill provide Family Life with a competitive advantage~~ in ~~this~~Kentucky, ~~market.~~to ~~Family~~distribute Investors Life’s ~~primary~~new ~~distribution~~Final ~~channel~~Expense isProduct. ~~its~~At ~~exclusive~~December ~~force of approximately 196 active agents as of June 30~~31, 2006. ~~During 2003~~ and ~~2004~~2005, ~~the~~Ultra had ~~sales~~501 ~~organization~~and ~~was~~195 ~~extensively~~agents, ~~restructured~~respectively, toselling ~~lower~~the ~~overall~~Final ~~policy~~Expense ~~acquisition costs~~Product. Investors ~~The~~Life ~~Company~~is ~~also~~looking ~~upgraded~~into ~~its~~marketing this product ~~portfolio~~through inits ~~2004~~own independent toagents ~~offer~~as ~~more~~well ~~competitive~~as ~~features~~other ~~and benefits, including an option to return premiums paid if the insured lives to the end of the term period~~IMOs.

~~Family~~In 2005, Investors Life isalso ~~licensed~~transitioned toa ~~sell~~significant ~~annuity~~portion ~~and~~of ~~life~~its ~~insurance~~Final ~~products~~Expense Product inprocessing 49to ~~states~~a ~~and~~third ~~the~~party, ~~District~~Direct ofInsurance ~~Columbia~~Marketing Administrators Corporation (“DIMA”). DIMA performs the file setup and ~~not~~all ~~licensed~~pre-underwriting functions. toInvestors ~~sell~~Life inmakes ~~New~~the ~~York)~~underwriting asdecision offor ~~June~~each 30policy, and after ~~2006.~~DIMA Inreceives ~~2004~~the underwriting decision, ~~Family~~prints ~~Life~~and ~~derived~~mails ~~premium~~the ~~income~~accepted policies ~~from~~to ~~all~~the ~~states~~policyholders. inInvestors ~~which~~Life itpays ~~was~~a ~~licensed,~~fixed ~~with~~fee ~~Texas,~~of ~~California~~$45 ~~and~~for each Final ~~Florida~~Expense ~~accounting~~policy ~~for~~issued. ~~approximately~~Because ~~29%~~fees are only paid based on policies issued, ~~21%~~this ~~and~~reduces 5%the overhead cost of ~~statutory~~Investors ~~premiums,~~Life ~~respectively~~with its Final Expense Product.

InAs an ongoing ~~2004~~part of the reorganization of our distribution systems, ~~direct~~beginning July 1, ~~statutory~~2006, ~~premiums~~Investors ~~received~~Life ontransitioned the exclusive agents of Family Life’s to ~~life~~a new ~~insurance~~division ~~products~~of ~~totaled~~Investors ~~$28~~Life.8 ~~million.~~The ~~This~~new ~~compares~~division tofocuses ~~$32.8~~on ~~million~~both inthe ~~2003~~mortgage protection and ~~$36.9~~final ~~million~~expense inmarkets ~~2002.~~using ~~First-year~~supplemental ~~premium~~leads ~~received~~provided ~~was~~through third-party $3vendors.6 ~~million~~The increation ~~2004~~of this division also affords these agents an expanded, ~~compared~~more competitive portfolio of products and enhanced sales methods designed to ~~$4.1~~improve ~~million~~the inoverall ~~2003~~marketability ~~and~~of ~~$4.0~~the ~~million~~Company inproducts ~~2002~~to the mortgage protection and final expense markets. ~~See~~At ~~also~~December ~~“Agency~~31, ~~Operations~~2006, -the Company had ~~Family~~135 ~~Life~~of ~~Distribution~~these ~~System~~exclusive agents.”

~~Direct deposits from the sale~~ Investment of ~~fixed annuity products (which were temporarily discontinued in April 2004) were $.1 million in 2004, compared to $1.4 million in 2003 and $1.4 million in 2002.~~ Assets

~~Investors~~The Company ~~Life.~~has ~~During~~retained ~~2004,~~Conning ~~Investors~~Asset ~~Life~~Management ~~was~~Company ~~engaged~~(“Conning”) ~~primarily~~as inthe investment ~~administering~~manager ~~its~~for ~~existing~~the ~~portfolio~~Company’s ofinvestment ~~individual life insurance and annuity policies~~assets. ~~Investors~~Conning ~~Life~~manages isthe portfolio ~~licensed~~investment ~~to sell individual life insurance~~ and ~~annuity~~investment ~~products~~accounting infor 49the ~~states~~Company, ~~(not~~reporting directly ~~licensed~~to inthe ~~New~~Investment ~~York),~~Committee of the ~~District~~Board of ~~Columbia,~~Directors and to the Company’s UCEO.S. ~~Virgin~~The ~~Islands~~Board’s asInvestment ofCommittee ~~June~~is ~~30,~~responsible ~~2006.~~for ~~These~~the ~~products~~Company’s Investment ~~were~~Policy ~~marketed~~which ~~through~~provides ~~independent, non-exclusive~~ general ~~agents.~~portfolio Inand ~~2004,~~investment ~~Investors~~criteria under which ~~Life~~Conning ~~derived~~makes ~~premium~~specific ~~income~~investment ~~from~~decisions. ~~all~~Conning ~~states~~also inprovides assistance ~~which~~to itthe ~~was~~Company ~~licensed,~~ with ~~the~~its ~~largest~~asset/liability ~~amounts,~~management ~~13%, 8%,~~ and ~~8%, derived from Pennsylvania, California and Ohio, respectively~~ analysis.

~~Products~~The assets ~~currently~~held ~~underwritten~~ by Investors Life ~~include~~must acomply ~~universal life insurance plan that ranks favorably to similar products offered by its competitors~~ with ~~regard~~applicable tostate ~~guaranteed~~ insurance laws and ~~current assumption cash values~~regulations. ~~Universal~~In ~~life~~selecting ~~insurance~~investments ~~provides~~for ~~death~~the ~~benefit~~portfolios ~~protection~~of ~~with flexible premium and coverage features~~Investors Life, ~~and~~ the ~~crediting~~Company ofemphasizes ~~interest~~obtaining ontargeted ~~cash~~profit ~~values~~margins, atwhile ~~company-declared~~minimizing the exposure ~~current~~to changing interest rates. ~~Under~~In ~~the~~making ~~flexible~~such ~~premium~~portfolio ~~policies~~selections, the Company ~~policyholders~~generally ~~may~~does ~~vary~~not ~~the~~select ~~amounts~~new ofinvestments ~~their~~that ~~coverage~~are ~~(subject~~commonly referred to as ~~minimum~~“high ~~and~~yield” ~~maximum~~or ~~limits)~~“below-investment asgrade.” ~~well~~However, as described below, beginning in late 2005, the ~~dates~~Company ofhas ~~payments~~allocated ~~and~~small ~~frequency~~portions of ~~payments~~its investments to such securities.

InThe general ~~addition,~~investment ~~Investors~~objective ~~Life has introduced a series~~ of ~~level-term~~the ~~life~~Company ~~products~~emphasizes ~~aimed at~~ the ~~mortgage-protection~~selection ~~market that feature competitive rates and a guaranteed return~~ of short-to-medium ~~premium~~term, ~~option.~~high-quality, ~~The~~fixed-income ~~Company~~securities, ~~has~~rated ~~also~~Baa-3 (investment ~~offered,~~grade) ~~but~~or ~~has~~better ~~temporarily~~by ~~discontinued~~Moody’s ~~the~~Investors ~~sale of~~Service, ~~fixed annuity products~~Inc. In October 2005, ~~Investors Life introduced a new whole life product (~~ the ~~“Final~~Board ~~Expense~~authorized ~~Product”)~~Conning ~~designed~~ to ~~compete~~invest inup ~~the 50~~ to 85$20 ~~year-old~~million ~~population~~for ~~market. This product is a simplified issue product which had allowed~~ Investors Life in investments tothat ~~improve~~are ~~its~~rated ~~agent~~below ~~and~~investment ~~customer support~~grade. ~~The~~This ~~Final~~change ~~Expense~~in ~~Product~~policy provides ~~has~~flexibility ~~allowed~~to Investors Life to ~~enter~~enhance ~~into~~overall ~~the~~portfolio ~~new~~performance under ~~niche~~various market ofconditions ~~the~~or ~~50 to 85 year~~event-~~old~~driven ~~population~~opportunities.

~~Direct~~At December ~~statutory~~31, ~~premiums received from all types of life insurance policies sold by Investors Life were $35.4 million in 2004~~2006, asinvested ~~compared~~assets to(including ~~$38.9~~cash ~~million in 2003~~ and cash equivalents) totaled $~~42.1~~624 million ~~in 2002~~. ~~Investors~~Of ~~Life~~FIC’s ~~received~~invested ~~reinsurance~~assets, ~~premiums~~83% ~~from~~were ~~Family Life of $4.4 million~~ in ~~2004,~~fixed ~~pursuant~~maturity tosecurities available ~~the reinsurance agreement~~ for ~~universal~~sale ~~life~~at ~~products~~December ~~written~~31, ~~by Family Life~~2006. ~~First-year~~At ~~premiums~~December ~~received were $251~~31,~~000~~ ~~in 2004~~2006, asthis ~~compared~~fixed maturity toportfolio ~~$1.1~~includes ~~million~~17% in ~~2003~~government ~~and~~securities, ~~$1.3~~61% ~~million~~ in ~~2002.~~corporate obligations, ~~The~~and ~~reduction~~22% in ~~premiums~~mortgage-backed ~~received during the period from 2002 to 2004~~ and ~~the relatively small amounts of first~~asset-~~year premiums received are a significant concern of the Company’s management, which is studying steps that are designed to increase the distribution of products written by Investors Life~~backed securities. ~~See also “Agency Operations - Investors Life Distribution System.”~~

~~Direct~~The Company ~~deposits~~also ~~from~~maintains ~~the~~a ~~sale~~portion of ~~fixed~~its ~~annuity~~investment ~~products~~assets ~~were $6.5 million~~ in ~~2004,~~each ~~compared~~of tothe following ~~$21.7~~categories: ~~million~~short-term ininvestments, ~~2003~~equity securities, and ~~$16~~policy loans.~~4 million in 2002.~~

~~Investors Life also sponsors~~ For a further ~~variable~~discussion annuity separate account, through which it has offered single premium and flexible premium policies. The policies provide for the contract owner to allocate premium payments among four different portfolios of ~~Putnam~~FIC’s ~~Variable~~invested ~~Trust~~assets, ~~(the~~see “~~Putnam~~Item ~~Fund”), a series fund which is managed by Putnam Investment~~ 7—Management,’s ~~Inc.~~Discussion and AsAnalysis of ~~December~~Financial ~~31,~~Condition ~~2004,~~and ~~the~~Results ~~assets~~of ~~held~~Operations in- ~~the~~Financial Condition ~~separate account totaled $27~~-Assets.9 million. During 2004, the premium received in connection with these variable annuity policies was $176,000, which was received from existing contract owners. Investors Life no longer actively markets these products.”

The separate account business of Investors Life also includes approximately $329.5 million of deposits under investment, or “wraparound”, annuity policies as of December 31, 2004. These policies were written during the 1970s, prior to FIC’s purchase of Investors Life. Investors Life (which was known as First Investment Annuity Company at that time) discontinued the sale of this type of policy following the issuance of a ruling by the IRS in 1977 that revoked prior rulings pertaining to the tax deferral of the inside build-up under the policies. However, the tax deferred treatment of policies issued prior to the 1977 ruling was grandfathered. Following the ruling, Investors Life reinsured 90% of the risk under this business with an independent life insurer, which also assumed responsibility for the administration of the policies. In June 2006, Investors Life recaptured the business, pursuant toOperations ~~the terms of the reinsurance agreement,~~ and ~~assumed~~Data responsibility for the administration of this block of business. Investors Life anticipates that this recaptured business will generate in excess of $2.0 million in additional annual fees. However, since the level of deposits under the policies has been declining over time, as annuitants die and policies are surrendered, the Company is not able to estimate the amount of fees that it will receive from this business in future years. Processing

~~Investors~~Operations. During 2004, ~~Life~~the ~~also~~Company ~~maintains~~completed athe ~~closed~~process ~~variable~~of ~~annuity~~consolidating ~~separate~~all ~~account,~~of ~~with~~its ~~approximately~~insurance operations ~~$10~~to its home office in Austin, Texas.9 ~~million~~In addition, the Company has reduced its staffing from its highpoint of ~~assets~~318 in June 2003 to 98 as of December 31, ~~2004~~2006, thereby substantially reducing operating costs. ~~The~~During ~~separate~~December of 2006, ~~account~~and ~~was~~as ~~closed~~part toof ~~new~~the ~~purchases~~strategic ininitiative ~~1981~~resulting asin athe ~~result~~sale of anFamily Life, ~~IRS~~33 ~~ruling~~positions ~~that~~were ~~adversely~~eliminated ~~affected~~resulting ~~the~~in ~~status~~wages in lieu of ~~variable~~notice ~~annuity~~expenses of ~~separate~~approximately ~~accounts~~$281,000. ~~that~~Through ~~invest~~ongoing improvements in ~~publicly-available~~systems ~~mutual~~and ~~funds.~~in operating ~~The~~procedures ~~ruling~~and ~~did~~efficiencies, ~~not~~the ~~adversely~~Company ~~affect~~is ~~the~~seeking ~~status~~to ofmake additional improvements in~~-force~~ ~~contracts~~its operating costs per policy.

~~Through~~Data Processing. The Company ~~its~~provides ~~affiliate,~~for ~~ILG~~its ~~Sales~~data ~~Corporation,~~processing ~~Investors~~and ~~Life~~control ~~operates~~needs awith ~~distribution~~modern industry-standard ~~system~~mainframe ~~for~~equipment, ~~the~~supplemented ~~products~~by ofnetwork ~~third-party~~computing utilizing ~~life~~multiple ~~insurance companies~~servers. The ~~marketing~~Company ~~arrangement~~maintains ~~makes~~its ~~available,~~own toweb ~~appointed agents of Investors Life~~sites, ~~types of life insurance~~ and separate ~~annuity~~sites ~~products~~for ~~not~~the ~~currently~~policyholders ~~being~~and ~~offered by Investors Life. The underwriting risk on~~ the ~~products~~agents ~~sold~~of ~~under~~both ~~this~~of ~~arrangement is assumed by~~ the ~~third-party insurer~~insurance affiliates. The Company’s ~~appointed~~believes ~~agents~~it ~~receive~~has ~~commissions on~~ the ~~sales~~capacity ofwith ~~these~~existing ~~products~~systems to handle ~~and~~substantial ~~the~~increases ~~Company’s~~in ~~marketing~~its ~~subsidiary~~business, ~~ILG~~and ~~Sales~~expects ~~Corporation,~~no ~~receives~~significant additional aninvestments ~~override~~in ~~commission.~~data ~~During~~processing ~~2004,~~facilities ~~ILG~~would ~~Sales~~be ~~Corporation~~required ~~received override revenues of $569,000 through this distribution system~~for such increases. AtThe ~~December~~Company ~~31,~~expects ~~2004,~~to ~~Investors~~make ~~Life~~additional ~~had~~efforts ~~relationships with approximately 200 agents engaged~~ in ~~this marketing effort as well as~~ the ~~sale~~future ~~of Investors Life’s own products. At June 30, 2006,~~to ~~reflecting~~ improve ~~the~~work ~~reorganization~~processes ~~of the Investors Life distribution system described below, only 45 agents were licensed to sell both the products of Investors Life~~ and ~~those~~reduce ofexpense ~~unrelated companies available through ILG Sales Corporation~~levels.

The Company, as it builds the distribution of Investors Life’s own products, is phasing out the sale of third-party products. At June 30, 2006, further reflecting the reorganization of the Investors Life distribution system, there were 797 agents, which included 349 appointed agents, 404 agents contracted through a third-party independent marketing organization, Reinsurance and ~~44 captive agents, licensed to sell products of Investors Life.~~ Reserves

~~Agency~~Investors Life ~~Operations~~limits the maximum net losses it may incur from large risks by reinsuring with other carriers. Such reinsurance provides for a portion of the mortality risk to be retained by Investors Life with the excess being ceded to a reinsurer at a premium set forth in a schedule based on the age and risk classification of the insured. The reinsurance treaties include allowances that help Investors Life offset the expense of writing new business. Although reinsurance does not eliminate the exposure of Investors Life to losses from risks insured, the net liability of such subsidiary will be limited to the portion of the risk retained, provided that the reinsurers meet their contractual obligations. If the cost of reinsurance were to increase, if reinsurance were to become unavailable, or if a reinsurer should fail to meet is obligations, the Company could be adversely affected.

~~The~~Investors Life ~~products~~generally retains the first $100,000 to $250,000 of ~~FIC’s~~risk ~~insurance~~on ~~subsidiaries~~the ~~are~~life of ~~marketed~~any individual ~~and~~on ~~sold~~its ~~through~~in-force ~~two~~block ~~separate~~of ~~distribution~~life ~~channels~~policies; it has initiated a recapture program to increase this limit to $250,000 on most of these policies when available under the terms of the applicable reinsurance treaty.

~~Family~~ Investors Life ~~Distribution~~maintains ~~System.~~reinsurance ~~Family~~treaties ~~Life~~under ~~utilizes~~which ait ~~nationwide~~reinsures ~~exclusive~~all ~~agent~~of ~~force~~the mortality torisks ~~sell~~under ~~its~~accidental ~~products.~~death ~~This~~benefit ~~agent force sells mortgage protection life insurance and, prior to April 2004, annuity products~~policies. ~~The products are sold primarily to~~

7In December 1997, Investors Life entered into a reinsurance treaty under which most of the contractual obligations and risks under accident and health and disability income policies were assumed by a third-party reinsurer.

~~customers~~In 1995, FIC’s offormer insurance subsidiary, Family Life’s ~~client~~(as ~~financial~~the ~~institutions~~ceding ~~with~~company), ~~mortgage~~entered into ~~loans~~a ~~under~~reinsurance ~~$150,000,~~agreement ~~usually~~with ~~through~~Investors aLife ~~list~~(as ofthe ~~borrowers~~reinsuring ~~provided~~company) pertaining byto ~~the~~universal ~~financial~~life ~~institution.~~insurance written by Family Life. ~~works~~The ~~closely~~reinsurance agreement ~~with~~was ~~the~~on ~~financial~~a ~~institutions~~co-insurance basis and applied to ~~maintain~~all ~~the~~covered ~~Family~~business with effective ~~Life~~dates ~~lead~~on ~~systems~~and after January 1, ~~which~~1995. ~~have~~In ~~been~~1996, ~~built~~Family ~~from~~Life (as the ceding ~~loan~~company) ~~portfolios~~entered ofinto ~~each~~a ~~active~~reinsurance ~~financial~~agreement ~~institution.~~with ~~Family~~Investors Life (as ~~agents~~the reinsuring ~~canvass~~company), inpertaining ~~person~~to ~~the~~annuity ~~mortgage~~contracts ~~borrowers~~written ofby ~~the~~Family ~~financial~~Life. The agreement ~~institutions~~applied ~~that~~to ~~are~~contracts ~~active~~written on ~~the~~or ~~Family~~after ~~Life~~January ~~lead~~1, ~~system~~1996. toEffective September ~~offer~~30, ~~the~~2006, ~~borrowers~~Family ~~the~~Life ~~opportunity~~and toInvestors ~~purchase~~Life ~~mortgage~~executed ~~protection~~recapture ~~insurance~~agreements which ~~(term~~terminated orboth ~~universal~~of ~~life~~these ~~insurance~~reinsurance ~~products)~~agreements.

Although Family Life continues to focus on its traditional sales approach, it has more recently established a supplemental leads program, through which leads are obtained from public records (e.g., county loan records). Family Life has also implemented a program to work with lenders as “set-up only,” in which a mortgage lending institution does not furnish leads but will collect and remit premiums from its borrowers. 7

AIn connection ~~principal~~with ~~focus~~the sale of Family Life’s, ~~marketing~~Investors ~~activity~~Life isentered ~~the~~into ~~development~~a coinsurance ~~and~~agreement ~~maintenance~~with ofFamily ~~contractual~~Life ~~agreements~~pursuant ~~with~~to ~~the~~which ~~financial~~Investors ~~institutions~~Life ~~that~~will cede ~~provide~~to ~~referrals~~Family ~~to,~~Life ~~and~~(now ~~collect~~a ~~monthly~~wholly-owned ~~premiums~~subsidiary ~~from,~~of ~~their~~Manhattan ~~borrowers~~Life) ~~for~~35% of ~~Family~~the face ~~Life~~amount ~~insurance~~of ~~plans.~~mortgage ~~Family~~protection ~~Life~~term ~~has~~policies ~~established~~written aduring ~~regional~~the ~~manager~~five-~~district~~year period ~~manager~~beginning ~~structure~~April 1, ~~with~~2007 ~~all~~and ~~compensation~~ending toMarch ~~managers~~31, ~~and~~2012. ~~agents~~Such onbusiness awill be administered ~~variable~~by ~~basis~~Investors Life, ~~based~~and Investors Life will receive allowances for its expenses on ~~sales~~the ~~production.~~portion of the business that is ceded.

~~During~~Investors Life ~~the~~establishes ~~last~~and ~~few~~carries ~~years,~~as ~~Family~~liabilities ~~Life~~actuarially ~~has~~determined ~~experienced~~reserves that are ~~changing~~calculated ~~demographics~~to inmeet the ~~types~~Company’s offuture ~~polices~~obligations. ~~that~~Reserves ~~its~~for ~~historic~~life insurance ~~market~~policies ~~can~~are ~~afford.~~based Inon ~~addition,~~actuarially ~~during~~recognized ~~years~~methods ~~with~~using ~~low~~prescribed morbidity ~~interest~~and ~~rates,~~mortality ~~policyholders~~tables ~~are~~in ~~refinancing~~general ~~mortgages~~use ~~with~~in ~~other~~the ~~lenders~~United States, ~~leading~~modified when appropriate to reflect the ~~challenge~~Company’s ofactual ~~keeping~~experience ~~the~~(e.g., ~~policies~~lapses, withdrawals). ~~in-force~~These reserves are computed to equal amounts that ~~were~~(with ~~once~~additions from ~~billed~~premiums byto ~~the~~be ~~previous~~received ~~lender.~~and ~~Based~~with ~~upon~~interest ~~these~~on ~~changes,~~such ~~Family~~reserves ~~Life~~compounded annually isat ~~currently~~certain ~~evaluating~~assumed ~~how~~rates) ~~these~~are ~~industry~~expected ~~changes~~to ~~affect~~be ~~its~~sufficient ~~distribution~~to ~~system~~meet the Company’s policy obligations at their maturities or in the event of an insured’s death.

Investors Life Distribution System. Through 2004, Investors Life contracted with independent, non-exclusive agents, general agents and brokers nation-wide to sell its products. Such agents and brokers also sold insurance products for companies in competition with Investors Life. To attract agents and enhance the sale of its products, Investors Life has sought to pay competitive commission rates and provide other sales inducements. Regulation

~~Investors~~General. The Company ~~Life~~and ~~has~~its ~~recently~~insurance ~~reorganized~~subsidiary ~~its~~are ~~distribution~~subject ~~system~~ to ~~enhance~~regulation ~~its~~and ~~ability~~supervision at toboth ~~distribute~~the ~~its~~state ~~life~~and ~~insurance~~federal ~~products.~~level, Inincluding ~~connection~~regulation ~~with~~under ~~this~~federal ~~reorganization,~~and state ~~Investors~~securities ~~Life~~laws ~~has~~and ~~eliminated~~regulation ~~several~~by ~~layers~~the ofstates ~~salaried~~in ~~sales~~which ~~managers~~they ~~and~~are ~~substituted~~licensed to do abusiness. ~~system~~The ofstate ~~personal~~insurance ~~producing~~regulation ~~agents~~is ~~(“PPGAs”)~~designed ~~managed~~primarily ~~directly~~to ~~from~~protect policy owners. Although the ~~home~~extent ~~office.~~of ~~The~~regulation ~~Company~~varies ~~believes~~by ~~that~~state, ~~this~~the ~~PPGA~~respective state ~~system~~insurance ~~better~~departments ~~suits~~have ~~the~~broad ~~current~~administrative ~~sales~~powers ~~level~~relating to the granting and ~~enables~~revocation ~~Investors~~of ~~Life~~licenses to ~~provide~~transact anbusiness, ~~attractive~~licensing ~~level~~ of ~~commissions~~agents, the toregulation ~~agents.~~of Attrade ~~June~~practices ~~30,~~and ~~2006~~premium rates, the ~~Company~~approval ~~had~~of ~~349~~form and content of ~~these~~financial ~~agents~~statements, and the type and character of investments.

InThese laws ~~2005,~~and ~~Investors~~regulations ~~Life~~require ~~entered~~the ~~into~~Company’s ainsurance ~~relationship~~subsidiary ~~with~~to ~~Ultra,~~maintain certain ~~Inc.~~minimum ~~(“Ultra”),~~surplus anlevels ~~independent~~and ~~marketing~~to ~~organization~~file ~~(“IMO”)~~detailed ~~based~~periodic reports with the supervisory agencies in ~~Kentucky,~~each toof ~~distribute~~the ~~Investors~~states ~~Life’s~~in ~~new~~which ~~Final~~it ~~Expense~~does ~~Product.~~business ~~Ultra~~and its business ~~currently~~and ~~has~~accounts ~~approximately~~are ~~404~~subject ~~agents~~to ~~selling~~examination ~~the~~by ~~Final~~such ~~Expense~~agencies ~~Product~~at any time. The ~~Investors~~insurance ~~Life~~laws isand ~~looking~~regulations ~~into~~of ~~marketing~~Texas, ~~this~~the ~~product~~domiciliary ~~through~~state ~~its~~of ~~own~~Investors Life, ~~independent~~require ~~agents~~that asit ~~well~~be asexamined ~~other~~at ~~IMOs~~specified intervals.

~~In 2005,~~ Investors Life ~~also~~is ~~transitioned~~subject ato ~~significant~~periodic ~~portion~~examination ofby ~~its~~the ~~Final~~state ~~Expense~~insurance ~~Product~~departments, usually ~~processing~~on a three to afive-year ~~third~~cycle. ~~party,~~The ~~Direct~~Texas Department of Insurance began an ~~Marketing~~examination ~~Administrators~~of ~~Corporation~~Investors ~~(“DIMA”).~~Life ~~DIMA~~on ~~performs~~July ~~the~~25, ~~file~~2005 ~~setup~~covering ~~and~~the ~~all~~years ~~pre~~1999-~~underwriting functions~~2004. ~~Investors~~ On ~~Life~~February ~~makes~~5, ~~the~~2007, ~~underwriting~~TDI ~~decision~~issued ~~for~~a ~~each~~report ~~policy,~~with ~~and~~respect ~~after~~to ~~DIMA~~this ~~receives~~examination that highlighted, ~~the~~among ~~underwriting~~other ~~decision~~issues, ~~prints~~the ~~and~~Company’s ~~mails~~failure ~~the~~to ~~accepted~~provide ~~policies~~accurate, complete and timely responses to the ~~policyholders~~TDI requests for information. ~~Investors~~ ~~Life~~We ~~pays~~attribute this afailure ~~fixed~~to ~~fee~~our lack of ~~$45~~current ~~for~~financial ~~each~~statements ~~Final~~at ~~Expense~~the ~~policy~~time ~~issued.~~the examination ~~Because~~was ~~fees~~being ~~are~~conducted ~~only~~and ~~paid~~the ~~based~~focus of our efforts on ~~policies~~becoming current in ~~issued,~~our ~~this~~public ~~reduces~~filings. ~~the~~The ~~overhead~~Company ~~cost~~has been notified that TDI will perform an examination of Investors Life ~~with~~for ~~its~~the ~~Final~~years ~~Expense~~ended ~~Product~~December 31, 2005 and 2006. The Company expects the examination will begin in June 2007.

As ~~an ongoing part~~ of the date ~~reorganization~~ of ~~our~~this ~~distribution systems~~report, Investors Life ~~transitioned~~is ~~the~~current ~~exclusive~~in ~~agents~~its offiling ~~Family~~obligations with respect ~~Life~~ to ~~the~~unaudited ~~new~~and ~~“Exclusive~~audited ~~Agent~~statutory ~~Division”~~financial ~~of Investors Life~~statements. The ~~creation~~audited statutory offinancial ~~this~~statements ~~new~~of ~~Division~~Investors ~~affords~~Life ~~these~~for ~~agents~~the anyear ~~expanded~~ended December 31, 2004 ~~more~~were ~~competitive~~due ~~portfolio~~during the month of ~~products~~June 2005 and ~~improved~~were ~~sales~~filed ~~methods~~by ~~designed~~Investors toLife with ~~improve~~ the ~~overall~~Texas ~~marketability~~Department of ~~the~~Insurance ~~Company~~on ~~products~~May to3, ~~the~~2006. ~~mortgage~~The ~~protection~~audited ~~market.~~statutory financial ~~Because~~statements of ~~these~~Investors ~~structural marketing changes, Family~~ Life’s ~~new~~for ~~business~~the ~~premium~~year ~~will~~ended beDecember ~~significantly~~31, ~~reduced. While~~2005 were due ~~the~~June ~~official~~1, ~~target~~2006 ~~date~~and ~~for~~were ~~this~~filed ~~transition~~with is the ~~third~~Texas ~~quarter~~Department of ~~2006~~Insurance on July 10, a2006. ~~total~~The of2006 44audited ~~agents~~statutory ~~have~~financial ~~been~~statements ~~transitioned~~are ~~through~~due June 301, 2007, and ~~2006~~the Company expects to file its statutory financial statements by this date.

~~In May~~ A number of ~~2006,~~states ~~the~~regulate ~~Company announced~~ the ~~reorganization~~manner ~~of its sales~~ and ~~marketing~~extent ~~departments~~to ~~for~~which ~~Family~~insurance ~~Life~~companies ~~and Investors Life. The reorganization provides~~ may test for aacquired ~~“shared~~immune ~~services”~~deficiency ~~marketing~~syndrome ~~and~~(AIDS) ~~sales~~antibodies ~~department~~in ~~that~~connection ~~combines~~with the underwriting ~~into~~of ~~one~~life ~~unit~~insurance ~~several~~policies. ~~functions~~To tothe ~~serve~~extent ~~all~~permitted ~~agent~~by ~~support needs for its life insurance subsidiaries~~law, Investors Life ~~and~~considers ~~Family~~AIDS ~~Life~~information ~~and~~in ~~allows~~underwriting ~~each~~coverage ~~insurance~~and establishing ~~subsidiary~~premium torates. ~~leverage~~An ~~the~~evaluation ~~expertise~~ of the ~~other.~~financial ~~Management~~impact of future AIDS claims is ~~currently~~extremely ~~evaluating~~difficult, ~~various~~due ~~options~~in part to ~~maximize~~insufficient ~~the~~and ~~effectiveness~~conflicting data regarding ~~and~~the ~~efficiencies~~incidence of the ~~combined~~disease ~~departments,~~in ~~including~~ the ~~combined~~general ~~use~~population ofand ~~Investors~~the prognosis ~~Life~~for ~~and~~the ~~Family~~probable ~~Life~~future ~~distribution~~course ~~systems~~of ~~and~~the ~~products~~disease.

8Risk-Based Capital Requirements. The National Association of Insurance Commissioners (“NAIC”) has imposed Risk-Based Capital (“RBC”) standards to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks associated with: (i) asset quality; (ii) mortality and morbidity; (iii) asset and liability matching; and (iv) other business factors. The RBC formula is intended to be used by insurance regulators as an early warning tool to discover potentially weakly capitalized companies for the purpose of initiating regulatory action. The RBC requirements are not intended to be a basis for ranking the relative financial strength of insurance companies. The formula also defines a new minimum capital standard that will supplement the prevailing system of fixed minimum capital and surplus requirements now applied on a state-by-state basis.

Marketing Agreement with Equita. In June 2003, in connection with the New Era transaction described above, the Company entered into a marketing agreement with Equita Financial and Insurance Services of Texas, Inc. (“Equita”). Under the terms of the agreement, and subject to standards of commercial reasonableness and its own rate-of-return thresholds, the Company undertook to develop various insurance and annuity products for distribution by Equita. It granted Equita an exclusive right to distribute these products specifically to persons over the age of 55, and also granted Equita options for the purchase of FIC stock contingent on Equita meeting certain sales targets pursuant to an option agreement. The continuation of Equita’s exclusive distribution rights after December 31, 2004, however, was also contingent upon Equita meeting certain sales targets.8

~~Beginning~~The RBC requirements inprovide ~~June~~for ~~2003,~~different ~~FIC~~levels ~~undertook the development~~ of ~~both~~regulatory ~~annuity~~attention ~~and~~for ~~insurance~~any company ~~products~~whose ~~for~~“Total ~~distribution~~Adjusted byCapital” ~~Equita.~~(which Asgenerally consists of ~~December~~its statutory 31capital, ~~2004~~surplus, ~~however,~~and ~~Equita~~asset ~~had~~valuation ~~not~~reserve) ~~begun~~falls ~~the~~below ~~distribution~~ 200% of ~~any~~its “Authorized ~~FIC~~Control ~~products~~Level RBC.” Calculations using Inthe ~~February~~NAIC ~~2004,~~formula ~~Equita~~and ~~informed~~the ~~FIC~~statutory ~~that~~financial ~~Equita~~statements ~~regarded FIC to be in breach~~ of ~~several~~Investors Life as of ~~FIC’s~~December ~~obligations~~31, ~~under~~2005 ~~the~~and ~~marketing~~December ~~agreement. In~~31, ~~June 2005~~2006, ~~Equita~~indicate ~~commenced~~that ~~litigation~~the ~~against~~Total ~~FIC~~Adjusted Capital ~~pertaining to matters arising out~~ of ~~the~~Investors ~~option~~Life ~~agreement.~~was ~~See~~above ~~“Item~~its ~~3-Legal~~Authorized ~~Proceedings-Litigation~~Control ~~with Equita Financial and Insurance Services of Texas, Inc~~Level RBC. ~~and M&W Insurance Services, Inc.”~~

~~Investment~~Solvency Laws Assessments. The solvency or guaranty laws of ~~Assets~~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. 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. Investors Life records the effect for guaranty fund assessments or credits in the period such amounts are probable and can be reasonably estimated.

~~From~~Dividends. Dividends ~~February~~paid ~~through~~by ~~August~~Investors ~~2003,~~Life ~~FIC’s~~are ~~investment~~a source of ~~its~~cash ~~securities~~for ~~portfolio~~FIC ~~was~~to ~~directed~~make bypayments of ~~its~~principal ~~internal~~and ~~investment~~interest ~~committee~~on its debt. AUnder ~~number~~current ofTexas ~~bond~~law, ~~purchases~~any ~~during~~proposed payment ~~this~~of ~~period~~an ~~resulted~~“extraordinary individend” ~~part,~~requires ata ~~the~~30-day ~~end~~prior ofnotice ~~September~~to ~~2003,~~the Texas inInsurance ~~writedowns~~Commissioner, ofduring ~~approximately~~which ~~$5.2~~period ~~million~~the ofCommissioner ~~other~~can ~~than~~approve the ~~temporarily~~dividend, ~~impaired~~disapprove ~~investments.~~the ~~These~~dividend, ~~bonds~~or ~~were~~fail ~~all~~to ~~sold~~comment inon the ~~fourth~~notice, in which ~~quarter~~case ofthe ~~2003,~~dividend ~~resulting~~is indeemed aapproved ~~small~~at ~~additional~~the ~~loss~~end ~~subsequent~~of to the ~~writedowns~~30-day period. An “extraordinary ~~One~~dividend” ~~additional~~is ~~bond~~a ~~purchased~~distribution inwhich, ~~early~~together ~~2003~~with ~~was~~dividends ~~sold~~or distributions inpaid ~~late~~during ~~2003~~the ~~for~~preceding atwelve ~~net~~months, ~~pre-tax~~exceeds ~~gain~~the greater of (i) ~~$580,000.~~10% Onof ~~August~~statutory ~~21,~~surplus ~~2003,~~as ~~when~~of the ~~new~~preceding ~~Board~~December ~~took~~31st ~~office,~~or it(ii) ~~suspended~~the statutory net gain from operations for the ~~investment~~preceding ~~authority~~calendar year. Payment of ~~the~~a regular ~~internal~~dividend ~~investment~~requires ~~committee~~that ~~and~~the ~~halted~~insurer’s ~~all~~earned ~~trading.~~surplus ~~The~~after ~~Company~~dividends ~~retained~~or distributions ~~Conning~~must ~~Asset~~be ~~Management~~reasonable ~~Company~~in ~~(“Conning”)~~relation asto the ~~investment~~insurer’s ~~manager~~outstanding liabilities ~~for~~and adequate to its financial needs. In 2004, 2005 and 2006, Investors Life and the Company’s ~~investment~~former ~~assets~~insurance onsubsidiary, ~~October~~Family 20Life, ~~2003~~did not make any dividend payments to FIC. ~~Conning~~Pursuant ~~now~~to ~~manages~~statutory limitations, the maximum ~~portfolio~~dividend ~~investment~~payment ~~and~~which ~~investment accounting~~could ~~for~~be ~~the~~made ~~Company,~~by ~~reporting~~Investors ~~directly~~Life toin 2007 without the ~~Investment~~prior ~~Committee~~approval of the ~~Board~~TDI is $5.5 million. Investors Life had statutory earned surplus of ~~Directors~~$31.5 million and to$35.8 ~~the~~million ~~Company’s~~at ~~CEO.~~December ~~The~~31, ~~new~~2005, ~~Board’s~~and December ~~Investment~~31, ~~Committee~~2006, ~~has~~respectively, ~~also~~and ~~adopted~~a ~~new~~statutory ~~Investment~~net ~~Policies~~gain ~~for~~from ~~both~~operations of $3.3 ~~Investors~~million ~~Life~~and $5.5 million for 2005 and ~~Family~~2006, ~~Life~~respectively.

InValuation Reserves. Life insurance ~~early~~companies ~~October~~are ~~2003,~~required ~~the~~to ~~new~~establish ~~Board~~an ~~commenced~~Asset Valuation Reserve (~~through~~“AVR”) consisting ~~outside~~of ~~counsel~~two components: (i) a “default component,” which provides for future credit-related losses on fixed maturity investments, and (ii) an ~~investigation~~“equity component,” ~~into~~which ~~whether~~provides ~~certain~~for losses on all types of ~~the~~equity ~~Company’s~~investments, including ~~investment~~equity ~~transactions~~securities ~~for~~and ~~the~~real ~~period~~estate. ~~from~~Insurers ~~January~~are ~~2003~~also ~~through~~required ~~August~~to establish ~~21,~~an ~~2003~~Interest Maintenance Reserve (“IMR”), ~~had~~designed ~~resulted~~to indefer ~~the~~realized capital ~~payment~~gains ofand ~~excessive~~losses ~~mark~~due ~~ups~~to interest rate changes on fixed income investments and ~~mark~~to ~~downs~~amortize those gains and losses into future income. The IMR is ~~Company~~required ~~referred~~to ~~the~~be ~~results~~amortized ofinto ~~its~~statutory ~~review~~earnings toon a basis reflecting the remaining ~~National~~period ~~Association~~to maturity of ~~Securities~~the ~~Dealers~~fixed ~~(“NASD”),~~maturity ~~which~~securities ~~declined~~sold. These reserves are required by state insurance regulatory authorities to ~~initiate~~be established ~~any~~as ~~formal~~a ~~action. After~~liability on a ~~review~~life ofinsurer’s ~~its~~statutory ~~options~~financial statements, but do not affect the ~~Board~~financial ~~concluded~~statements ~~that~~prepared itin ~~would~~accordance ~~not~~with accounting beprinciples generally accepted in the ~~best~~United ~~interests~~States of America (“GAAP”). Since dividend payments are based upon statutory earnings and surplus, the ~~Company~~combination of the AVR and IMR will affect statutory capital and surplus and therefore may reduce the ability of Investors Life to ~~pursue~~pay ~~legal~~dividends ~~remedies.~~to FIC.

AtInsurance Holding ~~December~~Company ~~31,~~Regulation. Following ~~2004,~~the ~~invested~~redomestication ~~assets~~of ~~(including~~Investors ~~cash~~Life ~~and~~to ~~cash~~Texas ~~equivalents)~~in ~~totaled~~March ~~$740.3~~2004, ~~million.~~it became ~~The~~subject ~~general~~to ~~investment~~regulation ~~objective~~under of the ~~Company~~insurance ~~emphasizes~~and ~~the~~insurance ~~selection~~holding company statutes of ~~short-to-medium~~the ~~term,~~state ~~high-quality,~~of ~~fixed-income~~Texas. ~~securities,~~The ~~rated~~insurance ~~Baa-3~~holding ~~(investment~~company ~~grade)~~laws orand regulations ~~better~~vary byfrom ~~Moody's~~jurisdiction ~~Investors~~to ~~Service~~jurisdiction, ~~Inc.~~but Ingenerally ~~October~~require insurance ~~2005,~~and ~~the~~reinsurance ~~Board~~subsidiaries ~~authorized~~of ~~Conning~~insurance holding companies to register ~~invest~~with upthe applicable state regulatory authorities and to ~~$20~~file ~~million~~with those authorities ~~for~~certain ~~Investors~~reports ~~Life~~describing, ~~and~~among $5other ~~million~~information, ~~for~~their ~~Family~~capital structure, ~~Life~~ownership, infinancial ~~investments~~condition, ~~that~~certain ~~are~~intercompany ~~rated~~transactions, and ~~below~~general ~~investment~~business ~~grade~~operations. ~~This~~The ~~change~~insurance holding company statutes also require prior regulatory agency approval, or in ~~policy~~certain ~~provides~~circumstances, ~~flexibility~~prior notice toof ~~Investors~~certain ~~Life~~material ~~and~~intercompany ~~Family~~transfers ~~Life~~of toassets ~~enhance~~as ~~overall~~well ~~portfolio~~as ~~performance~~certain transactions ~~under~~between ~~various~~insurance ~~market~~companies, ~~conditions~~their orparent ~~event-driven~~companies, ~~opportunities.~~and their affiliates.

~~The~~Under the Texas ~~Company~~Insurance Code, unless (i) certain filings are made with the ~~assistance~~Texas Department of ~~Conning~~Insurance, ~~began~~(ii) ~~more~~certain ~~actively~~requirements ~~managing~~are ~~its~~met, ~~asset/liability~~including ~~matching~~a inpublic hearing, ~~2004.~~and Of(iii) ~~FIC’s~~approval ~~invested~~or ~~assets~~exemption is granted by the insurance commissioner, ~~67.4~~no %person ~~were~~may inacquire ~~fixed~~any ~~maturity~~voting ~~securities~~security ~~available~~or ~~for~~security ~~sale~~convertible into ata ~~December~~voting 31security of an insurance holding company, ~~2004.~~such Atas ~~December~~the 31Company, which ~~2004~~controls a Texas insurance company, ~~this~~or ~~portfolio~~merge ~~consisted~~with such a holding company, if as a result of ~~12%~~such intransaction ~~government~~such ~~securities,~~person ~~51%~~would in“control” ~~corporate~~the ~~obligations,~~insurance holding ~~and~~company. 37“Control” is presumed to exist if a person directly or indirectly owns or controls 10% inor ~~mortgage-backed~~more ~~and~~of ~~asset-backed~~the voting securities of another person.

As described in more detail in “Item 2 - Properties,” Investors Life owned a significant real estate development, River Place Pointe, located in Austin, Texas. Investors Life sold the development on June 1, 2005, for a gross purchase price of $103 million. As a result of the sale of River Place Pointe, an analysis was conducted by Conning to maximize the risk/return profile of the reinvestment of the sales proceeds and the overall asset/liability duration efficiency for the Investors Life portfolio. As a result of Conning’s analysis, reinvestment of the proceeds into investment grade securities was made throughout the second half of 2005. The execution of this strategy lengthened the duration of the investment securities portfolio, thereby replacing the duration effects of the sale of the River Place Pointe assets.9

The insurance ~~assets~~holding ~~held~~company byregulations ~~Family~~generally ~~Life~~apply ~~and~~only ~~Investors~~to ~~Life~~insurers ~~must~~domiciled in ~~comply~~a ~~with~~particular ~~applicable~~ state. ~~insurance~~The ~~laws and~~ regulations. Inin ~~selecting~~certain ~~investments~~states ~~for~~also ~~the~~provide, ~~portfolios~~however, that ofinsurers ~~its~~that ~~life~~are ~~insurance~~“commercially ~~subsidiaries,~~domiciled” ~~the~~in ~~Company~~that ~~emphasizes~~state ~~obtaining~~are ~~targeted~~also ~~profit~~subject to ~~margins, while minimizing~~ the ~~exposure~~provisions applicable to ~~changing~~domiciled ~~interest rates~~insurers. InThe ~~making~~test ~~such~~for ~~portfolio~~determining whether ~~selections,~~an ~~the~~insurer ~~Company~~is ~~generally~~commercially ~~does~~domiciled ~~not~~is ~~select~~based ~~new~~on ~~investments~~the ~~that~~percentage ~~are~~of premiums ~~commonly~~written ~~referred~~in tothe state as ~~“high~~compared ~~yield”~~to orthe ~~“below-investment~~amount ~~grade.”~~of ~~However,~~premiums aswritten everywhere ~~described~~over ~~above,~~a ~~beginning~~measuring inperiod. ~~late 2005~~Currently, ~~the~~Investors ~~Company~~Life ~~has~~is ~~allocated~~not ~~small~~treated as commercially ~~portions~~domiciled ofin ~~its~~any ~~investments~~other ~~to such securities~~jurisdiction.

9Privacy Legislation. In July 2001, the Financial Services Modernization Act (referred to in this paragraph as the “Act”) of 1999 became applicable to insurance companies. In general, the Act provides that financial institutions have certain obligations with respect to the maintenance of the privacy of customer information. In addition, the Act places new restrictions on disclosure of nonpublic personal information to third party institutions seeking to utilize such information in connection with the sale of products or services. A financial institution may disseminate certain types of customer information to nonaffiliated third parties if the institution provides clear and conspicuous disclosure of the institution’s privacy policy and the customer authorizes the release of certain information to third parties. Where the customer permits the release of the information, the Act restricts disclosure of information that is non-public in nature but does not prohibit the release of information which can be obtained from public sources. Investors Life has not experienced any adverse effects to its business as a result of the Act to date.

~~The~~USA Patriot ~~Company also maintains a portion~~ Act. Title III of ~~its investment assets in each of~~ the ~~following~~USA ~~categories:~~Patriot ~~invested~~Act ~~real~~(Public ~~estate,~~Law ~~real estate available for sale, short~~107-~~term~~56) ~~investments,~~(referred ~~equity~~to ~~securities, and policy loans. Most significant has been its investment~~ in ~~real~~this ~~estate~~section as the “Act”), ~~which~~makes ~~totaled~~a ~~$77.2~~number ~~million at the end~~ of ~~2004.~~amendments ~~This~~to ~~consisted~~the ~~almost~~anti-money ~~entirely~~laundering ofprovisions of the ~~Company’s~~Bank ~~prior~~Secrecy ~~investment~~Act ~~in River Place Pointe, a seven-building office complex in Austin, Texas~~(“BSA”). The ~~Company~~purpose ~~occupies one~~ of the ~~buildings~~amendments aswas ~~its~~to ~~home~~facilitate the ~~office. This home office building~~prevention, ~~which~~detection ~~represented~~and anprosecution ~~additional investment~~ of ~~$13.6~~international ~~million~~money ~~at December 31, 2004, is classified as “real estate held for use” on~~ laundering and the ~~Company’s~~financing ~~consolidated balance sheet as~~ of ~~that date~~terrorism. The ~~River~~Act ~~Place~~requires ~~Pointe~~every ~~development,~~financial ~~completed~~institution to establish inan ~~2002,~~anti-money ~~was~~laundering ~~66%~~program ~~leased~~that asincludes: ~~of March 31, 2005~~ (~~excluding the Company’s home office building~~1). ~~The Company sold~~ the ~~River~~development ~~Place~~ of internal ~~Pointe development on June 1~~policies, ~~2005~~procedures, ~~for~~and acontrols; ~~total~~(2) ~~consideration~~the ofdesignation ~~$103 million. The Company will realize a gain~~ of ~~$10.1 million on the sale, which includes both~~ a ~~current~~compliance officer; ~~2005~~(3) ~~realized~~an ~~gain~~ongoing ofemployee $8training ~~million~~program; and a(4) ~~deferred~~an ~~gain~~independent audit function ~~of $2.1 million~~ to betest ~~recognized over the period from the sale date through March 31, 2008~~programs.

~~For~~In November a2005, ~~further~~the ~~discussion~~Department of ~~FIC’s~~the ~~invested~~Treasury ~~assets,~~(“Treasury”) ~~see~~released ~~“Item~~a 7final –rule prescribing ~~Management’s~~minimum ~~Discussion~~standards applicable to insurance companies pursuant to the aforementioned provision in the BSA that requires financial institutions to establish anti-money laundering programs and ~~Analysis~~to ofdefine ~~Financial~~the ~~Condition~~companies and insurance ~~Results~~products ofthat ~~Operations~~are subject to that requirement. Accordingly, Investors Life has taken steps to establish an anti-money ~~Investments~~laundering program and continue to check names, involved in certain transactions, against the Specially Designated Nationals and Blocked Persons List prepared by Treasury’s Office of Foreign Assets Control.”

~~Operations~~On March 2, 2006, the Act was renewed by the House and ~~Data~~Senate, ~~Processing~~and signed into law by President Bush on March 9, 2006.

~~Operations.~~Federal “do-not-call” ~~During 2004, the Company completed the process of consolidating all of its insurance operations to its home office in Austin, Texas~~Regulations. The Federal ~~Company~~Communications ~~had~~Commission ~~previously~~(“FCC”) ~~conducted~~has ~~its~~issued ~~day-to-day~~rules ~~insurance~~that ~~operations~~regulate telephone insolicitations ~~both its home office~~ and afax ~~separate facility in Seattle, Washington for Family Life~~solicitations. It ~~also~~These ~~maintained~~rules abecame ~~substantial~~effective on October ~~records~~1, ~~storage facility in Seattle~~2003. ~~During~~As ~~the~~part ~~second half~~ of ~~2003~~these ~~and the first quarter of 2004~~rules, the ~~Company~~FCC ~~moved~~established ~~its~~a ~~Family~~National ~~Life~~Do Not Call ~~operations from Seattle to Austin~~Registry. ~~The~~Investors ~~consolidation~~Life ofhas ~~its~~implemented ~~insurance~~procedures ~~operations allowed the Company~~ to ~~eliminate~~assist ~~its Seattle staff without any increase~~ agents in compliance ~~staffing~~with inthe ~~Austin~~federal regulations. AsFIC ~~part~~does ofnot ~~this~~believe ~~facility~~that ~~closure~~the additional ~~and~~compliance ~~resulting~~steps ~~employee~~that ~~terminations,~~agents ~~severance~~are ~~benefits~~required ~~were paid~~ to ~~employees.~~take ~~Severance~~have ~~costs~~had ~~incurred~~a significant inadverse ~~2004~~effect ~~and~~upon ~~2003 were $83,000 and $170,000, respectively~~sales.

~~Overall,~~Potential Federal Regulation. Although the ~~Company~~federal ~~has~~government ~~reduced~~generally ~~its~~does ~~staffing~~not ~~from~~directly ~~its~~regulate ~~highpoint~~the ofinsurance industry, ~~318~~federal ininitiatives ~~June~~often ~~2003~~have toan ~~173~~impact ason the business. Congress and certain federal agencies periodically investigate the condition of ~~December~~the ~~31,~~insurance industry ~~2004,~~(encompassing both life and health and property and casualty insurance) in the United States in order to ~~139~~decide aswhether some form of ~~June~~federal ~~30,~~role in ~~2006,~~the regulation ~~thereby~~of ~~substantially~~insurance ~~reducing~~companies ~~operating~~would ~~costs~~be appropriate. ~~Through~~Certain ~~ongoing~~policies, contracts ~~improvements~~and inannuities ~~systems~~offered ~~and~~by inInvestors ~~operating~~Life ~~procedures~~are ~~and~~subject ~~efficiencies,~~to regulations under the ~~Company~~federal issecurities ~~seeking~~laws toadministered ~~make~~by ~~additional~~the ~~improvements~~SEC. inThe ~~its~~federal securities ~~operating~~laws ~~costs~~contain ~~per~~regulatory ~~policy~~restrictions and criminal, administrative and private remedial provisions.

~~Data~~Federal Income ~~Processing~~Taxation. FIC files ~~The~~a ~~Company~~consolidated ~~provides~~federal ~~for~~income ~~its~~tax ~~data~~return ~~processing and control needs~~ with ~~modern~~its ~~industry-standard mainframe equipment~~subsidiaries, ~~supplemented~~other than Investors byLife ~~network~~and ~~computing~~ILG ~~utilizing~~Securities ~~multiple~~(each ~~servers. Current versions~~ of ~~the~~which ~~operating~~files ~~system~~a ~~and file maintenance software have been installed and are in operation. The Company maintains its own web sites, and~~ separate ~~sites~~federal income tax ~~for the policyholders and the agents of both of the insurance affiliates~~return). ~~The~~In ~~Company~~accordance ~~believes~~with ~~it has~~ the ~~capacity~~tax ~~with~~allocation ~~existing~~agreements ~~systems~~maintained by those toFIC ~~handle~~companies ~~substantial~~that ~~increases~~file ina ~~its~~consolidated ~~business~~return, ~~and~~federal ~~expects~~income notax ~~significant~~expense or ~~additional~~benefit ~~investments~~is inallocated ~~data processing facilities would be required for such increases. The Company expects~~ to ~~make~~each ~~additional~~entity ~~efforts~~ in the ~~future~~consolidated togroup ~~improve~~as ~~work~~if ~~processes~~such entity ~~and~~were ~~reduce~~filing ~~expense~~a ~~levels~~separate return.

~~Reinsurance~~NAIC IRIS Ratios. The NAIC Regulatory Information System (“IRIS”) ratios cover 12 categories of financial data with defined “usual” ranges for each such category. The ratios are intended to provide insurance regulators with “early warnings” as to when a given company might warrant special attention. An insurance company may fall outside of the usual range for one or more ratios, and ~~Reserves~~such variances may result from specific transactions that are, by themselves, immaterial or eliminated at the consolidation level. In certain states, insurers with more than three IRIS ratios outside of the NAIC usual ranges may be subject to increased regulatory oversight. For 2005, Investors Life had two ratios which were outside the usual ranges, primarily related to investment income and changes in premium. For 2006 Investors Life had four ratios which were outside the usual ranges, which were primarily related to changes in investment income and changes in premium, product mix, and reserving. The ratios were outside the usual ranges primarily due to a recapture of ceded reinsurance by Family Life from Investors Life during 2006. This recapture occurred prior to the sale of Family Life. For statutory accounting purposes, the recapture affected premium income and change in policy reserves which caused ratios to fall outside the usual ranges. Excluding the effects of the reinsurance recapture, Investors Life would have had one ratio outside the usual ranges, which related to investment income. Despite the IRIS ratio results for 2006, Investors Life continues to maintain capital and surplus positions which significantly exceed RBC and other regulatory requirements.

FIC’s insurance subsidiaries limit the maximum net losses they may incur from large risks by reinsuring with other carriers. Such reinsurance provides for a portion of the mortality risk to be retained by FIC’s insurance subsidiaries with the excess being ceded to a reinsurer at a premium set forth in a schedule based on the age and risk classification of the insured. The reinsurance treaties include allowances that help Family Life and Investors Life offset the expense of writing new business. Although reinsurance does not eliminate the exposure of FIC'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. If the cost of reinsurance were to increase, if reinsurance were to become unavailable, or if a reinsurer should fail to meet is obligations, the Company could be adversely affected. 10

Investors Life generally retains the first $100,000 to $250,000 of risk on the life of any individual on its in-force block of life policies; it has initiated a recapture program to increase this limit to $250,000 on most of these policies when available under the terms of the applicable reinsurance treaty. On its in-force block of business, Family Life generally retains the first $250,000 of risk on the life of any one individual. Competition

OnThe financial ~~certain~~services ~~products~~industry ~~being~~in ~~written~~general, byand ~~FIC’s~~the market for life insurance and annuity ~~subsidiaries~~products ~~(which~~in ~~amounted~~particular, toare ~~approximately~~highly ~~55%~~competitive, ofinvolving ~~new~~many companies. ~~business~~The ~~written~~principal incost ~~2004),~~and competitive factors that affect the ~~risk~~ability of FIC’s ~~was~~insurance ~~reinsured~~subsidiary to sell its insurance products on a ~~percentage~~profitable basis are: ~~with~~(1) ~~Family~~the ~~Life~~general ~~retaining~~level ~~either~~of ~~50%~~premium orrates ~~10%~~for ofcomparable products; (2) the extent ~~risk~~of ~~depending~~individual onpolicyholders ~~the~~services ~~face~~required ~~amount~~to ofservice ~~the~~each ~~policy.~~product category; ~~The~~(3) ~~reinsurer~~general oninterest ~~this~~rate ~~portion~~levels; of(4) ~~the~~competitive ~~business,~~commission asrates and related ~~part~~marketing ofcosts; ~~its~~(5) ~~general~~legislative ~~withdrawal~~and ~~from~~regulatory ~~the~~requirements ~~life~~and restrictions; ~~reinsurance~~(6) ~~market,~~the ~~terminated~~impact ~~these~~of ~~reinsurance~~competing ~~agreements~~insurance ~~with~~and ~~respect~~other tofinancial products; ~~new~~and ~~business~~(7) ~~written~~the oncondition ~~and~~of ~~after~~the ~~January~~regional and national economies.

10Agents placing insurance business with Investors Life are compensated on a commission basis. Some companies pay higher commissions and charge lower premium rates than Investors Life, and many companies have more resources than Investors Life.

18, 2005. The reinsurer will continue to remain obligated with regard to policies issued and reinsured under the agreements prior to that date. The Company replaced these reinsurance agreements with new reinsurance arrangements under which, with regard to these types of business, the Company retains all risks up to $100,000 and 50% of amounts in excess of $100,000 up to a maximum exposure of $250,000 per risk. Ratings

~~Family~~Investors Life is rated by A.M. Best Company, Inc. (“A.M. Best”), a nationally recognized rating agency. Insurance ratings represent the opinion of the rating agency on the financial strength of a company and its capacity to meet the obligations of insurance policies. As of March 31, 2007, the insurance financial strength ratings assigned by A.M. Best to Investors Life was B-. In both 2004 and 2005, the rating assigned by A.M. Best to Investors Life ~~maintain~~was ~~reinsurance~~B. ~~treaties~~The ~~under~~Company ~~which~~cannot predict ~~they~~what ~~reinsure~~actions, ~~all~~if ofany, A.M. Best may take in the ~~mortality~~future, ~~risks~~or ~~under~~what ~~accidental~~actions the ~~death~~Company ~~benefit~~may ~~policies~~take in response to such actions. A rating downgrade of Investors Life by A.M. Best could adversely affect new sales of insurance products and retention of current business.

InThese financial ~~December~~strength ~~1997~~ratings are current opinions of the rating agency. As such, they ~~FIC’s~~may ~~life~~be ~~insurance~~changed, ~~subsidiaries~~suspended ~~entered~~or ~~into~~withdrawn at any time by the rating agency as a ~~reinsurance~~result ~~treaty~~of ~~under~~changes ~~which~~in, ~~most~~or unavailability of, ~~the~~information ~~contractual~~or ~~obligations~~based ~~and~~on ~~risks~~other circumstances. ~~under~~Ratings ~~accident~~may ~~and~~also ~~health~~be ~~and~~withdrawn ~~disability~~at ~~income~~the ~~policies~~Company ~~were~~management’s request. ~~assumed~~In bythe aevent ~~third-party~~the ~~reinsurer~~Company’s ratings are downgraded, the Company’s business could be negatively impacted.

In 1995, Family Life (as the ceding company) entered into a reinsurance agreement with Investors Life (as the reinsuring company) pertaining to universal life insurance written by Family Life. The reinsurance agreement is on a co-insurance basis and applies to all covered business with effective dates on and after January 1, 1995. The agreement applies to only that portion Employees of the face amount of the policy that is less than $200,000 (increased to $250,000 for new business as of April 1, 2004). Face amounts above that level 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 Life (as the reinsuring company), pertaining to annuity contracts written by Family Life. The agreement applies to contracts written on or after January 1, 1996. Company

~~FIC’s~~At December ~~insurance~~31, ~~subsidiaries~~2006, ~~establish and carry as liabilities actuarially determined reserves that are calculated to meet~~ the Company’s ~~future~~(including ~~obligations.~~its ~~Reserves~~subsidiaries) ~~for~~had ~~life~~98 ~~insurance~~employees, all ~~policies~~of ~~are~~whom ~~based~~worked ~~on actuarially recognized methods using prescribed morbidity and mortality tables~~ in ~~general use in~~ the ~~United States, modified when appropriate to reflect the~~ Company’s ~~actual~~home ~~experience~~office (eoperations.~~g.,~~ ~~lapses,~~At ~~withdrawals).~~March ~~These~~31, reserves are computed to equal amounts that (with additions from premiums to be received and with interest on such reserves compounded annually at certain assumed rates) are expected to be sufficient to meet 2007, the Company’s ~~policy~~had ~~obligations~~90 ~~at their maturities or in the event of an insured’s death~~employees.

~~Regulation~~Available Information

~~General.~~Our website ~~The~~address ~~Company~~is ~~and~~www.ficgroup.com. ~~its~~We ~~insurance~~make ~~subsidiaries~~our ~~are~~website ~~subject~~content toavailable for information ~~regulation~~purposes ~~and~~only. ~~supervision~~It atshould ~~both~~not ~~the~~be ~~state~~relied ~~and~~upon ~~federal~~for ~~level~~investment purposes, nor ~~including~~is ~~regulation~~it ~~under~~incorporated ~~federal~~by ~~and~~reference ~~state~~in ~~securities~~this ~~laws~~Form ~~and~~10-K. ~~regulation~~We bymake available on the investor ~~states~~relations insection ~~which~~of ~~they~~this ~~are~~website, ~~licensed~~free toof docharge, ~~business.~~our ~~The~~annual ~~state~~reports on ~~insurance~~Form ~~regulation~~10-K, isquarterly ~~designed~~reports ~~primarily~~on Form 10-Q, current reports on Form 8-K and amendments to ~~protect~~those ~~policy~~reports ~~owners.~~promptly ~~Although~~after ~~the~~we ~~extent~~electronically offile ~~regulation~~those materials ~~varies~~with, byor ~~state~~furnish those materials to, the ~~respective~~SEC. ~~state~~Our ~~insurance~~Code ~~departments~~of ~~have~~Ethics for Senior ~~broad~~Executive ~~administrative~~and ~~powers~~Financial ~~relating~~Officers tois ~~the~~also ~~granting~~available ~~and~~on ~~revocation~~the investor relations section of ~~licenses~~our website. We will post any amendments to ~~transact~~or ~~business,~~waivers from a ~~licensing~~provision of ~~agents,~~our ~~the~~Code ~~regulation~~ of ~~trade~~Ethics ~~practices~~for ~~and~~Senior ~~premium~~Executive ~~rates,~~and Financial Officers on the ~~approval~~same section of ~~form~~our ~~and~~website. ~~content~~The ofSEC ~~financial~~also ~~statements~~maintains a website at www.sec.gov that contains reports, proxy statements and ~~the~~other ~~type~~information ~~and~~regarding ~~character~~SEC registrants, ofincluding ~~investments~~us.

These laws and regulations require the Company's insurance subsidiaries to maintain certain minimum surplus levels and to file detailed periodic reports with the supervisory agencies in each of the states in which they do business and their business and accounts are subject to examination by such agencies at any time. The insurance laws and regulations of the domiciliary state of the Company’s insurance subsidiaries require that such subsidiaries be examined at specified intervals. Both Investors Life and Family Life were domiciled in the state of Washington at the end of 2003 but, as noted elsewhere in this business description, redomesticated to Texas during the first quarter of 2004. 11

~~The Company’s life insurance subsidiaries, Investors Life and Family Life, are subject to periodic examination by the state insurance departments, usually on a three to five-year cycle~~ITEM 1A. ~~The~~RISK ~~Texas~~FACTORS ~~Department~~RELATED ofTO ~~Insurance~~OUR isCOMPANY ~~currently conducting an examination of the life insurance subsidiaries, which began on July 25, 2005. This examination covers the years 1999-2004.~~

AsThe reader ofshould ~~the~~carefully ~~date~~consider ofthe ~~this~~following ~~report~~risks, ~~the~~as ~~Company’s~~well ~~insurance~~as ~~subsidiaries~~the ~~are~~other information ~~current~~contained in ~~their~~this ~~filing~~Form ~~obligations with respect to unaudited statutory financial statements~~10-K. ~~The~~If ~~audited~~any ~~statutory financial statements~~ of the ~~insurance~~following ~~subsidiaries~~risks ~~for the year ended December 31~~actually occurs, ~~2004,~~our ~~(“2004 Audited Financial Statements”)~~business, ~~were~~financial ~~due~~condition ~~during~~and ~~the~~results ~~month~~ of ~~June~~operations ~~2005.~~could be materially ~~Family~~adversely ~~Life filed its 2004 Audited Financial Statements on February 17, 2006~~affected. ~~Investors~~ ~~Life~~In ~~filed~~that ~~its 2004 Audited Financial Statements on May 3~~case, ~~2006. As~~ the ~~Company~~value ~~and~~of ~~its~~our ~~insurance~~common ~~subsidiaries~~stock could decline ~~work~~substantially. toYou ~~become~~should ~~current~~also inrefer ~~their financial statement filings, it will continue~~ to ~~provide~~ the ~~domiciliary~~other ~~state regulatory agency (the Texas Department of Insurance) with periodic~~ information ~~regarding the operations of the Company and its insurance subsidiaries. The 2005 audited statutory financial statements of the insurance subsidiaries were~~set ~~filed~~ forth in onthis ~~July~~Form 10-K, ~~2006~~including toour ~~the~~consolidated ~~Texas~~financial ~~Department~~statements ofand ~~Insurance~~related notes.

AFIC is ~~number~~a ofholding ~~states~~company ~~regulate the manner~~ and ~~extent~~relies toon ~~which~~dividends ~~insurance~~from ~~companies~~its ~~may test for acquired immune deficiency syndrome (AIDS) antibodies in connection with the underwriting of life~~ insurance ~~policies. To the extent permitted by law~~subsidiary, Investors ~~the~~Life; ~~Company's~~state insurance ~~subsidiaries~~laws ~~consider~~may ~~AIDS~~restrict ~~information~~the inability ~~underwriting~~of ~~coverage~~Investors Life to ~~and~~pay ~~establishing premium rates~~dividends. An

11FIC is an insurance holding company whose principal assets consist of the outstanding capital stock of its insurance subsidiary, Investors Life Insurance Company of North America. As a holding company, FIC’s ability to meet its cash requirements, pay principal and interest on any debt, pay expenses related to its affairs and pay dividends on its common stock substantially depends upon dividends from its subsidiary. Applicable state insurance laws generally restrict the ability of insurance companies to pay cash dividends in excess of prescribed limitations without prior approval. Pursuant to statutory limitations, the maximum dividend payment which could be made in 2007 without the prior approval of the TDI is $5.5 million.

~~evaluation~~FIC may ofnot ~~the~~be ~~financial~~able ~~impact~~to ofcompete ~~future~~with ~~AIDS claims is extremely difficult~~larger, ~~due~~more inestablished ~~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~~insurance companies.

~~Risk-Based~~There are many ~~Capital~~life ~~Requirements.~~and ~~The~~health ~~National~~insurance ~~Association~~companies ofin ~~Insurance Commissioners (“NAIC”) has imposed Risk-Based Capital (“RBC”) standards to evaluate~~ the ~~adequacy~~United ofStates. ~~statutory~~Agents ~~capital and surplus in relation to investment and~~ placing insurance ~~risks~~business ~~associated~~ with: ~~(i)~~our ~~asset~~insurance ~~quality;~~subsidiary, ~~(ii)~~Investors ~~mortality~~Life, ~~and~~are compensated ~~morbidity;~~on ~~(iii)~~a ~~asset~~commission ~~and liability matching; and (iv) other business factors~~basis. ~~The~~However, ~~RBC~~some ~~formula~~companies ismay ~~intended~~pay tohigher commissions beand ~~used~~charge bylower ~~insurance~~premium ~~regulators~~rates asand anmany ~~early warning tool to discover potentially weakly capitalized~~ companies ~~for~~have ~~the~~more substantial ~~purpose~~resources ofthan ~~initiating~~we ~~regulatory action~~do. The ~~RBC~~principal ~~requirements~~cost ~~are~~and ~~not~~competitive ~~intended to be a basis for ranking the relative financial strength of insurance companies. The formula also defines a new minimum capital standard~~ factors that ~~will~~affect ~~supplement~~ the ~~prevailing~~ability ~~system~~ of ~~fixed~~Investors ~~minimum~~Life ~~capital~~to ~~and~~sell ~~surplus~~its ~~requirements~~insurance ~~now applied~~ products on a profitable ~~state-by-state~~ basis. are:

~~The~~· ~~RBC~~the ~~requirements~~general ~~provide~~level ~~for different levels~~ of ~~regulatory~~premium ~~attention~~rates for ~~any~~comparable company whose “Total Adjusted Capital” (which generally consists of its statutory capital, surplus, and asset valuation reserve) falls below 200% of its “Authorized Control Level RBC.” Calculations using the NAIC formula and the statutory financial statements of the Company’s insurance subsidiaries as of December 31, 2004, and December 31, 2005, indicate that the Total Adjusted Capital of each of the Company’s insurance subsidiaries was above its respective Authorized Control Level RBC.products;

~~Solvency~~· ~~Laws~~the ~~Assessments.~~extent ~~The solvency or guaranty laws~~ of ~~most~~individual ~~states~~policyholders inservices ~~which~~required ~~an insurance company does business may require that company~~ to ~~pay~~service ~~assessments~~each ~~(up~~product to certain prescribed limits) to fund policyholder losses or liabilities of insurance companies that become insolvent. 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 effect for guaranty fund assessments or credits in the period such amounts are probable and can be reasonably estimated.category;

~~Dividends.~~· ~~Dividends~~general ~~paid by FIC’s insurance company subsidiaries are a source of cash for FIC to make payments of principal and~~ interest onrate its debt. Under current Texas law, any proposed payment of an “extraordinary dividend” requires a 30-day prior notice to the Texas Insurance Commissioner, during which period the Commissioner can approve the dividend, disapprove the dividend, or fail to comment on the notice, in which case the dividend is deemed approved at the end of the 30-day period. An “extraordinary dividend” is a 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 31st or (ii) the statutory net gain from operations for the preceding calendar year. Payment of a regular dividend requires that the insurer’s earned surplus after dividends or distributions must be reasonable in relation to the insurer’s outstanding liabilities and adequate to its financial needs. Prior to the transfer of the domicile of Family Life and Investors Life from Washington to Texas in March 2004, the provisions of the Washington Insurance Code applied to the payment of dividends from the insurance subsidiaries to FIC. The provisions of the Washington Insurance Code applicable to the payment of dividends and extraordinary dividends by an insurance company are substantially similar to the provisions of Texas law described above. In 2003, 2004 and 2005, Family Life and Investors Life did not make any dividend payments to FIC. Family Life had earned surplus of ($4.3) million and $(7.3) million at December 31, 2004, and December 31, 2005, respectively, and a net loss from operations of $2.2 million for 2004 and $4.5 million for 2005. Investors Life had earned surplus of $18.5 million and $31.5 million at December 31, 2004, and December 31, 2005, respectively, and a net loss from operations of $3.9 million for 2004 and a net gain from operations of $3.3 million for 2005.levels;

~~Valuation~~· ~~Reserves. Life~~ insurance companies are required to establish an Asset Valuation Reserve (“AVR”) consisting of two components: (i) a “default component,” which provides for future credit-related losses on fixed maturity investments, and (ii) an “equity component,” which provides for losses on all types of equity investments, including equity securities and real estate. Insurers are also required to establish an Interest Maintenance Reserve (“IMR”), designed to defer realized capital gains and losses due to interest rate changes on fixed income investments and to amortize those gains and losses into future income. The IMR is required to be amortized into statutory earnings on a basis reflecting the remaining period to maturity of the fixed maturity securities sold. These reserves are required by state insurance regulatory authorities to be established as a liability on a life insurer’s statutory financial statements, but do not affect the financial statements prepared in accordance with generally accepted accounting principles (“GAAP”). Since dividend payments are based upon statutory earnings and surplus, the combination of the AVR and IMR will affect statutory capital and surplus and therefore may reduce the ability of Investors Life and Family Life to pay dividends to FIC. ratings;

~~Insurance~~· ~~Holding~~competitive ~~Company~~commission ~~Regulation.~~rates ~~Following the redomestication of Family Life~~ and ~~Investors~~related ~~Life~~marketing to Texas in March 2004, these companies became subject to regulation under the insurance and insurance holding company statutes of the state of Texas. The insurance holding company laws and regulations vary from jurisdiction to jurisdiction, but generally require costs;

12· legislative and regulatory requirements and restrictions;

~~insurance~~· ~~and~~the ~~reinsurance~~impact ~~subsidiaries~~ of competing 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,~~products; ~~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 their affiliates.

~~Under~~· the ~~Texas~~condition ~~Insurance~~of ~~Code, unless (i) certain filings are made with~~ the ~~Texas~~regional ~~Department of Insurance, (ii) certain requirements are met, including a public hearing,~~ and ~~(iii)~~national 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 Texas insurance company, or merge with such a holding company, if as a result of such transaction such person would “control” the insurance holding companyeconomies. ~~“Control” is presumed to exist if a person directly or indirectly owns or controls 10% or more of the voting securities of another person.~~

~~The~~If Investors ~~insurance~~Life ~~holding~~capital ~~company~~and ~~regulations~~surplus ~~generally~~falls ~~apply~~below ~~only to insurers domiciled in a particular state. The regulations in~~ certain ~~states~~statutory ~~also provide~~required levels, ~~however,~~regulatory ~~that~~authorities ~~insurers~~may ~~that~~place ~~are~~Investors ~~“commercially~~Life ~~domiciled”~~under ~~in that state are also subject to the provisions applicable to domiciled insurers~~regulatory control. The test for determining whether an insurer is commercially domiciled is based on the percentage of premiums written in the state as compared to the amount of premiums written everywhere over a measuring period. Currently, the insurance subsidiaries of FIC are not treated as commercially domiciled in any jurisdiction.

~~Privacy~~Investors Life ~~Legislation.~~is Insubject ~~July 2001, the Financial Services Modernization Act (referred~~ to inrisk-based ~~this~~capital ~~paragraph~~requirements asimposed by the ~~“Act”)~~National Association of ~~1999~~Insurance ~~became applicable to insurance companies~~Commissioners. InThese ~~general,~~requirements ~~the~~were ~~Act~~imposed ~~provides that financial institutions have certain obligations with respect~~ to evaluate the ~~maintenance~~adequacy of ~~the~~statutory ~~privacy~~capital ofand ~~customer~~surplus ~~information.~~in Inrelation ~~addition, the Act places new restrictions on disclosure of nonpublic personal information~~ to ~~third~~investment and ~~party~~insurance ~~institutions~~risks ~~seeking~~associated ~~to utilize such information in connection~~ with ~~the~~asset ~~sale~~quality, ofmortality ~~products or services. A financial institution may disseminate certain types of customer information to nonaffiliated third parties if the institution provides clear~~ and ~~conspicuous~~morbidity, asset ~~disclosure of the institution’s privacy policy~~ and ~~the~~liability ~~customer authorizes the release of certain information to third parties. Where the customer permits the release of the information~~matching, ~~the~~and ~~Act~~other restricts disclosure of information that is non-public in nature but does not prohibit the release of information which can be obtained from public sources. FIC’s insurance subsidiaries have not experienced any adverse effects to their business ~~as a result of the Act to date~~factors.

~~USA~~The requirements ~~Patriot~~are ~~Act.~~used ~~Title~~by ~~III~~states ofas ~~the~~an ~~USA~~early ~~Patriot~~warning ~~Act~~tool ~~(Public~~to ~~Law~~discover ~~107~~potential weakly-~~56)~~capitalized ~~(referred~~companies tofor inthe ~~this~~purposes ~~section~~of asinitiating ~~the~~regulatory ~~“Act”)~~action. Generally, ~~makes~~if aan ~~number~~insurer’s ofrisk-based ~~amendments~~capital tofalls ~~the~~below ~~anti-money~~specified ~~laundering~~levels, ~~provisions of~~ the insurer ~~Bank~~would ~~Secrecy~~be ~~Act~~subject ~~(“BSA”).~~to ~~The~~different ~~purpose~~degrees of ~~the~~regulatory ~~amendments~~action ~~was~~depending upon ~~to facilitate~~ the ~~prevention,~~magnitude ~~detection and prosecution~~ of ~~international money laundering and~~ the ~~financing of terrorism~~deficiency. ~~The~~Possible ~~Act~~regulatory ~~requires~~actions ~~every~~range ~~financial~~from requiring ~~institution~~the insurer to ~~establish~~propose anactions ~~anti-money~~to ~~laundering~~correct ~~program that includes: (1)~~ the ~~development~~risk-based ofcapital deficiency ~~internal~~to ~~policies,~~placing ~~procedures, and controls; (2)~~ the ~~designation~~insurer ofunder aregulatory ~~compliance officer; (3) an ongoing employee training program; and (4) an independent audit function to test programs~~control.

~~In October 2002~~Specifically, if the ~~Department~~applicable oflife ~~the~~insurance ~~Treasury~~company’s ~~(“Treasury”)~~total ~~released~~adjusted ancapital ~~interim~~is ~~final~~less ~~rule~~than 150% ~~that~~but ~~temporarily~~greater ~~deferred~~than ~~the~~or ~~application~~equal ofto ~~the~~70% ~~anti-money laundering program requirements~~ of ~~the~~its ~~Act~~authorized tocontrol-level ~~certain financial institutions~~risk-based capital, ~~including~~as ~~insurance~~each ~~companies.~~of ~~Although~~these ~~Treasury~~terms ~~has~~are ~~not~~defined ~~yet~~in ~~issued~~the ~~final~~risk-based ~~regulations pertaining to insurance companies~~capital requirements, ~~FIC’s~~the ~~insurance~~appropriate ~~subsidiaries~~state ~~have~~regulatory ~~taken~~authority ~~steps~~may totake ~~establish~~any anaction it deems ~~anti-money laundering program and continue to check names~~necessary, ~~involved~~including inplacing ~~certain transactions, against~~ the ~~Specially~~insurance ~~Designated~~company ~~Nationals~~under ~~and Blocked Persons List prepared by Treasury’s Office of Foreign Assets Control~~regulatory control. ~~Until~~In ~~Treasury~~addition, ~~issues~~if ~~final rules regarding~~ the insurance ~~industry~~company’s ~~compliance~~total ~~with~~adjusted ~~the~~capital ~~anti-money~~is ~~laundering~~less than ~~provisions~~70% of ~~the~~its ~~Act,~~authorized ~~FIC’s~~control-level ~~insurance~~risk-based ~~subsidiaries~~capital, ~~believe~~the ~~that~~appropriate state itregulatory authority is ~~too~~mandated ~~early~~ to ~~predict~~place the ~~Act’s~~ ~~long-term~~insurance ~~effects~~company ~~on their business~~under its control.

~~On March 2~~As of December 31, 2006, the ~~Act~~total adjusted capital of Investors Life was approximately ~~renewed~~584% byof ~~the~~its ~~House~~authorized ~~and~~control ~~Senate~~level risk-based capital, ~~and~~as compared ~~signed~~to ~~into~~560% ~~law~~at byDecember ~~President~~31, ~~Bush~~2005. onIf ~~March~~this 9percentage were to decrease, Investors ~~2006~~Life may become subject to regulatory action which could have a material adverse effect on our results of operations.

Federal “do-not-call” Regulations. The Federal Communications Commission (“FCC”) has issued rules that regulate telephone solicitations and fax solicitations. These rules became effective on October 1, 2003. As part of these rules, the FCC established a National Do Not Call Registry. Family Life distributes its insurance products primarily through leads furnished by mortgage lenders. FIC’s insurance subsidiaries have implemented procedures to assist agents in compliance with the federal regulations. FIC does not believe that the additional compliance steps that agents are required to take have had a significant adverse effect upon sales. 12

~~Potential~~Investors Life ~~Federal~~may ~~Regulation.~~be ~~Although~~required ~~the~~to ~~federal~~pay ~~government~~assessments ~~generally~~to ~~does~~fund ~~not~~policyholder ~~directly~~losses ~~regulate~~or liabilities; ~~the~~this ~~insurance~~may ~~industry,~~have ~~federal~~a ~~initiatives~~material ~~often~~adverse ~~have~~effect ~~an impact~~ on ~~the~~our ~~business.~~results ~~Congress and certain federal agencies periodically investigate the~~ of operations.

13The solvency or guaranty laws of most states in which Investors Life conducts business may require the Company 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. We cannot estimate the likelihood and amount of future assessments. Any future assessments may have a material adverse effect on our results of operations.

~~condition~~Investors Life ofis ~~the~~subject ~~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. Certain policies, contracts~~ and ~~annuities~~examination ~~offered~~ by ~~the~~state ~~Company’s~~insurance ~~subsidiaries are subject to regulations under the federal securities laws administered by the SEC. The federal securities laws contain regulatory restrictions and criminal~~departments, which ~~administrative~~could ~~and~~result private remedial provisions. As stated above, this Form 10-K for the fiscal year ended December 31, 2004 (the “2004 Form 10-K”) is the first annual statement covering periods subsequent to December 31, 2003. Therefore, the Company is currently delinquent in ~~its~~regulatory ~~filings with the SEC~~sanctions, ~~but~~such isas ~~diligently~~revocation ~~working~~of licenses to transact ~~become up-to-date with its required SEC filings~~business.

~~Federal~~Investors Life ~~Income~~is ~~Taxation.~~subject ~~FIC~~to ~~files~~regulation aand ~~consolidated~~supervision ~~federal~~by ~~income~~the ~~tax~~states ~~return~~in ~~with~~which ~~its~~it ~~subsidiaries,~~is licensed ~~except~~to ~~for~~do ~~Investors~~business. ~~Life~~This ~~(which~~regulation ~~files~~is adesigned ~~separate~~primarily ~~return)~~to ~~and~~protect policy owners. ~~ILG~~Although ~~Securities~~the ~~(which~~extent ~~files~~of ~~its~~regulation ~~own~~varies ~~federal~~by ~~income~~state, ~~tax~~state ~~return).~~insurance departments Inhave ~~accordance~~broad ~~with~~administrative ~~the~~powers ~~tax~~relating ~~allocation~~to ~~agreements~~the ~~maintained~~granting byand revocation ~~those~~of ~~FIC~~licenses ~~companies~~to ~~that~~transact ~~file~~business, alicensing ~~consolidated~~of ~~return~~agents, ~~federal~~the ~~income~~regulation of ~~tax~~trade ~~expense~~practices orand ~~benefit~~premium isrates, ~~allocated~~the toapproval ~~each~~of ~~entity~~form inand ~~the~~content ~~consolidated~~of financial ~~group~~statements asand ifthe ~~such~~type ~~entity~~and ~~were~~character ~~filing~~of ~~a separate return~~investments.

~~NAIC~~These laws ~~IRIS~~and ~~Ratios.~~regulations ~~The~~require ~~NAIC~~Investors ~~Regulatory~~Life ~~Information~~to ~~System~~maintain ~~(“IRIS”)~~certain ~~ratios~~minimum ~~cover~~surplus levels 12and ~~categories~~to offile ~~financial~~detailed ~~data~~periodic reports with ~~defined~~the ~~“usual”~~supervisory ~~ranges for~~ agencies in each ~~such~~of ~~category.~~the ~~The~~states ~~ratios~~in ~~are~~which ~~intended~~it todoes ~~provide~~business, ~~insurance~~and ~~regulators~~its ~~with~~business ~~“early~~and ~~warnings”~~accounts are subject as to ~~when~~examination aby ~~given~~these ~~company~~agencies ~~might~~at ~~warrant~~any ~~special attention~~time. AnThe insurance ~~company~~laws and regulations ~~may fall outside~~ of the ~~usual~~domiciliary ~~range~~state ~~for~~of ~~one~~Investors orLife ~~more~~require ~~ratios, and such variances may result from specific transactions~~ that ~~are,~~it bybe examined ~~themselves, immaterial or eliminated~~ at ~~the~~specified ~~consolidation level. In certain states~~intervals, ~~insurers~~usually ~~with~~on ~~more~~a ~~than~~ three ~~IRIS~~to ~~ratios~~five-year ~~outside~~cycle. ofThe Texas ~~the~~Department ~~NAIC~~of ~~usual~~Insurance ~~ranges~~(“TDI”) ~~may~~began bean ~~subject~~examination toof ~~increased~~Investors ~~regulatory~~Life ~~oversight.~~on July ~~For 2004~~25, ~~each~~2005 ofcovering the ~~Company’s~~years ~~insurance~~1999-2004. ~~subsidiaries~~On ~~had~~February ~~six IRIS ratios outside of the usual ranges. However~~5, ~~for 2005~~2007, ~~Family~~TDI ~~Life~~issued a report ~~had~~with ~~five~~respect ~~ratios,~~to ~~and~~this ~~Investors~~examination ~~Life~~that ~~had~~highlighted, ~~two~~among ~~ratios~~other ~~which~~issues, ~~were outside~~ the ~~usual~~Company’s ~~ranges.~~failure ~~For~~to ~~Family~~provide ~~Life~~accurate, ~~the~~complete ~~ratios~~and ~~outside~~timely ~~the~~responses ~~usual ranges were primarily related~~ to ~~changes~~the TDI inrequests ~~capital~~for ~~and~~information. ~~surplus,~~We ~~net~~attribute ~~income,~~this ~~investment~~failure ~~income,~~to ~~and~~our ~~non-admitted~~lack ~~assets.~~of ~~For~~current financial ~~Investors~~statements ~~Life,~~at the ~~ratios~~time ~~outside~~ the ~~usual~~examination ~~ranges~~was ~~were~~being ~~primarily~~conducted ~~related~~and the focus toof ~~investment~~our ~~income~~efforts ~~and~~on ~~changes~~becoming current in ~~premium~~our public filings. ~~Despite~~ ~~the~~The ~~IRIS~~Company has been ~~ratio~~notified ~~results~~that ~~for~~TDI ~~2005,~~will ~~both~~perform ~~Family~~an ~~Life~~examination ~~and~~of Investors Life ~~continue~~for the years toended ~~maintain~~December ~~capital~~31, 2005 and ~~surplus~~2006. ~~positions~~The ~~which~~Company ~~significantly~~expects ~~exceed~~the ~~RBC~~examination will begin ~~and~~in ~~other~~June ~~regulatory requirements~~2007.

~~Competition~~The federal government may seek to regulate the insurance industry, which may result in additional regulatory costs or constrain the nature and scope of our products and operations.

~~The financial services industry in general, and~~ Although the ~~market~~federal ~~for~~government ~~life~~generally ~~insurance~~does ~~and~~not ~~annuity~~directly ~~products~~regulate inthe ~~particular~~insurance industry, ~~are~~federal ~~highly~~initiatives ~~competitive,~~often ~~involving~~have ~~many~~a ~~companies.~~direct ~~The~~impact ~~principal~~on ~~cost and competitive factors that affect~~ the ~~ability of FIC’s~~ insurance business. ~~subsidiaries~~Congress toand ~~sell~~certain ~~their~~federal ~~insurance~~agencies ~~products on a profitable basis~~ are: ~~(1)~~investigating the ~~general~~current condition ~~level~~ of ~~premium~~the ~~rates~~insurance ~~for~~industry ~~comparable~~in ~~products; (2)~~ the ~~extent~~United ofStates ~~individual~~in ~~policyholders~~order ~~services required~~ to ~~service~~decide whether ~~each~~some ~~product~~form ~~category;~~of ~~(3)~~federal ~~general~~regulation ~~interest~~of ~~rate~~insurance ~~levels;~~companies ~~(4)~~would ~~competitive~~be appropriate. ~~commission~~We ~~rates~~are ~~and~~unable ~~related~~to ~~marketing~~predict ~~costs; (5) legislative and regulatory requirements and restrictions; (6)~~ the ~~impact~~outcome of ~~competing~~any ~~insurance~~such ~~and~~congressional activity ~~other~~or ~~financial~~the ~~products;~~potential ~~and~~effects ~~(7)~~that ~~the~~federal ~~condition~~regulation ofwould ~~the~~have ~~regional~~on ~~and~~us or our ~~national~~insurance ~~economies~~subsidiaries.

~~Agents~~The enactment ~~placing~~of ~~insurance~~federal ~~business~~privacy ~~with~~legislation, ~~Family~~such ~~Life~~as ~~and~~the ~~Investors~~Gramm-Leach-Bliley Act ~~Life~~(as it ~~are~~relates ~~compensated~~to onthe ause ~~commission~~of ~~basis.~~medical ~~Some companies pay higher commissions~~ and ~~charge~~financial ~~lower~~information ~~premium~~by ~~rates~~insurers) ~~than~~may result ~~FIC’s~~in ~~insurance~~additional ~~subsidiaries,~~regulatory ~~and~~compliance ~~many companies have more resources than FIC’s insurance subsidiaries. In addition~~costs, ~~consolidations~~limit ~~of insurance and banking institutions may adversely affect~~ the ability of ~~Family~~ Investors Life to ~~expand~~market its ~~customer~~products ~~referral~~or ~~relationships~~otherwise ~~with~~constrain ~~mortgage~~the ~~lending~~nature and ~~servicing~~scope ~~institutions~~of our operations.

The failure ~~Company~~of ~~believes~~the itCompany ~~can~~to ~~compete~~be ~~effectively~~current byin ~~focusing on markets where~~ its ~~approach~~SEC toreports ~~distribution~~ and ~~products provides competitive advantage. This includes initially~~ the ~~mortgage-protection~~delisting of ~~insurance~~our common ~~market.~~stock ~~Family~~from ~~Life’s~~Nasdaq ~~delivery~~may ~~system~~cause ~~provides~~fluctuations ~~an advantage~~ in the ~~lower-income~~price ~~homeowner market. Also during 2004~~ and ~~2005,~~volume ~~Family~~of our shares ~~Life introduced new mortgage-related products with improved benefits~~ and ~~features.~~limit ~~Investors~~access ~~Life has reorganized its distribution arrangements~~ to ~~compete~~additional ~~more effectively in the mortgage-related market through independent brokers~~capital.

~~Ratings~~The failure of the Company to be current in its SEC reports and the delisting of our common stock from Nasdaq may have adverse effects on the Company and its shareholders. During the period that we were delinquent in our SEC reports, FIC shareholders may have had limited and dated information about the Company. Our failure to be current in our SEC reports has caused us to not be in compliance with SEC rules and regulations and could lead to an enforcement action by the SEC seeking to revoke the Company’s registration under the Securities Exchange Act of 1934.

~~FIC’s~~Prior to our ~~life~~delisting ~~insurance~~in ~~subsidiaries~~2004, ~~are~~our ~~rated~~common bystock ~~A.M.~~traded ~~Best~~on ~~Company,~~the ~~Inc.~~Nasdaq ~~(“A.M.~~Stock ~~Best”),~~Market’s National aMarket. ~~nationally~~Our ~~recognized~~common ~~rating~~stock ~~agency.~~was ~~Insurance~~delisted ~~ratings~~as ~~represent~~a ~~the~~result ~~opinion~~ of ~~the~~our ~~rating~~failure to timely ~~agency~~file onSEC ~~the~~reports. ~~financial~~We ~~strength~~do ofnot aexpect ~~company~~to ~~and~~apply ~~its capacity~~ to ~~meet~~relist ~~the~~our ~~obligations~~common ofstock on Nasdaq ~~insurance~~or ~~policies.~~another Astrading ofmarket ~~June,~~until ~~2006,~~we ~~the~~are ~~insurance~~current ~~financial~~in ~~strength~~our ~~ratings~~SEC ~~assigned by A~~reports.M. While our ~~Best~~common tostock ~~Investors~~is ~~Life~~quoted ~~and~~in ~~Family~~the ~~Life~~Pink ~~was B- and B~~Sheets, ~~respectively.~~there Inis ~~both~~currently ~~2004~~only ~~and~~a limited trading ~~2005,~~market ~~the~~for ~~ratings~~our ~~assigned by A~~shares.M. ~~Best~~The tolimited ~~Investors~~trading ~~Life~~market ~~and~~for ~~Family~~our ~~Life~~common stock may ~~was~~cause Bfluctuations ~~and~~in ~~B+, respectively. Prior to 2004,~~ the ~~rating~~price ~~assigned~~and byvolume ~~A.M.~~of ~~Best~~our shares to ~~Investors~~be ~~Life~~more exaggerated ~~and~~than ~~Family~~would ~~Life~~occur ~~was~~on B+Nasdaq ~~and~~or ~~B++,~~another ~~respectively~~trading market. ~~The~~We ~~Company~~ cannot assure ~~predict~~you ~~what~~that ~~actions,~~prior ifto ~~any,~~relisting ~~A.M.~~our ~~Best~~shares ~~may~~on ~~take~~Nasdaq inor ~~the~~another ~~future~~trading market, oryou ~~what~~will ~~actions~~be ~~the~~able ~~Company~~to ~~may~~sell ~~take~~shares inof ~~response~~our tocommon ~~such~~stock ~~actions.~~without Aa considerable ~~rating~~delay ~~downgrade~~or ofsignificant ~~either~~impact ofon the ~~Company’s~~sale ~~insurance~~price ~~subsidiaries~~nor bycan ~~A.M.~~we ~~Best could~~assure ~~adversely~~ that ~~affect~~even ~~new~~after ~~sales~~we ofbecome ~~insurance~~current ~~products~~in ~~and~~our ~~retention~~SEC ofreports ~~current~~that ~~business.~~we will be relisted on Nasdaq.

1413

~~These~~We will not ~~financial~~be ~~strength~~eligible ~~ratings~~to ~~are~~use ~~current~~a ~~opinions~~registration ofstatement ~~the~~on ~~rating~~Form ~~agency.~~S-3 Asfor ~~such,~~a ~~they~~period of ~~may~~12 months beafter ~~changed,~~becoming ~~suspended~~current orwith ~~withdrawn~~our atSEC ~~any~~reports. ~~time~~The byinability ~~the~~to ~~rating~~use Form S-3 ~~agency~~may asimpair aour ~~result~~abilities ofor ~~changes~~increase ~~in,~~our orcosts ~~unavailability~~and the complexity of, our efforts ~~information~~to orraise ~~based~~funds onin ~~other~~the ~~circumstances~~public markets. ~~Ratings~~ ~~may~~Even ~~also~~after bewe ~~withdrawn~~become atcurrent with our ~~the~~SEC ~~Company~~reports, ~~management’s~~our ~~request. In~~access ~~the~~to ~~event~~capital ~~the~~may ~~Company’s~~be ~~ratings~~limited until we are ~~downgraded,~~able ~~the~~to be relisted ~~Company’s~~on ~~business~~Nasdaq ~~could~~or beanother ~~negatively~~trading ~~impacted~~market.

~~Employees~~As of December 31, 2006, we had material weaknesses in our internal controls, and our internal controls over financial reporting were not effective as of ~~the~~that date. ~~Company~~If we fail to maintain an effective system of internal controls, we may not be able to provide timely and accurate financial statements.

AtAs more fully ~~December~~described ~~31,~~under ~~2004~~Item 9A, ~~the~~Controls ~~Company~~and ~~(including its subsidiaries) had approximately 173 employees~~Procedures, ofour ~~whom~~management identified ~~165~~material ~~worked~~weaknesses inover the ~~Company’s~~effectiveness ~~home~~of ~~office~~our ~~operations~~internal ~~and~~controls over 8financial ~~worked as field staff in the Company’s two insurance company subsidiaries~~reporting. AtAs ~~the~~a ~~end~~result of ~~2005,~~ the ~~Company~~material ~~relocated~~weaknesses, ~~its~~management concluded ~~field~~that, ~~staff~~as toof ~~the~~December ~~home~~31, ~~office in Austin~~2006, ~~Texas. At~~we ~~June~~did ~~30,~~not ~~2006,~~maintain ~~the~~effective ~~Company~~internal control ~~had~~over ~~139~~financial ~~employees~~reporting.

~~Available~~The Public ~~Information~~Company Accounting Oversight Board has defined a material weakness as a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim statements will not be prevented or detected. Accordingly, a material weakness increases the risk that the financial information we report contains material errors. As more fully described under Item 9A, management concluded as of December 31, 2006, FIC’s disclosure controls and procedures were ineffective and that FIC did not maintain effective internal control over financial reporting. In our Form 10-K for the fiscal year ended December 31, 2005, we also reported material weaknesses and concluded that FIC’s disclosure controls and procedures were ineffective as of such date.

~~Our website address is www.ficgroup.com.~~ We have implemented ~~make~~initiatives ~~our~~to ~~website~~remediate ~~content~~the ~~available~~material ~~for~~weaknesses ~~information~~in ~~purposes~~our ~~only~~internal controls. ItThe ~~should~~steps ~~not~~we behave ~~relied~~taken ~~upon~~and ~~for~~are ~~investment~~taking ~~purposes,~~to ~~nor~~address isthe itmaterial weaknesses ~~incorporated~~may bynot ~~reference~~be ineffective. ~~this~~Any ~~Form~~failure ~~10-K.~~to Weeffectively ~~make~~address ~~available~~a onmaterial weakness ~~the~~or ~~investor~~other ~~relations~~control ~~section~~deficiency ofor ~~this~~implement ~~website,~~required ~~free~~new ofor ~~charge~~improved controls, ~~our~~or ~~annual~~difficulties ~~reports~~encountered onin ~~Form~~their ~~10-K~~implementation, ~~quarterly~~could ~~reports~~limit our ability onto ~~Form~~obtain ~~10-Q~~financing, ~~current~~harm ~~reports~~our onreputation, ~~Form~~further ~~8-K~~delay ~~and~~our ~~amendments~~ plan to become ~~those~~current ~~reports~~in ~~promptly~~our ~~after~~SEC ~~we electronically file those materials with~~reports, ordisrupt ~~furnish~~our ~~those~~ability ~~materials~~ to, ~~the~~process ~~SEC.~~key ~~Our Code~~ components of ~~Ethics~~our ~~for~~results ~~Senior~~of ~~Executive~~operations and ~~Financial~~financial ~~Officers~~condition istimely ~~also~~and ~~available~~accurately and cause onus ~~the~~to ~~investor~~continue ~~relations~~to ~~section~~fail ~~of our website. We will post any amendments~~ to ormeet ~~waivers from a provision of~~ our ~~Code~~reporting ofobligations ~~Ethics~~under ~~for Senior Executive and Financial Officers on~~ rules of the ~~same section of our website. The~~ SEC ~~also maintains a website at www~~.~~sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including us.~~

~~ITEM~~Changes to ~~1A.~~the ~~RISK~~Internal ~~FACTORS~~Revenue ~~RELATED~~Code TOcould ~~OUR~~have ~~COMPANY~~a material adverse effect on our results of operations.

~~The~~Currently, under ~~reader should carefully consider~~ the ~~following~~Internal ~~risks~~Revenue Code, asholders ~~well~~of asmany ~~the~~life ~~other~~insurance ~~information~~and ~~contained~~annuity products, inincluding ~~this~~both ~~Form~~traditional ~~10-K. The risks~~ and ~~uncertainties~~variable ~~described~~products, ~~below~~ are ~~not~~entitled to tax-favorable ~~the~~treatment ~~only~~on ~~ones~~these ~~facing our Company~~products. ~~Although~~For ~~significant~~example, ~~resources~~income ~~have~~tax ~~been~~payable by policyholders ~~devoted~~on toinvestment ~~developing~~earnings ~~risk~~under ~~management~~life ~~policies~~insurance and ~~procedures,~~annuity ~~we may be exposed to unidentified or unanticipated risks~~ products which ~~could~~are ~~negatively~~owned ~~affect~~by ~~our~~natural ~~financial~~persons ~~position~~is ~~and~~deferred ~~earnings.~~during ~~If any of~~ the ~~following~~product’s ~~risks~~accumulation period ~~actually~~and ~~occurs,~~is ~~our business~~payable, ~~financial~~if ~~condition~~at ~~and~~all, ~~results~~only ofwhen ~~operations could be materially adversely affected. In that case,~~ the ~~value~~insurance ofor ~~our~~annuity ~~common~~benefits are ~~stock~~actually ~~could~~paid ~~decline~~or ~~substantially. You should also refer~~ to ~~the~~be ~~other information set forth in this Form 10-K, including our consolidated financial statements and related notes~~paid.

~~FIC~~In the past, islegislation ahas ~~holding~~been ~~company~~proposed that would have curtailed the tax-favorable treatment of some of our life insurance and ~~relies~~annuity onproducts. ~~dividends~~For ~~from~~example, Congress ~~its~~has previously considered legislation that would have eliminated the tax-deferred treatment of annuity products purchased by consumers other than in connection with a tax qualified retirement plan. While no such proposals are currently under active consideration by Congress, if legislative proposals directed at limiting the tax-favorable treatment of life insurance ~~subsidiaries;~~policies or annuity ~~state~~contracts were enacted, market demand for such products would likely be adversely affected. In addition, proposals have been considered by Congress which would either eliminate or significantly reduce Federal estate taxes. Many insurance ~~laws~~products ~~may~~are ~~restrict~~designed and sold to help policyholders reduce the effect of ~~ability~~Federal estate taxation on their estates. Thus, the enactment of ~~these~~any legislation ~~subsidiaries~~that toeliminates ~~pay~~or ~~dividends~~significantly reduces Federal estate taxation would likely result in a significant reduction in sales of our currently tax-favorable products.

~~FIC~~Interest rate isvolatility anmay ~~insurance~~adversely ~~holding~~affect ~~company whose principal assets consist of the outstanding capital stock of its insurance subsidiaries, Family Life Insurance Company and Investors Life Insurance Company of North America~~our profitability. As a holding company, FIC’s ability to meet its cash requirements, pay principal and interest on any debt, pay expenses related to its affairs and pay dividends on its common stock substantially depends upon dividends from its subsidiaries.

~~Applicable~~Changes in ~~state~~interest ~~insurance~~rates ~~laws~~affect ~~generally~~many ~~restrict~~aspects ~~the ability~~ of ~~insurance~~our ~~companies~~business toand ~~pay~~can ~~cash~~significantly affect ~~dividends~~our ~~in excess of prescribed limitations without prior approval~~profitability. ~~The~~In ~~ability~~periods of ~~Family~~increasing ~~Life~~interest ~~and~~rates, ~~Investors~~withdrawals of ~~Life~~life ~~to pay shareholder dividends is subject to restrictions set forth in the~~ insurance ~~laws~~policies and ~~regulations~~fixed ofannuity ~~Texas~~contracts, ~~their~~including ~~domiciliary~~policy loans and ~~state since March 2004. Under current Texas law~~surrenders, ~~any~~and ~~proposed~~transfers ~~payment~~to ofseparate anaccount ~~“extraordinary~~variable ~~dividend”~~options ~~requires~~may aincrease as ~~30-day~~policyholders ~~prior~~choose ~~notice~~ to ~~the~~forego ~~Texas~~insurance ~~Insurance~~protection ~~Commissioner,~~and ~~during~~seek ~~which~~higher investment ~~period~~returns. ~~the~~Obtaining ~~Commissioner~~cash ~~can~~to ~~approve~~satisfy ~~the~~these ~~dividend,~~obligations ~~disapprove~~may ~~the dividend, or fail~~ require us to ~~comment~~liquidate onfixed ~~the~~income ~~notice,~~investment inassets ~~which case the dividend is deemed approved~~ at ~~the end of the 30-day period. An “extraordinary dividend” is~~ a ~~distribution~~time ~~which,~~when ~~together with dividends or distributions paid during~~ the ~~preceding~~market ~~twelve~~prices for those ~~months,~~assets ~~exceeds~~are ~~the~~depressed ~~greater~~because ofinterest ~~(i)~~rates ~~10%~~have ofincreased. ~~statutory~~This ~~surplus~~may as result ofin ~~the~~realized ~~preceding~~investment ~~December 31st or (ii) the statutory net gain from operations for the preceding calendar year~~losses. ~~Payment~~Regardless of awhether ~~regular~~we ~~dividend~~realize ~~requires~~an investment ~~that~~loss, ~~the~~these ~~insurer's~~cash ~~earned~~payments ~~surplus~~would ~~after~~result ~~dividends~~in ora ~~distributions~~decrease ~~must be reasonable~~ in ~~relation~~total invested toassets ~~the~~and ~~insurer's~~may ~~outstanding~~result ~~liabilities~~in ~~and~~a ~~adequate~~decrease toin ~~its~~net ~~financial needs~~income. ~~Prior~~Policy tosurrender charges ~~the~~may ~~transfer~~offset ofor ~~the~~minimize ~~domicile of Family Life and Investors Life from Washington to Texas,~~ the ~~provisions~~negative ofeffect ~~the Washington Insurance Code applied~~ to ~~the~~net ~~payment~~income ofin ~~dividends from~~ the ~~insurance subsidiaries to FIC. The provisions~~ period of the ~~Washington Insurance Code applicable to the payment of dividends and extraordinary dividends by an insurance company are substantially similar to the provisions of Texas law described above~~surrender. In ~~2003,~~Premature ~~2004~~withdrawals ~~and~~may ~~2005,~~also ~~Family~~cause ~~Life~~us ~~and Investors Life did not make any dividend payments~~ to ~~FIC.~~accelerate amortization ~~Family Life had statutory earned surplus (deficit)~~ of ~~($4.3)~~policy ~~million~~acquisition ~~and $(7.3) million at December 31~~costs, ~~2004,~~which ~~and~~would ~~December~~also ~~31,~~reduce ~~2005, respectively,~~our ~~and a statutory~~ net ~~loss from operations of $2~~ income.~~2 million for 2004 and $4.5 million for~~

1514

~~2005.~~Conversely, during ~~Investors~~periods ~~Life~~of ~~had~~declining ~~statutory~~interest ~~earned~~rates, ~~surplus~~life ofinsurance ~~$18.5~~and ~~million~~annuity ~~and~~products may ~~$31.5~~be ~~million~~relatively atmore ~~December~~attractive 31to consumers, ~~2004~~resulting in increased premium payments on products with flexible premium features, repayment of policy loans and ~~December~~increases 31in persistency, ~~2005~~or a higher percentage of insurance policies remaining in-force from year to year. During such a period, ~~respectively~~our investment earnings will be lower because the interest earnings on our fixed income investments will be more likely to be prepaid or redeemed as borrowers seek to borrow at lower interest rates, and awe ~~statutory~~may ~~net~~be ~~loss~~required ~~from~~to ~~operations~~reinvest ofthe $3proceeds in securities bearing lower interest rates.9 ~~million~~Accordingly, ~~for~~during ~~2004~~periods ~~and~~of declining ainterest ~~statutory~~rates, ~~net~~our ~~gain~~profitability ~~from~~may ~~operations~~suffer as a result of ~~$3.3~~a ~~million~~decrease in ~~for~~the ~~2005~~spread between interest rates credited to policyholders and returns on our investment portfolio.

~~FIC~~The profitability ~~may~~of ~~not~~our bespread-based ~~able~~business depends in large part upon our ability to ~~compete~~manage ~~with~~interest ~~larger~~rate spreads, ~~more~~and ~~established~~the ~~insurance~~credit ~~companies~~and other risks inherent in our investment portfolio. We cannot guarantee, however, that we will manage successfully our interest rate spreads or the potential negative impact of those risks.

~~There~~The price ~~are~~of ~~many~~shares ~~life~~of ~~and health insurance companies in the United States. Agents placing insurance business with~~ our ~~insurance~~common ~~subsidiaries~~stock ~~are~~can ~~compensated~~fluctuate onas a ~~commission~~result ~~basis.~~of ~~However~~a variety of factors, ~~some companies may pay higher commissions and charge lower premium rates and~~ many ~~companies have more substantial resources than we do. In addition, consolidations~~ of ~~insurance and banking institutions,~~ which are ~~permitted~~beyond ~~under federal legislation, may adversely affect the ability of~~ our ~~insurance subsidiaries to expand their customer referral relationships with mortgage lending and servicing institutions~~control. ~~The principal cost and competitive factors that affect the ability of our insurance subsidiaries to sell their insurance products on a profitable basis are:~~

•The factors which can cause the ~~general~~price ~~level~~of shares of ~~premium~~our ~~rates~~common ~~for~~stock ~~comparable~~to ~~products;~~fluctuate include, among others:

•· ~~the~~quarterly ~~extent~~variations ofin ~~individual~~our ~~policyholders~~operating ~~services required to service each product category~~results;

•· ~~general~~operating ~~interest~~results ~~rate~~that ~~levels~~vary from the expectations of management, securities analysts and investors;

•· ~~competitive~~changes ~~commission~~in ~~rates~~expectations ~~and~~as ~~related~~to ~~marketing~~our ~~costs~~future financial performance, including financial estimates by securities analysts and investors;

•· ~~legislative~~developments ~~and~~generally ~~regulatory~~affecting ~~requirements~~the ~~and~~insurance ~~restrictions~~industry;

•· ~~the~~announcements ~~impact~~by us or our competitors of ~~competing~~significant ~~insurance~~contracts, ~~and~~acquisitions, ~~other~~joint ~~financial~~marketing ~~products;~~relationships, ~~and~~joint ventures or capital commitments;

•· ~~the~~announcements ~~condition~~by third parties of ~~the~~significant ~~regional~~claims ~~and~~or ~~national~~proceedings ~~economies.~~against us;

In· ~~certain circumstances, regulatory authorities may place~~ our ~~insurance~~dividend ~~subsidiaries under regulatory control.~~policy;

~~Our~~· ~~insurance subsidiaries are subject to risk-based capital requirements imposed by~~ the ~~National~~relatively ~~Association~~low oftrading ~~Insurance~~volume ~~Commissioners. These requirements were imposed to evaluate the adequacy~~ of ~~statutory~~our ~~capital~~common ~~and surplus in relation to investment and insurance risks associated with asset quality, mortality and morbidity, asset and liability matching, and other business factors.~~stock;

~~The~~· ~~requirements~~future ~~are~~sales ~~used by states as an early warning tool to discover potential weakly-capitalized companies for the purposes~~ of ~~initiating~~our ~~regulatory~~equity ~~action.~~or ~~Generally, if an insurer’s risk~~equity-~~based~~linked capital falls below specified levels, the insurer would be subject to different degrees of regulatory action depending upon the magnitude of the deficiency. Possible regulatory actions range from requiring the insurer to propose actions to correct the risk-based capital deficiency to placing the insurer under regulatory control.securities;

~~Specifically,~~· ifdelinquency the applicable life insurance company’s total adjusted capital is less than 150% but greater than or equal to 70% of its authorized control-level risk-based capital, as each of these terms are defined in the ~~risk-based~~filing capital requirements, the appropriate state regulatory authority may take any action it deems necessary, including placing the insurance company under regulatory control. In addition, if the insurance company’s total adjusted capital is less than 70% of ~~its~~required ~~authorized~~financial ~~control-level risk-based capital, the appropriate state regulatory authority is mandated to place the insurance company under its control.~~statements;

As· ofnatural ~~December 31,~~disasters ~~2005, the total adjusted capital of FIC’s insurance subsidiaries, Family Life~~ and ~~Investors~~terrorist ~~Life,~~attacks; ~~was approximately 717%~~ and 560% of its authorized control level risk-based capital, respectively. If these percentages were to decrease, Family Life and Investors Life may become subject to regulatory action which could have a material adverse effect on our results of operations. The RBC ratio of Investors Life improved significantly as a result of the June 2005 sale of the River Place Pointe real estate investment. See Item 2-Properties.

~~Our~~· ~~insurance~~general ~~subsidiaries~~domestic ~~may~~and beinternational ~~required~~economic ~~to pay assessments to fund policyholder losses or liabilities; this may have a material adverse effect on our results of operations~~conditions.

~~The~~In addition, ~~solvency~~the orstock ~~guaranty~~market ~~laws of most states~~ in ~~which~~general ~~our~~has ~~insurance~~experienced ~~companies~~extreme ~~conduct~~volatility that has ~~business~~often ~~may~~been ~~require~~unrelated ~~the Company~~ to ~~pay~~the ~~assessments~~operating ~~(up~~performance ~~to certain prescribed limits) to fund policyholder losses or liabilities~~ of ~~insurance~~a ~~companies~~particular ~~that become insolvent~~company. These ~~assessments~~broad ~~may~~market befluctuations ~~deferred or forgiven under most guaranty laws if they would threaten an insurer’s financial strength and, in certain instances,~~ may beadversely ~~offset~~affect ~~against future premium taxes. We cannot estimate~~ the ~~likelihood~~market ~~and~~price ~~amount~~ of ~~future assessments. Any future assessments may have a material adverse effect on~~ our common ~~results of operations~~stock.

~~Our~~Sales of substantial ~~insurance~~amounts ~~subsidiaries~~of ~~are~~shares ~~subject~~of our common stock in the public market, or the perception that those sales may occur, could cause the market price of our common stock to ~~regulation~~decline byor ~~state~~make ~~insurance~~it ~~departments~~more difficult for us to sell equity and equity-linked securities in the future at a time and a price that we consider appropriate.

16State insurance laws may discourage takeover attempts that could be beneficial to us and our shareholders.

~~FIC’s insurance subsidiaries~~ We are subject to ~~regulation~~state ~~and~~statutes ~~supervision~~governing byinsurance ~~the~~holding ~~states~~companies, in which ~~they~~generally require ~~are~~that ~~licensed~~any toperson door ~~business.~~entity ~~This~~desiring ~~regulation~~to isacquire ~~designed~~direct ~~primarily~~or toindirect control of ~~protect~~any ~~policy~~of ~~owners.~~our ~~Although~~insurance ~~the~~company ~~extent~~subsidiaries ofobtain ~~regulation~~prior ~~varies~~regulatory byapproval. Control ~~state,~~would ~~state~~be ~~insurance~~presumed ~~departments~~to ~~have~~exist ~~broad~~under ~~administrative~~most ~~powers~~state ~~relating~~insurance tolaws with the acquisition ~~granting and revocation~~ of ~~licenses~~10% toor ~~transact~~more ~~business,~~of ~~licensing~~our ofoutstanding ~~agents,~~voting ~~the~~securities. ~~regulation~~Applicable state ofinsurance ~~trade~~company ~~practices~~laws and ~~premium~~regulations ~~rates,~~could ~~the~~delay ~~approval~~or ofimpede ~~form~~a ~~and~~change of control ~~content~~ of ~~financial~~our ~~statements~~Company, ~~and~~which ~~the~~could ~~type~~prevent ~~and~~our ~~character~~shareholders offrom ~~investments~~receiving a control premium.

~~These~~Our reserves ~~laws~~established ~~and~~for ~~regulations~~future ~~require~~policy ~~our~~benefits ~~insurance subsidiaries to maintain certain minimum surplus levels~~ and toclaims ~~file~~may ~~detailed~~prove ~~periodic reports with the supervisory agencies in each of the states in which they do business~~inadequate, requiring ~~and~~us ~~their business and accounts are subject~~ to ~~examination~~increase ~~by these agencies at any time~~liabilities. The insurance laws and regulations of the domiciliary state of our insurance subsidiaries require that FIC’s life insurance subsidiaries, Family Life and Investors Life, be examined at specified intervals, usually on a three to five-year cycle. The Texas Department of Insurance is currently conducting an examination of the life insurance subsidiaries, which began on July 25, 2005. This examination covers the years 1999-2004.

Our earnings depend significantly upon the extent to which our actual claims experience is consistent with the assumptions used in setting prices for our products and establishing liabilities for future insurance and annuity policy benefits and claims. The ~~federal~~liability ~~government~~that we have established for future policy benefits is based upon assumptions concerning a number of factors, including the amount of premiums that we will receive in the future, rate of return on assets we purchase with premiums received, expected claims, expenses and persistency, which is the measurement of the percentage of insurance policies remaining in-force from year to year. However, due to the nature of the underlying risks and the degree of uncertainty associated with the determination of the liabilities for unpaid policy benefits and claims, we cannot determine precisely the amounts that we will ultimately pay to settle these liabilities. As a result, we may ~~seek~~experience volatility in the level of our reserves from period to period. ~~regulate~~To the ~~insurance~~extent ~~industry~~that actual claims experience is less favorable than our underlying assumptions, we could be required to increase our liabilities. As a result, we may experience volatility in the level of future earnings to the extent that experience differs from our assumptions.

Although the federal government generally does not directly regulate the insurance industry, federal initiatives often have a direct impact on the insurance business. Congress and certain federal agencies are investigating the current condition of the insurance industry in the United States in order to decide whether some form of federal regulation of insurance companies would be appropriate. Congress is currently conducting a variety of hearings relating in general to the solvency of insurers. We are unable to predict the outcome of any such congressional activity or the potential effects that federal regulation would have on us or our insurance subsidiaries.15

~~The~~A downgrade ~~enactment~~in ~~of federal privacy legislation, such as~~ the ~~Gramm-Leach-Bliley Act (as it relates to the use of medical and~~ financial ~~information~~strength byratings ~~insurers) may result in additional regulatory compliance costs, limit the ability~~ of our insurance subsidiaries may increase topolicy ~~market~~surrenders ~~their~~and ~~products~~withdrawals, orreduce ~~otherwise~~new ~~constrain~~sales ~~the nature~~ and ~~scope~~adversely affect ofrelationships with our ~~operations~~sales force.

~~Failure~~Rating organizations periodically review the financial performance and condition of insurers, including the Company’s toinsurance besubsidiary, ~~current~~Investors inLife. ~~its~~In recent ~~SEC~~years, ~~reports~~downgrades ~~and~~of ~~the~~insurance ~~delisting~~companies have occurred with increasing frequency. In June of ~~our~~2006, ~~common~~Investors ~~stock~~Life ~~from~~was ~~Nasdaq~~downgraded ~~may~~by ~~have~~A.M. ~~adverse~~Best ~~effects~~from a rating onof ~~the~~B ~~Company~~to ~~and~~a ~~its~~rating ~~shareholders~~of B-.

~~Failure~~Financial strength ofratings ~~the~~are ~~Company~~important tofactors ~~be current~~ in ~~its~~establishing ~~SEC reports and~~ the ~~delisting~~competitive position of ~~our~~insurance ~~common stock from Nasdaq may have adverse effects on the Company and its shareholders~~companies. ~~During~~ ~~the~~A ~~period~~rating ~~that we are delinquent in our SEC reports~~downgrade, ~~FIC~~or ~~shareholders may have limited and dated information about~~ the ~~Company. Our~~potential ~~failure~~for tosuch bea downgrade ~~current~~of in our ~~SEC~~insurance ~~reports~~subsidiary ~~has caused us to not be in compliance with SEC rules and regulations and~~ could, ~~lead~~among toother ~~an enforcement action by the SEC seeking to revoke the Company’s registration under the Securities Exchange Act of 1934.~~things:

~~Prior~~· tomaterially ~~our~~increase ~~delisting in 2004, our common stock traded on~~ the ~~Nasdaq~~number ~~Stock Market’s National Market. Our common stock was delisted as a result~~ of ~~our~~policy ~~failure~~or tocontract ~~timely~~surrenders ~~file~~for ~~SEC~~all ~~reports. We do not expect to apply to relist our common stock on Nasdaq~~ or ~~another trading market until we are current in our SEC reports. While our common stock is quoted in the Pink Sheets, there is currently only~~ a ~~limited~~portion ~~trading~~of ~~market~~their ~~for~~net ~~our~~cash ~~shares. The~~values ~~limited trading market for our common stock may cause fluctuations in the price~~ and ~~volume~~withdrawals ofby ~~our~~policyholders shares to be more exaggerated than would occur on Nasdaq or another trading market. We cannot assure you that prior to relisting our shares on Nasdaq or another trading market, you will be able to sell shares of ~~our~~cash ~~common~~values ~~stock~~from ~~without~~their ~~a considerable delay or significant impact on the sale price nor can we assure that even after we become current in our SEC reports that we will be relisted on Nasdaq.~~policies;

~~Until~~· weresult ~~can become current~~ in ~~our~~the ~~SEC~~termination ~~reports,~~of our ~~access~~relationships to capital will be limited, which may make it more difficult to grow our business. Additionally, we will not be eligible to use a registration statement on Form S-3 for a period of 12 months after becoming current with ~~our~~agents ~~SEC reports. The inability to use Form S-3 may impair our abilities or increase our costs~~ and ~~the~~other ~~complexity~~distributors of our ~~efforts~~products toand ~~raise~~services; ~~funds in the public markets. Even after we become current with our SEC reports, our access to capital may be limited until we are able to be relisted on Nasdaq or another trading market.~~and

As· ofreduce ~~December~~new ~~31, 2004, we had material weaknesses in our internal controls, and our internal controls over financial reporting were not effective as of that date~~sales. ~~If we fail to maintain an effective system of internal controls, we may not be able to provide timely and accurate financial statements.~~

AsRating organizations ~~more~~assign ~~fully~~ratings ~~described~~based ~~under~~upon ~~Item~~several 9Afactors. While most of the factors relate to the rated companies, ~~Controls~~some of the factors relate to the views of the rating organization, general economic conditions and ~~Procedures~~circumstances outside the rated company’s control. In addition, ~~our~~rating ~~management~~organizations ~~identified~~use various ~~numerous~~models ~~material~~and ~~weaknesses~~formulas ~~over~~to assess the ~~effectiveness~~strength of ~~our~~a ~~internal~~rated ~~controls~~company, ~~over~~and from time ~~financial~~to ~~reporting~~time rating organizations have, in their discretion, altered the models. As Changes ato ~~result~~the models could impact the rating organizations’ judgment of the financial ~~material~~strength ~~weaknesses,~~rating ~~management~~to ~~concluded~~be ~~that,~~assigned asto ofthe ~~December~~rated ~~31,~~company. ~~2004~~The Company cannot predict what actions the rating organizations may take, weor ~~did~~what ~~not~~actions the ~~maintain~~Company ~~effective~~may ~~internal~~be ~~control~~required ~~over~~to ~~financial~~take ~~reporting~~in response to the actions of the rating organizations, which could adversely affect the Company.

17These financial strength ratings are current opinions of the rating agency. As such, they may be changed, suspended or withdrawn at any time by the rating agency as a result of changes in, or unavailability of, information or based on other circumstances. Ratings may also be withdrawn at the Company management’s request. In the event the Company’s ratings are downgraded, the Company’s business may be negatively impacted.

~~The~~We may ~~Public~~require ~~Company~~additional ~~Accounting~~capital ~~Oversight Board has defined a material weakness as a control deficiency, or combination of control deficiencies, that results~~ in ~~more than a remote likelihood that a material misstatement of~~ the ~~annual~~future ~~or interim statements will not be prevented or detected. Accordingly, a material weakness increases the risk~~ that ~~the~~may financial information we report contains material errors. As more fully described under Item 9A, management concluded as of December 31, 2004, FIC’s disclosure controls and procedures were ineffective and that FIC did not ~~maintain effective internal control over financial reporting. We expect management to reach a similar conclusion as of December 31, 2005 in management’s report to~~ be ~~issued~~available ~~in our Form 10-K for the fiscal year ended December 31, 2005. In our Form 10-K for the fiscal year ended December 31, 2003, we also reported numerous material~~or ~~weaknesses~~ only available ~~and~~on ~~concluded~~unfavorable ~~that FIC’s disclosure controls and procedures were ineffective as of such date~~terms. ~~Many of the material weaknesses identified as of December 31, 2003 were present at year end 2004 and have not been remediated to date.~~

WeFIC’s future ~~have~~capital ~~implemented~~requirements ~~initiatives~~depend toon ~~remediate~~many ~~the~~factors, ~~material~~including ~~weaknesses~~its inability to write ~~our~~new ~~internal~~business ~~controls. The~~successfully ~~steps we have taken~~ and ~~are taking~~ to ~~address~~establish ~~the~~premium ~~material~~rates ~~weaknesses~~and ~~may~~reserves at levels ~~not~~sufficient ~~be effective. Any failure~~ to ~~effectively~~cover ~~address~~losses. aTo ~~material~~the ~~weakness~~extent orthat ~~other~~FIC ~~control~~needs ~~deficiency~~to orraise additional ~~implement~~funds, ~~required~~any ~~new~~equity or ~~improved~~debt ~~controls,~~financing orfor ~~difficulties~~this ~~encountered in their implementation~~purpose, ~~could~~if ~~limit our ability to obtain financing~~available at all, ~~harm~~may ~~our~~be ~~reputation,~~on ~~further~~terms ~~delay~~that ~~our~~are ~~plan~~not favorable to ~~become~~it. ~~current~~If inFIC ~~our~~cannot ~~SEC~~obtain ~~reports~~adequate capital, ~~disrupt~~its ~~our~~business, ~~ability~~results ~~to process key components~~ of ~~our result of~~ operations and financial condition ~~timely~~could be adversely ~~and accurately and cause us to continue to fail to meet our reporting obligations under rules of the SEC~~affected.

~~Changes~~Our policy toclaims ~~the~~fluctuate ~~Internal~~from ~~Revenue~~period ~~Code~~to ~~could~~period, ~~have~~and aactual ~~material~~results ~~adverse~~could ~~effect~~differ from on our ~~results of operations~~expectations.

~~Currently,~~Our results ~~under~~may ~~the~~fluctuate ~~Internal~~from ~~Revenue~~period ~~Code,~~to ~~holders~~period ofdue ~~many life insurance and annuity products, including both traditional and variable products, are entitled~~ to ~~tax-favorable~~fluctuations ~~treatment~~in onpolicy claims received ~~these products. For example, income tax payable~~ by ~~policyholders~~the onCompany. ~~investment~~Investors ~~earnings~~Life ~~under~~may ~~life~~experience ~~insurance~~higher ~~and~~claims ~~annuity~~if ~~products which are owned by natural persons is deferred during~~ the economy ~~product’s accumulation period and~~ is ~~payable,~~growing ifslowly ~~at all, only when the insurance~~ or ~~annuity~~in ~~benefits~~recession, ~~are actually paid~~ or toequity ~~be paid~~markets decline.

~~In the past~~Mortality, morbidity, ~~legislation~~and ~~has~~casualty ~~been~~expectations ~~proposed~~incorporate ~~that~~assumptions ~~would~~about ~~have~~many ~~curtailed~~factors, including ~~the~~for ~~tax-favorable treatment of some of our life insurance and annuity products. For~~ example, ~~Congress~~how ~~has previously considered legislation that would have eliminated the tax-deferred treatment of annuity products purchased by consumers other than in connection with~~ a ~~tax~~product ~~qualified~~is ~~retirement~~distributed, ~~plan.~~persistency ~~While~~and ~~no such proposals are currently under active consideration by Congress~~lapses, and future ifprogress ~~legislative~~in ~~proposals directed at limiting~~ the ~~tax-favorable~~fields ~~treatment~~ of ~~life~~health ~~insurance~~and ~~policies or annuity contracts were enacted, market demand for such products would likely be adversely affected~~medicine. InActual ~~addition~~mortality, morbidity, ~~proposals have been considered by Congress which would either eliminate or significantly reduce Federal estate taxes. Many insurance products are designed~~ and ~~sold~~casualty toclaims ~~help~~could ~~policyholders~~differ ~~reduce~~from ~~the~~expectations ~~effect~~if ofactual ~~Federal estate taxation on their estates. Thus, the~~results ~~enactment~~ differ offrom ~~any~~those ~~legislation that eliminates or significantly reduces Federal estate taxation would likely result in a significant reduction in sales of our currently tax-favorable products~~assumptions.

~~Interest~~Our results ~~rate~~may ~~volatility~~be ~~may~~negatively ~~adversely~~affected ~~affect~~should ~~our~~actual ~~profitability~~experience differ from management’s assumptions and estimates.

~~Changes~~In the conduct ~~in interest rates affect many aspects~~ of ~~our~~ business, ~~and~~FIC ~~can~~makes ~~significantly~~certain ~~affect~~assumptions ~~our~~regarding ~~profitability.~~the Inmortality, persistency, ~~periods~~expenses ofand ~~increasing~~ interest rates, ~~withdrawals~~or ofother ~~life~~factors ~~insurance~~appropriate ~~policies and fixed annuity contracts, including policy loans and surrenders, and transfers~~ to the type ~~separate~~of ~~account~~business ~~variable~~it ~~options~~expects ~~may increase as policyholders choose~~ to ~~forego~~experience ~~insurance~~in ~~protection~~future ~~and seek higher investment returns~~periods. ~~Obtaining~~These ~~cash~~assumptions are toalso ~~satisfy~~used ~~these obligations may require us~~ to ~~liquidate~~estimate ~~fixed income investment assets at a time when~~ the ~~market~~amounts ~~prices for those assets are depressed because interest rates have increased. This may result in realized investment losses. Regardless~~ of ~~whether~~deferred wepolicy ~~realize~~acquisition ~~an investment loss~~costs, policy ~~these~~liabilities ~~cash~~and ~~payments~~accruals, ~~would~~future ~~result~~earnings, ~~in a decrease in total invested assets~~ and ~~may~~various ~~result~~components of FIC’s inbalance ~~a decrease in net income~~sheet. ~~Policy~~FIC’s ~~surrender~~actual ~~charges~~experiences, ~~may~~as ~~offset~~well oras ~~minimize~~changes ~~the negative effect to net income~~ in ~~the~~estimates, ~~period~~ are ofused ~~the~~to ~~surrender.~~prepare ~~Premature~~FIC’s ~~withdrawals~~consolidated ~~may~~statements ~~also cause us to accelerate amortization~~ of ~~policy acquisition costs, which would also reduce our net income~~operations.

Conversely, during periods of declining interest rates, life insurance and annuity products may be relatively more attractive to consumers, resulting in increased premium payments on products with flexible premium features, repayment of policy loans and increases in persistency, or a higher percentage of insurance policies remaining in-force from year to year. During such a period, our investment earnings will be lower because the interest earnings on our fixed income investments will be more likely to be prepaid or redeemed as borrowers seek to borrow at lower interest rates, and we may be required to reinvest the proceeds in securities bearing lower interest rates. Accordingly, during periods of declining interest rates, our profitability may suffer as a result of a decrease in the spread between interest rates credited to policyholders and returns on our investment portfolio.16

18The calculations FIC uses to estimate various components of its balance sheet and statements of income are necessarily complex and involve analyzing and interpreting large quantities of data. FIC currently employs various techniques for such calculations and it from time to time will develop and implement more sophisticated administrative systems and procedures capable of facilitating the calculation of more precise estimates.

~~The~~Assumptions and ~~profitability~~estimates ofinvolve ~~our~~judgment, ~~spread-based~~and ~~business~~by ~~depends~~their innature ~~large~~are ~~part~~imprecise ~~upon~~and ~~our ability~~ subject to changes ~~manage~~and ~~interest~~revision ~~rate~~over ~~spreads~~time. Accordingly, ~~and~~our ~~the~~results ~~credit~~may ~~and~~be ~~other~~affected, positively ~~risks~~or ~~inherent~~negatively, infrom ~~our~~time ~~investment~~to ~~portfolio.~~time, Weby ~~cannot~~actual ~~guarantee,~~results ~~however~~different from assumptions, ~~that~~by wechanges ~~will~~in ~~manage~~estimates, ~~successfully~~and ~~our~~by ~~interest~~changes ~~rate~~resulting ~~spreads~~from orimplementing more ~~the~~sophisticated ~~potential~~administrative ~~negative~~systems ~~impact~~and procedures that facilitate the calculation of ~~those~~more ~~risks~~precise estimates.

~~The~~Reinsurance may ~~price~~not ofbe ~~shares~~available ofor ~~our~~adequate ~~common~~to ~~stock~~protect ~~can~~us ~~fluctuate~~against aslosses, aand ~~result~~we ofare subject ato ~~variety~~the ofcredit ~~factors,~~risk ~~many~~ of ~~which are beyond our control~~reinsurers.

~~The~~As part of ~~factors~~our ~~which~~overall ~~can~~risk ~~cause~~and capacity management strategy, we purchase reinsurance for certain risks underwritten by Investors Life. Market conditions beyond our control determine the ~~price~~availability and cost of ~~shares~~the reinsurance protection we purchase. For example, subsequent to the terrorist assaults of September 11, 2001, reinsurance for man-made catastrophes became generally unavailable due to capacity constraints and, to the limited extent available, much more expensive. The high cost of reinsurance or lack of affordable coverage could adversely affect our ~~common~~results. ~~stock~~If we fail to ~~fluctuate~~obtain ~~include~~sufficient reinsurance, ~~among~~it ~~others:~~could adversely affect our ability to write future business.

•As part of ~~quarterly~~our ~~variations~~business, inwe have reinsured certain life risks to reinsurers. Although the reinsurer is liable to us to the extent of the ceded reinsurance, we remain liable as the direct insurer on all risks reinsured. As a result, ceded reinsurance arrangements do not eliminate our ~~operating~~obligation to pay claims. We are subject to credit risk with respect to our ability to recover amounts due from reinsurers. Our reinsurers may not pay the reinsurance recoverables that they owe to us or they may not pay such recoverables on a timely basis. A reinsurer’s insolvency, underwriting results; or investment returns may affect its ability to fulfill reinsurance obligations.

•We may not ~~operating~~be ~~results~~able ~~that~~to ~~vary~~maintain ~~from~~our current reinsurance facilities and, even where highly desirable or necessary, we may not be able to obtain other reinsurance facilities in adequate amounts and at favorable rates. If we are unable to renew our expiring facilities or to obtain new reinsurance facilities, either our net exposures would increase or, if we are unwilling to bear an increase in net exposures, we may have to reduce the ~~expectations~~level of ~~management,~~our ~~securities~~underwriting ~~analysts~~commitments. Either of these potential developments could materially adversely affect our results of operating and ~~investors;~~financial condition.

•General economic, ~~changes~~financial inmarket ~~expectations~~and aspolitical toconditions ~~our~~may ~~future~~adversely ~~financial~~affect our results ~~performance,~~of ~~including~~operations ~~financial estimates by securities analysts~~ and ~~investors;~~financial condition.

•Our results ~~developments~~of ~~generally~~operations ~~affecting~~and ~~the~~financial ~~insurance~~condition ~~industry;~~may be materially adversely affected from time to time by general economic, financial market and political conditions. These conditions include economic cycles such as:

•· ~~announcements~~insurance byindustry ~~us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments~~cycles;

•· ~~announcements~~levels ~~by third parties~~ of ~~significant claims or proceedings against us~~employment;

•· ~~our~~levels ~~dividend~~of ~~policy~~consumer lending;

•· ~~the~~levels ~~relatively low trading volume~~ of ~~our common stock~~inflation; and

•· ~~future~~movements ~~sales~~ of ~~our~~the ~~equity~~financial ~~or equity-linked securities;~~markets.

•Fluctuations in ~~delinquency~~interest inrates, ~~the~~monetary ~~filing~~policy, ofdemographics, ~~required~~and ~~financial~~legislative ~~statements;~~and competitive factors also influence our performance. During periods of economic downturn:

•· ~~natural~~individuals ~~disasters~~and businesses may choose not to purchase our insurance products and ~~terrorist~~other ~~attacks;~~related products and services, may terminate existing policies or contracts or permit them to lapse, or may choose to reduce the amount of coverage purchased;

•· ~~general~~new ~~domestic~~disability insurance claims and ~~international~~claims ~~economic~~on ~~conditions.~~other specialized insurance products tend to rise;

In· ~~addition,~~there ~~the~~is ~~stock~~a ~~market~~higher inloss ~~general~~ratio ~~has~~on ~~experienced~~credit ~~extreme~~card ~~volatility~~and ~~that~~installment ~~has~~loan ~~often~~insurance ~~been~~due ~~unrelated~~ to ~~the~~rising ~~operating~~unemployment ~~performance~~levels; ~~of a particular company. These broad market fluctuations may adversely affect the market price of our common stock.~~and

~~Sales~~· ofinsureds atend ~~significant~~to ~~number~~increase oftheir ~~shares~~utilization of ~~our~~health ~~common stock in the public market, or the perception of such sales, could reduce our share price~~ and ~~impair~~dental ~~our~~benefits ~~ability~~if tothey ~~raise~~anticipate ~~funds~~becoming inunemployed ~~new~~or ~~share~~losing ~~offerings~~benefits.

Sales of substantial amounts of shares of our common stock in the public market, or the perception that those sales may occur, could cause the market price of our common stock to decline or make it more difficult for us to sell equity and equity-linked securities in the future at a time and a price that we consider appropriate.17

~~State~~The failure ~~insurance~~to ~~laws~~effectively ~~may~~maintain ~~discourage~~and ~~takeover~~modernize ~~attempts~~our ~~that~~information systems could adversely beaffect ~~beneficial to us and~~ our ~~shareholders~~business.

WeOur business ~~are~~is ~~subject~~dependent toupon ~~state~~our ~~statutes~~ability ~~governing~~to ~~insurance~~keep ~~holding~~up ~~companies,~~to ~~which~~date ~~generally~~with ~~require~~technological advances. ~~that~~Our ~~any~~failure ~~person or entity desiring~~ to ~~acquire~~update ~~direct or indirect control of any of~~ our ~~insurance~~systems, ~~company subsidiaries obtain prior regulatory approval. Control would be presumed~~ to ~~exist~~reflect ~~under~~technological advancements ~~most state insurance laws with the acquisition of 10%~~ or ~~more~~to ofprotect our ~~outstanding~~systems ~~voting~~may ~~securities.~~adversely ~~Applicable~~affect ~~state~~our ~~insurance company laws~~ relationships and ~~regulations~~ability ~~could~~to ~~delay~~do orbusiness ~~impede~~with ~~a change of control of~~ our ~~Company, which could prevent our shareholders from receiving a control premium~~clients.

~~Our~~In addition, ~~reserves~~our ~~established~~business depends significantly on effective information systems, and we have many different information systems for ~~future~~our ~~policy~~various ~~benefits~~businesses. We must commit significant resources to maintain and ~~claims~~enhance ~~may~~our ~~prove~~existing information ~~inadequate~~systems and develop new information systems in order to keep pace with continuing changes in information processing technology, ~~requiring~~evolving usindustry and regulatory standards and changing customer preferences. As a result of our past acquisition activities, we have acquired additional information systems. Our failure to ~~increase~~maintain ~~liabilities~~effective and efficient information systems, or our failure to efficiently and effectively consolidate our information systems to eliminate redundant or obsolete applications, could have a material adverse effect on our results of operations and financial condition. If we do not maintain adequate systems we could experience adverse consequences, including:

~~Our~~· ~~earnings~~inadequate ~~depend~~information significantly upon the extent to which our actual claims experience is consistent with the assumptions used in setting prices for our products and establishing liabilities for future insurance and annuity policy benefits and claims. The liability that we have established for future policy benefits is based upon assumptions concerning a number of factors, including the amount of premiums that we will receive in the future, rate of return on ~~assets we purchase with premiums received, expected claims, expenses and persistency,~~ which ~~is the measurement of the percentage of insurance policies remaining in-force from year~~ to ~~year.~~base ~~However~~pricing, ~~due~~underwriting ~~to the nature of the underlying risks~~ and ~~the~~reserving degree of uncertainty associated with the determination of the liabilities for unpaid policy benefits and claims, we cannot determine precisely the amounts that we will ultimately pay to settle these liabilities. As a result, we may experience volatility in the level of our reserves from period to period. To the extent that actual claims experience is less favorable than our underlying assumptions, we could be required to increase our liabilities. As a result, we may experience volatility in the level of future earnings to the extent that experience differs from our assumptions.decisions;

19· the loss of existing customers;

A· ~~downgrade~~difficulty in ~~the~~attracting ~~financial strength ratings of our insurance subsidiaries may increase policy surrenders and withdrawals, reduce~~ new ~~sales and adversely affect relationships with our sales force.~~customers;

~~Rating~~· ~~organizations periodically review the financial performance and condition of insurers~~customer, ~~including~~provider the Company’s insurance subsidiaries. In recent years, downgrades of insurance companies have occurred with increasing frequency. In June of 2006, Investors Life was downgraded by A.M. Best from a rating of B to a rating of B-, and ~~Family~~agent ~~Life was downgraded from B+ to B.~~disputes;

~~Financial~~· ~~strength~~regulatory ~~ratings are important factors in establishing the competitive position of insurance companies. A rating downgrade~~problems, ~~or the potential for~~ such aas ~~downgrade,~~failure ofto ~~either~~meet ofprompt ~~our~~payment ~~insurance subsidiaries could, among other things:~~obligations;

•· ~~materially~~litigation ~~increase~~exposure; ~~the number of policy~~ or ~~contract surrenders for all or a portion of their net cash values and withdrawals by policyholders of cash values from their policies;~~

•· ~~result~~increases in ~~the~~administrative ~~termination of our relationships with agents and other distributors of our products and services; and~~expenses.

•Our management ~~reduce~~information, ~~new~~internal ~~sales~~control and financial reporting systems may need further enhancements and development to satisfy the financial and other reporting requirements of being a public company.

~~Rating~~FIC may organizations assign ratings based upon several factors. While most of the factors relate to the rated companies, some of the factors relate to the views of the rating organization, general economic conditions and circumstances outside the rated company’s control. In addition, rating organizations use various models and formulas to assess the strength of a rated company, and from time to time rating organizations have, inliability ~~their~~for ~~discretion,~~indemnification ~~altered~~obligations ~~the~~under ~~models. Changes to~~ the ~~models~~Family ~~could impact the rating organizations’ judgment of the financial strength rating to be assigned to the rated company~~Life sale agreement. The Company cannot predict what actions the rating organizations may take, or what actions the Company may be required to take in response to the actions of the rating organizations, which could adversely affect the Company.

~~These~~FIC, through ~~financial~~its ~~strength~~wholly ~~ratings~~owned ~~are~~subsidiary, ~~current~~Family ~~opinions~~Life ofCorporation, ~~the~~entered ~~rating~~into a definitive ~~agency.~~agreement Ason ~~such~~December 8, ~~they~~2006 ~~may~~for bethe ~~changed,~~sale ~~suspended~~of orits ~~withdrawn~~wholly atowned insurance ~~any~~subsidiary, ~~time~~Family byLife, ~~the~~to ~~rating~~Manhattan ~~agency~~Life asfor a$28.0 ~~result~~million ~~of changes~~ in cash, subject orto ~~unavailability~~certain ~~of,~~post-closing ~~information~~adjustments. orA ~~based~~copy onof ~~other~~the ~~circumstances. Ratings~~sale ~~may~~agreement with Manhattan ~~also~~Life bewas ~~withdrawn~~filed atas an exhibit to the Company ~~management~~’s ~~request. In~~2005 ~~the~~Annual ~~event~~Report ~~the~~on Form ~~Company's~~10-K. ~~ratings~~The ~~are~~sale ~~downgraded,~~of ~~the~~Family ~~Company's~~Life ~~business~~was ~~may~~completed beon ~~negatively~~December ~~impacted~~29, 2006.

WePursuant to the terms and subject to the limitations contained in the sale agreement, Family Life Corporation agreed to indemnify Manhattan Life against all losses incurred by Manhattan Life that are caused by a breach of any of the representations, warranties, covenants or other agreements made by Family Life Corporation in the sale agreement. Manhattan Life filed suit against the Company on April 17, 2007 claiming that the Company has breached the non-competition provision contained in the sale agreement (see "Item 3 - Legal Proceedings"), and Manhattan Life may ~~require~~file additional ~~capital~~indemnification claims in the future. We cannot estimate the amount that ~~may~~the ~~not~~Company may be ~~available~~required to pay to Manhattan Life if it is successful in its pending lawsuit, nor can we estimate the likelihood or ~~only~~amount ~~available~~of onfuture ~~unfavorable~~claims ~~terms.~~under the sale agreement.

~~FIC’~~Family Life Corporation's ~~future~~obligation ~~capital~~to ~~requirements~~indemnify ~~depend~~Manhattan onLife ~~many~~is ~~factors,~~limited ~~including~~to individual ~~its~~or ~~ability~~related tolosses ~~write~~of ~~new~~Manhattan ~~business~~Life ~~successfully~~that exceed $10,000, and toFamily Life ~~establish~~Corporation ~~premium~~is ~~rates~~responsible ~~and~~only ~~reserves~~for atthe ~~levels~~portion ~~sufficient~~of toall ~~cover~~such losses. Tothat exceeds $420,000. Furthermore, the ~~extent~~maximum amount that ~~FIC~~Family ~~needs~~Life Corporation can be required to ~~raise~~pay ~~additional~~Manhattan ~~funds~~Life as indemnification under the sale agreement is $8,400,000. Family ~~any~~Life ~~equity~~Corporation's orindemnification obligations ~~debt~~expire ~~financing~~on ~~for~~June ~~this~~29, ~~purpose~~2008, ifexcept ~~available~~with atrespect ~~all,~~to ~~may~~covenants beand agreements onof ~~terms~~Family Life Corporation that ~~are~~extend beyond such date, including but not ~~favorable~~limited to ~~it.~~the Ifnon-competition ~~FIC~~provisions ~~cannot~~of ~~obtain~~the ~~adequate~~sale ~~capital~~agreement, which survive ~~its~~for ~~business,~~a ~~results~~period of ~~operations~~5 ~~and~~years ~~financial~~following ~~condition~~the ~~could~~closing beof ~~adversely~~the ~~affected~~sale transaction.

~~Our~~ITEM 1B. ~~policy~~UNRESOLVED ~~claims~~STAFF ~~fluctuate from period to period, and actual results could differ from our expectations.~~COMMENTS

~~Our results may fluctuate from period to period due to fluctuations in policy claims received by the Company~~None. ~~Family Life and Investors Life may experience higher claims if the economy is growing slowly or in recession, or equity markets decline.~~

Mortality, morbidity, and casualty expectations incorporate assumptions about many factors, including for example, how a product is distributed, persistency and lapses, and future progress in the fields of health and medicineITEM 2. ~~Actual~~ ~~mortality,~~PROPERTIES ~~morbidity, and casualty claims could differ from expectations if actual results differ from those assumptions.~~

~~Our~~FIC’s home ~~results~~office ~~may~~is belocated ~~negatively~~at ~~affected~~River ~~should~~Place ~~actual~~Pointe, ~~experience~~6500 ~~differ~~River ~~from~~Place ~~management~~Blvd., Building One, Austin, Texas. The Company occupies Building One of River Place Pointe, consisting of approximately 76,143 square feet of space. On June 1, 2005, the Company sold River Place Pointe to a non-affiliated party and entered into a lease with the purchaser with respect to Building One, for a five-year term at a rate of $28.00 per square foot, which is above the market rate in effect in June 2005, but was the prevailing rental rate at the time that FIC and its subsidiaries occupied the building in July 2000. The lease provides the Company with a right of cancellation at March 31, 2008. Upon the sale of Family Life in December, 2006, the Company evaluated its office space requirements. Based on this evaluation, the Company entered into three sublease transactions with unrelated parties in the first quarter of 2007. Cumulatively, these sublease arrangements will reduce the Company’s ~~assumptions~~rent ~~and~~expense ~~estimates~~by approximately $350,000 through the period ending March 31, 2008.

In the conduct of business, FIC makes certain assumptions regarding the mortality, persistency, expenses and interest rates, or other factors appropriate to the type of business it expects to experience in future periods. These assumptions are also used to estimate the amounts of deferred policy acquisition costs, policy liabilities and accruals, future earnings, and various components of FIC’s balance sheet. FIC’s actual experiences, as well as changes in estimates, are used to prepare FIC’s statements of income.18

The Company ~~calculations~~also ~~FIC~~leases ~~uses~~approximately to10,000 ~~estimate~~square ~~various~~feet ~~components~~in ofCedar ~~its~~Park, ~~balance~~Texas, to house ~~sheet~~the ~~and~~Company’s ~~statements~~printing ofoperations ~~income are necessarily complex~~ and ~~involve~~warehouse ~~analyzing and interpreting large quantities of data~~storage. ~~FIC~~ ~~currently~~During ~~employs~~2006, ~~various~~the monthly ~~techniques~~base rental for ~~such~~the ~~calculations~~Cedar ~~and~~Park itfacility ~~from~~was ~~time~~$7,988. toThe ~~time~~lease ~~will~~term ends on ~~develop~~March ~~and~~31, ~~implement more sophisticated administrative systems and procedures capable of facilitating the calculation of more precise estimates~~2008.

20The Company believes that its properties and leased space are adequate to meet its foreseeable requirements.

~~Assumptions and estimates involve judgment, and by their nature are imprecise and subject to changes and revision over time~~ITEM 3. ~~Accordingly,~~ ~~our~~LEGAL ~~results~~PROCEEDINGS may be affected, positively or negatively, from time to time, by actual results different from assumptions, by changes in estimates, and by changes resulting from implementing more sophisticated administrative systems and procedures that facilitate the calculation of more precise estimates.

~~Reinsurance~~Please refer ~~may not be available or adequate~~ to ~~protect~~“Forward-Looking usStatements” ~~against~~on ~~losses,~~page ~~and~~2 ~~we are subject to the credit risk~~ of ~~reinsurers~~this Form 10-K.

~~As part of our overall risk and capacity management strategy, we purchase reinsurance for certain risks underwritten by Family Life and Investors Life~~T. ~~Market~~ David ~~conditions~~Porter ~~beyond our control determine the availability and cost of the reinsurance protection we purchase~~v. ~~For~~ ~~example,~~Financial ~~subsequent~~Industries to the terrorist assaults of September 11, 2001, reinsurance for man-made catastrophes became generally unavailable due to capacity constraints and, to the limited extent available, much more expensive. The high cost of reinsurance or lack of affordable coverage could adversely affect our results. If we fail to obtain sufficient reinsurance, it could adversely affect our ability to write future business.Corporation

AsOn May 31, ~~part~~2006, ofT. ~~our~~David ~~business~~Porter, wean ~~have~~FIC ~~reinsured~~shareholder, ~~certain~~filed ~~life~~a ~~risks~~civil tosuit ~~reinsurers. Although~~in ~~the~~Travis County, ~~reinsurer~~Texas isDistrict ~~liable~~Court ~~to us to~~ (the ~~extent~~“Court”), ofagainst the ~~ceded reinsurance~~Company, weseeking ~~remain~~to compel ~~liable~~the asCompany ~~the~~to ~~direct~~hold ~~insurer~~an onannual ~~all~~meeting ~~risks~~of ~~reinsured~~shareholders. As aFIC ~~result,~~has ~~ceded~~been unable ~~reinsurance~~to ~~arrangements~~solicit doproxies ~~not~~for ~~eliminate~~an ~~our~~annual ~~obligation~~meeting tobecause ~~pay~~it ~~claims. We~~has ~~are~~not ~~subject~~been able to comply ~~credit risk~~ with ~~respect~~Rule to14a-3 ~~our~~of ~~ability~~the toSecurities ~~recover~~Exchange ~~amounts~~Act ~~due~~of ~~from~~1934, ~~reinsurers. Our~~which ~~reinsurers~~requires that ~~may~~the ~~not~~Company ~~pay~~provide ~~the~~an ~~reinsurance~~annual ~~recoverables~~report ~~that~~containing ~~they~~current ~~owe~~financial statements to usshareholders orin ~~they~~connection ~~may~~with ~~not~~an ~~pay~~annual ~~such recoverables on a timely basis~~meeting. ~~A reinsurer’s insolvency, underwriting results or investment returns may affect its ability to fulfill reinsurance obligations.~~

WeMr. Porter ~~may~~sued ~~not~~under beArticle ~~able~~2.24(B) toof ~~maintain~~the ~~our~~Texas ~~current~~Business ~~reinsurance~~Corporation ~~facilities and~~Act, which provides ~~even~~that ~~where~~if ~~highly~~an ~~desirable~~annual ormeeting ~~necessary,~~of weshareholders ~~may~~is not beheld ~~able~~within toany 13-month ~~obtain~~period ~~other~~and ~~reinsurance~~a ~~facilities~~written inconsent ~~adequate~~of ~~amounts~~shareholders ~~and~~has atnot ~~favorable~~been ~~rates. If~~executed instead weof ~~are~~a ~~unable~~meeting, toany ~~renew~~court ~~our~~of ~~expiring~~competent ~~facilities~~jurisdiction orin tothe ~~obtain~~county ~~new~~in which the ~~reinsurance~~principal ~~facilities,~~office ~~either~~of ~~our~~the ~~net~~corporation ~~exposures~~is ~~would~~located ~~increase~~may, oron the application of any shareholder, ifsummarily weorder ~~are~~a ~~unwilling~~meeting to ~~bear~~be anheld. ~~increase~~On inAugust ~~net~~7, ~~exposures~~2006, the Company weentered ~~may~~into ~~have~~an Agreed Order On Plaintiff’s Motion to ~~reduce~~Compel Annual Shareholders Meeting and agreed among other things to hold an annual shareholders meeting for the ~~level~~election of ~~our~~directors ~~underwriting~~on ~~commitments~~December 6, 2006. ~~Either~~ ofThe Company ~~these~~made ~~potential~~arrangements ~~developments~~for, ~~could~~and ~~materially~~was ~~adversely~~prepared ~~affect~~to ~~our~~hold, ~~results~~an annual meeting of shareholders ~~operating~~on ~~and~~December ~~financial~~6, ~~condition~~2006, as required by the Agreed Order, but the Company was unable to hold the meeting on the appointed date because no quorum was present.

~~General~~On December ~~economic~~12, ~~financial~~2006, ~~market~~FIC ~~and~~filed ~~political~~a ~~conditions~~Motion ~~may~~for ~~adversely~~Summary ~~affect~~Judgment ~~our~~seeking ~~results~~dismissal of Porter’s suit on the grounds that the Agreed Order did not dispense with the requirement of ~~operations~~a quorum; the lack of a quorum was a direct and ~~financial~~foreseeable result ~~condition~~of Mr. Porter’s insistence on a one-sided solicitation and election; FIC had complied with its obligations under the Agreed Order and Mr. Porter has obtained all relief sought by his petition. FIC’s Motion for Summary Judgment remains pending and has not been heard.

~~Our~~Prior to a ~~results~~hearing on FIC’s Motion for Summary Judgment, Mr. Porter applied for a temporary restraining order and temporary injunction requiring the Company to convene one or more additional meetings of ~~operations~~shareholders, contending that in the absence of a quorum on December 6, Texas law and ~~financial~~the ~~condition~~Company’s ~~may~~bylaws entitled a majority of the shareholders in attendance to choose a date to which the meeting would be ~~materially~~adjourned. ~~adversely~~The ~~affected~~District ~~from~~Court ~~time~~held a hearing on Porter’s application, and on December 22, 2006 entered an order requiring among other things that FIC hold an annual shareholders meeting for the election of directors on January 16, 2007, but stating that if a quorum was not present on that date, FIC would not be required to hold an annual meeting of shareholders at any time before July 17, 2007. The Company made arrangements for, and was prepared to hold, an annual meeting of shareholders on January 16, 2007, as required by ~~general~~the ~~economic~~Court’s order, but ~~financial~~the ~~market~~Company ~~and~~was ~~political~~again ~~conditions~~unable to hold the meeting on the appointed date because no quorum was present. ~~These~~ ~~conditions~~No ~~include~~further ~~economic~~action ~~cycles~~has ~~such~~been ~~as:~~taken by Mr. Porter, whose suit remains pending.

•Litigation with ~~insurance~~Equita ~~industry~~Financial ~~cycles;~~and Insurance Services of Texas, Inc. and M&W Insurance Services, Inc.

•On June 2, ~~levels~~2005, Equita and M&W Insurance Services, Inc. (“M&W”) filed a civil suit in Travis County, Texas District Court against the Company. The suit alleges that, in entering into certain agreements with the plaintiffs, the Company made certain misrepresentations and omissions as to its business and financial condition. The agreements referenced in the suit consist of ~~employment;~~(a) an option agreement entered into in June 2003 between Equita and the Company, granting Equita the right to purchase shares of FIC’s common stock at $16.42 per share, if certain sales goals were achieved under an exclusive marketing agreement between Equita and a subsidiary of the Company (the “Option Agreement”), (b) a stock purchase agreement entered into in June 2003 between M&W and the Roy F. and Joann Cole Mitte Foundation, pertaining to the purchase of 204,918 shares of FIC’s common stock (the Stock Purchase Agreement”), and (c) a registration rights agreement entered into in June 2003 among the plaintiffs and the Company, whereby the Company agreed to file and maintain a shelf registration statement with respect to the shares of FIC’s common stock purchased by M&W from the Mitte Foundation or which may be acquired in the future by Equita under the option agreement (the “Registration Rights Agreement,” and, collectively, the “Agreements”).

~~• levels of consumer lending;~~19

•The suit alleges ~~levels~~that the Company breached the provisions of ~~inflation~~the Option Agreement by refusing to indemnify the plaintiffs for losses relating to the alleged breach of certain representations and warranties included in the Option Agreement. The plaintiffs also allege that the Company required M&W to purchase 204,918 shares of FIC common stock from the Mitte Foundation as a condition of Equita’s obtaining, in June 2003, an exclusive marketing agreement with a subsidiary of the Company pertaining to the distribution of insurance products in the “senior market” (the “Marketing Agreement”), and that such requirement was motivated by the desire of the Company’s management to obtain certain proxy rights obtained under a settlement agreement with the Mitte Foundation and the Mitte family. The plaintiffs further allege that the Company breached the provisions of the Registration Rights Agreement by failing to file a shelf registration with the SEC with respect to the shares of FIC’s common stock purchased by M&W from the Mitte Foundation and the shares which may be acquired in the future by Equita under the provisions of the Option Agreement. The plaintiffs seek rescission of the Agreements; damages in an amount equal to the $3 million that M&W paid to acquire FIC shares from the Mitte Foundation, together with interest and attorney’s fees and unspecified expenses; and an unspecified amount of exemplary damages.

•Late in 2005, ~~movements~~the Company’s two life insurance subsidiaries, Investors Life and Family Life, intervened in the lawsuit to assert claims that Equita had breached its obligations under the Marketing Agreement with respect to the distribution of insurance products, thereby causing damages to the ~~financial~~life ~~markets~~insurance subsidiaries. Equita moved to dismiss the intervention, but at a hearing on December 20, 2005, the court denied Equita’s motion. As a result, Investors Life and Family Life will be permitted to assert their claims against Equita in this lawsuit.

~~Fluctuations~~Deposition discovery inwith ~~interest~~respect ~~rates,~~to ~~monetary~~both ~~policy,~~the ~~demographics,~~case filed by Equita and ~~legislative~~M&W, and ~~competitive~~the claims ~~factors~~in ~~also~~intervention ~~influence~~asserted ~~our~~by ~~performance. During~~Family ~~periods~~Life ofand ~~economic~~Investors ~~downturn:~~Life, began in October of 2006.

•In response ~~individuals~~to ~~and~~a ~~businesses~~motion ~~may~~for ~~choose~~partial ~~not~~summary judgment, the Company has stipulated to certain ~~purchase~~elements ~~our~~of ~~insurance~~some ~~products~~of the causes of action asserted by Equita and ~~other~~M&W, including ~~related~~that ~~products~~certain representations and ~~services~~warranties made in the Option Agreement were partially incorrect, ~~may~~and ~~terminate~~that ~~existing~~FIC ~~policies~~was orunable ~~contracts~~to orcomply ~~permit~~with certain ~~them~~of its obligations under the Option Agreement. FIC did not stipulate, and continues to ~~lapse~~dispute, orother ~~may~~elements ~~choose~~of tocertain ~~reduce~~of the ~~amount~~causes of ~~coverage~~action asserted ~~purchased;~~by Equita and M&W, and disputes other causes of action in their entirety.

•On or about ~~new~~May ~~disability~~8, ~~insurance~~2007, ~~claims~~Equita and M&W amended their petition, removing their claims onunder ~~other~~the ~~specialized~~Texas Securities Act and common-law fraud. FIC intends to vigorously oppose the lawsuit and any effort by Equita and M&W to recover damages from FIC, and the life insurance ~~products~~subsidiary ~~tend~~intends to ~~rise;~~vigorously prosecute its claims in intervention against Equita.

•The Manhattan ~~there~~Life isInsurance aCompany ~~higher~~and ~~loss~~Family ~~ratio~~Life onInsurance ~~credit~~Company ~~card~~v. ~~and~~Family Life ~~installment~~Corporation, ~~loan~~Investors ~~insurance~~Life ~~due~~Insurance toCompany ~~rising~~of ~~unemployment~~North ~~levels;~~America and FIC Insurance Services, L.P.

•On April 17, ~~insureds~~2007, ~~tend~~Manhattan Life and Family Life, filed a civil suit in the 215th Judicial District Court, Harris County, Texas, against Family Life Corporation, Investors Life and FIC Insurance Services, L.P. (“FICIS”), each a subsidiary of the Company. The suit alleges that: a) Family Life Corporation breached the Stock Purchase Agreement with Manhattan life by competing with Family Life and accepting insurance “directly or indirectly” from active accounts of Family Life; b) FICIS breached the Administrative Services Agreement with Family Life by willfully communicating with or willfully assisting with the communication by its affiliates with policyholders in a manner intended to ~~increase~~solicit Family Life accounts on behalf of Investors Life; c) FICIS breached fiduciary duties owed to Family Life in the administration and management of the accounts of the policyholders of Family Life by assisting in the conversion of Family Life policies to the policies of Investors Life, and by their ~~utilization~~actions, Investors Life and Family Life Corporation aided and abetted such breach of ~~health~~fiduciary duty; and, ~~dental~~d) ~~benefits~~Family ifLife ~~they~~Corporation, ~~anticipate~~Investors ~~becoming~~Life ~~unemployed~~and orFICIS ~~losing~~have ~~benefits~~tortiously interfered with existing contracts of Family Life with its policyholders, including the Stock Purchase Agreement and the Administrative Services Agreement. The Company intends to vigorously defend the suit, and has filed an answer denying the plaintiffs' claims. In addition, FICIS has filed, and intends to vigorously prosecute, a counterclaim for amounts due and owing by Family Life for services performed pursuant to the Administrative Services Agreement.

~~The failure to effectively maintain and modernize our information systems could adversely affect our business.~~20

Our business is dependent upon our ability to keep up to date with technological advances. Our failure to update our systems, to reflect technological advancements or to protect our systems may adversely affect our relationships and ability to do business with our clients.Other Litigation

21FIC and its insurance subsidiaries are regularly involved in litigation, both as a defendant and as a plaintiff. The litigation naming the insurance subsidiaries as defendant ordinarily involves our activities as a provider of insurance products. Management does not believe that any of this other litigation, either individually or in the aggregate, will have a material adverse effect on the Company’s results of operations, financial position, or cash flows.

In the opinion ~~addition,~~of ~~our~~the ~~business~~Company’s ~~depends significantly on effective information systems~~management, ~~and~~it weis ~~have~~not ~~many~~currently ~~different~~possible ~~information systems for our various businesses. We must commit significant resources~~ to ~~maintain~~estimate the ~~and~~impact, ~~enhance~~if ~~our existing information systems and develop new information systems in order to keep pace with continuing changes in information processing technology~~any, ~~evolving~~that ~~industry~~the ~~and~~ultimate ~~regulatory~~resolution ~~standards and changing customer preferences. As a result~~ of ~~our~~these ~~past~~legal ~~acquisition~~proceedings previously ~~activities,~~disclosed wewill have acquired additional information systems. Our failure to maintain effective and efficient information systems, or our failure to efficiently and effectively consolidate our information systems to eliminate redundant or obsolete applications, could have a material adverse effect on ~~our~~the Company’s results of operations, ~~and~~ financial position, ~~condition. If~~or wecash doflows. ~~not maintain adequate systems we could experience adverse consequences, including:~~

•ITEM 4. ~~inadequate~~SUBMISSION ~~information~~OF onMATTERS ~~which~~TO toA ~~base~~VOTE ~~pricing,~~OF ~~underwriting~~SECURITY ~~and reserving decisions;~~HOLDERS

•No matter was submitted to a vote of security holders during the ~~loss~~fourth quarter of the fiscal ~~existing~~year ~~customers;~~ended December 31, 2006.

~~• difficulty in attracting new customers;~~PART II

•ITEM 5. ~~customer,~~MARKET ~~provider~~FOR ~~and~~THE ~~agent~~REGISTRANT’S ~~disputes;~~COMMON STOCK AND RELATED HOLDER MATTERS

~~• regulatory problems, such as failure to meet prompt payment obligations;~~Market Information

•From January ~~litigation~~2001 ~~exposure;~~until June 30, 2004, FIC’s common stock was traded on the National Association of Securities Dealers Automated Quotation System (“Nasdaq”) (Nasdaq symbol: FNIN). Effective as of July 1, 2004, FIC’s common stock was delisted from trading on the Nasdaq National Market following a determination by the Nasdaq Listing Qualifications Panel (the “Panel”) regarding the Company’s eligibility for continued listing. The Panel determined that the continued listing of the Company’s securities on Nasdaq was subject to the Company having filed, on or before June 30, 2004, its Form 10-K for the year ended December 31, 2003, and its Form 10-Q for the quarter ended March 31, 2004. In a Form 8-K filed on June 29, 2004, FIC announced that it would not be able to file its Form 10-K for the year ended December 31, 2003, and its Form 10-Q for the quarter ended March 31, 2004, by the June 30th date established by the Panel. Since July 1, 2004, quotations for FIC’s common stock have been available on the National Quotation Bureau’s Pink Sheet quotation service, under the symbol FNIN.PK.

•The following ~~increases~~table insets ~~administrative~~forth ~~expenses~~the quarterly high and low closing prices for FIC common stock for 2006, 2005 and 2004. Quotations are furnished by the Nasdaq and, for periods subsequent to June 30, 2004, the National Quotation Bureau’s Pink sheet quotation service.

Our management information, internal control and financial reporting systems may need further enhancements and development to satisfy the financial and other reporting requirements of being a public company.

	Common Stock Prices
	2006				2005				2004
	High		Low		High		Low		High		Low

First Quarter	$	8.70	$	8.00	$	7.90	$	6.95	$	14.35	$	13.14
Second Quarter		9.00		8.00		8.95		7.40		14.11		9.28
Third Quarter		8.90		8.30		8.43		6.75		9.28		7.25
Fourth Quarter		8.50		7.30		8.50		7.40		8.50		7.30

~~ITEM 1B. UNRESOLVED STAFF COMMENTS~~Holders

~~Not~~As of March ~~applicable~~31, 2007, there were approximately 16,950 holders of record of FIC common stock.

~~ITEM 2. PROPERTIES~~Dividends

~~FIC’s~~No dividends ~~home~~were ~~office~~declared ~~is located at River Place Pointe, 6500 River Place Blvd., Building One, Austin, Texas. River Place Pointe was purchased~~ by ~~Investors Life in October 1998. It consisted of approximately 48 acres of land in Austin, Texas. The aggregate purchase price for~~ the undeveloped land was $8.1 million. The site development permit allowed for the construction of seven office buildings totaling 600,000 square feet, with associated parking, drives and related improvements. The Company completed construction of the first section of the project, which consists of four office buildings, an associated parking garage and related infrastructure, during 2000 and 2001. It completed the second phase of construction, which included three more office buildings, an associated parking garage and related infrastructure, in ~~2002. FIC and its insurance subsidiaries occupy Building One of River Place Pointe~~2006, ~~consisting of approximately 76,143 square feet of space, and, for part of~~ 2005, ~~also~~or ~~occupied approximately 5,000 square feet of Building Four for records storage~~2004. On June 1, 2005, the Company sold River Place Pointe to a non-affiliated party, in a cash transaction for a gross purchase price of $103 million. Under the terms of the sale agreement, Investors Life entered into a lease with the purchaser with respect to all of the space in Building One, for a five-year term at a rate of $28.00 per square foot, which is above the market rate in effect in June 2005, but was the prevailing rental rate at the time that FIC and its subsidiaries occupied the building in July 2000. The lease provides Investors Life with a right of cancellation of the lease at March 31, 2008.

The Company also leases approximately 10,000 square feet in Cedar Park, Texas, to house the company’s printing operations and warehouse storage. The monthly rental for the Cedar Park facility is $9,123. The lease terms ends on February 28, 2007.21

~~Family~~The payment ~~Life and Investors Life leased approximately 7,700 square feet~~ of ~~space~~dividends inis ansubject ~~office~~to ~~building in Seattle, Washington, which served as~~ the ~~statutory~~discretion ~~home office~~ of the ~~insurance~~Board ~~companies.~~of ~~In addition~~Directors, and will ~~the~~depend ~~insurance~~on, ~~companies~~among ~~leased~~other 22things,~~100~~ ~~square~~the ~~feet~~financial condition of ~~warehouse~~the ~~space in Tukwila~~Company, results ~~Washington. The leases for each~~ of ~~these facilities expired on November 30~~operations, ~~2003,~~capital and ~~were~~cash ~~extended on a month-to-month basis~~requirements, ~~pending~~future ~~completion of the~~ prospects, regulatory ~~approval~~restrictions ofon the ~~redomestication~~payment of ~~the insurance companies from Washington to Texas. The lease for office space in Seattle was terminated on March 31~~dividends, ~~2004.~~as ~~The~~well ~~lease~~as ~~for~~other ~~the~~factors deemed ~~warehouse~~to ~~space~~be ~~was~~relevant ~~terminated~~by ~~on February 29, 2004. For 2004,~~ the ~~combined~~Board ~~monthly~~of ~~rental expense for these facilities was $24,891~~Directors.

AThe ability ~~subsidiary~~ of ~~FIC~~an ~~leased~~insurance aholding ~~building~~company, ~~located~~such atas ~~40 Parker Road~~FIC, ~~Elizabeth,~~to ~~New~~pay ~~Jersey.~~dividends ~~This~~to its shareholders ~~building~~may ~~contains~~be ~~approximately~~limited ~~41,400~~by ~~square~~the ~~feet~~Company’s ofability ~~office~~to ~~space.~~obtain ~~The lease~~revenue, ~~which was entered into~~ in ~~December~~the form ~~1985 and expired in December 2005, called for an annual rental~~ of ~~$798,456~~dividends ~~effective~~and ~~January~~other 1payments, ~~2004;~~from ~~the~~its ~~actual rental charge for 2004 was $736,961~~subsidiaries. The ~~lease~~right ~~provided~~of FIC’s insurance ~~that~~subsidiary ~~all costs including, but not limited~~ to, ~~those~~pay ~~for~~dividends ~~maintenance,~~is ~~repairs,~~restricted ~~insurance and taxes be borne~~ by ~~FIC;~~the ~~these~~insurance ~~costs~~laws of ~~amounted~~its domiciliary tostate. ~~$331,685,~~See ~~$316,392,~~Item ~~and $306~~1,~~505~~ inDescription ~~2004,~~of ~~2003~~the ~~and~~Business ~~2002,~~- ~~respectively.~~Regulation ~~FIC subleased this space to third parties,~~ - Dividends.

22Equity Compensation Plans

~~for which it received $214,099, $212,012, and $204,700 in 2004, 2003 and 2002, respectively.~~ The following ~~lease~~table ~~was~~presents ~~terminated~~information onregarding ~~December 31, 2005. As described in more detail in “Note 12 – Lease Commitments” in~~ the ~~accompanying consolidated financial statements, at December 31, 2003, the~~ Company’s ~~accrued~~equity ~~the~~compensation plans ~~estimated~~as ~~net loss for the continued operation~~ of ~~this building through the lease termination date. The estimated net loss of $2.0 million represented the annual base rental amount plus estimated operating expenses through~~ December ~~2005~~31, ~~reduced by estimated sublease income. Actual losses incurred through the lease termination date were substantially equal to the estimated losses.~~2006:

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

	(a)		(b)		(c)
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

Equity compensation plans approved by security holders		-		-		-
Equity compensation plans not approved by security holders ^{(1) (2)}		20,000	$	13.25		-
Total		20,000	$	13.25		-

~~ITEM~~(1) 3Includes options granted by FIC in March 2004 to Vincent L. ~~LEGAL~~Kasch ~~PROCEEDINGS~~, in connection with his election as Chief Financial Officer of FIC as follows: an option to purchase 20,000 shares of its common stock at a per share price of $13.25. The grant was conditioned upon the approval by the shareholders of FIC of the Incentive Stock Plan pursuant to which the grants would be made. As of the date of this report, the Incentive Stock Plan has not yet been presented to the shareholders of FIC for approval.

~~Please~~(2) ~~refer~~Does not include options that are to ~~“Forward~~be granted to Michael P. Hydanus pursuant to the terms of the COO Employment Letter entered into in connection with Mr. Hydanus’ election as Senior Vice President -~~Looking~~ ~~Statements”~~Operations of FIC in May 2005. Mr. Hydanus’ employment letter provides that, upon the approval of the Incentive Stock Plan by the shareholders of FIC, assuming Mr. Hydanus continues to be employed by FIC at such time, he will be granted an option to purchase 15,000 shares of common stock of FIC at an exercise price equal to the fair market value of FIC’s common stock on ~~page~~the 2date of such grant. As of the date of this ~~Form~~report, ~~10-K~~the Incentive Stock Plan has not yet been presented to the shareholders of FIC for approval. In previous public filings made by the Company, it was incorrectly disclosed that Mr. Hydanus received a grant, in May 2005, of an option to purchase 15,000 shares of FIC’s common stock at a per share exercise price of $8.50.

T.Recent Sales ~~David~~of ~~Porter~~Unregistered ~~v. Financial Industries Corporation~~Securities

OnDuring the ~~May~~year ended December 31, 2006, ~~T. David Porter, an~~ FIC ~~shareholder,~~did ~~filed~~not amake ~~civil~~any ~~suit~~sales in Travis County, Texas District Court (the “Court”), against the Company. The suit alleges that the Company refuses to hold a shareholder meeting because FIC is currently unable to comply with Rule 14a-3 of ~~the Securities Exchange Act of 1934. The Company claims~~ securities that were ~~because FIC is~~ not ~~currently~~registered in a position to solicit proxies in connection with an annual meeting, or to provide an annual report to its shareholders, FIC does not believe it is currently able to hold an annual shareholders’ meeting at which its shareholders will be fully informed or represented. The suit is brought under ~~Article 2.24(B) of~~ the ~~Texas~~Securities ~~Business Corporation~~ Act, ~~which states that if an annual meeting~~ of ~~shareholders is not held within any 13-month period and a written consent of shareholders has not been executed instead of a meeting~~1933, any court of competent jurisdiction in the county in which the principal office of the corporation is located may, on the application of any shareholder, summarily order a meeting to be held. Mr. Porter is asking the Court to compel the Company to have a shareholder meeting; to order FIC to send notice of the meeting to the Company’s shareholders at its expense; to order the Company to provide Mr. Porter with a list of shareholders as ofamended the record date for the meeting; and for costs and attorney’s fees. The Company filed its answer on June 30, 2006. On July 18, 2006, plaintiffs filed a motion to compel an annual shareholders meeting. On August 7, 2006, the Company entered into an Agreed Order On Plaintiff’s Motion to Compel Annual Shareholders Meeting (the “Order”) and agreed (1) to hold an annual shareholders meeting for the election of directors on December 6, 2006, even if the Company has not filed all relevant financial statements with the SEC or whether ~~management is able to solicit proxies for the meeting; (2) that the record date for the annual shareholders meeting shall be October 24, 2006 (the~~ “~~Record~~Securities ~~Date~~Act”)~~; (3) that on or before October 27, 2006, the Company shall serve Mr~~. Porter with a complete list of shareholders as of the Record Date and (4) in the event that the Board of Directors of FIC, between the date of the Order and the December 6, 2006 annual meeting, votes to sell either or both of FIC’s life insurance subsidiaries without first obtaining approval of FIC’s shareholders, FIC will announce such impending transaction to the public through a Form 8-K filed with the SEC, and will agree to allow Mr. Porter a reasonable amount of expedited discovery prior to the closing of such transaction(s) so that Mr. Porter may determine whether or not to seek a restraining order or temporary injunctive relief preventing the closing of such transaction(s). In such event, Mr. Porter will also appear for deposition by the Company’s counsel, at a mutually agreeable time and place prior to any hearing on an application for restraining order or temporary injunctive relief.

~~Litigation with Otter Creek Partnership I, L.P.~~22

~~During~~Stock Performance 2003, Otter Creek Management Inc., (“Otter Creek Management”), solicited proxies for the Company’s 2003 Annual Meeting of Stockholders (the “2003 Annual Meeting”) held on July 31, 2003, seeking the election of seven nominees to the Board of Directors of the Company in opposition to the ten candidates selected by the then incumbent Board of Directors. Otter Creek Management is an investment advisory firm that manages three investment funds that are shareholders of the Company: Otter Creek Partners I, LP (“Otter Creek Partners”), Otter Creek International Ltd. and HHMI XIII, LLC (together with Otter Creek Management and Otter Creek Partners, “Otter Creek”). Graph

InThe following ~~connection~~graph ~~with~~shows ~~this~~FIC’s ~~solicitation~~cumulative oftotal ~~proxies,~~shareholder onreturn ~~June~~during ~~13, 2003, Otter Creek Partners commenced a lawsuit in~~ the ~~District~~five fiscal ~~Court~~years inending ~~Travis~~with ~~County,~~fiscal ~~Texas, Cause No~~2006. ~~GN302872~~The ~~(the~~graph ~~“Litigation”)~~also ~~seeking,~~shows ~~among other things, to compel~~ the ~~Company~~cumulative total returns toof ~~hold~~ the ~~previously~~Nasdaq ~~delayed~~stock ~~2003~~market ~~Annual~~and ~~Meeting. Otter Creek also sought in~~ the ~~Litigation~~Nasdaq toinsurance ~~neutralize~~stock ~~the~~index. The comparison ~~effect~~assumes of$100 awas ~~proxy~~invested ~~obtained~~on byDecember ~~the~~31, ~~Company~~2001 ~~from~~in ~~the~~shares ~~Mitte~~and ~~Family~~in each of (the ~~“Mitte~~indices ~~Proxy”)~~shown ~~the~~and ~~preceding~~assumes ~~month~~that ~~whereby~~all ~~the incumbent board was able to vote 1,627,610 shares in favor~~ of ~~its~~the ~~nominees~~dividends were reinvested.

~~Following~~ITEM 6. ~~the~~SELECTED ~~initiation~~FINANCIAL of this litigation and a hearing before the court, the court ordered the Company not to amend its bylaws in a manner that would adversely affect voting or other matters relating to the Annual Meeting and election of directors and not to reschedule such Annual Meeting scheduled for July 31, 2003, or the record date of the Annual Meeting.DATA

At the meeting, six of the seven Otter Creek nominees were elected to the Board: R. Keith Long, J. Bruce Boisture, Salvador Diaz-Verson Jr., Patrick E. Falconio, Richard H. Gudeman and Lonnie L. Steffen. The following ~~shares~~selected ~~covered~~consolidated byfinancial ~~the~~data ~~Mitte~~includes ~~Proxy were all voted in favor of~~ the ~~incumbent~~accounts ~~nominees at the 2003 Annual Meeting. Had Otter Creek been successful in neutralizing the effect~~ of Financial ~~the~~Industries ~~Mitte~~Corporation ~~Proxy,~~and ~~all~~its ~~seven of the Otter Creek nominees would have been elected~~subsidiaries.

Following the 2003 Annual Meeting, Otter Creek and FIC completed a settlement with respect to the lawsuit in December 2003. Under the settlement agreement, the Company reimbursed Otter Creek for $250,000 in proxy expenses in 2003. An additional $475,000 of proxy and litigation expenses will be submitted to the Company’s shareholders for approval at the next Annual Meeting of Shareholders. If payment of the additional $475,000 is so approved, the amount will be expensed by the Company in the year of approval. The Board of Directors will recommend that shareholders approve the reimbursement. The settlement also included mutual releases between the Company and Otter Creek and its affiliates. The Chairman of the Board of Directors of the Company, R. Keith Long, is the President and owner of the General Partner of Otter Creek Partners I, L.P.

	Year Ended December 31,
	2006			2005			2004			2003			2002
	(In thousands, except per share data)
Statement of Operations Information:

Total revenues	$	72,413		$	75,556		$	71,198		$	77,188		$	81,575

Income (loss) from continuing operations before federal income taxes, discontinued operations, and cumulative effect of change in accounting principle	$	3,624		$	1,562		$	(12,973	)	$	(17,750	)	$	(16,358	)

Federal income tax expense (benefit)		2,909			620			(913	)		(2,419	)		(4,824	)
Income (loss) from continuing operations before discontinued operations, and cumulative effect of change in accounting principle		715			942			(12,060	)		(15,331	)		(11,534	)

Income (loss) from discontinued operations (1)		(25,497	)		(1,107	)		(2,507	)		(8,252	)		2,529

Loss before cumulative effect of change in accounting principle		(24,782	)		(165	)		(14,567	)		(23,583	)		(9,005	)

Cumulative effect of change in accounting principle (2), (3)		-			-			229			-			4,140

Net loss	$	(24,782	)	$	(165	)	$	(14,338	)	$	(23,583	)	$	(4,865	)

Net income (loss) per share from continuing operations:
Basic	$	0.07		$	0.09		$	(1.23	)	$	(1.59	)	$	(1.21	)
Diluted	$	0.07		$	0.09		$	(1.23	)	$	(1.59	)	$	(1.21	)

Net loss per share:
Basic	$	(2.51	)	$	(0.02	)	$	(1.46	)	$	(2.44	)	$	(0.51	)
Diluted	$	(2.51	)	$	(0.02	)	$	(1.46	)	$	(2.44	)	$	(0.51	)

Cash dividends paid per share	$	-		$	-		$	-		$	-		$	0.28

Balance Sheet Information, as of December 31:
Total assets of continuing operations	$	1,038,311		$	1,020,902		$	1,070,263		$	1,102,769		$	1,102,012
Total assets	$	1,038,311		$	1,180,063		$	1,240,757		$	1,286,044		$	1,295,978

Long-term obligations of continuing operations (4)	$	15,000		$	15,000		$	15,000		$	15,000		$	-
Total liabilities of continuing operations	$	977,630		$	991,010		$	1,040,764		$	1,063,908		$	1,035,781
Total liabilities	$	977,630		$	1,097,992		$	1,153,214		$	1,181,735		$	1,160,586
Total shareholders’ equity	$	60,681		$	82,071		$	87,543		$	104,309		$	135,392

~~Litigation with Former Employee of Subsidiary~~24

~~As reported in its Annual Report on Form 10-K for the year ended December 31, 2003~~ (~~the “2003 Form 10-K”~~1), ~~under~~In ~~“Item 3-Legal Proceedings-Litigation with Former Employee of Subsidiary”~~2006, in ~~October 2003,~~ the Company ~~placed Earl Johnson, the then-president of JNT Group, Inc. (“JNT”), a subsidiary of FIC that was later~~ sold inone ~~December 2003 in the sale~~ of ~~the~~its ~~New~~insurance ~~Era~~subsidiaries ~~companies,~~as ondescribed ~~administrative leave pending an investigation of matters related to (1) Johnson’s alleged termination of an employee~~ in response to her request for information regarding her workers’ compensation rights arising out of an injury and (2) his co-mingled and disorganized bookkeeping of JNT’s client accounts with those of a personal business owned by Mr. Johnson and run by him at the ~~same~~accompanying ~~office~~consolidated ~~(using~~financial ~~the~~statements ~~Company’s employees to do so). Soon after being interviewed~~ in ~~the~~Note ~~course of that investigation~~2, Mr. Johnson resigned, alleging good reason under his employment agreement with a subsidiary of FIC, on the ground that the change in the composition of the Board of Directors of FIC following the 2003 Annual Meeting of Shareholders resulted in a “~~change~~Discontinued ofOperations control” under the provisions of his employment agreement. The employment agreement provided that if Mr. Johnson were to voluntarily terminate his employment for good reason, he would receive compensation and benefits for the remainder of the three-~~year~~ ~~term~~Sale of ~~the~~Family ~~agreement~~Life ~~and~~Insurance ~~would become fully vested in 17,899 restricted shares of FIC stock. The~~ Company ~~notified Mr~~. ~~Johnson that his resignation was not for “good reason~~” pursuant to his employment agreement. Under that agreement, termination without good reason results in forfeiture of future salary and benefits, as well as forfeiture of the restricted shares of FIC common stock.

(2) In ~~November 2003~~2004, ~~Mr.~~net ~~Johnson~~income and ~~his~~earnings ~~wife,~~per ~~Carol~~share ~~Johnson,~~were ~~filed~~affected ~~suit~~by inthe ~~Harris~~cumulative ~~County,~~effect ~~Texas~~of ~~District~~a ~~Court~~change ~~against~~in ~~the~~accounting ~~Company,~~principle ~~FIC~~of ~~Financial Services~~$229, ~~Inc~~000. ~~(“FICFS”)~~This ~~and~~amount anrepresents ~~employee of~~ the ~~Company.~~cumulative ~~The~~effect ~~suit, which sought an unspecified amount~~ of ~~damages~~changes ~~and~~in ~~injunctive~~accounting ~~relief,~~recognition ~~alleges~~for ~~that~~sales ~~the~~inducements ~~defendants~~under ~~interfered~~Statement ~~with the non-JNT contract and business relationships~~ of ~~the~~Position ~~plaintiffs~~03-01, ~~made~~specifically ~~slanderous~~bonus ~~statements~~interest. ~~regarding~~The ~~the~~Company ~~plaintiffs,~~has ~~and~~certain ~~accessed~~universal ~~computer~~life ~~files~~insurance atproducts ~~the~~that ~~JNT~~are ~~offices~~credited ~~relating~~with tobonus ~~the~~interest ~~non-JNT~~after ~~business~~applicable ~~relationships~~qualifying ofperiods. ~~the~~The ~~plaintiffs,~~adoption ~~without the consent~~ of the ~~plaintiffs.~~new ~~The~~accounting ~~suit~~principle ~~also~~changed ~~alleged conspiracy, conversion, and various other torts, all related to~~ the ~~defendants’~~pattern ~~investigation~~ of ~~plaintiff’s~~recognition ~~business~~of ~~practices~~the atbonus ~~JNT.~~interest expense.

~~Subsequently,~~(3) ~~Mr.~~In ~~Johnson~~2002, ~~filed~~net aincome ~~demand~~and ~~for~~earnings ~~arbitration~~per ~~under~~share ~~his~~were ~~employment~~affected ~~agreement,~~by ~~which has a mandatory arbitration clause. In~~ the ~~arbitration,~~cumulative ~~Mr.~~effect ~~Johnson sought damages for breach~~ of ~~contract~~a ~~and~~change ~~various~~in ~~other~~accounting ~~benefits~~principle ~~relating to the termination~~ of ~~his employment contract, totaling~~ $~~913,133~~4.401 million. InThis ~~connection~~amount ~~with~~represents the ~~arbitration,~~excess ~~FIC~~of ~~submitted~~fair avalue ~~counter-claim,~~of ~~alleging~~net ~~that~~assets ~~Mr.~~acquired ~~Johnson~~over ~~committed~~cost ~~multiple~~as ~~breaches~~ of ~~his~~the ~~employment~~beginning ~~agreement,~~of ~~and~~2002 ~~that~~related ~~he breached his fiduciary duty~~ to ~~FIC~~the asmerger ~~a result~~ of ~~his~~ILCO ~~actions~~with inand ~~conducting~~into ~~the~~a ~~business~~subsidiary of ~~JNT, thereby entitling~~ FIC toon aMay ~~dismissal~~18, ~~of plaintiff’s claims~~2001. ~~Prior~~The toCompany ~~the~~recorded ~~hearing~~this oncumulative ~~the~~effect ~~arbitration,~~in ~~the~~conjunction ~~Harris~~with ~~County~~adopting ~~Court~~Statement ~~ordered~~of ~~that~~Financial ~~the~~Accounting ~~matters~~Standards ~~raised~~No. in141 ~~that~~(“SFAS ~~lawsuit~~141”), by“Business ~~Mr.~~Combinations,” ~~Johnson~~in ~~(though~~the ~~not~~first ~~Carol~~quarter ~~Johnson)~~of be2002, ~~combined~~as ~~with~~required ~~the~~by ~~arbitration.~~SFAS 141.

An(4) ~~arbitration~~Discontinued ~~hearing~~operations onhad ~~Johnson’s~~no ~~contract~~long-term ~~claims was conducted in April 2005~~obligations. On July 21, 2005, the Arbitrator issued an interim award in which he denied all of Johnson’s claims for breach of contract, as well as Johnson’s claims with respect to the restricted shares of FIC stock. In denying Johnson’s claims, the Arbitrator concluded that:

~~(1)~~ITEM 7. ~~Johnson~~MANAGEMENT’S ~~had~~DISCUSSION ~~committed~~AND ~~multiple~~ANALYSIS ~~and~~OF ~~material~~FINANCIAL ~~breaches~~CONDITION ofAND ~~his~~RESULTS employment agreement by operating a personal tax and accounting business out of office space and using employees, utilities and other items, all paid for by FICFS; by engaging in a self-dealing transaction involving the payment to himself of $25,000 out of funds held by JNT in aOF OPERATIONS

24Following is a discussion and analysis of the consolidated financial statements and other statistical data that management believes will enhance the understanding of FIC’s financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements beginning on page F-1. See also “Item 1-Description of Business”.

~~suspense~~Please refer ~~account, an account~~ to ~~which~~“Forward-Looking ~~JNT~~Statements” ~~owed~~on ~~fiduciary~~page ~~duties~~2 ~~to its customers and clients; and by firing an employee~~ of ~~JNT~~this ~~on the same day that the employee inquired about possible workers compensation benefits in connection with an on~~Form 10-~~the-job injury,~~ K.

(2) Johnson’s breaches of his employment agreement occurred prior to the time that he was placed on administrative leave, thereby precluding him from maintaining a breach of contract suit against FIC and FICFS, andIntroduction

Financial Industries Corporation (3)“FIC” or the ~~change~~“Company”) is a holding company engaged through its subsidiaries in the ~~majority~~business of ~~the~~marketing, ~~Board~~underwriting ofand servicing ~~Directors~~life insurance and annuity products in 49 states, the District of Columbia and the U.S. Virgin Islands. Like other financial intermediaries, FIC earns ~~resulting~~income ~~from~~principally based on the ~~2003~~“spread” ~~Annual~~between ~~Meeting~~what ofit pays its customers (death benefits, interest on funds on deposit) and what it earns on the money (premiums, policy and annuity deposits) its customers place in its care. Its long-term viability, profitability, and growth turn on FIC’s ~~shareholders~~ability to ~~did~~manage ~~not~~both ~~constitute~~sides aof ~~“change~~this spread (investment of ~~control”~~assets ~~under~~and ~~Johnson’s~~pricing ~~employment~~of liabilities), ~~agreement~~to keep its operating expenses reasonable, ~~thereby~~and ~~denying~~to ~~Johnson’s~~attract ~~claim~~a sufficient ~~that~~volume heof ~~was~~new ~~entitled~~deposits (by selling new insurance policies and annuities) to amore ~~“good~~than ~~reason”~~replace ~~termination~~the inevitable withdrawal (through deaths, policy cancellations, and annuity contract surrenders) of ~~his~~funds ~~employment~~currently in ~~agreement~~its keeping.

InFIC incurred ~~addition,~~a ~~the~~net ~~Arbitrator~~loss ~~awarded~~of ~~FICFS~~ $~~28,000,~~24.8 ~~plus~~million ~~interest~~in at2006 ~~the~~compared ~~rate~~to ofnet 6%losses ~~per~~of ~~annum~~$165,000 and ~~from~~$14.3 ~~July~~million ~~21,~~in 2005, toand ~~the date of payment~~2004, ~~with~~respectively. ~~respect~~The tonet ~~Johnson’s~~loss ~~unauthorized~~incurred ~~conversion~~during 2006 ofprimarily ~~funds~~includes ~~held~~losses infrom the ~~JNT~~discontinued ~~suspense~~operations ~~account.~~of ~~The~~the ~~order~~Company’s wholly-owned ~~confirming~~subsidiary, ~~the~~Family ~~arbitration~~Life, ~~award~~totaling ~~was~~$25.5 ~~signed~~million. onThis ~~February~~is ~~27,~~offset by income ~~2006,~~from bycontinuing ~~the~~operations ~~Harris~~of ~~County~~$0.7 ~~district~~million. ~~judge~~Compared ~~and~~to results for 2004, the ~~Company~~small isnet ~~currently~~loss ~~pursuing~~for ~~collection~~2005 ofin ~~the~~largely ~~judgment. No~~attributable ~~amounts~~to ~~have~~lower ~~been~~policyholder benefits ~~recorded~~and inoperating ~~the~~expenses, ~~Company’s~~along ~~consolidated~~with ~~financial~~increases ~~statements~~in ~~for~~net ~~such~~realized ~~judgment~~gains on investments.

~~With respect to~~ At the end ~~matters~~of ~~raised by Mr. Johnson in the Harris County lawsuit~~2006, ~~which were referred by~~ the ~~Court~~equity toof ~~the~~FIC’s ~~arbitration,~~shareholders ~~following~~totaled ~~his~~$60.7 ~~loss in the arbitration of the employment agreement~~million, Mrdown from $82.1 ~~Johnson~~million ~~notified~~at the ~~Arbitrator~~end ~~that he would not pursue arbitration~~ of ~~his other claims~~2005. In ~~addition,~~This ~~in May 2006, Mrs~~$21.4 ~~Johnson~~million ~~filed~~decline ain ~~notice~~shareholders’ equity ofprimarily ~~non-suit~~reflects ~~with respect to~~ the ~~claims~~Company’s ~~made~~net byloss ~~her~~for in the ~~Harris County lawsuit~~year. ~~Accordingly, this matter is now closed.~~

~~Litigation~~FIC’s mutual commitments with ~~Equita~~its ~~Financial~~life insurance policyholders and ~~Insurance~~annuitants ~~Services~~- policyholders ofto ~~Texas~~pay premiums and make future deposits, ~~Inc~~FIC to pay annuities and death benefits - stretch far into the future. This means that FIC’s consolidated statement of operations and ~~M&W~~balance ~~Insurance~~sheet ~~Services~~must necessarily embody several significant estimates about future events. The rates at which its customers will actually become ill and die, ~~Inc~~or will withdraw their funds in response to interest rate changes or other factors, and the returns that FIC will be able to earn on its investments, must all be estimated far into the future in order to judge whether the Company is truly operating currently at a profit and whether its consolidated balance sheet is properly reflecting the current value of its assets and liabilities. Most of these estimates are embodied in balance sheet accounts such as deferred policy acquisition costs, the present value of future profits of acquired businesses, and policy liability reserves.

On June 2, 2005, Equita and M&W Insurance Services, Inc. (“M&W”) filed a civil suit in Travis County, Texas District Court against the Company. The suit alleges that, in entering into certain agreements with the plaintiffs, the Company made certain misrepresentations and omissions as to its business and financial condition. The agreements referenced in the suit consist of (a) an option agreement entered into in June 2003 between Equita and the Company, granting Equita the right to purchase shares of FIC’s common stock at $16.42 per share, if certain sales goals were achieved under an exclusive marketing agreement between Equita and a subsidiary of the Company (the “Option Agreement”), (b) a stock purchase agreement entered into in June 2003 between M&W and the Roy F. and Joann Cole Mitte Foundation, pertaining to the purchase of 204,918 shares of FIC’s common stock (the Stock Purchase Agreement”), and (c) a registration rights agreement entered into in June 2003 among the plaintiffs and the Company, whereby the Company agreed to file and maintain a shelf registration statement which respect to the shares of FIC’s common stock purchased by M&W from the Mitte Foundation or which may be acquired in the future by Equita under the option agreement (the “Registration Rights Agreement,” and, collectively, the “Agreements”). See “Item 1-Description of the Business-Marketing Agreement with Equita” and “Item 13-Certain Relationships and Related Transactions.”25

The suit alleges that the Company breached the provisions of the Option Agreement by refusing to indemnify the plaintiffs for losses relating to the alleged breach of certain representations and warranties included in the Option Agreement. The plaintiffs also allege that the Company required M&W to purchase 204,918 shares of FIC common stock from the Mitte Foundation as a condition ofDiscontinued ~~Equita's~~ Operations obtaining, in June 2003, an exclusive marketing agreement with a subsidiary of the Company pertaining to the distribution of insurance products in the senior market (the "Marketing Agreement"), and that such requirement was motivated by the desire of the Company's management to obtain certain proxy rights obtained under a settlement agreement with the Mitte Foundation and the Mitte family. See Item 13-~~Certain~~ ~~Relationships~~Sale ~~and Related Transactions-Settlement~~ of ~~Litigation with Mitte~~ Family. ~~The~~Life ~~plaintiffs~~Insurance ~~further allege that the~~ Company breached the provisions of the Registration Rights Agreement by failing to file a shelf registration with the SEC with respect to the shares of FIC's common stock purchased by M&W from the Mitte Foundation and the shares which may be acquired in the future by Equita under the provisions of the Option Agreement. The plaintiffs seek rescission of the Agreements; damages in an amount equal to the $3 million that M&W paid to acquire FIC shares from the Mitte Foundation, together with interest and attorneys' fees and unspecified expenses; and an unspecified amount of exemplary damages.

~~Late~~On December in29, ~~2005~~2006, ~~the~~Financial ~~Company’s~~Industries ~~two~~Corporation ~~life~~completed ~~insurance~~the ~~subsidiaries,~~sale ~~Investors~~of its wholly ~~Life~~owned ~~and~~subsidiary, Family Life, ~~intervened~~Insurance inCompany, ~~the lawsuit~~ to ~~assert~~The ~~claims~~Manhattan Life Insurance ~~that~~Company ~~Equita~~for ~~had~~$28.0 ~~breached~~million ~~its~~in ~~obligations~~cash. ~~under~~In ~~the~~accordance ~~Marketing Agreement~~ with ~~respect~~SFAS ~~to the distribution of insurance products~~144, ~~thereby causing damages to~~ the consolidated ~~life~~financial ~~insurance~~statements ~~subsidiaries. Equita~~reflect ~~moved to dismiss~~ the ~~intervention~~assets, ~~but~~liabilities atand aoperating results ~~hearing~~of ~~on December 20, 2005, the court denied Equita’s motion. As a result, Investors Life and~~ Family Life ~~will~~Insurance beCompany ~~permitted~~as todiscontinued ~~assert~~operations, ~~their~~adjusted for ~~claims~~certain ~~against~~activities ~~Equita~~as indescribed ~~this lawsuit~~below.

~~Deposition~~Prior to the ~~discovery~~sale, ~~with~~the ~~respect~~Company transitioned the sales force of Family Life to ~~both~~a ~~the~~new division ~~case~~of ~~filed~~Investors Life, FIC’s remaining insurance subsidiary. Although Investors Life is now selling similar products as those that were sold by Family Life, ~~Equita~~there are notable differences. The insurance is written on Investors Life policy forms and ~~M&W,~~leads are no longer obtained from lending institutions. Leads are now purchased through other sources and the ~~claims~~focus inis ~~intervention~~on ~~asserted~~a bydifferent market demographic than the previous Family Life ~~and~~target ~~Investors~~market. The new division also now sells final expense insurance products, which was not a market focus for Family Life. Additionally, as a condition of the sales agreement, the new division of Investors Life is ~~set~~prohibited from selling products to ~~begin~~existing policyholders inand ~~October~~related customers of ~~2006~~Family Life for five years.

25In connection with the sale of Family Life, Investors Life entered into a coinsurance agreement with Family Life pursuant to which Investors Life will cede to Family Life (now a wholly-owned subsidiary of Manhattan Life) 35% of the face amount of mortgage protection term policies written during the five-year period beginning April 1, 2007 and ending March 31, 2012. Such business will be administered by Investors Life, and Investors Life will receive allowances for its expenses on the portion of the business that is ceded. Accordingly, the Company accrued a deferred revenue liability of $1.4 million in conjunction with recording the sale of Family Life, equal to the estimated net present value of future business expected to be ceded to Manhattan Life. Costs associated with the Family Life agents while affiliated with Family Life, much of which were capitalized and amortized as deferred policy acquisition costs, are included in discontinued operations.

~~In response~~ Prior to the ~~a motion for partial summary judgment~~sale, ~~the~~Investors ~~Company~~Life ~~has~~assumed ~~stipulated to~~ certain ~~elements~~universal oflife ~~some~~insurance ofand ~~the~~annuity contracts ~~causes~~written ~~of action asserted~~ by ~~Equita~~Family ~~and~~Life ~~M&W,~~under ~~including~~reinsurance ~~that~~treaties ~~certain~~between ~~representations and warranties made in~~ the companies. ~~Option~~Effective ~~Agreement~~September ~~were~~30, ~~partially incorrect~~2006, ~~and~~Family ~~that~~Life ~~FIC~~and ~~was~~Investors ~~unable~~Life toexecuted recapture ~~comply~~agreements ~~with~~related ~~certain~~to ofthese ~~its~~reinsurance ~~obligations~~treaties ~~under~~effectively terminating ~~the~~these ~~Option~~treaties ~~Agreement. FIC did not stipulate,~~ and ~~continues~~removing toInvestors ~~dispute,~~Life ~~other~~from ~~elements~~any ofliability for life ~~certain~~insurance ofand ~~the~~annuity ~~causes~~contracts ofwritten ~~action asserted~~ by ~~Equita~~Family ~~and~~Life. ~~M&W~~Accordingly, all ~~and disputes other causes~~ of ~~action in their entirely. FIC intends to vigorously oppose~~ the ~~lawsuit~~assets, ~~and~~liabilities, ~~any~~revenues ~~effort by Equita~~ and ~~M&W~~costs toassociated ~~recover~~with ~~damages~~these ~~from FIC, and the~~ universal life insurance ~~subsidiaries~~and ~~intend~~annuity tocontracts ~~vigorously~~are ~~prosecute~~included ~~their claims~~ in ~~intervention against Equita~~discontinued operations.

~~Shareholder~~Also, prior ~~Claim~~to the closing of the sale, the Family Life Pension Plan, along with its assets and liabilities, was transferred from Family Life to its upstream parent company and all current and future obligations of the Family Life Pension Plan remain the responsibility of the Company. Accordingly, pension liabilities and costs were not included in discontinued operations.

AsFamily Life ~~reported~~owned in648,640 ~~its~~shares ~~Annual~~of ~~Report~~FIC oncommon ~~Form~~stock ~~10-K~~prior ~~for~~to the ~~year~~sale. ~~ended~~Such ~~December~~shares were ~~31,~~reflected ~~2003~~as ~~(the~~common ~~“2003~~treasury ~~Form~~stock ~~10-K”),~~in ~~under “Item 3-Legal Proceedings-Shareholder Claim,”~~ the Company’s ~~received~~historical aconsolidated financial ~~demand~~statements. ~~letter~~Immediately inpreceding ~~April~~and ~~2004~~as ~~from~~ a ~~law~~condition ~~firm representing an individual shareholder (Mr. Cook) who owns 530 shares~~ of the ~~Company’s~~sale of Family ~~common~~Life, ~~stock~~324,320 ~~which~~of ~~letter~~these ~~set~~shares ~~forth~~were ~~certain~~acquired ~~allegations~~by ~~and notified~~ the ~~Registrant~~Company ~~that~~and the remaining ~~shareholder~~324,320 ~~intended~~shares toremained ~~file~~with aFamily ~~shareholder~~Life ~~derivative~~at ~~lawsuit (~~the ~~“Demand~~time ~~Letter”). A detailed description~~ of the ~~claims~~sale. Accordingly, ~~raised by~~ the ~~individual~~shares ~~shareholder,~~that ~~and~~remained ~~the~~with ~~actions~~Family ~~taken~~Life byare ~~the~~now ~~Special~~reflected as outstanding ~~Litigation~~common ~~Committee~~stock ~~appointed~~shares byas ~~the~~of ~~Company’s~~December ~~Board~~31, of2006, ~~Directors~~and tohave ~~conduct~~been reflected as a ~~review~~sale of ~~such~~treasury ~~claims,~~stock ~~is set forth~~ in the ~~2003~~accompanying ~~Form~~consolidated ~~10-K~~financial statements.

InFamily Life ~~May~~shared ~~2004,~~certain ~~FIC,~~operating ~~by and through its Special Litigation Committee~~costs, ~~filed~~including ~~a petition in the 250th District Court of Travis County~~personnel, ~~Texas (the “Court”)~~premises, ~~seeking to have the Court appoint a panel of independent~~ equipment and ~~disinterested persons pursuant to Section H (3) of Article 5.14 of the Texas Business Corporation Act to investigate the allegations~~software, and ~~stay~~other ~~any~~office ~~shareholder~~and ~~derivative~~administrative ~~actions.~~expenses ~~Subsequently,~~with onFIC ~~June~~and 1,its other ~~2004,~~subsidiaries ~~the~~through ~~Court~~various ~~issued~~sharing ~~an Order appointing Eugene Woznicki, Kenneth S~~agreements. ~~Shifrin,~~These ~~John~~agreements D.with Family ~~Barnett~~Life ~~and~~were F.terminated ~~Gary~~upon ~~Valdez~~its assale ~~a panel of independent~~ and ~~disinterested~~Family ~~persons~~Life (now the ~~“Panel”)~~wholly-owned subsidiary ~~to make determinations contemplated by Section F~~ of ~~Article~~Manhattan ~~5.14~~Life) ofdid ~~the~~not ~~Texas~~retain ~~Business Corporation Act in connection with the Demand Letter and staying~~ any ~~shareholder derivative actions relating to the letter until the Panel’s review was completed and a determination was made by the panel as to what~~employees, ~~if any~~equipment, ~~further~~software or ~~action~~liability ~~was~~for ~~to be taken~~leases. ~~Messrs. Woznicki~~Accordingly, ~~Shifrin~~the ~~and~~discontinued ~~Barnett~~operations ~~are independent directors~~ of ~~FIC.~~Family Life were ~~Mr.~~adjusted ~~Valdez~~to iseliminate ~~neither a director nor an employee of FIC. Mr. Valdez is~~ the ~~founder~~estimated ~~and~~continuing ~~president~~expenses ofassociated ~~Focus~~with these ~~Strategies,~~shared ~~L.L.C.~~operating ~~and is active in various community and civic organizations in the Austin, Texas area~~costs.

~~Following~~Loss on discontinued anoperations ~~extensive review of the claims made by the individual shareholder, the Panel, in January 2005, filed with the court a Petition~~ for ~~Declaratory~~2006 ~~Judgment~~totaled ~~pursuant~~$25.5 tomillion ~~the~~which ~~Texas~~consists ~~Declaratory Judgments Act and Article 5.14~~ of a ~~the Texas Business Corporations Act (the “Petition”)~~$1.1 million ~~The~~loss ~~Petition~~on ~~describes~~operations ~~the~~during ~~process used by~~ the ~~Panel~~year and ~~its~~a ~~counsel in considering the matters raised in the Demand Letter and the submittal provided by counsel for the shareholder~~$24.4 ~~The~~million ~~Petition~~loss advised the Court that, after consideration of the evidence obtained through its inquiry, the Panel had unanimously made a good faith determination that the continuation of the Committee’s derivative proceeding and the commencement of any further derivative proceedings based on the ~~allegations made by the individual shareholder was not in the best interests~~ sale of ~~FIC~~Family Life.

OnThe following ~~October~~sections ~~10, 2005, the 250th District Court~~ of ~~Travis~~this ~~County,~~Item ~~Texas,~~7 ~~heard~~reflect ~~for~~Family ~~trial~~Life onas ~~the~~discontinued ~~merits~~operations pursuant ~~the~~to ~~matters~~SFAS ~~raised~~144 byas ~~the~~described ~~Panel in the Petition (Financial Industries Corporation v~~above. ~~Tom~~Accordingly, ~~Cook~~unless ~~(Cause~~otherwise ~~No. GN 401513). After consideration of the pleadings~~noted, amounts ~~evidence~~ and ~~authorities~~analysis ~~submitted by counsel for the Company, the Court issued a Final Judgment on October 10, 2005,~~ in ~~which~~this itItem ~~ruled~~7 ~~that~~reflect the ~~determinations~~continuing ~~made~~operations byof FIC ~~the~~and its ~~Panel~~subsidiaries, asexclusive ~~reflected~~of inFamily aLife. ~~report~~References ~~submitted~~ to ~~the~~income ~~Court~~and byloss from operations aare ~~Special~~identified ~~Litigation~~as ~~Committee~~continuing ~~appointed~~operations byor ~~the~~discontinued ~~Registrant’s Board of Directors~~operations, while ~~were~~references ~~made:~~to ~~(1)~~net inincome ~~good~~or ~~faith,~~net ~~(2)~~loss ~~after~~reflect the ~~Panel~~consolidated ~~conducted~~net ~~a reasonable inquiry, and (3) based on the factors deemed appropriate under the circumstances by the Panel. The Court’s ruling otherwise dismissed with prejudice the derivative proceedings~~results ~~involved~~ of inboth ~~this~~continuing ~~matter. The Final Judgment was approved as to form~~ and ~~substance~~discontinued ~~by counsel for the Registrant and by counsel for the defendant~~operations.

~~Management Conclusion on Legal Proceedings~~26

In the opinion of the Company’s management, it is not currently possible to estimate the impact, if any, that the ultimate resolution of the foregoing legal proceedings will have on the Company’s results of operations, financial position or cash flows. Financial Condition

~~Other~~During 2006, ~~Litigation~~the equity of the shareholders of the Company (that is, the excess of the Company’s assets over its liabilities) declined by $21.4 million. The change in FIC’s shareholders’ equity is due to the following:

~~FIC~~· ~~and~~Net ~~its~~loss ~~insurance~~for ~~subsidiaries~~the ~~are~~year ~~regularly~~of ~~involved in litigation, both as a defendant and as a plaintiff~~$24.8 ~~The~~million ~~litigation~~consisting ~~naming~~of the ~~insurance subsidiaries as defendant ordinarily involves our activities as a provider of insurance products.~~ following:

26o Income from continuing operations - $0.7 million

~~Management~~o ~~does~~Loss ~~not~~from ~~believe~~discontinued ~~that~~operations ~~any~~- ~~of this other litigation, either individually or in the aggregate, will have a material adverse effect on the Company’s business or financial condition~~$25.5 million

~~ITEM~~· 4.Increase ~~SUBMISSION~~in OFnet ~~MATTERS~~unrealized TOlosses Aon ~~VOTE~~fixed OFmaturities ~~SECURITY~~available ~~HOLDERS~~for sale of $1.8 million consisting of the following:

Noo ~~matter~~Other ~~was~~comprehensive ~~submitted~~loss tofrom acontinuing ~~vote~~operations of- ~~security holders during the fourth quarter of the fiscal year ended December 31, 2004~~$2.3 million

~~PART~~o IIOther comprehensive income from discontinued operations - $0.5 million

~~ITEM~~· 5.Net ~~MARKET~~appreciation ~~FOR~~of ~~THE~~equity ~~REGISTRANT’S~~securities ~~COMMON~~of ~~STOCK~~continuing ~~AND~~operations ~~RELATED~~totaling ~~HOLDER~~$0.5 ~~MATTERS~~million included in other comprehensive income

~~Market~~· ~~Information~~Net decrease in minimum pension liabilities totaling $2.0 million

~~From~~· ~~January~~Sale ~~2001~~of ~~until~~treasury ~~June 30, 2004, FIC’s common~~ stock ~~was traded on the National Association of Securities Dealers Automated Quotation System~~ (~~“Nasdaq”)~~in ~~(Nasdaq~~conjunction ~~symbol:~~with ~~FNIN).~~sale ~~Effective as~~ of ~~July~~Family ~~1, 2004, FIC’s common stock was delisted from trading on the Nasdaq National Market following a determination by the Nasdaq Listing Qualifications Panel (the “Panel”~~Life) ~~regarding~~totaling ~~the Company’s eligibility for continued listing~~$2.5 The Panel determined that the continued listing of the Company’s securities on Nasdaq was subject to the Company having filed, on or before June 30, 2004, its Form 10-K for the year ended December 31, 2003, and its Form 10-Q for the quarter ended March 31, 2004. In a Form 8-K filed on June 29, 2004, FIC announced that it would not be able to file its Form 10-K for the year ended December 31, 2003, and its Form 10-Q for the quarter ended March 31, 2004, by the June 30th date established by the Panel. Since July 1, 2004, quotations for FIC’s common stock have been available on the National Quotation Bureau’s Pink Sheet quotation service, under the symbol FNIN.PK.million

~~The~~· ~~following~~Treasury ~~table~~stock ~~sets~~distributed ~~forth~~in ~~the~~lieu ~~quarterly~~of ~~high~~cash ~~and~~of ~~low closing prices for FIC common stock for 2005, 2004 and 2003~~$0.2 ~~Quotations~~million ~~are furnished by the Nasdaq and,~~ for ~~periods~~board ~~subsequent~~of todirector ~~June 30, 2004, the National Quotation Bureau’s Pink sheet quotation service.~~fees

	Common Stock Prices
	2005		2004		2003
	High	Low	High	Low	High	Low
First Quarter	$7.90	$6.95	$14.35	$13.14	$15.87	$14.11
Second Quarter	8.95	7.40	14.11	9.28	14.98	12.95
Third Quarter	8.43	6.75	9.28	7.25	15.38	14.03
Fourth Quarter	8.50	7.30	8.50	7.30	14.99	13.42

Assets

~~Holders~~At the end of 2006, FIC had $687.3 million of assets under its direct management, exclusive of separate account assets and assets of discontinued operations. In broad terms, these funds were invested as follows:

As of June 30, 2006, there were approximately 14,403 holders of record of FIC common stock.

	December 31,				Percentage
	2006		2005		change
	(In thousands)

Investments in financial instruments:
Cash and short-term investments	$	63,076	$	38,110		65.5	%
Fixed maturity securities		520,957		525,209		-0.8	%
Policy loans		30,189		32,936		-8.3	%
Equity securities		9,805		8,876		10.5	%
Accrued investment income		6,772		6,258		8.2	%
Total investments in financial instruments		630,799		611,389		3.2	%

Investments in real estate:
Real estate held for sale		-		130		-100.0	%
Total investments in real estate		-		130		-100.0	%

All other managed assets:
Deferred policy acquisition costs		14,429		11,671		23.6	%
Present value of future profits of acquired business		7,749		9,007		-14.0	%
Other		34,347		45,794		-25.0	%
All other managed assets		56,525		66,472		-15.0	%

Total managed assets	$	687,324	$	677,991		1.4	%

~~Dividends~~Total managed assets increased during 2006 by $9.3 million, or 1.4%. This overall increase was largely related to the proceeds from the sale of Family Life, partially offset by net run-off of the Company’s annuity and life insurance business in force.

In May 2002, the Board of FIC approved a cash dividend of $0.23 per common share payable on June 21, 2002, to holders of record as of June 7, 2002. On December 13, 2002, the Board declared a dividend of $0.05 per common share payable on January 24, 2003, to holders of record as of January 3, 2003. No dividends have been declared subsequently. At its meeting on December 13, 2002, the Board modified the previously announced dividend policy. Under the revised policy, the payment of dividends is subject to the discretion of the Board of Directors, and will depend on, among other things, the financial condition of the Company, results of operations, capital and cash requirements, future prospects, regulatory restrictions on the payment of dividends, as well as other factors deemed to be relevant by the Board of Directors.27

The ~~ability of an insurance holding company, such as FIC, to pay dividends to its shareholders may be limited by the~~ Company’s ~~ability~~life ~~to obtain revenue, in the form of dividends and other payments, from its subsidiaries. The right of FIC’s~~ insurance ~~subsidiaries~~subsidiary tohas ~~pay~~an ~~dividends~~investment ismanagement ~~restricted~~agreement ~~by the insurance laws of their domiciliary state~~with Conning. ~~See~~Under ~~Item~~this 1agreement, ~~Description~~Conning ofmanages the ~~Business~~investment -security ~~Regulation~~portfolio in -accordance ~~Dividends.~~with ~~Further,~~investment ~~Family~~policies ~~Life~~set ~~Corporation, which holds all of the stock of Family Life, is restricted from paying dividends on its common stock~~ by the ~~provisions~~Company’s Board of ~~the $30 million note held by Investors Life~~Directors. ~~FIC (as~~

27The Company, working with Conning, also revised the investment policies of its insurance subsidiary in recent years. The new policies reiterate compliance with legal requirements of state insurance laws and regulations that are applicable to the Company. They also emphasize sensitivity to the way that FIC’s liabilities are likely to change over time and with changes in general interest rate levels. In practical terms, this means that the Company now focuses almost all of its investment in investment-grade securities, keeping the schedule of anticipated asset maturities in line with its projected cash needs. It also means that the Company attempts to keep the duration of its investment assets (a measure of the sensitivity of their value to changes in interest rates) in line with the duration of the Company’s liabilities. At December 31, 2006, the Company’s holdings of below investment grade securities totaled approximately 3.1% of the fixed maturity securities portfolio.

Since the engagement ~~successor~~of toConning as the ~~obligations~~Company’s ofinvestment ~~Family~~manager ~~Life~~in ~~Insurance~~October ~~Investment~~2003, the Company) ishas ~~also~~realigned ~~prohibited~~its ~~from~~portfolio, ~~paying~~decreasing ~~dividends~~its oninvestment ~~its~~in mortgage-backed ~~stock~~securities by(including ~~the~~asset-backed ~~provisions~~securities) ofsignificantly, from ~~the~~35.8% $4in 2004, to 24.51% ~~million~~at ~~note~~December ~~held~~31, by2005 ~~Investors~~and ~~Life~~to 22.0% Toat ~~provide~~December 31, 2006 ~~for~~as ~~the~~a ~~payment~~percentage of ~~the~~its ~~cash~~total ~~dividends~~investment ~~declared~~ in ~~2002,~~fixed ~~FIC~~maturities. ~~received~~With ~~waivers~~the reduction ~~from~~of ~~Investors~~this ~~Life~~exposure ofto ~~the~~mortgage ~~above~~and asset-~~described~~backed ~~restrictions~~securities, of the ~~notes,~~Company increased ~~thereby~~its ~~permitting~~holdings ~~FIC~~in corporate securities from 48.3% in 2004, to ~~make~~54.3% at December ~~the~~31, ~~dividend~~2005 ~~payments~~and to ~~its~~61.1% ~~shareholders~~at December 31, 2006, substantially all of which are in investment grade securities.

~~Equity~~Mortgage-backed securities ~~Compensation~~are ~~Plans~~sensitive to changes in prevailing interest rates, since interest rate levels affect the rate at which the underlying mortgage obligations are repaid. Mortgage-backed pass-through securities, sequential CMOs and support bonds, which comprised approximately 62.8% of the market value of FIC’s mortgage-backed securities at December 31, 2006, are sensitive to prepayment and extension risks. FIC’s insurance subsidiary has reduced the risk of prepayment associated with mortgage-backed securities by investing in planned amortization class (“PAC”), target amortization class (“TAC”) instruments 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, 2006, PAC and TAC instruments and scheduled bonds represented approximately 21.8% of the market value of FIC’s mortgage-backed securities. Sequential and support classes represented approximately 19.7% of the market value of FIC’s mortgage-backed securities at December 31, 2006.

~~The~~An allocation ~~following~~by ~~table~~security ~~presents~~type ~~information~~of ~~regarding~~ the Company’s ~~equity~~investments ~~compensation~~in ~~plans~~fixed asmaturities as of December 31, ~~2004:~~2006 and 2005 is detailed below.

			(a)		(b)		(c)
		December 31,
Plan Category			Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
		2006			2005
Equity compensation plans
Mortgage-backed and asset-backed			22.0	%		24.1	%
	approved by security holders		-		-		-
Corporate			61.1	%		54.3	%
Equity compensation plans not
U.S. Treasury securities and obligations of U.S. government agencies and corporations			13.2	%		17.6	%
	approved by security holders (1) (2) (3)		170,000		$ 13.91		-
States, municipalities and political subdivisions			3.7	%		4.0	%
Total			170,000		$ 13.91		-
Total fixed maturities			100.0	%		100.0	%

~~(1)~~In addition ~~Includes options granted by FIC in January 2004~~ to J.the ~~Bruce~~realignment ~~Boisture,~~strategy ~~in connection with his election~~ as ~~Chief~~described ~~Executive Office and President of FIC~~above, asthe ~~follows:~~Company analso increased ~~option~~its tolevel ~~purchase~~of ~~150,000~~cash ~~shares~~and ofshort-term ~~its~~investments ~~common~~from ~~stock~~$38.1 million at December a31, ~~per~~2005, ~~share~~to ~~price of~~ $1463.~~00.~~1 ~~The~~million ~~grant~~at ~~was~~December ~~conditioned~~31, ~~upon~~2006, ~~the~~primarily ~~approval~~as bya result of the ~~shareholders~~infusion of ~~FIC~~proceeds offrom the ~~Incentive~~sale ~~Stock~~of ~~Plan pursuant to which~~ the ~~grant~~Company’s ~~would~~wholly-owned subsidiary, beFamily ~~made.~~Life, Asas of ~~the~~December ~~date~~29, of2006. ~~this~~Conning ~~report,~~and the ~~Incentive~~Company also completed ~~Stock~~more ~~Plan~~extensive ~~has~~asset/liability ~~not~~management ~~been~~and ~~presented~~duration toanalysis which provided the ~~shareholders~~information offor ~~FIC~~more ~~for~~effective ~~approval.~~reinvestment Inof ~~connection~~funds. ~~with~~As ~~the~~market interest ~~resignation~~rates ofbegan ~~Mr.~~to ~~Boisture~~rise in ~~November~~ 2005, ~~the~~cash ~~grant was cancelled~~ and ~~replaced~~short-term byinvestments anwere deployed ~~agreement~~in ~~under~~longer ~~which~~term ~~FIC~~debt ~~would~~securities ~~issue~~during ~~60,000~~2005 ~~shares~~and ~~of its common stock to Mr. Boisture on or before June 30~~2006, ~~2007,~~particularily utilizing ~~provided that~~ the ~~Incentive~~proceeds ~~Stock~~from ~~Plan~~the issale ~~approved~~of bythe ~~FIC~~Company’s ~~shareholders.~~real Ifestate ~~such approval is not so obtained by June 30~~investment, River ~~2007,~~Place ~~Mr. Boisture would receive a cash payment of $465~~Pointe,~~000,~~ ~~less applicable tax withholding. The table includes the number of shares subject to the options~~ in ~~January 2004, which were terminated as described above~~2005.

~~(2) Includes options granted by~~ FIC’s equity ~~in March~~securities ~~2004~~consist toprimarily ~~Vincent~~of L.its ~~Kasch,~~investment in ~~connection~~the ~~with~~investment ~~his~~funds underlying ~~election~~the asseparate ~~Chief~~accounts ~~Financial~~business ~~Officer~~ of ~~FIC~~Investors asLife. ~~follows:~~As anof ~~option to purchase 20~~December 31,~~000~~ 2006, ~~shares~~FIC’s ofequity ~~its~~securities ~~common~~totaled ~~stock~~$9.8 atmillion, acompared ~~per~~to ~~share price of~~ $138.~~25.~~9 ~~The~~million ~~grant~~at December ~~was~~31, ~~conditioned~~2005. ~~upon~~The ~~the~~increase ~~approval~~is bydue ~~the shareholders of FIC of the Incentive Stock Plan pursuant~~ to ~~which~~ the ~~grants~~strong ~~would~~performance ~~be made. As~~ of the ~~date~~equity markets ofduring ~~this~~2006 ~~report,~~resulting ~~the~~in ~~Incentive~~appreciation ~~Stock~~of ~~Plan has not yet been presented to~~ the ~~shareholders~~investment ~~of FIC for approval~~funds.

(3) Does not include shares that may be distributed under FIC’s non-tax qualified deferred compensation plan, which has not been approved by our shareholders. There are two participants in this plan, both of whom are former executives and directors of the Company. Under this plan, participants may defer certain compensation, with the deferred amounts invested as selected by the plan trustee, including common stock of the Company. As of December 31, 2004, the deferred compensation account of one participant (Eugene E. Payne) included 13,600 shares of FIC common stock.28

Agency ~~Recent~~ advances ~~Sales~~and other receivables, totaling $929,000 and $2.9 million at December 31, 2006 and 2005, respectively, consist primarily of ~~Unregistered~~agent ~~Securities~~balances, federal income taxes recoverable, receivables for securities, and other receivables. This decrease of $2.0 million is comprised predominately of the following: 1) increase in receivable for securities sold but not settled as of December 31, 2005 of $900,000, and 2) decline in federal income taxes recoverable of $2.7 million during 2006.

~~During~~The costs related to acquiring new business, including certain costs of issuing policies and certain other variable selling expenses (principally commissions), are capitalized and treated as deferred policy acquisition costs (“DAC”) to be amortized over the ~~year~~life ~~ended~~of the related policies. The increase in the Company’s DAC from December 31, ~~2004~~2005 to December 31, ~~FIC~~2006, ~~did~~reflects ~~not~~that ~~make~~the capitalization ~~any~~of acquisition costs associated with sales of ~~securities~~new insurance policies plus adjustments for unrealized losses in the Company’s portfolio exceeded the amortization of such amounts capitalized in prior years. The present value of future profits of acquired business is the capitalized acquisition cost of blocks of insurance business that ~~were~~the ~~not~~Company ~~registered~~has ~~under~~acquired from others in the ~~Securities~~past. ~~Act~~This asset is amortized to expense as the profits are realized from the various blocks of ~~1933~~acquired business and the policies in force gradually decrease. These two assets are also impacted by the net run-off in business that the Company experienced in 2006, as ~~amended~~shown (in the ~~“Securities Act”)~~following table.

ITEM 6. SELECTED FINANCIAL DATA: (REGISTRANT AND ITS CONSOLIDATED SUBSIDIARIES)

	December 31,							Percentage
	2006		2005		Change			Change
	(In billions, except percentages and policies in force)

Policies in force		103,231		117,019		(13,788	)		-11.8	%
Life insurance in force:
Traditional life insurance		1.0		1.0		-			0.0	%
Universal life insurance		2.8		3.0		(0.2	)		-6.7	%
Annuity funds on deposit		0.11		0.13		(0.02	)		-15.4	%

~~The~~For prior year ~~following~~comparative ~~selected~~purposes, ~~consolidated financial data includes~~ the ~~accounts~~changes offor ~~Financial~~in-force ~~Industries~~from ~~Corporation~~2004 ~~and~~to ~~its~~2005 ~~subsidiaries. This~~for policies, ~~financial~~traditional ~~data~~life ~~has~~insurance, ~~been~~universal ~~restated~~life insurance, asand ~~more~~annuity funds ~~fully~~on ~~described~~deposit inwere ~~Item~~(7.0)%, (16.7~~-Management’s~~)%, ~~Discussion~~(6.3)%, and ~~Analysis~~ 0.0%, respectively.

28Investors Life had $351.0 million of separate account assets as of December 31, 2006 (not including the value of the Company’s own start-up investment in one of the accounts), as compared to $342.9 million at the end of 2005. These assets include (a) two variable annuity separate accounts that permit contractholders to allocate their contract values among a selection of third-party mutual funds and (b) $325.1 million held in custodian accounts in connection with investment annuity contracts. The investment annuity business was reinsured with Symetra Life Insurance Company (formerly Safeco Life Insurance Company), a third-party reinsurer, on a 90%/10% coinsurance basis, with Investors Life retaining 10% of such business. Investors Life is not marketing new separate account annuity contracts.

Effective June 1, 2006, Investors Life recaptured the previously reinsured investment annuity business with Symetra Life resulting in the retention of ~~Financial~~100% ~~Condition~~of this business. ~~and~~The ~~Results~~recapture of ~~Operations~~this ~~and~~previously reinsured business increased other revenues in ~~Note~~2006 2,by ~~“Restatement~~approximately of$1.3 ~~Previously~~million ~~Issued~~as ~~Financial~~compared ~~Statements”~~with 2005. Revenues from this business could increase in 2007 as the ~~accompanying~~Company ~~consolidated~~retained ~~financial~~only ~~statements~~10% of such business for five months of 2006. However, as this is a closed block of business, annual revenues are expected to decrease as the policies in force decline.

	Year Ended December 31,
		2003	2002	2001	2000
	2004	Restated(1)	Restated(1)	Restated(1)	Restated(1)
	(In thousands)
Statement of Operations Information:
Total revenues	$ 102,612	$ 111,397	$ 121,036	$ 98,249	$ 44,801
(Loss) income from continuing operations
before federal income taxes, equity in net
earnings of affiliate, and cumulative
effect of change in accounting principle	$ (16,771)	$ (20,961)	$ (12,526)	$ 5,562	$ 4,042
Provision (benefit) for federal income taxes:
Current	(943)	(1,613)	(59)	3,047	1,383
Deferred	(1,261)	(1,898)	(3,462)	(1,197)	(962)
(Loss) income from continuing operations
before equity in net earnings of affiliate,
discontinued operations, and cumulative
effect of change in accounting principle	(14,567)	(17,450)	(9,005)	3,712	3,622
Equity in net earnings of affiliate, net of tax	-	-	-	222	(2,306)
(Loss) income from continuing operations
before discontinued operations and cumulative
effect of change in accounting principle	(14,567)	(17,450)	(9,005)	3,934	1,316
Discontinued operations	-	(6,133)	-	-	-
(Loss) income before cumulative effect of
change in accounting principle	(14,567)	(23,583)	(9,005)	3,934	1,316
Cumulative effect of change
in accounting principle	229	-	4,140	-	-
Net (loss) income	$ (14,338)	$ (23,583)	$ (4,865)	$ 3,934	$ 1,316
Net (loss) income per share:
Basic	$ (1.46)	$ (2.44)	$ (0.51)	$ 0.50	$ 0.26
Diluted	$ (1.46)	$ (2.44)	$ (0.51)	$ 0.50	$ 0.25
Cash dividends paid per share	$ -	$ -	$ 0.28	$ 0.87	$ 0.18
Balance Sheet Information:
Total assets	$1,240,757	$1,286,044	$1,295,978	$1,353,820	$ 250,852
Long-term obligations	$ 15,000	$ 15,000	$ -	$ -	$ -
Total liabilities	$1,153,214	$1,181,735	$1,160,586	$1,217,548	$ 156,886
Total shareholders’ equity	$ 87,543	$ 104,309	$ 135,392	$ 136,272	$ 93,966

Liabilities

29The Company’s insurance-related liabilities (future policy benefits and contractholder deposit funds) were $570.8 million at December 31, 2006, as compared to $603.5 million at December 31, 2005. The decrease in contractholder deposit funds and future policy benefits reflects the business run-off as previously described above. Contractholder fund withdrawals during 2006 were $56.5 million compared to contractholder fund deposits of $27.7 million, reflecting the primary reason for the decrease in the related liability.

~~(1)~~Other liabilities, ~~The~~which ~~Company~~totaled ~~restated~~$34.0 ~~prior~~million ~~financial~~at ~~statements~~December ~~for~~31, ~~the~~2006, ~~effects~~compared ~~of errors as disclosed in Note 2~~ to $22.1 million ~~the~~at ~~consolidated~~December ~~financial~~31, ~~statements~~2005, ~~and~~consist ~~Item~~primarily 7.of ~~Amounts~~accrued ~~included~~expenses, policyholder ~~herewith~~suspense ~~are~~liabilities, ~~derived~~pension ~~from~~plan ~~the~~liabilities, ~~effects~~income oftaxes payable, ~~these~~amounts ~~restatements~~due on ~~the~~unsettled ~~consolidated~~security ~~financial~~transactions, ~~statements~~and ~~presented~~amounts inheld as agent ~~the~~or ~~2003 Form 10-K~~trustee. ~~Amounts~~This ~~included~~increase in ~~the~~other ~~original~~liabilities ~~Forms~~is ~~10-K~~primarily ~~for~~due ~~the~~to amounts due ~~years~~for ~~ended~~unsettled ~~December~~transactions ~~31,~~for ~~2003,~~purchased ~~2002,~~securities ~~2001,~~of ~~and 2000 should no longer be relied upon~~$15.2 million.

InThe ILCO pension ~~2002,~~plan ~~net~~has ~~income~~a ~~and~~projected ~~earnings~~benefit ~~per~~obligation ~~share~~at ~~were~~year-end ~~affected~~2006 bytotaling $19.2 million ~~the~~in ~~cumulative~~comparison ~~effect~~to ofthe afair ~~change~~value inof ~~accounting~~plan ~~principle~~assets of $419.13 million. The difference ~~This~~in ~~amount~~these ~~represents~~amounts ~~the~~reflects ~~excess~~a offunded ~~fair~~status ~~value~~ of ~~net~~approximately ~~assets~~$108,000, which ~~acquired~~is ~~over~~reflected ~~cost~~ as ofa ~~the~~pension ~~beginning~~asset ofin ~~2002~~the ~~related~~accompanying toconsolidated ~~the~~financial statements. ~~merger~~The ofFamily ~~ILCO~~Life ~~with~~pension ~~and~~plan ~~into~~has a ~~subsidiary~~projected ofbenefit ~~FIC~~obligation at year-end on2006 ~~May~~totaling ~~18, 2001~~$7.6 ~~The~~million ~~Company~~in ~~recorded~~comparison ~~this~~to ~~cumulative~~the ~~effect~~fair value of plan assets of $5.9 million. The difference in ~~conjunction~~these ~~with~~amounts ~~adopting~~reflects ~~Statement~~an unfunded status of ~~Financial~~approximately ~~Accounting~~$1.7 ~~Standards~~million, ~~No.~~which ~~141~~is ~~(“SFAS~~reflected ~~141”),~~as ~~“Business~~a ~~Combinations,”~~pension liability in the ~~first~~accompanying ~~quarter~~consolidated offinancial ~~2002,~~statements. Amounts included as components ~~required~~of bythe ~~SFAS~~projected ~~141.~~benefit ~~Please~~obligation ~~refer~~which tohave ~~Note~~not 1been inrecognized as an ~~the~~expense ~~accompanying~~are ~~consolidated~~included ~~financial~~in ~~statements~~accumulated other comprehensive income.

The results for the year ended December 31, 2001, were affected by the merger of ILCO with and into a subsidiary of FIC. On May 18, 2001, pursuant to an Agreement and Plan of Merger, as amended (the “Merger Agreement”), dated as of January 17, 2001, among FIC, InterContinental Life Corporation (“ILCO”), and ILCO Acquisition Company, a Texas corporation and wholly owned subsidiary of FIC (“Merger Sub”), Merger Sub was merged with and into ILCO (the “Merger”). ILCO was the surviving corporation of the Merger and became a wholly owned subsidiary of FIC. In accordance with the Merger Agreement, FIC issued 1.1 shares of common stock, par value $0.20 per share (“FIC Common Stock”), for each share of common stock, par value $0.22 per share, of ILCO outstanding at the time of the Merger (“ILCO Common Stock”). In addition, each outstanding option to purchase a share of ILCO Common Stock issuable pursuant to outstanding options was assumed by FIC and became an option to acquire FIC Common Stock with the number of shares and exercise price adjusted for the exchange ratio in the Merger. Prior to the merger, FIC owned approximately 48.1% of ILCO’s common stock. Since ILCO was a wholly-owned subsidiary of FIC for the period from May 18, 2001, to December 31, 2001, and thereafter, the operations of ILCO are reported on a consolidated basis with FIC for a portion of 2001 and for all of subsequent periods. For the period from January 1, 2001, to May 17, 2001, FIC’s net income includes its equity interest in the net income of ILCO, with such equity interest being based on FIC’s percentage ownership of ILCO. 29

~~ITEM~~On December 731, 2006, the Company adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. ~~MANAGEMENT~~158 (“SFAS 158”), “Employers’S Accounting ~~DISCUSSION~~for ~~AND~~Defined ~~ANALYSIS~~Benefit OFPension ~~FINANCIAL~~and ~~CONDITION~~Other ~~AND~~Postretirement Plans”. SFAS 158 required the Company to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligation) of its defined benefit pension plans in its December 31, 2006 consolidated financial statements, with a corresponding adjustment to accumulated other comprehensive income, net of tax, eliminating the minimum pension liability provision of SFAS No. 87. For the ILCO pension plan, this new accounting requirement effectively resulted in an implementation adjustment of $3,250,000, before taxes, as a reduction to accumulated other comprehensive income as the Company would have been able to recognize a larger pension asset under the previous rules. There was no SFAS 158 implementation adjustment for the Family Life pension plan due primarily to its unfunded status and frozen benefit status in the current and prior year.

~~RESULTS~~In 2003, the OFCompany ~~OPERATIONS~~borrowed $15 million through the issuance of trust preferred notes (the “2003 Notes”) which bear interest at the three-month LIBOR rate plus 4.2%, not to exceed 12.5% prior to May 2008. The 2003 Notes require the payment only of interest through May 22, 2033, when the entire $15 million must be repaid, but may be repaid without any prepayment penalty after May 2008.

~~Following~~The entire isprincipal aamount ~~discussion~~of the 2003 Notes and ~~analysis~~any accrued but unpaid interest may become immediately due and payable upon an event of default, which includes: (1) failure to pay interest within 30 days of any due date; (2) failure to pay principal when due; (3) the ~~consolidated~~bankruptcy ~~financial~~or ~~statements~~insolvency ~~and~~of ~~other~~FIC; ~~statistical~~or ~~data~~(4) the merger of FIC or sale of all or substantially all of its assets unless the successor entity to a merger is a United States corporation (or a foreign corporation that agrees ~~management~~to ~~believes~~be ~~will~~bound ~~enhance~~by certain tax provisions). The terms of the ~~understanding~~2003 Notes also place certain limitations on the offer or sale of securities of FIC’s ~~financial~~if ~~condition~~it would render ~~and~~invalid ~~results~~the exemption of ~~operations~~the notes issued in connection with the loan from the registration requirements of the Securities Act of 1933. ~~This~~Other ~~discussion~~terms and ~~should~~conditions beof ~~read~~the $15 million borrowing are described in ~~conjunction~~Note ~~with~~7 in the accompanying consolidated financial statements. ~~beginning~~As onof ~~page~~December ~~F-1. See~~31, ~~also~~2006, the Company ~~“Item~~is ~~1-Description~~in ofcompliance ~~Business-Exploration~~with all provisions of ~~Strategic~~this ~~Alternatives~~agreement.”

The financial data in this Annual Report on Form 10-K for the years 2003, 2002, 2001, and 2000, and for the four quarters of 2003, have been restated from amounts previously reported in the company’s Annual Report on Form 10-K for the fiscal year 2003 because of the correction of accounting errors. All information presented in “Item 6 - Selected Financial Data” and in this “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” reflects this restatement. A discussion of the restatement is also provided in “Note 2 – Restatement of Previously Issued Financial Statements” in the accompanying consolidated financial statements.Capital Adequacy

~~Please~~Financial intermediaries ~~refer~~such as FIC depend on their capital to ~~“Forward~~absorb short-~~Looking~~term fluctuations ~~Statements”~~in asset and liability values in their financial structures. They also count on ~~page~~capital 2to support the growth of the business. One typical measure of the strength of a financial holding company such as FIC is the simple ratio of its shareholders’ equity to its total assets. For FIC this ~~Form~~ratio ~~10-K~~was 5.8% at December 31, 2006, compared to 7.0% at December 31, 2005. If separate account assets were not included (which management believes is appropriate) this ratio would have been higher by 3.0% and 2.8% at December 31, 2006 and 2005, respectively. The decline in the ratio in 2006 is primarily due to the loss from discontinued operations on the sale of Family Life. Management believes that its current capital is sufficient to meet the Company’s liabilities and to fund growth at currently planned levels.

~~Introduction~~Investors Life is subject to regulation under state law. Among other requirements, these state laws and regulations impose capital adequacy requirements on insurance companies. Using a calculation that takes into account the quality, liquidity, maturities, and amounts of its assets and liabilities, Investors Life is required to calculate its “risk-based capital” (or “RBC”). Investors Life’s total adjusted capital must exceed 200% of the authorized control level RBC to avoid supervisory activity by the insurance regulators. The RBC solvency margins for Investors Life at December 31, 2006 and 2005 were in excess of NAIC minimum standards. At December 31, 2006 and 2005, the RBC ratios for Investors Life were 584% and 560%, respectively.

~~Financial~~State regulators ~~Industries~~also ~~Corporation~~use (NAIC IRIS ratios to monitor capital adequacy requirements. The NAIC ratios cover 12 categories of financial data with defined “~~FIC~~usual” ranges orfor ~~the~~each such category. The ratios are intended to provide insurance regulators with “~~Company~~early warnings”) isas to when a ~~holding~~given company ~~engaged~~might ~~through~~warrant special ~~its~~attention. ~~subsidiaries~~An ininsurance ~~the~~company ~~business~~may fall outside of ~~marketing,~~the ~~underwriting~~usual ~~and~~range for one ~~servicing~~or ~~life~~more ~~insurance~~ratios, and ~~annuity~~such ~~products~~variances inmay 49result ~~states~~from specific transactions that are, ~~the~~by ~~District~~themselves, ofimmaterial ~~Columbia~~or ~~and~~eliminated at the ~~U.S.~~consolidation ~~Virgin Islands~~level. In certain ~~Like~~states, ~~other~~insurers ~~financial~~with ~~intermediaries,~~more ~~FIC~~than ~~earns~~three ~~income~~IRIS ~~principally~~ratios ~~based~~outside onof the NAIC usual ~~“spread”~~ranges ~~between~~may ~~what~~be itsubject ~~pays~~to ~~its~~increased ~~customers~~regulatory ~~(death~~oversight. ~~benefits~~For 2005, Investors ~~interest~~Life onhad ~~funds~~two onratios ~~deposit)~~which ~~and~~were ~~what~~outside itthe ~~earns~~usual onranges ~~the~~primarily related ~~money~~to ~~(premiums,~~investment ~~policy~~income and ~~annuity~~changes ~~deposits)~~in ~~its~~premium. ~~customers~~For ~~place~~2006 Investors Life had four ratios which were outside the usual ranges, which were primarily related to changes in ~~its~~investment ~~care.~~income ~~Its~~and ~~long-term~~changes ~~viability~~in premium, ~~profitability~~product mix, and ~~growth~~reserving. The ~~depend~~ratios onwere ~~FIC’s~~outside ~~ability~~the tousual ~~manage~~ranges ~~both~~primarily ~~sides~~due to a recapture of ceded reinsurance ~~this~~by ~~spread~~Family ~~(investment~~Life offrom ~~assets~~Investors ~~and~~Life ~~pricing~~during of2006. ~~liabilities),~~This recapture occurred prior to ~~keep~~the ~~its~~sale ~~operating~~of ~~expenses~~Family ~~reasonable~~Life. For statutory accounting purposes, the recapture affected premium income and change in policy reserves which caused ratios to ~~attract~~fall aoutside ~~sufficient~~the ~~volume~~usual ofranges. ~~new~~Excluding ~~deposits~~the ~~(by~~effects ~~selling~~of ~~new~~the reinsurance ~~insurance~~recapture, ~~policies~~Investors ~~and~~Life ~~annuities)~~would tohave ~~more~~had ~~than~~one ~~replace~~ratio ~~the~~outside ~~inevitable~~the ~~withdrawal~~ usual ranges, ~~(through~~which ~~deaths,~~related ~~policy~~to ~~cancellations,~~investment income. Investors Life continues to maintain capital and ~~annuity~~surplus ~~contract~~positions ~~surrenders)~~which ofsignificantly ~~funds~~exceed ~~currently~~risk-based incapital (“RBC”) ~~its~~and ~~keeping~~other regulatory requirements.

At the end of 2004, the equity of FIC’s shareholders totaled $87.5 million, down from $104.3 million at the end of 2003. This $16.8 million decline in shareholders’ equity primarily reflects the Company’s net loss for the year and increases in the 30

30During 2004, the Company and its investment manager developed asset-liability (“ALM”) models for the investment portfolio of FIC’s insurance company. These models focus on comparing the respective durations of the assets and liabilities of each company. Since duration is a direct measure of the sensitivity of an asset or liability to a change in interest rates, these ALM models are designed to allow the Company’s management to deploy investment assets in ways expected to moderate the impact of changes in interest rates on the equity of Investors Life.

~~Company’s minimum pension liability. FIC’s financial condition and prospects at the end~~ Results of 2004 were marked most significantly by the impact of the continuing moderate run-off of contractholder deposit funds and lower premiums during the year, cash demands, changes in the management of its investment assets, and expenses incurred and resources utilized in the internal review of the Company’s consolidated financial statements culminating in the restatements as reported herein.Operations

~~FIC~~Net losses ~~incurred~~for a2006, ~~net~~2005, ~~loss~~and of2004 were $1424.38 million, in$165,000, ~~2004~~and $14.3 Inmillion, respectively. ~~addition~~However, toin analyzing the ~~impact~~Company’s results of ~~lower~~operations, ~~interest~~a separation ~~rates~~of onresults ~~its~~between ~~investment~~continuing ~~income,~~and ~~this~~discontinued ~~loss~~operations ~~reflected~~ provides a more ~~decline~~meaningful inview. ~~premium~~As ~~revenues~~previously described, ~~increases~~the inCompany ~~policyholder~~sold ~~benefits~~Family ~~and~~Life resulting ~~amortization~~in ofa ~~deferred~~loss ~~policy~~from ~~acquisition~~discontinued ~~costs~~operations ~~and~~totaling ~~significant~~$25.5 ~~auditing,~~million ~~accounting~~in 2006, which ~~consulting~~consists ~~and~~of ~~legal~~a ~~fees~~$1.1 ~~associated~~million ~~with~~loss ~~the~~on ~~2003~~operations ~~restatement~~during ~~process of~~ the ~~consolidated~~year ~~financial~~and ~~statements~~a $24. ~~These~~4 million ~~items~~loss ~~were~~on ~~partially~~the ~~offset~~sale. byLosses ~~realized~~from ~~gains~~discontinued onoperations ~~investments,~~were ~~lower~~$1.1 ~~interest~~million in ~~expense~~2005 ~~on contractholder deposit funds,~~ and ~~lower~~$2.5 ~~amortization~~million ofin ~~present value of future profits of acquired business~~2004.

~~FIC’s~~Income from ~~mutual~~continuing ~~commitments~~operations ~~with~~totaled ~~its~~$715,000 ~~life insurance policyholders~~ and ~~annuitants – policyholders to pay premiums and make future deposits~~$942,000 ~~FIC~~in to2006 ~~pay annuities~~ and ~~death benefits – stretch far into the future~~2005, respectively. ~~This~~Loss ~~means~~from ~~that~~continuing ~~FIC’s consolidated statement of~~ operations ~~and~~was ~~balance sheet must necessarily embody several significant estimates about future events~~$12.1 ~~The~~million ~~rates at which its customers will actually die, or will withdraw their funds~~ in ~~response to interest rate changes or other factors, and the returns that FIC will be able to earn on its investments, must all be estimated far into the future in order to judge whether the~~ 2004. The Company isalso ~~truly~~recorded ~~operating~~income ~~currently~~resulting atfrom a ~~profit~~cumulative ~~and~~effect ~~whether its consolidated balance sheet is properly reflecting the current value~~ of ~~its assets and liabilities. Most of these estimates are embodied~~ change in ~~balance sheet accounts such as deferred policy acquisition costs,~~ ~~the~~ accounting ~~present~~principle ~~value~~ of ~~future profits of acquired businesses~~$229,000 ~~and~~in ~~policy liability reserves~~2004. ~~The consolidated balance sheet of the Company presented with this report reflects the result of an extensive review and revision of these accounts and estimates by the Company’s management.~~

AsA summary of ~~explained in~~ the ~~accompanying consolidated financial statements (see Note 2 on Restatement of Previously Issued Financial Statements and Item 6, Selected Financial Data), FIC~~Company’s ~~consolidated financial statements for 2003 and prior periods have been restated. The comments in this discussion and analysis of the financial condition and~~ results of operations ~~relate~~is toas ~~the restated balances.~~ follows:

Restatement of Previously Issued Financial Statements

	Year Ended December 31,
	2006			2005			2004
	(In millions)

Income (loss) from continuing operations	$	0.7		$	0.9		$	(12.1	)
Loss from discontinued operations		(1.1	)		(1.1	)		(2.5	)
Loss from sale of discontinued operations		(24.4	)		-			-
Net loss		(24.8	)		(0.2	)		(14.3	)

~~Introduction.~~ In ~~this Form 10-K~~ 2006, income ~~the~~from ~~Company~~continuing ~~has~~operations ~~restated~~was ~~its~~affected ~~consolidated~~by ~~financial statements, for~~ the correction of accounting errors, for the years 2003, 2002, 2001 and 2000, that were previously reported in its Annual Report on Form 10-K for the year ended December 31, 2003. All information presented in this Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects the restatement.following items:

In(1) ~~the~~Premium ~~course~~revenues ofincreased ~~the Company’s work on its insurance company subsidiaries’ 2004 statutory financial statements the Company identified significant adjustments relating to 2003 and other prior periods~~$0. ~~The~~9 ~~Company~~million ~~initially announced these findings~~ in ~~its~~2006 ~~Form~~compared ~~12b-25~~to ~~filing for the year ended December 31,~~ 2005, ~~and~~primarily ~~that~~due ~~the~~to ~~Company~~increased ~~was~~sales ~~analyzing the possible impact~~ of ~~these~~mortgage ~~adjustments~~protection onterm ~~the~~($0.2 ~~consolidated~~million) ~~financial~~and ~~statements~~final ~~included~~expense in($0.6 ~~its~~million) ~~2003~~insurance ~~Form 10-K~~products.

~~Upon~~(2) ~~additional~~Market ~~analysis~~interest ofrates ~~the~~have ~~statutory adjustments~~risen, ~~the~~allowing ~~Company~~for ~~determined that~~ the ~~accounting~~investment ~~errors~~of ~~also~~cash ~~affected~~and ~~its~~short-term ~~consolidated~~investments ~~financial~~in ~~statements~~fixed ~~prepared~~maturity insecurities ~~accordance~~ with ~~generally~~higher ~~accepted~~interest ~~accounting~~yields, ~~principles~~thus asallowing ~~included~~for inincreased ~~its~~investment ~~previously~~income ~~filed~~during ~~2003 Form 10-K~~2006. ~~The~~With ~~Company~~the ~~disclosed~~sale ~~this~~of ~~determination~~the inRiver aPlace ~~Form~~Pointe ~~8-K~~property ~~filing~~in onJune ~~April 12~~2005, ~~2006, along with management’s and~~ the ~~Board of Director’s conclusion that the~~ Company ~~would~~had beadditional ~~required~~funds to ~~restate~~invest ~~its~~in ~~consolidated~~the ~~financial~~latter ~~statements~~half ~~for~~of ~~2003~~2005 and ~~prior~~during ~~years~~2006. ~~Subsequent to this determination~~However, ~~the~~as ~~Company continued to work on~~ the ~~completion~~sale of ~~its~~River ~~consolidated~~Place ~~financial~~Pointe ~~statements~~occurred ~~for 2004. This work resulted~~ in ~~the~~2005, ~~identification~~net ofrealized ~~additional~~gains ~~adjustments~~on ~~affecting~~real ~~2003~~estate ~~and~~have ~~prior~~declined ~~years~~$8. ~~The~~7 ~~details~~million ~~of the significant adjustments and resulting restatement are described below and~~ in ~~Notes~~2006 2compared ~~and~~to ~~19 of the accompanying consolidated financial statements~~2005.

31(3) Reductions of $3.1 million were noted in policyholder benefits and expenses, as compared to 2005. These were primarily attributable to lower death benefits.

~~Restatement. The aggregate effect of the restatement for accounting errors decreased the opening balance of shareholders' equity at January 1, 2002~~ (~~for~~4) ~~the~~Operating ~~effect~~expenses oncontinued ~~shareholders'~~to ~~equity~~decline ~~of the correction of accounting errors occurring~~ in ~~years prior to 2002) and the shareholders' equity at December 31~~2006, ~~2002~~reflecting ~~and~~reductions ~~2003,~~of ~~respectively, by~~ $2.1 ~~million, $4~~.62 million ~~and $4~~.~~8 million, as follows:~~

		Change in Shareholders' Equity
		December 31,		January 1,
		2003	2002	2002
		(In thousands)
Change in additional paid-in capital		$ 524	$ -	$ -
Change in retained earnings:
	Policy liabilities and contractholder deposit funds	(6,540)	(4,853)	(4,432)
	Reinsurance	(668)	(413)	(360)
	Present value of future profits of acquired businesses	56	-	-
	Excess of net assets acquired over cost	-	-	2,650
	Other miscellaneous adjustments	(220)	(390)	(451)
	Income taxes	1,639	1,007	455
		(5,733)	(4,649)	(2,138)
Change in accumulated other comprehensive income		280	-	-
Change in common treasury stock, at cost		122	-	-
		$ (4,807)	$ (4,649)	$ (2,138)

(5)

Other income increased $2.2 million during 2006 primarily due to additional fees earned on separate accounts.

~~These adjustments have been classified into the following areas:~~31

~~Policy~~(6) ~~liabilities~~Federal ~~and~~income ~~Contractholder~~tax ~~Deposit~~expense ~~Funds~~was –significantly ~~Following~~higher ~~the~~reflecting ~~filing~~an ofeffective ~~its~~tax ~~2003~~rate ~~Form~~of ~~10-K,~~80.3% ~~the~~in ~~Company~~2006. ~~engaged~~The ahigher ~~new~~taxes ~~actuarial~~were ~~consulting~~due ~~firm~~primarily to ~~assist~~an ~~with~~increase in the Company’s ~~actuarial~~valuation ~~functions~~allowance ~~and~~for ~~the~~deferred ~~actuarial~~taxes ~~processes~~resulting ~~affecting~~from ~~financial statement preparation. The Company, along with~~ the ~~new~~sale ~~firm, performed various reviews~~ of ~~the~~Family ~~actuarial~~Life. ~~policy~~The ~~reserving~~sale ~~process. Through~~of ~~this~~Family ~~review,~~Life ~~errors~~removed in the ~~Company’s~~source ~~2003~~of ~~and~~income ~~prior~~supporting ~~year~~certain ~~consolidated~~deferred ~~financial~~tax ~~statements~~assets ~~were~~at ~~identified~~the ~~relating~~FIC toconsolidated ~~policy liabilities and contractholder deposit funds as described below~~level.

The most significant of the errors related to a unique block of life insurance policies. This block of policies consisted of several different policy types including hybrid fixed premium universal life policies and fixed premium interest sensitive whole life policies. These are relatively complex products that were not properly administered in some cases andIn 2005, income ~~therefore,~~from ~~reserves~~continuing ~~were~~operations ~~not~~was ~~recorded~~affected toby ~~cover all of~~ the policy options. This block also required manual policy reserve calculations in many instances. Upon additional review of this block of business, errors in the reserving calculations were identified along with the determination that a significant number of policies had not been included in the reserving process. following items:

~~Another~~(1) ~~significant~~Gains ~~adjustment~~were ~~related~~recognized toon ~~contractholder~~the ~~deposit~~sales ~~funds~~of ~~for~~River ~~annuity~~Place ~~policies. Several~~Pointe ~~annuity~~and ~~policies~~other ~~were~~real ~~misidentified~~estate intotaling ~~prior~~$9.2 ~~years~~million. asLease ~~variable~~income, ~~annuities~~which ~~and~~is ~~excluded~~included ~~from~~in ~~policy~~net ~~liabilities. Upon~~real ~~additional~~estate ~~review~~income, ~~these~~declined ~~policies~~approximately ~~have~~$1.2 ~~been~~million ~~appropriately~~in ~~identified~~2005, as ~~general~~compared ~~account~~to ~~policies~~2004, ~~and~~as ~~included~~a inresult ~~the~~of ~~Company’s~~these ~~contractholder deposit fund liabilities~~sales.

As(2) aSignificant ~~result~~auditing, ~~corrected~~actuarial, ~~calculations~~accounting, consulting, and ~~reserving~~legal ~~processes~~fees ~~for~~continued ~~these~~to ~~policies~~be ~~were~~incurred ~~performed~~in ~~and~~2005, although reduced from the ~~liability~~level ~~balances~~of ~~were~~2004, ~~increased~~as ~~for~~a ~~these~~result ~~corrections~~of ~~totaling~~the ~~$6.5~~audit ~~million,~~of ~~specifically~~the Company’s financial accounts and resulting restatement of prior years’ consolidated financial statements included in its 2004 Form 10-K filing, ~~contractholder~~along ~~deposit~~with ~~funds~~various ~~totaling~~litigation matters continuing into 2005. These fees totaled $45.86 million ~~and~~in ~~future~~2005, ~~policy~~reflecting ~~benefits~~a ~~totaling~~ $1.73 million decrease from 2004.

~~The~~(3) ~~Company~~Reductions ~~also~~of ~~determined~~$5.8 ~~that~~million ~~there~~ were ~~errors~~noted in ~~its~~policyholder ~~process~~benefits ~~for~~and ~~calculating~~expenses, ~~the~~as ~~liability~~compared ~~for premiums received in advance related~~ to ~~policies processed on one of its policy administration systems~~2004. As aThese ~~result,~~were ~~the~~primarily ~~Company~~attributable ~~developed a new program~~ to ~~correct~~lower ~~the~~death ~~advance~~benefits ~~premium~~and ~~calculation~~policy ~~process resulting in an increase to this liability of $365,000~~surrenders.

32(4) Interest expense on contractholder deposit funds continues to decline totaling $18.4 million in 2005 compared to $19.4 million in 2004.

~~Various other errors were identified resulting in corrections primarily related to paid-up insurance coverages~~In 2004, loss ~~manual~~from ~~policy~~continuing ~~processing,~~operations ~~and~~was ~~accumulation~~affected ofby ~~GAAP~~the ~~policy reserves and related reinsurance reserve credits. These resulted in an increase to reinsurance receivables of $291,000, with a reduction in future policy benefits of $17,000.~~following items:

~~Reinsurance~~(1) –Significant Asauditing, aactuarial, ~~result~~accounting, ofconsulting, ~~the~~and ~~findings~~legal byfees awere ~~significant~~incurred ~~reinsurer~~in ~~and~~2004, ~~issues~~much ~~identified~~of bywhich ~~the~~was ~~Company,~~associated with the ~~Company~~internal ~~completed a comprehensive~~ review of ~~its reinsurance administrative systems. These systems generally rely on manual interface with~~ the Company’s ~~policy~~financial ~~administration~~accounts ~~systems~~ and ~~general~~resulting ~~ledger. This~~restatement ~~manual~~of ~~interface,~~prior ~~along~~years’ ~~with~~consolidated ~~changes~~financial instatements ~~retention~~as ~~policies~~reported ~~which~~in ~~are~~its ~~based~~2003 onForm ~~covered~~10-K ~~individuals,~~filing. ~~resulted~~The intotal ~~errors~~for inall ~~premiums~~these ~~ceded.~~expenses Asand ~~a result~~fees, ~~restatement~~much ~~adjustments~~of ~~totaling~~which ~~$668,000~~related ~~were made~~ to ~~appropriately~~the ~~cede~~internal ~~premiums~~review, restatement and ~~reduce~~litigation ~~reinsurance~~matters, ~~receivables~~was inapproximately ~~accordance~~$6.9 ~~with~~million ~~the~~for ~~reinsurance agreements with various reinsurers~~2004.

~~Present~~(2) ~~Value~~Effective ofJanuary ~~Future~~1, ~~Profits~~2004, ofthe ~~Acquired~~Company ~~Businesses~~adopted Statement of Position (~~PVFP~~“SOP”) –03-01, ~~The~~“Accounting ~~Company~~and ~~recorded~~Reporting aby ~~restatement~~Insurance ~~adjustment~~Enterprises for Certain Non-traditional Long-Duration Contracts and for Separate Accounts.” This resulted in recognizing additional income totaling $56229,000, ~~for~~net ~~the~~of ~~amortization~~taxes, as a cumulative effect of ~~PVFP~~change in ~~2003~~accounting ~~related~~principle toin 2004. The implementation of this SOP changed the ~~correction~~pattern of recognition of bonus interest credited to contractholders for certain ~~policy~~of ~~in-force~~the ~~data~~Company’s insurance products.

(3) Excess of ~~Net~~cost ~~Assets~~over Acquired Over Cost – In connection with the 2001 acquisition of ILCO, the Company allocated the purchase price to the fair value of the assets acquired and liabilities assumed in accordance with the purchase method of accounting resulting in the recognition of an excess of net assets acquired ~~over cost~~, ~~also~~or ~~referred to as negative~~ goodwill~~. Prior to its acquisition of ILCO’s remaining outstanding common shares on May 18~~, ~~2001,~~totaling ~~the Company accounted for ILCO under the equity method of accounting. The Company owned approximately 48% of ILCO’s common shares prior to May 18~~$752,000 ~~2001.~~was ~~The~~written ~~restatement~~off ~~adjustments~~as toan ~~the~~operating ~~Company’s~~expense ~~equity~~ in ~~earnings~~2004 ofas ~~affiliate~~a ~~are~~result ~~therefore equal to approximately 48%~~ of the ~~related adjustments to ILCO~~Company’s ~~retained~~annual ~~earnings~~impairment ~~and~~analysis ~~total shareholders’ equity prior to May 18, 2001. Certain restatement adjustments, therefore, affected the fair value~~ of ~~the~~such ~~net assets acquired from ILCO and the cost of the investment in ILCO resulting in a decrease of $2~~asset.7 million in the remaining unamortized negative goodwill, which was recognized as a cumulative effect of a change in accounting principle in 2002 in accordance with SFAS No. 141 “Business Combinations”.

~~Income~~(4) ~~Taxes --~~A ~~Current~~valuation ~~and~~allowance ~~deferred~~related ~~Federal income tax provisions were recalculated~~ to ~~include~~ the ~~impact~~realization of ~~the~~net ~~restatement~~operating ~~adjustments~~loss ~~as described herein, and to reflect the amount of taxes receivable from the IRS and the amount of~~ deferred ~~Federal income~~ tax liability resulting from the utilization of the asset and liability method after consideration of the portion of the deferred tax asset that may not be realized pursuant to the requirements of SFAS No. 109, "Accounting for Income Taxes." The Company also determined that deferred taxes had not been established related to ILCO's pension assets. ~~Adjustments~~reduced ~~made to decrease~~ the income tax ~~receivable~~benefit ~~and~~from ~~reduce~~continuing ~~the~~operations ~~deferred~~by ~~tax liability totaled~~ $13.93 million, including an increase to accumulated other comprehensive income of $280,000 primarily as a result of changes to the deferred tax valuation allowance applied to other comprehensive income and the recalculation of deferred income taxes applied to the Company's minimum pension liability.

~~Other~~The above described ~~Miscellaneous~~items –need ~~The~~to ~~Company~~be ~~recorded~~taken into consideration in drawing comparisons between the ~~following~~results ~~additional~~from ~~restatement~~continuing ~~adjustments:~~operations in 2006 and other periods.

~~• Correct agent advances for calculation errors in amounts collected by the Company, increasing accounts receivable $33,000~~32

~~• Correct the accounting of certain manually administered policy loans, decreasing policy loans $163,000~~Revenues

•Components of ~~Establish~~revenue ~~sales~~by ~~tax~~type ~~accrual~~are ondetailed ~~actuarial consulting fees, increasing other liabilities $79,000~~below:

• Adjustment of duplicate claims checks included in escheat liability and vacation benefits liability, reducing other liabilities by $95,000

	Year Ended December 31,
	2006		2005			2004
	(In millions)

Premiums, net	$	5.9	$	5.0		$	5.3
Earned insurance charges		31.7		32.8			34.0
Net investment income		29.3		25.8			25.1
Real estate income, net		-		0.6			1.8
Net realized gains on real estate		0.6		9.2			1.7
Net realized gains (losses) on fixed maturities and other		-		(0.6	)		1.1
Other		4.9		2.7			2.2
Total revenues	$	72.4	$	75.5		$	71.2

•Premium revenues ~~Reduction~~reported offor ~~accrued~~traditional ~~interest~~life oninsurance ~~bond~~products ~~for~~are ~~which~~recognized when due. ~~interest~~Both ~~received~~renewal ~~was~~premiums ~~held~~and first-year premiums declined from 2004 to 2005. However, improvements were shown in ~~suspense~~both ~~totaling~~renewal ~~$52~~and first-year premiums during 2006,~~000~~ as shown in the following table. The increase in premiums is primarily from sales of mortgage protection term and final expense insurance products, which increased by $0.2 million and $0.6 million respectively.

• Increase in a tax withholding liability totaling $54,000

	Year Ended December 31,
	2006		2005		2004
	(In millions)

Investors Life:
First year	$	0.6	$	0.1	$	0.1
Renewal		5.3		4.9		5.2
Total net earned premiums	$	5.9	$	5.0	$	5.3

•In accordance ~~Increase~~with GAAP, deposits received in ~~agency~~connection ~~receivables~~with ofannuity ~~$183~~contracts and premiums received for universal life (“UL”) insurance policies are reflected in the consolidated financial statements as increases in liabilities for contractholder deposit funds and not as revenues. Annual charges made against these deposits are reported as revenue. For the years 2004 through 2006,~~000~~ the table below reflects the amounts of such annuity deposits and UL premiums.

• Reduction of accounts receivable for straight-line treatment of rental income totaling $86,000

	Year Ended December 31,
	2006		2005		2004
Annuity deposits and UL premiums	(In millions)

Annuity deposits	$	1.2	$	1.3	$	5.8
UL premiums		26.4		28.6		29.7
Total annuity deposits and UL premiums	$	27.6	$	29.9	$	35.5

•The declines ~~Correction~~in UL premiums and annuity deposits in 2006 and 2005, shown in the above table, reflect the net run-off of ~~agent~~business ~~commission~~from ~~liability~~the Company’s existing book of ~~$255~~business,~~000~~ and ~~allowance~~declining ~~for~~sales ~~agents’~~of ~~balances~~new ofUL ~~$157~~policies. Although the Company is focusing on reversing these trends on an overall basis,~~000~~ management has de-emphasized the sale of annuity and UL products since 2004 due primarily to the ~~errors~~interest-rate inenvironment ~~programming~~and certain design features of FIC’s current annuity products. Most of the Company’s ~~commission~~marketing ~~rate~~efforts ~~structure~~are ~~totaling~~now focused on the sale of traditional life insurance products, such as mortgage protection term insurance and final expense whole life insurance. Liabilities for contractholder deposit funds have declined from $98511.4 million in 2004 to $483.1 million and $453.7 million in 2005 and 2006,~~000~~ respectively.

•Earned insurance ~~Correction~~charges oftotaled ~~treasury~~$31.7 ~~stock~~million, ~~increasing~~$32.8 ~~additional~~million, ~~paid-in~~and ~~capital by~~ $~~524,000~~34.0 ~~and~~million for the ~~common~~years ~~treasury~~ended ~~stock~~December by31, ~~$122~~2006,~~000~~ 2005, and ~~reducing~~2004, ~~other~~respectively. ~~liabilities~~These byrevenues primarily ~~$646,000~~consist asof aUL ~~result~~cost of ~~treasury~~insurance ~~shares~~charges, ~~distributed~~but inalso ~~2003~~include inpolicy surrender ~~conjunction~~charges, ~~with~~and ~~the~~policy ~~acquisition~~administration ~~of the New Era companies~~charges. ~~See~~The ~~Note~~decline 17 in ~~the~~earned insurance ~~accompanying~~charges ~~consolidating~~is ~~financial~~primarily ~~statements~~due ~~for~~to ~~additional~~reduced ~~details~~UL ~~regarding~~cost ~~the~~of ~~acquisition~~insurance ~~and~~charges resulting ~~subsequent~~from ~~sale of~~ the ~~New~~net ~~Era~~run-off ~~companies~~of business.

~~• Establishment of cash account and liability for a unrecorded premium depository account totaling $249,000~~33

•Net investment ~~Reclassifications~~income for the year ended December 31, 2006, was $29.3 million as compared to $25.8 million for the year ended December 31, 2005, and $25.1 million for the year ended December 31, 2004. The increase in net investment income from 2005 to 2006 of ~~certain~~$3.5 ~~balance~~million ~~sheet~~and from 2004 to 2005 of $0.8 million was primarily attributable to the reinvestment of cash and ~~statement~~short-term investments and real estate sales proceeds into higher-yielding fixed maturity investments during the latter part of ~~operations~~2005 ~~items~~and ~~which~~2006 consistent with the revised investment policies of the Company. The Company sold its investment in the River Place Pointe office complex in June 2005 for $103 million in cash. These proceeds were ~~improperly~~initially ~~classified,~~invested in short-term investments and subsequently reinvested into longer term fixed maturity securities resulting in increased net investment income versus real estate income. The increase in market interest rates has also had a positive impact on investment yields.

33The Company’s holdings of fixed maturities, policy loans, and short-term investments (including cash equivalents) are its primary interest bearing securities. Components of net investment income by investment type are detailed below:

including amortization of DAC and PVFP of $121,000, premium revenue and policyholder benefits and expenses of $202,000, accrued investment income and accounts receivable of $395,000, reinsurance receivables and contractholder deposit funds of $303,000, and policyholder benefits and expenses and interest in contractholder deposit funds totaling $1.5 million.

	Year Ended December 31,
	2006			2005			2004
	(In thousands)

Fixed maturities	$	27,453		$	23,340		$	22,890
Policy loans		2,192			2,369			2,530
Other		198			696			218
Gross investment income		29,843			26,405			25,638
Investment expenses		(522	)		(564	)		(556	)

Net investment income	$	29,321		$	25,841		$	25,082

InReal estate ~~addition~~revenue towas primarily earned from the ~~above~~leases ~~restatements,~~on the ~~statement~~buildings ofat ~~cash~~the Company’s ~~flows~~River Place Pointe office complex in Austin, Texas. Net real estate income (revenues from leases less associated operating expenses and depreciation) totaled $0.6 million and $1.8 million for the ~~year~~years ended December 31, ~~2003~~2005 and 2004, respectively. The decrease in real estate income from 2004 to 2005 was ~~also~~primarily ~~affected~~due byto the ~~following~~sale ~~items:~~of the River Place Point office complex in June, 2005. The Company’s remaining real estate properties held for sale totaling $130,000 at December 31, 2005 were sold in January 2006. Accordingly, the Company no longer had real estate income in 2006.

•For the year ~~Loss~~ended ~~from~~December ~~discontinued~~31, ~~operations~~2006, ofFIC ~~the~~had ~~New~~$517,000 ~~Era~~net ~~companies~~realized ~~was~~gains ~~shown~~on asreal estate sales, acompared ~~separate~~to ~~line~~$9.2 ~~item,~~million ~~with~~net ~~offsetting~~realized ~~reductions~~gains in ~~change~~2005 and $1.7 million net realized gains in ~~agency~~2004. ~~advances~~The ~~($273,000),~~realized ~~change~~gains inon ~~other~~real ~~assets~~estate (for 2005 includes $~~4,780,000),~~8.5 million ~~other~~in (gains recognized on the sale of the River Place Pointe property and $~~442~~761,000), ~~and~~of angains ~~increase~~recognized inon ~~other~~the ~~liabilities~~sale of three properties included in real estate held for sale. The remaining three properties were sold in January 2006. The net realized gains on real estate for 2004 includes $~~560,000~~1.7 million in gains on sales of two of the Company’s real estate properties classified as held for sale.

•For the year ~~Acquisition~~ended ofDecember ~~subsidiary~~31, ~~companies~~2006, ~~was~~FIC ~~adjusted~~had to$11,000 ~~eliminate~~net ~~the~~realized losses on fixed maturities and other investments, compared to net ~~effects~~realized losses of ~~changes~~ $631,000 in 2005 ~~other~~and ~~assets~~net ~~and~~realized ~~liabilities~~gains of $1.1 ~~Acquisition~~million ofin ~~subsidiary~~2004. ~~companies~~In ~~increased~~the bythird ~~$941~~quarter of 2005,~~000,~~ ~~offset~~a bybond ~~reductions~~was classified as temporarily impaired, resulting in ~~other~~a writedown of $1~~,587,000,~~ ~~issuance~~million. ofThis ~~treasury~~bond ~~stock~~was ofcalled ~~$646,000,~~in ~~and~~the ~~increases~~fourth inquarter ~~change~~of in2005. Various other bonds ~~assets~~were ofcalled ~~$647,000~~or ~~and~~sold ~~change~~by inthe ~~other~~Company ~~liabilities~~throughout of2005 ~~$2,527,000~~for net gains that largely offset the previously described write-down.

•Other revenues ~~Adjustment~~totaled $4.9 million, $2.7 million and $2.2 million for the years ended December 31, 2006, 2005 and 2004, respectively. The significant increase in other revenues in 2006 is primarily related to ~~issuance~~fees earned related to the Company’s separate accounts. As previously described, effective June 1, 2006, Investors Life recaptured the previously reinsured investment annuity business with Symetra Life resulting in the retention of ~~treasury~~100% ~~stock~~of this business. The recapture of this previously reinsured separate accounts business increased other revenues in 2006 by approximately $~~127~~1.3 million as compared with 2005. Additionally,~~000~~ ~~due~~other torevenues ~~issuance~~in of2006 ~~treasury~~included ~~stock~~approximately to$0.6 ~~401(k)~~million in interest ~~participants,~~income ~~reclassifying~~received ~~change~~from the IRS on tax refunds related to ~~other~~prior years’ amended returns.

• Adjustment of proceeds from sales or maturities of fixed maturities of $458,000, with offset to other, for accretion and amortization of bond discount and premium, respectively, previously included.34

~~Financial~~Benefits and ~~Condition~~Expenses

~~Assets~~Policyholder benefits and expenses, which consist primarily of death benefit claims, totaled $26.7 million, $29.9 million, and $35.7 million for the years ended December 31, 2006, 2005, and 2004, respectively. The decreases noted from 2005 to 2006 and from 2004 to 2005 are primarily attributable to lower death claims.

~~During~~Interest expense ~~2004,~~on ~~the~~contractholder ~~equity~~deposit offunds ~~the~~represents ~~shareholders~~interest ofpaid ~~the~~or ~~Company~~credited to contractholders ~~(that~~on ~~is,~~cash ~~the~~values ~~excess~~accumulated ofin ~~the~~their ~~Company’s~~universal ~~assets~~life ~~over~~insurance and annuity ~~its~~accounts. ~~liabilities)~~Interest ~~declined~~expense bytotaled $1618.80 million in 2006, $18.4 million in 2005, and $19.4 million in 2004. The ~~predominant~~decreases ~~change~~in interest expense noted during the preceding two years were primarily due to the decline in ~~FIC’s~~the ~~financial~~number of ~~condition~~universal islife ~~reflected~~insurance and annuity policies in-force. As previously described, UL premiums and annuity deposits have declined and contractholder fund withdrawals have been exceeding contractholder deposits in 2006, 2005 and 2004, reflecting the net ~~loss~~run-off ~~for~~of business. Consequently, the ~~year~~decrease in interest expense in 2006 and 2005 is primarily attributable to the overall reduction in the level of contractholder deposit funds. Liabilities for contractholder deposit funds have declined from $14511.34 million, asin ~~discussed~~2004 to $483.1 million and $453.0 million in ~~more~~2005 ~~detail~~and ~~below~~2006, respectively.

~~Additional~~The level of ~~changes~~market interest rates can effect the interest spread which is the difference in the Company’s investment portfolio rate and the interest rates credited on policyholder contracts for universal life insurance and annuities. The Company responded to ~~assets~~lower market rates in 2004 and ~~liabilities~~2005 ~~resulting~~by lowering many of the credited rates on its policies in athese ~~net~~periods. ~~decrease~~However, touniversal ~~shareholders’~~life insurance ~~equity~~and ~~totaling~~annuity $2policies have contractual minimum guaranteed rates and credited rates cannot be lower than such minimums. Because many of the Company’s policies have minimum guaranteed rates of 4.0%, ~~million:~~the market interest rate environment in prior periods put pressure on the Company’s interest spread. Market rate increases in 2005 and 2006 have improved the Company’s interest spread.

•Amortization of deferred policy acquisition costs (“DAC”) totaled $31.2 million,~~205~~ $1.6 million, and $978,000 ~~reduction~~for the years ended December 31, 2006, 2005, and 2004, respectively. These expenses represent the amortization of the costs of producing new business, which consist primarily of agents’ commissions and certain policy issuance and underwriting costs. DAC is amortized over the premium-paying period of the policies in proportion to estimated annual premium revenue for ~~increases~~traditional life insurance business. For interest sensitive products, these costs are amortized in relation to the ~~Company’s~~estimated ~~minimum~~annual ~~pension~~gross profits ~~liability~~of the policies. The level of policy lapses and surrenders can also have a significant impact on the amount of amortization. Lower policy lapses and surrenders for certain blocks of traditional life business resulted in the reduced amortization for 2006.

•Present value of future profits on acquired businesses (“PVFP”) is amortized in a similar manner as DAC, as previously described, for traditional and interest sensitive business. Amortization of PVFP totaled $~~236~~902,000, ~~increase~~$1.1 ~~from~~million, and $1.1 ~~change~~million infor ~~net~~the ~~unrealized~~years ~~losses~~ended onDecember ~~investments~~31, in2006, ~~fixed~~2005, ~~maturities~~and ~~available~~2004, respectively. ~~for~~The ~~sale~~amortization is consistent with the run-off of the acquired blocks of business.

•Operating expenses for 2006 were $~~423~~20.6 million,~~000~~ ~~increase~~as ~~from~~compared ~~net~~to ~~unrealized~~$21.8 ~~appreciation~~million in 2005 and $26.1 million in 2004. The Company implemented cost reduction measures in 2004 and 2005, as well as in 2006, and this continues to be a critical focus for the Company. However, audit, actuarial, accounting and other consulting, and legal fees continue to represent a significant component of ~~equity~~operating ~~securities~~expenses, as the Company completes its delinquent SEC filings with a target of becoming current on all filings at the end of the second quarter of 2007. During 2006, the expenditures in these cost components continued to significantly offset overall reductions in the Company’s overhead cost structure. As indicated in the table below, these fees totaled approximately $6.6 million, $5.6 million, and $6.9 million for 2006, 2005, and 2004, respectively.

• $118,000 increase from the distribution of treasury stock

	Year Ended December 31,
	2006		2005		2004
	(In thousands)

Audit fees	$	3,442	$	2,417	$	2,680
Actuarial fees		988		1,092		904
Accounting and other consulting fees		1,030		450		2,193
Legal fees		1,095		1,637		1,136
Total	$	6,555	$	5,596	$	6,913

3435

As At discussed ~~the~~in ~~end~~Item 1 - Description of the Business, the Company filed its 2004 Form 10-K and Forms 10-Q on October 30, ~~FIC~~2006 ~~had~~and ~~$880~~filed its 2005 Form 10-K and Forms 10-Q on January 12, 2007.9 ~~million~~These efforts required significant additional audit, actuarial, and consulting services, especially considering that, following the filing of ~~assets~~the ~~under~~2003 Form 10-K, the Company engaged Deloitte & Touche LLP as its ~~direct~~new ~~management~~independent registered public accounting firm and engaged Allen Bailey & Associates, ~~exclusive~~Inc. ofas ~~separate~~its ~~account~~new ~~assets~~actuarial consulting firm. InBoth firms ~~broad~~were ~~terms~~also engaged to work on the 2004 and 2005 statutory financial statements for the Company’s insurance subsidiaries, ~~these~~as ~~funds~~well as the 2004 and 2005 consolidated financial statements. This change in auditors and actuaries, the first by the Company in many years, required additional work by both internal and external accounting and actuarial personnel. Effectively, costs and fees related to two years of audits were ~~invested~~substantially asincurred ~~follows:~~in one year during 2006. During 2007, substantially all the costs and fees related to the 2006 audits and Form 10-K and Forms 10-Q for 2006 will be incurred, along with a significant portion of the costs for the 2007 audits related to interim audit work throughout the year.

	December 31,
		2003	Percentage
	2004	Restated	change
	(In thousands)
Investments in financial instruments:
Cash and short-term investments	$ 114,558	$ 82,436	39.0%
Debt securities	500,212	560,691	-10.8%
Policy loans	39,855	42,452	-6.1%
Equity securities	8,502	7,941	7.1%
Accrued investment income	5,652	6,695	-15.6%
Total investments in financial instruments	668,779	700,215	-4.5%
Investments in real estate:
Invested real estate	77,169	77,680	-0.7%
Real estate held for use	13,559	13,870	-2.2%
Total investments in real estate	90,728	91,550	-0.9%
Investments in future income streams:
Deferred policy acquisition costs	50,640	54,819	-7.6%
Present value of future profits of acquired business	17,905	21,096	-15.1%
Total investments in future income streams	68,545	75,915	-9.7%
All other assets	52,829	60,093	-12.1%
Total managed assets	$ 880,881	$ 927,773	-5.1%

During 2004, the Company took significant steps to reduce the level of general operating expenses. Subsequent to the changes in the Board and management in late 2003 and early 2004 as previously described, a comprehensive review of the Company’s staffing and operational structure was performed. This review identified numerous opportunities in these areas for reductions in the Company’s cost structure, given the levels of sales and business in force. Accordingly, significant reductions in staffing levels have been achieved since 2003. The Company also closed its Seattle branch office and records storage facility, upgraded various operating and accounting systems, and restructured employee benefit programs.

~~Total~~Operating expenses ~~managed~~in ~~assets~~2004 ~~declined~~also ~~during~~include ~~2004~~a bywrite ~~5.1%.~~off ~~The~~of ~~decline~~excess ~~was~~of ~~primarily~~cost ~~due~~over tonet ~~reductions~~assets acquired, inor goodwill, totaling $752,000 resulting from the Company’s ~~investment~~annual impairment ~~securities~~analysis ~~portfolio,~~of ~~deferred~~such ~~policy~~asset. ~~acquisition~~The ~~costs,~~goodwill ~~and~~was ~~present~~originally ~~value~~recognized by ILCO ofin ~~future~~connection ~~profits~~with ofits ~~acquired~~acquisitions, ~~business~~including Investors Life. The impairment ~~level~~ of ~~these~~the ~~reductions~~entire ~~was~~goodwill ~~significantly~~asset ~~impacted~~was triggered by the ~~net~~significant decline in ~~run-off~~the ofCompany’s ~~the~~stock price from December 31, 2003 to December 31, 2004. The Company’s ~~annuity~~stock ~~and~~price ~~life~~is ~~insurance~~a ~~business~~significant component in~~-force~~ the valuation calculation as required in the impairment analysis.

~~During~~Interest expense ~~2003~~for 2006, ~~the~~2005 ~~Company~~and ~~reduced~~2004 ~~its~~totaled ~~investment~~$1.4 inmillion, ~~cash~~$1.1 million and ~~short-term investments significantly~~$864,000, respectively. ~~shifting~~As ~~funds~~previously todisclosed ~~investments~~ in ~~debt~~this ~~instruments.~~Item ~~A substantial portion of these funds~~7, ~~along~~the ~~with~~interest ~~proceeds~~expense relates ~~from~~to ~~maturing~~debt ~~investments~~service ~~and~~on ~~sales, were reinvested during~~ the ~~first~~$15 ~~half~~million oftrust ~~2003~~preferred innotes ~~assets~~ (~~collateralized~~the ~~mortgage obligations (~~“~~CMOs~~2003 Notes”),. ~~asset-backed~~The ~~securities,~~2003 ~~and~~Notes ~~private~~bear ~~placements)~~interest ~~that~~quarterly at the ~~then~~three-~~incumbent~~month ~~management~~LIBOR ofrate plus ~~the Company expected would increase overall returns on invested assets~~4.2%. ~~Following~~Interest aexpense ~~review~~for ~~of the investment portfolios of the life insurance subsidiaries of the Company in September 2003~~2006, ~~the~~2005 ~~Investment~~and ~~Committee~~2004 ofreflects ~~the~~an ~~Company’s~~average ~~then~~annual interest ~~newly~~rate ~~elected Board~~ of ~~Directors~~approximately ~~recommended the engagement of a third-party investment manager to provide ongoing~~9.4%, ~~professional management of the portfolios~~7.6% Inand ~~October 2003~~5.8%, ~~the~~respectively. ~~life~~The ~~insurance subsidiaries entered into investment~~higher ~~management~~ interest ~~agreements~~expense ~~with~~in ~~Conning.~~2006 ~~Under~~and ~~these~~2005 ~~agreements,~~is ~~Conning~~a ~~manages~~direct ~~the~~result ~~investment security portfolios~~ of the ~~Company’s~~increase ~~life insurance subsidiaries~~ in ~~accordance with investment policies set by~~ the LIBOR ~~Company’s Board of Directors~~rate.

The Company, working with Conning, also revised the investment policies of its insurance subsidiaries. The new policies reiterate compliance with legal requirements of state insurance laws and regulations that are applicable to the Company’s insurance company subsidiaries. They also emphasize sensitivity to the way that FIC’s liabilities are likely to change over time and with changes in general interest rate levels. In practical terms, this means that the Company now focuses almost all of its investment in investment-grade securities, keeping the schedule of anticipated asset maturities in line with its projected cash needs. It also means that the Company attempts to keep the duration of its investment assets (a measure of the sensitivity of their value to changes in interest rates) in line with the duration of the Company’s liabilities. Taxes

~~Conning~~The provision ~~commenced~~for federal income taxes on income (loss) from continuing operations, before cumulative effect of change in accounting principle, reflects tax expense (benefit) totaling $2.9 million, $0.6 million and $(0.9) million for the years 2006, ~~realignment~~2005 and 2004, respectively. These tax amounts equate to effective tax expense (benefit) rates of 80.3%, 39.7%, and (7.0%) for the years ended December 31, 2006, 2005, and 2004, respectively. The primary reason for the significant deviation from the expected statutory tax rate of 34% for the Company for the year 2006 is due to an increase in the Company’s valuation allowance for deferred taxes resulting from the sale of Family Life. The sale of Family Life removed the source of income supporting certain deferred tax assets at the FIC consolidated level. The primary reason for the significant deviation from the expected statutory tax rate of 34% for the Company for the year 2005 is due to increases to the valuation allowance for deferred tax assets and the tax benefit for dividends received deduction. The primary reason for the significant deviation from the expected statutory tax rate of 34% for the Company for the year 2004 is due to increases to the valuation allowance for deferred tax assets. Under SFAS No. 109, the Company has established a valuation allowance when, based on the weight of the available evidence, it is more likely than not that some portion of its deferred tax assets will not be realized. Realization of deferred tax assets is dependent upon the Company’s generation of sufficient taxable income in the future to recover tax benefits that cannot be recovered from taxes paid in prior periods. The Company’s deferred tax assets are primarily comprised of net operating losses of FIC and its non-life insurance wholly owned subsidiaries’ ~~portfolios~~and inunrealized ~~accordance~~losses ~~with~~and ~~these~~policy ~~new~~reserves ~~policies~~of its life insurance subsidiary. These non-life net operating loss carry forwards totaled approximately $33.0 million at year-end 2006 and begin to expire in 2008 through 2025. The valuation allowance totaled $12.3 million at December 31, 2006. Additions to the ~~fourth~~allowance ~~quarter~~totaled of$2.1 ~~2003~~million, $0.4 Asmillion ~~part~~and of$3.0 ~~this~~million in ~~realignment~~2006, ~~Conning~~2005 ~~identified~~and ~~eight~~2004, ~~securities~~respectively. ~~purchased~~The ~~earlier~~additions in ~~2003~~2006 include $2.0 million related to continuing operations, $0.5 million related to discontinued operations, and $(0.4) million related to other comprehensive income. The additions in 2005 include $0.1 million related to continuing operations and $0.3 million related to other comprehensive income. The additions in 2004 include $3.3 million related to continuing operations and a reduction of $(0.3) million related to other comprehensive income.

3536

that it concluded had significant future principal risk. While all of these securities were investment grade when purchased, six of the eight had experienced ratings downgrades since purchase. These securities were written down as other than temporary impaired securities in 2003, resulting in a net realized pre-tax loss of $5.2 million. One additional bond purchased in early 2003 was sold in late 2003 for a net pre-tax gain of $580,000. The other bonds purchased from January to September of 2003 had by December 31, 2003, resulted in an additional net unrealized loss of approximately $12.3 million; however, the Company determined that the decline in market value of this group of bonds was temporary, Liquidity and ~~retained~~Capital ~~them in the portfolio.~~Resources

~~The~~Liquidity describes ~~Company~~the ~~and~~ability ~~Conning~~of ~~continued~~a ~~the~~company ~~realignment~~to ofgenerate sufficient cash flows to meet the cash ~~portfolio~~requirements inof ~~2004.~~its ~~During~~business ~~2004,~~operations. ~~the~~FIC ~~Company~~is ~~decreased~~an ~~its~~insurance ~~investment~~holding company inwhose ~~mortgage-backed~~principal ~~securities~~assets ~~(including~~at ~~asset-backed~~and ~~securities)~~for ~~significantly,~~the ~~from~~year ~~53.8%~~ended toDecember ~~37.4%~~31, 2006, consisted of its ~~total~~ownership ~~investment~~interests in ~~fixed~~its ~~maturities~~insurance subsidiary, Investors Life. ~~With~~As ~~the~~a ~~reduction~~holding ofcompany, ~~this~~FIC’s ~~exposure~~ability to ~~mortgage~~pay interest and ~~asset-backed~~principal ~~securities~~on its debt, ~~the~~pay ~~Company increased~~ its ~~holdings~~expenses inand ~~corporate~~pay ~~securities~~dividends ~~from~~on ~~33.8%~~its tocommon ~~51.4%,~~stock depend substantially ~~all~~on its receipt of ~~which~~dividends ~~are~~or inother ~~investment~~cash ~~grade~~flow ~~securities~~from Investors Life.

~~Mortgage-backed~~As of December ~~securities~~31, ~~are~~2005, ~~sensitive~~Investors toLife ~~changes~~held in$15.4 ~~prevailing~~million ~~interest~~of ~~rates,~~notes ~~since~~receivable from FIC ~~interest~~that ~~rate~~represented ~~levels affect~~ the ~~rate~~remaining atindebtedness ~~which~~related to the ~~underlying~~Family ~~mortgage obligations are repaid~~Life acquisition. ~~Mortgage-backed~~Although ~~pass-through~~this ~~securities,~~intercompany ~~sequential~~indebtedness ~~CMOs~~was ~~and~~eliminated ~~support~~on ~~bonds, which comprised approximately 67% of the book value of~~ FIC’s consolidated ~~mortgage-backed~~balance ~~securities at December 31~~sheets, ~~2004,~~it ~~are~~created ~~sensitive~~a todebt ~~prepayment~~service ~~and~~requirement ~~extension~~at ~~risks. FIC’s insurance subsidiaries have reduced~~ the holding ~~risk~~company ~~of prepayment associated with mortgage-backed securities by investing in planned amortization class (“PAC”), target amortization class (“TAC”) instruments and scheduled bonds~~level. These ~~investments~~notes ~~are~~were ~~designed~~paid tooff ~~amortize in a predictable manner~~ by ~~shifting~~FIC ~~the~~on ~~risk of prepayment of the underlying collateral to other investors in other tranches (“support classes”) of the CMO. At~~ December 3129, ~~2004, PAC and TAC~~2006 ~~instruments~~ using ~~and~~proceeds ~~scheduled~~from ~~bonds represented approximately 19.8% of~~ the ~~book~~sale ~~value~~ of ~~FIC’s~~Family ~~mortgage-backed securities~~Life. ~~Sequential and support classes represented approximately 23.9% of the book value of FIC’s mortgage-backed securities at December 31, 2004.~~

AnAt the holding ~~allocation~~company bylevel, ~~security~~FIC’s ~~type~~principal ofcurrent ongoing liquidity demands relate to debt service on the ~~Company’s~~$15 ~~investments~~million of 2003 Notes that it issued in ~~fixed~~May ~~maturities~~2003. (See as“Financial Condition - Liabilities” earlier in this Item 7.) These notes require quarterly interest payments at a variable interest rate of ~~December~~the three-month ~~31,~~LIBOR ~~2004~~rate ~~and~~plus 4.2% (which yielded an average rate of approximately 9.4% for 2006). The principal amount of the 2003, isNotes ~~detailed~~must ~~below~~be repaid in a single payment in 2033.

	December 31,
	2004	2003
Mortgage-backed and asset-backed	37.4%	53.8%
Corporate	51.4%	33.8%
U.S. Treasury securities and obligations
of U.S. government agencies and corporations	7.9%	9.5%
States, municipalities and political subdivisions	3.3%	2.9%
Total fixed maturities	100.0%	100.0%

In addition to debt service, the holding company must pay its expenses in connection with Board of Directors fees, insurance costs, corporate overhead, certain audit and accounting fees, and legal and consulting expenses as incurred. The holding company has not paid any dividends to its shareholders since 2003, and management does not anticipate the payment of such dividends in the near future.

InSince FIC is ~~addition~~not tocurrent ~~the~~in ~~realignment~~its ~~strategy~~filing asof ~~described~~financial ~~above,~~information with the ~~low market interest rate environment during 2004~~SEC, ~~the~~it ~~Company~~does not have ~~also~~access ~~increased its level of cash and short-term investments from $82.4 million at December 31, 2003,~~ to ~~$114.6~~the ~~million~~public atcapital ~~December 31, 2004, in anticipation of an improved interest rate environment~~markets. It ~~was~~Although ~~also~~FIC ~~during~~does ~~this~~not ~~time~~ believe that ~~Conning~~it will ~~and~~need ~~the~~additional ~~Company~~capital ~~completed~~to ~~more~~fund ~~extensive~~its ~~asset/liability~~obligations ~~management~~through ~~and~~2006, ~~duration analysis which provided~~ the unavailability ~~information for more effective reinvestment~~ of ~~funds. As~~access ~~market interest rates began~~ to ~~rise subsequent to 2004, most of~~ the ~~cash~~public ~~and~~capital ~~short-term~~markets ~~investments~~may ~~were~~adversely ~~deployed~~affect our ability into ~~longer~~grow ~~term~~our ~~debt~~business ~~securities~~through ~~during 2005 and the first quarter of 2006~~acquisitions.

The ability of Investors Life to pay dividends to FIC’s ~~equity~~and ~~securities~~meet ~~consist~~these ~~primarily~~holding-company liquidity ofdemands ~~its~~is ~~investment~~subject to restrictions set forth in the ~~investment~~insurance ~~funds~~laws and regulations ~~underlying~~of ~~the~~Texas, ~~separate~~its ~~accounts~~domiciliary ~~business~~state. ofTexas ~~Investors~~limits how and when Investors Life ~~Insurance~~can ~~Company~~pay ofsuch ~~North~~dividends ~~America~~by (a) including the “~~Investors~~greater ~~Life~~of”). Asstandard for payment of ~~December~~dividends ~~31,~~to ~~2004,~~shareholders ~~the~~and ~~market~~(b) requiring ~~value~~that prior notification of ~~FIC’s~~a ~~equity~~proposed ~~securities~~dividend ~~was~~be ~~$8.5~~given ~~million,~~to ~~compared~~the toTexas $7Department of Insurance.9 ~~million~~Under atthe ~~December~~“greater 31of” standard, ~~2003.~~an ~~The~~insurer ~~increase~~may ispay ~~related~~a todividend in an amount ~~increase~~equal into the ~~value~~greater of: (i) 10% of the ~~funds~~policyholder ~~underlying~~surplus or (ii) the insurer’s ~~separate~~statutory ~~accounts~~net gain from operations for the previous year.

In June 2004, FIC’s, ~~real~~with ~~estate investment is primarily related to~~ the ~~development~~approval of the ~~River~~Texas ~~Place~~Department ~~Pointe~~of ~~project~~Insurance, ~~(“River~~created FIC Insurance ~~Place~~Services, ~~Pointe”) by Investors Life~~L.P., Ata ~~December~~service ~~31,~~company ~~2004~~subsidiary, ~~FIC’s~~and ~~investment~~transferred ~~totaled~~to it many ~~$90.1~~of ~~million~~the inadministrative ~~this~~functions ~~600,000~~of ~~sq.~~the ftinsurance companies., ~~seven-building~~The ~~office~~new service company ~~complex~~charges onInvestors 48Life ~~acres~~a inmonthly ~~Austin,~~service ~~Texas.~~fee ~~(For~~that is calculated using a formula ~~more~~based ~~detailed~~on ~~description~~policies ofunder ~~the~~management, ~~River~~new ~~Place~~policies ~~Pointe~~issued, ~~project~~managed assets, and ~~see~~other ~~Item 2 -Properties~~factors.) ~~FIC~~Profits ~~and~~earned ~~its~~by ~~insurance~~the service company ~~subsidiaries~~are ~~occupy~~paid ~~one~~as ofdividends to the ~~seven~~holding ~~buildings.~~company, ~~Four~~providing an additional source of liquidity at the holding ~~other~~company ~~buildings~~level. ~~were~~Profits ~~substantially~~earned ~~leased,~~by ~~but~~the ~~two~~service ~~buildings~~company ~~(approximately~~are ~~34%~~expected to decrease ofin ~~the~~2007, ~~total~~as ~~space~~fees inwill ~~the~~decline ~~project)~~due ~~remained~~to ~~vacant~~the assale of Family Life on December 3129, ~~2004~~2006. ~~The~~ ~~project~~This ~~was~~agreement ~~sold~~with inthe ~~June~~service ~~2005,~~

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